Happiest Minds Technologies Limited (HAPPSTMNDS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Happiest Minds Limited Q1 FY '26 Earnings Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this call is being recorded. With this, I now hand the conference over to Ms. Aditi Patil from ICICI Securities. Thank you, and over to you, ma'am.

Thank you, Soumya. Good morning, ladies and gentlemen. Thank you for joining us today on Q1 FY '26 Earnings Call of Happiest Minds Technologies Limited. On behalf of ICICI Securities, I would like to thank the management of Happiest Minds for giving us the opportunity to host this earnings call. Today, we have with us Mr. Ashok Soota, Chairman and Chief Mentor, Mr. Joseph Anantharaju, Co-Chairman and CEO; Mr. Venkatraman Narayanan, Managing Director; Mr. Rajiv Shah, Executive Director; Mr. Ram Mohan, CEO, Infrastructure Management and Security Services; Mr. Sridhar Mantha; CEO, Generative AI Business Services; Mr. Anand Balakrishnan, CFO, and Ms. Priyanka Sharma, Head, Investor Relations. I will hand it over to Priyanka for safe harbor statement and to take the proceedings forward. Thank you, and over to you, Priyanka.

Good morning to all participants in the call. Welcome to this conference call to discuss the financial results for the first quarter ended June 30, 2025. I'm Priyanka, Head of Investor Relations. We hope you have had an opportunity to review the earnings release we issued yesterday. Let me quickly outline the agenda for today's call. Ashok will begin the call by sharing his perspectives on the business environment and our results. Joseph and Venkat will then speak about our financial performance and operational highlights, after which we'll have the floor open for Q&A. Before I hand over, let me begin with the safe harbor statement. During the call, we could 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. Let me now pass it on to Ashok. Ashok, over to you.

Thank you, Priyanka. Good morning, everyone. It is truly a pleasure to have you with us today as we step confidently into a new fiscal year. In Q1 FY '26, Happiest Minds has powered ahead, delivering 17.5% year-on-year growth in constant currency and maintaining a robust margin of 21.4%, firmly within our guided range. Our EBITDA this quarter stood at INR 124 crores, achieving a standout 12.9% sequential growth, well ahead of most peers and industry trends. In a quarter where most reported muted or single-digit growth, our strong profitability and disciplined execution clearly sets us apart. What makes this milestone even more significant is that we achieved it while continuing to invest deeply in our future, strengthening our delivery ecosystem, scaling our platforms, driving innovation across our focused verticals and making sustained investments in the GenAI business unit and in the net new sales unit. Friends, as shared in our last call, over the past 2 years, we have launched 10 transformational initiatives, and it is gratifying to see them now taking root and delivering tangible results. These initiatives are helping us not only to grow but also broaden our horizons, unlock new opportunities and shape the digital landscape ahead. We are proud to have delivered another quarter of double-digit growth backed by a superior margin profile, which has been sustained for 20 consecutive quarters, earning our customers' trust as their advisers and co-creators in shaping their digital journeys. Last quarter, we announced that Joseph has become the Co-Chairman and CEO as a part of our planned succession. Joseph brings his steady vision and deep commitment to drive profitable growth and strategic strength. Let me touch upon the four most strategic transformations that have touched and shaped this quarter's performance and will continue to drive value in the years ahead. Through our acquisitions in the previous financial year, we have significantly deepened our capabilities in BFSI and accelerated our leadership in AI-driven digital transformation. These entities are now fully integrated into the Happiest Minds fabric, delivering innovation across 13 countries and powering performance that is well above industry benchmarks. Three other significant transformational changes were introduced in the second half of FY '25, and we had shared that the impact would become visible in FY '26. We are seeing this -- exactly this position unfold in this quarter and will continue hereafter. Reorganizing Happiest Minds on six industry verticals basis was one of these changes. We are noticing that this verticalization strategy is already fueling accelerated growth in travel, media and entertainment and manufacturing. BFSI has become our largest vertical, and health care, our third largest, is also gaining strong momentum. At the same time, our focused investments in the GenAI business unit under Sridhar Mantha's leadership, and the net new sales engine under Maninder are not only advancing this quarter's growth but have also built a strong foundation for sustained high-quality growth in the quarters ahead. Friends, as you are aware, the global IT industry continues to face its own set of challenges with many peers reporting flat or subdued performance. Our 10 strategic transformation and focused investments have enabled us to navigate this environment with clarity and conviction, driving growth ahead of industry levels. We believe the impact of these transformational changes will continue to drive strong momentum through the coming quarters this year and even more so in FY '27. We are confident that this momentum will help us deliver double-digit growth over a 3-year cycle that began last year and will carry through FY '27. On that note of confidence and progress, I will now hand it over to our Co-Chairman and CEO, Joseph, who will bring these strategies to life with stories from the ground, recent wins across our business and updates on the other key initiatives.

