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MindTree Ltd
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Good day, ladies and gentlemen, and a very warm welcome to the Q1 Earnings Conference Call of Mindtree Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sushanth Pai. Thank you, and over to you, sir.
Thanks, Ali. Welcome to the conference call to discuss the financial results for Mindtree for the first quarter ended June 30, 2018. I am Sushanth, Head of Investor Relations. On this call, we have senior management team, Krishnakumar Natarajan, Executive Chairman; Rostow Ravanan, CEO and Managing Director; Parthasarathy N.S., Executive Vice Chairman and COO; and Jagannathan Chakravarthi, CFO. The agenda for the session is as follows: Rostow and Jagan will begin with a brief overview of the company's performance, after which, we will open the floor for the Q&A session. Since we have introduced an audio webcast, some of you may have joined the webcast. The webcast is a listen-only mode, but you can post questions. We will take the webcast questions once we complete the questions from the conference call mode. Please note that this call is meant for only analysts and investors. In case there's anyone from the media, I request you to please disconnect as we just concluded the media briefing before this call. Before I hand over, let me begin with the safe harbor statement. During the course of the call, we could make forward-looking statements. These statements are considering the environment we see of today -- as of today and obviously 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.I'll now pass it on to Rostow.
Thank you, Sushanth. Good evening to all our friends in the investment community. Happy to share with you that we started the new financial year on a very strong footing with a stellar quarter. Revenues in quarter 1 was $241.5 million, which is a growth of 6.8% Q-o-Q and 20.7% Y-o-Y. On a constant currency basis, the Q-o-Q growth was 8.2%. We added about $15 million revenues in this quarter, making it the best incremental growth over the last 11 quarters. The strong growth in this quarter is a reflection of the following: one, our strategy is resonating very well with our customers, and our focused investment in Digital continues to yield the desired results. Two, the new wins we reported earlier are ramping up as expected. Three, improving win ratios have resulted in robust deal closures in this quarter. Tremendous traction in our top accounts, because of entry into new business units, which are providing us further opportunities to grow. We continue to work in areas that are very core to our customer business. Having said that, we are also mindful of prime concentration and hence focusing on growth opportunities beyond the top customers. The composition of our top customers have changed. Excluding the top customers, our efforts to go deeper and beyond the top customers have also yielded good results. Our top 2 to 20 accounts have grown significantly by about 5.2% in this quarter. I would also like to share another important highlights of this quarter. Enterprisers have started to think of technologies beyond Digital, such as artificial intelligence, cognitive technologies and quantum computing. These technologies are important focus areas for research and academic focus. In order to get benefit from these research and to stay connected to the academic ecosystem, we are looking for new opportunities to collaborate with academic institutions, which will help us create new possibility for our customers. In line with this approach, we're happy to announce that we have signed a collaboration agreement with Stanford University, which requires a commitment of $2 million, of which we have spent $1.5 million in this quarter. This endowment will create a Mindtree faculty scholar position focused on AI at Stanford University. We are looking for similar collaboration agreements with other leading academic institutes and we'll make such investment as needed over the future. In some of the comments from the investment community, we heard some concerns about the resolution that was approved by our shareholders yesterday on the amount of INR 150 crores, or 10% of our profit to be earmarked for charitable contributions. We'd like to take this opportunity to clarify that, that is only an enabling resolution. We just took the resolution as a shareholder approval on a higher level, but the reason for that resolution was because we currently -- as many of you know, Mindtree already has several social programs and that we are going to continue to support. Grants to the -- of the nature that we make to Stanford, under the applicable law, will also get covered as a charitable contribution. We did not want to take the risk that -- the automatic approval route available for that contribution may get breached based on the plans that we have. And therefore, to just provide for some flexibility, we have now taken the shareholders’ approval, and like I said, on an enabling resolution basis, for INR 150 crores or up to 10% of our profits. Switching back to our other highlights for this quarter, we have seen a good all-round performance across all our verticals.Our Hi-tech and media business led growth with 9.3%, Travel & Hospitality grew 6%, BFSI grew by 5% and Retail, CPG and Manufacturing grew by 4.9%. Amongst geographies, the U.S. grew by a very healthy 9.3%, Europe grew by 1.7%, however, Europe revenues were impacted by currency movements. On a constant currency basis, Europe grew by a healthy 7.3%. Our Digital service line grew by 12.6% in this quarter and 35.4% Y-o-Y, which is almost double Mindtree's growth. Among service lines, independent testing and IMS have both shown a 10% Q-o-Q growth. We entered this quarter with 339 active customers and we added 24 new clients in quarter 1. Our count of $10 million customers grew by 2, $5 million customers grew by 1. Also very happy to report -- very satisfactory people metrics. Trailing 12-month attrition further reduced to 12.2%. Quarterly annualized attrition is 14%. We added 1,954 Mindtree Minds in this quarter on a gross basis, which includes a very strong campus addition of 567 minds in this quarter. We ended the quarter with 18,990 Mindtree Minds and 406 BOTs. We also had some strong multiyear multimillion dollar wins as follows: we implemented SAP's business planning and consolidation suite for the world's largest auto manufacturer; we are implementing a very complex financial reporting solution, powered by SAP HANA for a FTSE 20 company. This is the largest deal so far in Bluefin in history. As you will probably remember, Bluefin is the brand name of our SAP practice. A global home appliances company contracted Mindtree to streamline their sales process, using Salesforce as a solution. We are also fortunate to win a very large cloud-migration opportunity from a leading government authority in the Middle East. With that, let me switch to our point of view on outlook. This quarter saw very strong contract signings at $306 million, of which renewals were $255 million, and new contracts were $51 million. Contracts to be executed within 1 year were $259 million and contracts that lasted greater than 1 year were $47 million. Digital contracts signed in this quarter were $139 million. So overall, our deal closure, pipeline and win ratio continue to remain steady. Taking into consideration the market factor as well as our own customer-specific issues and some of the -- our deal wins, et cetera, we expect to have a strong -- we reiterate our commitment for a strong growth momentum in FY '19. However, given the very strong growth we had in Q1, the growth rate in Q2 will be lower than Q1. With that, I'm passing on to my colleague, Jagan, to share a few other financial highlights.
