Happiest Minds Technologies Ltd

NSE:HAPPSTMNDS

Earnings Call Analysis

Happiest Minds Reports Strong Growth and Strategic Initiatives

Happiest Minds announced robust results for Q2 FY '25, achieving a quarter-over-quarter growth of 12.7% and year-over-year growth of 28.2%. Strategic acquisitions of PureSoftware and Aureus are driving operational synergies and expanding market reach. The company anticipates revenue growth of 30-35% for the year, supported by a strong pipeline of potential deals. However, Q3 may see a dip in performance due to seasonal factors. The EBITDA margin is projected to stabilize at 20-22%, despite recent investments in leadership and new technology initiatives. An interim dividend of INR 2.50 per share was also declared, reflecting strong cash flows.

Strong Growth Momentum

Happiest Minds has reported impressive growth figures, showcasing a 12.7% quarter-over-quarter increase and a significant year-over-year growth of 28.2%. This marks the best growth performance seen in the last two years, supported by stable pricing and higher volumes, as well as the contributions from recent acquisitions—PureSoftware and Aureus【4:6†source】【4:10†source】.

Financial Highlights

For the quarter ending September 30, 2024, the company's total income reached INR 549 crores, an increase of 12.1% year-over-year. EBITDA stood at INR 119 crores, which reflects a 1.3% growth sequentially and 12.8% growth annually, with an EBITDA margin of 21.7%. Although there was a slight margin decline, primarily due to the roll-out of pay increases and a significant INR 9-10 crore investment in the GenAI business unit, the adjusted EBITDA margin would be over 24% when accounting for these impacts【4:1†source】【4:4†source】【4:5†source】.

Revenue and Earnings per Share Insights

The cash EPS for the quarter was INR 6.18, marking a year-over-year growth of 9.5% compared to INR 5.60 previously. Nonetheless, diluted EPS decreased to INR 3.29 from INR 3.39 in the last quarter and INR 3.90 from the previous year. For the first half of the fiscal year, total revenues reached USD 118 million, exhibiting a constant currency growth of 23%, with an INR 1,038 crores total income, representing a 24.5% annual increase【4:1†source】【4:4†source】【4:10†source】.

Operational Metrics and Margin Outlook

The company reported a trailing 12-month attrition rate of 14.4% and a utilization rate of 76.3%. The PBT remained stable at about INR 67 crores, despite increased interest costs linked with recent acquisitions. The management has indicated stable margins in the medium term, targeting a range of 20% to 22%【4:1†source】【4:4†source】【4:10†source】.

Future Growth Strategy

Happiest Minds is optimistic about achieving a revenue growth projection of 30% to 35% for the upcoming fiscal year. Management highlights potential customer demand increases and new senior leadership aimed at capitalizing on sales opportunities as key factors in driving this growth【4:1†source】【4:4†source】【4:10†source】.

Investments in Innovation

The company has been proactive in investing in future technologies, particularly Generative AI (GenAI). Investments made in this area should start generating returns as the company is in the initial phases of replicable sales approaches—this includes innovations in sectors like research, customer service, learning, and contract management【4:3†source】【4:4†source】【4:10†source】.

Dividend Policy

Additionally, the Board of Directors has recommended a dividend of INR 2.50 per equity share, consistent with the prior year, demonstrating the company’s commitment to returning value to shareholders amid substantial investments in business growth【4:9†source】【4:10†source】.

Conclusion: A Positive Outlook

In conclusion, the earnings call reflects a strong growth trajectory supported by strategic acquisitions, stability in operational performance, and robust investments in future technologies, all pointing to a positive outlook for Happiest Minds. Investors should watch for the company’s ability to maintain margins and leverage new sales efforts in the coming quarters【4:7†source】【4:10†source】.

Earnings Call Transcript 2025-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Happiest Minds Limited Q2 FY '25 Earnings Conference Call hosted by HDFC Securities. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Apur Prasad from HDFC Securities. Thank you, and over to you, sir.

[Apurva Prasad, analyst]

Thank you, Steve. Good morning, and thank you all for joining us today on the Q2 FY '25 Earnings Call of Happiest Minds Technologies Limited. On behalf of HDFC Securities, I would like to thank the management of Happiest Minds for giving us the opportunity to host this earnings call.

So today, we have with us from the company, Mr. Ashok Soota, Executive Chairman; Mr. Joseph Anantharaju, Executive Vice Chairman and CEO, Product and Digital Engineering Services at PDES, Mr. Venkatraman Narayanan, Managing Director and Chief Financial Officer; Mr. Rajiv Shah, Executive Director; Mr. Ram Mohan, CEO; Infrastructure Management and Securities Services; Mr. Sridhar Mantha, CEO, Generative AI Business Services; and Mr. Sunil Gujjar, Head of Investor Relations.

With that introduction, I'll hand it over to you, Sunil, for safe harbor and to take the proceedings forward. Thank you, and over to you.

[Sunil Gujjar, executive]

Thank you, Apurva. Good morning to all participants in this call. My apologies for a delayed start because of a small glitch. Welcome to this conference call to discuss the financial results for the second quarter ended September 30, 2024. I am Sunil, Head of Investor Relations. We hope you have had the opportunity to review the earnings release we issued yesterday.

Now let me quickly begin the agenda for today's call. Ashok will begin the call by sharing his perspectives on the business environment and our results. Venkat and Joseph will then speak about our financial performance and operational highlights, after which, we will have the floor open for Q&A.

