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Birlasoft Ltd
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Ladies and gentlemen, good day, and welcome to the Birlasoft Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Vikas Jadhav. Thank you, and over to you, sir.
Well, thanks, Simon. So good evening to all of you, and thanks for joining Birlasoft's Q2 FY '21 earnings call discussion. I'm Vikas from Investor Relations. And joining us today on this call, we have our CEO and MD, Dharmender Kapoor, DK; Roop Singh, our Chief Business Officer; Shreeranganath Kulkarni, SK, who's our Chief Delivery Officer; Arun Rao, our Chief People Officer; and Chandrasekar Thyagarajan, and we'll have Chandru as our CFO.So please note that anything which we say or refer to relating to the outlook or the future is a forward-looking statement and must be read in conjunction with the disclaimer in our investor update, which we have sent to the exchanges and which mentions the risks that the company faces.I now hand over the call to DK. Over to you, DK.
Thank you, Vikas. Good evening, and welcome to the Birlasoft quarter 2 financial year '21 earning call. First of all, I appreciate you taking out time, basically, in the evening for joining us on this call. I sincerely hope all of you and your loved ones are safe and keeping healthy.I'm very pleased to say that we continued to grow year-on-year and reported a 5.2% year-on-year growth in quarter 2. We expect to see a sequential and year-on-year growth for quarter 3 financial year '21. After delivering 3 consecutive quarters of above-industry average performance, our quarter 2 revenue may seem to be a bit of an outlier given the sequential decline in revenue. Let me address this upfront before I move to the other performance indicators that show we have, once again, delivered continuously improving performance.In the quarter 1 call, I had highlighted about our customers seeking discounts and project deferrals caused due to the COVID situation. While we were able to negotiate and minimize the impact in quarter 1, we took the full 3-year -- 3-month impact of discounts and project deferments in the quarter 2. Our focus was to secure long-term annuity wins, and we have significant progress in the number of annuity wins in the quarter 2 as well.We won $274 million of TCV in quarter 2, which is one of the highest in the last 7 quarters. Now this includes renewal worth $154 million. That shows that we have been able to protect our revenues largely. And about $120 million as new revenue addition to our portfolio. This has not only helped us secure the runoff risk going forward, but will also give us growth momentum in the coming quarters.Further, as you all would be aware, we are executing a large transformational deal, and we delivered a couple of milestones in the quarter 1 that gave us better revenue in that quarter. And it was able to negate the decline that came because of the discounts and the project deferrals. We signed 2 large deals in the quarter 2 and the transition revenue from those deals will fit in starting quarter 3 as we continue to focus on execution even in this constrained environment.The number of wins have not slowed down for us. In fact, it has picked up even in the quarter 2. But the execution definitely took more time than what we thought because nobody was able to travel, and we did the transition over the Internet and online. So it is slower than the normal. But let me give very well the confidence, both the transitions are complete, and that means that in the quarter 3, we are targeting the revenue for those deals that we won in the quarter 1 and quarter 2.The milestones in revenue dip was seen in the life sciences vertical and emerging horizontals. We continue to remain upbeat about our winning ability in the life sciences and emerging horizontals. And quarter 2 reflects only a temporary blip. We expect our upcoming quarters to take benefit from wins that we have had in the H1.Some of our other performance parameters were the best we have had post merger. Our EBITDA margin improved 158 bps quarter-on-quarter. PAT 14.9%, highest in the last 7 quarters. Attrition was at 11.4%, which is the lowest -- which is at the lowest point for the last 8, 9 quarters. Utilization was at 83.7%, highest till date. And I'm absolutely very delighted that we have been able to bring the optimization in our execution, where we have achieved the utilization, which is at par or better than many of our peers in the industry.Cash and cash equivalents are at $124.3 million, which is INR 917 crores, highest till date. DSO of 58 days, which is the lowest till date. Total wins in quarter 2 were at $274 million, out of which the renewed business is $154 million in quarter 2 and $244 million in H1.The deal signed in H1 at $454 million and $940 million in the past 10 months. So as you can see that our winning momentum is continuing. Hence, we do not have much of the concerns in the coming quarter. And the quarter 2 can be seen as just one of the outliers because of the reasons I earlier stated.The annuity revenue, we started the year with 64% -- 60%, and it has already improved to 64% at the end of H1. We have been talking about cutting the tail because this was a little hard decision for us because we have had many of the clients where we were bleeding from the perspective of the margin, and the revenue was very, very small. And we had to cut the tail so that we can bring focus on the clients, so that we can grow with lot of confidence. So we have been talking about cutting the tail and improving the revenue share from top customers. In quarter 2, revenue contribution from the top customer -- customers was the highest. Our top 20 customers contributed 58.5% versus 48.8% post-merger, while active customers count stood at 310 versus 356 in quarter 1.We continue to be in the ISG's Top 15 Sourcing Standout globally for the third consecutive quarter. We continue to strengthen our ERP and enterprise solution services with strong relationships with Oracle, Microsoft and SAP. We are actively working with our partners to redefine our go-to-market model to combine the power of digital, cloud and core enterprise solutions.While there is an impact on the discretionary spend in the short term, customers have started to reinitiate the discussions on the transformation deals, so they can stay relevant in the new environment that they are also facing. We continue to see significant interest from our clients on the digital initiatives, and we continue to help our clients reimagine their IT cost structure and work with them in shifting focus through initiatives that will create business value for them.Differentiation and innovation remains on our top agenda with our key partners such as Microsoft, Salesforce.com, ServiceNow and AWS. We are actively pursuing platform-based deals and revenue that will help us create new avenues for growth in the coming quarter.There is ongoing uncertainty due to the continued COVID-19 crisis, with a few countries going into their second phase of restrictions. Birlasoft is well placed with its clients as we have a very balanced play and portfolio between core and digital initiatives. And this makes us a highly resilient organization. Our revenue and profitability has become more predictable and stable in the past 6 quarters, and I'm very pleased with the progress we have made in improving both on the growth and the profitability.Just to mention again because of that one-time blip, if you just do not consider that, our revenue for the rest of the portfolio is higher than what we delivered in the Q1. So that must give you the confidence that it is only an outlier for 1 quarter.Considering the key tenets of our strategy, we remain convinced that we have the right levers for growth and margin improvement. Our deal pipeline is robust, and I'm pleased to see that Birlasoft is navigating very well through these challenging times.With this, I will hand over to Chandru, our CFO, for providing more color on our financials. Over to you, Chandru.
