Firstsource Solutions Ltd

NSE:FSL

Earnings Call Analysis

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Firstsource Solutions Limited Q2 FY '25 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, Investor Relations and ESG, to provide an overview on company's performance followed by Q&A.

Please note that some of the matters that we will discuss on this call, including 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 the company has mentioned in its prospectus filed with SEBI and subsequent annual reports that are available on the website.

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

[Ritesh Idnani, executive]

Hello, everybody. Thank you for joining us today to discuss our financial results for the second quarter of FY '25. My name is Ritesh Idnani, and I'm the CEO at Firstsource. Before I start with the discussion on our quarter performance, I would like to welcome our colleagues from Ascensos or the A-team as they are known, who joined us last month. I would also thank them and each one of our 32,898 Firstsourcers around the world for their relentless commitment to deliver value to our clients that has driven our growth to the top decile of the broader tech and tech-enabled services industry over the last 4 quarters, including Q2.

Coming to our Q2 results, I'm happy to report yet another strong quarter from a revenue growth standpoint. Our operating margins, excluding the one-off costs related to the Ascensos acquisition, were stable, and we sustained the accelerated momentum in deal wins with 3 large deals again in this quarter. Our deal pipeline continues to remain healthy. Let me now give you some more details on our quarterly performance. Our revenue grew by 25% year-on-year and came in at INR 19.3 billion.

In U.S. dollar terms, the growth was 23% year-on-year and 7.1% quarter-on-quarter at $230 million. In constant currency, revenue grew 6.9% quarter-on-quarter. Adjusted for 1 month of Ascensos's revenue, our growth was 4.2% in constant currency terms. As you may note, this is the fourth straight quarter where we have delivered over 3% quarter-on-quarter constant currency revenue growth. EBIT margin for the quarter was 11.1%, excluding onetime charges related to the Ascensos acquisition. This is broadly stable, both on a quarter-on-quarter and a year-on-year basis. Our net profit was INR 1.4 billion, and the diluted EPS was INR 1.96 for the quarter.

With that, let me give you some color on the deal wins. We continue to participate actively in the process transformation agendas of our clients. In Q2, we repeated our success of Q1 by signing 3 strategically large deals. As you're aware, we consider a deal with ACV of over $5 million as a large deal. We expect these deals to ramp up in a phased manner over the coming quarters. We also added 13 new logos during the quarter, the highest in the last 2 years. What I find more satisfying is that in both Q1 and Q2, we've added a new logo through a large deal.

I believe this underlines our success in leveraging our deep industry and functional expertise, our partnerships in the technology ecosystem and our ability to proactively bring automation and AI into the mix that's resonating well with our clients. Let me highlight a few notable wins during Q2. We won a large deal from one of the largest telco companies in Australia. This is a new logo for us and is a cross tower deal. We were selected by one of the top 5 mortgage companies in the U.S., one of our long-term existing clients for a 5-year deal to power enterprise-wide transformation initiatives. We expanded our footprint and wallet share in one of the top 5 health care insurance companies in the U.S. for claims processing.

And we won an additional large deal from a large cooperative financial institution in the U.K. for services to their retail customers. Let me now provide you a deep dive into our performance and outlook for each of our industry verticals. I will start with Banking and Financial Services. In Q2 FY '25, our BFS vertical was up 1% quarter-on-quarter and 3.3% year-on-year in constant currency terms. We added 5 new logos in this vertical in Q2. We had healthy deal wins in Q2 in this vertical, including a large deal win from a top 5 home mortgage company in the U.S. that I referenced earlier.

We continue to make good progress in our efforts to broad-base our portfolio in this vertical, both in terms of market segments as well as our service offerings. For example, our AI-infused digital collection platform is seeing growing interest amongst customers. Recently, we also announced our investment in building our own domain-centric large language model specific to the mortgage industry. Overall, we expect a sequentially improving growth trajectory in this vertical over FY '25. For Health Care, Q2 was again a strong quarter. Our revenues grew 10% quarter-on-quarter and 38% year-on-year in constant currency terms. Growth was well distributed across both the Payer and the Provider segments.

We added 5 new logos in this vertical. The Payer segment has seen the typical slowdown in decision-making ahead of the open enrollment period and the impending U.S. presidential elections. That said, we continue to see a very active and healthy pipeline on the Payer side. The integration of QBSS acquisition is on track, and it has also been rebranded as Firstsource Provider Services. We have redrafted our revenue cycle management services catalog to include QBSS capabilities and build a technology-first proposition, leveraging both our proprietary technology assets as well as our partner ecosystem. This is resonating well with both industry analysts and clients.

We had 2 joint deal wins in Q2, including a new logo. We expect a steady and distributed growth in this vertical in the coming quarters. Turning to our CMT vertical. We saw a 1% quarter-on-quarter and a 22% year-on-year growth in this vertical in constant currency terms. We added 2 new logos in Q2 in this vertical. In the Communications and Media business, where most clients are large but mature outsourcers, our strategy to position ourselves as a challenger to the existing ecosystem by bringing in our entire service portfolio helped us win a large deal and a new logo that I mentioned earlier.