Before I hand over, let me begin with the safe harbor statement. During the call, we would make forward-looking statements. These statements consider the environment we see as of today and carry a risk in terms of uncertainty because of which, the actual results could be different. We do not undertake to update those statements periodically.

Now let me pass it on to Ashok.

[Ashok Soota, executive]

Thank you, Sunil. Good morning to everybody. I'm happy to inform you that Happiest Minds has delivered our best growth results since the last 2 years. We have had double-digit serial quarter-over-quarter growth, which is 12.7%. And the year-over-year growth was 28.2% year-over-year.

The transformational changes we initiated this year are all gathering momentum. These changes include the acquisition of PureSoftware and Aureus. The creation of our GenAI business unit named as SUDS, hiring a senior leader to expand net new sales, which we call as NN sales; and creating 6 industry groups, each headed by an industry manager. That's a lot of changes. And the full impact of all these changes on revenue and growth will become visible in the quarters ahead.

PureSoftware and Aureus teams, now part of Happiest Minds family, are geared up to drive synergies. We will expand into each other's accounts, cross leverage our complementary skills and capabilities. For instance, we took our GenAI services to a large global financial services provider, who is a customer of PureSoftware.

Our award-winning Banking-as-a-Service platform from PureSoftware, which has a very strong brand recall in Southeast Asia and Africa, is now being taken to new markets such as Philippines.

India is a large market and so far, unexplored faster, and our combined teams will lead the entry of -- into India.

Our GenAI business, or GBS, continues to take rapid strides in building a leadership position by being a thought leader through innovation, strong partnerships with technology tool providers. We see huge potential for replicable sales. And when I say replicable sales, I mean, a new class of solutions is becoming available through GenAI, and you can take that to many customers.

We have such opportunities in areas like research, customer service, learning and contract management.

Muninder, our Chief Growth Officer, who joined us in Q2, is now in charge of net new sales, and has already built a healthy new logo pipeline across our focus industry groups. We expect many more new logo wins, which will grow as the accounts are transitioned to the respective industry managers.

Each of our industry groups are maturing, all of them are into engines of growth. And you can see from the results that some are already leading the growth like BFSI and Healthcare.

We have developed strong capabilities in bioinformatics, which are unparalleled in the industry. With in-house experts on areas like molecular biology, data scientists, engineers and health care domain specialists, we work with some medical research community from prestigious medical institutions in India and abroad.

In the reported quarter, a European Health Research Institute shows Happiest Minds to build their AI and ML data platform. In another instance, for a leading medical care organization in India, Happiest Minds will leverage imaging analytics to review medical information and diagnosis. These are all very high end, very specialized areas, which I believe there is probably nobody within the country would ever be able to deliver because of the expertise we have built up.

Let me briefly share my views on the outlook. The results demonstrate our continued ability to continue to manage our business with rigor and discipline in a very dynamic business environment.

With the transformation in the agenda that I outlined, we are very excited about the future as the outlook has never looked better than what we see today.

Before I pass this on to Venkat, let me congratulate him as he was recognized during the quarter as the leading CFO of the Year in the IT sector at the CII CFO Excellence Awards for '23 '24. I'm sure Happiest Minds will continue to be benefited by his leadership, and Venkat, along with his colleagues at the Executive Board and other senior leaders, including from the integrated teams of PureSoftware and Aureus, will play a very pivotal role in the exciting phase ahead for Happiest Minds.

With this, I conclude my commentary and pass this over to Venkat. Thank you.

[Venkatraman Narayanan, executive]

Good morning. Thank you, Ashok. Let me begin my commentary by sharing the financial operational highlights for the quarter, followed by the half year. For the quarter, our revenues in constant currency was [ USD 52.4 million ] on a good growth of 12.7% on a Q-o-Q basis and about 28.2% Y-o-Y. The growth was driven by a stable pricing environment, higher volumes and the full quarter consolidation benefit coming from PureSoftware and Aureus.

Our total income for the quarter was INR 549 crores, showing a growth of 12.1% over the previous year and 28% on a year-over-year basis. We reported an EBITDA of INR 119 crores, showing a growth of 1.3% over the previous quarter and 12.8% over the previous year. EBITDA as a percentage of total income stood at 21.7% this quarter. The drop from 23.9% in the previous quarter was primarily due to pay increases that we instituted for most of our people, which was rolled out effective July 1, which had an impact of almost 230 basis points. The more important aspect is an investment of about INR 9 crores -- INR 9 crore to INR 10 crores that we have made in the quarter in our GenAI business, which is another 150 bps. We have also made investments into the new sales engine with Maninder and his team, and that's also had an impact on the financials -- on the EBITDA.

EBITDA for the quarter, adjusted gross for the pay increase and the GenAI investments, would be about 24% plus. And like the previous quarter, reflecting the fundamental strength in our business and our commitment to investment in new and current technologies, but we adjust for the pay increase and the investments that we are making as a services company, which gets consistently evaluated on profits into new technologies and expansion to new markets. Our EBITDA is higher, slightly higher than the last quarter and maybe even similar to what we saw in the last year.

It is pertinent to note that on pay increases, we have gone ahead with our regular cycles backdrop of many of our peer companies who have either deferred or canceled their regular cycles. So that's something that's on the press.

As mentioned by Ashok, we've made significant investments into our new sales force, and that too, has, as I said, impacted our margins.

Our current sales and sales support team is about 62 plus.

