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Birlasoft Ltd
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Ladies and gentlemen, good day, and welcome to Birlasoft Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Vikas Jadhav from Birlasoft. Thank you, and over to you, sir.
Thank you, Sandy. So good evening to everyone. This is Vikas from Investor Relations team and joining us on this call, we have our CEO and MD, Mr. Dharmender Kapoor, DK, as we call him; CFO, Mr. Chandrasekar Thyagarajan; Chandra, as we call him; Mr. Roop Singh, who is our Chief Business Officer; Mr. Shreeranganath Kulkarni, SK, as we call him, our Chief Delivery Officer; and we have also Mr. Arun Rao, who is our Chief People Officer.
So we'll begin the call with opening remarks from Mr. Kapoor. So please note that anything that we say on this call on the company's outlook for the future is a forward-looking statement and must be read in conjunction with the disclaimer mentioned in our Q1 FY '23 investor update, which has been sent to you and also uploaded on the stock exchanges.
So with this, I'll now hand over the call to DK. Over to you, DK.
Thank you, Vikas. Good evening, and welcome to Birlasoft's first quarter financial year '22-'23 earnings call. We have begun the new financial year on a steady note. Q1 revenue was at $148.6 million, registering a sequential growth of 1.5% and a year-on-year growth of 15.8%. Our sequential growth in constant currency terms was at 2.3% and year-on-year constant currency growth was at 17.7% for quarter 1. New deal momentum continues to be good with wins of $112 million in Q1, which is up by 19% in a year-on-year basis. The total TCV wins were also healthy at $185.1 million. EBITDA margin stood at 14.7%.
We have seen margins getting impacted due to high cost hiring and within junior level promotions, drop in utilization, investment and -- investments and were aided by rupee depreciation. So we have switched to reporting attrition, which is more in line with the industry and factors early attrition. The good news is that we have seen a drop in our LTM attrition number, which fell from 29.4% in Q4 to 27.9% in Q1, a drop of about 150 bps. However, needless to mention, it still remains elevated and we expect to see a further drop going ahead, which will help support margins going ahead.
Our TCV stood at $15.5 million and was up 0.7% year-on-year and down 12% quarter-on-quarter. INR PAT was at INR 121 crores, up 6.2% year-on-year and down 9.2% year-on-year, 6.2%, I think, quarter-on-quarter. In verticals, the growth was led by BFSI and manufacturing verticals. BFSI saw growth of 5.1% quarter-on-quarter and 17.9% year-on-year, while manufacturing was up 2.8% quarter-on-quarter and 22.4% year-on-year. Horizontal growth was led by business and technology transformation services, which saw a growth of 7.4% quarter-on-quarter and 20.7% year-on-year. That clearly shows that slowly and surely we are becoming an enterprise digital company and our revenue around digital is growing faster than the traditional services.
Growth continues to be driven by larger accounts with top 5, top 10 and top 20 customers growing at 16.5% and 22.7% quarter-on-quarter and 21% on a year-on-year basis, respectively. Our year-on-year customer count of $5 million plus revenue improved by 3 and that of 1 million plus improved by 5. Active customer count remains steady at 300. The headcount at end of Q1 stood at 12,565 and saw an addition of 361 professionals quarter-on-quarter and the addition of 1,057 professionals on a year-on-year basis. We have hired 280 fresher in Q1 and plan to hire 500 fresher in Q2.
Birlasoft continues to get various recognition. It was named again as a Top 15 Sourcing Standout by ISG and among the leading providers in the Booming 15 category globally as well as for the Americas region based on annual contract value won over the last 12 months. This is the ninth consecutive time that Birlasoft has been featured across named categories by ISG. During the quarter, Birlasoft adopted RISE with SAP to transform its global landscape on the cloud. With enterprises adopting cloud for strategy, this move will enable Birlasoft to accelerate dear clients' transformation journey substantially. Most of the clients today are already looking at modernizing their ERPs, especially SAP and SAP on RISE is definitely a promising one and we are very happy that we are the first few who have moved to RISE and I think that will help us to go and take those opportunities in market very, very confidently.
In conclusion, I would reiterate that the IT demand outlook over the next 3 years looks healthy despite some of the recession challenges. However, opportunities are multifold, especially in digital and cloud ecosystem, which augers well for Birlasoft. We continue to remain optimistic and are well positioned on capitalizing the growth opportunities.
With this, I would like to open the floor for questions.
[Operator Instructions] The first question is from the line of Sandeep Shah from Equirus Securities.
DK, I think the Q4 result has come late on 24th of May. And during that day we were bullish both in terms of near-term growth as well as for FY 2023 kind of growth. We were also expecting utilization to remain more on [indiscernible]. On all these counts, looking at the 1Q result, again being soft, where are we going wrong in terms of execution and even predicting the near-term earnings visibility or flexibility?
