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Eclerx Services Ltd
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Ladies and gentlemen, good day, and welcome to the eClerx Services Limited Q4 FY '18 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rohitash Gupta, eClerx Services Limited. Thank you. And over to you, Mr. Gupta.
Thank you. Thank you, all, for joining eClerx' earning call for the fourth fiscal quarter of FY '18 and 12 months ending 31st of March. I will start with the annual strategic review before getting into financial performance of this specific quarter and year.Our clients experienced a mixed business environment in fiscal 2018. In the U.S. domicile for our majority of the clients, the passing of tax reforms act and the partial rollback of [ unrest ] regulatory burdens led to increased profitability and business confidence. Compliance and consumer protection cost, however, increased across our broader client universe with greater responsibility placed on our clients to ensure the highest standards of business practices. Amidst a backdrop of elevated political pitch, some trade tariffs, job [ protections ] and visa restrictions which were imposed, adding further to the cost of doing business for our clients. Automation continued to be in the forefront of our clients and investments continued towards digitizing business functions. Experiments with robotics, machine learning, blockchain accelerated in this year, and utilities were once again high on discussion agendas as clients look to reduce cost further. We were well prepared to take advantage of these changes in the year, and fiscal year 2018, therefore, marked a welcome return to growth for eClerx. Overall revenues grew about 2% USD to $198.6 million, led by growth in our financial markets and digital businesses. Overall sales for the firm, new contracts and orders were strongest in our history, and we probably added a number of large clients across each of our 3 businesses, while our year-end pipeline remains significantly higher on Y-o-Y basis. It is of some note that whilst firm revenues have increased by 1/3 over the past 3 years, the firm's risk profile also today has dramatically improved. Over this time of 3 years, the top 10 clients' concentration has decreased from 87% to 70%. Our top 5 concentration has reduced from 67% to 60%, and our largest service line now represents less than 15% of revenue, down from about 1/5 3 years back. Today, we have 6 clients which are over $5 million in revenue and our number of $1 million-plus clients has increased from 14 3 years ago, to 23 this year. Notably, 1/5 of our firm's revenue now comes from outside India delivery, making us most global and closest to customer we have ever been. We have achieved good growth in new business lines this year. In financial markets, notable growth came from our data and compliance services, with particular focus on onshore consulting and managed services and from automation projects leveraging machine learning and robotics. Customer operations vertical offset our major client loss with new clients wins across dispatch and quality services, and added new business for delivery out of our North Carolina center. Digital continued strong growth, with online operations being the largest driver. Creative services, which is also computer-generated imagery service line for us, and onshore-led advanced analytics witnessed strong demand, both with existing clients as well as new logos. Client advocacy continued to be strong for eClerx. We won notable client awards and continued to win new business at existing clients. Our internal service excellence team won the National Golden Peacock award, and then went on to win 3 awards at the World Quality Congress. Our investment in training, automation were recognized at the CLO Summit for Best Customer Service Training Program. Finally, we were in the top 2 companies for Investor Returns and Corporate Governance across all listed mid-cap and large-cap IT and ITES firms at the Financial Express CFO awards. We remain deeply committed to our social responsibilities as a firm and to our CSR program. This year, we focused on increasing employee participation and on enhancing capabilities of the charity organizations that we partner with through initiatives to teach relevant BPM skills to improve employability of the youth. We also launched CSR initiatives in partnership with some of our key clients. As always, the focus of initiatives remains to help children obtain a better education and to develop skills to gain life independence. I also want to update you on the progress of our strategic roadmap, as FY '18 return to growth was built on those initiatives. First and the most notable was the build-out of our onshore delivery centers' capabilities. 2018 saw overall outside India headcount reaching just over 500. This helped us address 2 large trends that we have anticipated some time back. First, the move towards more complex services requiring greater client interaction and solutions that combine technology, analytics and processing. And the second, the greater demand for customer-facing support from within client geographies. In 2018, we purchased assets of TwoFour Consulting, a New York-based onshore consulting firm focused on complementary areas of business, and further invested in our onshore recruiting capabilities through it. This helped us deploy client programs spanning consulting and project management. Our Italian business, CLX, helped in building out our -- of our creative capabilities in India centers, thus creating capacity, both in Verona as well as Phuket, to deliver newer services. In onshore analytics, we saw a substantial increase in overall sophistication of services provided, with particular focus on services co-delivered from onshore and offshore. We added Singapore to our deliveries location, and our teams in Austin and Toronto grew substantially. The successful launch of client-funded programs at our North Carolina site saw delivery headcount increase, and in light of strong [ client ] interest, we agreed to increase the delivery capacity further at that site.Second of the strategic roadmap item, we had made -- we have made substantial progress across our technology