I'm happy to share that our margins of 21.9% -- 21.7% is within the guided range of 20% to 22% for the year.

From this quarter, we have started showing operating profit, which is defined as EBITDA excluding other income over operating revenues. This has grown from INR 92 crores in the previous quarter to INR 93 crores in the current. It stands at about 17.9% of revenues compared to 19.8% in the previous quarter. The operating revenues takes out the slight noise that you can have due to other income. So with this, we are able to even isolate that noise and show you the margins.

The drop in operating profit is primarily on account of the same point that I made earlier, which is pay increases, investment in GBS, and the new sales team.

Growth in subsequent quarters, both volumetric and in terms of selling higher-priced services like Gen AI and repeatable sales services like GenAI, we should be able to get back to our earlier levels of profitability.

Moving from operating margin to PBT. The meaningful change that has happened is the increased interest cost on account of borrowings made for acquisitions. Noncash costs, which is amortization of intangibles from acquisitions, continue to remain the same as last quarter. PBT between quarters, despite these changes, remain at about INR 67 crores. So it remains constant.

Now that the cost of acquisitions have stabilized, this would be the base for future quarters. We have, from this quarter, started reporting in our presentations the metric of cash EPS, along with the diluted -- nondiluted EPS because I believe cash EPS gives an alternate and realistic view of shareholder returns shown of noncash accounting charges, which one seems to take in larger proportions as we grow through acquisitions.

Our cash EPS for the quarter was INR 6.18 compared to INR 6.11 in the previous quarter and INR 5.60 for the previous. Cash EPS for the quarter has just shown a growth of 9.5% Y-o-Y.

However, diluted EPS for the quarter was INR 3.29 compared to INR 3.39 in the previous quarter and INR 3.90 in the previous year.

Coming to our [ half year yearly ] performance, our revenues for the first half of this year was USD 118 million, a growth of 23% in constant currency. Total income for the half year stood at INR 1,038 crores, a growth of 24.5% Y-o-Y. Just that's the number. We have reached the INR 1,000 crore mark by half year-end. And so [ 2000 ] for the year looks part, of course.

EBITDA has grown to INR 235 crores from INR 208 crores, showing a growth of 13.1%. EBITDA as a percentage of revenue is at 22.6%, which is in line with our forecast for the year of 20% to 22%.

Operating margin has grown to INR 185 crores from INR 174 crores, showing a growth of 6.4%.

All the reasons shared earlier for the quarter, which are investments in GenAI business, new sales team, pay increases have had an impact on margins even for the half year. And it's despite all of those that we have shown expansion in absolute terms.

When we come to PBT, we have taken an additional noncash charges of [indiscernible] INR 17 crores. Cash and onetime acquisition cost of about INR 6.5 crores. This is for the half year. These have pulled down our PBT from INR 157 crores to INR 156 crores. That's because of the acquisition amortization and the onetime acquisition costs that we had in the first quarter. So that's an impact of about INR 23.5 crores. We just pulled down the PBT.

Adjusted for that, our PBT continues to grow and expand in absolute terms.

Here is why I said the cash EPS number gives a clearer picture of our financials and growth.

Cash EPS for the first half year stood at INR 12.30 compared to the INR 11.83 in the last year, showing a growth of 4.5%.

EPS for the first half was INR 6.58 -- INR 6.68 compared to the INR 7.92 in the previous year.

Switching gears to some operational metrics. Our DSO on a consolidated basis stands [ 38 days to 50 days ] Cash on our books stands at about INR 1,470 crores. We continue to report solid cash conversion ratios, and our half yearly free cash conversion was about INR 232 crores, which is about 98.4% of EBITDA.

Return on capital metrics of ROCE and ROE are at 23.1% and 13.5%.

We closed this quarter with 6,580 Happiest Minds. And during the first half, we had 144 campus joinees or Happiest Minds join us on campus.

Trailing 12-month attrition has inched up slightly to 14.4% from the 13.5% in the previous quarter.

Our utilization during the quarter was 76.3% compared to 78.2% in the last quarter. And the dip primarily is because of the campus hires and the GenAI continuing to be in the 20% to 25% utilization as in the previous quarter.

We ended the quarter with 281 customers, 59 million-dollar customers, 82 billion-dollar customers. Our customers have got revenues of more than $1 billion and average revenue per customer of $842,000. So if you look at all these metrics and take it together with a repeat sales of 95%, it gives you a fair handle of the solid ground that we are currently on.

Coming to our acquisitions. We have made satisfactory progress in integrating the acquired entities, driving operational synergies, ERP, people and process integration plans and various other back-end support systems, which are in advanced stages of completion.

Progress on deals are tracked and measured regularly. What is more important, we'll see integration at the sales and delivery customer upsell, cross-sell standpoint, all of which is happening at a very fervent pace.

As of today, we have about 700 plus open positions, and this is in anticipation of both a demand build and existing demand from our customers. We are building capacity across our delivery centers in Bangalore, Pune, and [indiscernible], and we've added about 500 in the first half of this year, and we are looking to expand into a larger delivery center in Hyderabad. We have signed up for us 150 -- 150-plus center in Hyderabad, which will also become operational during the third quarter.

Finally, in line with our progressive dividend policy, the Board of Directors of the company have recommended an interim dividend of INR 2.50 per equity share, INR 2.50 per equity share. Record date for the payout has been fixed as November 6, 2024.

Cash flow on discount will be INR 38 crores, very similar to the interim dividend paid out in the last year.