Thank you, Sandeep. No, I don't think that we are going wrong anywhere but I think there are a few reasons that are to be looked at considering the situation that is there. I think the first big reason was that there is a delayed start on a couple of engagements that we have won in the previous quarter. It is not part of the wins that we have there because one of the win actually is part of the wins that we have shown as part of $185 million, but the client wanted to start in the Q1, but they delayed it because they are into a merger situation and they decided to delay it by a quarter. Okay? So that revenue that we thought earlier would start flowing in, it did not come.
Similarly, there is another deal that we have won. But there again, it was a delayed start, where client wanted to wait for some time and they did not want to go for that in the Q1. It will get closed in the Q2 and some revenue will start coming into the Q2. So that also impacted us for the Q1 revenue. So these are the 2 engagements that are the large customer for us or 1 of them is a new customer, large engagement, but second is an existing customer, again, large engagement, which is where we could not get the revenue that we thought and it was part of the plan, and it is primarily due to the transformation that they are doing or undergoing in their organization, and they took more time than what we thought that they will be able to do that. So that is 1 challenge that was there.
Second, as I earlier also said that the -- and I said that in the previous quarter, there is going to be a revenue rationalization or not rationalization, but normalization for us in 1 particular vertical for the 2 quarters. We took that normalization first-hand in the previous quarter and the second was in this quarter. Okay? So that was a planned one and that is also another normalization that happened. Third is the -- there is a little bit of supply constraint that continue to happen. Despite that we are seeing lesser attrition but at the same time for every organization, the joining ratio dropped during this time because you would have seen some of the reports where there are regrets with the new joinees, have they joined the right place and will that fit into their scheme of things or not. And we have seen that ratio dropping a little bit and that also had an impact because when you do not get those people join in time, you end up not getting the revenue that you planned for. So these are the 3 reasons.
Why I say that, that it doesn't -- there's nothing wrong because wins-wise if you look at, I continue to see that the wins are happening. I continue to see that the clients who planned for the program, they continue to come and sign these contracts with us. So there also, there is no slowdown as of now. While I know that we continue to hear the constraint or continue to hear the recession fear and that probably is becoming more and more as the time passes. But I believe that it will be more clearer in the quarter 3 for us, but the projects that we are doing today are happening, except that in a couple of cases, where the delay is there, but the delay is not for the recession reasons, it is actually for their own transformation program of integration post merger that has given them a little bit of delay in starting those projects.
But this, we were not knowing on 24th May when we were already 2 months in the quarter for the Q1 as a whole. So this could be a surprise for all the elements being used for post 24th of May?
Sorry to interrupt, sir. Sir, your audio was not very clear, Sandeep Shah. Can you please repeat your question?
So what I'm asking is all these 3 reasons which you have said were not known on 24th of May when we were already 2 months into the quarter?
So I tell you, we actually started some discussions and planned already. Considering that, that the discussion on the contract will get finalized in a week or 2 weeks. And we never knew that it will not begin. In fact, that is what actually has hit us on the utilization as well because when that gets delayed, it hits your utilization and it increases your bench because we had hired the people to go ahead and start working on those projects. So no, it was not clearly known, but we had already started, then we had to scale back because the discussion with the client was that we will have to move it by a few weeks before we start these engagements.
And DK, can you update about your FY '23 outlook? Last time you shared [ both up ]. DK, both in terms of U.S. dollar revenue growth and on EBITDA margin for FY '23 versus last time you said both will surpass what you have done in FY '22. Because even to achieve a 15% growth in U.S. dollar terms, we have to do 4.8% compounded Q-on-Q growth rate in the next 3 quarters, which looks stretched at point. And then I have a follow-up question for Mr. Chandru, just on the DSO.
Yes. No, I think we are continuing with the goals that we took in the beginning, okay, of the financial year. So there is no change in our internal plans that are there for the growth perspective. We have not changed anything and we continue to push aggressively on how do we go and meet the objectives and the goals that we set for ourselves. So right now, we are not scaling down anything from the growth perspective. On the margin side, also, if you look at, while there are going to be more headwinds during the quarter 2, as you know that we will have to give the increments. But there are some of the levers that we are already working on so that we remain at least flat or do a little better than what we have done in this quarter, quarter 1. So that's the plan that we do. It is a steep improvement that we want to bring in.
There is a huge amount of a focus that is there on improving our margins and I would like to at least for the Q2, I would like to remain flat or improve a little bit on top of that. But then in the Q3, by that time, there are other productivity levers and all that will kick in and probably we will improve in the quarter 3 and quarter 4 again then, so that we deliver more than 15%. But this quarter came -- this quarter came with a significant higher headwinds for simple reason that we did not get the revenue that we thought as I explained earlier. And whereas we had taken the cost already. So that was really a bit of a disappointment in the delays that we saw. But we are not seeing this with the other clients. So it is not widespread. It is only focused in 1 or 2 clients only.
