Eclerx Services Ltd

NSE:ECLERX

Earnings Call Transcript 2019-Q4

[Operator]

Good day, ladies and gentlemen, and a very warm welcome to the eClerx Services Limited Q4 and Full Year FY '19 Earning Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Rohitash Gupta, CFO, eClerx Services Limited. Thank you, and over to you, Mr. Gupta.

[Rohitash Gupta, Chief Financial Officer]

Thank you. Thank you all for joining eClerx Earning Call for the Fourth Fiscal Quarter and Full Year of FY '19 Ending on 31st March 2019. I will start my prepared remarks with a full year review, and then I will cover Q4 financial performance towards the end. eClerx completed FY '19 with USD 201 million in revenue, its highest ever with a constant currency growth of 1.4%. Thus, we continued our trajectory of growth. Operating profit declined for the year to INR 2,629 million as an increasing proportion of our business shifted towards the high-cost location. Overall, sales for the firm, new contracts and orders were up 8% year-over-year while the contract reductions slowed down by 19% year-over-year. This provides good revenue momentum going into FY '20. Our top 10 client concentration decreased for the first time below 70% in a full year. And our over $5 million client list returned back to previous high of 7. Our emerging client portfolio showed significantly higher growth over the top 10 clients. We saw good growth in Asia, typically a very competitive market, and also in Europe, where we grew by selling large deals to 2 multinational clients. Overall, we were able to improve pricing on our portfolio of services and increased the size of individual deals sold last year, which is a testament to quality and relevance of our services. eClerx Markets, which is our financial services unit, saw growth in its data and compliance practice on back of a number of onshore and managed services engagements, which are embedding our platforms and technological capability. We fared well against competitors and the captives, adding 2 large banking clients this year. eClerx Customer Operations unit further grew its onshore footprint by adding a new customer in a new line of business. This was on the back of excellent delivery, something notable given our firm's relative inexperience in running U.S. delivery. We also won a large new client for technical operations services for offshore delivery with revenues to start in mid-FY '20.eClerx Digital offset some reduction in its traditional content management business with growth in advanced creative analytics and RPA services. I wish to provide you 2 significant examples of digital transformation projects won in new clients this year. First, eClerx Digital won business with a global [ Fortune ] client to transform their digital analytics program. The client looked to eClerx's extensive digital analytics functional experience in fast-moving B2C e-commerce to guide their transformation program recommendation as well as feature early program wins. The combination of client-side consulting and offshore delivery teams have realized significant savings for the client as they rapidly grew their e-commerce channel. Second, eClerx Digital won a new business with a global technology product and services company to automate business operations using client's preferred RPA platform to enable cost savings and operational efficiency. In conjunction with the automation deployment, eClerx has collaborated heavily with the client's RPA center of excellence to accelerate the client automation deployment and adopt industry best practices. Our onshore consulting and analytics businesses saw double-digit percentage growth driven by analytics. Helped by growth at our acquired business, CLX and TwoFour Consulting, our ex India business grew to just under 10% of our employee base and 1/4 of our revenue. As complexity of business needs to increase, this onshore presence allowed us to move into more difficult, stickier services requiring greater client interactions, technology and analytics. It also allowed us to win substantial new engagements, delivered concurrently from both onshore and offshore that we otherwise would not have been able to win. Technology played a more special role at eClerx in 2019. We sold the most advanced technology projects in the year, including RPA services, to new clients. We had great success with selling services embedding our platform, notably compliance managers, DocIntel, eCube and fluid 4. And an increasing percentage of our engagements moved towards managed services model this year. We continued with senior technology hires, including our Financial Markets Managing Principal and our -- the partnership with product company. Notably, the Department of Scientific and Industrial Research of Government of India, after exhaustive diligence, gave formal recognition this year to our in-house research and development effort and innovation in areas like big data, analytics, machine learning, robotics process automation. This is what we have fought for, a BPO/KPO, a significant honor and a vindication of our strategy of making technology core to our services. We are today a diverse family of almost 9,500 people representing 20 nationalities working from over 20 cities in the world. And we remain as deeply committed to investing in our people and talent.We increased recruiting from targeted colleges and broadened our industry-leading skill and hire program, offering college [ leading ] community an opportunity to increase employability in high-demand areas such as analytics, advanced automation and complex financial products. This is also a proven excellent testing and recruiting channel for eClerx. We launched new reward and recognition program to account for more diverse skill set and implemented a number of combined initiatives to improve employee engagement. We invested in new technologies to deliver and monitor more customized training, including more comprehensive leadership training. On onshore, we hired a new HR leader to run our HR and recruiting and to oversee the increasingly complex portfolio of onshore location and businesses supported. We are happy to report good results on back of some of these HR initiatives. Employee satisfaction, as measured by third-party surveys, improved over the course of the year. And attrition, especially in mid- to senior management, appreciably reduced, sitting at almost lower than in last 3 years.However, our overall efficiency improvement will remain an area of