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Coforge Ltd
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Ladies and gentlemen, good day, and welcome to the Q3 FY 2022 Earnings Conference Call of Coforge Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Agarwal, Head Investor Relations and M&A for Coforge. Thank you, and over to you sir.
Thanks, Margaret. A very warm welcome to all of you, and thank you for joining us today for Coforge Q3 FY '22 Earnings Conference Call. As you know, we announced our Q3 results today, which we have filed with the stock exchanges, and the same is also available on the Investors section of our website, www.coforge.com. I have with me today our CEO, Mr. Sudhir Singh; and our CFO, Mr. Ajay Kalra, for the call. As always, we will start with the opening remarks from our CEO, and post that, we'll open the floor for your comments and questions. With that, I would like to hand it over to our CEO, Mr. Sudhir Singh. Sudhir, all yours.
Thank you very much, Ankur. And a very good morning, very good afternoon and a very good evening to you across the world, folks. Since we're meeting for the first time in the new year, I'd like to wish you and yours a very healthy, happy and meaningful 2022. Thank you very much for taking the time and for joining us for the conversation today. Before getting into the details for the quarter, I would like to highlight the strong operating markets that have characterized our year-to-date and our third quarter performance. You will recall that our performance plans for the current fiscal, not only warrant registering very aggressive growth, but they also involve expanding our EBITDA materially at the same time. In Q3, the shortest quarter of the year, we saw continued sequential EBITDA expansion despite existing supply-side pressures. The quarter also saw robust broad-based sequential growth, continued net headcount addition at a very fast clip, strong growth across our top clients, yet another large deal closure and a continued improvement in the offshore on-site revenue mix, onboarding senior talent at scale, successful integration of acquired businesses, and attrition below industry average for the other callouts. With that, I move on to the revenue and the growth section around our quarterly performance. I do want to call out at the outset that every time I refer to organic, I shall be calling out performance, excluding SLK Global, the acquired entity, and consolidated will refer to the aggregate firm's consolidated performance. With that, we are pleased to report that the firm experienced robust organic growth during quarter 3 fiscal year '22. On an organic basis, excluding the acquired SLK Global business, our quarter-on-quarter growth during quarter 3 was 5.7% in constant currency terms, it was 4.6% in U.S. dollar terms and it was 6.1% in Indian rupee terms. The firm's consolidated revenue, including contribution from SLK Global grew quarter-on-quarter by 5.2% in constant currency terms, 4.2% in U.S. dollar terms and 5.7% in Indian rupee terms. On a year-on-year basis, quarter 3 growth was 37.8% in U.S. dollar terms and 39.3% in Indian rupee terms. On a year-to-date basis, at the end of the first 9 months of the current fiscal year, the firm is growing 39.2% in U.S. dollar terms. On an organic basis, the firm is growing 26.2% year-to-date in U.S. dollar terms. The consolidated reported revenue registered by the firm for quarter 3 fiscal year '22 was $221.6 million in U.S. dollar terms and INR 16,581 in Indian rupee terms. I shall now detail the vertical-wise consolidated revenue growth for the quarter under review. In quarter 3, our BFS vertical grew 111.9% year-on-year. The Insurance vertical grew 23.1% year-on-year. The Travel, Transportation, Hospitality vertical grew 27.4% year-on-year. The other segment, which includes health care, government outside India, high-tech and manufacturing grew 18.8% year-on-year. Our consolidated vertical-wise revenue contribution is available in the fact sheet uploaded on the firm's website. You will notice that BFS, Banking Financial Services, is now 28.4% of the firm's revenue, Insurance is 27.8% of the firm's revenue and TTH, Travel, Transportation, Hospitality is 18.3% of the firm's revenue. Our top 5 clients grew 18.4% quarter-on-quarter, and they contributed 25.2% to our overall revenue. Our top 10 clients grew 15.5% sequentially, and they contributed 36.1% to the total revenues in the quarter. We continue to, and I believe you would have noticed that, remain very derisked from a client concentration perspective. Equally importantly, sustained growth across our key client relationships has seen the number of greater than USD 10 million client relationships doubled from USD 9 million to USD 18 million over the last 2 years. Our offshore revenues represented 46% of total revenues in quarter 3 fiscal year '22. One of the important and positive structural changes in the firm's operating profile has been the continued expansion of offshore revenue as a percentage of overall revenues. Offshore revenue as a percentage of global revenues has risen by 10% over the last 5 quarters from 36% in quarter 2 fiscal year '21 to 46% now in quarter 3 fiscal year '22. This reflects ongoing execution of our recent large fleets which have a larger offshore component as well as our expanding book of managed services contracts. We also believe that this remains a key margin expansion lever going forward, an aspect that I shall detail now. Moving on to the margin performance for Q3. In Q3, we recorded an adjusted EBITDA margin of 19.5%. This is the highest quarterly adjusted EBITDA margin recorded in the last 10-year history of the firm. And it reflects strong execution during a period where the industry is combating rising retention and hiring costs. This expansion in EBITDA over the last quarter came during the shortest quarter of the year, where we had multiple headwinds on account of hiring and retention costs, a sequential decline in revenue of our AdvantageGo platform business and the impact of holiday-related furloughs. The adjusted EBITDA margin expansion in the current quarter follows a sequential adjusted EBITDA margin expansion of 260 bps in constant currency terms in Q2 over Q1. The principal execution-related drivers have been higher offshore revenues and a calibrated