Hexaware Technologies Limited (HEXT) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Hexaware Technologies Limited Earnings Conference Call for the Q3 Earnings Call. We will begin today's session with a presentation from the Hexaware management team followed by a Q&A. [Operator Instructions] I'll now hand the conference over to Mr. Niraj Khemka, Head, Investor Relations. Thank you. Over to you, Mr. Niraj.

Thank you. Hello, everyone, and welcome to Hexaware Technologies Q3 CY '25 Earnings Call. In the call today, we have with us Mr. R. Srikrishna, CEO; and Mr. Vikash Jain, CFO. In the course of this call, we may make certain statements which are forward-looking and may involve a number of risk and uncertainties. All forward-looking statements made herein are based on information presently available to the management, and the company does not undertake to update any forward-looking statements that may be made in the course of this call. In this regard, there is a full disclosure which had been included in the investor presentation and the press release we consider that as read. With this, I'll hand over the call to Keech. Over to you Keech.

Thank you, Niraj. Good morning, everyone. If you could go to 2 slides from now, please. Thank you. Last quarter, we said our business model has shifted right by 1 to 2 quarters. What it meant is two things. It meant that deals had slowed down in closure. We expect that to pick up. The second thing is that no matter what deals close, it would have limited impact on our Q3 or limited to no impact on our Q3 and Q4 revenues. That thesis actually is playing out quite nicely. So we will talk about deals later, but deal momentum has picked up, but it does not have an impact on our current quarter revenue or unlikely to have an impact on our Q4 revenue either. So our revenues were roughly in line with what we had expected, what we had said likely we will do up at 3.3% quarter-on-quarter on U.S. dollar basis. Our profitability actually improved a little bit, which is normal for Q3. It puts us in line with what we had said from beginning of the year that we will deliver a 17.1% to 17.4% reported EBITDA margin. So YTD is about 17.2%. So we are in line to deliver that. Our cash, as always, is very strong. This is a $2.8 million closing balance after paying for the SMC acquisition. There were several critical leadership updates during the quarter. Shantanu Baruah joined us as the Head of H&I Vertical. He joined us from HCL Technologies, where for the past decade, he grew their health care business from close to 0 to $1 billion. And that's a new opportunity for us to grow. A lot of our presence is in insurance and life sciences. Health care actually is a big opportunity area for us to grow and Shantanu comes with significant expertise there. Just a few days ago, Eravi joined us as the Head of High Tech Products and Platform, a new vertical we created by splitting our High Tech and Professional Services vertical. This is something we've been speaking about. Eravi comes actually with a mix of big IT services industry experience, but more interestingly, over the last several years in the start-up ecosystem in the Bay Area, and we think that mix of skills is very valuable for us as we build out our High Tech business. Our operational metrics are very strong. We continue to add headcount every quarter as we've done for a number of quarters. Our attrition remains amongst the best and our utilization is very strong. I do want to provide some update on our strategic initiatives. On legacy modernization, we spoke last quarter that we've got kind of 2 initial big deals, which is an important marker of progress. I think where we are now is that there are at least 3 deals that have gone to a point where there are scale transformations. Two of them are RFP situations and one is sole source. We launched in early Q2 offering on Vibe coding and Vibe engineering. We have a simple online proposition, build applications 10x faster and 3x cheaper. And this is finding widespread acceptance, not just with Hexaware customers, but across the industry as well. I think we've taken a very early lead on widespread training of our workforce and widespread conversations with our customers in Vibe coding. Finally, we going on AI, two critical things. One, Siddharth Dhar, who's built a scale business for us in Digital ITO, took over additional mantle as the Head of AI practice for us. And in the course of this quarter, we launched multiple domain AI solutions and the contact center transformation. There are at least 3 solutions that have already found initial orders with the customers. We launched one that has Agentic AI for parts of a clinical trial process, and we are actually building one for a client already in that area and some solutions will soon go into production. We launched a solution for an investment analyst agent to help asset managers. And this is a solution that actually we already have, again, a client for. So a lot of our domain solutions are immediately seeing resonance in the market. If we go to the next slide, please. Just today, we announced another acquisition. This is a company called CyberSolve. CyberSolve is a specialist in IAM. And