Thank you, Rostow. Good evening all. In Q1, our fee revenue grew by 6.1%, volumes increased by 6.6% and pricing realization declined by 0.5%. Overall, our pricing remains stable. On a consolidated basis, EBITDA margins are at 14.1% as compared to 16.1% in Q4. We had an impact of 270 basis points for salary increment, Visa cost of 20 basis points, contribution to Stanford University, as articulated by Rostow earlier, had an impact of 60 basis points. This was offset by operational improvement of 30 basis points and the predepreciation benefit of 120 basis points. For the quarter, we had a ForEx gain of $2.8 million compared to the ForEx gain of $2.9 million in the previous quarter. The effective tax rate is at 26.8% as compared to 27.3% in Q4. Tax margin for the quarter is at 9.6%, as compared to 12.4% in Q4. The EPS for the quarter was INR 9.62, which is the gain of 13.2% quarter-on-quarter. The decline impact on EPS is mainly due to the one-off gains pertaining to Bluefin earnout reversal in Q4, which is absent in this quarter. Our DSO is stable at 67 days. Our EBITDA to operating cash flow and EBITDA to free cash flow were 5% and 10%, respectively. The primary reason for a drop in cash conversion is the increase in receivables. We will focus to improve this parameter.Return on capital employed was 29.1% for this quarter. Some points on the margin outlook. Given the growth momentum, our efforts to drive operational efficiency are yielding results. Thus, we are on track to improve our margin for financial year '19. In Q2, we see the margins to be slightly better than the Q1, excluding any currency fluctuations. This -- that concludes my update. I will now pass on to Rostow for concluding comments.
Thank you, Jagan. I also wanted to share two further important updates with all the members of the investment community. Firstly, recently a media publication highlighted an article that indicated that the Mindtree founders are planning to sell their stake. I would like to categorically deny this rumor, and this news is completely false. We expect media to be more responsible and not to publish false news, and that too during our silent period. What makes it even more worrisome is that this was a story that we denied, just a few weeks ago, on 2nd of May to the same publication. We abide by the regulatory environment that prevents us from making any external communication during the silent period. I would also like to unequivocally clarify that building Mindtree into a memorable company is a great source of inspiration for all the founders and the entire leadership team at Mindtree. As you have seen, we have continuously strengthened our business model, continue to make the right investment and create long-term value for all our stakeholders. There has also been similar speculation on the plans of our larger shareholder, speculations that indicate that they are planning to divest a portion of their holding in Mindtree. Our large shareholder has clarified to us that he is a strong supporter of Mindtree, our vision and our strategy, and mentioned to us that they have no plans to dilute their stake currently. Another update that I would like to share is that, after a glorious innings in Mindtree lasting almost 10 years, our CFO, Jagan, has decided to accept a career opportunity outside the company. We thank him for his various and immense contributions to Mindtree and wish him the very best for his future plans. We expect to have a successor in place within the next 3 months. With this, we conclude the management update, and we can open the floor now for question-and-answer.
[Operator Instructions] We will take the first question from the line of Mukul Garg from Haitong Securities.
Jagan, thanks for helping us all out and best of luck for your future endeavors. The first question, Rostow, is on the large -- the top client, which Mindtree has -- they have been delivering really strong growth for last many quarters. This quarter 50% Y-o-Y growth, this is something which is unprecedented. Could you help us understand how we should look at: a, the growth opportunities, which are still there at this client? And b, what all is driving this strong growth at your top client?
Well, thank you, Mukul, both for the comments on our performance as well as your wishes for Jagan. Our large customer continues to, like I said, post very strong growth for us. Little bit of the growth in this quarter is seasonal because their financial year is July to June and therefore, a lot of contract renewals happen in this period. But nonetheless, I think the biggest reason for our strong performance in this account is very, very consistent high-quality delivery and very deep client relationships. That has allowed us to open multiple business groups within this customer, so we are well diversified within the customer, in terms of nature of business. For example, between run the business and grow the business, business units that deal with us, et cetera. So overall, very pleased with the performance of the account, and continue to see enormous growth possibilities for the future. If you look at, while it is a large customer for us, we are still a relatively small vendor within their ecosystem. They have many partners who are significantly larger than us. So there's an enormous amount of headroom for us to grow even further.