efforts. We made strategic technology hires, both onshore as well as offshore, created partnerships with emerging product companies and sold the highest number of technology programs into our clients. And increasing share of new sales embedded technology platforms and tools, allowing us to skew business mix to productized and managed services. We embarked on a number of new robotics and machine learning initiatives, both internal and client-funded, to improve efficiency and reduce cost. A significant portion of onshore and consulting engagements leverage technology skills, and we found our mix of specific domain knowledge, industry expertise and relevant technology skills of high value to those clients. This drive to tech wrapped services remains core to our differentiation, relevance, stickiness and long-term value for eClerx.Final item in the strategic roadmap. We continued our growth in analytics, and we had a strong year leveraging client location delivery and technology to drive new growth. We continued to focus away from managing data to extracting value insights and outcome for our clients and enjoyed early success taking some of these services into other verticals. We are convinced that the success of our analytics initiative will be critical to overall success of the firm. We pride ourselves as a firm focused on prudent allocation of capital to ensure high profitability and industry-leading returns. In 2018, we completed our second successful and oversubscribed buyback, maintaining our tradition of returning excess capital to investors whilst ensuring sufficient capital to fund strategic growth objectives. Further in line with last few years, we have declared dividend of INR 1 per share for FY '18. Coming specifically to our Q4 and FY '18 results. In Q4, our INR operating revenues increased by 6%, whilst full year INR operating revenue grew at 3% Y-o-Y. The growth in revenues for this quarter was largely due to growth in short-term creative services projects out of our CLX unit. The OPM or operating margin for the Q4 and FY '18 decreased by 12% and 23%, respectively, with FY '18 OPM roughly at about INR 3,200 million. Profit after tax has shown a strong increase of 13% in Q4, while showing a decline of 18% for the year, with full year profit after tax coming at roughly about INR 2,900 million. Other income for the year as well as quarter increased sharply due to revaluation and realized gain due to currency movements, with full year other income coming at roughly INR 400 million. Our forward hedge book of $141 million is at an average rate of INR 68.8, a rate which gives us smooth realization cover over next 24 months. As you will recall, we talked about dollar revenues and absolute operating margins to grow sequentially from Q4 onwards in the last call. While the dollar revenues were much more than our anticipation, the absolute operating margin was down sequentially, against our expectation. The operating margin drop was due to continued growth in onshore business replacing the offshore business, which has declined due to reasons discussed previously, especially the 3 large client events that we witnessed over last 2 years. The normalized operating margin percentage in Q4, excluding one-offs, would have been very similar to Q3. We feel that FY '18 margin percentage is much more representative of our medium-term outlook instead of Q4. The operating margin percentage dropped by about 840 bps this year, as delivery and support employee cost grew disproportionately on nearly similar revenue base. This was coupled with our increased investment in upgrading of BD team and increased travel cost. We now anticipate that we will have a softer start of FY '19, as much of the onetime growth seen in Q4 will taper off along with usual year-end regular roll-offs. For the early part of FY '19, we'll see the usual impact of wage hikes, which are effective 1st April, which were in high single-digits for India staff and low-single digits for the onshore staff. We had about INR 6,000 million of cash and cash equivalents at the year-end, after the buyback of INR 2,580 million. We have spent around INR 273 million on CapEx in FY '18, which was higher by about INR 60 million compared to previous year. We expect FY '19 CapEx to be around FY '18 levels, excluding any major facility refurbishment or realignment that we plan to do -- that we may plan to do. We have spent about INR 68 million on various CSR activities during the year and allocation is likely to increase to INR 77 million in FY '19. The DSO was at 89 days at the year-end, which is significantly higher than the expected range, as 2 of our top 5 clients changed their accounts payable vendors and processes leading to temporarily payment holdups, which we plan to resolve by Q1 end.Top 10 clients Y-o-Y revenue decline rate has been lowest in last 6 quarters. Emerging clients show a healthy acceleration trend, driven by mining of larger emerging clients. However, some of this emerging growth in Q4 was one-off, as explained earlier. We have now included 2 additional disclosures, 1 for onshore revenue share and second for breakup of emerging clients revenue in $0.5 million-plus clients versus the rest. We hope that these 2 additions will help you understand the profile of changing business and its margin implications better.In terms of accounting update, the company will adopt the new revenue accounting standards AS 115 effective April 1, 2018. And we will update you if there are any significant changes due to that. The company employee strength has increased Y-o-Y to 9,429, with increase coming from net additions of 233 in offshore and 83 in onshore delivery centers and further investments in our tech and R&D staff. Our sales and business development staff count has remained roughly similar year-over-year, although with several resource upgrades. Further, we have been beefing up our onshore support services organization to tackle the onshore delivery growth. The India attrition has increased by 130 bps to 39.6% this time. Our effective tax rate for the year, as well as quarter, was around 23% to 24%, and we expected to touch about 25% for FY '19, as some of our older SEZ units come out of MAT.With this, I will hand over the call back for Q&A.
