Firstsource Solutions Ltd

NSE:FSL

Earnings Call Analysis

Quarterly Revenue Hits Record High with Strong Pipelines

In Q1 FY '25, the company achieved its highest quarterly revenue ever, growing 17.1% year-on-year to INR 17.9 billion. EBIT margin for the quarter was stable at 11%, within the guided 11% to 12% range. Net profit stood at INR 1.4 billion. The company secured 3 large deals and added 10 new logos, showing robust growth despite seasonally muted trends. They raised their FY '25 revenue growth guidance to 11.5%-13.5%. The healthcare vertical showed strong performance, with notable gains in digital intake and AI-based offerings to clients.

Strong Performance in Q1 FY '25

Firstsource Solutions Limited reported a remarkable Q1 FY '25, showcasing strong revenue growth of 17.1% year-on-year, reaching INR 17.9 billion (USD 215 million). This growth marks the company’s third consecutive quarter of significant performance, placing it in the top decile among peers in the IT and IT-enabled services industry. Notably, revenue recognized in constant currency showed a solid quarter-on-quarter growth of 6.5%. This impressive financial outcome reflects the effectiveness of Firstsource's revitalized sales strategies and a robust pipeline of deals.

Profitability and Margins

The EBIT margin for the quarter was stable at 11%, aligning with the company’s guidance range of 11% to 12% for the financial year. However, this figure reflects a year-on-year decline of 70 basis points. The net profit stood at INR 1.4 billion, equating to a diluted earnings per share (EPS) of INR 1.92. The management expressed confidence in maintaining these margins despite ongoing investments in sales and leadership talent, suggesting that margins can improve by 50 to 75 basis points annually in the medium term as investments bear fruit.

Strategic Wins and Robust Pipeline

During Q1, Firstsource secured three large deals, classified as those with an annual contract value (ACV) of $5 million or more. These strategic wins, coupled with the addition of 10 new logos, underline the company's strong market presence. Firstsource is leveraging partnerships and expertise in process transformation and has demonstrated substantial capability by winning contracts across sectors including healthcare, freight, and pension administration.

Vertical Performance Insights

Performance across business verticals was varied. The Banking and Financial Services (BFS) vertical demonstrated a quarter-on-quarter growth of 4% and 2.2% year-on-year. Despite traditionally being a muted quarter, Firstsource effectively countered this seasonality. Conversely, the healthcare vertical surged by 15% quarter-on-quarter and 26% year-on-year, bolstered by the integration of the recently acquired QBSS and an expanding deal pipeline. The company's emphasis on cost optimization has resulted in favorable positioning among its payer clients.

Guidance and Outlook

Firstsource raised its revenue growth guidance for FY '25 to a range of 11.5% to 13.5%, an increase from the initial estimate of 10% to 13%. The company also targets a revenue run rate of $1 billion by Q4 of FY '26, reinforcing its long-term vision. The management remains cautiously optimistic, ensuring that guidance factors in conservative estimates amidst ongoing macroeconomic shifts, while highlighting the potential for upside.

Employee Attrition and Company Culture

The total employee count stood at 29,231, with a trailing 12-month attrition rate dropping to 32%, a significant improvement from previous quarters. Firstsource is addressing employee retention through enhanced engagement initiatives, labor investment, and the newly launched FirstALUM platform, aimed at maintaining connections with former employees. The goal is to improve employee satisfaction further, promoting a cohesive and motivated workforce.

Environmental Commitments and Recognitions

In addition to strong financial results, Firstsource has committed to science-based targets for carbon emission reductions, demonstrating a commitment to sustainability. The company received accolades for its innovative solutions, particularly in the healthcare sector, recognized as a disruptor in the revenue cycle management space. This blend of performance and corporate responsibility enhances Firstsource's appeal to investors focused on sustainable practices.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Firstsource Solutions Limited Q1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

On this call, we have Mr. Ritesh Idnani, MD and CEO; Mr. Dinesh Jain, CFO; and Mr. Pankaj Kapoor, Head of Strategy and Investor Relations, to provide an overview on the company's performance followed by Q&A.

Please note that some of the matters that will discuss on this call, include the company's business outlook, are forward-looking and as such, are subject to known and unknown risks. These uncertainties and risks are included, but not limited to, what company has mentioned in its prospectus filed with SEBI and subsequent annual reports that are available on its website.

I now hand the conference over to Mr. Ritesh Idnani. Thank you, and over to you, sir.

[Ritesh Idnani, executive]

Thank you. Hello, everybody, and thank you for joining us today to discuss our financial results for the first quarter of FY '25. Before I start with the discussion on our performance, I would like to thank each one of our 29,231 Firstsourcers around the world for their extraordinary work and commitment to our clients, which resulted in delivering another strong quarter for us.

Q1 is a milestone quarter for us from multiple dimensions. We clocked our highest quarterly revenues ever in the history of the company, and our growth in the quarter is in the top decile among our peer group. What pleases me even more is that this strong growth has come in a quarter that has historically been a seasonally muted quarter for Firstsource. We also won 3 large deals in Q1, and despite that, we exited the quarter with a very strong and robust pipeline.

Let me now give you some more color on our Q1 performance. Our revenue grew by 17.1% year-on-year and came in at INR 17.9 billion. In U.S. dollar terms, the growth was 15.4% year-on-year and 6.7% quarter-on-quarter at USD 215 million. In constant currency, the revenue grew at 6.5% quarter-on-quarter. I would like to point out that this is our third consecutive quarter of strong sequential revenue growth and a revenue growth of 3% plus CQGR over the last 4 quarters places us in the top decile of the broader IT and IT-enabled services industry.

EBIT margin for the quarter was 11%. This is broadly stable quarter-on-quarter, lower by 70 basis points versus Q1 of last year and within our guided 11% to 12% band for the financial year. Our net profit was INR 1.4 billion, and the diluted EPS was INR 1.92 for the quarter.