In the Technology segment, we continue to expand our footprint among the marquee consumer tech logos with both traditional and nontraditional service propositions. One of the new logos we added in this vertical is one of the fastest-growing online marketplaces in the U.S. We continue to see a strong deal pipeline in this vertical. Lastly, coming to our diverse portfolio that grew 49% quarter-on-quarter and 85% year-on-year in constant currency terms. This includes the Retail vertical that came through the Ascensos acquisition and our traditional business from utilities companies.

We see a healthy deal pipeline in this portfolio in both the verticals, which should translate to a broad-based growth in the coming quarters. Let me now provide you a commentary from a geography standpoint. From a geography perspective, growth in Q2 was driven by the U.S. with an 8.3% quarter-on-quarter and a 30% year-on-year growth in constant currency terms. We expect the growth to get more distributed across verticals in the second half in the U.S. Europe grew 3.6% quarter-on-quarter. Our organic revenues, excluding Ascensos, were down about 4% quarter-on-quarter. However, companies in the U.K. are facing significant cost pressure that has led to them increasingly exploring offshore or nearshore delivery options even in some of the previously awarded deals. This caused some delays in ramp-ups in some of the strategic deals, which has normalized now.

We are also seeing increased conversations around carve-out deals, leading to a significant and a healthy buildup in our deal pipeline in Europe. We expect revenue growth to improve over the next 2 quarters, as we had outlined earlier as well. On the people front, we ended Q2 with a total headcount of 32,898 Firstsourcers. Our trailing 12-month attrition rate for the quarter was 31%, a reduction from 32% in Q1 FY '25 and 39.8% in Q2 of last year.

We anticipate this downward trend to continue in the coming quarters, though at a more gradual pace, driven by the success of our employee value-focused initiatives aimed at improving retention and satisfaction. I'm also pleased to report that Firstsource is now certified as a Great Place to Work across 4 key geographies: India, the Philippines, U.K. and the U.S., underscoring our commitment to creating an environment where every Firstsourcer feels valued, empowered and motivated to contribute their best. I'm also proud of the diversity of our workforce. Women employees form 46% of our workforce. And with Ascensos in Australia now coming into the fold, we now have employees working across 10 countries in the world.

Let me now turn your attention to some of the awards, recognitions that we received during the quarter as well as update you on our initiatives on the sustainability front. I'm happy to share that Firstsource continues to be positively recognized by leading analysts for bringing significant value to clients and offering innovative tech solutions in our focus markets. To mention a few, in Q2, Firstsource was named as a leader by Everest Group in their assessments for health care payer BPaaS solutions and a major contender and star performer for the health care provider revenue cycle management operations.

Everest also ranked Firstsource as a leader for the lending services operations. Last month, we also released our ESG report for FY '24, along with our very first TCFD report. Both these reports are live on our website, and I would encourage each one of you to look through them. With that, let me now provide you a little bit of a brief on our acquisition of Ascensos that we announced last month. Let me start by giving you a brief background of the company. Ascensos was founded in 2013 and is headquartered in Scotland, U.K. It's focused on providing BPM services to clients in retail, consumer and e-commerce verticals.

Its services portfolio covers the full front, middle- and back-office spectrum that includes customer experience services management, digital transformation and customer insights and analytics. It has close to 2,500 employees spread across the U.K., South Africa, Romania, Trinidad and Tobago and Turkey and has capabilities of providing customer support across 11 different languages, including languages as varied as Arabic, Mandarin and Lithuanian. It has deep and long-standing relationships with some of the top high street retail brands in the U.K. and the average tenure of the top 5 clients is more than 4 years.

Coming to the strategic rationale for this acquisition. As you're aware, expanding our footprint in high-growth markets and strengthening our capabilities are key pivots to our strategy refresh under the One Firstsource framework. Our acquisition of Ascensos aligns to this objective at multiple levels. Firstly, Ascensos enables us to jump-start our presence in the retail and e-commerce segments, a strategically important and fast-growing vertical. This market is a $35 billion market globally from a TAM standpoint, which is growing at double digits every year. Ascensos adds some of the most iconic U.K. retail brands to our client list and broad-bases our revenue portfolio, a key tenet of the One Firstsource playbook.

Secondly, Ascensos brings to us a scale presence in several strategically important global delivery locations. For example, its presence in South Africa improves our attractiveness to the clients and prospects in the U.K. who are actively exploring economical outsourcing capacities in the same time zone. In fact, one of our existing clients in the U.K. has already awarded us additional business in South Africa post the acquisition. Thirdly, and equally importantly, Ascensos provides us with delivery capabilities in 11 non-English languages.