some of you who follow the space may know that IAM is a critical growth area within the security ecosystem. Every customer is in the process of either starting their IAM journey or completing it because every single application in every major enterprise has to be onboarded to an IAM platform. While the company is a specialist in IAM, the team that comes with it have broad-based security experience that we think will have value for us in our overall security business. And Mohit, who's the CEO, will actually stay and continue with a larger role in Hexagon. They were modest size as many of our acquisitions have been. Last year, the revenues were at over $25 million and actually, their first 18 months [zeroes] $18.5 million. This is a sole-source deal. So actually, we got it at what we think is an attractive valuation of just under $35 million upfront and about $31.5 million based on performance in future. Go to the next slide, please. I spoke about deal momentum picking up. I will speak now to deals in Q3, and I will come back at the end to speak about what we expect may happen in Q4 and the impact for that on a go-forward basis. So we've won, I'll say, 2 or 3 categories of deals this quarter. The first category is of the 4 consolidation deals that we have been speaking about, we've won 1. And this is with a large U.S. and Canadian bank. The second one we won was not an enterprise consolidation, but consolidation of a book of work. This is actually something that came new to the pipeline. It closed rapidly within the quarter. And this is for a very large global insurance company headquartered in Germany. Aside from that, we won a GCC opportunity aided in part by our acquisition of SMC. People understand that we are serious players in this space. That's the one that you see in the top right-hand corner. We won digital ITO outsourcing deals 2 of them, one, again, with a large insurance company. Actually, in this case, it was a rebid situation. They were not an incumbent. We displaced a Tier 1 incumbent in this case. And another one that is starting off modest, but the customer is in a space that is rapidly growing. And they provide data center infrastructure, and they are growing very fast. And hopefully, our business with them will grow as they continue to grow. We also won product engineering for a global fintech platform company that services a very large number of asset managers and hedge funds. We won a marketing analytics deal. This came from our -- the capability came from our prior acquisition of Softcrylic for a large video game streaming platform. And finally, we've been speaking about doing more in Asia. We opened actually our first client in New Zealand for a major bank, and this is tech modernization using Amaze platform. So we are seeing a pickup in the momentum across categories, smaller deals like the tech modernization enabled by platforms, GCC, consolidation deals. So there's -- and outsourcing deals, including renewal situations where we were not the incumbent. With that, I'm going to pause and hand over to Vikash.

Thanks Keech. We can move to the next slide. Revenue for the quarter came in at INR 395 million on a sequential basis, a reported number of 3.3%. We did have some headwind coming in from ForEx on a sequential basis. Our constant currency growth was a tad higher at 3.4%. In INR terms, this represents a sequential growth of 6.8%. Year-on-year, the reported number is 5.5%. It obviously includes an impact associated with the SMC, the acquisition that we closed in the middle of the quarter. On a pro forma basis, our year-on-year growth is 4.3%. INR terms translated, it's a year-on-year growth of 11.1%. Growth for the quarter was driven by underlying volume growth, and I'll speak to it more when we cover the operational metrics later during the call. SMC that we closed in the quarter. This quarter, we also had a higher share of license revenue, which was partially offset by the headwinds due to revenue mix change, higher offshore revenue mix in the current quarter versus the prior ones and marginal headwinds from ForEx and BPS. So overall, strong underlying volume growth, SMC, higher license revenues, offset by higher offshore mix revenues and headwinds from FX and BPS. On the margin front, reported EBITDA for the quarter at 17.5%. This represents a 30 bps improvement quarter-on-quarter and on the back of 50 bps that we did in the last quarter. Year-on-year, it represents a meaningful expansion of close to 154 bps. YTD Q3 EBITDA is at 17.2%, which is well within the guided range what we gave at the beginning of the year of 17.1% to 17.5%. The 30 bps improvement in the current quarter, there are a few puts and takes. First and foremost, the operational items added close to 40 bps. FX from a margin perspective was a tailwind at 110 bps. And then there were 2 headwinds, both of them actually specific to the current quarter. License revenues, which came in higher in the current quarter had a -- had a headwind of close to 70 bps. And in the current quarter, we also saw some medical expenses in the U.S. go up and a higher travel of close to 50 bps. Move to the next one. Some color on the unit level performance. In the current quarter, 4 