Coming to the outlook for the rest of the year. We are hopeful of meeting our revenue growth projections of 30% to 35% for this [ physical. ] We are beginning to see positive changes in the demand environment. And like the rest of the industry, expecting to see a fill up in the fourth quarter.

While Q2 is a quarter with the increases, which we -- which I talked about, Q3 is one with lesser number of working days due to vacations and furloughs by clients. We are also likely to see a small impact for account -- on account of the -- the pay increase for the leadership team.

On margins, coming to margins, both of the above, the lower working days and the leadership increases, will have an effect and which we will address in Q3.

With this, I conclude my commentary and pass this over to Joseph. Over to you, Joseph.

[Joseph Anantharaju, executive]

Thanks, Venkat. Good morning to all the participants in the call. Building on a strong and transformational Q1, we have delivered yet another quarter of strong performance across all fronts. The results demonstrate Happiest Minds commitment to its customers to deliver value at state our ability to keep ahead of market and technology shifts, add value to our customers' transformation initiatives and be the partner of choice in their strategic imperatives.

Our results and growth have been well rounded with all geos and verticals demonstrating excellent performance. We have expanded our base of deep client relationships through our strong account mining practices and proactively anticipating the needs of our customers.

We received an industry-leading Net Promoter Score of 65, extending the impressive NPS scores that we have received over the last few years, which is a validation of the commitment of our Happiest Minds through our mission of happiest people, happiest customers, and the drive to deliver value in our execution.

During the reported quarter, our USD 3 million to USD 5 million customers have increased by 4 to a total of 6, while average revenue per customer picked up to $842,000. We worked with 59 customers to contribute more than $1 million in revenues, up from 58 last quarter. We worked with 82 billion-dollar corporations which offers us scope to increase wallet share and drive growth through the efforts of our newly formed industry groups.

I would now like to share some interesting work that we are doing with our customers. Our rich experience in mobility, analytics and IoT allow us to combine machine-generated data with human insights to help develop products that reengineer businesses to drive effective outcomes.

In the reported quarter, this new one maintains Happiest Minds to provide consulting-led solutions to develop unified IoT platform for a North American-based energy tech company.

Customers are seeking to reinvent their business and looking at new ways of working by elevating AI technologies to drive productivity. For a European Health Research Institute, Happiest Minds is building their AI/ML data platform [indiscernible] advanced analytical techniques to help them discover new paradigms.

Our IMSS business enables agile infrastructure through a consult, transform and manage approach in hybrid and multicloud digital [indiscernible]. I'm happy to share that during the quarter, we won our single largest multi -- multimillion dollar deal. It provides cybersecurity services for one of the largest pharmaceutical contract manufacturer.

During the reported period, we launched Happiest Minds Secure 360, GenAI-powered cutting-edge solution, designed to deliver unmatched speed and precision in identifying and responding to cyber threats. This solution enables organizations to address even the most complex and unprecedented security incidents at 3x the speed of traditional remediation processes.

During this quarter, Happiest Minds was chosen as a strategic cybersecurity partner to oversee end-to-end design and implementation of cybersecurity program for one of the largest banks in India.

Let's talk more about our generative AI business unit, which is enabling companies to accelerate their digital transformation by leveraging the part of Gen AI. Our 120 GenAI specialists, along with the larger 350-plus AI specialized workforce, are working on 25 different projects as we speak with several of these -- moving to production and starting to deliver business value.

Happiest Minds is also -- solutions with our customers in the areas of employee productivity, audio sentiment analysis, information with treatment contextualization and personal-based virtual engagements.

Postage, our GenAI low code, no code test automation platform, streamlines and automates the testing processes, enabling rapid development cycle and enhancing software quality.

Happiest Minds is a proud member of the Microsoft AI Partner Council program, a recognition of our care expertise and our commitment to driving digital transformation through Microsoft AI ecosystem.

For large beverage makers, we are leveraging Microsoft Azure AI to implement a GenAI solution to drive workforce efficiency and improve utilization of customer-facing assets. For a world's leading digital print platform in the energy sector, Happiest Minds was chosen to drive their GenAI innovation in that field data collection and retrieval. Faster collection and retrieval means the possibilities of speedier resolution and lower downtimes.

As an innovator and technology leader, Happiest Minds is also rapidly adopting GenAI internally to drive productivity. We have identified a list of areas and use cases across various corporate functions and have put together a plan to execute on these use cases, which is being driven by our GBS business unit.

For instance, our recently rolled out SmileBot has been trained on our people's policies and contact retrieves and answers questions relative to our HR policies. Our talent acquisition teams are piloting the use of an in-house developed -- matcher, a GenAI-based solution that automatically matches the job description to matching profile, enabling recruiters to search for -- faster.

Talking about our acquisition, we have established joint go-to sales with PureSoftware and Aureus teams with focused effort on cross-selling both ways. This initiative is being led by industry group heads. We're working closely with the Aureus and PureSoftware sales and delivery teams to ensure expertise is reached both ways to serve our customers better.

For example, we were able to take our GenAI services to a large global financial service provider who is a customer of PureSoftware. The sales teams on both sides are very excited about the value proposition of the larger Happiest Minds entity and are striving to spread our wings into each other's accounts.

During the quarter, our award-winning platform Arttha was implemented for an Africa-based market leader in logistics and supply chain.