great focus in FY '20. We are proud of being a prudent firm focused on long-term shareholder return and value of our reputation as a firm with highest level of corporate governance in India. In 2019, we continued with the initiative to help us be better with a particular focus this year on firm-wide efficiency. We rationalized the corporate structure by subsuming one Italian subsidiary, thereby reducing our headcount cost.In the background of a challenging margin year, we implemented a number of initiatives to focus on margins. These included process and technology to allow better cost reporting and management across payroll, infrastructure, third-party services and travel and expenses. We also pivoted an increasing number of internal performance targets towards margins. We expect this initiative to have margin impact over medium term.We launched our new consolidated facility in Pune to consolidate our offices spread across several cities. This is to provide additional growth capacity and create a new, state-of-the-art work environment for our large Pune family. We also added to our facility in North Carolina to provide growth capacity. Both of these initiatives provide better economies of scale and capital efficiency for the firm.We've continued our established methodology of returning excess capital to shareholders by announcing our third buyback towards the end of the year, on this occasion at a market-leading premium. Notably, the independent employee stockholders option plan trust met its ownership targets, which will limit further share issuance to meet ESOP exercises in the future and, hence, minimize the future dilution.We also believe that firms like ours can have a large impact on environment, local community and society, and we are committed to exercising our responsibility thoughtfully and purposefully. This year, we launched several energy and natural resources saving initiatives to reduce environmental costs, and we'll be continuously monitoring our progress on these initiatives.Last year, we consolidated our CSR efforts into high-impact programs such as our Lonavla program impacting over 1,000 travel families and stakeholder engagement programs to maximize our impacted areas of education, skills and employment. We focus on employee engagement by providing opportunities for our employees to participate in volunteering efforts such as teaching computer skills and carrier counseling for students from marginalized sectors of the society. We have been able to provide more than 18,000 hours of volunteering effort by our employees this year. We also contributed to causes of national importance such as various natural calamities that happened through the year.The industry also recognized our work. eClerx Digital won Asia-Pacific Stevie Awards, a gold award for innovation and e-commerce and a silver award for innovative use of technology in customer service. Customer Operations vertical won eCare Partner of the year at its largest customer in U.S. CSO50 of the IDG group recognized eVigil Pro, our centralized security monitoring application, as a leading product in its segment. Our virtual assistant technology won recognition and award from NASSCOM and CIO 100 forum. Our people function won the national Golden Peacock Award for the quality for the second consecutive year and the prestigious Brandon Hall award for excellence in learning and development. It is gratifying when our clients and industries cite us for differentiated value that we bring. Our business is in the midst of a deliberate transformation that has needed and will continue to need investments from us. From being an all-India delivery and knowledge process outsourcer reliant on a handful of clients and service lines, we are changing to become a more technology-centric process management and data analytics company. We service today several hundred clients across many functions from locations across the world with a fantastic global management team. We are aware that this transformation has meant lower profitability and growth than in recent past that shareholders would have otherwise be accustomed to, but we believe this transformation to be key to our long-term future and to shareholder return.Lastly, coming to our quarterly results, we reported operating revenue of USD 51.2 million and INR 3,651 million, which is roughly 2% up sequentially on reported as well as constant currency basis. Our total income grew by 5% sequentially due to favorable other income movements because of reduction in revaluation losses.All our INR margin metrics grew in double digits quarter-on-quarter with operating margin coming in at INR 680 million and net profit of INR 593 million. Our offshore revenues in Q4 grew sequentially by nearly 1 million, reversing the declining trend of the last few quarters and reverting to Q4 FY '18 level. Our percentage margin metric for Q4 was very similar to the full year FY '19, which signifies stabilization of margins at this level of current business mix. Our hedge book of $143 million stands at INR 72.7 to $1 and will result in strong conversion into operating revenue from Q2 FY '20 onwards. Our operating cash flow, while down in line with our profit year-over-year, has displayed a healthy PAT conversion ratio above 90% during the year. Our cash balances at the year-end were INR 7,398 million, which will come down once we complete the ongoing buyback and also execute on the proposed dividend of INR 1 per share pending shareholder approval. On the cost outlook for Q1, while we expect some of the facilities costs when depreciating to come down due to tapering of Pune consolidation impact. And also, we expect drop in CSR allocation. However, the big increase effective 1st April may cause OPM to decrease on a like-for-like basis in Q1.The effective tax rate for FY '19 was about 27%, and we expect it to nudge up in FY '20 as more SEZ units complete 10 years.Our high-probability pipeline, which typically converts in the next 1 to 2 quarters and is a good indicator of the demand mix, was significantly higher at year-end compared to same time last year with the highest Y-o-Y dollar increase we've seen in customer operations vertical. Almost half of current pipeline is for onshore work and 1/4 is for managed services, indicating continued traction around our strategic intent to grow these pieces. Lastly, company will adopt AS 116 for leases from FY '20, and we will update you on the impact, if any.With this, I will open up for Q&A.