[Operator Instructions] The first question is from the line of Sharan Pillay from Allegro.
I had one -- I had a couple questions. The first question was in terms of your growth, over the last 2 quarters, we've seen our growth come back a little bit. In -- as a long-term outlook, could you just sort of give me some idea of where this -- whether this growth is sustainable, where we see it going, et cetera?
It's Anjan. [indiscernible] future. But in recent times, what we've seen is our clients come back to the table with investment [indiscernible]. That's for certain, the reduction in tax rates has brought back a lot of buoyancy in spending. Overall morale seems to have improved dramatically in our buyer community. So certainly, I think, from a confidence perspective, we're seeing more transactions. Secondly, I think there is definitely a shift towards those vendors that are [indiscernible] see themselves as a combination of tech and services versus pure services or pure tech, tech play. So -- and more of that demand seems to be shifting towards those people. And the third shift where we're continuing to see increasing demand is more complex services where there is more upfront solutioning involved, which by definition means it will be more client location based. So there are -- I would say that those are -- there's an overall increase in confidence, but it's in -- specifically in areas where you can show automation and services combined and onshore solutioning and delivering combined.
Okay. And my second question was in terms of margins. Could you sort of explain to us what's been happening in terms of costs, in terms of your other expenses and your employee cost? They seem to be have increasing quite significantly over the last couple quarters. So any reason behind that? Are those -- is that -- is this level of margin what we should be expecting going forward?
No, I think I referred to that, that if you look at the business metrics, we have added 2 new measures. One is the onshore revenue share as well as the managed services percentage share of the revenue. Now both these things, when they increase in share, they have significant impact on margin. The onshore one is pretty obvious because the onshore business comes in very, very thin margin profile, by definition. The managed services one is little tricky simply because that's where you are taking the ownership, to some extent of the efficiencies, if we are able to produce, we may be able to retain that. However, when you sign up those deals, upfront, you take effectively a price cut, right? So basically your margin compresses in the initial period of that deal. And if you see both these metrics now stand at -- in Q4 at least, at about 23% give or take, right, which is almost double than what it was 8 quarters back. I think this is the major shift which has caused delivery cost to increase as we are focusing more on onshore as well as taking bets on the managed services deals.
[Operator Instructions] The next question is from the line of Pankaj Kapoor from JM Financial.
My first question is on the billing mix that you have shared about managed services and onshore. There seems to be a jump in the current quarter in both of them by 3%, 4% on a Q-on-Q basis. So A, is this because -- is there any overlap between these 2 metrics that -- similar kind of projects which were executed and that's the reason why we have seen a jump? Or these are 2 different kind of projects?
Pankaj, great question. And I think there is significant overlap in both the metrics. And I would say probably more than half is overlapping.
Okay. So as you also were mentioning Rohitash, managed services obviously give you a better margin control, but onshore services essentially means a margin dilution. So if I have to take a slightly longer-term view over the next 1 to 2 to 3 years, where do you see A, the mix of onshore, offshore revenues will be playing out, which you think will be the optimal level? Should we expect the 30-70 or 25-75? What kind of a level do you think, given the current pipeline that you see and the nature of projects that you see, it can settle out to? And based on that, what is a kind of a margin outlook do you think one can assume over a 2- to 3-year period?