This fills a critical gap in our portfolio and now positions us very well to offer multilingual support to several of our large global clients, especially those in the consumer tech space. And last but not the least, the culture fit between the 2 organizations was exceptionally good. Both organizations are nimble, agile, scrappy and are customer-obsessed. And that was one of the primary reasons, amongst the others that drew us to Ascensos. Over the medium term, we see significant revenue synergies from the combination of Ascensos's deep domain knowledge in retail and e-commerce and Firstsource's capabilities in AI, automation and transformation.

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

[Dinesh Jain, executive]

Thank you, Ritesh, and hello, everyone. Let me start by taking you through our quarterly financials numbers. Revenue for Q2 FY '25 came in at INR 19,254 million or USD 230 million.

This implies a year-on-year growth of 25% in rupee terms and 23.4% in dollar terms. In constant currency, this translates to a year-on-year growth of 22.7%. We have consolidated Ascensos from September 1, so we have 1 month contribution from Ascensos in the quarterly numbers. I'm happy to report that our constant currency revenue growth, excluding Ascensos contribution was 19.6% in quarter 2. This is the highest growth year-on-year in constant currency terms in last 12 quarters. Our operating profit was INR 2,081 million in quarter 2, which is up 27.3% over quarter 2 of last year. This translates to an EBIT or operating margin profile of 10.8%. This includes 30 bps impact of onetime charges related to Ascensos acquisition.

Excluding that, our normalized EBIT margin in quarter 2 was 11.1% versus the 11%, which we reported last quarter. We have been able to keep our margin stable despite giving out the annual wage hike to our employees effective 1st July and continue to make investment in our businesses. Our normalized margin in H1 is 11%, which is our within guided band of FY '25. Profit after tax came in at INR 1,382 million or 7.2% of the revenue for the quarter. Coming to the other financial highlights for the quarter.

The tax rate was 19.2% for the quarter, which is within the guided range of 18% to 20%. Reported DSO came down to 65 days in Q2 from 68 days in Q1, as I spoke last time that there are some of the one-off delays, which have got normalized this quarter. We have a healthy cash conversion this quarter. Our OCF to EBITDA was 79% and FCF to PAT was 101%. Our cash balances, including investments stood at INR 2.3 billion at the end of the quarter 2. Our net debt stands at INR 12 billion as of September 30, 2024. We have paid INR 3 billion to our Ascensos acquisition during this quarter.

As we have reported earlier, we have acquired 100% stake in the company at a purchase consideration of GBP 42 million, which includes GBP 9.5 million as an earn-out linked to achieving predefined milestone in the next 2 years. We continue to invest in expanding our execution infrastructure in Q2. We have added new seat capacities in Chennai, Hyderabad, Philippines and Mexico. Our hedge book as of September 30 was as follows: we have coverage of GBP 75.6 million for the next 12 months with an average rate of INR 109.3 to the GBP. Coverage for dollar is for $141.3 million with an average rate of INR 85 to the dollar. This is all from my side.

Now I hand it back to Ritesh to talk about strategic priorities and the outlook. Ritesh, over to you.

[Ritesh Idnani, executive]

Thanks, Dinesh. As you know, the One Firstsource framework has been our North Star for the strategy refresh in the organization over the last 4 quarters. I'm pleased with the progress we are making on each of the 7 themes we have defined as part of the playbook and our success so far in translating this progress into business outcomes. I have regularly highlighted our initiatives to build a world-class sales engine that is visible in the continuous improvement in our clients and deal metrics over the last 4 quarters.

To highlight, the number of clients with over $1 million of revenue has gone up by 4, to 105 in Q2 from 101 a year ago. During the same period, the number of clients with whom we get over $20 million of revenue has increased from 8 to 11. Similarly, we are now clocking 3 large deal wins in a quarter versus just about 1 deal a year back. This quarter, I would like to take you through the progress we are making in areas that are under the hood, but equally critical for realizing our aspiration to build a resilient and durable business with industry-leading growth.

One of the foundational tenets of the One Firstsource playbook is to institutionalize our efforts to cross-sell, upsell our entire service portfolio into both our existing accounts as well as to take them proactively to new prospects. I believe multi-tower relationships are critical for us to grow ahead of the industry by gaining wallet share in our large clients. Let me give an example of what we are doing with our Collections business. As you know, Firstsource is one of the top companies globally with end-to-end capabilities ranging from first-party collections to third-party collections and legal collections.

Traditionally, our portfolio was centered on debt collections for large U.S. credit card issuers. However, over the last 4 quarters, we made considerable progress both in expanding in adjacent market segments as well as non-BFS verticals. For instance, we are working with some of the top fintech companies in the U.S. and U.K. that are major brands in the areas of personal lending, BNPL and personal finance. We've also been making steady progress in cross-selling Collection services to our existing non-BFS clients in verticals such as Health Care, Communications and Media and Utilities.

One of the large deal wins that we had in Q2 is a multi-tower deal that included both Customer Experience and Collection services. Another theme of the One Firstsource playbook is 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 platforms with the latest technologies to improve their relevance and attractiveness in the marketplace. In Q2, we announced a partnership with Microsoft, under which we will be leveraging Azure OpenAI services to provide generative AI-powered solutions and platforms to our clients.