Coming to the demand environment, we are seeing customers continue to leverage a wide range of digital technologies to reinvent their business and drive productivity and growth. While geopolitical uncertainties continue, the continued good performance of the U.S. economy, the resolution of the U.S. election rather this is a manner and the cut in interest rates are acting as a tailwind encouraging customers to start planning new transformation initiatives for 2025.

We've already seen trends of this in sectors like BFSI and capital-intensive sectors like manufacturing and expect other verticals to demonstrate a similar behavior.

Customers continue to look for ways to [indiscernible] their data using analytics and AI, while using GenAI to bring in operational efficiencies and drive revenue growth. Our expertise and ecosystem relationships, the significant investment and early leadership positions in promising technologies like GenAI, AI automation, IoT and other digital technologies will help us capitalize on these opportunities that we expect to come our way.

With this, I conclude my commentary. Operator, we can open the floor for Q&A. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Apur Prasad from HDFC Securities.

[Apurva Prasad, analyst]

Good show on margins. So I had a question on the H2 outlook, which you partly gave, but just to understand. If I look at the growth guidance, even at the lower end of 30%, that translates to over a 6% sequential growth in the next 2 quarters. So I wanted to understand if that visibility is there in terms of deals, SOWs, especially as Q3 will be having furlough and working days impact.

[Ashok Soota, executive]

Venkat? Hello, Venkat, will you get the question? I know you're getting to respond to it.

[Venkatraman Narayanan, executive]

Yes. Sorry, I was on -- sorry, I was on mute. I was on mute. Sorry. Apur, thanks for asking. Yes, that's the number that's out there that we realize that there is going to be that amount of -- amount of work that needs to be done to invert that number or reach that number to 30%. Today, we are at about 23 point -- 24% in longer terms, constant currency of about 24%.

So there is that growth that we have to bring in. Because we had acquired PureSoftware and Aureus, we had baked in a certain expectation coming in from as a banking, as a banking product that award winning product banking platform that is there.

The revenue flow from there tends to be lumpy. So we have got a very good pipeline on that front, and there is expectation to close at least 2 large deals in the next 2 quarters. So that's one.

The second is, yes, we had taken a little bit of an aggressive vision on the growth coming in through cross-sell, upsell because that's the only way to drive integration. There is no way to use it, acquire companies and say, actually, your numbers, the numbers kind of thing. So there was -- there is a significant element of cross-sell, upsell that's there on both sides, and we have seen quite a bit of traction happening.

The third upside that we are really looking for are some of the large deals that are in the pipeline. There was a bid earlier to one large deal. We did add 2 significant $5 million run rate customers during the quarter [indiscernible] maybe 5 or so, slightly below 5, but we have added during the half year, rather, 2 $5 million clients, which they're expecting to ramp up.

And the fourth is the GenAI POC to work, steady stream of work, repeatable sales, is what we are looking for.

These 4 are -- have been baked in. And fully, we have the new sales engine firing, numbers joined in, but there has to be a certain amount of fairness. You can expect from a team which is just about join. But while that we so he is also contributing quite a bit to the [indiscernible].

[Ashok Soota, executive]

Venkat, can I just -- excuse me a second, I'll just add to what Venkat just said. And I think you've given a very good comprehensive response. I'm just asking you Venkat a question here. Would it be fair to say on that question which said that we'll have a 6% average needed in the next 2 quarters? That Q3 will be a little lower and Q4 where the bulk of the benefit of some of the large deals, including even that bioinformatic deal that we are working on, they will start generating revenue in Q4. And therefore, clearly, Q4 will be better than Q3, heading towards on a grand total basis along the lines we have indicated. Would you say that's correct?

[Venkatraman Narayanan, executive]

That is absolutely -- that is absolutely right, Ashok. So [indiscernible] banking lines also. .

[Ashok Soota, executive]

Sure. Okay. Apur, back to you.

[Apurva Prasad, analyst]

Got that. And just on the point of the seasonality, I wanted to understand the PureSoftware and Aureus through the quarters, what's the normal seasonality? Does it tend to get stronger Q3 on Arttha?

[Venkatraman Narayanan, executive]

What we have seen as a trend is Q4 tends to be the best quarter because that's when budgets get released across the -- and it's about a 6-month to 9-month sales cycle. And it's a term license kind of a structure. So Q4 is when -- last 2 years, last year, for sure, we saw that. And this year as well, as we go through the financials, that's what we see. Q4, Q3, Q4 is when the sign-offs happen, Apur.

And to be very honest, as a services company, some of this, we had our IP and IP-linked sales in the past. We contribute about 10% comes from that -- that sort of a business. But the pure product business and the lumpiness is something that we will now start seeing. As this starts growing, we'll have to plan to see how that will get factored into our revenue projections and flows.

[Apurva Prasad, analyst]

Got that. The other question really I had is trying to get a more medium-term view on -- with the restructuring done on the industry groups, the verticalized structure with the investments that you called out earlier in building the sales engine. And then I understand the opportunity in the large client cohort versus the mid-market client segment over the medium term. How can sort of that revenue per client number look like over the next few years?

[Ashok Soota, executive]

[indiscernible], you guess you could take that.

[Unknown Executive]

Yes. I was just about to. So our goal creating the investor group and tenant sales was to ensure that we bring in more focused specialization and contribute to both of these functions. And the charter for the new logo sales team has been to pursue -- deals and to target more of larger customers.

We do have 82 billion-dollar customers that I've already talked about. But I feel that going forward, we should be targeting more of these companies so that the initial deal sizes themselves pick up and become larger as this group starts functioning.