Let me now turn your attention to the deal wins for the quarter. We continue to leverage our deep industry and functional expertise and our partnerships in the technology ecosystem to improve our participation in the process transformation agendas of our clients. We signed 3 strategically large deals in Q1, another first for Firstsource. As you are aware, we consider a deal with ACV of $5 million as a large deal. We expect these deals to ramp up in a phased manner over the coming quarters. We also added 10 new logos during the quarter.

Let me highlight a few notable wins. We won a large deal from a Fortune 500 managed healthcare company in the U.S., one of our existing clients, for member and provider services and end-to-end claims processing services, leveraging AI and automation. We also expanded our footprint and wallet share in one of the top 5 healthcare insurance companies in the U.S. for providing digital intake, claims and provider data management services. This is on the back of our digital intake platform that allows us to ingest both structured and unstructured data.

We won a large deal from a premier SaaS platform for the freight industry in North America for providing customer service and back office operations. This was also a new logo for us. Another new logo addition with a scale deal was from a leading pension administrator in the U.K. to improve their service coverage.

Let me now provide you a deep dive into our performance and outlook for each one of our industry verticals. I'll start with Banking and Financial Services. In Q1 FY '25, our BFS vertical was up 4% quarter-on-quarter and 2.2% year-on-year in constant currency terms. Traditionally, Q1 has been a seasonally muted quarter for us in this vertical, but we were able to counter the trend this year due to our concentrated efforts over the past few quarters to reduce the macro dependency in the portfolio. For example, while elevated interest rates remain an overhang in the mortgage market, our focus on engaging on the cost optimization programs with our customers is helping us expand our market share, especially amongst our mono-liner customers.

Our AI use cases for this segment are also seeing strong interest from customers looking at nonlinear execution models to prepare for the expected volume upcycle in their business. As you'll recall, we have made several key hires over the last couple of quarters to strengthen our sales and solutions team in this vertical. This is also helping us gain access to several potentially large logos and expand our pipeline as well as have focused execution on cross-selling additional service lines in our existing accounts.

We continue to make progress in our efforts to broad base our portfolio in this vertical, both in terms of market segments as well as in terms of our service offerings. For example, our collection services are seeing strong traction amongst fintech players, and our competitors for this offering are largely other SaaS players in this space. We are also seeing growing interest in our new service offerings around financial clients and compliance. We added 5 new logos in this vertical in Q1. Overall, we expect a sequentially improving growth trajectory in this vertical through the rest of FY '25.

Let me turn your attention now to Healthcare. For Healthcare, Q1 was a strong quarter. Our revenues grew 15% quarter-on-quarter and 26% year-on-year in constant currency terms, helped by a ramp-up in the deal wins that we've had in the recent quarters, particularly in the payer segment.

Medicare utilization has been on the rise in the U.S. and along with weaker payment rates and high medical costs, this is putting pressure on the margins of healthcare insurers. This has led to a surge in transformative initiatives across our payer clients, as they seek ways of optimizing their cost structure.

We have 2 large deal wins in this segment in Q1, and we continue to see a very strong pipeline with several potentially large deals across the large client base, giving us confidence of maintaining the growth momentum in this segment in FY '25.

Our provider business has also been stable. As you recall, we announced the acquisition of QBSS in the last quarter. QBSS was strong in the mid-office revenue cycle management market and complements our strength in the front and back office markets, thus enabling us to now go to market with a significantly enhanced end-to-end value proposition. The integration of our teams is progressing well. We also had our first joint deal win in Q1, and the synergies helped us close an additional 2 transactions in the very first quarter of integration. We added 2 new logos in this vertical, one each in the payer and provider business. Overall, we expect growth to remain strong in the verticals, driven by the payer segment.

Next, I will talk about our CMT vertical, where we saw strong growth of 17% year-on-year, though the revenues were largely flat quarter-on-quarter in constant currency terms. As you know, for us, this vertical is made up of 3 subsegments: Telecom and Digital Media, EdTech and Consumer Tech. Let me give you the color on each one of these.

We are seeing a healthy momentum in our Telecom and Media business. As you know, companies in this vertical are large but mature outsourcers. As such, we are positioning ourselves as a challenger to the existing ecosystem by bringing in our entire service portfolio. Our proposition is resonating well with both our existing clients and new logos. We added one new logo in this segment in Q1. We also see a good deal pipeline, including a couple of large deals in advanced stages.

In EdTech, our engagement with [ ETS ] continues to scale up. We are also expanding business in other logos that we have added over the last few quarters.

In Consumer Tech, we continue to expand our footprint amongst the marquee consumer tech logos, with a nontraditional service proposition that has seen good traction in the market. For example, we are working with 2 of the largest consumer tech brands in training their AI models, leveraging our AI Ops framework. We also added a third logo during the quarter.

In Q1, we also won a large deal from a new logo, a premier SaaS platform provider that I referenced earlier. Overall, we added 3 new logos in this vertical. We continue to have a healthy deal pipeline out here, and are hopeful of converting some of these deals in the coming quarters.

Overall, while movement of specific processes from onshore to offshore in our top client could remain an optical headwind in the near term, we expect good growth in the overall vertical, given continued ramp-up in other clients as well as a healthy deal pipeline.

Lastly, our diverse vertical, which mainly comprises utilities and energy, grew 34% year-on-year in constant currency terms in Q1. In sequential terms, revenues in this vertical declined by 3% quarter-on-quarter due to seasonally lower volumes in one of our large accounts. We expect the same to recover in Q2. We are also making concerted efforts to expand our client portfolio in this segment.

Let me now provide you with a flavor from a geography standpoint. Growth in Q1 was driven by the U.S., with a 12% quarter-on-quarter growth and a 24% year-on-year growth in constant currency terms. We saw a 3% quarter-on-quarter decline in Europe due to quarterly volatility in a couple of clients, besides the optical impact of a planned on-site to offshore shift in our top client.

From the macro perspective, companies in the U.K. are facing significant cost pressures that is leading to increased conversations around [indiscernible] deals. We also see a growing recognition of the need to pivot towards offshoring. Based on the pipeline, we expect Europe to see a stronger second half. In the U.S., we expect a more broad-based growth across verticals.