Understood. So you don't expect any moderation in growth at this client going forward. You think there are enough opportunities available to Mindtree to scale up further here?
It's difficult for us to give guidance. At the end of the day, obviously, businesses evolve from time to time, but at this point of time, don't see any headwinds that make us worried. Nonetheless, like I said, there's a continuous focus on growing the rest of the portfolio. And like I reported, if you look at our 2 to 20 customers grew 5.2% in this quarter. In spite of the fact, like I said, there is a very strong currency headwind and some of our customers are non-U.S. based and the currency headwind was due to cross-currency movements of other currency. In spite of that, some of our other large customers are -- continue to grow quite well. So we will continue to push for both. We will do the best that we can and go deeper within the large customer, and also continue to do equally focused growth on all the rest of the portfolio as well.
Understood. And if I may squeeze in one more question, on the SG&A side this quarter, there was a big jump, almost $4 million from last quarter to 17.6% of sales. Usually, when you report this kind of a top line growth, SG&A as a portion of revenue should have climbed down, instead of that it has moved up. So what is causing this pickup?
Couple of reasons. Like we announced in this quarter, the salary increase for the entire company, that's whatever starting from me to the junior-most software engineer, everybody, happens in this quarter, and to the extent that there are people who are in nondelivery roles, all of their cost increases would get covered under SG&A. This quarter, we also, like I mentioned, had very strong people addition. So some of those people have got added were in enabling functions or in client-facing roles. To that extent that also led to the cost increase. So those are the 2 people-related movements from a SG&A perspective. The last is the -- from an accounting point of view, the endowment that we made to Stanford would also get recognized as an SG&A expense. So that also was an impact in the SG&A cost of this quarter.
The next question is from the line of Viju George with JPMorgan.
Just a couple of questions. We have a rough sense of your top -- size of the top client. But if I look through the overall client mix, it appears that the next 4, 5 guys are well below the $50 million mark. And so essentially, my question is not so much of top client, but the maturity levels that the other clients can potentially reach, because it seems that you have 1 big outsized client right now, but the others, even your top 5 are probably less than 1/3 of that. So is that -- how do you, sort of, explain, how you can take your clients to the next level? I know, a lot of moving parts are there, with clients coming and going well, et cetera, but in terms of capability of clients of next level besides the top client, that's not been seen as of now?
Very valid observation, Viju. We do completely agree with you. Obviously, to the extent that you're pointing out is a mathematical fact there. Just to provide some additional inputs, some of those customers are going through business pressures. For example, one of the customers in that category that you mentioned, is a very large U.S. insurance company, long-standing Mindtree customer, great track record in terms of delivery, et cetera. But their own business is going through a lot of churn. So, for example, that is one of the reasons why we are finding it difficult to grow in that customer. Again, like I said, the issue is not because of our sales efforts or our delivery, but business issues of that customer. Little bit of that in this quarter is also due to currency. Again, like I said, if you look at our European customers, there is an approximately 5% kind of a headwind on currency. Our Europe business grew 7.3% constant currency, but 1.7% on a reported currency basis. So there is, in this quarter, little bit of an impact because of currency. But the larger answer to your question, apart from just the mathematical or the factual answer, I would say, there are at least 2 customers within the top 5 that have a high probability of hitting $50 million fairly quickly. And obviously, I'm not giving the exact month or the date by which it will happen, but whether it is in terms of relationship, or their business performance, or our sort of contact and tying to the right sort of business units of the customer, et cetera. So I would -- I feel confident that we can get 2 more customers into the $50 million market fairly quickly. But we are not keeping quiet on it. There are, like I said, a fair amount of initiatives being done to help get the growth out of the rest of our portfolio.
Sure. And the other question I had was on the sales trend. It technically declined by 10% on a Y-o-Y basis from $268 million to $242 million. I'm sure that you're driving productivity there, but can you just take us through why the reduction and what's the plan going forward?
I think it was just anecdotal, so beginning of the year when you complete your performance and sales cycle and so on and so forth, so at the end of the year, there will be some chance, but don't see a concern. We have a map in terms of by revenue, by geography, market opportunity, territory, coverage, et cetera. So we will make investments in order to fill those areas where there are gaps. Don't see a challenge there.
Sure. And all the best, Jagan.
Thank you.
The next question is from the line of Sandeep Shah with CIMB.
Just the question is, if you look at our top client, it is approaching close to $200 million. I do agree that you are opening more purchasing window within the client, but the experience with the large peers is whenever it approaches to that size, the bargaining power in terms of the billing rate is always slightly lower for the vendor side. So do you foresee that renewal pressure keeps coming from a top client? Though the volume may increase, but the billing rate may be under pressure?