And just last question to Mr. Chandru. Just on the DSO, if I look at the absolute increase in U.S. dollar sales is $2.2 million, while your better increase is as big as $7 million to $7.2 million, and including unbilled, the increase is $11.3 million. And we have reported a flat DSO on a Q-on-Q. So I'm just confused how this calculation is arrived at?
Firstly, the DSO is billed DSO. So to that extent, the calculation is correct because DSO is obviously a function of the rolling 3 months, the debtors at a functional are already 3-month earlier, right? So the DSO number is correct. To your question on the absolute increase in DSO, there are 2 parts to it. One is, of course, the ForEx translation difference cost about 45% of the increase, right? And the balance, 55% real increase in the absolute number of receivables, deferred receivables coming from the increased revenue that we've seen over the past 2 quarters. So in essence, therefore, the DSO number of 58 is in relation to the receivables as a function of the average revenue.
Now, our unbilled also in real term have gone up. But if you look at it as a percentage of revenue, they're still staying flat on a quarter-on-quarter basis. So that -- these are 2 metrics that we watch fairly closely. Let me also tell you that there were 2 clients that delayed payment, the payment actually came on the 2nd of July versus the last week of June. That could have actually reduced my DSO from 58 down to 55, but it does happen sometime, right?
The next question is from the line of Shradha from Amsec.
DK, a couple of questions. First, if I look at your other expenses, that has seen a significant increase of 10%. So what has gone in the other expenses line item?
Shradha, I will take this question, Chandru here. So the other expenses has a couple of components, right? So one is if a contractor payout that still accounts for a big portion of the other expenses. While we've seen a marginal [ disruption ] of contractors because we've started to replace them with regular employees, we still have to accelerate that phase as we are able to get more people, more regular resources deployed again, sub-contractors both on site and offshore, primarily on site. So that is 1 area. 2, also a part of our -- as part of our growth strategy, we continue to -- as part of our growth strategy, we continue to invest in newer areas.
One of the things is around hiring talent, hiring capability. Some of that, the cost of hiring goes into the other expenses, while the resources themselves are part of the -- part of the salary expenses, the cost of hiring goes into other expenses. And we have -- we continue to look at the cost of hiring staying where it is. While we spoke about reduced attrition, we are also ramping up for additional growth in the coming quarters, right, like DK spoke about. So that, that gets accounted for. And the third item that gets accounted for here is that we have engaged -- we have engaged third-party to work with us on our $1 billion strategy, and that's also a cost that we've been incurring for our growth as we spoke about the investments that we continue to do. So that's the third item.
Would it be possible, sir, to call out the one-off expense in this quarter, the consulting charges that you pay, which will probably not get repeated in the next quarter?
Shradha, there are some ongoing costs that will come for the next 3 to 4 quarters. So to be honest with you, there will be some repeat costs we will incur in the second quarter as well. So in that sense, I wouldn't call it one-off.
Sir, you mentioned that sub-contractor expenses were high, but if I look at that number, it was almost 15.8% of our revenue last quarter. Is it possible to give out the percentage number for this quarter so that we know where directionally are we headed there?
I will get back to you on that. Just give me some time.
And sir, related question is your other unallocated expenditure, that item remains very high at almost 10% of revenue, other unallocable expenses. So what basically goes into that line item?
Yes, I'll come back to both of these questions, Shradha. I'll get the answer while we work through rest of it. Okay?
DK, to you, I mean, our cloud services, though we have been talking very positively on this service line, but that saw a decline in this quarter. So how do we reach that? And also the DTC number was soft on a Q-on-Q basis. So both these question if you can take up.
Yes. So on the cloud side, absolutely one of the work that is going on, on the strategy for $1 billion, 1 is actually around the cloud. In fact, with the cloud, we are seeing significant traction. So a little bit of up and down with the quarter. I don't think that should be seen as a trend because with the cloud, we are going to definitely grow significantly higher than the rest of the traditional services. You would have seen now we have joined hands with the Google also. And after that, we made 2 wins as well along with Google and there's a significant amount of focus is there on to set up a new GTM keeping in mind the partner with Microsoft as well as with Google and AWS.
So on the cloud side, I'm absolutely upbeat that the revenue for us is going to grow. In fact, if you look at -- even today, we are very much at par with what we see with the industry. But being a smaller company, we see the upside potential in a big way, and we will continue to work on that. And the extent that we are doing on the strategy, actually, both part of that spend is on the direction of really increasing our revenue in the cloud and associated areas.
And lastly, on the DTC number, though on a Y-o-Y basis, it's tough, but we have seen some softness on both new deals and renewables on a Q-on-Q basis?