Let me now turn your attention to the people side. Our total employee count was 29,231 Firstsourcers as of 30th June 2024. Our trailing 12-month attrition rate for the quarter stood 32% compared to 35.4% in Q4 FY '24 and 41.7% in the same quarter last year. We expect this metric to continue to trend downwards in the coming quarters, albeit at a more moderated pace, supported by the positive outcomes of our employee value-focused initiatives aimed at enhancing retention and satisfaction.

Additionally, during the quarter, we also launched FirstALUM. This is a platform to create a Firstsource alumni network to encourage our former employees to stay connected to development in Firstsource as well as keep them informed of potential opportunities to resume their association within the company, either for themselves or for their network and finally to contribute to opportunities within the broader Firstsource community.

We also won several awards during the quarter, and let me talk about the same. In Q1, we were recognized as a disruptor amongst the service providers to the healthcare provider industry by HFS Research for our full set life cycle RCM offering. During the quarter, we also committed to science-based targets initiative, SBTI, reinforcing our commitment towards reducing carbon emissions as for the set guidelines.

With that, let me turn over the call to Dinesh to give a detailed color on the quarterly financials and related matters. I will come back after that to talk about our progress on the strategic priorities as well as the outlook for FY '25. Dinesh?

[Dinesh Jain, executive]

Thank you, Ritesh, and hi, everyone. Let me start by taking you through our quarterly financials.

Revenue for Q1 FY '25 came in at INR 17.9 billion or USD 215 million. This implies a year-on-year growth of 17.1% in rupee terms and 15.4% in dollar terms. In constant currency, this translates to a year-on-year growth of 14.8%.

On a sequential basis, our revenue grew 6.5% in constant currency terms. I'm happy to report that we have returned to double-digit year-on growth in constant currency. And after 11 quarters that was affected by the portfolio changes in our mortgage businesses.

We reported operating profit of INR 1,970 million in Q1 FY '25, up 10% over Q1 FY '24. This translates to EBIT margin of 11%, similar to last quarter and down 70% on a year-on-year basis.

Earlier, although we have been making significant investment in our businesses, large part of this has been in hiring leadership, sales, solution and technology talent that has its associated upfront cost. Despite this, we have been able to keep our margin stable. We have also advanced our annual [indiscernible] cycle from quarter 3 to quarter 2. While this will pose some headwinds in our margin in Q2, we remain confident of staying within our guided band for FY '25. Profit after tax came in at INR 1.35 billion or 7.6% of the revenue for the quarter.

Coming to the other financial highlights for the quarter. The tax rate was 19.1% for the quarter, within our previously guided range of 18% to 20% for FY '25. Reported DSO moved up by -- in the quarter to 68 days in Q1, mainly due to some delay in collection of a couple of healthcare accounts. Almost all of these were collected in the first 2 weeks of July and normalizing to that, our DSO is at 61 days.

Cash balance, including investments stood at INR 2.1 billion at the end of the quarter 1. Our net debt to standard INR 9.7 billion as of June 30, 2024, versus INR 6 billion as of March 31, 2024. This increase was mainly due to the higher working capital requirement, which we have due to the higher revenues as well as from DSO delay. We also converted some short-term working capital launch to a long term to gain advantage of the interest cost arbitrage, which is as of today in the market.

During the quarter, we also paid a cash consideration of INR 2 billion for the acquisition of QBSS. I'm happy to report that we have completed the integration of QBSS during Q1 itself.

We continue to invest in expanding our execution infrastructure. In Q1 we have added 2 new city capacities at Chennai, India and Philippines. We're also investing in additional captivities in Hyderabad, Mumbai and also in the Mexico City.

Our hedge book as of 30th June were as follows. We have coverage of GBP 72.8 million for the next 12 months, with average rate of INR 106.9 to the pound and coverage of $133.2 million, with an average rate of INR 84.6 to $1.

This is all from my side. I will hand the call back to Ritesh to talk about our strategic priorities and outlook. Ritesh?

[Ritesh Idnani, executive]

Thank you, Dinesh. As you will recall, one Firstsource framework has been our playbook for the strategy refresh across the organization over the last 3 quarters. Our Q1 results are a testimony of our focused execution on each one of the 17 that we outlined as part of this playbook. In the interest of time, let me highlight the progress we have made on a few of these themes in Q1.

One of the foundational tenets of the one Firstsource playbook was the simplification of organization's design and realignment of the leadership team. During Q1, we hired Sohit Brahmawar as our new President and Chief Operating Officer. Sohit has over 25 years of rich and varied experience across global organizations, and in his most recent stint, he was leading a global team of over 50,000 people as the Chief Delivery Officer.

During Q1, we also made several senior hires to fill identified gaps in sales, solution design, technology and delivery operations across market units and capability units. We also added muscle to our technology and partnership teams. I believe we now have the team in place to deliver on the medium-term growth aspirations. What gives me confidence is the quality of leadership talent we have been able to attract, and I see that as a validation of both our core strengths, our revamped go-to-market strategy and our ability to build a resilient, durable and differentiated business with industry-leading growth.

Given the healthy momentum we are experiencing, we continue to invest, to ensure that we can capitalize on the momentum with our differentiated proposition in the market today.

During Q1, we also completed the setting up of a customer advisory board that includes experts across verticals such as financial services, healthcare, communications, media and technology. These are industry veterans who held senior leadership roles in various globally reputed companies. We intend to leverage their deep domain knowledge and experience to improve our value proposition, guide our strategic thinking and amplify the Firstsource brand in the marketplace.

Our investments in reinvigorating our sales engines are also yielding results. In Q1, we won 3 large deals. We've also identified a set of both existing accounts as well as a basket of new logos, where we are making a concerted effort to drive growth. Our success in rapidly refilling and growing the deal pipeline gives me confidence that we are on the right track.

Another key theme of the one Firstsource playbook was to bring technology in everything we do. This includes building technology-led propositions to disrupt incumbents in our target set of accounts and infusing our existing frameworks and platform with the latest technology to improve their relevance and attractiveness in the marketplace.