Don't see that fact as of now. But the reason why we're probably slightly differing from -- I mean, our ground reality is slightly differing from the hypothesis that you have, is a large portion of our wins have been by promising and delivering very strong value to the customer. So we've implemented very high levels of automation, bought in new technologies like AI into some other solutions we're delivering, et cetera. So currently, not seeing the kind of pressure that you're outlining. Clearly, this is a very sophisticated technology buy-in and it's a very competitive account. So we have to do whatever we do to win the business, but not seeing the kind of pressures that you are outlining at the moment.
Okay, okay. And Rostow, just the AGM notice says that the higher of INR 150 crores or the 10% of the company's average net profit for the last 3 years, which will be spent on the CSR. So even if you assume it's not INR 150 crore, but it is 10%, that it's higher than the regulatory requirement of 2%. So is it fair to say that at least we will spend 10%, which may amount to close to INR 50 crores worth of CSR initiatives, which, in this year was close to around INR 12 crores? And can you elaborate how the business sense -- if you make an endowment to Stanford University, because this is like a new kind of an investment for the Indian IT? How you will try to monetize it? What are the business plans regarding this?
Like I mentioned briefly during my calls, Sandeep, the regulatory, both accounting and tax, requires us to include all of the contributions we make to academic universities, also as a charitable contribution. So to that extent, some of these initiatives are not strictly sort of CSR. In any case, like many of you would know, we have a very strong social consciousness, and we do a lot more than what is regulatorily required. We are doing some of these things way before this was mandatorily required to be spent, et cetera, because, in many ways, that's what defines Mindtree. That's the culture and that's the soul of Mindtree to give back to society. Mission statement reads that we will engineer technology solutions that make businesses and societies flourish. But leaving that aside, so the contribution that we are doing here, like I mentioned, from and accounting point of view and a tax point of view, gets counted as a charitable contribution. The amount that we probably might end up making this year will be higher than the 5% limit that the law allows us to make with board approval. We did not want to keep going back to shareholders on a case-by-case basis, so we obtained an enabling resolution that to go up to 10% this [indiscernible] flexibility and not have to breach the ceiling. I'm very surprised -- a little bit with your question, to be honest. Participation in research ecosystems, like Stanford, offer a tremendous amount of business potential for businesses. If you look at, in many ways, Silicon Valley is what it is because of the kind of research support that technologies that will come out of places like Stanford. So participating in that ecosystem, getting access to kind of research that they have, helping those professors understand the kind of business implications of technology and finding technology solutions that are relevant to business contact, are all the kind of agendas that we want to drive during -- through this partnership and some other partnerships that we have in mind during the course of this year and over the future with other institutes. So we are very convinced that there is a very important business ROI for this, including the fact that some of these programs allow top-performing technology-talented Mindtree to go participate in the research that some of these institutes do. Some of them are just learning opportunities, some of them also allow the talent that gets planted from Mindtree, to work as part of those research teams, also lead to an academic qualification. So that's also a very big ROI for us in terms of encouraging, motivating, rewarding high-performing talent that we have in Mindtree. So there's a business agenda, there's a knowledge -- what shall I say, creation, IP creation agenda and there is a people agenda that we have through these alliances.
So I think I do agree, definitely there's a lot of potential and especially when the endowment is to an institute like Stanford. The question was, through this, this will help you to create some solutions proactively for the technologies, which you have seen, beyond Digital? Is this the way to look at this kind of investment, which will help you to create a business case for Mindtree?
No. Again, like I said, let me clarify. This is an endowment to Stanford to create a faculty scholar position. So there will be -- and we'll announce more details over the course of the next few days as soon as we get all the approvals. But there will be a position created called Mindtree Faculty Scholar for Artificial Intelligence. A leading individual will be a named to that position and that person will have a team and use this endowment to research on artificial intelligence, et cetera. That research could lead to IP, that IP will be useful for us and for our clients. So that's the business benefit that we are anticipating out of this here. We will obviously, have more than one way of collaborating with this university. In this case, like I said, it's a creation of a faculty scholar, endowed faculty scholar position in Mindtree's name. But it would also come up with a set of problems, give it to universities to like Stanford, they will research and any IP that comes out of it will be owned by Mindtree, et cetera. So there are multiple ways by which you will collaborate with leading universities like Stanford.
[Operator Instructions] The next question is from the line of Madhu Babu with Prabhudas Lilladher.
Sir, we said that 2Q growth will be a bit softer compared to 1Q, that is a CC growth? On the constant currency? Because this quarter is 8% kind of constant currency growth?
It's a reported currency. We'll -- constant currency is a derived number, so this quarter reported currency growth was 6.8%. We expect Q2 to be lower than that. It will be difficult to predict currency movements from this quarter to next quarter.
Okay. And I guess, one more question. So usually we have a -- sometimes we have seasonality in the second half of the year. So how is that going to be this year, as well as the margin outlook? I mean, are we going to start seeing the strong margin expansion from here on, considering that wage hikes are behind?