Thank you, DK. I hope I'm audible to everyone. Good evening, everyone, and I hope you are keeping well, staying safe. Let me take you through the numbers in some bit of detail. Our Q2 revenue was at $115.6 million versus $121.2 million in Q1. It was up 5.2% year-on-year, but down 4.6% quarter-on-quarter. We did see cross-currency tailwinds of about 100 basis points. And hence, revenue in constant currency was lower to that extent. EBITDA was at $16.1 million in Q2 versus $15 million in Q1, and it was up 32.6% year-on-year, 7.6% quarter-on-quarter. Our EBITDA was up by $1.1 million, an improvement of 288 basis points year-on-year and 158 basis points quarter-on-quarter.We were able to do better on margins as a result of the following factors. DK spoke about our utilization improvement and that's an improvement of 550 basis points quarter-on-quarter, optimization of our subcon expenses and ongoing optimization initiatives across all of our cost levers.Our margin improvement was in spite of a rupee depreciation of around 2% in Q2, as you know, and lower revenue that DK alluded to. Consequently, tax for the quarter was better at $9.3 million versus $7.5 million last quarter, up 60.7% year-on-year and 24.8% quarter-on-quarter.Our cash and cash equivalents as of 30th September 2020 went up by $15.5 million quarter-on-quarter from 188 -- $108.8 million in the previous quarter, which amounted to INR 822 crores. And it moved up to $124.3 million, which is INR 917 crores in Q2. Our operating cash flow stood at $18.5 million, which is INR 137 crores in Q2. We had a CapEx spend of about $1 million, and our free cash for Q2 was at $17.5 million, and that is 187% of our PAT.The Board has decided on interim dividend of INR 1 per share. I'd like to point out here that we've declared dividend in the past 3 out of 4 quarters and amounting to a cash outgrow (sic) [ outflow ] of approximately INR 88 crores and that translates to $12 million in the past 1 year.In Q1, we had utilized some hedges when we brought cash into India for better yields and had mentioned that we would continue to build a hedge book to our comfort level of 60% to 70% of our net ForEx inflows. Accordingly, the hedge book in Q2 stands at $77 million versus $63 million last quarter. As we grow, we will further improve our hedges based on our net cap -- net ForEx inflows.Overall, Q2 has been a quarter of strong performance, and our endeavor will continue to be to focus on the key metrics.With this, let me throw the floor open for questions.
[Operator Instructions] The first question is from the line of Baidik Sarkar from Unifi Capital.
DK, congrats on a strong quarter operationally. A couple of award questions on the industry front. Oracle in their recent quarter's commentary seemed to suggest that there's a massive migration of in-premise SAP customers to Oracle cloud. My question is given the size and the materiality of our SAP practice, would that sound like a void to you? And what are you seeing on the ground?
So Baidik, yes, there are opportunities that have started coming up about implementation of Oracle on cloud or SAP on cloud that have started coming up. But most of those initiatives are yet the new initiatives that the clients have taken where the implementation is new.But if you look at the existing implementations, they are still largely on-premise and haven't moved to the cloud as it was initially thought to be because there is significant amount of effort and investment that is required in order for them to grow -- to move to cloud. And a lot of customizations have been built on those ERPs, and it is very difficult to go and use the standardized system. And even if some of them have moved, it is a lift-and-shift and not adoption of the cloud ERP.So from that perspective, I believe that the larger part of their business system is on-premise, but there is improvement with respect to adoption of the cloud by the newer clients who are implementing the new ERP solutions on the cloud.
So net-net, as far as the saliency of our SAP practice is concerned, you're saying that there's no reason to be worried as yet?
Absolutely not. Absolutely not. In fact, if you look at -- we are hoping that it picks up rather quicker because if it picks up rather quicker, obviously, that would mean that we will start getting a lot more opportunities of migration to the cloud also. So...
And do we have Oracle cloud practice of scale to prove it to assess the work?
Absolutely, absolutely. We continue to do multiple opportunities of migrating as well as implementing new solutions on the cloud. So we do have the practice, both in the cloud as in the SAP -- both in the Oracle and the SAP.
Okay. Any one-off in the OpEx this quarter that can potentially eat into our margins in the coming period? Just wanted to understand how we see margins in the quarter?
I'm sorry, your voice was not very clear. Can you repeat that?
Sorry. I was trying to understand if there is any one-off in our operating expenses which eat on -- that you think can come back at least in the subsequent quarters and...
Baidik, I'm sorry. In fact, we are -- I'm not sure if it is because of me, or in general, others are also not able to get it. But yes, Vikas -- your voice is very weak. Can you repeat the question?
So apologies. Let me try again. Any one-offs in our operating expenses that can come back and hurt our margins in the coming quarters? That was my question.
No, no, no. Absolutely, no, no, no. It is a fundamental shift that we have made in our operating parameter. The utilization is here to stay, okay? Similarly, if you look at the changes that we started bringing into our bench costs, our delivery overheads, our G&A costs, these are permanent changes. These are not one-off changes. We are going to provide the increments to our people in the quarter 4, starting from the January 1. But we have made the plans as to how will we go and improve our rest of the operations, continue to improve in the quarter 3 also so that we are able to negate that impact.
And just one last question, sir. In terms of a buyback, I understand there's been an interim dividend, but I think there were thoughts of a larger buyback. Any thoughts of the Board on that?
No, not yet. We have discussed it, okay? But Board has said that they will continue to look at the market condition and also our growth plan because we are getting on to the long-term planning. And we want to look at all the considerations before we take the decision. So there is no final decision as yet on that, but the discussion definitely is there on the table.
The next question is from the line of Shradha from Asian Markets Securities.