Thank you, Ashok, and good morning to everyone on the call. I'm delighted to share that this quarter has been another period of solid growth and outstanding performance...

Sir, sorry to interrupt. Your voice is echoing.

Can you hear me now?

No, sir. Too much echo, sir.

I think, Joseph, can you step back a little bit from microphone and speak?

Sure. Is it better?

No, sir.

Yes, a little better though.

Venkat, is it better now?

Yes, much better.

Yes.

Yes, better.

Thank you, Ashok, and good morning to everyone on the call. I'm delighted to share that this quarter has been another period of solid growth and outstanding performance for Happiest Minds across all fronts. Leveraging the strong foundation we have built and the 10 transformational initiatives underway, we are seeing momentum accelerate across our key business units and geographies, translating into strong double-digit growth of 17.5% and healthy profitability. Active customers have grown from 281 to 285 and $1 million-plus customers have increased from 57 to 59, showing how we are deepening relationships and converting early engagements into multimillion-dollar partnerships. Repeat business remains strong at 94%, a consistent metric that reflects both customer loyalty and the stable growth engine. Let me briefly touch upon the demand environment. The global IT industry continues to face a mixed environment marked by macroeconomic and geopolitical uncertainty. At the same time, customers need to execute on their digital and AI strategies to remain competitive and deliver growth. Demand remains resilient in key verticals such as BFSI and health care, while technology, media and entertainment and manufacturing are beginning to show early signs of renewed investment. Against this backdrop, Happiest Minds has delivered a standout quarter. In an environment where customers are seeking partners to help them achieve more with less, modernize data and adopt AI, GenAI for greater efficiency and resilience, our continued investments in these areas are clearly paying off. These focused investments have translated into strong results across our portfolio. Our GenAI business unit led the way this quarter with 12.7% sequential and 82% year-on-year growth while showing significant traction with multiple pilots scaling into long-term engagements and utilization improving sharply from 34.3% to 40.8%. IMSS is driving growth with stronger realizations and three new global clients added this quarter, and both IMSS and PDES delivered healthy year-on-year gains, underscoring the broad-based momentum we are building. I'm also delighted to share that our annual flagship tech event Blitz 2025 concluded successfully on 24th July. Under the theme Generate and Innovate, our teams showcased how we disrupt -- do we drive disruption, innovation and acceleration, highlighting our commitment to building future-ready solutions and platforms. Many of the solutions and concepts showcased in Blitz hold huge potential and should contribute to our growth in the coming years. When I look at this quarter, I see our three pillars of unifying strengths, igniting innovation and cultivating enduring partnerships coming alive in tangible ways. When I stepped into this role, I carried a clear vision to build Happiest Minds into an organization that integrates seamlessly, innovates relentlessly and forges partnerships that stand the test of time. This quarter, that vision is translating into action and measurable results. We are unifying strength by integrating our acquired entities, harmonizing processes, platforms and talent to build a stronger, better and bigger organization. We're igniting innovation by investing in next-generation solutions advancing cloud, AI and GenAI offerings and leveraging domain expertise to power client transformations. We are -- third, we are cultivating enduring partnerships with some of the leading technology companies, deepening engagements, co-creating on priorities and earning long-term trust. Let me share a few stories from the ground. A leading U.S. airport chose us to reimagine their customer interaction platform, not as a proof of concept, but as a full production-grade GenAI deployment, transforming passenger experiences in the airport. In BFSI, an insurance major entrusted us to automate critical workflows using Microsoft's Power platform. In Australia, a mining services company engaged us to overhaul IT infrastructure and cybersecurity at a time when operational resilience is a Boardroom priority. We're also working with a global home improvement retail chain on custom finance and IT solutions and with a multinational logistics company to embed GenAI into the operations. These are some of the many wins powered by our investments in net new sales, combined with a proven land-and-expand approach. Our industry group verticalization strategy is also showing results. We are seeing strong momentum in technology, media and entertainment and in industrial manufacturing with the resurgence in discretionary spending. BFSI, our largest vertical, contributing 26% to revenues, and health care, our third largest vertical, continue to build on their momentum. We're also witnessing strong traction in global capability centers or GCCs and within the private equity ecosystems. We continue to support the portfolio companies in their post-acquisition journeys, unlocking synergies while enabling GCCs to modernize operations and deliver greater value. These initiatives are gaining momentum, and we expect them to drive meaningful results and growth in the coming quarters. Our product-led SaaS strategy is another important driver. Arttha, our flagship unified banking platform, is showing encouraging signs of expansion. In BFSI, our Insurance-in-a-Box is replacing fragmented systems with a unified low-code solution that streamlines insurance operations, accelerates product launches, lowers costs and ensures compliance. Together, these efforts are enabling insurers and UMAs to operate smarter, faster and at scale. Our revolutionary health care product built on unmatched bioinformatics capabilities and collaboration with leading research institutions is progressing well too, with development on track for a potential launch by Q1 of FY '27. In Q1 FY '26, we delivered EBITDA with a 21.4% margin, achieving 12.9% sequential growth. Sustaining this level of profitability while integrating acquisitions, investing in GenAI and strengthening our sales engine is a testament to the resilience and scalability of our business. When you connect the dots, our strategic transformations and focused investments are clearly driving strong financial outcomes, telling a compelling story of purposeful change, seamless integration and long-term value creation. Friends, as I reflect on this quarter, it is clear, in a challenging industry demand environment, our transformation initiatives are working. Our growth is broad-based and our outlook remains strong. With that note of confidence and excitement about the road ahead, let me now hand it over to Venkat, our Managing Director, to walk you through the numbers and share how we are thinking about the future. Venkat, over to you.