Today, we also announced the launch of relAI, a suite of AI-led offerings, solutions and platforms to drive digital transformation of clients in a responsible manner. The offerings are aimed at each stage of the transformation journey, starting with the discovery phase where we partner our customers in assessing and benchmarking their AI readiness, discovering the use cases, selecting the optimal platform to the mature phase where we help with data engineering, building of AI platform stacks and verification and trading on LLM.

We are also infusing our current platforms across HealthTech, FinTech and CX with AI to significantly enhance their operational efficiencies and improve business benefits to customers, while continuing to deepen our partnerships with innovative start-ups at hyperscalers. In my view, relAI is the prime example of how we are leveraging the current tech disruption to our advantage.

Finally, I would like to draw your attention to our margins that have remained in a narrow band over the last 4 quarters despite the step-up investment. This underscores our efforts on cost optimization and driving operational efficiencies as part of the one Firstsource framework. We have identified 24 specific margin levers where we see meaningful scope for improvement, some, like offshoring or right-shoring resources are already in place, which you see in the business mix, while others, like increasing the span of control as well as consolidation of on-site delivery locations, would have a more visible impact over the coming quarters. We are also taking a hard look at our portfolio to identify accounts with suboptimal profitability and pushing for corrective steps there, including reviewing the contract commercials.

Overall, I feel comfortable with our ability to drive a consistent improvement in our margins, which would have a more visible flow-through in our reported margins starting next year, even as we keep them in a narrow band during our investment phase in the near term.

In summary, I am pleased with the progress we have made in the last 3 quarters in each of the areas we've identified for a strategy refresh.

Turning to the business outlook. For fiscal year '25, we now expect our revenue to grow in the range of 11.5% to 13.5% in constant currency terms. This is ahead of our initial guidance of 10% to 13%. We also remain optimistic of achieving USD 1 billion revenue run rate by Q4 of FY '26. For operating margins, we continue to expect our FY '25 EBIT margin to be in the range of 11% to 12%. This is inclusive of the impact of upfront investments that we are making in the business. Post the investment phase, we expect our EBIT margins to improve by 50 to 75 basis points each year over the medium term as we have stated earlier.

This concludes our opening remarks, and we can now open the floor over for questions. Operator, over to you.

[Operator]

[Operator Instructions] The first question is from the line of Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

Congrats on a strong performance yet again. So basically 2 questions from my side. Lots of shelf in the results in this quarter. So I think the only point of weakness which we could find was what possibly the CMT vertical. So we -- I mean, as you had alluded last quarter as well, I think this quarter -- this vertical we will see the weakness because of the on-site to offshore shift for the top client. So what is the outlook on that client and the vertical in the offshore to -- sorry, onsite to offshore shift that you are expecting, is it complete? Or is it going to come in the next couple of quarters as well?

And taking that along with what will be the kind of growth rate that we are expecting or what's the growth outlook for this segment for FY '25 on overall basis? And then I have a follow-up question.

[Ritesh Idnani, executive]

Thank you, Vibhor, for the question. While I don't want to talk about a specific line, but what I can tell you is that we continue to engage very actively with all of our large clients in this vertical, and we continue to gain new business from them. Specifically on our top client, you are aware that we are working on moving some components of the work from on-site to offshore, and this transition is happening in phases. So there could be some volatility on a quarter-on-quarter basis, but I wouldn't read too much into it.

On a full year basis, it's in line with our estimates and is already factored in our guidance. So there's nothing new out there that you need to think about there. It's in line with our guidance that we have provided in the beginning of the year.

At the same time, what I also want to talk about is our CMT vertical, from an overall pipeline standpoint, continues to be very robust, and we are seeing traction both in the telecom and digital media space as well as in the EdTech side and finally, in the consumer tech side. So we're seeing broad-based growth across all the 3 subsegments out here, and you will see some logo conversions in the coming quarter as well.

[Vibhor Singhal, analyst]

Got it. Got it. That was very helpful.

Second question is on the healthcare vertical. Of course, this quarter saw a very sharp jump in revenues because of QBSS as well as, of course, the ramp-up of deals. So again, in this front, is the initial ramp-up of most of these deals complete? And thereafter, we could expect a normalized run rate? Or do you believe there could be some, again, sharp volatility in the revenue run rate for the [indiscernible] in this vertical going forward? On an overall basis, just wanted to cross verify that we would expect healthcare vertical to grow above industry -- above the company average for FY '25?

[Ritesh Idnani, executive]

So let me start at the outset, I think, we do expect the healthcare vertical to grow above the company average for the year. And we do expect that growth to be largely driven by the payer segment. And number three, we expect the growth in the payer segment to be broad-based across a wide range of clients as opposed to pay a particular client itself. So those are 3 comments that I just want to make right at the outset.

On the payer side, what I think is helping us is the fact that our strategy to focus on strategic accounts is playing well. And we had good deal wins in the space even in Q1, what you have seen some of the growth that we experienced in Q1 as a function of the deal wins that we had in the last 3 quarters. And a lot of that ramp continues to happen in phases, so it's not like everything is fully out there. But at the same time, we also see a very healthy pipeline in the payer segment, and that's what makes us confident about the outlook for the segment itself.

On the provider side, we are focused on broad-basing our portfolio. So we're quite excited by the potential in the offshore RCM market, where the QBSS acquisition now allows us to aggressively compete with a technology-led end-to-end capability on the RCM side. We had 2 joint deal wins in the quarter, which is a validation of the rationale for acquiring QBSS in the first instance, and I think we continue to build up on top of that.

[Vibhor Singhal, analyst]

Just one last question for Dinesh. Please, I think you mentioned the wage hike has been kind of moved from Q3 to Q2. So what could come given that we are in July and a large part of wage hike already have been rolled out. What is the likely impact on margins that we are expecting to see on the gross level of the wage hike? And where do you expect the margins for Q2 to land up? Would we be able to negate that drop by other levers? Or do you expect a drop in margins in Q2?

[Dinesh Jain, executive]

No. I think, as I said, we will continue in the same band rate of 11% to 12%. And I think our wage hike is in the same lines what we have historically doing. I don't want to comment. It's basically what percentage, but I think that margin guidance will remain within 11% to 12%.