flattening of the delivery pyramid. As I've noted earlier, offshore revenue as a percentage of global revenues has risen by 10% over the last 5 quarters. Our offshore revenues have grown at a CQGR quarterly growth rate of 11% over the last 5 quarters, outpacing the firm's overall growth. In absolute terms, adjusted EBITDA reported for the quarter is INR 3,226 million in Indian rupee terms and USD 43.1 million in U.S. dollar terms. As you know, adjusted EBITDA excludes ESOP costs, and any nonrecurring items such as acquisition-related expenses. We believe our mix of increased offshoring levels, continued improvement in the delivery pyramid, and operating leverage from growth has set the ramp for another strong sequential expansion of adjusted EBITDA margin in Q4 over Q3. Our consolidated profit after tax for the quarter stood at INR 1,837 million in Indian rupee terms. This is an increase of 25.2% quarter-on-quarter and an increase of 50.7% year-on-year. In U.S. dollar terms, our consolidated PAT for the quarter stood at USD 24.5 million, which is an increase of 23.1% quarter-on-quarter and an increase of 49% year-on-year. As I conclude the first 2 sections of my commentary around revenue and margin performance, I would like to underline once again that not only are we attempting to drive very strong growth, as exemplified by our 39.2% year-to-date growth number, but that we are equally committed to expanding our adjusted EBITDA margin at the same time in fiscal year '22 over fiscal year '21. With that, I move on to the order intake section. This year has been the best year in the history of the firm in terms of the size and the velocity of large deals won. In the first half of the year, we had already secured a USD 105 million TCV, 4-year 8-month contract and also two USD 50 million plus contracts. That momentum continued in Q3, and we signed a USD 45 million plus PCV contract in Europe. The order intake for the quarter was USD 247 million. It comprised USD 91 million from the Americas, USD 110 million from EMEA and USD 47 million from the rest of the world. I would like to note again that in the first 9 months of fiscal year '22, the current year, those first 9 months, our total order intake stands at USD 850 million. And this is 9% more than the order intake of USD 781 million in the entire last year, which was fiscal year '21. As a result, booked orders for the next 12 months now stands at USD 701 million. This robust order book for the next 12 months coupled with a track record of repeat business from clients of over 90%. In parts a high degree of visibility and confidence in achieving our stated goal of $1 billion plus of revenue in next fiscal year. 13 new logos were signed during the quarter, they included one of the world's largest retailers and one of the largest global travel tech firms. I shall provide quick color around delivery operations and capability build efforts now. An intense focus on execution reflected also in our attempt to increase margins by 100 bps in the current fiscal year despite the supply-side pressures. Along with a complete recreation of the firm's technical services stack has underlaid our efforts over the last 5 years to create a product engineering-driven culture. At the end of the current quarter, our revenues from product engineering, enterprise integration, intelligent automation, data services and cloud infra services stands at 72%. The bulk of the remaining organic revenue, around 27%, came from the ADM service line application development maintenance, which is also being aligned with a product-first approach. We are recreating the ADM service line as a composite engineering service line with training at scale of full stack developers and scrum masters. Our strong belief that robust and sustainable, long-term growth can only be built on the back of both deep technology and industry expertise continues to drive our investments. In our view, surprise-free execution is what has led to the number of greater than USD 100 million accounts for the firm, doubling over the last 2 years itself. Our execution against the USD 105 million 4-year 8-month TCV contract, one in quarter 1, and the 2 USD 50 million contracts last quarter continues to remain firmly on plan. As we've shared earlier, [indiscernible] disciplinary integration, convergence of multi-clouds, and systems resilience across the stack, including applications, architecture, data, cloud, intra workplace, networking and security is the key agenda of most of our client organizations. Our recently created sales force service line, our engineering convergence at approach, our AIOps platform, which is an integrated programmable platform, and our own proprietary platforms continue to drive differentiation and address our clients' objectives. During quarter 3, a global travel concierge company and a leading U.S.-based retail chain have chosen Coforge as their journey to the cloud partner. We have also won 2 new digital transformation programs from an Australian entity to replace their legacy CRM applications with the modern Pega solution. While Pega continues to be the flagship alliance partner in our digital process automation service line, strategic initiatives such as our in-house Appian Academy, have become a crucial lever to enable our growth for Appian-based services as well. In quarter 3, on the digital integration front, we secured a mandate from a U.S.