The seasonality factor will continue. Obviously, Q3 we'll have lower number of billing days, higher client shut-downs, more people take leaves. All those seasonality factors will continue, but if you see the last 3 quarters, Q3 and Q4 of last year, we had very strong growth. So while the seasonality factors will continue, overall I would say, we see some good tailwind for us on growth without commenting on what the exact percentage of growth will be. That will obviously, vary from quarter to quarter, depending on all the factors that affect us in that quarter. As far as margins are concerned, and like Jagan outlined in his comments, we have committed to margin improvement in this year compared to last year, and we will, like I said, continue to reiterate that approach. We will see this year ending up with a higher margin than last year ex of currency. Obviously, whatever comes or goes because of currency is not in my control, but on an operational basis, full year this year will be a higher margins than full year, last year.
The next question is from the line of Apurva Prasad from HDFC Securities.
It's a slightly related question to one of the earlier questions. So on the top 10 accounts...
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Apurva, just hold on. It seems the line for the management is disconnected. Participants are asked to stay connected while the management is reconnected. [Technical Difficulty]We have the line for the management reconnected. Apurva Prasad, I would request you to repeat your question.
Sure. So my question is on the top 10, actually top 2 to 10 accounts. Are there any other headwinds that you see besides the U.S. insurance account that you spoke of earlier? And I am asking since we are seeing a flattish sort of a performance in the last 2 quarters, so anything to really look out for? And is that really holding you back for mid-teens to possibly a high-teens type of a guidance, which you can see?
Okay. Two -- there are 2 parts to your question. I'll take the second part first. We don't give guidance. So therefore, I'm not commenting on what our growth rate for this year will be other than the same comment that we made at the end of the last quarter saying that we are very confident of growth and expect growth to be significantly better than last year. So really nothing has happened to change our view on that growth outlook. Coming to our 2 to 10 customers, like I said, occasionally there was an impact of 1 customer having some business pressure. There was also, like I said, 3 of our top 10 customers are European customers and there was a currency impact that has affected that group there. And some 1 or 2 customers coming in and going out. So a combination of all of these led to whatever number that we reported at the end of this quarter, but very confident of our 2 to 20 growth.
Your next question from the line of Gaurav Rateria from Morgan Stanley.
Just wanted to get some color on the Digital deals, what kind of sizes are they on an average? And do you see a trend of accelerating growth compared to the last 2 years, because you've reached an inflection point for that business?
I'm not sure there is an inflection point for the business. I think the business has to continue to grow quite well. Like we announced in this quarter, Digital grew approximately 12%, growing at, like I said, almost double Mindtree's growth rate, which has been the trend over the last 2 years as well. So overall, our investments are yielding a lot of traction from our customers, pushing the boundaries on technology on one dimension, attracting some really world-class talents on the second dimension, and some of the work that we are doing is not just transforming our clients' business, but at least in a couple of cases, reshaping the industries that our clients are operating in if all goes well and our projects are successful there. So very, very pleased with the focus that we have on Digital and the results it's bringing. However, I also want to clarify that our investment in helping our customers run their business is also equally attractive. Like I explained, even the traditional kind of service lines like infrastructure management and testing, which are grouped under the run the business portfolio, both grew over 10% in this quarter each. So lot of technology improvement, a lot of advanced technology like AI being deployed for our customers in both kind of programs as well. So overall there is a lot of innovation happening in that area also. So both parts of our business are chugging along very nicely.
Sure. Question for Jagan, if you could lay out what are the potential headwinds and tailwinds for your margin in the coming quarter? And while the wage hikes are behind your commentary of slight improvement, if you could lay down why you think there's only going to be a slight improvement in 2Q?
Yes, I think margin improvement is -- will continue to happen. However, this is -- will take 1 or 2 quarters for us to reach the growth. We are just giving the guidance on the margin will improve now. There is no specific headwind or factor in the next quarter. We are seeing that operational improvement will help us to improve the margin.
Maybe a couple of more comments, just to expand on the point that Jagan made. Some of the headwinds in this Q2, from a margin perspective, are the full quarter impact of all the people that we added. Like I mentioned, the net addition was approximately 1,200 people in this quarter and 700-plus lateral additions and 500-plus campus additions in this quarter. Those happened during the course of the quarter. And so the full impact of that headcount addition is one margin headwind. The second margin headwind is, from a performance management perspective, all our promotions are due 1st of July. So that impact to salary increase based on the promotions will be another margin headwind. And like our historic spend, we are excluding any impact of currency on this. So these, I would say, are the 2 largest headwinds. Tailwinds are clearly growths, like we mentioned, Q2 will continue to grow. Obviously, the growth rate may be slightly lower than Q1, but the growth will be real tailwind in Q2.
All the best, Jagan.
Thank you.
The next question is from the line of Rishi Jhunjhunwala from IIFL.
Couple of questions. One from a segment margin perspective, sir, EBITDA margin in BFSI has gone down to almost 3.3% in this quarter, which is like almost 600 basis points correction, both Q-o-Q and Y-o-Y. So just wanted to understand, what is the nature -- or basically what is the reason for this kind of profitability in BFSI, which otherwise, from a growth perspective, has done quite well Q-o-Q? So just wanted to get some color on that.