[Operator]

The next question is from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

Congratulations on a very solid performance. I just wanted to pick your brains with regards to the revision in terms of guidance. Given the qualitative commentary that you've shared, the deal wins that you've spoken about as well as the likely trajectory across industry segments. The implied growth arithmetic through the next 3 quarters appears to be quite conservative. Just trying to understand what exactly is driving that? That's question number one.

The second question was with regards to the metrics or the improvement in terms of offshore revenue mix. While I understand there is an element of the acquisition consolidation as well, but would be great to simply get your sense in terms of how should one be seeing this massive moves over the course of foreseeable future as well as the likely tailwind that's emerging because of this phenomenon? Those will be my 2 questions, and I'll come back with follow-up questions.

[Ritesh Idnani, executive]

Yes. Let me take that, Manik. Thanks for your question. Let me start with the first question on the guidance itself. So Manik, our guidance is based on our line of sight in the business over FY '25 as of today. So I don't want to qualify it in any manner or comment on what you alluded to on the quarter-on-quarter growth calculations itself. But from our vantage point, what we are trying to do is to keep our focus on supporting our clients proactively in the transformation agenda and identifying opportunities to expand our footprint, both within our existing clients as well as new logos.

Our sales engine is chugging well. I feel confident of our revamped go-to-market strategy as well as the rigor that we are bringing in, in our execution. And that's quite honestly what gave us the confidence to raise the guidance from 10% to 13% that we provided at the beginning of the year to 11.5% to 13.5% now. I would like to leave it at that for now based on what we see because we're trying to make sure that this is the best possible visibility that we have at this point in time.

With regards to your second question on the offshore on-site mix. The one thing you would have seen, as you look at just the last 4 quarters itself, right, our revenue by delivery from an offshore, onshore standpoint, if I go back to Q1 of FY '24 to where we are today, we were at about [ 25-75 ] mix, and we are now at about a [ 35-65 ] mix.

What you will see is just a renewed focus on continuing to try and balance that mix out towards a greater offshore concentration, and that's something that every -- all of us are in the leadership team are driving very clearly. I don't want to comment on what it might play out on a particular quarter itself or what this outlook might assume. But what you should take away is that as a secular theme, the offshore to onshore mix should continue to move directionally in the same manner as it has over the last 4 quarters.

[Manik Taneja, analyst]

Okay, just to prod you further on this front, how should one be thinking about the margin profile for offshore delivery of our business compared to the typical onshore or [ offshore ] delivery that -- really great to get your inputs on that.

[Ritesh Idnani, executive]

Look, obviously, the offshore delivery comes at a higher margin than the onshore delivery, so sets the tone at that. That being said, look, there are a bunch of puts and takes out here, right? So if you think about the last 3 quarters also, we've been trying to play a very fine balancing act between what investments we need for the business, what cost takeouts we need to do to ensure that we can continue to support the growth that the business demand and to ensure that we're able to pay something that's truly resilient and durable.

So while we might end up getting some margin benefits from the greater offshore concentration, some of it, we are also in the near term trying to leverage in the context of maybe supporting additional investments that we also need for the business as well. So that's the way we're trying to balance it out. But suffice to say, at a summary level, the offshore margins are obviously higher than the onshore margins that we get.

[Operator]

The next question is from the line of Jalaj from Svan Investments.

[Unknown Analyst]

Am I audible?

[Operator]

Yes, sir, you are audible.

[Unknown Analyst]

Congrats on a good set of numbers. I have a few questions. First of all, could you break the growth in healthcare vertical, both organically and the inorganic part? First of all, in the organic, what part has come from a payer and a provider? Some direction view over that?

[Ritesh Idnani, executive]

So let me address the first one, which is if you take our overall growth for the quarter itself, a couple of percentage points is what we've got from QBSS from a contribution standpoint. But outside of that, we're not breaking out the payer provider mix itself in terms of the revenues because what we are starting to see is increasingly also a convergence where a bunch of payers have provider offerings and vice versa. So the rider capability set is emerging so.

We're also starting to view the business in that context where it's more integrated than otherwise. And there's a bunch of overlaps that end up happening. So from that vantage point, as much as we talk about the capability set and where we see traction, this is the way we are actually viewing the revenue splits.

[Unknown Analyst]

Understood, understood. So no quantification of QBSS contribution this time? Could I have the number there?

[Ritesh Idnani, executive]

I mentioned the number. The overall growth is about 2% from QBSS or you can do the math, yes. .

[Unknown Analyst]

This is Debashish from Svan Investments. So one more question apart from what Jalaj asked. Sir, if I see our guidance, obviously, this is including the inorganic contribution that we have. So even if I assume that flattish performance for the next 3 quarters will be [indiscernible] kind of numbers. On the one side, we are talking about higher order book, higher pipeline. On the other side, we are remaining very, very conservative. Is it like because of the uncertain macro scenario or it is like we are trying to be competitive?

[Ritesh Idnani, executive]

Look, I think the way to think about it is -- given the strong growth that we had in Q1, it was natural to raise the lower end of the guidance. right? The guidance band; however, is influenced by a variety of variables, right? For example, how we see the pipeline converting the pace of ramp-up that we have put on, it's very difficult to quantify each and every variable for you. At the same time, it's difficult for me to comment on the macro variables when -- in fact, you may have a better view on the trend in these variables, right? Because if I listen to the Fed Chairman every month, the commentary out there could vary, right?

So the reason that we are trying to build this out is to say that our guidance is based on what we are seeing in our business as of today. We're not making any assumptions on the macro variables on which we have no influence whatsoever. So anything that happens out there is purely an upside to the numbers. And from our vantage point, we're trying to make sure that with that visibility of data on pipeline, pace of ramp up of deals, et cetera, where do we stand at this point in time is what we are trying to provide visibility to and this is the best that we could do at this stage.

[Unknown Analyst]

Sure. So should we assume that because considering the size that we are operating to, I don't think macro has a very large role to play in our performance, should we consider like despite macro performing our order book and everything is giving us sufficient confidence that we will be able to possibly meet our higher end of the guidance [indiscernible] that?