verticals, namely the financial services, health care and insurance, manufacturing and consumer and travel and transportation delivered both sequential and year-on-year growth. Sequential growth for the quarter was led by M&C and H&I. Financial Services business continues to be strong. If you see the current year, FSS posted sequential and year-on-year growth every single quarter and is expected to be the fastest-growing vertical for us by the end of the year. And this is despite the fact that we had a meaningful headwind from one of the large clients driven by the budget cuts at Q1 end. H&I delivered double-digit sequential growth this quarter. Some of this growth would be unsustainable next quarter because of onetime license revenues what we had. However, we'll still deliver a strong year-on-year growth next quarter. M&C has the fastest sequential growth this quarter, which was a combination of both organic business and SMC. On the organic side, we are seeing that the decline what we had in the vertical has tapered -- has bottomed out, and we see the growth coming back. So there are green shoots both in terms of existing account and the pipeline that's building in terms of new logos. HTPS has sequential decline both from -- has a sequential and year-on-year decline driven by some of the project closures. We do see a massive opportunity for us growth in the High Tech space because that's one space where we think we have a significant amount of headroom to grow. And Keech just spoke about the fact that we are really excited about Eravi joining us to lead the High Tech vertical. Banking, as we had called out in the prior calls, is seeing a sharp recovery driven by both new deals in existing and new logos. Banking delivered a strong sequential growth this quarter on the back of a solid quarter what we had in Q2. We'll see the growth trajectory continue even from a future quarter perspective. Travel and Transportation, the sequential decline is driven more by project closures. So there are some puts and takes within the quarter as to how the project starts and closes. It's going to be one of the -- in fact, from a full year perspective, GTT is going to deliver better than the overall company growth. From a geo perspective, second quarter in a row that all the 3 geos actually have delivered sequential growth. From a full year perspective, we expect North America to outperform the company growth while followed by Europe. We do have some bit of a catch-up to be done as far as Asia Pacific is concerned. On the IT and BPS, similar to the last quarter, we see that the growth rate in IT is far accelerating compared to what the BPS growth rates are. Go to the next one. We continue to add meaningful clients to our client base, and that's also reflected in terms of the greater than $50 million accounts is a specific call out that from an LTM basis, the number of $50 million accounts what we have has gone from 3 to 4 on a like-to-like basis. Next -- this is the chart which actually explains all the operational improvements what we are doing and which is actually aiding in terms of our margin expansion that I spoke about 154 bps on a year-on-year basis and the 30 bps that we had on a sequential basis. Starting with our offshore revenue. Our offshore revenue now is at close to 49%. That's a 220 bps improvement sequentially and a 520 bps improvement on a year-on-year basis. Of the 220 bps improvement that we had sequentially, close to half of that came from SMC. SMC being in the GCC space is completely offshore centric. So that is aiding. But outside of SMC too, we continue to make a significant progress in terms of improving our offshore mix. Headcount for the quarter, we added close to 1,180 people, 750 of that in IT and 430 in BPS. The 750 that we added in IT had close to 250 coming in from SMC. So excluding SMC, the IT headcount addition, net addition was close to 500 people. And this is the ninth straight quarter of headcount addition. Now if you see the headcount addition and take into consideration how the utilization is faring, which is 10 bps improvement and has been at the range of more than 83% or 83.5% for the last few quarters, you would see that's actually driving the underlying volume growth. So the headcount additions with the high utilization numbers. And added to that, we have one of the lowest attrition rates in the industry. So we continue to be comfortable at the attrition rates that we have, which is trending around 11% to 11.5% for the last few quarters. Next. We continue to maintain one of the lowest DSO in the industry, which is at 73 days and have a very strong cash conversion. Our closing cash balance is at $228 million after paying for the SMC acquisition of close to 45%. Our OCF to EBITDA on an LTM basis is 80%. This is significantly better than the range what we had guided at the beginning of the year of close to 70%. Our ETR on a YTD basis is close to 23.5%. What we had guided to from an ETR perspective of close to 24%, I think from a full year perspective, that ETR is going to be tad below at close to 23.7% because we have been able to manage that better than what we had estimated at the beginning of the year. With that, I'll pass it back to Keech.