Congratulations, DK, on a strong deal signing yet again. Question on margins, first of all. Most of the margin improvements for us this quarter have been led by leveraging of our SG&A expense. And if you look at the gross margin impact, it's down on a Q-on-Q basis. So I mean, how should we read margins that really went into a steep decline in SG&A? Because most of the companies have shown a better margin improvement led by gross margin improvement, which is not the case in our company. So could you just elaborate on the margins, please?
So in our case also, there is an improvement in the gross margin. But as you know, that we have gone through the merger situation, we have higher spend sitting in the delivery overhead or the G&A line items out there. So we have taken the optimization on every single line item, even on the gross margin side also, because as you can imagine, that during the quarter 1, when the projects have been deferred or if there are discounts being given, despite getting this full impact for the quarter, we have delivered much better EBITDA than the previous quarter. So it is coming through improvements in every single line item.
DK, just to persist on this, our gross margins are actually down by 250 bps Q-on-Q. We were at 42% -- 41.6% last quarter. We were down to 39% in this quarter.
That is because of some of the shift in the expenses that we have done. Earlier, those expenses were sitting into the other expenses. There used to be another expenses item. And that used to be considered as part of the G&A. For example, those are the -- that was cost that has been incurred on the employees who are working on the projects. We have moved that back into the gross margin so that we continue to improve on there rather than we ignore that. So we have done a little bit of shifting of that also. And that's the reason that you may see that it is the higher cost there, but it is -- after improving, it is not on the gross margin side as well.
Right. And sir, I mean, we had stated our margin guidance to band of 15% by Q1 of next financial year. So how -- I mean, are we committed to that margin guidance? Or do we see it happening much higher than expected now that we're already back in the 15% margin?
Yes, I still am committed to delivering 15% EBITDA in the quarter 1 of the next financial year. And we are pretty much in line with what has been planned, and we are going and moving as per our own targets and plans.
Sure. And just one last question, if I can. Europe business is also down by 15%. Sir, is this because of that milestone project completion? Was that Europe business that showed the decline?
That is right. That is right. That is right.
The next question is from the line of Sandip Agarwal from Edelweiss.
Very good set of deal signing and execution. So DK, I have a couple of questions. One, is there anything which has happened, especially in the life sciences? Is it the completion of some project which has hurted us there? Or it is something else? Number one.And number two, the way we are signing deals, if you take into account both -- or total TCV, we are much ahead of our quarterly revenue run rate, in fact, almost double, I would say. So does it give you a very good visibility into the next year, a big jump in growth? Or you think that we're signing that for a longer period of time, which doesn't necessarily imply a very big shift -- jump in growth next year? That is question number two.And question number three, what are you doing strategically on the cloud side? Because as you, too, have seen that the whole attention has shifted from now more from digital to the cloud because most of the clients are thinking that cloud should be prioritized a little more because of this kind of challenges which are happening. So any thoughts on that sector? These 3 questions if you can answer, would be great.
Yes. Absolutely, I think your assumptions in the first question are absolutely right. The impact on the life sciences is due to the completion of the milestones that we have had with Invacare. And that's the reason that it has impacted the life sciences vertical and the emerging horizontal higher than the others, while it is widespread because almost every horizontal deals with the Invacare engagement, but it was highest in the emerging horizontals.Now is rest of the part of the business doing very well with respect to making the wins? Absolutely. Do we still have the confidence in the life sciences? Exactly. We have more confidence in the life sciences because when we complete any execution with a larger transformation for them, it definitely gives more confidence for us to go in the market and win similar deals.So from that perspective, we stay very confident because our fundamental growth story is still intact and working out very well for us. And that is reflected through the wins that we have seen in quarter 1 and quarter 2. And you're absolutely right in assuming that this is what is going to give us much better visibility in the coming quarters and in the next financial year also for the significant growth that we can achieve.So I'm absolutely very upbeat on that front. It is just so that if the quarter 1 and quarter 2, we did not have the COVID situation, we could have started the transition and completed the transition much early on and would have been able to fill the gap in the quarter 2 itself. But we finished the transition in both the large deals 10 days back, and it has been approved by the client. And we have reached to the sale stage. That would mean that our revenue is not leaking in the quarter 3 and quarter 4. And hence, it will give us the additional growth that we are looking for.
Okay. And with the -- one final question, if I may, and I will come back in queue if required. So, only one thing I wanted to know, DK, there is a big availability of very good set of talent in the market, if you see, because of 2 of the very large players probably going through some crisis kind of situation. So are we using this opportunity to build big leadership positions or leadership in our areas where we see big opportunity going forward?Because, see, the reason I'm asking this question is I'm seeing that many of the leaders from these 2 large players are actually joining a lot of IT -- largest IT companies and even some of the mid-cap IT companies. So some of the mid-cap peers are actually adding a lot of talent, which is very good quality, very high-level talent, which is available because of some internal issues of 2 large players.So I would wonder, what are we doing on that side? Are we bringing in more leaders? Because, obviously, the way we are signing deals and the opportunities coming up in this cycle, you would be -- definitely be looking forward to add some serious talent on the emerging technology side, and particularly, I would say, on the cloud side. So what is your thought, if you can share on that side?
Yes. I think that is a very, very important point that you mentioned. I'm sorry, I can't take the names of those companies. But we definitely have hired some of very good folks from those 2 companies. In fact, in just last week, one of our leader in digital joined from a large consulting company because it is not only the united service providers, even the consulting companies are also going through the tough period because nobody is spending money on the transformation for them. So we hired our digital leader and -- from those companies.At the same time, some of the sales, who joined us in the SAP side and in the other ERP area, they came from those companies that we are talking about. So we are still continuing to look for key people who are available in the industry, who can give us good capability and good talent. So we definitely continue to always look for and continue to hire wherever we need to build our capability better than what we have today.
The next question is from Madhu Babu from Centrum Broking.
Yes. Sir, just on Invacare deal, would that be helping reference client for some of the larger clients? Because -- and second is the profile of our top 15 accounts. So most of them are kind of midsize enterprises in their respective verticals. So I mean, is it that the reason where we had to give discounts and all because they are struggling in the COVID situation? Or just a view on how the discounts are actually...