So I'll let Rohitash answer the margin question. The outlook for demand, I think, we, in the short-term, will see a blip in onshore as a percentage of total revenue. I think in the longer term, we will see onshore as a percentage decrease from these levels potentially as a good -- we are looking at onshore as a driver of more hybrid offering. So we don't want to be onshore just for the purpose of onshore. We want to be onshore because it drives more demand offshore or it drives more demand for mixed services or managed services. So I think we look at 2018 and potentially 2019 as a period of investment where we build out our onshore capabilities, whether it's in analytics, whether it's in consulting and market space or it's in the face of delivery center for customer operations. So all of those -- so I think short-term, increase. Longer-term, we would expect it to come down, but overall business growth to increase as a result.
Sure.
Pankaj...
And Rohitash -- yes, on the margin side, yes.
Pankaj, as I mentioned in my opening remarks, the Q4 margins are definitely below what the steady state looks like in near term. And I would say that FY '18 full year margins are a little more representative for the medium term. Having said that, like Anjan mentioned that, as we add new BPO work, which may come out of this onshore engagement or mix delivery engagements, I think that profile has an opportunity to improve from here on. Although, that will depend on how the mix evolves over a period of time.
So Rohitash, sorry to persist on this, but A, we are going to see an impact of some of the wage hikes and all coming in the first, second quarter, which obviously puts a dent on the margin in the very short term. Second, this year and maybe even in the first half of next year, you may still be in the investing mode, so the on-site share may continue to grow. So do you think that these are the trough margin or there is a potential that the margins can go down further before they start recovering?
That's a tough one to answer, Pankaj, simply because if you look just last 2 quarters, our Fayetteville or North Carolina center has been in the work for set up mode for almost more than 1 year now. But really speaking, the revenues started accruing only in Q4, and that will witness an increasing trend from here on. So if you look at FY '18, just on that aspect, obviously, the costs were significantly manyfold compared to the revenue that we earned out of our North Carolina initiative. But that ratio will change dramatically as we enter into FY '19 because at least for the current capacity, we will be almost billing almost the full center.
Okay. So these costs were already flowing into the P&L on the delivery side?
Correct, for the full year, yes.
Okay, okay. Got it. And just lastly, what -- I mean, based on the hedges that you have, what kind of outlook one can assume on the effective exchange rate and the hedge gains and all?
So current hedge book of $141 million is -- stands around INR 68.8 to $1 mark. And I would tend to think that if rupee remains at current levels of INR 68-plus spot, then we will only increase this average hedge realization rate number going forward. So base case, at this time looks like INR 68.8, but all the chances that it will improve from here.
Sure. And just one more question, if I can squeeze, Rohitash. The SEIS income is accounted for in the revenues, right?
Only for FY '18, it is included in the operating revenues. But bulk of that SEIS, which was roughly around INR 20 crores as we disclosed last quarter, goes into exceptional income and is not in operating revenue.
The next question is from the line of Vishal Desai of Axis Capital.
Congratulations on a strong execution on the top line. Couple of things from my side. First, if you could help me out with the outlook in terms of what we are seeing in the FS space and the other 2 verticals as well? And secondly, for Rohitash, if you could help me with some amount of sense in terms of what are the margin levers going into FY '19 from here on?
I'll take the question on demand again. I think it's -- as I discussed last year or in the year that's gone by in FY '18, a lot of our growth -- in fact, most of our growth has come from markets and digital, and we continue to see that trend. Digital being led by things like CGI, site operations and analytics, and markets [indiscernible].
Sure. And some color on FS, if you could give me?
Yes, I think it's going to be -- it's primarily being driven by compliance-led activities and [indiscernible] led activities for the market space. So these are all onshore, offshore with built-in robotics, RPA, machine learning and automation. So that's -- those are the big drivers of demand in FM and digital, respectively. For the -- for customer operations, actually, demand coming from our U.S. center in 2 or 3 broad areas. So in the area of logistical engineering, we're seeing growth again, and in care operations, we continue to see growth. So I think broadly, we're seeing demand growth out there. How that translates into top line and bottom line for us is ultimately about execution.
Sure.