We're also making accelerated progress with relAI, our suite of AI-led offerings, solutions and platforms introduced in the last quarter to drive digital transformation of clients in a responsible and ethical manner. Last week, we also announced an investment in building our own domain-centric large language model specific to the mortgage industry that leverages our deep domain expertise to tailor-make sector-specific AI-driven services and platform offerings.

This LLM would significantly reduce the cycle time for prequalification and formal loan applications, creating a seamless, digital end-to-end process for loan application and fulfillment. Another example is of our digital collections platform where we have infused AI to drive personalization at scale with an empathy-first mindset. We engage with the customer using the most effective channel at the most effective time of the day with a personalized and dynamic payment plan, and we have used AI for persona-based segmentation to make our communication emotionally intelligent.

While these are early days, we have already seen more than a 10% uplift in our collection efficiency with the revamped platform. Overall, I'm pleased with the progress we have made over the last 4 quarters in each of the areas we've identified for a strategy refresh. What I also find encouraging is the growing client recognition of our efforts. We recently hosted our first-ever client event in the U.K. that saw close to 100 CXOs participating over 2 days, and each one of them shared positive feedback on our relationship.

Turning to the business outlook. For fiscal year '25, we now expect our revenue to grow in the range of 19.5% to 20.5% in constant currency terms. This includes about 5% contribution from Ascensos over the 7 months in FY '25. For operating margins, we expect our normalized FY '25 EBIT margin, excluding onetime charges related to the acquisitions, to be in the 11% to 11.5% band.

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

[Operator]

Thank you very much, sir. [Operator Instructions] The first question is from the line of Manik Taneja from Axis Capital.

[Manik Taneja, analyst]

Congratulations to the leadership for another solid quarter. I just wanted to prod you with regards to the outlook or the revised outlook, both on an organic basis as well as including the acquisition. Given the growth trajectory that you've been showing in the first half of this year as well as how the deal wins and which once again continue to get consistent, would be interesting to know why our implied ask rate for the guidance essentially remains very conservative, practically very modest growth through the next few quarters, next couple of quarters?

That's my question number one. The second question was a bookkeeping question with regards to the headcount for the quarter. If you could help us understand how much of the incremental headcount change in the quarter was aided by the Ascensos consolidation?

[Ritesh Idnani, executive]

Thanks, Manik, for your questions. Let me provide you some color first on the outlook. When we started the -- before we started Q1 or FY '25 itself, our guidance was 10% to 13%. If you realize at the end of Q1, we updated the guidance to 11.5% to 13.5%. And the question that I was asked then also is what's your view on the outlook? And I'm going to reiterate some of the points I made then because it's kind of consistent in a way.

When we provide a guidance, it's based on our line of sight on the business at that point in time and at this stage over the next 2 quarters of FY '25 as it stands today. So I don't want to qualify it in any manner or comment on what this might translate into in terms of Q-on-Q growth calculations. But what I have said earlier and which continues to remain consistent is our guidance does not build any changes in the macro environment. And if there is something out there, that's potentially an upside. We're also keeping our focus at this stage on supporting our clients proactively in their transformation agendas 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 our execution. And that's, frankly, what gave us the confidence to raise the guidance to 14.5% to 15.5% organically, excluding the 5% contribution that we expect from Ascensos for the rest of the year. So I'll leave it at that in terms of what I end up seeing. Your second question was related to the headcount. Ascensos gave us close to about 2,500 people. The rest of it is all organic. And that's in terms of the breakdown of the headcount that we added through the quarter.

[Manik Taneja, analyst]

Sure. And if I can just ask one more. You had spoken about the aspiration to get to $1 billion mark sometime in FY '26. And now with this Ascensos acquisition, I would reckon we'll probably hit that mark much earlier. Do you want to revisit that time line?

[Ritesh Idnani, executive]

So again, my comment would be fairly simple in some sense that at this stage, this is the visibility that we have and we're not going out there to update what might be a guidance at the end of every quarter itself. As you know, this was a medium-term aspiration that we had put out there, which is that we would look to hit a $1 billion run rate business by Q4 of FY '26. Obviously, we've had a good growth in the first 2 quarters. But I'd leave it at that and probably come back as the environment around us becomes more visible. Yes.

[Manik Taneja, analyst]

Okay. And the last question was with regards to this qualitative commentary that you've shared on BFS side, something that you had even alluded to during your -- during the prior quarter's earnings call. At that point of time also you had mentioned that one should expect a sequentially improving growth trajectory in BFS through the rest of the year. Just to understand that better, does that mean basically sequential growth rates will see a further improvement or an acceleration? Or is that just suggesting that you expect to see growth in the vertical over the subsequent quarters?

[Ritesh Idnani, executive]

So Manik, firstly, let me just state that one of the things that we talked about specific to BFS itself is in the quarter, we added 5 new logos. So we had a pretty good new client as well as existing client expansion as well. And that's what we feel good about as we look at the rest of the financial year also in terms of the outlook for BFS. That being said, look, the macro environment continues to be uncertain.