Correct. Because it is not just cloud because in that bucket, it is cloud plus base services. So one of the engagement that I talked about that got delayed, okay? So we have won a large deal that we could not finish the contracting at the point of time and the client wanted to go through a little longer process with an advisor, okay? So it took time, that actually was going to be in the base services and that will be followed by cloud, but that will come later. So if that was going to be there, our percentage could have been higher in the quarter-on-quarter base as well.
The next question is from the line of Mihir Manohar from Carnelian Asset Management.
DK, you mentioned about the 2 engagements, which got delayed in this particular quarter. I mean, if you could quantify them? And how should we see these accounts ramping back? That was the first question. And the second was on the Europe. I mean, we saw quite a sharper contraction in Europe. So how should we read this? And what is leading to this contraction here?
So if you look at these deals, these are in the range of $15 million to $20 million, both the deals are of that range, okay? And that, hopefully, we will now go and declare that in the Q2. And I wish it was started at that time when they would have given some good revenue in the quarter 1 as well. So that's the size of the deal. Contraction on the Europe side is more towards when we look at -- and Chandru, let me know if I'm correct with that, it is mainly -- we are actually flat. But percentage-wise, it will look smaller because the dollar has appreciated against the euro as well and when you convert that revenue into the dollar, the dollar equivalent becomes little smaller, but we are pretty much flat in Europe quarter-on-quarter.
And lastly, on the Google Cloud, is it a transformation, the update that you mentioned? So how should we read this? I mean, what significance does it help you? If you could throw some more light on that?
So on the cloud side, to be very frank, already as you know that, we mostly kept our focus on digital services as a larger umbrella. While we have been working with our partners as well as with our clients and going and taking up the opportunity. This is the first time that we are putting the GTM in place for cloud, while within every vertical and with every horizontal, we were addressing it. But now we are putting a GTM focus that means that there will be someone who will be focused just on the cloud because cloud doesn't come only in the cloud and base services, there is a significant amount of cloud that has started to happen in the business and technology transformation services as well. And we should look at not only migrating organization to the cloud but what is that we can achieve once they are already on the cloud and what more can be achieved because there is a lot of transformation that happens once someone moves to the cloud. So now we have broadened our horizon from that perspective.
So what we are doing is we are picking up cloud as we book it, okay? And we are looking at what kind of services can be there at various stages, starting from the consulting to the migration to the modernization and then finally, transforming, okay? So we are looking at what could be the offering. And how do we go and address every offering rather than trying to restrict ourselves only to fewer offerings and going there. Now that we have a significant amount of cloud revenue with us, we believe that we are in a good position where we can actually participate in the transformation program also for our customers and that is the focus that we are working on.
The next question is from the line of Abhishek Shindadkar from InCred Capital.
Congrats on a good quarter. Sir, I think I heard you that one of the challenges in the customer impacted the cloud and base services business. If you can just highlight was there any enterprise solutions related to work there as well? That is 1. And from a vertical standpoint, is it largely reflected in the energy and life sciences vertical or the manufacturing piece is also witnessing the moderation because of these customer-specific issues?
Yes. So I talked about these 2 clients. One of the client is purely enterprise solutions, one of the client, okay? The other client has a smaller piece but because it is more into the kind of total IT outsourcing. So definitely enterprise solution is also a piece, but a smaller piece. But the other engagement that I talked about, it is purely the transformation program on the enterprise solutions side. So yes, if I put it together, both of them, about 50% of that will actually be enterprise solution.
And so in the past, you've been highlighting that the enterprise recovery, which started in the H2 of fiscal '22 might continue in fiscal '23. So based on your assessment and what you saw recently, do you think that the enterprise projects that we had run a risk where some of them may get delay or there could be some other instances? Any color on that size could be really helpful, sir.
So during the COVID time, yes, it was -- it became a binary situation where somebody clearly said that no, I don't think that we should take up the project, okay? And then they kind of stopped it a couple of time, not for the reason of the investment and all that. But for the reasons that even the talent was not available on-site for them to really execute those projects because most of those projects will actually begin with a lot of planning and consulting where you require on-site presence along with the customer. It is very different now actually, when we look at going forward, when the discussion is on the slow down or on the recession or something like that, because I always believe that there is always a blessing in disguise for IT services when we talk about the recession. But at the same time, the sentiments are sentiments and it also have their own impact.
What I believe is that one thing everybody has realized is that they need to adopt digitalization in a very stronger way and in a faster way. So that is no more if and but it is all about that a matter of survival. But the biggest question that all those are asking is that will I succeed with the digitalization, if I do not modernize my SAP, my Oracle, my JD or my other ERP or enterprise solutions below that.