Vishal, on the margin front, the biggest lever is, can we grow the absolute offshore BPO revenue from here on. As you will note from last 2, 2.5 years, the BPO revenues have not grown because we have lost a few businesses as we discussed previously, which were purely offshore, very stable, which means they were very efficient in terms of delivery cost, et cetera. Now we are trying to build from there on. So I think that is the biggest lever. All the other things on G&A front, et cetera, they are relatively minor, plus there were some one-off things that also happened towards Q4. Just to name -- just to give one example, there was a gratuity increase of some legislation change, which required us to increase the cost onetime by INR 2.5 crores. Similarly, as we discussed of our onshore setup, the seeding part is over, which means that all the travel related to that, which our staff from India or SMEs from India need to do for training of people there, is now over. And we hope that for future growth in that center, the future training can be more and more taken on by the local staff, which is already there in place. So that could be second kind of lever, where travel costs, for example, will reduce.
I think there is 2 things. One is, of course, some of the managed service deals that we have in place, and to the extent that we're able to outperform, [indiscernible] that we've built into it, that will drive some -- that will drive additional profit as well. One thing I did want to talk about, which is on the demand outlook, it is important to note, and I know Rohitash mentioned this earlier, that we shouldn't be looking at this quarter as representative of all the quarters that we expect to see in 2019, for sure. I think Rohitash mentioned that we had a lot of bulk work that sort of came at us strong, both at CLX subsidiary and also from North Carolina, in the shape of both managed services and onshore work. Some of it was short-term, but a lot of it was predated as it was pulled forward into the calendar quarter 1, which coincides with our fiscal quarter 4. So it is important to note that we would expect Q1 not to be anything as strong, and particularly, we would expect it to be even down from what we've expected and what's happened in Q4. I think you have to look at what our average spend for '19 is, and we feel pretty bullish.
Sure. So just, if I can squeeze in one more. So where exactly are the misses in terms of a softer outlook panning out for H1? Where are we seeing that growth not picking up from Q4 going into Q1, which is giving us an outlook of expecting some amount of softness here on?
I don't think -- so my comment isn't related to H1 or '19, specifically. I think what I'm saying is that I think Q4 is exceptionally strong because some of the business that we would have expected in Q1 was pulled forward into Q4.
[Operator Instructions] The next question is from the line of Sandip Agarwal from Edelweiss Securities.
This is Pranav from Edelweiss. I just want to check, your commentary basically stated that you are seeing good growth because of the tax cut. I would have expected stronger growth in North America because of that, but it seems that Europe is driving the growth. And I mean, similarly the North Carolina should also be driving the growth in North America and not really in Europe. So what exactly is happening? That is my first question. And second question is staff utilization seems to be on the lower side vis-à-vis what we saw last year, and it is going down a bit. And so how should we see this going forward? That is second question. And lastly, DSO days have increased quite dramatically in this quarter, and is there any one-off or any color you can provide me there? That's it for my side.
So I'll take the demand question again. The tax cut in the U.S. doesn't necessarily mean that all your demand should come from the nation of the U.S. because ultimately, a lot of the organizations that we support, although they might be listed and tax paying in the U.S. and domiciled in the U.S., they have global reach and have global operations, and in most instances, we support all of them. I think the Europe growth is not linked to what's happened in the U.S., first of all. Secondly, the tax cuts are recent, so although we've started hearing more optimistic noise from our customers and started seeing increasing in transactions, I don't think that's translated into revenue or profit as yet. We expect that to play out over '19. And similarly, North Carolina, I think we are in the very early stages of that growth, and I think Rohitash mentioned this in his opening commentary, that we are in the process of trying to secure additional space because we already have demand lined up. So we anticipate a fair amount of demand in North America coming in for North American delivery and -- but it hasn't panned out completely as yet, obviously because it's relatively recent, but we expect it over the course of '19 and '20.
In terms of staff utilization, that metric has been choppy over last 2 years, if you especially look at the Slide 7. The reasons for long-term volatility on that obviously are related to roll-offs that we have witnessed in that period. But if you look closely for last 3 to four quarters, it has been fairly stable around 73% mark, give or take. And we expect that FY '19 wouldn't be any different, at least on that metric. And one of the side reasons, I would say, for a slight dip in utilization also has been higher attrition, which obviously you need to repurpose and you have overlapping staff for certain period and things like that, and that is also reflected in our total offshore headcount, if you see in the other metric.
Okay. That is very helpful. If I may, I just want to know what exactly led to such a stark difference in the growth for North America and Europe for this quarter.
Well, I think there wasn't a stark difference. I think we mentioned earlier that a lot of the growth has come from onshore, and I think that onshore growth is pretty much broken out between what's happened in CLX and what's happened in North Carolina, which is in the U.S.
The next question is from the line of Rahul Jain from Emkay Global.