As you know, while the Fed lowered interest rates, at the end of the day, if you look at just the last -- the 30-year mortgage rates over the last 3 weeks, it's actually gone up from the initial drop from 6.08% to 6.44%. You also look at Fannie data, about 80% of outstanding fixed rate mortgage loans are at 5% or less from an interest rate standpoint. So look, on one hand, we feel good about the logos we've added.

We feel good about the existing clients from an expansion standpoint. And yet there does end up being some of the macro uncertainty that is there. So I think that's where I would leave with that. But I think we feel good about what we end up seeing in the BFS space right now.

[Operator]

We'll take the next question from the line of Shradha from AMSEC.

[Shradha Agrawal, analyst]

Congratulations on another strong quarter. Coming on the guidance bit again, if I look at the implied ask rate for the organic guidance, it essentially implies a decline in revenue over the next 2 quarters. And given the typical seasonality that we see in our business every year due to collections and also because you're talking about pipeline buildup being very strong in other verticals.

So what essentially is driving that seasonal -- this weakness in the implied guidance for the next 2 quarters on an organic basis purely?

[Ritesh Idnani, executive]

Thank you for your question, Shradha. I want to reiterate one of the comments that I made upfront itself that our revised guidance is based on our line of sight on the business over the next 2 quarters of FY '25 as it stands today, right? We've obviously had a set of deal wins. We added 13 new logos in the quarter that went by. And all of that obviously is a net positive, but there's always a time line by which deal ramps happen and so on and so forth. And we're just mindful in terms of what we see visible at a point in time. I think that's one part of the question.

The second is, I think the way we are trying to build the business also is to minimize the impact of the macro, as I've stated earlier as well. And therefore, in some sense, we continue to see the benefits of that. I mean just take collections as an example. If you look at credit card delinquencies on one hand, they have continued to trend upwards, but the U.S. consumer, as an example, has continued to remain resilient. So I don't end up seeing any causality out there one way or the other. So what we are trying to do is to build a business in each one of our industry verticals, which is independent and minimizing the impact of the macro itself.

And that's the way we see it at this stage. So what we are -- what I'm essentially saying is today, the guidance that we are providing is based on the data that we have visible as of now. And at the same time, it does not bear in mind any impact of the macro itself. So if anything else, that's an upside.

[Shradha Agrawal, analyst]

Right. That's helpful. And Ritesh, if I caught you right, did you mention that the U.K. business declined organically for us in this quarter?

[Ritesh Idnani, executive]

Excluding Ascensos, that's right.

[Shradha Agrawal, analyst]

Yes. So is it more to do because of the offshoring impact in the large U.K. account? Or is it to do with BFS U.K. being weak? So any color on the U.K. business would be helpful.

[Ritesh Idnani, executive]

I think I had mentioned this even when we did the Q1 commentary that we expect Europe to be soft in Q2 as well. But at the same time, we also said that this is going to pick up in the second half of the year. And if you look at several of our large -- recent large deal wins, they're not the regular headcount-centric deals, but these are more strategic deals where we are participating in the transformation agendas of our clients by bringing in AI/ML automation, including our partner ecosystem.

Some of these deals are also sole sourced where we have gone in and shaped the deal composition and structure and ramp-up in some of these deals follows a very different trajectory compared to a regular RFP-led deal itself. And that's why -- that's the reason why we've been highlighting, and you may recall my comments earlier also that these deals will reflect in the revenues in a phased manner and not necessarily in a linear way. But we feel pretty good about the pipeline that we have in Europe as well as the deal wins that we've had in the last couple of quarters.

[Shradha Agrawal, analyst]

Right. And any particular comments would you like to make around the top account in U.K.? I mean, is it trending as per expected lines or any weakness outlined there? Anything there?

[Ritesh Idnani, executive]

So Shradha, if you recall, starting Q1 of this year, we stopped commenting on a specific account itself, but suffice to say that we continue to have a very deep relationship with our top account.

[Operator]

[Operator Instructions] We'll take the next question from the line of Aayush Rastogi from B&K Securities. The participant has -- give me a moment, let me check, sir. [Operator Instructions]. We'll take the next question from the line of Jalaj from Svan Investments.

[Jalaj Manocha, analyst]

First of all, congrats on the great set of numbers. I just wanted to understand one thing for the acquisition, which is the Ascensos acquisition. If I were to see the last 3 years' numbers for the top line, they have been more or less stable. So could you give us a broad outline? So you did mention the rationale behind the acquisition. But is it a slow-growing business or what? Or is it a mature business per se? How do you see it? And what value -- what sort of synergies do you foresee coming from here?