-based client to rearchitect and support their systems around a configurable MuleSoft sales force platform, and thereby enable future acquisitions for them with speed. During the quarter, once again -- during this quarter, MuleSoft indicated that they are prepared to agree to use the Coforge MuleSoft 4 migration service for a majority of their strategic European clients. Moving on, Coforge was also named as a major contender in the sales force services and insurance [indiscernible] matrix assessment 2022 of the Everest Group. This is the first time Coforge is being assessed for its sales force capabilities. So marking our entry as a major contender helps validate the maturity of the practice and our deep understanding of the insurance space at the same time. In the insurance space, during the quarter, we delivered a strategic project for an insurance major life products, helping them with expanding their accelerated underwriting footprint. On the travel side of the house, courses, the next-generation air cargo ground handling platform developed by Coforge for [indiscernible] has been implemented by us at another airport in the Middle East. With this rollout, 3 major airports in that region will now be operating on the Coforge developed courses platform. Separately, another leading airport in the Middle East as well as an India-based airport governance body, have partnered with us for their IT transformation and IT security improvement over the next 3 years. Travel technology, again, has always been a strong end market for us. Building upon our deep domain knowledge and a decade-long engagement to the client, we were selected during the quarter to be their preferred partner for their Partner Network Program. That program involves product delivery and implementation of the entire product portfolio of the client. And finally, both SLK Global and WISHWORKS were folded into the Coforge master brand during this quarter. These businesses now operate as the Coforge business process and the Coforge sales force service lines, respectively. With that commentary, I move on to the people section now. Net employee headcount addition was yet again near an all-time high for a quarter. During the quarter under review, we added a net 1,087 people to our headcount in the IT business. This is an increase of around 7.5% to the global IT services headcount, which now stands at 15,467. For the overall firm, including the Business Process Solutions business, our total headcount at the end of December 2021, stood at 22,130. Utilization for the quarter was 77.1%. As you're aware, we include trainees in our utilization calculation as well. And this year, the number of trainees is likely to be around 6x of what it was 2 years back. Attrition during the quarter increased marginally to 16.3% and remains one of the lowest across the industry. This relatively low attrition number, in our view, is the best possible testament to our workplace culture and environment, and we believe reflects the very strong affiliation that members of team Coforge have with the firm. Balance sheet, quick commentary, cash bank balances at the end of the quarter stood at USD 440.8 million after payout towards an interim dividend declared in October and the acquisition of the residual equity of WISHWORKS. CapEx spend during the quarter was USD 2.3 million. The debtors at the end of the quarter stood at 70 days of sales outstanding. Coming up, an outlook. 4 years back, I had shared our plans to carve out a path to deliver robust, sustained and profitable growth. More recently, at the start of the current fiscal year, we had indicated that we plan to grow at least 17% in organic CC terms. Over the next 2 quarters, we had raised that guidance to at least 19% and subsequently to at least 22% organic constant currency growth. Given the sustained growth momentum, we are pleased to revise our annual revenue guidance upwards. We now believe that our consolidated revenue will grow around 37% in constant currency terms over last year, and that our organic revenue will grow around 24% in constant currency terms over last year. Reported dollar growth based at current exchange levels will be higher in our view. In the last fiscal year, we delivered an adjusted EBITDA margin of 18%. This year, we continue to target an adjusted EBITDA margin of 19%. And we believe we will end the year between 18.9% to 19% adjusted EBITDA margin. This will require another sequential expansion in the adjusted EBITDA margin in Q4 over Q3 by around 130 bps, and we are working towards that. To sum up, we expect consolidated revenue to grow around 37% in constant currency terms and adjusted EBITDA to grow around 44% in CC terms for the year. Fiscal year '22 continues to promise to be a landmark year in our 40-year history. We believe that our growth this year has set us firmly on the path to be a $1 billion-plus IT services firm next year. The significant and concurrent jump in both revenue and adjusted EBITDA margin during a supply constrained year, a structural change in our cost structure with an improvement in both offshore on-site mix and the operating pyramid, continued broad-based growth, significantly augmented employee head count, strong growth with our top clients, material accretion in the Fortune 1000 client numbers, sustained large deal wins and ability to onboard senior talent at scale, successful integration of acquired businesses, and attrition below industry average, we believe, set us up very well to continue on the path to robust, sustained and profitable growth in the years to come. With that, ladies and gentlemen, I come to the end of my opening remarks, and I look forward to hearing your comments and to addressing your questions.
[Operator Instructions] The first question is from the line of Sandip Agarwal from Edelweiss.
Yes. Good evening to the management team for excellent execution in a seasonally weak quarter. I wish happen new year to the whole team. So Sudhir, while you very clearly are confident of $1 billion roadmap for the next year and the kind of margin we are reporting all set to be very positive. There are a couple of things which investors are always wanting to know. Do you also see that this high-growth demand environment is going to be just for a longer period of time and it is not a short period of time the way we think, number one? Number two, if you see the digital portion of the businesses are becoming substantial and because the structure of the deals have changed in the last 2, 3 years and the way digital expense are driving revenues for the enterprises, you think that digital at any time can start decelerating or leave aside the base effect, but with the portion of the business will be substantial going forward in next 2, 3 years, maybe 80%, 90% of the overall business. And even if that grows at 20%, 25% versus 35%, 40% now, then structurally, we are moving in a trend where growth will keep on surprising positively. Do you believe it is a possibility? And finally, I'm sorry to ask, a third question. How difficult is the supply set situation? Has it started to show signs of peak behind? Or do you think there is peak then will be probably next quarter or current quarter? What is your sense on that. Over to you for the answers.