[Operator]

So we can begin with the question-and-answer session, right?

[Rohitash Gupta, Chief Financial Officer]

Yes.

[Operator]

[Operator Instructions] We take the first question from the line of Madhu Babu from Centrum Broking.

[Madhu Babu, Research Analyst]

Congrats on a good quarter. Sir, I think the exit has been fairly decent for this year, so the exit run rate for 4Q. So should we say that I think the worst is behind over the last 3 years and now we can look at a mid-single-digit kind of growth, like 5%, 6% kind of growth for next year?

[Anjan Malik, Co]

I think it's too early to say that. I think the point that Rohitash mentioned, our business has also inflected to more project-oriented work. I think some of the business that we're winning is also shorter-term work and then more volatile outcome. So I think we'd like to watch over the next couple of quarters to see if underlying demand has changed significantly. So we wouldn't be comfortable giving you a guide that's very different from what we have right now.

[Madhu Babu, Research Analyst]

And in terms of -- obviously, we will build managed services, but, I mean, so in terms of building a kind of more longer-term annuity kind of contracts, so any verticals where we are seeing that happening? And any few case studies, I mean, where we have much longer-term annuity kind of contracts within some of the processes?

[Anjan Malik, Co]

I think overall, and I think you will have heard this from the industry in general, there is much less appetite from large enterprise customers to find longer-term deals because their businesses are themselves being disrupted by technologies. So overall across the whole book, we see a decrease in the duration of contracts. And I don't think it's in one place or the other. You are right that typically the duration of managed services contracts tends to be longer [indiscernible] sign more managed service contracts, you'll get slight extension in duration. But we're not seeing that propensity in one business or the other.

[Madhu Babu, Research Analyst]

Okay. And sir, in terms of the technical services, the R&D headcount, which currently create [ the extra ], there had been a decline in that over the last few quarters. So any specific reason? I mean is it that we have done a good amount of investment on the platform side and maybe the staff strength will be static from here?

[Rohitash Gupta, Chief Financial Officer]

Madhu, that's a good observation. Yes, you are right that our technical staff has reduced a little bit year-over-year, and the primary reason is that, that technology service unit is now more and more focusing on client-oriented projects and has reduced a lot of support to the in-house [indiscernible]. I think it's just mix change. I don't think on the client servicing side for the technology team there's any reduction. But the net reduction is coming from where they were working for in-house applications or our own use.

[Madhu Babu, Research Analyst]

Okay. And last from my side, the on-site intensity, so that will continue to increase next year in FY '20?

[Anjan Malik, Co]

I think we're -- seems like -- can you repeat that question?

[Madhu Babu, Research Analyst]

The on-site headcount, I mean, our on-site effort and on-site investments.