Madhu, first of all, our top -- yes, our top clients are not only mid-tier, they are larger companies also, larger clients also, is not there. But interestingly, it is not the smaller players who ask for the discount. It is only the largest players. Because you can give the discount only where there is a volume. If there is no volume, the client will not come and ask for the discount. At the same time, you may not have as much bandwidth to provide them the discount also.So what we have to look at is that wherever we are giving the discount, one, it is not a discount forever. It is a discount for the limited period. So that means that we still have the headroom for margin growth in the coming period when the discounts will shut down, okay, and that period will be over. And that is the one thing that we have to be aware of.At the same time, wherever we have given some discounts, we are negotiating with the customers, how can we compensate that with the growth for the future growth? So that negotiation also continues to go on. Because it is not -- it is a tricky strategy when the client asks the discounts, we need to compensate it either with the growth or we need to look at how we continue to grow with them. And also being able to improve the operating parameter so that we are able to claw back the discount that we had given to the client.In some of the cases, we have moved people from on-site to offshore, okay? We have removed senior people, recruiting them out, and replaced that with the junior people so that we get back to the same level of margins that are there with those clients despite giving them the discounts. So for that to work, it generally takes probably 3 to 6 months because every location and every change will happen slowly because there is a handing on process that happens.So from that perspective, we are pretty confident that we will be able to claw back the discounts that we have given, and we'll be back there. And that's what we're concerned. My concern remains that how do we continue to protect our revenue with these top 10, top 20 customers because that is the first priority. We know how to improve our margins and operating parameters. And we continue to negotiate with the customers so that we do not take the hit for the longer time.
And sir, on-site has increased substantially this quarter, revenues from on-site. And despite that, revenues have been weak. So just wanted to understand on that.And third is just on this 3Q growth, so would you have a strong uptick in 3Q despite furloughs and all that, like 3%, 4% Q-o-Q growth can we expect in 3Q?
So on-site, yes, it is improving because -- for simple reason that you can't make people travel. Also, there is not too much of work that can shift during this time. So we have to depend on the on-site folks to get the work completed. So that's the reason that we see there is a jump on to the on-site revenues. But we have to always continue to keep the balance between the on-site and offshore, and we'll continue to do that.When it comes to the third quarter, yes, we definitely believe that there will be growth, okay? And then we are -- as we have made good wins in the quarter 1 and quarter 2, there is a good execution that has already started that is going to give us higher revenue in the quarter 3 and quarter 4, so do expect growth in the quarter 3 and quarter 4.
Yes, sir, despite high on-site, the revenue decline was around 4.5%. So that is more worrisome. That is what I was asking.
Yes, correct, because the work that we have completed, that work happens a lot on the offshore side. So from that perspective, it all depends upon that -- the run-off revenue, whether it was from on-site side or offshore, and resultant revenue looks higher on, on-site this time. But I'm sure that it will continue to remain in balance going forward also.
The next question is from the line of Abhishek Shindadkar from Elara Capital.
Congrats on a good execution. Sir, my first question is regarding just a clarification. So there is a clarification about CARE ratings reaffirming your bank facility. So just wanted to know, is this just a facility which got our rating? Or we are thinking of any long-term loans? Or just wanted your clarification?
So I would request Chandru to answer this question because he is much closer to those details. Chandru, can you please kindly answer this question?
Yes. Sure, DK. Thanks for the question, Abhishek. So we already had[Technical Difficulty]
We seem to have lost the line from Mr. Chandrasekar. Please stay connected while I reconnect him. We have the line from Mr. Chandrasekar reconnected. Over to you, sir.
Chandru, please go ahead.
Hello. Can you hear me?
Yes, we can hear you, Chandru.
Yes. Sorry, the call dropped. So Abhishek, to your question, CARE had already rated us in the past. And it was a renewal of the CARE rating. So we went through a review, and CARE has reaffirmed our rating as AA-.To your second part of the question, there are no immediate plans for funding or borrowing. But this is part of our exercise to ensure that we have all of our limits in place. And we also want to make sure that we have the right pricing from the institution. So this rating reaffirmed is going to certainly help us keep our rates and even better them.
That's helpful, sir. The second question is for you, DK sir. If I heard you correctly, you said if not for the pricing discounts, our absolute dollar number for Q2 could have been better than Q1. Did I hear it correctly?
Not only discount, but also the deferred projects.
Sorry, sir?
It is both discount plus deferred projects. Those are the part of the reason that our revenue decline is there. But there is also a portion that is coming from the onetime completion that happened in the quarter 1, and we had higher revenues for Invacare. And now Invacare revenues have stabilized because we were going through the transition in the U.S., APAC as well as in Europe. That, we completed, and we achieved the milestone. So that part of the revenue collection was over. And hence, you see that also contributing to the decline for the quarter 2.
Okay. Okay. Understood. That's helpful. So sir, given the strong order books that we have signed and these pricing discounts are likely behind, would it be fair to assume that by next Q3 or Q4, we should be exiting at the Q4 FY '20 exit rate? Or that will be a tough ask?
So we continue to work at how do we beat that, okay? So as you know, that we have been beating our year-on-year growth, definitely. For all the same quarters in the previous financial year, so far we have been doing better than them. And that's the plan for -- going forward as well.
Okay. Okay. So -- okay, that's fair enough, sir. And just one follow-up -- just one question on the margins. Now given that the other expenses have dropped substantially, and we had talked of MIS integration and other rationalization of expenses, would it be fair that the margin profile of the firm can remain at the current levels or expand? And I'm asking from the perspective that would you also have a consideration for wage hikes given that many other organizations have given wage hikes or would give wage hikes from January quarter?
Correct. So we are also giving the wage hikes from the January, and we have taken that into the consideration. We believe that the changes that we made in the last 2 quarters on our operating parameters are very much fundamental and foundational in nature. And that would mean that, that margin profile is going to stay. Yes, the newer expenses such as wage hike will come, but our objective remains that we will earn all the hikes that we build by improving our productivity and by improving our efficiency. And we continue to work in that direction. So our goal of reaching 15% EBITDA in the quarter 1 of the next fiscal year stays.