Thank you, Sandip, for all the 3 questions. Let me take them in order. As far as the first question around demand environment and the demand outlook is concerned, from an environment perspective, we continue to see no slackening in the demand environment from what we've seen over the past few quarters. We also believe at the same time that robust sustained growth in the future will also come besides just the demand environment being positive from the fact that where we stand today, we have $701 million 12-month booked order book compared to a number that was only $501 million in the same quarter last year. That gives us confidence. We also derive confidence from the large deals, a number of large deals and the fact that a lot of those ramp-ups have really begun around the middle of the current fiscal year. So there should be a step jump next year from that. We expect, particularly in our case, where 18% of our revenues still -- 18% to 19%, still comes from the travel, transportation, hospitality sector. Another bounce back, another fillip next year as the sector bounces back in calendar year 2022. Of course, the fact that the roster of clients now has 60-plus folks, Global 1000 clients, the fact that the farming engine is doing very well, and the number of $10 million clients has doubled over the last 2 years. The fact that our client concentration is low, and we are not banking on one particular client to drive growth. The fact that growth continues to be broad-based across our businesses. And importantly, the fact that order intake this year in the first 3 quarters, cumulatively, is 9% higher than what it was all of last year, gives us comfort both around the demand outlook, the growth outlook and also the demand environment, which is positive. So that's the answer to question one.Question 2 around digital expanding. If you look at the last 5-odd years, we -- I did call out the fact that across the 5 service lines that I referred to, including product engineering, data, cloud, intelligent automation, enterprise integration, the revenue number's already at 7%. We do not have a material legacy service line, like a big portion of our revenue coming from mainframe. The remaining 27% out of the remaining 28% of our revenue, which comes from ADM is increasingly being pivoted to a product engineering-first mindset. I suspect at some point in time, it will be really very difficult to call out any portion of the revenue that we have as a quasi-legacy or a legacy revenue. And for the portion that we are calling out at 72%, the 5 service lines, we see strong growth going forward as well. Third, as far as the supply side situation is concerned, Sandip, we expect attrition in quarter 4 to be more or less -- maybe marginally higher, but more or less, very close to what we've already experienced in quarter 3. We haven't seen a slackening of the -- on the supply side pressures, but we haven't seen a very material increase on those fairly substantial pressures from the previous quarter. You would have noticed that despite the supply side pressures, we've been able to manage margins actually grow margins materially sequentially. And we continue to be able to hire at scale. This quarter itself, the headcount has gone up net on the technology services side by 7.5% sequentially. So those are the answers from our vantage, Sandip, and thanks once again for the question.
Best of luck for the current quarter.
The next question is from the line of Sandeep Shah from Equirus Securities.
Sudhir, just wanted to understand when you given a guidance of 37% in constant currency U.S. dollar terms, if I assume a 50 basis point kind of a cross-currency tailwind, it comes to 37.5% for the dollar terms. So in that scenario, Q4 implied growth could be 5.5%. So am I mathematically correct? Because Q4, generally, we have a seasonal strength coming out of WISHWORKS-related revenues also. So that's the question number one. Question number 2 is in terms of your Q4 EBITDA, adjusted EBITDA margin could be 20.8%, which would be higher than your full year margin of 19%. So it seems that your upward journey in margin may even continue in FY 2023 as well. Can you share some outlook about the growth because some of your mid-cap peers have been indicating confidently that more than 20% growth is likely even in FY '23 on an organic basis?
Sandeep, thanks for the question. I don't have the translation of the annual CC growth into the USD number. So I can't confirm the 50 bps upside that you're talking about. In CC terms, the 37% that we've offered is a number that we feel very confident about. And as always, as in the past, the intent will be to reach that number. And again, the attempt will be to exceed it. That's how we see the revenue growth numbers and the guidance. As far as Q4 adjusted EBITDA of 20.8% is concerned, that calculation is correct. Even the 19.5% that we registered in quarter 3, right, is the highest ever over the last 10 years. So that 130 bps is going to be a very smart further fillip on where we will land it up. And that calculation around 20.8% I can confirm is correct and is the number we're going for and will attempt to reach in quarter. As far as growth is concerned, Sandeep, the intent is to drive very robust growth. We're not at a stage right now where we can offer a hard number as a plus 20, minus 20 or 20 at this stage. But everything that I talked about, right, the 12-month booked orders, the fact that large deal ramp-ups signed this year are still happening and will be a fillip. The fact that in our case, Travel is 18% to 19% of our revenues. And we -- that industry clearly is poised for a smart demand rebound. The fact that farming is doing well. The fact that client concentration is low, and hence, to that extent, we feel derisk, the fact that all verticals, all businesses are doing reasonably well and very well, gives us comfort that next year should be a solid year. If you look at us this year, Sandeep, I do want to leave you with that thought. If you look at us this year, I have already offered you information that we will, in organic CC terms, grow 24%. This was a good demand outlook year. Last year through the pandemic, if you were to take out the stressed Travel vertical, we had grown about 18.4%. So the intent will continue to be to drive robust growth.
Okay. Okay. Just to follow up. Is it fair to say 4Q as a seasonal trend because of WHISHWORKS, that may continue in this year as well? And when you say 37% CC growth, is it in dollar terms? Or is it in INR terms?
It's in CC against constant currency terms. It would be in dollar terms, the way we've calculated it.
Okay. Okay. 4Q will have a seasonal trend because of WHISHWORKS?