[Anjan Malik, Co]

I think we break on-site investments into 2 distinct parts. So there's delivery and there's what I would call our traditional onshore function, which is sales and client engagement. We anticipate delivery will continue to increase because there is general demand for services delivered from client locations. So on the client engagement front, we will grow at what I would call an organic rate of investments. So we don't -- we will continue to grow and upgrade that function to drive our sales initiative, but it will be more [indiscernible].

[Operator]

Mr. Madhu Babu, does that answer your question?

[Madhu Babu, Research Analyst]

Yes. Yes.

[Operator]

[Operator Instructions] Next question is from the line of [ Nirman Shakti ], individual investor.

[Unknown Shareholder]

This is [ Nirman ] here. Am I audible?

[Rohitash Gupta, Chief Financial Officer]

Yes, you are, [ Nirman ].

[Unknown Shareholder]

Anjan, Rohitash, my question is not so much about the quarter, but if you look at kind of your trajectory, the economics of your business over time, we've obviously seen this has gotten harder, especially over the last couple of years. Margins have been dropping and so on. So obviously, nobody can predict the future. But as the management team, what is your hope or ambition? How do you -- or what is your strategy? How do you feel you can improve the economics of the business? If you can just give us some sense of the things you're doing to try to, let's say, improve the return on capital employed of the business in the next 5 years, 10 years.

[Anjan Malik, Co]

I think 10 years is a lifetime in our business, so I won't try and answer that question. I think there are a number of initiatives that we set out on a couple of years ago, which we've considered to be strategically important for the firm. All of them were investing in onshore. We consider that to be-- differentiation is the key to stickiness and profitability. The investment in onshore is also what's been driving reduction in profitability. As you can see, today almost 1/4 of our revenue is onshore, and that move is basically what has driven margin down overall, at least a very large majority of the change in margin. Over a period of time, we expect that, that investment will start driving more hybrid business through the combination of onshore and offshore business or purely offshore business. We're early in the cycle in terms of investing, if that's going to be successful. Early signs show that we are winning in places in that strategy. That will drive more differentiation. And we think over a period of time, that will improve stickiness, duration of contracts and profitability.So we see profitability being directly a function of differentiation, niche -- niche-ning and being able to provide higher-end services, all of which are somewhat predicated by: one, the investment in onshore; and two, to the point that Rohitash was making earlier, more directed investments in technology and making technology much more central to the services that we deliver, both of which are underway.

[Unknown Shareholder]

Okay, great. I don't know if I can ask a follow-up question. I'm not sure how much time I have.

[Rohitash Gupta, Chief Financial Officer]

Go ahead, [ Nirman ].

[Unknown Shareholder]

Okay. So it's actually related to what you're saying. So if stickiness is a key facet of kind of the strategy going forward, isn't that something that can easily be copied and probably improved upon by people who have bigger scale than us and therefore something that you would have to -- you'll kind of back to square one 2 or 3 years down the road when others have copied this, and you'll have to think of other ways of ensuring that you are doing -- or you're pulling ahead of the pack? So what is your perspective? On a slightly different note...

[Anjan Malik, Co]

All right, go ahead.

[Operator]

Mr. [ Shakti ], we are unable to hear you, sir. Mr. [ Nirman Shakti ], we've lost your line. Hello? As there's no response from the current participant, we move on to the next one. We take [ Shiva Salram Chandran ] from Spark Capital.

[Unknown Analyst]

This is [ Shiva Chandran ]. I just wanted to get your thoughts. The last 2 or 2.5 years, we've been seeing change from an offshore maybe going on-site, maybe -- or on-site-dominated model. I just want to get...

[Operator]

Excuse me, sir. I'm so sorry to interrupt, but your voice is not very loud. We are unable to hear you, sir.

[Unknown Analyst]

So the question I was trying to ask is our on-site growth has been pretty good in the last few quarters. I want to get a sense how do you look at profitability. Do you think you are at a scale where profitability could expand in on-site margins still? Or do you see that you already hit the threshold in here, maybe you're more or less on a linear path on the on-site profitability?