The next question is from the line of Ravi Menon from Motilal Oswal.
DK, you explained this quite a bit. But I think -- sorry to hop on that. But if we look beyond, the temporary rate cut that was given at Invacare, is there any kind of cost takeout that was promised as part of the transformation program? So that's a more permanent change in the revenue?
No. There was nothing -- that was not a part of the plan for Invacare. There was no cost take-out that we wanted to give or committed to give, additionally, other than that will come by improving the efficiency after transitioning the work to us. So this is in normal pace where they have off-shored the work, and they will get the benefit from the business case that has been created. But there is nothing substantial or different that we plan to provide them that would result into any margins or revenue declines.
That's what I meant. I mean -- so how much of the revenue decline would you say is due to the planned decline because of the offshore move and the transformation that's been done? And how much would be the temporary rate cut?
Approximately, if you look at the gap due to the -- Invacare is approximately $3 million, $3.5 million, okay? And rest of the part is due to the full quarter discount and deferment there. So that's the ratio between the 2 regions.
Okay. Okay. And what sort of deals are you -- have you signed? About this -- the new deals that you signed, are these with new customers? And are these outsourcing deals,more projects? Because I saw in the press release and it seemed to be a lot more implementation programs. So how much of those do you think is annuity? And how much of those would be consumed in, say, less than 2 years?
Yes. The larger deals that we signed, these are the annuity deals for 2 years and 5 years. The larger deals that we have signed are towards the energy customers or what we saw with the manufacturing and all that. They were all 3 years and 5 years run. So that's the reason that you see that 4% uptick that we have seen in H1 for our annuity revenue. And you will see the same uptick in the H2 also because now when we start executing that we were and that the revenue will grow.There were not as many transformational projects that happened in the H1 except for few, which were already in the motion for our clients, and they could not stop. But other than that, you would see that net new wins have reduced, whereas the new revenue for existing customers have really grown significantly. So from that perspective, that gives you a lot more confident that our margin profile will not go down because the margin profile takes a hit when you win a net new customer and get through the whole process.But most of our customers where even we have won the larger deals, these were -- some of these were consolidation deals that happened in our favor. And that means that we are going to continue to improve on our margin going forward also. And there is not significant risk that remains with those projects that will be runoff revenue, and then these are all 3 to 5 years.
And one question to you, Chandru, on the dividend payout. If I look at engineering, your DSOs have been coming off. And that's really great. But we've now, I think, come to a level where we should probably expect that to go up from here, right? Would you think so? And what sort of cash conversion should we see to prompt that growth path?
Sure. On the DSO point, I do think we will stabilize between the 63 and 65 days. And you're right, as we grow going forward, as DK said, we should see some uptick in our DSOs that we expect to. We expect to be steady at between 62 and 65 days.Now what impact will it have on our cash quarter-on-quarter, I still do believe that our cash will continue to -- will stay stable and improve as we go forward. Of course, we have to look at what further CapEx and other investments that we will continue to make as we grow. And that's an item that we will take on an ongoing basis. But the cash inflows will certainly improve at -- on an absolute basis.
Right. And on the long-term assets, what we see as other financial assets, the INR 51.3 crores, are these long-term fixed deposits or mutual fund holdings. So how should we actually watch this?
Yes. So they are investments that we have made this past quarter in fixed deposits in highly rated companies and also in liquid mutual fund stuff we have invested during the past quarter. The financial assets that you're looking at are predominantly the fixed deposits.
Great. And so given that our cash flow is really healthy, I think the current dividend payout implies roughly about, I think, 25% more or less. DK says very clearly that there is no transformational M&A that -- but you'll be looking at only tuck-in for capabilities. So what's the need to keep adding cash? So wouldn't -- would it be prudent to consider a better cash payout?
So there is -- let me answer. If I look at a couple of quarters back, we were of the opinion that we need to see our revenue and profit margins to be at a stable point to look fundamentally firm. Only then, we'll think about any new acquisition or go for nonlinear growth-related opportunities.I believe that today, if we look at -- I have a lot more confidence in the stability and the consistency of our revenue and the growth than what I thought 2 or 3 quarters back. So we are discussing that how do we look at the assets that are available in the industry today, some of those are required because there is a big shift in the asks that our clients have. There is a different focus that would be required, different set of capabilities that will be required if we have to continue to grow.So we have started looking at those opportunities as well. But we will go for those opportunities only if it is going to help us scale our revenues, scale our existing services and offerings also. So we are working in that direction. That would mean that we will need cash for those opportunities as well. And hence, we are open for taking those steps today. But we are going to be very careful with respect to where do we invest and what kind of growth should we expect from those kind of investments.
DK, but given that you have said there will clearly be no acquisitions for revenue. I think these shouldn't be very sizable, right. And you are sitting on quite a good cash balance. So I think that you could improve your return ratios, but then improve the dividend payout or through a onetime buyback and get some of this off because, otherwise, it suppresses our return ratios.
But I feel that -- absolutely. I think we have given our request and we have started discussing that at the Board level, all the possibilities. So as I said in the beginning that the Board -- considerations are definitely there in front of the Board and we are going to decide on that. Our objective definitely will remain how do we give and maximize our returns to our stakeholders and shareholders. So we definitely will continue to work in that direction.
The next question is from the line of Rohit Balakrishnan from VRDDHI Capital.
Am I audible?
Yes.
Yes. So DK, just on this revenue trajectory going ahead and given our very strong deal wins, especially new deals as well, so I think, I missed the part when you mentioned about -- somebody was asking about beating the Q4 base, which has been the highest. So can you just allude what was your answer to that? I mean do we expect to sort of go beyond the Q4 base that we had set at the end of this -- at the end of the last financial year -- in this financial year, I mean?
Correct. Absolutely. Look, we are very clear with our objectives. While I see the decline in this quarter, our first focus definitely is that we continue to grow quarter-on-quarter. That is our first subjective, very clearly. Even when we have seen the decline, our objective doesn't change. We want to grow quarter-on-quarter in the upcoming quarter.At the same time, the second objective is that we also continue to grow year-on-year so that we are always showing the growth in our revenue year-on-year also. So that's the second.And third, that I am always committed to that we have to get to the EBITDA level at par with the industry. And we need to deliver in the quarter 1 next year at 15%. And I'm committed to that off.