Thank you, Joseph, and good morning, everyone. The next few minutes, I'll cover the financial and operational highlights of the quarter, first quarter of FY '26. To start with, we have posted a very encouraging set of numbers. Seeing numbers and results ticking in from others in the industry, I do feel even more so. At $64.4 million, we have shown a sequential growth of 2.3% in dollar terms. Coincidentally, growth in constant currency has been also at 2.3%. Our year-over-year growth on discount was 16%. This is the 20th quarter after our IPO where we have shown sequential and year-over-year growth in our revenues. Our revenue CAGR in constant currency, if counted from IPO, is about 25%. Coming back to the quarter, in rupees, we reported a total income of INR 580 crores, a growth of 18.5% year-over-year. I would like to mention that our results reflect our unwavering focus on growth alongside with profitability. Operating margins at 17.6%, showing a sequential growth of 19.6%, reflects a swing back over the temporary dip we saw in the previous quarter. Year-over-year, growth of 5.8% in our operating margins despite continued investments in our generative AI business, new sales engine and other transformational agenda items reflect our commitment to our vision of profitable growth. If you look at our segmental results, Generative AI Business Services has broken even at an operating margin level this quarter. This is a swing from a loss of about INR 2.53 crores in the previous quarter to a marginal profit of INR 24 lakhs this quarter. This business ran at an average utilization of about 55%. Our opportunity cost, or rather, I would like to call investment in the segment, for the quarter continues to be about INR 3 crores. That's computed on the basis that generative AI services if it was to deliver the similar levels of profitability as our PDES business or slightly higher, we should have seen a margin increase by about INR 3 crores. Now if you adjust our operating margin for the above number and similar investments in our new sales engine, the number on profitability or operating margin we would guess is about 18.4% to 18.5%. I referred to these adjustments to highlight the path we are taking to improving operating margins as we will see some cost pressures going forward into Q2 due to our planned pay increases. In sum, efficiency in our established businesses payback start from our new business segments of generative AI and our new sales engine and some bit of luck or benefit from foreign currency movements will be definitely required to mitigate people cost increases that we'll see in the coming quarters. Now coming to EBITDA, we are back to 21.4% for the quarter, which is about INR 124 crores. Our profit margin percentage is within our estimated range of 20% to 22% on total income. Sequential year-over-year EBITDA growth was 12.9% and year-over-year was 6.3%. I will not delve too much into these as I've covered the rationale for growth and improvement while talking about operating margins. Our PAT for the quarter at 9.9% and INR 57 crores showed a sequential and year-over growth of 68% and 12%, respectively. Adjusted EPS, as I mentioned in my earlier call, a better indicator of stable shareholder return, was INR 4.55 for the quarter. Coming to certain operational metrics, Utilization for the quarter stood at 78.9%. This has been the best in the last 9 quarters and reflects some of the steps taken towards improving efficiency in delivery and demand-aligned resourcing that we are resorting to. As we had shared in our previous call, enhancing utilization remains a key priority, and we are pleased to see our efforts yielding tangible results. We ended the quarter with 6,523 Happiest Minds, showing a reduction of 109, but here, the story would not be complete if I didn't tell you that our gross additions were close to 150. Our attrition has trended upwards to 18.2% and efforts are on to manage this and bring this in line with previous quarters. Our DSO has slightly increased to 91 days, and that's being brought back or we are trying to reign that in and bring it closer to a long-term average of between 85 to 88. Capital return ratios of ROCE and ROE have shown substantial improvement [ to 23% ] and 14%, respectively. On customer [Audio Gap], we increased our $1 million clients to 59 from 57 in the previous quarter. Total customer increased on a net number basis by 4 to 285. Billion-dollar customers have stayed constant at 85 and so has the average revenue customer remaining range-bound at about $900,000 per customer. Looking ahead, we'll continue to drive growth in areas like cloud, data, cybersecurity and AI-led transformation in our verticals of focus while maintaining financial discipline. For the year, our effort is to deliver double-digit growth in constant currency while maintaining our EBITDA margins in the range of 20% to 22%. Thank you for your time and continued trust. We'll now open the call for questions.