I'll take that question. Good observation, Rishi. I think it was a little bit anecdotal. I don't think that anything happened to significantly deteriorate the profitability of that business. Beginning of the year, some of our overhead allocation approaches got recalibrated, including, as we are progressing, the acquired entities of Bluefin and Magnet are getting integrated into Mindtree. So their costs are being reallocated to all the 4 verticals on a slightly different basis than how they were accounted for in the past. That, I think, was the biggest reason for the change in profitability of our BFSI business. Relatively smaller impact because of the cross-currency and the impact to our large insurance U.S. client that I outlined earlier in the quarter.
So you're saying that this will reverse over the next 2, 3 quarters?
I guess, we've adopted a new overhead allocation methodology, so it's unlikely that, that will reverse, so obviously, when the business grows, et cetera. So that overhead allocation will ease off on our larger base, but it's also difference in the accounting that we have done. Primary reason for that is now the acquired entities are fully integrated into Mindtree. So their overheads are now being absorbed on the larger revenue base.
Understood. And secondly, on these CSR initiative that you talked about earlier in the call, just wanted to understand from a medium-term perspective, right, 2 years to 3 years, what kind of investments do you intend to make? And I'm asking more from a perspective of impact on margins. Like you mentioned, 60 bps in this quarter, but how do we look at it from a 2-year, 3-year perspective? How -- what could possibly be a ballpark range in terms of impact in margins from these initiatives?
Rishi, on a lighter vein, it's difficult to give a precise answer to your question, because it is an era of the technology and so all these models are evolving very, very rapidly. So whatever, 1 year back, we had no, what I shall say, opportunity to even make this step that we have taken today. But I'd like to sort of come back to the point that we made. While we look at these kind of opportunities, do what is right for our business, we are committing to margin expansion year-over-year, in spite of, like I said, this endowment that we created, maybe 1 or 2 more that are depending on which quarter what close, et cetera, we may do a little bit more collaboration with a few other universities this year, but nonetheless, the game plan of margin improvement does not change. So I don't have a precise number to give you saying that it will be X or it will be Y. Overall this year, it's quite likely that the maximum amount of commitment we would need to make to some of these initiative, could possibly be in the range of, maybe I would say, $3.5 million to $4 million. But if a really interesting very valuable investment opportunity comes, we will have to evaluate it as and when that happens. Nonetheless, the commitment to margin improvement this year stands. I would like to sort of again request all of you not to over-interpret that approval that we took, it was meant to be an enabling approval only because I can't be going back to shareholders tomorrow for any reason if I have to make an extra $100,000 investment in something and I can't make that investment because of the regulatory requirement, we didn't want to be hamstrung.
Understood. Yes, I mean, my intention was only to basically ensure that there will be, in quarters, wherein you will do these kind of contributions, there will volatility in margins. So unless you're going to guide it ahead of the investment, the volatility can be high.
Which is absolutely fair point. Completely understand and respect your perspective. Like we've been mentioning, at this stage of our life, given the disruptions happening in our industry, I think the appropriate benchmark would be to see Mindtree on a full year versus full year basis, there will be, like I said, from all these things that might distort reported numbers on a quarter-to-quarter basis.
The next question is from the line of Dipesh Mehta from SBICAP Securities.
Yes, can you hear me now?
Yes.
So just a couple of questions from my side. Just want to get sense about this quarter reported revenue and fee-based revenue, there is a wider gap compared to our historical standards. So can you help us understand why that gap has almost doubled, kind of, in this quarter, and what are the reasons? Second question is about Digital business. Couple of quarters back, we have seen some kind of muted-ness or stability in Digital business, because we focus on increasing dealer size kind of thinking. Help us understand what is the progress now? How we are seeing Digital deal size shape up over last few quarters? And third question is about the university endowment, which we made. Just now you valued it to around $3.5 million to $4 million kind of outer limit kind of thing, is it additional to $2 million or it includes $2 million?
It includes the $2 million. So, but I'm not going to, obviously, suddenly go write a $6 million check there, but thank you for raising it. Maybe I didn't realize that my comment could have been misinterpreted, so thank you for raising it. On Digital, I'm just answering your questions in reverse order. And then Jagan will answer the first question that you raised. On the -- on Digital, continuing to see Digital size expansion, in terms of deals, and working on customers on very transformative, large kind of opportunities. So we're making progress on that front a bit. But like as I said, it's incremental progress over last quarter but the trend is very, very favorable for two reasons: One is, Digital is becoming a larger and more industrial kind of spend for our customers. Secondly, the nature of the advanced technologies that are being deployed in Digital, drive the customer to choose a partner who is specialized, rather than a partner which is purely scale. So maybe, I have 3 experts in an area and one of my competitors, maybe probably has 100 people in that area, but my -- is my 3 experts have the right expertise, that's more valuable to our customers. So therefore, when customers choose partners for large Digital programs, they are looking for specialization and not scale. Over to Jagan, now, for the first question on the difference between the revenue growth and volume growth.