Got it. Also, DK, you mentioned that this decline, I think, about $3 million or somewhere above that number was driven by Invacare. So Invacare was roughly $24 million kind of run rate yearly. So this was -- does that -- I mean, so $6 million quarterly. So does that change or -- because you've shifted to offshore? Or is there -- or did I miss that part? So just one clarification on that.
No. I think we will stabilize at $24 million every year from now onwards. So that will remain.
Got it. And DK, just also in terms of margin outlook. So obviously, very heartening to hear that you were committing to 15% Q1. But a couple of questions. So one, in terms of our cost, there has been significant improvement. And also, while our offshore declined quarter-on-quarter, but for most of the IT companies that have come out there, they have seen a big tailwind in their offshore mix. So given these 2, given the cost decline and the offshore/onshore -- offshore tailwinds, is there a thinking that we can perhaps even like go -- either achieve 15% earlier and also go beyond that given these 2 tailwinds apart from the operational improvements that we have?
No. I'm sure because profit is never sufficient. We always want to do more and more. So absolutely, we are also working towards that. But we also have to look at that we all will need significant investments in order for us to be prepared for better growth. So the reason that I want to sit myself to 15% is that while I deliver higher than that, I deliver higher margins so that I'm able to invest back for the higher growth. So that's the clear objective. And I stated that in the -- 3 or 4 quarters back also, the same question, and the answer that I gave was that we want to be at the level where we are able to deliver internally more than 15%. But I committed to the Board that the higher fees, I will invest back into the business for the growth in the subsequent quarter.
Got it. And just 2 more questions. One was on the -- and just a clarification. So someone had asked about rapid -- the finding by staff that they were talking more rapid deployment towards -- or rapid movement of their client base towards cloud. So -- and even Oracle has been talking about it. So is that is a tailwind for us or a headwind for us? Given our existing revenue base, there would be some -- I mean, there would be some runoff there. And in general, if my understanding is correct, that the deal size or the implementation revenues for cloud deals is a bit lower. So for us, incremental revenues will be lower. That was the first question.And second, I'll just roundabout my question. The second question was on tax rate, so we still continue to sort of pay 30%. Is there any thinking to move towards 25%, the lower tax rate?
Yes. So I will ask Chandru to answer the second question after I finish the first one. If you look at -- it is a bit normal that -- it's normal that the revenue of migration to the cloud or the rapid deployment on the cloud will reduce the revenue coming from the service provider because it is not that the complexity has reduced. In fact, what has happened is that earlier, there was a monolithic implementation that used to happen. Hence, the revenue looked higher. But when it is happening on the cloud, this has got distributed from 1 big monolithic component to multiple components, which integrate with each other. So on a particular component, it may look like the revenue is smaller. But when you go and end up integrating with the other products, other solutions, other components on the cloud, you come back to the sales level of implementation costs.Earlier, the entire implementation used to happen in one go. Now that will get scattered and will happen in the pieces. But that does not mean then the implementation costs will go down. If you pick up any of the product, even if you pick up SAP on cloud, now success factor sits outside the SAP. And now this becomes 2 components. Similarly, there are other solutions that are there on the cloud. They sit outside the core SAP, but they do get integrated with the SAP.So if you look at these total cost of ownership, it may still be either equal or higher because you have to spend on the integration. If some components are on cloud, other components are on-premise, you get higher costs of the integration. So the total cost of ownership doesn't go down. It still comes. But it doesn't come in one big chunk. It comes in the smaller chunks. If you're happy with the answer, I can ask Chandru to answer the second question.
Yes, DK, that was very elaborate. I got it.
Okay. On the second part of the question around tax rates, we continue to evaluate that. We obviously need to look at a few factors. The deferred tax effects in our balance sheet and the MAT credits already available versus the improvement that we will get from the -- this -- moving of tax regime from the old to the new. So this is being monitored on a continuous basis, and we will take the decision at the appropriate time.
The next question is from the line of Ashish Aggarwal from Principal Mutual Funds.
Sir, most of my questions have been answered, just a couple of them. Wanted to understand, you said that the revenue decline in this quarter was also because some of the projects got deferred by the client. So just wanted to understand, have those projects started? And will we see those revenues starting to come in second half?And also on the pricing side, are these prices for short-term discounts you have given? Or these are for the duration of the MSAs for the client?And lastly, on the pipeline side, if you can quantify how much the pipeline has grown on a year-on-year or on a Q-on-Q basis, that will be really helpful.
Okay. Great. If we look at from the perspective of the deferred projects, some of them have started trickling in. But I believe it is going to come back in the quarter 4 for us because that would be quarter 1 for the U.S. market. And they all are going through their budgeting exercise, and that means that quarter 1 is a time when we should look forward to having them back and started again.On the discount side, we have not changed the prices. We had given the discount. It is a one-time discount, limited period discount. So they will definitely start coming back in the Q3. Many of them will start coming in the Q3, then rest will come in the Q4. So that are all going to get reversed because we have not changed the rates. We have not changed the prices.Then there was a question on the pipeline. Let me ask Roop to answer that question. Roop is our Chief Business Officer, and there is a significant improvement that we have seen in the pipeline increase, and I don't want to take this time away from him. So let him talk about this.
Sure. Thank you, DK. So our annual pipeline, if I look at it, say in the last 1 year, we moved our pipeline -- active pipeline from roughly about $500 million annually to about close to $900 million at this point in time. So that's a significant jump. Now quarter-on-quarter, that translates anywhere between an increase of 15% to 20% increase of our pipeline. And we will continue to see that trend. And the significant shift is the type of deals and the type of deal value pipeline that we are getting, and that has improved significantly.
Great. But sir, when you see some of these pipeline, a lot of these deals will be more offshore-centric or these will be similar to what happened during the pre-COVID time?