At the same time, the industry groups that we from the industry group has we'll be working closely with our account managers and client partners to further expand into our existing customers, especially the large customers, and increase our wallet of share and -- which should also again start driving growth.

Both of these, I expect, will lead to, over the next few years, an increase in the number of $1 million customers, $5 million customers and $10 million customers, but at the same time, driving up average revenue per customer.

[Operator]

[Operator Instructions] The next question is from the line of Chirag from Ashika Institutional Equities.

[Chirag Kacharia, analyst]

I have a couple of questions. So as we aim for a 1 million kind of top line post FY '30, what would be the thought process on this onshore/offshore mix? Because if I look at it from a industry perspective, the companies which have [indiscernible] have [indiscernible] of revenue. The mix is around 60-40 or so. Question number one is that.

Second, our margin is relatively higher on EBITDA, if I look -- consider it from of rate hike impact and all. Going forward, has been aiming for such a high growth, more than 20% for the next 3, 4 years, is there any impact from margin and all -- or we will go in line with the -- what industry standard is at comparable to the similar size of company? Sir, the ad tech vertical, when do you think that back to the normal growth trajectory?

[Ashok Soota, executive]

You've asked lots of questions in between. So maybe we can split some of those into one by one. Let me just take the very first one. on-site offshore, then I'll pass this over to both Joseph and Venkat to some of the other aspects.

When you talk about our on-site offshore ratios, and actually, we're very pleased with that percentage. I mean, of course, we'd like to get more because it drives more revenue. As you've noted, it helps to improve our margins. It's also giving much higher value to the customer because after all, we're bringing down the cost of their project.

It's also an indication that in contracts with other people who've got a 60-40 ratio, we are actually delivering more volume and proportion. If you take like-for-like, you're delivering lots more volume because we're charging at a lower rate for the offshore. And so therefore, we are not [indiscernible].

The reasons why we want to increase on-site is to get more consulting-led business out there and use it as a front end for generating more business, which we finally drive offshore.

So it's a good healthy mix we have. I've said about the fact that 70, 60 or 40, and we are 15.5 down to 11.4 this quarter -- half year, simply because even our new acquisitions have got a very large proportion of offshore. So it's a good, healthy place to be in. But let me pass this over to either Joseph or Venkat for answering some of the other questions you asked.

[Venkatraman Narayanan, executive]

The second question I'll take on the margins part, this is what I alluded to. Typically, you have a pay increase cycle and then you have dollar-to-rupee changes, which can go either way. And that's how the industry has been buffeted by ups and downs on the margins, other than certain other aspects like sales and delivery kind of.

So margin prediction, according to me, is the most difficult part. So to that extent, we are expecting to continue this margin price of 20% to 22% in the medium term. That's the question that you had in mind.

But yes, the question is how much of that we should invest into our business for the future. And we have said this in the past, we will not hesitate because of margin constraints or margin that we have to show in investing into new business, which we are now seeing that we have taken. So restructuring into verticals, getting a new sales engine and investing into GenAI, doing the acquisition for both capability, reach competency, all of these made investments and it has a certain margin impact on the financials. But we have not hesitated looking at evaluate the longer-term strategy and go ahead and make it.

But even with all of that, the focus will be to make sure that we are in the 20% to 22%. We pull all stocks to make sure that the efficiencies of pyramid is there. Integration brings you a certain size and scale, so the base increases, but at the same time, there is a possibility to bring down certain costs, common overlap costs, cross-sell, upsell so that we get more bang for the buck.

These are the areas that we are focusing. And so if you look into our financials right now, half year over half year, you will see elements of all of that coming out, which is what I said. Some of this really gets muted or gets covered by lots of happening, but you adjusted for all of the ones that I mentioned. You will see [indiscernible] again will be the future maybe a platform like ours will require more investment. It's just not that it's completely plug-and-play situation. So you have to continue to make that investment to make sure that it becomes $40 million to $50 million, $60 million, whatever the road map for that product is.

And one should not hesitate to do that if there is a market for potential and there is a reason to make that investment from a long-term financial standpoint. But yes, I do understand in the short term, medium term, quarter-over-quarter, there could be those ups and downs. And -- but we'll rather explain it to the investor rather than not make the investment.

[Joseph Anantharaju, executive]

Can you just repeat the last question, Chirag?

[Chirag Kacharia, analyst]

Yes. Your outlook on ad tech vertical.

[Joseph Anantharaju, executive]

Sure. [indiscernible] tech vertical. So on a quarter-on-quarter basis, it has shown growth, right? And so what we see is that which track the rest of the company performance. And -- but if you look at the sector as such, you have to break it up into 3 segments. The first is higher ed, then you have K-12, and then you have more of professional education. And what we're seeing is that out of these 3, the higher ed segment has got impacted by some structural challenges that you're having, especially in the U.S. market, with the number of enrollments coming down and universities being under cost pressure. And that has been reflected in some of the business and traction that tech higher ed companies are getting.

K-12 has performed well, but I think it's a statistical business because there's an upgrade. And then for the next few years, they tend to leverage some of the investments they made. So areas that we've seen a lot of improvement and investment happening is in the professional education space.

As you can see, there are a lot of new technologies coming in, there's a faster evolution in how people need to constantly keep upgrading themselves. And this is leading to multiple opportunities in the market that customers are stepping in. Our existing customers are extending their products, and we are focusing more on this segment to get more traction and grow this segment.