This is on the ForEx rate. I -- am I understanding it correctly?
No I think, Dipesh, your question was why there is difference between the total revenue and fee revenue. Was that your question?
Yes, that's right. So roughly $4 million gap, usually we used to -- say, around $2 million to $2.5 million used to be the gap?
So the answer for that is the new accounting standard for revenue recognition, the Ind AS 115, which now requires us to classify some kinds of expense billing also as revenue. So -- whereas the historic accounting convention was on those kind of our expense billing would be counted as a -- revenue would be counted as an expense credit, whereas now the new revenue recognition standard require us to count that as revenue.
So does it mean, your margin has some implication because of this accounting standard?
Mathematically, to a small extent, yes, but it is what I said, it's $4 million on a $240 million revenue. So in quantum terms, it will be relatively small. However, if you notice some of the ratios that at least we use internally and I'm sure your models also are the same, if you look at, say, EBITDA margin, it will always be on the fee revenue. However, in some of these nonoperational revenue aren't used to calculate profitability margin. But yes, if you don't make that adjustments and take it on both of revenue, to that extent, there will be an arithmetic impact.
[Operator Instructions] The next question is from the line of Sangam Iyer from Subhkam Ventures.
Sorry to again harp on the margin profile question. If I look at the headwinds from this particular quarter, if you get almost 100 basis points, to 150 basis points headwinds could actually get reversed in the next quarter onwards. So in spite that and the fact that we are continuing to grow on a strong footing, given the strong tailwind of 8% growth in Q1, and marginally lower growth in Q2, but that's also a strong growth. Why are we talking about a very, very marginal increase in margins, 1, and on the overall full year perspective, we are still having a benchmark of FY '18 as the margin profile. But given the exit run rate of Q4 and the currency benefit, et cetera, shouldn't there be a meaningful increase in the margin profile? Or are we missing some headwinds over here?
I think probably, our comments are not being understood in the right perspective, to be honest, Sangam. Given the fact that we don't give guidance, Jagan made his comment, and margins will make -- will improve in Q2. Now Jagan never used the words and I am going to be repeating the words that we said, Jagan never made a comment that there will be a very, very marginal increase in margins in Q2, now that will be ...
Okay. I added very, but he said a marginal increase.
Given the marginal increase, there will be a slight increase in margin in Q2 is what he said. Now it is a business that is growing. We just absorbed a 2.7% in cost increase in Q1, because of the salary increases that happened. I did mention that we added 1,200-plus employees in this quarter. The full revenue -- full cost impact of that for the whole quarter is another headwind. I also mentioned in response to a previous question that the promotions in Mindtree are effective July 1st, so that will be a cost increase because of that. So it's a business that is improving profitability continuously. Q4 last quarter was a good quarter for Mindtree, but like I said, but I can't be benchmarked to 1 quarter. And again, I'm reiterating the point that I made some time ago, the more appropriate benchmark to value or to analyze Mindtree is full year versus full year and not quarter-to-quarter. We are committing to revenue -- committing to strong revenue growth and committing to margin increase, and we have delivered all our commitments in the past. Now very marginal, marginal, very, very marginal kind of adjectives don't make sense to me, to be honest.
Okay. So okay. So could you help quantify the 2 headwinds that you mentioned? One being the full quarter impact of the new employees added and as well as the promotions, et cetera? What kind of a headwind are we talking about here?
Very, very marginal. But that comment was obviously on a lighter vein. But on a more serious note, there will be an impact, we don't want to quantify, mainly because, like I said, there's no sanctity to the approach saying that you will have -- we don't give guidance. Accept -- we request you to accept our position, that there will be a margin improvement next quarter. We just want to guide you to the fact that there are some positives and negatives quarterly basis. But that's the nature of our business right now, and accept our stand that we don't want to give guidance.
The next question is from the line of Nitin Padmanabhan from Investec.
Over the past quite a few quarters, we have seen a steady improvement in growth for both Mindtree and for quite a few companies in the industry. Do you think that going -- forward at some point, do you think there could be supply-side constraints? And how are you thinking about the supply side right now?
Thank you, Nitin. At this point of time, not foreseeing a supply-side constraint, but it is an area where we definitely can't afford to be sanguine. There is a very competitive marketplace for export talent. At this point of time, all the factors are aligned in Mindtree's favor. Again, like I just outlined a few minutes back, this quarter saw approximately 700-plus lateral additions and 500-plus campus additions in this quarter, which is one reflection of the fact that we are able to attract talent. Overall, like I said, revenue momentum continues to be strong. The brand of Mindtree, both in the nature of quality of work and also in a culture, transparency, some of the factors that talent likes to come and work in an organization are all very favorably aligned for Mindtree. But lastly, if you look at factors like attrition as a trailing indicator, that is also in Mindtree's favor. Multi-quarter low on attrition that we are running at right now. So from a talent perspective, very comfortably poised at the moment, but it is an area where we are continuously innovating, communicating to world-class talent, attracting talent from all over the world. It's an area where we're continuously pushing the boundaries and doing more. But at this point of time, feel that all the stars are aligned in our favor.