[Ritesh Idnani, executive]

I think it's fair to assume that -- and this is one of the things that you probably heard me say right at the outset, which is we're trying to minimize the impact of the macro on our business itself. We want to make sure that we're able to provide a degree of predictability to how we grow the business.

What we have tried to do at this stage is that, obviously, we had a strong Q1. We want to make sure -- and based on the fact that we ended up having a strong Q1, we up the forecast of what we thought we could achieve, but it's based on, obviously, a set of variables that I talked about. And we are trying to provide guidance given the controls of that itself. So there's no assumption on macro at all, whether it's on the interest rate side or otherwise, we think that any of that can potentially just end up being an upside.

[Unknown Analyst]

Sure, sure. One last question, sir. If I see our employee cost, obviously, you and CFO sir has already touched upon on this. But if I see our employee cost despite shifting towards offshore, it has not come down significantly over the period of last 2, 3 quarters. And I'm assuming a large part of that is because of the senior hiring that we had done, which has given a positive boost to revenue and the cost per employee.

So by what time we can expect some operating leverage [indiscernible] here because the kind of offshore shifting that we had in last 3, 4 quarters, it should have a very positive repercussion on our margin performance. So by what time we can see a significant impact on our EBIT level margin or EBITDA level margin performance of -- operating leverage in our margin performance?

[Ritesh Idnani, executive]

Yes. Well, thank you for asking that question. So look, let me take a step back and just give you a flavor of where those investments are happening today, right? So we're making investments in broadly 3 areas. First is in expanding our sales and account teams itself. I've spoken about how our sales teams have grown by almost 1/3 over the last 6 months itself.

Second is on the capability side where we are doing both leadership hires as well as beefing up our solutions teams itself. For example, I spoke about relAI earlier, where we continue to modernize our services and platforms by infusing them with the latest technology. Similarly, we are building out our trust and safety practice, Akash Pugalia, who joined us last quarter and is based in the Bay Area, is leading that effort for us, right?

The third area that we're also investing is in amplifying the Firstsource brand in expanding our relationships and visibility in the analyst and adviser community. You would have seen that also in the repression of brand positioning that's more dynamic and enlarge with our aspirations.

While some of these investments would be ongoing, I expect the bulk of our initial investments on the people front in areas such as leadership, sales and solution teams should be largely over to the next quarter. So a lot of our initiatives around cost optimization and margin improvement should gradually get visible over H2. And as I stated earlier also, that's why we expect to still operate in the band of 11% to 12%. But starting next fiscal, we expect to see the margin uptake of 50 to 75 basis points every year.

[Unknown Analyst]

So sir, aspirationally, should we look at kind of 15%, 16% margin in this business over the period of next 4, 5 years? Is it a possible number?

[Ritesh Idnani, executive]

The simple answer that I would give is our peers are typically in the 14% to 15% EBIT range. This business is continuing to undergo a fair amount of shift. Also, those shifts demand investments and capabilities to ensure that the business continues to be relevant and contemporary. So the way we are designing the business is that we should converge to the 14%, 15% over the next 3 to 4 years, and that's where we are keeping our current line of sight too.

[Operator]

The next question is from the line of Shradha from Asian Market Securities.

[Shradha Agrawal, analyst]

Congratulations on another very good quarter. Just a couple of questions on GenAI. Large IT services companies...

[Operator]

Sorry to interrupt you, ma'am. May I request you to please use your handset?

[Shradha Agrawal, analyst]

I am on my handset. Is it better now?

[Operator]

Yes, ma'am. Please go ahead.

[Shradha Agrawal, analyst]

Congratulations on another strong quarter, Ritesh. Just a couple of questions related to GenAI. One of the large IT services, companies indicated that the productivity improvement because of implementation of GenAI can be added to the 50% in some of the BPO offering. So what are your views on that? And what is the kind of ask from clients in terms of fast-track [indiscernible]?

[Ritesh Idnani, executive]

Yes. Thank you, Shradha, for the question. I can't comment about the peer group and what they might be seeing out there. What I can see is only what we are seeing in our business. And let me respond to this in a few different streams, right, in terms of the impact of GenAI and what we are seeing in the marketplace itself.

First and foremost, today, and some of this has not changed even over the last 3 months when we did the last earnings call. There's a lot of POCs, proof of concepts that are still being executed. There's very little that actually moving into a production environment itself.

What I think is critical, though, is the ability to take AI and provide the [indiscernible] possible of how the landscape might shift over the next few years, and that's one of the things that we are certainly taking to our customers, and this is one of the reasons why I think we are able to win out there in the marketplace itself.

What I do expect is that AI will certainly cannibalize some of the lower end of the BPO services, but it's not material enough. New business opportunities using AI is far bigger. And at the same time, what I'm also seeing is data, AI/ML operations, [indiscernible] Trust & Safety will be a new frontier to expand our business using AI.

Data is the lifeblood of artificial intelligence, which is why companies specializing in data management and processing are faring well right now. And from our vantage point, we see an opportunity to play in that space and generate incremental revenue, while at the same time, using AI also as an efficiency tool where it's competitive the solutions that we're taking to market.

One of the other things that's also is creating an opportunity for us is to play on offense and take share from some of the larger players who might not be willing to go out there and use disruptive propositions in the marketplace. So we are also seeing opportunities out there to take share from some of the larger incumbents as well as some undifferentiated players who may not be bringing some of these capabilities to the forefront.

So net-net, from our vantage point, while AI is out here as a secular team is here to stay. We also believe it can be a net positive in terms of how we are approaching the business itself, and that's manifested in some of the outcomes that we're seeing.

[Shradha Agrawal, analyst]

That's helpful. Another question is we've seen a good amount of offshore shift, and I believe that, that has to do with the top class CMT. And despite that, I look at the segmental margin in CMT, that's down almost 300 bps Q-on-Q. So any color on that front would be helpful.