So when -- we don't the difference in terms of a mix of whether there's more offshore-centric or on-site-centric at this point in time. It will all depend on the execution and where the customer feels based on the COVID scenario that is, whether we could do the project on a distributed model. And in that case, we will see more work shift towards offshore. But the deal structures are not changing in terms of where -- it's not being defined as to more off-site, on-site at this point in time.
The next question is from the line of Dipesh Mehta from Emkay Global.
A couple of questions. I think you -- first, about the utilization. DK, earlier, you indicated about your comfort range of utilization was around 82 percentage to 83 percentage. So any rethinking on that number you think we can operate much higher comfortably?Second question on the tail account rationalization. Do you believe we are largely done through tail account rationalization and now it should stabilize and grow? Or do you think there is still some time to go before we reach some stability in active client?Third question is about annuity revenue. Can you help us where we have reached in annuity revenue mix perspective?And last, if you can provide some color about the deal we entered this quarter remained very strong. So if you can provide some additional detail on the deal win?
On the utilization, I believe that there is lot of hard work done by SK and team in order for us to improve our utilization. And we have reached to -- closer to 84%. But I believe that if we remain at 83% or 84%, I think this is a very good utilization to have. Because if we continue to deliver the utilization at that level, our next goal would be, how do we touch upon the other parameters so that by keeping utilization constant, we are able to get the efficiency from improving on the other parameters, such as pyramid and the other things? So that is what will be the focus going forward. So I don't think that we will run after improving the utilization more. But how the same utilization will give us better efficiency will be the focus for us going forward.Looking at the tail accounts, I believe that, yes, we had made significant progress on getting the rid of our tail that was not moving. That means that the margins were very low, but revenue growth is not happening or revenue is very, very negligible, okay? Because at the end, we should know where we are going to put rest of our investment.Having said that, tail never finishes. Tail is something that we continue to develop going forward also. And what we have to look at is that we continue to assess every second or third quarter as to what is the situation of the tail. Is there a tail account that we acquired thinking that it would become big, but it has not for a year time, and then it's a time to take a decision on that.So this is a continuous process. But I believe that we have largely taken the actions where the actions are required. And then we'll continue to work in the direction that how do we make the new wins, but only sustain it if it is going to grow in the future. So that's sort of my answer on to the annuity side -- sorry, on the tail account side.On the annuity side, as I mentioned, we have moved by -- moved up by 4% in the H1. And that, in my opinion, is very good because this is something that is going to give us much higher order booking for the next financial year. And our focus will remain that we go after those deals that we can sign for the multiyear and for the multiservices. So I'm very satisfied with that progress that is happening. And on the deal win side, let me ask and request Roop to give a color to the kind of deals that we have won in this quarter as well.
Yes. So thank you, DK. So the deals that we are actually going after specifically and the option would be large sort of AMS-type activity. So application management annuity-type deals. That's number one.Number two, we have also seen a fair amount of asks from our clients in terms of expectations on the user experience. So that has enabled us to significantly grow our digital component of our business. So how they are actually either looking at revenue generation activities or they're looking at client experience, and that is overall. So it's a mix of both significant things that have been in terms of the large annuity deals, AMS-type deals, and then added digital components on top of that.The second, of course, is we continue to work with our clients to extend the life of the current ERP platforms given the cost optimization. So that has also helped. And that's being converted into annuity, given that you are supporting them on the current ERP platform. And the third, and also, we've continued to see some implementation in either ERP implementation or platform implementation. That probably gives you a mix of what we are focused on.
Correct. And I'll just extend that answer by saying that there is a big shift that we have seen that even in those support and maintenance kind of deals, or ASM deals. There is going to be a digital component in that also. So we are seeing that as clients continue to adopt the digital technology, even in the ASM, there is a digital component that has started coming in.So with that, that shows that the level of competence and capabilities will continue to improve, and the level of differentiation that we have to provide in the business model will be very crucial. And that definitely will provide us the tailwind in order to go and close those kind of deals in the future as well.
DK, on the utilization, if I may add, while we maintained 82% to 84%, healthy utilization, some of the efficiency drivers for delivery and execution will continue. What it helps is to induct fresh campus graduates that help me to improve margin over a period of time, and also create a pool that helps us to accelerate our growth. So that kind of efficiency we should be able to bring by maintaining the utilization.
DK, just one annuity number. What was the number for -- at the end of Q2? I mean you said 4 percentage increase in H1, but what is the absolute number?
64%.
The next question is from the line of Ashish Kacholia from Lucky Investment.
Congratulations on a good set of deal wins. My question is whether in the future, the customers are going to ask for any on-site presence at all? Or I mean it's going to be pretty much left to the discretion of the contractor to decide on-site, offshore?
So even today also, the client is always in the discussion when we decide what part of the work has to be delivered at on-site and what part of the work will be delivered at offshore. And some of the parts that have to happen at work shore -- at offshore will begin at on-site and then will get transitioned to the offshore. So it's -- always there's a mutual agreement that happens.However, if you look at -- the situation is also changing a little bit with the new visa rules coming into the play. And we are working on now a completely different model that can be called as a boundaryless border -- boundaryless operating model, where it will not matter from where the work is getting delivered. The virtual teams will be able to come together and deliver the work that is required by the client.So earlier, client wanted one ODC and all the people to be in lock and key under that ODC. But today, client knows that if all these people are sitting at one location, there is a risk of infection getting spread within the teams. And that would mean suddenly the whole team is quarantined. So considering all that, they are far more open that we have people distributed across multiple locations and even multiple countries. So that gives us larger flexibility that we can provide them, the operating model that is widespread, and we can choose best-of-breed people wherever they are available rather than trying to bring all the people into one location.So that's a very exciting piece of work that we are doing it with a couple of our customers, where we are defining the boundaryless working environment for them. So on-site and offshore slowly may lose the meaning as it was traditionally known. And in future, it may take shape -- very, very -- take very different, different shapes so that we are able to create the tools -- put up the tools that bring the virtual team together, but still be able to deliver without letting clients know if there's any impact because the team is sitting in the multiple locations.