[Anjan Malik, Co]

I think I'll answer the same way that I answered the earlier question, which is that I think we look at overall profitability not as percentage but as overall profit dollars or pick your currency of choice. And we think that we can drive an overall increase in profit dollars by driving more high grade in managed service business to which onshore delivery is a key component but not the only one. So we are not as interested in what I would call purely onshore business just for the sake of onshore business. We look at it very much as a means to an end. To the extent that we're successful in achieving that end, then we anticipate overall profit dollars grow to accelerate.

[Unknown Analyst]

Okay. One quick follow-up. In the last 12, 18 months, there's not been much acquisition or target -- or conversation around it. Is it more a conscious choice saying that let's fix what we're trying to achieve internally than have an acquisition on this technology? Or is it you didn't find any right candidate?

[Anjan Malik, Co]

I think the velocity at which we've been saying acquisition opportunity hasn't really changed substantially from, let's say, the previous 3 years. We have found a dearth of good quality assets which fit strategically into our business profile, meet our internal sort of thresholds for different parameters that we look at. And we have also felt that some of the assets that we've looked at perhaps not been valued at a level at which we would consider it to be accretive to shareholder return. But I don't think it's for the lack of trying that we haven't done M&A. And we do consider M&A to be a spiral track as opposed to -- and instead of track, to focusing on our organic business.

[Operator]

We take the next question from the line of Vishal Desai from Axis Capital.

[Vishal Desai, Assistant Vice President of IT Services]

Congrats on a strong set of numbers. Just -- Rohitash, just quickly on the margin commentary that you gave out for Q1 and then I would want to follow it up with a more long-term view, could you spell out again what would be the headwinds and tailwinds in terms of the quarter 1 expectation?

[Rohitash Gupta, Chief Financial Officer]

Yes. So I can give you qualitative commentary on that again. So the biggest headwind that we'll see is basically the wage hike. And typically, over the last few years, we have seen the wage hike impact to be theoretically around 200 to 230 bps in the quarter -- in the first quarter, sorry. So that's the kind of expectation even this year because hikes have been very similar. Apart from that, there's no obvious such a large headwind that I see on the margin front. On the tailwind front, there are few smaller items that will help us on the G&A side, the topmost one being the facilities cost. There, we have been seeing some amount of duplication during the last few quarters, and I think that will taper off during Q1 and completely be over towards the later part of Q1. So that will provide us some small cushion. The second thing is that CSR allocation is slightly coming down based on the 2% calculation. And there are few other G&A items that will also see a slight decrease like -- not G&A, sorry, but depreciation that will see a slight decrease, again, because of Pune consolidation project being over. So these 2 or 3 are small tailwinds, but the larger headwind is around wage hike.

[Vishal Desai, Assistant Vice President of IT Services]

Sure. And just from a margin perspective, while we have continued to highlight that we will continue to be a little bit on-site skewed given that most of the deals that we are winning are on-site, our exit rate of margin for this quarter is close to around 22%, if I get the EBITDA number right. Do you expect this to at least be stable from a year-on-year perspective? Will we be able to recoup the entire wage cost pressure that we've seen given that our investments in on-site will continue? Or we expect this to taper off from here on?

[Rohitash Gupta, Chief Financial Officer]

Well, as Anjan was alluding, we focus a little more on the absolute operating margin as opposed to percentage. But to answer your question qualitatively, if you look at both Q4 and FY '19 margin metrics, they are pretty similar, showing signs of stabilization at this level of business mix. By business mix, I mean what is the onshore share, what is the managed services share and things like that, right?Now as we just discussed, there are few headwinds lined up and few smaller tailwinds also. So there will be a net impact. But I think the crucial factor which will help us maintain this percentage levels of EBITDA will be -- as you know, on one hand, it will be the hedge rate realization that will happen. And the second, which is even harder to predict, is the client price hike. We have been seeing some uptick towards the H2 of FY '19. Will we continue to see it in FY '20? It's hard to say. But if it that comes by along with the hedge rates, it will help us consume the wage hike.

[Vishal Desai, Assistant Vice President of IT Services]

Sure. And one last, if I may. Anjan or any of you could probably highlight. In terms of the 3 business verticals, what is likely to be a growth driver going in to FY '20 given our project pipeline currently? If I understood correctly, our pipeline is up year-on-year and is looking stronger. So some sense in terms of verticals or our business segments would be helpful, please.