So what is happening is that they have realized during this time that they will need to take the underlying transformation now. So if they want to get the right benefit from the digitalization because you can very easily imagine that most of the data and the processes lie within the enterprise solutions. And when you have to get the digitalization done, you need to invoke the value of the processes and the data that lies in the enterprise solution.
So they definitely want to continue to modernize. They want to continue to go ahead. That's the discussion that I am seeing most of the time. Nobody is saying that no, right now will not drop and now we will only look at doing it in the next year. So far, that discussion is not coming up.
Sorry, to interrupt. There was a question from Shradha Agrawal, I just thought I will respond to the 2 outstanding questions. So 1 was subcontractor expenses, the question was what is the percentage of the revenue in Q1. The percentage of revenue in Q1 was kind of flat quarter-on-quarter, Shradha at the overall level. Like I said, we've seen -- we've started to see a reduction at the end of the quarter, so we should see improvement in the second quarter. The unallocated expenses in the segment report relates primarily to SG&A, which is our selling, general and admin expenses. It also has spend on our freshers, which is the leaders in freshers SMA that we have hired in the first quarter.
The next question is from the line of Sameer Dosani from ICICI Prudential AMC.
Just what to understand this $15 million to $20 million deals, the 2 deals that we have signed, just want to understand how big is the tenure of these 2 deals? And as you said, right, these contributing in Q1. So as of date or mid of this quarter, has this project actually started ramping up in your view or how do you see?
You're talking about the 2 deals or were you talking about the overall deal win.
No, no, 2 deals that we have seen delay, in which we have experienced delay.
Sure. Sorry, your voice was a little bit not clear. Hence I asked for the repeat but I've understood, I've understood. So on the 2 deals, one of the deal is for about 1.5 years -- 1 to 1.5 years, that the time frame that we see. The other deal, which is total IT outsourcing, this is for the 3 years.
And second is on the margin right, we have delivered 13% EBIT margins. And Q2 would have some wage hikes where you're probably are saying it would be flat or maybe some improvement. But to get and improve your margins on a year-on-year basis for FY '23, you'll have to substantially take up your margins maybe even more than 15%, which you have delivered last year, right? So how do you think that journey will be for us? How confident are we around that number?
Yes. So there are...
Squeezing one more point that we have started a quarter with 2 to 3 kind of percent dollar growth, CC growth. To reach up to 15% or deliver more than 15%, 16%, what we delivered last quarter would need right 4% to 5% growth for next 3 quarters. So how confident are you around both these numbers, if you can just speak about that?
Yes. So on the margin side, very clearly, there are headwinds and the headwind is about the increase that we had to give it to our employees, so that definitely is a headwind. But if I look at the planning that we have done with respect to where all we pull the lever for getting the cost saving advantage, I anticipate, okay, this is not a guidance, I anticipate that we should remain flat, okay? That is what I look at it. I do believe that there could be a few unknowns because as you know that the last quarter also, nobody thought that there will be a drop because there is so much that is changing on the talent front, supply front and the cost of hiring and all that, which is really making us think again and again that should I go and capture the growth? Or should I really continue to look at the margin? Of course, the decision are different at different times. But these are some of the things or the decisions or the choices that we had to continue to make.
So far that I see, I believe that we want to remain flat quarter-on-quarter, okay? And I think as the time passes, probably another month or so we may have more clarity with respect to how things are unfolding, but with the current plan that we have, hopefully, quarter-on-quarter, it will be flat. Now coming to the growth side and all that, okay, as I told you that in this quarter, we had some revenue normalization that we had to do and some delays that also happened and all that. Okay. And that tells me that I think we want to continue to really look at much better growth in the rest of the quarter and that is what we are running for. We don't give the guidance, as you know. But definitely, the plan is to do much better than what we had done in this quarter.
And -- but do we stay with the overall directional picture that would be able to deliver better growth than FY '22 and better margins than FY '22?
So my view will be it will be in the ballpark, okay? That is what I see. But a lot, I think, which is being talked about, you would have seen in the industry-wide, there is a lot of talk about that -- and there are different, different views about the recession. There are different, different views about the budgets that clients are going to come up and the adoption of the technology that they want to go for. Okay? So everybody is coming up with those kind of plans. My view would be that how do we do same or a little better than what we did in the previous year.
No, no, that's fair. We can't control the macros that...
Correct.
That are evolving. Fair enough. Also, we have spoken about a lot around that how recession or downturn would be much better for IT as a sector. But can you throw some light because what happens is the scale players benefit more than -- but obviously, time has changed in the last 2 years. So can you throw some lights around the capabilities that we would have built that will help us actually take the benefit of the downturn like the scale players do usually. Can you just throw some lights around that?