[Ritesh Idnani, executive]

So let me start by, again, just reiterating the rationale for when we acquired Ascensos, right? As I said upfront, it broad-bases our footprint, which is in line with what we had outlined in the One Firstsource framework. And Ascensos has a very large footprint with leading high street retailers in the U.K. that was very attractive to us. There was zero overlap between the businesses, and it was a complete complementarity, if you will. They had a very large offshore and nearshore footprint in locations like South Africa, Romania, Trinidad and Tobago and Turkey, all of which were locations that Firstsource was not in. And at the same time, they had also built deep relationships as well. So these were obviously some of the elements that prompted us to look at the combination itself.

At the same time, over the last 3 years or so, they have increasingly gone from being a business that had a large footprint in the U.K. to increasing their footprint in the offshore and nearshore locations itself. And that's one of the reasons why what you might have gleaned in terms of their financials was relatively flat. But we feel actually pretty good about the outlook for the business. The pipeline is healthy. And at the same time, we do believe that the retail and e-commerce vertical is a vertical that has significant tailwinds that are available.

The target addressable market is about $35 billion. So it's a meaningful size TAM. And I think coupled with some of the capabilities that we can bring to bear, it actually gives us the opportunity to potentially grow that business as well.

[Jalaj Manocha, analyst]

Understood. And what sort of margin profile does the company bring in? The acquisition.

[Dinesh Jain, executive]

Your question is around the margin profile for Ascensos?

[Jalaj Manocha, analyst]

Yes.

[Dinesh Jain, executive]

Yes, it's I think, slightly lower than what our margin, but I think in the similar lines of thing, not that materially different from that.

[Jalaj Manocha, analyst]

Understood. And one last question, if I may. So if I were to see the revenue growth per se from the buckets of the clients, it looks like that majority of growth has come from ex of top 10, at least for this quarter, if I were to compare sequentially. What explains that? Is it the new logos which are helping us grow faster? Some light on that or some flavor on that?

[Ritesh Idnani, executive]

If anything else, that is probably validation of what we are trying to do with the One Firstsource framework. If you look at one of the tenets of the One Firstsource framework, it was cross-selling and upselling into our existing accounts.

We had also identified about 50 strategic relationships where we would have the opportunity to increase our wallet share. And that's one of the things that we feel really good about because as we scale up as a business and start seeing the outcomes of some of these measures itself, the fact that you're actually broad-basing growth, and it's not just restricted to the top 5 or the top 10 accounts is validation of the execution of the strategy. One of the other comments that I also talked about is the fact that I mean just take the number of $20 million accounts that we have. The fact that, that has gone up, the number of $1 million accounts has gone up.

I think we feel very encouraged by some of those bottom-up metrics because they're truly a validation of the success of the strategy that we are executing on.

[Jalaj Manocha, analyst]

Understood. And then one last question quickly. So U.K., you mentioned that ex of the acquisition, there was a degrowth per se. So is it just the macro environment there per se or something specifically is happening in the geo because your acquisition again comes from the same geography?

[Ritesh Idnani, executive]

If anything else, we feel that the U.K. economy is -- companies out there are under a significant amount of pressure to go out there and reexamine their cost structures as well as the opportunities that might be available to them to be competitive. And that creates a play for us to partner with them in their transformation agendas, whether it's around their cost competitiveness, whether it's around improving the revenue growth or whether it's around the process transformation itself.

Our pipeline in Europe continues to be very robust, and we have a number of large strategic deals also in the pipeline. And we also expect that some of the deal wins that we've had in the first 2 quarters will start bearing fruit in the second half of the year as we had outlined even at the end of Q1. So I wouldn't read anything further into the Q2 number there.

[Operator]

We'll take the next question from the line of Pratyush from White Capital.

[Pratyush Agarwal, analyst]

Congrats on a great set of results. Ritesh, I wanted to circle back on the collections part that you were speaking. So can you please elaborate more on sort of the disconnect because delinquency rates, at least on credit card loans are going up and up for the last 5, 10, 12 quarters, right? So is there more a yield lag effect here? Or there's something nuanced here on why our Collections business is not, let's say, correlated to the delinquency rates?

[Ritesh Idnani, executive]

So first and foremost, Pratyush, thanks for the question. I think the Collections business for us continues to grow, right? And I think one of the reasons why it continues to grow is because we play end-to-end across first-party, third-party and the legal collection side.

And underlying all of it is the digital collections platform itself. The comment I was just making on the macro is that if you look at the last several quarters, not just related to this quarter or otherwise, credit card delinquencies have consistently ticked upwards. And you would think that, that's just a net positive for the business itself. But the U.S. consumer, in particular, has been fairly resilient. So it's not like the delinquency has translated to a loss, that loss is in turn resulted in a charge-off and so on and so forth.

So -- but that being said, look, I think what we've been able to do is through our competitiveness in this marketplace itself, through the capability set of our digital collections platform, which is now infused with AI and ML and is truly cutting-edge. And in fact, we don't run into the traditional IT services or BPO players in the space, but more SaaS players in Silicon Valley. I think what we are able to do is to offer something that's truly aligned to what enterprise customers are looking for. And that's what I think is driving our growth.