[Operator Instructions] The first question comes from the line of Ruchi Mukhija from ICICI Securities.

Firstly, the question on your geographic growth mix. This quarter, we saw our largest market, U.S. sequential revenue decline. There was in tandem, our top client revenue has also declined. So could you help us understand how the U.S. market performed for us outside the top accounts?

Sure. Ruchi, if you see, one of the criteria for the acquisitions we made last year was the diversification of our geographic revenues. If you remember -- if you recall, a year or maybe 1.5 years back, our share of revenues from U.S. was 75% or so, which was uncomfortably high, and through organic means and inorganic means, we've been able to diversify. So it's a deliberate strategy to get the share of U.S. revenues to around 60% or so. Now there's been a small sequential decline in the revenues of -- in the share of -- in the revenues from India. And there are a couple of reasons to this. The first reason is that one of our existing customers -- one of our customers had a program that was a 1.5 year program that just got completed. We finished it in Q1 -- sorry, Q4, and therefore, the -- and we've not redone the engagement, so excellent engagement, and therefore, that's had some impact. Secondly, we had a customer that is relooking at their overall strategy, and therefore, they've had a couple of programs there on pause. But as I mentioned earlier, at a broad level, I think while there are some challenges in the macroeconomic and geopolitical environment, I think customers are still -- there is -- I see resilience in the demand environment and customers wanting to undertake and execute on your strategic initiatives, especially so in the second half of Q1. And I think this momentum will carry over into Q2.

Okay. My second question was for your geographies, which saw a very strong growth this quarter, India and APAC. So do we expect this kind of momentum from India and APAC to continue in the near future?

If you look at the growth from India and APAC, I would say it's much on the higher side in this quarter. So while I expect the growth to continue, it would not be at the same level. But if you look at APAC through our acquisition of PureSoftware, we did get a couple of large accounts on those accounts in the BFSI space, one of them is a leading banking and financial services company. It's a global major. But we are doing most of our work with the units in APAC, and that's shown very good growth. We have solid relationships, good track record, and we expect this account to continue growing and get into the $10 million range by end of the year. And in India, we do have a health care company that we're working with, which has done quite well. We've also had a few of the engagements that we are doing with the U.S. entities, those have been transferred to India, the GCCs, and we're engaging with the GCCs. So obviously, the movement of money from dollars from U.S. to India, which has contributed to the slight drop in the North America revenues that you talked about and increase the growth in India. Having said that, I think India is a geo that we are quite bullish about. Probably our share of revenues from India is among the highest. And just given the expected growth rate in the U.S. GDP, continued growth rate, I would say, this is a geo that we will continue focusing on.

Sure. Secondly, last quarter, we had mentioned that we will relook at our $1 billion revenue target. Could you please share any updates regarding our $1 billion revenue target that we had earlier set?