[Ritesh Idnani, executive]

I wouldn't read anything into it. It's probably just one quarter of play or something. Some of that will reverse itself out in the next quarter. So there are a bunch of other things that we are working on in the same space. So between our Telecom and Digital Media clients, between our Consumer Tech clients and between our -- and with our EdTech clients, so we continue to also make some investments in the business. We are building out the capacity for some of the pipeline that we're seeing in this space as well. So this is a natural put and take in a quarter itself.

[Shradha Agrawal, analyst]

Right. And just last thing, again, talking on the guidance, Ritesh. I mean I understand that we gave the guidance, but looking at how we entered into FY '25, probably the extent of upgrade is not very encouraging, especially given the fact that if you look at the lead indicator like employee growth number, that itself is up 5% in this quarter. And also we are talking about getting into 3 strategic deals in this quarter. And probably the season -- the collection business seasonality that plays out every year in second half. So would it be possible for you to quantify the areas where you are a bit cautious on and which is why the guidance you're talking of or flattish groups in the next few quarters?

[Ritesh Idnani, executive]

So the first comment, and I tried to cover this in my opening comments as well, Shradha, is that we are expecting broad-based growth across verticals and across geographies. At the same time, we're also expecting growth across capability areas as well. So we're not seeing a weakness, some of these verticals and capabilities may grow at a faster pace than other verticals, we are seeing broad-based growth.

That being said, I just want to reiterate the same comment on the guidance itself. We had a strong Q1, that give us comfort and confidence to raise our guidance from the 10% to 13% earlier to 11.5% to 13.5%. It was natural for us to raise the lower end of the guidance. But at the same time, I want to make sure that the guidance band is influenced by multiple things that we want to be careful about, whether it's when does the pipeline convert, the pace of ramp-up of deals, all of those are variables that play out with 1 quarter to -- over 1 quarter, 2 quarters, et cetera. So I want to be mindful of that. And it's difficult for us to quantify each and every one of those variables, and that's the reason why the [indiscernible] to the guidance of 11.5% to 13.5%. It's the best visibility that we have based on how we see the business today.

[Operator]

The next question is from the line of Dipesh from Emkay Global.

[Dipesh Mehta, analyst]

Congrats for a strong results. A couple of questions. First of all, the quarter 1 performance, whether it was largely in line with management expectation at the beginning or it is better than, and whether we witness any preponement kind of thing in terms of revenue conversion then what you might have anticipated at the beginning?

Second question is about if I go to the past source point related noncontrolling stake purchase. I think one of the installment was due April '24. So if you can provide some detail about how that played out?

Third is about the group Chairman interview. I think where you made a comment about 2.5x profit growth in next 3 years, whether management is also in sync with those kind of expectations from the business?

And lastly is more about AI, partly your answered, but I have slightly different pace to the question, whether in terms of your client interaction, increased interest in AI led to any kind of higher level of productivity expectation from clients. So when the deals are getting structured, are we seeing clients expecting, let's say, year 2, year 3 onwards, higher productivity built into the contract?

[Ritesh Idnani, executive]

Thanks, Dipesh, for all those questions. Let me actually take the second one first and ask Dinesh to comment on the source point piece, and then I'll come to the 3 other questions that you had.

[Dinesh Jain, executive]

Yes. So I think, Dipesh, we paid the last installment in April, which was 2.5 million, and that's now no more any payment with respect to any of the acquisition or the transaction that was with the source point is now pending in the books. So all have been closed.

[Dipesh Mehta, analyst]

Dinesh, one was -- sorry, one was -- I think when we announced it, April '25 was also one due. So now it is no longer due?

[Dinesh Jain, executive]

No, no, it was 3 years. So '24 was the last which we have done.

[Operator]

The next question...

[Ritesh Idnani, executive]

I think there were 3 other questions. So just let me just respond to those.

[Operator]

Sure.

[Ritesh Idnani, executive]

I think the first question was related to how we said about the quarter that went by relative to our forecast. Look, We knew it was going to be a strong quarter. And sometimes, if it comes back to the comment I made, even when we were talking about the guidance, right? At any stage in the life cycle, sometimes you don't know when some of the pipeline might convert, when the deals might ramp up, et cetera. So we feel good about how we did in the quarter. We thought it was a strong performance.

I'm going to address the third question, the last question that you had related to the commentary that Dr. Goenka made on CNBC. Look, very simply first, right? As we based our guidance for constant currency growth to 11.5% to 13.5%. We maintained our EBIT margin guided band at 11% to 12% in FY '25 including the ongoing accelerated investments in the business. We've also maintained our aspirations for a $1 billion run rate by fourth quarter of FY '26 as well as improving our margins by 50 to 75 basis points each year over the medium term. Both these level of commentary pretty much aligned to the same end state itself. So there's nothing which is out of sync. That's the one thing that I would say.

What I would also say is, which you didn't talk about, so let me bring it out to the table anyway, is we talked about targeting 3 large deals in the quarter. We actually did that in the quarter that went by. And we've been making a focused effort to rev up our sales engine. So we feel good about how we're building out this business itself, both from a growth capability as well as from a margin standpoint, and that's what gives us comfort in terms of how we are setting this up for a more resilient durable business over the long run.

I'm missing -- sorry, I know you had one more question, which I think I missed.

[Dipesh Mehta, analyst]

Can you hear me?

[Ritesh Idnani, executive]

Yes.

[Dipesh Mehta, analyst]

Yes. So question was about increased interest in AI, whether clients asking for a high level of productivity and the way deals are getting structured year 2, year 3 onwards.

[Ritesh Idnani, executive]

So I think what I am seeing is that clients -- we are participating very actively with customers on their revenue growth, cost optimization and process transformation agenda and how we can bring in tech into those solutions.

What you will see with that is not necessarily a linear headcount-based pricing model, but you're seeing innovative commercial constructs. And a lot of it, particularly where -- we are actively hunting for sole-source opportunities, both in our existing portfolio accounts as well as new logos. We're seeing the opportunity to construct the deal on our own, and that gives us the flexibility to determine the kind of benefits that are possible where we can reduce the total cost of ownership for our customers for that scope of work itself.

Now the way we might bring that about might be through higher productivity, might be by bringing in the promise of what AI can bring to them, so on and so forth. But eventually, it comes down to can you take a customer from point A to point B?