Two things here. One on the structural basis, given that the way the business is changing, and we moving more from a pure offshore to a mixed delivery kind of a player. And at the same time, the general growth rate of the segment and including our business coming off sharply. So from a medium- to long-term perspective, if we eventually turn into a 10% growth business and that, too, with a profile where we may have 25% to 30% on-site, offshore mix, so what is the new net kind of a margin that this kind of a profile should get? Because on a short-term basis, it's been moving a lot and it may again look better for '18. But the way we may stabilize as an organization, the way we have shaped it up, what is the realistic margin based on the current profile?
I think PD has mentioned this on a couple of -- in a number of calls before. Ultimately, I think what we are focused on is net margin dollars, which are actually quantum of money as opposed to margin rates [indiscernible]. We think that focusing just on the margin as a percentage is terribly limiting for a business as we're trying to [indiscernible]. So I think Rohitash mentioned this earlier. We think, ultimately, that we probably average out near where we are for the year, but it's hard to tell quarter-to-quarter because we'll continue to invest, and -- but we expect that investment will yield results, which would mean that in the short term, we may have margin that's depressed, but over the longer term, we will have margins that increase.
Okay. And if -- let's assume we have to grow at anywhere between 10% to 15% over next 2 to 3 years. What, in your opinion, the current revenue mix should drive that kind of momentum for us?
It's hard to answer that question. So I'll refer to the same answer that I gave to a gentleman earlier, which is that in the short term, our default strategy is to -- is -- let me rephrase it. Our default strategy will have us increase the percentage of onshore revenue. But I think in the medium term, we'll bring it back down as we get more BPO and hybrid business as result of our onshore strategy.
Okay. And lastly, could you comment on the offshore BPO revenue that has not grown in last 2 years, if it picks up? So is there any deal or anything that has given us something? Or it's just that if we improve, then we will see that the margin [indiscernible]?
No, I think we have seen instances of where -- we have seen instances in FY '18 where onshore engagement has led to BPO deals. And I think there have been more than a few instances where [indiscernible] having greater reach and being able to integrate with customers earlier in the decision-making cycle.
And lastly, if I may. The -- so this recent quarter, we saw good growth in the European business. So what is driving this kind of a traction? And I mean, what should be the sustainable thing here?
So I think Q4 is traditionally a strong quarter for our Italian subsidiary because of demand from the fashion houses. So I think it was partly seasonal and -- so Q4 is usually strong, and I think this year was exceptionally strong, but as a function of the investments that we made in that business in sales and marketing and advanced technologies.
The next question is from the line of Apurva Prasad from HDFC Securities.
So if you can tell me how much of the revenue move....
You have to speak up. We can't hear you.
Yes. Is it better now?
Yes.
Yes. So if you can quantify how much of revenue moved from 1Q to 4Q? That's one. And second, if you can talk about how growth in FY '18 was for financial, digital and customer ops? If you can give a split of that? And thirdly, if you can explain how much the margin is for the onshore business?
I think Q1 to Q4 shift is more of a way to explain things. But you have to understand that the revenue that was grown, in this quarter especially, bulk of it was short-term revenue. So that will basically definitely roll off in early part of Q1, and that's why even on the revenue front, we think that Q1 will be softer. And sorry, what was your second question?
Yes. Second was, Rohitash, in financial, digital and customer ops for FY '18, if you can give the number in terms of growth and [ decline ], how that was?
Anjan, do you want to take that vertical-wise view for FY '19?
Sorry. Is that a question for '19 or is that a question...?
No, '18.
It's a question for '18.
Okay. So that mix, Apurva, doesn't change. Obviously, if you look quarter-to-quarter, it will be very volatile because of the roll-offs that have happened in early part of the year in customer operations, especially. But if you cut to today, probably 40, 40, 20 mix still hold good, if you take a little longer view in past.
Would that mix have been similar in -- even in FY '17?
No, FY '17 still would -- customer operations would have been higher actually, maybe more than 25%.
Okay. Got that. And also in the onshore margins, if you can indicate to where it is now?
So I won't be able to give you the stable margins for onshore because we have just started investing in that. So -- but effectively, onshore margins in -- at least in the investing phase, tend to be in single digits. But with time, they have a real chance of getting into double-digit zone.
The next question is from the line of Arpit Zelawat from Swastika Investmart.