Great. Just one more, if I may. These 700 lateral recruits that you've had, do you think that -- in your experience, do you think that the cost of acquiring the laterals with the similar sort of profiles in the -- versus the past, has the cost increased or is it similar at this point in time?
I don't have a specific sort of a -- I don't have the data right in front of me at the moment, to be honest. However, two comments: One is, across-the-board, and I've also participated in some of the recent initiatives -- across-the-board, seeing a marked increase in the quality of people who are applying to Mindtree. So the brand of Mindtree, or the nature of work that we do as a trust, is resonating very, very positively in the talent market. For example, if we conduct a weekend drive, we are walking away with much more confirmed offers, almost, I would say, 1.5x, 2x the number of offers that we used to make in a similar drive about 1 year back there. Secondly, maybe at an arithmetic level, the cost per hire is not going up, the partners that we use, the arrangements we have with the partner, the recruitment channels and the process that we have, haven't been made -- haven't become like very expensive, nor are we seeing a very huge sort of salary differential between the incoming talent compared to the median at Mindtree right now. So my gut feel is, no, we are not seeing a big increase in the cost of hiring compared to the past, but like I said, it is the finger on the pulse point, I don't have the actual data on my fingertips right now.
That was very helpful. All the best to Jagan as well. Thank you so much for all the help so far.
Thank you.
The next question is from the line of Ruchi Burde from BOB Capital Markets.
My question is relatively on the broader on-demand scenario. Over the last 3 quarters we have seen significant acceleration in growth rate for Mindtree as well few of our similar-sized peers. Could you help us understand, at client end, what is driving such a sharp growth? Are the deal conversion cycle contracting, now will you see a faster decision-making? Or is this a general buoyancy in demand?
Difficult to make any comment on other players in the industry, to be honest, Ruchi, because I guess, everybody has their own strategy, their own plan-specific issues and so on and so forth. So I will limit my comments only to Mindtree. From Mindtree perspective, I think two things happened. One is, I would say, absence of a headwind, which is the 2016, '17 year. We just had, like I said, got hit by many of our large clients simultaneously having different issues in their own business, et cetera, therefore, we had some growth challenges in that year. So some of those issues are going away and that's one of the reason for us to report good growth over the last 3 or 4 quarters including this quarter. But there are also some tailwinds that we are seeing. Some of our customers have begun to see the true benefits after initial investment they made in Digital. So they are beginning to see much bigger revenue impact and therefore, they are committing to much larger programs with players like Mindtree, either, for example, a complete left-to-right transformation of their front end or increasingly a number of front-to-back kind of large Digital programs are being implemented by Mindtree. So industrialization of Digital is of one of the reasons for our growth. The second is very strong, what shall I say, value proposition in the traditional areas like run the business by using platforms, by using AI, by able to deliver very high automation, et cetera, to our customers. That's also another contribution -- another reason for the high-growth momentum that we are seeing. All of that is translating into both pipeline, conversion ratio in terms of the deal wins and also quarter-to-quarter contract signings as well. So that's what gives us confidence in our growth.
That's helpful. Secondly, for Mindtree, in the recent past the concern area has been Bluefin, Magnet 360 and the insurance client that you talked about. Could you update us, how we see the health of these issues today? And what progress we see given that Bluefin had its, one of largest deal win? How do we see operating performance at these 2 entities going forward?
One is over time, that will become lesser and lesser of an issue. Partly for many reasons, including the fact that those entities are getting integrated into Mindtree. Bluefin is already both legally and operationally fully integrated into Mindtree. Magnet 360 should also get integrated reasonably quickly, because we are awaiting the last regulatory approval. So some of the distortions that used to happen from a reporting perspective, which is sometimes revenue gets booked in 1 entity, costs are in different entities because of the accounting rules, et cetera, some of those distortions will go away and we'll bring the entire business little more stable footing fairly soon. But zooming away from the practical or optical kind of according kind of disclosure issues, very confident on the growth potential for both our businesses, very strong traction with both the partners as well. Like you would seen in the recent past, multiple awards from Salesforce for some of the best-in-class kind of implementations we have done on Salesforce technology. Similarly, for example, lots of recognition from SAP for really, really high-quality work they've delivered for some of our customers there. So strong support from both the partners and, like I said, strong talent that's creating a lot of impact for our customers, all of which should find us in good state.
We'll take the last question from the line of Manthan Mehta from Kotak.
[indiscernible]
Manthan, you are on the line. Could you ask your question?
[indiscernible]
Sorry. We are not getting a response from him. There is a lot of disturbance.
There are no further questions.
Yes, there are no further questions. So Mr. Pai, any closing comments from you or the management's end.
Yes. Thanks, Ali. Thank you all for joining this call. We look forward to being in touch in the coming days. If you have any further questions, do write to us and we will get back you. Thank you, once again. Bye.
Thank you. Ladies and gentlemen, on behalf of Mindtree Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.