Yes. So I don't think capability in addressing the opportunities is an issue, okay? I don't think that is an issue. But we need to look at from the ecosystem perspective. For example, one of the major focus that we have right now is that how do we improve the talent supply chain. For example, we focus on the talent acquisition for a very long time. But with the twist that is there with the talent availability and the resignation or the attrition and also this work from home, somehow these 6 months to 9 months have been a perfect storm, okay, that nobody wanted to really see in their lifetime, but then it always happens that we get to see unexpected in the market.
So when that period is going on, we had looked at 1 thing that what is that now the recession is there. And when we come out of the recession, we get into similar situation again at that point of time, okay? Let's assume the recession is there. And from quarter 3, quarter 4, quarter 5, for a couple of quarters, we see the slow down and it impacts everybody. But when we are coming out of the recession, we should not be saying sorry to ourselves at that point of time that we should have anticipated the higher growth or see growth at that point of time.
So it is not about getting ready only for this and next quarter. It is also about getting ready 6 or 7 quarters down the line that if there is again a steep demand that we encounter, we should be able to manage the talent supply chain in a much, much better way. And that's the reason our intake on freshers is much higher, our intake on the juniors is very higher. We are spending money on the learning and development, okay? We are spending money on various other initiatives so that we are able to address this better if we confront this situation, let's say, 3, 4 quarters down the line again. It is a more long-term solution. I did talk about in the previous meetings also that we need to work on the longer-term solution, okay? So even if we have to sacrifice a little bit of my margin now so that I get much better benefit in the future, we should do that because that would be the right approach in order for us to have a predictable revenue and margin.
Right. Right, DK. It will actually help us scale up. I think 1 question got answered was, are those 2 contracts, which were delayed has started ramping up as we speak? Or is it yet to actually ramp -- start for us?
For that, we already did the ramp up actually. It is only that now we need to deploy and work on those because -- and the work on one of them is already actually started and all that. So with that, we did the deployment in the previous quarter itself. It is just that it did not start and it ended up hitting our utilization and the margin and, of course, the revenue as well.
So 1 contracted started at the end of Q1 and second is yet to start?
That's right, yes.
The next question is from the line of Dipesh Mehta from Emkay Global.
DK, couple of questions. Starting with the deal pipeline, if you can help us understand how the deal pipeline is shaping up? I think earlier you used to give some number. So if you can provide deal pipeline number at the end of Q1 and give some comparable number maybe Q-o-Q, Y-o-Y, whichever way you are comfortable with. Second question is about the revenue normalization, which you earlier alluded, which partly explained weakness in Q1. Can you provide some more detail on it? What do you mean by revenue normalization and which vertical is largely you refer to? Whether a life science is what you are referring to and how you expect it to evolve over the next few quarters?
Third question is about the Microsoft relationship. I think earlier a couple of quarters that you indicated $100 million aspiration by FY '24. So if you can provide some update where we are in that journey from that relationship and how it is scaling up? And last question for Chandru is about the OCF. OCF remained weak this quarter, it was negative. So if you can provide some sense what explains it?
Sorry, what do you...
Operating cash flow.
Operating cash flow, okay.
Okay. So let me go one by one. On the deal pipeline, if you look at our pipeline, I'm talking about sales pipeline that we continue to pursue with our customers, we had actually moved up from significantly. We, at the end of the financial year, previous financial, we were at about $1.2 million. We are touching already $1.7 million. Yes. So that is the $1.7 million is on to the sales pipeline and all that. When it comes to the billing pipeline, I do not have the number up front with me, but let me check and come back by the time I answer other questions. So I will answer that, that we -- let me come back to the revenue first, the revenue normalization. The revenue normalization, as you know, it is the same account that we talked about and the same vertical that we talked about in the life sciences last time also, it is the planned normalization because generally, when you have the large deal and when you have the run and change part at different, different times. When the project finishes, your revenue will get softer and get more steady going forward and that is where we are.
And we had to do that over the 2 quarters, we have done most of it already. It is only about 0.5 million that is there, which probably we will do it in the next quarter, but we may actually be able to get that also, okay? So -- but we were supposed to do that over 2 quarters, which finishes with the quarter 1, most of it. So that was the revenue normalization. The third is on to the Microsoft. So Microsoft, we continue to do very well. In fact, now we have started getting revenue from Microsoft as a customer as well, okay? So that is a good change that has happened in the last 3, 4 months, where now we are not only discussing going to market with the offerings that are the Microsoft offering but also going to Microsoft and delivering services to them. So we remain very, very upbeat on the Microsoft side and I believe that we should be able to achieve our goals of being a $100 million partnership in time for us to really achieve that.
As to your question on the operating cash flow, there are a couple of items. One we spoke about the increase in receivables was the billed and unbilled receivables we spoke about a little earlier. That was 1 item. The other -- we also had lower financial liabilities coming from the fact that we had pay out the variable performance in terms of the first quarter based on our performance in FY '22. So net result of that is that we did have a movement in working capital cost to lower operating cash flow in Q1 versus the prior quarter.