[Anjan Malik, Co]

I think all the businesses have similar opportunities and challenges. I mean as you know, our Customer Operations business and the market business is really -- has a customer of the CIO and COO whereas the part of traditional marketing services and traditional services tends to be in the CMO. We see spend patterns in digital obviously accelerating because there's a lot of focus on digital first, I think, in businesses directly to customer and now that's -- and that's an area where we have a specialization. So we continue to see demand.The programs tend to be smaller in size. So we've -- and I think to the point that Rohitash was making, we've made some headway this year in increasing the size of projects that we've been able to sell in as our lead-in project declined in sites where we are -- instead of us going into small engagement which focuses only one corner of the business, we're sort of doing these multi-jurisdictional projects, which are very much predicated on our ability to staff in client locations and to provide onshore delivery in partnership with offshore. So that's increasing our portfolio size of a new location. So given those 2 trends, we continue to see a fair amount of tailwind in digital.The CIO/CEO front just in the Markets business, the tailwind there is really in compliance and client. So that portfolio of services we continue to see a fair of demand in. And we continue to see a lot of challenges because, obviously, there's a lot of focus on cost at the same time and some element of captive bias, which has continued over the last few years. In the cable and multi-system operator space, we've seen both ups and downs, right? So again, we see in some places some in-sourcing bias and, in other places, new clients and new -- from new jurisdictions buying services from us. But there, I'd say that if we were to put money down, we believe that[Audio Gap][indiscernible]

[Vishal Desai, Assistant Vice President of IT Services]

Hello? Sorry, I missed you in between.

[Anjan Malik, Co]

Digital services capability is, I think, what is the most in demand. And again, onshore capability is what's most in demand in our Customer Operations business.

[Operator]

Next question is from the line of Harit Shah from Reliance Securities.

[Harit Shah, Former Senior Research Analyst]

Sure. Yes, Harit here. Okay. Sir, I just wanted a clarification on this. In the -- on the first quarter, on, one, that -- the impact of your Pune consolidation that will taper off, so it will build depreciation then sort of stabilize? Or would -- will you see some sort of decline on that front?

[Rohitash Gupta, Chief Financial Officer]

On depreciation, we are likely to see a decline in Q1 for a couple of reasons. One, because at the year-end, we reset -- written down values. So a new lower base is taken for depreciation. That's one reason. And the second reason, as you mentioned, is Pune facility, which will have a slightly offsetting impact on that. But overall, netting of these 2 factors, I think depreciation should decrease in Q1.

[Harit Shah, Former Senior Research Analyst]

Okay. Sure. My second question relates to the attrition rate. So your attrition has been increasing. I mean, it's been on the up for the last 3, 4 quarters now. So what is the -- your guidance this -- just what you -- are you seeing some sort of a shortage of your talent for your newer services that you're looking at? Or is there some other reasons that you -- for the same? I mean what steps are you taking to maybe get it stacked down to lower levels?

[Rohitash Gupta, Chief Financial Officer]

You're right that attrition is probably at a higher level when compared to last year also. And we're seeing most of the attrition at the execution level because, as I just mentioned, the mid to senior management put together, we are at nearly all-time low in last [ 3 ]. But execution level, attrition remains a problem because that kind of happens to be stabilized operation delivery excellence. So the steps we have taken, and as I alluded to also, is that on the career planning side, on the training side and on the job role side, and we are seeing some early good outcomes of that based on our third-party surveys that we have done both in H1 and H2, and we saw a noticeable jump up in the employee satisfaction. So we hope that in time, it will help in reducing attrition at the senior level as well. But the second reason, I think, also is also the change in business, right? So as we had talked about in last few calls, both the new sales as well as roll-offs are at elevated levels although they are coming down from last year, but absolute number is still very large for both those legs, right? And sometimes, what is getting rolled off is not exactly of the same skill as what is coming in, and that requires some people to find other opportunities elsewhere which fits their skills better as opposed to moving on to a new project or new skill area that is offered in eClerx.

[Harit Shah, Former Senior Research Analyst]

Sure. What will you be -- what level of attrition will you probably be comfortable with? So we are at about 44% or so on the offshore side and -- in the fourth quarter. So at what level would you be, let's say, satisfied with -- at -- if you were to put it in that way?