WHISHWORKS has -- I mean, see, WHISHWORKS advantage though to the erstwhile insistence which is DPA. They've all been fully integrated. I do not believe that we will see the kind of ups and downs that we were seeing earlier. It will be a smoother gradient than what you've seen in WHISHWORKS in the past.
And last thing, if I can squeeze. In terms of there was a delay in booking of the AdvantageGo license revenue from 1Q to 2Q to 3Q, has that come? Or there is something which is still pending in terms of license revenue booking, which can come in 4Q as well?
Look, what the AdvantageGo license revenue from the previous quarter came, Sandeep, but AdvantageGo has sequentially declined over quarter 2. So the fact that our margin has done well, has done well despite the fact that we expected AdvantageGo to be a margin fillip. That did not translate, that did not come in. AdvantageGo today is, of course, a very important part of our overall portfolio, but it is only 3.5% of our aggregate revenues as we stand. And that revenue -- the pending revenue from Q2 did flow in, but Q3, what we expected has still not materially realized. So the revenue numbers that I called out revenue growth, equally importantly, the EBITDA growth, has come despite those assumptions not playing out. We expect Q4 over Q3, and our attempt is in Q4 over Q3 to drive a sequential growth that should, again, hopefully provide a fillip to the growth numbers and to the EBITDA expansion plans.
Sandeep, there is one addition I just want to make. The 37% growth year-on-year, we're talking about is on a constant currency growth. From a dollar perspective, it will be higher, and the final number will be dependent upon how the dollar behaves in the next couple of months.
Okay. That's why I asked the -- if I assume 37.5%, then dollar numbers, implied growth comes to 5.5%.
So we can't confirm that as the dollars will behave...
No. I understand. I understand. So I think 37% number, which you are seeing is in dollar terms, CC, right, not INR terms CC.
It's constant currency, Sandeep, basically assuming all the currencies remain at the same level as of last year.
The next question is from the line of Vibhor Singhal from PhillipCapital.
Congrats on great execution once again. [indiscernible] my side. Just ticking through from the last question. What is the outlook on the insurance sector going forward? I mean not just from a quarterly perspective, but let's say [indiscernible] perspective itself. Do you see this vertical recovering meaningfully AdvantageGo also to become start basically reporting growth in a decent manner? How are we looking at the sectors over the next -- let's say, next quarter and maybe next 3 to 5 quarters as well?
Vibhor, thanks for the question. We expect insurance to do well for us and to perform strongly. Even in the current quarter, I did call out the fact that AdvantageGo, which is about 20% or slightly less of our insurance portfolio, saw a sequential decline in the holiday season. But overall, the insurance core services business has grown up more than 6% sequentially. So the core insurance services business continues to do well. AdvantageGo is likely to bounce back, and we feel very, very positive about the insurance vertical. We also -- and we'll talk about it when we come to the people discussion if we get to that, have also been adding very strongly, both to the senior SME pool, the senior leadership pool in the vertical because we feel very good about this business and the growth prospects for this vertical continue to be strong.
Right. And is there any reason that AdvantageGo is showing the kind of reset that it is, or is it something related to the overall maybe the industry or seasonality?
We've had 2 quarters of sequential decline in AdvantageGo before, and we expect that to reverse in quarter 4 right now. This is a business where revenue recognition is contingent on licenses getting signed, and that sign-off process normally is delayed by prospects in the last week of the quarter. So there are some ups and downs that happen as a consequence of when license will get signed. Currently, we believe, as I've said that next year, this business will be growing over the current year and even next quarter, it should grow over the current -- over quarter 3 that closed.
Got it. Got it. My second question was actually on the margins front. So I just want to understand a bit on the margin box that you are expecting going forward. So as our guidance is that we're looking at 19 -- we maintain the 19% pre-RSU margin guidance so far and as you mentioned, you were around 130, 140 basis point expansion on a Q-on-Q, so that means we will probably touch somewhere, let's say, 20%, 21% kind of EBITDA margin in Q4. So just wanted to check that how -- thereafter, how do you see the margins playing out? Do you think we can sustain those kind of margins going forward after that as well? And what are going to be our acquisition costs next year?
Vibhor, I'm going to request Ajay after I respond to the first question to give you a sense of the acquisition cost for next year. Let me start off by commenting on the margin question that you talked about. We do expect to get to 18.9% to 19% adjusted EBITDA for the full year, which does imply a minimum or and around expansion, sequential expansion of another 130 bps. We see 8 levers. We are working across all the 8 levers to get to this sequential expansion that we've indicated. Those 8 levers are: one, the fact that ramp-up of the large deals from Q1, Q2, Q3 continues, and offshore, the offshore factory as a consequence, should continue to grow. That's lever 1 that we are looking at. Lever number 2 that we are focused on is the upside that we are likely to get as a consequence of the AdvantageGo business growing sequentially next quarter. Number 3 is the fact that quarter 4 will not see the holiday-related furloughs that quarter 3 saw. The next lever that we're looking at is, of course, the fact that the number of billing days in quarter 4 outside of furloughs is going to be more than the number of billing days in quarter 3. We do see -- we do anticipate currently in quarter 4, an increase in sequential utilization. That number should jump. That's the other lever we're looking at. Of course, in the background, there's the aggregate lever around operating leverage that comes from higher growth. And the final lever, the eighth lever in play from our perspective is the delivery pyramid continued flattening with the number of campus hires this year being 6x of what it was 2 years back and being almost, I would venture to say, more than 3x what it was last year. So those are the 8 levers basis switch. We think there will be strong sequential expansion on adjusted EBITDA margin in Q4 over Q3. To the other part of your question around to what extent is it sustained. It's a little early for us to -- we believe, to talk about how sustainable this new platform is. But we feel good. We feel actually very confident about what we've created. If we do exit quarter 4 of the current year at around 20.8% adjusted EBITDA and you contrast that with where we exited last year. Last year, our exit on adjusted EBITDA was at 18%. So it's a very material restructuring of the cost structure and the margin profile that has been done through a very, very difficult year. We would expect some of it to flow through but we'll be able to offer a clearer outlook at the end of this year when we talk about next year in total.Finally, I'm going to request Ajay. Ajay, can you please address the question around acquisition-related costs?