So again, it goes back to the tenet that I earlier talked about that we are, in some sense, trying to minimize any impact of the macro, but instead try and continue to grow our business in a broad-based fashion, and I think that's bearing out here as well.

[Operator]

The next question is from the line of Aayush Rastogi from B&K Securities.

[Aayush Rastogi, analyst]

Congratulations on a good set of numbers. Just wanted to pick your brains on the Health Care segment. So you called that out that you are kind of facing some kind of dip in this -- in the Payer side of the segment. So when shall we expect this recovery to be there because our Health Care business has shown good results on quarter-on-quarter basis. So just trying to understand what's the sort of demand we are seeing in the Payer side of the business? And when do we expect that it should be getting bounced back?

[Ritesh Idnani, executive]

So as I mentioned in my opening comments, Health Care has been a key driver of growth for us in the recent quarters, led by the Payer segment. In Q2, we saw a more distributed growth with both the Payer and the Provider segments doing equally well. Also on the Payer side, our strategy to focus on our key strategic accounts is playing really well. And we have a healthy pipeline.

But typically in Q2 and Q3, what you end up starting to see is some of the decision time lines on these deals gets pushed out because of open enrollment on one hand as well as this year because of the typical uncertainty that you've seen on account of the U.S. presidential elections. But again, I'm not too fussed about it one way or the other. I think we expect it to bounce back just because of the quality and quantity of the pipeline as well as the deals that are in advanced stages to come back in the next quarter itself.

On the Provider side, we continue to broad-base our portfolio. So we are quite excited actually by the offshore revenue cycle management market, where the QBSS acquisition is helping us to compete with the technology-led, end-to-end capability set. And so far, we've had 4 joint deal wins since the announcement of the acquisition itself, which is in a way, a validation of the rationale for acquiring QBSS in the first instance.

[Aayush Rastogi, analyst]

Okay. And second is on Communication, Media and Tech vertical. So if I see for like from -- starting from 3Q '22 to 3Q '24, so we have been posting one of the good set of numbers in 3Q for the Communication, Media and Tech, be it 3Q '22 or 3Q FY '23 or 3Q FY '24. So should we assume that the same trajectory kind of a thing that one can expect for this vertical? I'm not asking for any sort of numbers, but in terms of trajectory if one has to map, then should we expect the same kind of bump for the same vertical in 3Q?

[Ritesh Idnani, executive]

Let me take a step back and probably provide you a little bit of color on the Communications, Media and the Technology verticals. And the only reason I'm doing that is because I think each one of them -- each one of these subsegments has different attributes or characteristics itself. In the Communications/Telco space, that's a very mature crowded market.

Our positioning out there is as a challenger who's coming out there to disrupt the traditional ways of working, and we're using that with a tech-first, AI-led approach in terms of how processes are getting reimagined and so on and so forth. And that's yielding results. As you saw, even in Q2, we actually entered the Australia and New Zealand market with one of the largest deals in the Telco space. And that came on the back of a disruptor strategy itself. If you take the Media side of the house, a lot of the media companies are struggling to make the pivot from a paper-based environment to more of a digital environment itself.

There's also a significant amount of issue in terms of subscriber base and whether they can actually go out there, not just acquire but also retain their existing subscribers. And a lot of those companies, particularly newspapers, publishers, et cetera, are looking for a full transformation agenda to help revamp the way they run their business itself. Our storyline there to help them change their business model, make the pivot and do that in a manner that allows them to impact both the revenue as well as the bottom line is extremely attractive to them, along with a proven track record of executing against that.

And we continue to see pipeline to work with several newspapers and publishers along those dimensions.

The Tech space is a little different. Here, we work with 2 kinds of players. On one hand, we work with several companies which are themselves trying to disrupt traditional industries, whether it's on the Ed-Tech side, one of the wins that we had last quarter was with a company which was in the freight and logistics space, but was disrupting traditional freight and logistics providers with a SaaS platform. And several of these companies are again looking for a full-fledged transformation agenda.

The second part of the Tech space that we work with is with several companies in Silicon Valley. And a lot of the work that we are doing out here is providing the plumbing that is required to ensure that they can have the right data sets, trained data sets that feed into the foundational models itself. A lot of this work is project-based. It has quick turnaround times. It requires significant critical thinking skills, and it requires to work in close tandem with these big tech companies because the nature of work is first time, but at the same time, it has a significant runway in terms of growth itself.

So we see today across all of these segments, a pipeline that's very attractive, and we feel good about, therefore, the opportunity that's there. Also, given the size of this unit for us, I think the opportunity to grow exists just on account of what we have from a pipeline perspective. Hopefully, that addresses your question.

[Operator]

The next question is from the line of Rahul Jain from Dolat Capital. Sorry to interrupt you, your voice is muffled. I would request you to use your handset, please.

[Rahul Jain, analyst]

Is it any better?

[Operator]

Thank you, sir. Please go ahead.