[Rohitash Gupta, Chief Financial Officer]

Attrition reported today was actually offshore and not onshore. And I think most of the attrition numbers that we have seen, we have worked through them through exit ventures and other things so that delivery is largely unaffected. Having said that, something in 30s, around mid-30s markets are at much more comfortable range than in 40%.

[Operator]

We take the next question from the line of Apurva Prasad from HDFC Securities.

[Apurva Prasad, Research Analyst]

Perhaps you can tell me about the 5 million-plus accounts. I think you talked earlier about a moderation over the next 2 quarters. So how is that progressing in 2 out of those 7 accounts?

[Rohitash Gupta, Chief Financial Officer]

Sorry, can you elaborate your question a little bit? Are you referring to something that we said or...

[Apurva Prasad, Research Analyst]

Yes. Yes. Yes, I think this is in reference to the 5 million-plus clients, which are currently 7 in number. And you talked -- I think you had earlier referred to challenges in 2 of those accounts which are expected to moderate. So if there's any progress you can talk about.

[Rohitash Gupta, Chief Financial Officer]

Talking about the last quarter commentary, is it?

[Apurva Prasad, Research Analyst]

Yes, that's correct.

[Rohitash Gupta, Chief Financial Officer]

Yes. Right. So the client event which happened, which was disclosed in the Q3 call, was more around actually $1 million to $5 million clients. So some of our couple of digital clients got acquired, and that led to change in their outsourcing or partnership programs with vendors. And I think that impact is already moderating as we speak. On the $5 million-plus clients, I think there's a good news that last year, we were only 6 in number, and now we have come back to 7, which was our highest ever. So I don't think there's any concern on the $5 million-plus clients. There's more -- a little concern on a couple of clients in the $1 million to $5 million, which is now tapering off in Q1 as we speak.

[Apurva Prasad, Research Analyst]

Right. So, I mean, do we expect growth in the $5 million client bucket as we stand today?

[Anjan Malik, Co]

We expect growth. Yes.

[Apurva Prasad, Research Analyst]

Right. And if you can break down FY '19 by segments in terms of revenue contribution, how would that be? And how much, plus or minus, growth would that have been versus the company average for the full year?

[Rohitash Gupta, Chief Financial Officer]

Well, we don't give vertical line breakouts. And -- however, qualitatively speaking, I think the digital has done well this year compared to last year. So year-over-year growth in digital is better compared to other 2 verticals.

[Operator]

We take the next question from the line of Parth Thakkar from JM Financial.

[Parth Thakkar, Research Analyst]

I guess I missed a bit on the pipeline. So if I get it correctly, is it 25% in managed services, the pipeline which constitutes right now? Was it correct?

[Rohitash Gupta, Chief Financial Officer]

Yes, you're right.

[Parth Thakkar, Research Analyst]

And regarding the win ratio, so do we expect stable or increasing win ratios going forward?

[Anjan Malik, Co]

I think win ratio is very hard to predict on a year-on-year basis. I mean, I think we have a very good idea having looked at our data over the last 5 or 7 years, on what -- how different stages of a deal will convert to actual conversions to dollars, and I think that's not really changed substantially over a period of time.

[Parth Thakkar, Research Analyst]

So over a year of -- year-over-year, I would say the pipeline had been stable to increasing, right? At least that's what, I think, as per our definition, internally what you must have been remarked?

[Rohitash Gupta, Chief Financial Officer]

Yes.

[Parth Thakkar, Research Analyst]

Yes. And just last question on the -- it's a bit of bookkeeping question. So do we have any export incentive income in this quarter? We had in 2Q and 1Q. I mean, can you just provide, sir?

[Rohitash Gupta, Chief Financial Officer]

We did.

[Parth Thakkar, Research Analyst]

Pardon?

[Rohitash Gupta, Chief Financial Officer]

In quarter -- Yes. Yes, we did have.

[Parth Thakkar, Research Analyst]

We did? How much did we have? I'm sorry, I guess, I'm missing your voice. Hello?

[Rohitash Gupta, Chief Financial Officer]

Yes. So am I audible now?

[Parth Thakkar, Research Analyst]

Now you're audible clearly, yes.