[Operator]

[Operator Instructions] The next question is from the line of Apurva Prasad from HDFC Securities.

[Apurva Prasad, analyst]

Yes. This is on the GBS unit. I'm trying to understand how are the conversions that you're seeing from pilots to production? Then what's the size of the GBS in terms of resources that are currently there? And what's the expansion plan here or perhaps in terms of customer coverage?

So I'm basically trying to understand with the investments that you're making in this, what's the scale that is being targeted here over the medium term?

[Ashok Soota, executive]

Sure. Sridhar, I guess you'll take this. I will add a little bit to what you're going to say.

[Sridhar Mantha, executive]

Sure, Ashok. Thanks for the question, and I'll break it into to 3 parts. The first one is the POS to orders, right? Of course, being constantly working with the digital technologies, we always understand it will take a few quarters for the customers to do the prototypes and then move them into production.

So broadly, the kind of work we are doing is working with the digital products and platforms to add generate oriented features. Those are moving to the production much faster because they want to sell as part of either their SaaS solution or as part of the product generating feature.

However, the place where things are taking a little bit more time is on the IT organization where selective use cases are moving from the POCs to production, whereas the other local use cases are staying in the POCs probably being deferred by a quarter or 2, and then they would like to take it forward into the production.

That's how the market is moving, more like a technology [indiscernible] certain platform companies and like the organization with critical use cases and slow movers who are waiting for the ROIs.

The second part of the question is in terms of the team size and the competency that we have. So when we form the GBS separate business unit, a few strong leaders from the organization were pulled out and put as part of the core team and we went to the market and also had additional people.

And as Joseph mentioned, as part of his earlier note, we have, at this point in time, 120 people who purely work on generative AI-based projects, which are supported by 315 plus AI and analytics Center of Excellence so that the others that have the difference generative AI, et cetera, we can bring them together.

Now in terms of the last point on how we are seeing as the work and the investments and the business growing. Now of course, we continue to proactively develop our own use cases and repeat the solutions, as Ashok mentioned because putting a new kind of opportunity where semifinished GenAI solutions can be taken to the market, Ashok already shared, for discrete examples.

Now the other area we are looking at is our internal strong solutions like Arttha, which are like addressing various banking-related functions of course, can benefit significantly from generative AI. So we'll add the way we are adding generative AI features to the customers' products, very similarly, we'll add to the Arttha platform and other IP and solutions we have also.

[Ashok Soota, executive]

Very good. Sridhar, I guess you've covered a lot of what I wanted to say, but I just -- I'll highlight this point on replicable sales. I had mentioned, for example, that we've got -- when a new application comes up, the moment you do one customer, you can begin to say, can I take the same application to multiple ones.

I identified 4 areas in my opening talk, which had research, customer service, learning and contract management. I believe in almost all of those, we've already got our first customer. Now we begin to look for multiple ones.

I'll give you an example of research. If we are doing a research application for an R&D organization, actually, there must be at least 30 research organizations we can take them to in India you know what I'm talking of. Supposing you don't do 30, maybe we'll do 8 to 10, now that repeat customer makes a lot of difference, a much quicker sense because we've been able to demonstrate that it has worked for somebody.

And the margins will keep improving on those sales because now your own incremental cost, you still charge the customer the same amount. You won't need giant-type orders. But if you then take 8 such orders, then it becomes a very healthy order, and executable with a really high level of efficiency as we go ahead.

[Apurva Prasad, analyst]

And just finally, a couple from my side. The on-site resource reduction was fairly steep this quarter. And you also saw T&M go up substantially. Any explanation for this?

[Ashok Soota, executive]

[indiscernible]

[Unknown Executive]

The thing is, if you look at it overall, as Ashok pointed out, Apur, Aureus and PureSoftware are mostly offshore centric. And that has led to a drop in the offshore on-site issue. And the other thing that we're also seeing is that given some of the budget constraints, customers have been trying to get better bang for the buck and leveraging offshore more. I think the COVID-induced remote working is also giving customers more comfort and got them used to having larger teams offshore and doing some of the work that they wouldn't have done earlier offshore, which gives them the benefit of managing the budget better. Can you give some of the sense that we've seen?

[Venkatraman Narayanan, executive]

Sorry, I thought I had to interject. I think there is a typo in the numbers, Apurva, because it is 2 11, it's just showing 4 12. So it's a typo on the page on the financial metrics. If that's what you're referring to, we'll have that checked and corrected.

But just to give -- continue. It has remained same quarter-over-quarter in terms of revenues and in terms of headcount because we look at the daily [indiscernible]. It's just the same.

But Joseph, just to give you the number from FY '24, 2 11, it has gone up to 4 12 as per our PPT in FY '25 Q1, and then come down to FY '25 Q2 to 2 74. So that is something which is not right. We'll check it and get back to you and update the presentation. Thanks. Thanks. Good catch also.

[Apurva Prasad, analyst]

Thanks for that. And Venkat, just finally on margins, puts and takes for the next 2 quarters, part of wage increase for leadership. I think that should happen in Q3. But generally, from here on as -- if I look at this as a base level, how should we look at margins for the next 2 quarters?

[Venkatraman Narayanan, executive]

That's what I said. Hopefully, we have -- when I say margins, I'll now restricted to EBITDA and operating margin first. EBITDA and operating margin should be stable except for the wage increases. And we should see upsides. The dollar rupee is a little bit of a joker in the pack. But hopefully, we have covered that for the next 12 months or 9 months on a major average with proper hedges.