Where I think there's an opportunity for us is, today, clients don't know what they don't know. And service providers are not competing on an even field. So it's not an apples-to-apples playing field. And that gives opportunity for nimble, agile innovative providers like us who are challenging the status quo to go out there and disrupt and try and bring solutions which help address complex business problems. That is where I think we are able to win in the marketplace today.

[Operator]

We have the next follow-up question from the line of Vibhor Singhal from Nuvama Equities.

[Vibhor Singhal, analyst]

Just a couple of smaller questions from my side. One is in the headcount additions that we saw in this quarter, how much is linked to the QBSS acquisition? And how much was the basically headcount addition in our own source company?

Second thing is, Ritesh, you mentioned that, I mean, we've seen the increase in offshoring from 25% to 35% over the past 2, 3 quarters. Where do you think, with the current business mix that we have, given that many times it's a regulatory requirement to have hire on-site people, the mix of GenAI that we are looking at, what could be the upper ceiling for this number? I'm not asking for the time lines that we have ever reached that. But what we believe could be a potential cap -- but okay, that is a number that could probably be there -- would be difficult to reach in that sense.

And lastly, a question for Dinesh again. In terms of our net debt position, what is our basically outlook on this? How do we expect this net debt to come down over the next few quarters? And is there a time line that we have in our business plan made as to when would we be likely looking at a net cash company?

[Ritesh Idnani, executive]

Dinesh, you want to take that question first, and then I'll come to the first 2 questions that we got?

[Dinesh Jain, executive]

Yes. So I think net debt position, I think most of the cash flow this quarter is basically slightly higher DSO. That's the reason the cash flow is likely weak and as the level -- I think that, that level is [indiscernible]. Though we expect, I think, every quarter, whatever the surplus cash which we expect between -- it should between, I will say, $10 million to $12 million in extra cash, which we generate every quarter, we should get repaid these borrowings, which is the norms which we have considered as of today.

But I'm not able to give you exact timeline when it will be. But if you really model it, most likely that is equal to around $110 million to $115 million, it should be probably 6 to 8 quarters, which is that normal cash generation to make it net zero.

[Vibhor Singhal, analyst]

My other 2 questions Ritesh, if you could.

[Ritesh Idnani, executive]

Yes. Vibhor, the remaining 2 questions that you had. Let me address the second one first and then come to the first question on the headcount.

So it's hard to put a specific number on where we expect that mix to get to. What we know is we are trying to directionally continue to move towards the higher offshore revenue contribution from a delivery standpoint. So I think as a secular team, it will continue to go that way.

But one of the things that also allowed us to differentiate ourselves in the market, right? [indiscernible] regulated markets, particularly financial services and healthcare. Regulated markets require [indiscernible] that the work is done in country and the market itself. Number two, it allows us to take on a process end to end. And those are actually key differentiators in the market. In fact, one of the deals we won last quarter, we were up against a couple of our large IT services [indiscernible] and who we were competing with, and they could not show the in-country footprint. And that was -- why we actually ended up winning the bid so -- was because they just didn't have the comparable capability set.

We think that, that is actually a differentiator for us if used in the right way. So I know I'm not giving you a very specific answer on the number, which you're looking for, even a time horizon. But I think what you will end up seeing is directionally, this number moves in the right -- continues to move upwards. I don't know what's the ceiling for it, which is what you're asking for, and start to say whether it's going to happen over 3 quarters, 6 quarters, 4 quarters, et cetera. But you should expect the mix to continue to trend in favor of offshore. That's the second question.

The first one, so one of the areas of focus for us also, Vibhor, is to reduce the linearity in our business as well, right? So there are elements which require headcount addition, and QBSS has had some tech capabilities. They have platforms that they used to deliver some of the coding work that they do as well as some of the AR follow-ups and so on and so forth.

We are able to deliver a lot of services today on the back of the tech platforms and IT that we have. So when you look at the combination of some of these things, that is going to have a bearing on how headcount addition actually plays out every quarter. So it is going to be a combination of some linear work and some nonlinear work at them.

I'll give you another example. We launched our collections as a service capability last quarter. And that actually allows customers to do -- to build a cutting-edge digital collections capabilities with minimal human intervention. And it's largely configurable right from the get-go. And those are the kinds of things that actually allow us to differentiate ourselves in the market, and I kind of referenced it upfront in my commentary, that in a market like that, we don't even run into the traditional IT services and BPO companies. We run into other SaaS players who have a similar platform. So there's minimal human touch. So you will see this playing out this quarter as well as in next quarter as well that as we add revenue, some of that revenue may not have a direct correlation to headcount.

[Vibhor Singhal, analyst]

Got it. Got it. Sure. Just one last follow-up on the second question. So you are saying that while -- it would be difficult to give a feeling to the offshoring number. But even from current levels, we have ample scope to take that number higher. Is that my understanding correct?

[Ritesh Idnani, executive]

Yes, absolutely. That's correct.

[Operator]

Ladies and gentlemen, we will take that as the last question. I would now like to hand the conference over to Mr. Ritesh Idnani for closing comments.

[Ritesh Idnani, executive]

Thank you for joining the call and for all of your questions.

I just want to close with a few final points. We remain laser-focused on leveraging our strong foundation to gain from market opportunities that are caused by the ongoing macro and technology shifts. We started FY '25 with strong revenue growth. Our revamped sales engine is working well, which is reflected in our strong deal wins as well as deal pipeline in Q1. That has also given us confidence to raise our FY '25 revenue growth guidance to 11.5% to 13.5%.

Our leadership rebuild is also on track. Our ability to attract top-quality talent is yet another validation of both our core strengths, our revamped go-to-market strategy and our ability to build a resilient, durable business with industry-leading growth, overall, I'm satisfied with our progress, and we are optimistic about realizing our long-term growth aspirations of achieving $1 billion revenue run rate business by Q4 of FY '26, while continuing to expand margins.

That's all from our side, and we look forward to interacting with you again in the next quarter call. Thank you.

[Operator]

On behalf of Firstsource Solutions Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.