My question is to Mr. Malik. Like, how expanding business onshore brings more business? Like, earlier in few calls, you said that you get business basically because clients approach you. So how going onshore can help us bring more business?
There are certain clients that do not deal with you if you do not have onshore execution. So we've been able to have conversations and are in negotiation stages with certain clients who are only talking to us because we have onshore capability. That's one. Secondly, when we do work in the consulting space, we're usually able to hire more senior people who have more senior reaches into our client organizations and who have more subject matter expertise to be able to provide consulting solutions to our clients. So all those consulting solutions end up with being -- us being able to provide a part of the activities from offshore. And the third part of it is, in areas like advanced analytics, it's a given that some of the customer problems that we are looking to solve, we just don't have the skills or the domain in our -- in India. So you need local market presence and you need a local market team that works closely with our client's stakeholders. So having that capability increases your overall pool of revenue which you're able to attack. So I think those are the 3 reasons why we see more offshore growth because of onshore capability.
Okay. And one more question I have. What is the long-term problem you currently see with the business?
Our long-term problem is the problem that we've always had, which is how do you stay relevant. And pretty much everything that we do from a strategy perspective is to try and stay relevant to our clients every year.
The next question is from the line of Sandeep Kapadia from Fourstones Advisors.
My question was around -- I just wanted to take some time with you around understanding how you sort of change the business. We have invested a fair amount in new areas like analytics and robotics. I'm just trying to grasp from where you come, how you're making the changes, and where you would like to go. So you know just [indiscernible] all the questions, but I had a frame of mind from couple of years back of where the company was, and I can see that many changes have taken place. But I'm not being able to kind of comprehend that. So if you don't mind it, can you take a step back and spend a few minutes on that?
Yes. I mean, I think that's a very broad question, and I think we need much more time than we have available on this call. But if you ask us where this journey is taking us, we see ourselves, ultimately, as the chosen middleware company in the services space. By that I mean, we have specific niches, we want to have more of those niches, and in those niches, we want to be the top 2 and top 3 supplier for combined services. And by combined services, I mean that everything that we do has a combination of onshore, offshore business services or we could call it BPO, it has an element of automation and technology, and it has a large element of analytics built into it. So we are seen more and more as a middleware solution company as opposed to a pure-play BPO. And I think that's kind of the place that we've always been in, but as we scale, the size of that challenge becomes bigger. So if you will compare us to the large guys, we're not IT services. And if you look at where [indiscernible] revenue would come from IT implementation and perhaps then to think us pure large-scale BPO. And we are not pure BPO, where -- so we are not running a function of 300 headcount doing the same thing on average, right? So we tend to run more clustered programs where there is higher amount of domain expertise [indiscernible] we tend to do more of that.
Okay. And this whole area of analytics, robotics, does that lend itself to more of these services? Or is that just simply necessary to be more relevant, like you were explaining before?
I think -- I don't think you can take any one of those things in isolation. I think you have to take all those things together to determine what is -- what gives you relevance. So we look at the robotics journey as the tool of today, let's say, or a tool of yesterday. Today, it's machine learning. Before that, it could be [indiscernible] software or it could be -- before that it was web crawling. I mean, so if you look at our journey and evolution, every year, we make a decision on which are the areas that we want to invest in, and every year that's different. So I think we're not a pure-play technology [indiscernible] we don't want to be pretending that we are building robotic solutions for our clients. But what we're saying is that we're embedding best-practice technology that's top of mind for our clients in the services and the solutions that we deliver.
Okay. And you don't envision that the services component decreases? Because everything which goes on, on the cloud and Software-as-a-Service and all these models, effectively it seems to be decreasing the need for IT usage. So is that actually becoming -- sorry, yes, go ahead.
I was just going to say, and I'm sure much of the audience, since it is so selective, will be avid readers and a lot of the reading would be in finance and technology. So there isn't a shortage of books and magazines that will talk about the rise of the robots and how algorithms would replace humans. So inevitably, automation, you always fight the automation curve, right? So whether you are in the coding business or in the servicing business, there is always automation that's going to make you obsolete in some way, shape or the other. We actually feel that the book of business that we run, and I think the way we are trying -- the way we are I think successfully positioning ourselves, makes us less vulnerable as opposed to more vulnerable. I mentioned to you that we don't run very large books of homogenous functions because most [indiscernible] making that have elements of automation, they have elements of analytics. These are not functions that lend themselves very easily to pure-play automation. So I would say that the journey that we've taken and the journey that we've been on helps us be more relevant and more sticky. And I guess, more automation-protected in some sense.