What one should look OCF to EBITDA conversion, if you can provide some sense from full year perspective?
Sorry, ask that question again, please.
OCF-to-EBITDA conversion, what is the right number or optimal number one should expect from Birlasoft on a full year basis?
Let me get back to you on that question, please. While we go ahead, I'll come back to you in a moment.
Dipesh, do you have any further questions?
No, thanks.
We'll move to the next question from the line of Devang Bhatt from IDBI Capital.
So how much utilization can improve in the next quarter based on your deal ramp ups? And what kind of sub-con cost do you expect to reduce? What kind of quantum of wage hike in Q2 would be there in the impact? And is there any transition costs in the large deal that would impact the margin?
Sorry, just to repeat the last line that you said.
So is there any transition cost in the large deals that might impact the margins in the near term?
Okay. So utilization, I believe that we should be able to come back to the levels that we used to be anything between 84% to 85% is something that we have delivered very consistently. So I don't think that, that should be too much of an issue for us. When it comes to looking at the quantum of wage hike, I expect that it will be approximately closer to 3% average that we believe will be an impact due to the wage hike. There are -- there is some wage hike that we have done in parts for some of the people in order to retain them over a period of time. So that means that we will have to do it in such a way that we keep the impact to around 3%, okay, so -- and then that plan is there in place. And I expect that anything from 2.5% to 3% is what we will get the impact on that frame -- that perspective.
On the transition side, there will be a minor transition impact that might come. I don't think it will be a very significant one in the overall scheme of things. So they're not going to change in big way, yes, we do have the transition for one of the deal that we are talking about, but I don't think there will be too much of an impact on that front because some of the costs that we had to take in order to create the plan have already been taken, okay? So incremental will be not as much.
And how much sub-con cost you expect to reduce? And secondly, if the macros turn worse, what percentage of revenues would be impacted? I mean, what percentage of revenue will be impacted?
Sorry, could you ask the second question again, please?
So if the macro turns worse, what percentage of revenue you think would be impacted because of the macros or there might be some halt to your or they must be delaying, ramping up those kind of deals?
Okay. So let me -- Chandru here, let me answer the first question on reduction in sub-con cost. The expectation is that we will gradually improve on our sub-con spending from the current levels of 15% of revenue. My expectation is that we should be able to shave off at least 100 basis points to 150 basis points in Q2 and in Q3, right, maybe Q3 will be a little less than Q2. But we should be able to shave off 150 basis points over the next quarter or so.
Yes. But one additional point that I will talk, which is more qualitative on the subcontractor side is that traditionally, we have always seen subcontractor to be very cost consuming and all that. But with this whole slip on the cost increasing across the board for on-site and offshore people, many times, we have seen that the subcontractors are now either at par and in some of the cases, it is also lower because it is quicker to get them on projects and off the project, whereas with the employees, there is always a bench time that comes into the play. So I believe that over -- if we were fine, I don't think that right now is at the right time to really change the way we look at the subcontractor. But over a period of time, probably we will have to look at subcontractor in a way where we do the planning in such a way that it is a quick on boarding and off boarding so that both the directions when you end up losing the utilization and somebody is on boarded as an employee, you can actually save on that money.
At the same time, this work from home is going to lead more and more people opting for the subcontractors. So we need to really improve our process the way we manage that and reduce the cost rather than just looking at the count of the subcontractors. So from that perspective also, we are working on. So this is being looked at with a new lens. And I think it is very, very important that we look at with a new light actually. But we'll continue to come back as it is something that is emerging now new reality for the business. And we may have to decide our benchmark going forward accordingly.
Thank you. Devang, do you have any further questions?
Just the macro part that what percentage of revenue can be impacted if the macro turns worse?
I'm sorry, I didn't catch you.
The question is what percentage of revenue drop we expect if the macros turn worse?
I tell you, it is very difficult to say that. I hope that it doesn't come for the worse, okay? But it is very difficult because people talk about different, different range and everybody has a jury, okay, that how wrong it can go. In my opinion, there is not going to be one yardstick through which you can define because it will be different for different industries. It will be different for different geos, it will be different for different companies within the same industry also. So it is very difficult to right now say how much it will be the impact on us. We hope not -- we hope that we continue to grow, okay, the way we have planned and there is no adverse impact it comes. But we are preparing ourselves for that for only 1 reason keeping in mind that how can we reduce the impact on the margins in case that happens, okay? So that's the focus area that we are looking at. But it is very difficult to really put a finger on what figure that would be.