Sure. Thank you, Sudhir. Vibhor, for the acquisition-related costs, if there are no new acquisitions, which we do for financial year '23, the acquisition cost will be zero.
Right. So the entire SMC-related cost will be basically consumed in this year itself and nothing last financial -- in the next financial year.
That is correct.
Great. If I can just maybe squeeze one more question. Would you be able to give an update on the time line and what is the current status of our ADR issue and where we are in that process? And when can we expect the process to complete and the [indiscernible]?
Yes, absolutely. So we are proceeding with our plans to list in the U.S. and we publicly filed a registration statement on Form F-1 with the U.S. SEC, then we actually trigger that when the event actually happens will, of course, be subject to market considerations and to other factors, including approval from the Board. So that's where we stand. We are proceeding with our plans as of now, as I called out.
Okay. But we will be able to provide a time line of when that event could close down, right, as of now?
From a time line perspective, Vibhor, in the U.S., we are not running against any regulatory deadline for the listing. We do have to refresh the F1 as and when required by the SEC. And in India, we will continue to seek approvals on the time line as required under the local regulatory frameworks. So there's no deadline to when that process will consummate, but we are proceeding with the plans to list and that public filing and the registration statement on Form F1 with the U.S. SEC has been done.
The next question is from the line of Vimal Gohil from Union AMC.
My question on margins has been answered. I just wanted to understand the guidance a little bit better, just organic -- the inorganic contribution really. So if I were to look at the organic guidance, you said about 24% is the growth, which will be towards $780 million. And your inorganic guidance will be about $862 million, so to say. Now that means that the SLK will probably do $81 million of revenues in FY '22. Is that calculation correct?
SLK will do significantly better than $81 million. This year, we are only recognizing 11 months of SLK revenues because the acquisition was consummated at the end of April. Last year, SLK, as a firm, had registered a revenue of USD 73 million. We had guided in the past to the fact that SLK business this year will grow at least 22%, and we remain committed to it. It will grow at least 22%, almost in line with the 24% guidance for the aggregate firm. So it's not $81 million, it's a higher number. $81 million is going to be the broad number for 11 months of revenue.
Yes, okay. So basically -- okay, okay. So FY '23 will be a materially better number because of on one more year addition, plus you expect the growth to continue? Would that understanding be correct?
Absolutely correct, Vimal. It's been -- as we look at the SLK acquisition, we feel very pleased about it. We feel very pleased about the demand outlook that we are seeing for next year and indeed even for next quarter for that specific business. So you're absolutely right on those counts.
Would you want to share the contribution from SLK this quarter?
Yes. SLK is the only business where we will be calling out their performance. Ajay, can I request you to -- because the others have all been integrated fully, right? Ajay, can I request you to share those numbers.
Yes. Thank you, Sudhir. The SLK contributed $22.4 million in the current quarter.
All right. And just to confirm, last quarter, it was around $22.3 million, somewhat, right?
It was $22.2 million.
Yes, yes. Okay. Okay. Okay. So it has been flattish on a quarter-on-quarter basis, which I would assume is probably because of seasonality. Or are there any other takeaways?
No, it's because...
No, it's essential...
Sorry, go ahead, Sudhir, please.
No, no, please go ahead. Please go ahead, Ajay.
Yes. So it's no major issues. It's transaction-based business with lower number of days and hence lower revenues. And as Sudhir had indicated, we see the year, we believe that we will have a sequential growth in quarter 4.
Thank you. The next question is from the line of Ashwin Mehta from AMBIT Capital.
Sudhir, 2 questions. One, in terms of sales and marketing. We've seen a pretty good leverage play out in sales and marketing over the last year. So what's driving that? And secondly, what explains the 5% reduction in sales and marketing headcount this quarter? And the second question was in terms of ESOP charges, we were at close to 1% in terms of ESOP charges. How do you see that playing out in the next year?