Just an add-on question. Earlier, it used to be that the person in the front end used to understand from the clients what are their new projects and what are the -- how to kind of go about starting up the project. Now given that most people have gotten used to working from remote locations during COVID, does that front-end project understanding, transitioning and kind of initial implementation, has that lost its kind of importance in the overall scheme of things? Or you feel that you still need the front-end teams to kind of start off the execution and then transition it offshore?
Yes. No, I think this is the absolutely brilliant question. Because as I said that the execution slowed down a little bit in the quarter 1 and quarter 2. There are 2 large deals that we closed, in which 100% transition happened without a single travel. So everything over the web, over the Zoom and the Microsoft Teams calls, the whole transition has happened.One of the transition was in an environment which was missile transition. That means the investing incumbent was not very much willing to help and support. But we were able to finish that also with them successfully. So that gives us good confidence that in these 2 quarters, we have been able to create 2 very good case studies where we can do the transition without making any person travel. It brings the cost drastically down. But at the same time, it gives the confidence to the client that it is not necessary that I need to have all the people sitting next to me if I have to transition the knowledge.So as they say that necessity is the mother of invention, I think that is what happened in the last 2 quarters, where we have closed these 2 transitions very, very successfully. Will it lose the meaning in the future? No. Once the travel is back, I'm sure there will be different type of pressure that -- can I have person next to me? Can the transitions that are going to happen in 3 months be done in 2 months if the person can travel? Yes, those kind of prospects still remain. But the confidence will be there with the customer that even if that person may be sitting away, the knowledge transition can happen without too much of an impact. It will take 5%, 10% efforts more, but it can still happen.
And do you think that the importance of client mining and the front-end person being out there, that remains intact pretty much for client-mining purposes?
Yes. It does remain because from the relationship perspective because people don't buy just from anyone. They buy when there is a relationship between the people of the 2 companies. So I don't think that is going to go away. However, I think the significance of inside sales or being able to provide the first level of connect to explain what are the offerings can happen from any location. And that would mean that the cost of that inside sales will come down because a lot can be achieved by sitting at offshore office. But in my opinion, to close a deal, it is always good to be in front of the client because the relationship makes a lot of difference.
Okay. And sir, my last question, basically, we have won some fairly large deals in this quarter. So -- where most of these would likely have been versus Tier 1. So what was the differentiation factor that you got out of these deals?
So I think the execution quality was -- in one of the case, we were also incumbent, but we are very small in comparison to the competition. And our execution capability was seen as a big factor in giving that work to us, okay?In the other case, it was the solution that we presented to them. And solution, as I say, it has 3 components: it is one that has a technical solution; second, it is the commercial aspect; and third, the relationship aspect. So all these 3 things have to come together to make a win, and we were able to deliver very superior experience for the client and the level of attention that was needed by them during this time and that made us win.Those are the kind of differentiation that happened. We also went with our approach of micro vertical and micro horizontal, where we could go and challenge that it doesn't matter you're incumbent or bigger than us, but we can deliver better than them. And we were able to demonstrate them through the POC and those approaches, and they got the confidence and provided that to us.Last but not the least, the level of attention that we can give it to them by being a smaller company, okay? So the kind of attention that we gave to them, and we committed to them that this is the kind of potential that we give to them. They are very happy with us, and they went ahead signing those deals with us.
The next question is from the line of Manik Taneja from JM Financial.
DK, my question is with regards to this...
Manik, can you please be a bit louder?
Just give me a second. Is this better?
Yes. Much better, yes.
Yes. So my question to you is with regards to this strategy of cutting the long tail of accounts. You've only seen that accelerate in the first half of this year. I just wanted to get your thoughts as to where are we in that journey? And how -- while it has been beneficial from a margin standpoint, how much drag would we have seen because of this in the recent past?
There is not much revenue drag that we can see by taking the decisions on the tail account because we are very careful in looking at how do we shift our resources from those tail accounts to the strategic accounts. So that means that if we do something at one place, we are significantly growing the revenue at the other place. So that there is no negative impact, but margins have improved.At the same time, what we have to look at is not only about the revenue and the margin, we have to also look at the level of attention that we can give to them. Because even if the account is small, if it has a lot of potential from our account management team and if you want our account management team to be focused on our platinum and gold and silver accounts and not on the tail accounts, then we need to get rid of the tails. And it is a spring cleaning that we have to continue to do every year. And I think it should be seeing it that way rather than seeing that we will go and sacrifice any revenue or margin because of that.
Sure. So is there -- can you give us some sense as to where are we in that journey? Should this continue further going forward? Or do you think it hit the right size now in terms of number of customers?
I think we are pretty much stable now. I think we came down to very -- about 312 or something like that, that we have reached. As far as the tail accounts are concerned, it is not in front of me. But we significantly reduced our tail accounts. Yes, now it stands at about 310, yes, correct, right?So we have reached to 310. And we are significantly reducing. But we are pretty much stable here because there are -- it's not that tail is not there. Tail is still there. But we believe that it is still a tail that has an opportunity in it, and we should go and mine their account. So it is about keeping a clear focus that, yes, we can go back where the account manager or the sales person will take the accountability that we would keep this account because we know that we can grow it. So that would mean that the attention will be there on that account, and we would start growing them.So if they don't grow, let's say, for the next 6 months, then we will have to take decision again on a couple of goals, which we see that despite our all best efforts, those are not growing, then we will have to cut the tail at the right time. So this is how much we are sorting this process.
We'll take that as the last question. I would now like to hand the conference back to DK for closing comments.
So thank you very much, everyone, once again, for joining that late during the day. And as I said, I think our #1 priority will remain that we continue to grow quarter-on-quarter despite having this blip in the quarter 2. I am absolutely very, very positive and upbeat about upcoming quarter. So from that perspective, that remains our first priority. Second priority, as I said, will definitely be to continue to improve on our margins. And third, how do we continue to grow year-on-year also, so that from all aspects, we see that our performance is green.And I definitely appreciate and thank all of you for your support. And I'm sure that we'll continue to come back and continue to create value for all our shareholders. Thank you very much.
Thank you very much. On behalf of Birlasoft Limited, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.