There was a question on OCF project that I will quickly respond to that. The OCF number as we go forward for the rest of the year, to my mind, it will clearly depend on a couple of things. Right? One is of course managing our working capital managing to make sure that we drive -- continue to drive higher collections, keep our receivables in check and also make sure that we manage the unbilled component as we spoke earlier. The ideal, of course, I would say, ideal of course is 100%, but we will have to work through this for the rest of the year. Given some of the headwinds we spoke about at the macro level, while I do not see any concerns from a credit standpoint and from a receivable standpoint, I also think we'll have to look at what kind of, what kind of AR days we end up having to sign up to with some of our new, newer clients in the new geographies where we are having a lot of push, particularly in Europe where typically [ 7 ] days are longer than in the U.S., but this is something that we'll continue to watch closely.
The next question is from the line of Sandeep Shah from Equirus Securities.
Just for the previous question, for the 2 delayed contracts as we are in the first week of August, you said 1 of the delayed contract has already started at the start of the quarter. And another is yet to start, right? Is it the right understanding?
So the other one is yet to start, yes, correct.
And DK, in terms of enterprise solution being recession could be a worry. Are you worried about your growth plans and the budgeting for the enterprise solution if recession happens because that could be termed as a discretionary IT spend for some of the clients as a whole?
No, I don't think so. In my opinion, the enterprise solutions, if you look at, slowly what is happening is that they are also becoming digital and hence, their growth also is coming in the newer area of modernization. So everybody is going after the digitalization. And when anybody is doing in the span of the enterprise solution, then that continues to happen. So traditional solutions and all that, yes, it will be lesser growth overall because that will happen. But the newer area within the enterprise solutions, they are growing as good as digital though the quantum may be much lesser than the overall digital pie that is there around us, okay? And it also depends upon how and where you count the revenue. So I don't think that there should be too much of an issue. But on the traditional side, slowdown will always have an impact. But I believe that it will be limited and lesser than what we actually saw during the COVID times.
And just a clarification, DK, what could have been a quantitative impact of these 2 deals was delayed? If they could have realized on time how the growth could have looked like in the first quarter? And second, on a wage increase, 2.5% to 3%, are you saying a margin impact in 2Q? Or are you saying it's an average wage hike to be given to the employees as a whole? And where are we in terms of the annuity revenues or a sticky revenue as a percentage to the total revenues, which we used to disclose earlier as well?
So the 2.5% to 3% was the -- not the margin impact, but percentage of the revenue. Is that right, Chandru that we have, that percentage that we computed?
Yes.
Yes, it is the percentage of the revenue that is there, okay? There are other factors through which we are improving it also, okay? So that's a case on the revenue side. And when it comes to the deal, I believe that we could have got approximately $2 million of the revenue if it was going to start in time.
And in terms of annuity revenues?
Annuity revenue stands at 70%, 71%.
So we are slightly off-track in terms of our target of 75%, which we were targeting by Q4 of FY '22, right?
Yes. So what has happened is that now the deals that are coming as we have, I think, taken that point multiple times that the deals are shorter, okay, and we [ put ] our deals and not the long-term deals. So from that perspective, it does have impact on the annuity revenue. And second, more and more digital deals and the transformation deals are becoming project based. And in fact, this is being seen that the project revenue for almost every company has become more than what it used to be earlier. The thought that we should be able to reach 75%, but I think 71%, I always say this is the ideal -- I mean, 75% is ideal, but 71% is a good percentage for us to continue to follow and we remain at 70%, 71%.
The next question is from the line of Mihir Manohar from Carnelian Asset Management.
DK, in between the remarks you mentioned about you have started providing services to Microsoft as a customer and you were aspiring of roughly $100 million kind of a partnership here. I mean, is this $100 million number include the earlier cloud Microsoft revenue that we were aspiring? I mean, because that target was also $100 million. I mean so are both of them similar or different?
No, $100 million, our revenue for that practice, okay, it will include revenue being sold to Microsoft as a client, plus the revenue that we sell on the services on the Microsoft platforms to any other customer. It includes everything, yes.
So this $100 million number includes the Microsoft Cloud plus Microsoft as a customer?
That's right, yes.
And just on the services side, I mean, what kind of services are we giving to Microsoft? Just any understanding on that?
So most of these are actually either on the Microsoft Dynamics side, it could be CRM or it could be the other enterprise solutions that they have and on the cloud as well.
This was the last question for today. I now hand the conference over to Mr. Dharmender Kapoor for closing comments.
Yes. No, thank you very much, everyone for your participation and the questions that you asked. Yes, we could have done better in the quarter 1, but there are always going to be some times where there are unforeseen items that come in front of us. But we say confident that from the capability perspective, from the client perspective, from the way we are winning the deals and how our pipeline has increased, we stay confident that we are on the right track. And I believe that, that should give the confidence to us and to everyone around us that we will continue to do better.
With that, I wish good luck to all of you as well as to us for the next quarter. Thank you very much.
Thank you very much. On behalf of Birlasoft Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.