[Rohitash Gupta, Chief Financial Officer]

So we do have SEIS income -- incentive income recognition every quarter. And during the last year, FY '19, the accruals were in the range of about INR 4.5 crores to INR 5 crores per quarter. And in FY '20, we expect the number to be slightly up, let's say, around INR 5 crores to INR 5.5 crores a quarter.

[Parth Thakkar, Research Analyst]

INR 5 crores to INR 5.5 crores per quarter. Okay. That helps a lot.

[Operator]

[Operator Instructions] We take the next question from the line of Ruchi Burde from BOB Capital.

[Ruchi Burde, Research Analyst]

Rohitash, this refers to your, well, prepared comments. You mentioned about one big offshore deal which is expected to start flowing to revenue from mid of the year. Could you talk more about the characteristics of the deal? Does it fall into the zone where we had won this on the back of some on-site work? Or this is an independent deal that came through?

[Rohitash Gupta, Chief Financial Officer]

So the example I gave was from Customer Operations, and this was in the service area of technical operation that Anjan also alluded in some other context. But that had been a very good, fast-growing area for us. And this is largely an offshore deal from a client which generally doesn't outsource and definitely doesn't offshore. So I think this is a good example for winning deals on back of just the value proposition as opposed to being a offshore provider at low cost.

[Ruchi Burde, Research Analyst]

Did it start or did it come from an already on-site engagement? Or was this an altogether new offshore delivery that we start?

[Rohitash Gupta, Chief Financial Officer]

No. It's a totally new client.

[Ruchi Burde, Research Analyst]

Okay. Understood. Understood. And qualitatively, how do you see the in terms of -- in our offshore deal pipeline, has the intensity increased now or staying at what it was, let's say, last quarter or last few quarter?

[Rohitash Gupta, Chief Financial Officer]

So I think I alluded to that indirectly, that our pipeline is currently higher than what it was in March 2018.

[Ruchi Burde, Research Analyst]

That 50% on-site proportion?

[Rohitash Gupta, Chief Financial Officer]

Yes. And by the same logic, because our pipeline roughly has been in the same mix, 50-50 for onshore-offshore, by that logic, the offshore value-wise also is slightly larger than what it was last year. So I think that's a good indication on the pipeline side. Secondly, you'll see on the revenue side, I think, we were at $39 million in a quarter in Q4 FY '18. And now we have come back to $39 million in a quarter in Q4 FY '19. Although in between, we have declined to almost $38 million and below, right? So if you put these 2 pieces together, the revenue trajectory as well as the pipeline indication, I think offshore is also likely to grow, although onshore mix, as I just said, is 50%. So that is slightly stronger on its 25% base.

[Ruchi Burde, Research Analyst]

Okay. Lastly on margins. I understood your point that you're focused on more absolute increase in operating profit. But at the same time, you guys emphasized about the stability of margin for the revenue mix that we have. So is it fair to assess that this is -- the operating margin that we see for the full year, this is kind of a stable margin for the business that we have, let's say, in the near term if the on-site mix of the business doesn't fluctuate much? Is that what we intend to imply?

[Rohitash Gupta, Chief Financial Officer]

So Ruchi, that's a very tough question because there are so many unknowns, right? So the business mix, how it will pan out in next 4 to 6 quarters, is very hard to define now. What we talk in terms of indications is pipeline which will hardly take 1 or 2 quarters to materialize. And also, remember that much of our revenue conversions happen through a very, very short cycle of conversions because they are typically incremental deals of small projects in the existing clients, right? So clients don't give or don't need to give too much notice to us. So there are too many uncertainties around what business mix would be on managed services or onshore 2 quarters out or 3 quarters out. As far as Q1 is concerned, I think in the earlier question I have talked about few headwinds and tailwinds. And so I think that's where I would like to leave it.

[Operator]

Thank you. Well, ladies and gentlemen, that was the last question for today. I would now like to hand the floor over to the management for closing comments.

[Rohitash Gupta, Chief Financial Officer]

Thank you very much, everyone, and I look forward to talking to you next quarter.

[Operator]

Thank you very much. Well, ladies and gentlemen, on behalf of eClerx Services Limited, we conclude today's conference. Thank you all for joining. You may disconnect your lines now.