[Rahul Jain, analyst]

Yes. Sorry for that. So firstly, of course [Technical Difficulty] but is it safer to assume that...

[Operator]

I am sorry, sir. You're sounding distant now.

[Rahul Jain, analyst]

Apologies for that. So my question is that is it that Ritesh, you don't see the need for upgrading the guidance on the organic basis because there's no point doing it given the historical preferences? Or is it -- or in a way to say that is that is there an upside risk to the current guidance because you're baking in the potential downside. But if things are smoother than what you're thinking, you could eventually do better than that? So that is question number one.

Question number two is also to understand the need for investment in the business where we are because it seems we are in a decent business trajectory and double-digit organic growth may sustain beyond FY '25. So will that be accretive by nature? Or there could be some conflicts in terms of margins going forward as well? And lastly, on the ETR, if you could give a flavor in terms of how it should pan out in FY '26 and FY '25?

[Ritesh Idnani, executive]

Sorry, could you repeat the third question again, Rahul?

[Rahul Jain, analyst]

Yes. Third one was basically effective tax rate, if you could guide for near to medium term.

[Ritesh Idnani, executive]

So Dinesh, do you want to take the third one, and I'll come back to the first and second.

[Dinesh Jain, executive]

I think our band was 18% to 20%. Current quarter, we did 19.1%, but we see that for the year, it will be within that range.

[Ritesh Idnani, executive]

So Rahul, let me reiterate the comments that I made on the guidance front, right? Before we started the fiscal year FY '25, our guidance was 10% to 13% because that is what we had visible at that point in time from a line-of-sight standpoint. At the end of Q1, when we saw the demand environment being significant in terms of what we saw, plus the fact that we had a very strong Q1, we upped the guidance to 11.5% to 13.5%.

At the end of Q2, we're back out here with a good set of numbers in Q2 as well. And again, we're at the point where we have upped our organic guidance, given what we have today from an environment perspective, right? It's based on a line-of-sight of the business over the next 2 quarters as of today, as we see it, right? I'm not getting into qualifying it in any manner or comment on the Q-on-Q growth calculations or what it means. But what I will say again is our guidance does not build any changes in the macro environment that represents potentially an upside.

Our objective very simply is keep your focus on supporting your clients proactively on their transformation agendas and identifying opportunities to expand our footprint, both within existing accounts as well as landing new logos. What I also feel good about is the fact that our sales engine is chugging well. I feel confident of our revamped go-to-market strategy and the rigor we are bringing in our execution. And frankly, that's what gave us the confidence also to raise the guidance to 14.5% to 15.5%, excluding the 5% contribution we expect from Ascensos for the year. I'll leave it at that.

What was your second question?

[Rahul Jain, analyst]

Yes. That was more on the margins to understand do we see there are needs for investment in some -- which could be beyond this year? Or you think the margin profile should be accretive going forward if the growth sustainability stays?

[Ritesh Idnani, executive]

So I'll just say one thing. Let me give you some background. We if you look at some of the investments that we have made, they've been in broadly 3 areas, right? The first has been in expanding our sales and marketing team and our account management teams itself, right? I spoke about how our sales team has grown by over 40% in the last 6 months. We're largely over in this area, though we'll keep adding a few people as we see the need. The second is on the capability side, where we have beefed up our leadership team as well as our solutions side hires.

We've accelerated some of our investments, especially around investments in modernizing our services portfolio by infusing AI and automation, some of which I talked about earlier. But I talked about relAI and also more specifically about the investment in the mortgage-specific large language model as well. So while we continue, on one hand, to drive cost optimization initiatives to fund these investments, given some of the accelerated investment plan on the capability modernization also in the coming quarters, the way to think about this is that the optical flow-through of those into reported margins that we were expecting could get pushed out, but we expect our margins could remain in a band.

And at the same time, I also want to reiterate, this does not change the trajectory of the 50 to 75 basis point improvement that we expect every year over the medium term from FY '26.

[Operator]

Thank you very much. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Ritesh Idnani for closing comments. Over to you, sir.

[Ritesh Idnani, executive]

So firstly, thank you all for joining the call and for your questions. I just want to close out with a few final comments. We are making steady progress on our revamped go-to-market strategy and remain laser-focused on building a resilient and durable business with industry-leading growth. Our sales engine is working well. We've had 3 large deal wins in each of the last 2 quarters as well as our Q2 closing pipeline has been healthy.

There is an upward movement in the number of clients across all the revenue buckets. The Ascensos acquisition gives us a strong nearshore footprint, which we plan to leverage well with some of our existing large U.K. as well as U.S. clients. Our solid growth in H1 gives us a good base to raise our FY '25 revenue growth guidance to 19.5% to 20.5%, which we believe should place us in the top decile of the industry in terms of revenue growth.

That's all from our side, and we look forward to interacting with you again in the next quarter call. Thank you all, and I wish you a very happy and festive season. Thank you once again.

[Operator]

Thank you, members of the management. Ladies and gentlemen, on behalf of Firstsource Solutions Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.