Sure. Thanks for both the questions, Ashwin. I'll take number one, and I'll request Ajay to take number two. Sales and marketing, Ashwin, we continue to invest very, very strongly. And one of the things that we didn't reference in my front-end commentary was the fact that this EBITDA expansion is happening despite a very strong investment both in front-end sales and also in capabilities. If you look at us, Ashwin, and contrast, the number of folks that we have in the front-end sales, presales activities, that number is roughly around 280 as we speak now. Same quarter last year, that number was 180. So on a gradient basis, it's been going up very strongly. The quarterly number could be a blip, very few offers that you make in around the holidays, really see people joining post holiday. So you will see that correction in quarter 4. But we have been committed and we remain very strongly committed to both increasing the number of folks that we have at the front end and also making sure that there's a very definite caliber improvement. This quarter has seen us not reflected in the numbers, hired 2 Executive Vice President. And as you know, overall, we have only about 12 to 13 EVPs. So we continue to -- and both of them are joined in the markets, and we remain very committed to doing that number, Ashwin. That's the answer to question one. I'm going to request Ajay to address number two, please.
Thank you, Sudhir. Ashwin, for the current year, we believe, our cost of ESOP would be 85 basis points. Though we have seen an increase in quarter 3. That is a onetime blip, which we are seeing because of certain exercises that happened in quarter 3. We expect this number to be lower in quarter 4, taking the full year estimate to be 85 basis points.
And how do we see this playing out going into the next year? Do you think it kind of stays stable or we expect that to come off?
We do expect -- we believe that we do -- this number will go down by 10 to 15 basis points.
And Sudhir, just one question, if I can squeeze in. In terms of travel, how are you seeing the outlook going forward? And any impacts near term because of Omicron or that's not necessarily there?
So Ashwin, travel has bounced back smartly already. Year-to-date, first 9 months, we are higher than where we were not just year-to-date last year, but year-to-date fiscal year '20. So pre-pandemic, year-to-date this year, travel for us is higher than where it was pre-pandemic overall. As we look forward, we do recognize that a lot of our recovery has happened from new account openings and from wallet share expansion in the existing clients that we had, there are clients, particularly European clients, where the business recovery has not been to the extent that we and they had anticipated in the current fiscal year, but they are likely to bounce back on the IT spend aspect next year. So that's a tailwind that we believe is still reserved for next year but travel has executed a smart bounce back. Every other commentary that we have all the other analysis that we've seen, again, for the travel sector next year is projecting strong growth unlike before, and some of the broader themes for that industry, of course, are purpose-driven trips, the value now being placed around vacation time and the increased investment that's being done in unique experiences. Also, Ashwin, there has been an accelerated investment, which seems to be still accelerating in digitalization with a focus on streamlining passenger journey experience. And the latest report from CETA, which also happens to be one of our clients, did talk about the fact that 85%, which is a very high number for this industry, 85% of the CIOs and CEOs expect IT budgets for airlines and airports to expand sequentially in 2022 over '21. So we feel very good about the fact that we are where we are on a YTD basis, and we do expect travel to register strong growth on a go-forward basis as well.
The next question is from the line of [indiscernible].
And congrats on the very excellent numbers. So I had a couple of questions. So now that, say, in the next 1, 1.5 years, basically point $1 billion run rate. So how do you see the new possibilities coming up? And the second one was a bookkeeping question that if you see the current tax rate of around 17%.
Mr. Jain, your line is not very clear. Would you mind repeating the question, please? You're breaking up a little.
Now is it clear?
It is clearer. Yes, Mr. Jain.
Yes. So basically, within the next 1, 1.5 years, you will be crossing the $1 billion mark in revenues. So how do you envisage the new deal wins or the new growth spectrum post that? And the second one was the bookkeeping question. that the current tax rate is coming around 17%, which is lower in absolute numbers also compared to year-on-year as well as last quarter. So could you shed some light on that? These are the 2 questions from my side.
Sure, Mr. Jain. I'll take question number one, and Ajay wants to address question number 2 around tax. Yes, the intent is not to take a year -- I mean, definitely, it could be $1 billion plus in the next fiscal year. And everything that we have by way of the 12-month order confirmed, by way of the large deal ramp up that we are looking at currently, by way of the fact that key accounts are scaling up very fast and the number of 10 million clients has gone up. By way of the fact that client concentration is low, we are not reliant on one particular client to drive growth, which would pose a potential risk. The fact that all businesses seem to be on a very even key right now as we speak. The fact that we've invested as much as we have in the front end and in the back end capability makes us feel good that we should grow strongly. We have always send this over the last 5 years that the primary focus of the firm is growth, and that's not going to waiver beyond $1 billion as well. We will continue to focus on attempting to deliver very robust sustained and profitable growth going forward. Ajay, can you address the tax rate question, please?
Sure. During the quarter, we had recorded a benefit of INR 142 million pertaining to a deduction available under the Indian income tax laws. This is in respect to the dividend income received from our foreign subsidiaries. And that is driving the tax rate for the current quarter lower. This benefit includes 1 year 9 months. So therefore, that drop is significant for the current quarter. Does that answer your question?
Yes, yes. That was very helpful. So I think it won't continue in the future, right? The dividend income benefits?
It would continue, but not at the same rate. I would say that.
The next question is from the line of Abhishek Shindadkar from Equirus Capital.
Just a couple of questions. You mentioned about some senior hires in your prepared comments. Can you just add any color in terms of service lines, verticals and which organizations are -- they are coming from, any size that you can elaborate? The second is on largely pipeline, how is it compared to last quarter compared to last quarter and same time last year? And the third as a follow-on to that is in terms of joint wins with SLK, any color on that in terms of how it is progressing related to our assumptions when we acquired them.