The next question is from the line of Vishal Desai from Axis Capital.
Sorry, just one -- a couple of things on the margin. But you all mentioned that Q1, we will have a salary hike coming in, right? And any kind of quantification that you all have given on the on-site, offshore bit, if I missed out?
So it is very similar to last year, and it is in low single-digit percentage for the onshore staff and mid- to high-single digits for the offshore, which is largely India staff.
For offshore, okay. And Rohitash, if you could just help me, what was the one-off component in the margin breakup between Q3 and Q4, so that we could get some sense as to, excluding that, how margins have played out?
So for that, Vishal, I already mentioned that you have to look at FY '18 picture as opposed to Q4 picture. Because Q4 will systematically have those one-offs which were actually for the full year or were truly one-off items, et cetera. So if you look at full year, that is already presenting a normalized picture, what it would have been in Q1, for example.
The next question is from the line of Rahul Jain from Emkay Global.
Any incremental input you could give on the TwoFour acquisition and the prospect that we share in terms of our access to client [ visit ] and how that kind of a model could involve incremental prospect for us in that space? And where that revenue run rate today stand versus where we acquired it?
The TwoFour acquisition was a special situation for us because ultimately, it came at a -- what I will call a stressed -- distressed value. If you look at the run rate of the business from when we closed the deal to where we are, it's kind of about the same. I think what's interesting to look at is synergy, and I know that's an overused word, the synergies that, that business has afforded us, right? So first of all, it's given us a bunch of new MSAs that we didn't have. Secondly, it's given us a recruiting engine and [indiscernible] our ability to hire in the onshore locations. So some of the -- a lot of the work that we today do in the onshore locations requires a staff onshore, and we certainly didn't have the capabilities -- as much of the capabilities before the acquisition. So that's two. Three, I think it's actually increased credibility within our large existing clients, where they now see us as potentially providers of [ onshore and ] something in a more serious way because they've seen us commit capital to buying those capabilities. It's played out in different ways, and we think it was -- ultimately, it was a very low risk and low-capital entry point and a very simple bolt-on for us. So it's certainly in a concentric area of growth.
Okay. So how we plan to leverage it in terms of growing business from some key clients? I mean, our top client is what we have seen sort of stuck from a revenue run rate perspective for pretty long, and that is hampering the overall growth. So does that add any leg to that piece?
So I will, again, refer back to my earlier answers around how we see FY '19 and FY '20 playing out. We mentioned that we anticipate growing onshore footprint in all the 3 areas that we mentioned, whether it's North Carolina delivery, whether it's consulting in the market space and analytics in the digital space. To us, the TwoFour helps us in the second axis. It significantly helps us turbocharge our ability to staff onshore in those -- in the [indiscernible]. Out of the -- it's part of the same answer, so TwoFour is one part of the solution [indiscernible] market. But I've mentioned -- I think I've mentioned a couple of times earlier that we see onshore driving offshore.
Hello?
Are you able to hear us?
The next question is from the line of Ruchi Burde from BOB Capital Markets.
My question is regarding our managed services and the on-site. So one of the participants earlier asked about the overlap. Could you elaborate this in more detail?
So I mentioned earlier that roughly half or probably more of those 2 will be overlapping revenues. So if you are trying to find what is the sum total of onshore plus managed services, I would hazard a guess, probably 1/3 or slightly little bit more than that of total book.
Okay. And secondly, though earlier participant tried to ask in different way regarding this quarter's margin. So this year -- in this quarter, we talked about we had some short-term project which kind of aided our top line. However, there were margin not as much favorable as we would want. So that imply that in this quarter, the quantum of extraordinary items impacting margin is bit on higher side. You called out one such item being gratuity. Could you just, I mean, talk us through what are other items?
So the other item also I alluded to actually, and these are smaller items, to be honest. Second one was travel, for example. And the third item was that -- which is actually is the bigger item, is the onshore build-out and the new revenue that we got in Q4, which was substantial, 7% increase quarter-on-quarter. That came at [ pretty significant ] margin.
Thank you. Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for their closing comments. Over to you, sir.
Thank you, all. We look forward to talking to you again in Q1. Thank you.
Thank you very much, sir. Ladies and gentlemen, on behalf of eClerx Services Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.