And as a banking, while it has got that lumpiness in terms of sales, it also contributes to margin. So I'm giving you all the pluses. I'm on the optimistic side.

On the minuses, it's a senior management wage increase that we are talking about and some more investments in the newer technologies that may be required because if that has to be done, that has to be done, including investment into Arttha.

So for example, if Arttha to be sold in India, it requires a little element of investments, we'll go ahead and make it. I don't think that's going to stop us from -- nothing is going to stop us from doing that.

So on the minuses, that's what I see. But like I said, it's a very, very tricky situation on margins because of all the things that happen simultaneously. And now that we are -- with humbleness, I say we are a much larger company running at about a $280 million run rate, exit run rate for the year. It's becoming that much more final to maintain and predict margins with a greater level of accuracy than the 20%, 22% [indiscernible].

[Operator]

The next question is from the line of Vidya from Asset Managers.

[Unknown Analyst]

In this first quarter, I think you would over line the hits on the amortization increase and intangibles was INR 6.8 crores and INR 1.3 crores for part of the quarter, right? For the full quarter, it's going to be INR 19 crores. But in Q2, the GBA has gone up by just INR 1 crore. So I'm just trying to understand what's changed?

[Ashok Soota, executive]

Yes. So data, thanks for asking that question. It's an accounting thing. So if you notice, we had about 15 days to close the books after integrating PureSoftware and Aureus last quarter. So it was, I would say a little hurry to get the valuation. So we closed it and we set provisional valuations and went ahead and closed the books.

After that, we did an extremely intensive exercise of about 1 month, got multiple experts looking into the valuation, the allocation of PPA and looked at what the industry impact is. And that's what we have done in terms of the allocation of PPA, the Monte Carlo simulations, assigning probabilities for earnouts and all of that, and we relooked at that provisional valuation.

And after getting 1 report, maybe actually, we talked about 2, 3 valuation experts and revalue the whole thing and have now plugged in the final valuation. So which is what is a number that you see.

It has an impact on 2 aspects. One is there is a [indiscernible] interest, and both of them 1 1 sets out the other. So last quarter, it was for 48 days. This quarter, like you rightly said, is for 90 days. The number remains the same, given all the real-time value that we did.

[Unknown Analyst]

So what was earlier guided to be INR 19.1 crores for the full quarter is now going to be what? What's that number now?

[Ashok Soota, executive]

It will be [ 14. 14. ] Now what you see in Q2 is for the full quarter.

[Unknown Analyst]

That's -- that's, as I said, at least the amortization which is a major part is up by just INR 1 crore. So it looks like INR 8.3 crores going to INR 9.3 crores.

[Ashok Soota, executive]

That's right.

[Unknown Analyst]

INR 9.3 crores is [indiscernible]

[Ashok Soota, executive]

[indiscernible]

[Unknown Analyst]

Is that correct?

[Ashok Soota, executive]

No, no. Why don't you look at the half year? In the half year, last year, we had INR 11 crores. We have the amortization and unwinding cost coming from 2 acquisitions, which is GBS and OSS -- sorry, and SMI. So that's for the last quarter. Some of them will trail off. In the current quarter, in Q1 for about 50 days or 48 days, we have INR 14 crores with amortization and unwinding of all the 4 companies of your software, Aureus and the 2 other companies of SMI and PGS.

In Q2, it's the same. The only difference is in Q1, you had 48 days for the last 2 acquisitions, whereas in Q2, you have the full impact. But Q2 has not gone sequentially, you would have expected a sequential increase to about INR 19 crores. It has not happened because we really looked at the provisional valuation that was done in Q1.

[Unknown Analyst]

So the DVA which you had in this quarter is a sustainable one?

[Ashok Soota, executive]

That's right. [indiscernible]

[Unknown Analyst]

[indiscernible]

[Ashok Soota, executive]

[indiscernible] we need further acquisitions. In fact, it will go down because I am expecting 1 or 2 to trail off. The Pimcore intangible write-off was done over 4 years. So that's almost done 4 or 5 years because the effect of useful life is also something that we have to evaluate. PGS, Pimcore was over 5 years. SMI was over 6, 7 years. PureSoftware, the assessment that has been done is 8 years, PureSoftware and Aureus. So Pimcore will slide off. So it will only improve in maybe...

[Unknown Analyst]

What will be that impact?

[Ashok Soota, executive]

The 14.06 will actually reduce by a couple of crores.

[Unknown Analyst]

Okay. Okay. So -- but that is from FY '26, is it?

[Ashok Soota, executive]

Yes, yes. From the first quarter.

[Unknown Analyst]

So Q3, Q4 is similar to Q2. And then next year, that trails up [indiscernible]

[Ashok Soota, executive]

That's right. So just so you find out, that's the reason why we have started calling out cash EPS because we're a smaller company. Relative to our size, these charges can have a [indiscernible] impact on your PBT and financials. So one needs to be aware of that, and that's why the cash EPS.

[Operator]

Thank you. Ladies and gentlemen, that was the last question for today's conference call. I would now like to hand the conference over to the management for their closing comments.

[Sunil Gujjar, executive]

Thank you all for joining us today. We thank HDFC Securities for hosting -- for this call. We look forward to interacting with you. You can reach out to us on [e-mail]. Good day.

[Venkatraman Narayanan, executive]

Good day, everybody. Bye.

[Operator]

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

[Ashok Soota, executive]

Thank you.