Thank you, Abhishek. Let me answer all 3 questions in order. Senior hires, as I said, we continue to hire senior folks and 2 Executive Vice Presidents reporting -- have been hired since we spoke last around 3 months back. Our Executive Vice President strength should be in the region of around 14 for the company globally. So these are clearly important additions for us.The first leader has come and is going to straddle global sales across the BFS and the BPS business, which is the erstwhile SLK business. The SLK business had a very strong bias towards BFS. And we, of course, have added this gentleman to be the Global Head of Sales for the BFS vertical reporting into the current business head and also reporting to the current BPS business, the erstwhile SLK business either as well. So that's the first hire. He comes from one of the largest -- he was a transformation head of one of the largest BFS BPO players globally. That's his profile. The second leader has joined us and will run the insurance North America business reporting into the current insurance business leader. He again comes in with about 2.5, close to 3 decades of experience with Tier 1 organizations. We've always had a very strong bias over the last 5 years as we recreated the management team to hire people from Tier 1 organizations, people who've seen scale, feel comfortable with scale and can help scale up and grow businesses rapidly.So both these 2 executive VP hires are in line with that. In addition, we continue to hire other very senior leaders. A lot of SVPs have been hired both at the front end and at the back end. So that's how I would characterize the hiring Abhishek. As far as large deal pipeline is concerned, if I reflect back on the current year, we signed a $100 million plus 4-year 8-month contract in Q1, followed that up in quarter 2 with $250 million-plus contract. We've signed a $45 million plus contract in quarter 3, which as all of us know, is a shorter quarter. The pipeline is robust. We are seeing growth not just come from short duration deals that, of course, is there because the general environment is bullish.But we have continued to stay very focused on figuring out a way of carving out large deals as well because that is what is allowing us to ramp up our offshore factory, structurally change our cost structure, expand EBITDA despite all the ambient pressures around supply side. We feel good about the pipeline that we have. The recreation of the front end that is an ongoing process, the investment that has been made, and I talked about it, 280-odd people today versus 180-odd just 4 quarters back again, is what is helping us do that. Finally, as far as the joint win with SLK is concerned, as I noted, we expect SLK to grow broadly in line with the rest of the organization. And I already called out an around 24% organic CC growth. So that's -- they've grown very smartly. They've grown completely in line, I dare say, higher than what we had expected them to grow when we were initially looking at this transaction. The other important aspect about the SLK, now the Coforge BPS business is the fact that we expected it to be EBITDA accretive. And despite the increase in the firm's EBITDA profile, it still continues to be EBITDA accretive. So we feel very, very good about that acquisition. And as Ajay and I have noted, even in quarter 4, we believe there's going to be a material blip on the revenue side in that specific business on the top line as well. Gross sell is -- has been very promising. As I said, the new EVP who's been hired over the last 90 days is going to straddle the erstwhile SLK now Coforge BPS business and our BFS vertical and be the joint sales leader for both. There's a clear and a very significant joint pipeline that is in play which is why we brought him on board to make sure that this transition goes through. So that's how I would characterize answers to the 3 questions that you had, Abhishek.
The next question is from the line of Shraddha Agarwal from AMSEC.
Congrats on good execution. Just 2 questions. Can you give us some more information on the large deal that we signed this quarter, the $45 million deal in the Europe region?
Yes, Shraddha. The large deal that we signed in this quarter, Shraddha, was signed in Europe. It was signed with the public sector institution. It's slightly north of $45 million and is a 6-year contract that we've signed. Normally, our large deals are between 3 to 5 years. This is with the public sector. It's a 6-year contract, $45 million Europe-based.
And the execution will start from 4Q itself?
Absolutely.
Okay. And would it be possible for you to give out the number for AdvantageGo in this quarter as well as last quarter? What was that number?
Shraddha, we're calling out numbers for all entities that have not been merged. So AdvantageGo, WHISHWORKS, both of them have got merged as was Insistent in the past. We will continue reporting the service line numbers for BPS and for product engineering, where SLK and AdvantageGo fall, respectively. So we won't be calling out stand-alone numbers.
So -- but just qualitatively, if you can indicate what was the extent of decline in AdvantageGo well this quarter because you did indicate that it declined even in this quarter on a sequential basis. Was it a double-digit kind of...
Sure. I can give you the -- absolutely, Shraddha. As I said, the insurance services business grew more than 6% for us, right? AdvantageGo is now roughly about 2.5% of our console revenues. So it's, obviously, an important differentiating business, but it's not a scale business from our vantage and that saw a sequential decline in quarter 3, which we expect to reverse in quarter 4.
Thank you. Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to Mr. Sudhir Singh for closing comments.
We'd like to end the conversation by thanking you once again for your interest for the comments that you've offered us, for the insights that you shared. Your questions always make us reflect on where we're headed, what we need to tweak, what we need to focus on. I know a call this early morning, especially for folks on the East Coast is always a little difficult as it is because it's late evening for the folks across Asia as well. So thank you once again, and we look forward to speaking with you in 3 months from now. Thanks again.
Thank you. On behalf of Coforge Limited, that concludes the conference. Thank you for joining us, and you may now disconnect your lines.