Venkat? Do you want to take that, Venkat? So Ruchi, as part of our vision, we had set ourselves a goal of being a $1 billion company by FY '31. And the market environment in which we had set that goal was a more conducive environment. There were several other goals that we have set as part of that vision on which we're progressing well. And if you really look at our CAGR from FY '21 to FY '25, we've done a CAGR of 28.5%. And to get to $1 billion by FY '31, we'll need around 22% to 23%. So it is doable, but the market conditions are a little different as we pointed out last time. We are relooking -- we're tracking and reviewing the situation and when we feel that we need to make an announcement or an adjustment, we will come back. But as of now, we are holding forth, Ruchi.

The next question comes from the line of Ms. Aditi Patil from ICICI Securities.

So my question is on order book and pipeline. Can you give some color on how has the order book shaped up, maybe the Y-o-Y growth and how is the pipeline shaping up? And do you expect H2 to be better than H1 or we should see the normal seasonality in Q3?

Sure. I think while we don't share numbers on our order book and pipeline, we've addressed this several times. I think there's been a healthy growth in our order book and our pipeline. And this is cutting across multiple geos and verticals, so that's the happening part. As we speak, there are -- and I would say it's coming from two angles. One is the NN strategy that Ashok referred to. The team has come together over the last -- in Q1, and we have several large customers that have already got closed and some that are in later stages. And a few of them have started with discoveries, which should lead into larger implementations in Q2 and Q3 and others are starting off at good to decent size right off the bat. So that's on the NN part of it. Our land and expand strategy, which is something that has worked out really well for us, continues to do well. If you see the number of $1 million customers, that's gone up. We have one additional $10 million-plus customer and one additional $3 million to $5 million customer. The $1 million customers have gone up from 57 to 59. So all of these metrics point -- reflect the increased pipeline and the order book that we have.

And sir, therefore, should we expect H2 to be better than H1?

Venkat, do you want to take that one, Venkat?

Yes. Aditi, I hope you guys can hear me now better, somehow something glitchy right now. But yes, started the quarter with about 2.3% growth like we mentioned and talked about on the call earlier. I want to keep the same momentum and build on it. Obviously, [ Q2 ] is expected to be better, except for the seasonal issues of some holidays in Q3, we should hopefully do better. And that's how we will achieve that double-digit growth that I talked about, right, for the year.

Okay. Okay. Got it. My second question is on -- so we gave the share of revenue from automation, and there has been a significant increase in that in Q1. So how do you define automation and what has driven this sharp growth?

So I think if you look at automation, Aditi, the various components out here is RPA that includes infrastructure automation; BPA, business process automation; and low code, no code related work. And if you just see that with GenAI also coming in, there's a huge push towards automation. We're looking at how do you automate most of L1 activities from an infrastructure monitoring standpoint and automate quite a bit of the L2 activities. And we are building some solution accelerators internally to enable and to accelerate that. Again, on business process automation, there's been a huge push by customers to bring in more efficiency and accelerate some of the process, whether it's order to cash or managing inventory and other processes, just because of the pressure, the cost pressures that they are facing, they're making these investments in various automation activities, which plays very well to our DPA CoE that we created 6, 7 years back. And low-code no-code is something that customers are looking at to enable citizen developers and to get applications out faster. And so all of these have contributed to the growth that you see of the revenue from automation from 25.3% to 28.2% in Q1.

Okay, okay. Got it. Yes. The next question is on the high-tech vertical. So this vertical has been soft for last 2 quarters and is flat on a Y-o-Y basis. So what has led to the softness? And when should we expect recovery in this vertical?

So Aditi, while Joseph [Audio Gap] the order picture, from the industry standpoint, there is a slight correction to that number because of the debt [Audio Gap] and that was a reasonably large customer. And he was in the high-tech vertical. Yes, Joseph.

Sure. Yes, after even accounting for that movement that Venkat talked about, if you really look at that vertical, Aditi, it's like a duck feet under the water, and there's a fair bit of movement between increases and drops. So we've had a couple of customers in the networking space and one in the tech space grow quite significantly during the quarter as reflected in the top 20 customers. At the same time, we did -- if you remember last earnings call, we talked about a customer called [ VBC ], we took a hit on the -- on our margins as well because of the write-offs that we had to do, they were not able to raise the next round of funding. And that project, we had to stop, and we had talked about it in the last earnings. So there's been a spillover effect of that, and that was in the high-tech vertical. But overall, what I'm seeing is that there are -- there is spend in the high-tech vertical. We put high-tech and media and entertainment together in some of the areas around networking, on using more of GenAI in these activities, on high-tech analytics, which is a new initiative that we've started. And our hope is that this vertical will demonstrate growth in the ensuing quarters.