Thank you, Vikash. We’ll go back to the next slide -- go to the next slide, please. Okay. On overall outlook, we think the demand environment has stabilized. Variety of kind of factors, which we are all aware of that have been impacting it through the course of the year. But I will say right now, there is a sense of stability leading to improvement, including in M&C. You heard that from Vikash. That's the single sector that has pulled us down quite a bit in this year, and we're seeing signs of recovery in M&C. We actually had a solid positive growth quarter-on-quarter in M&C Deals. I already said we won 2 consolidation deals, one which is something that's been running through the year, other which is not an enterprise consolidation, but a consolidation of a significant book of work that actually just came in and was won in the quarter itself. And there's actually continued good progress on 2 others. And there's one which we said, hey, the Phase 1 got complete, and we have a role to play in that. And Phase 2, we're not sure, will pick up anytime soon. Now we do expect actually more deals to be decided in Q4 with actually quite a few deals with – we’ll decide in Q4. There are many where customers have stated intentions of starting a transition in Jan or getting into a new strategic vendor program from Jan in the consolidation opportunities. So there's quite a number of them that have picked up speed in the last quarter or so and we’ll decide in Q4. Our overall pipeline actually is the largest ever, okay? It's actually in excess of $3 billion. But I'm going to say it's got to the size in part because it's got bloated. The last -- in Q2 and maybe later part of Q1, there was not many decisions, neither was it going out with a win or a loss. So we actually expect our pipeline size will reduce a bit in Q4, but actually in a good way because decisions will happen. Our legacy modernization deals are growing, and I said this is worthwhile reiterating that we now have 3 deals that involve full-scale modernization of material size, 2 of them are RFP-based and 1 is a sole source deal. Vikash gave quite a bit of commentary about -- sorry, actually, before I go into the vertical view, so what does kind of this mean the future, it will not have an impact on Q4. And we said this last quarter itself. So these deals as positive as the momentum is will not have an impact on Q4. So Q4 will continue to have our regular headwinds of furloughs and calendar. In addition, we have a short-term headwind due to the government shutdown. And I want to clarify, this is not as it relates to the H1B piece, okay? A minute on that. We have been reducing our dependence on new H1s consistently over the last 4 or 5 years. And as a matter of fact, in this year, much before the new policy was announced, we had applied for 0 new H1s. So it was not part of our talent strategy to get new H1Bs. So this is actually not to do with that. What is happening is that we currently can't enable visa transfers. So the impact for that -- impact is that growth in some accounts and some aspects of some accounts which are on site is restricted because of visa transfers. That's not the only pool that we hired from, but it is a chunk or in some cases, a good chunk of the pool, people who are -- who have visas with other organizations that we need to transfer. Right now, there are no transfers happening. This is not unique to Hexaware. Nobody in the world can get visa transfers right now. Reiteration on vertical. FS will lead growth for the year, followed by Travel and then followed by H&I. Banking will lead Q-on-Q growth and eventually will lead full Y-o-Y growth. If you recall, it started with a big call, big negative in quarter 1, but since then, it's been on a tear. HTPS there's some commentary. Why is it that we are seeing kind of a drop? There are two things there. One, this -- one of the customers we won a consolidation deal earlier in the quarter. So that ramp-up is going on, but it's actually stopped kind of growing in Q3, which actually is the customers quarter 1. And there was actually a budget cut in -- significant budget cut in quarter 1. Some of it is expected. The extent was not. Nevertheless, we were still -- what it meant is that our growth got curtailed. There's another client which had a very significant budget cut. So this, I think, choppiness will continue 1 to 2 quarters, but it will resume growth. The long-term outlook or even the medium-term outlook for this sector continues to be very strong. Not in Q4, but from Q1 onwards, we will separate reporting for High Tech and Professional Services. And we expect that over the next few years, High Tech will have rapid growth. And Vikas already said, M&C has good, solid early signs of recovery. Margin, we are narrowing the outlook from 17.1% to 17.4% to 17.1% to 17.2% for the full year. Now last comment before we turn over for questions. Now what does all this mean for FY '26, calendar '26. We'll definitely be better than the current year, okay? How much better? I think we will provide color when we come back a quarter from now. We are in a budget cycle. We are having conversations with multiple customers, getting a better understanding of the budgets for next year. And also, like I said, there's quite a number of deals that are in the final stage. And a combination of that will tell us how much better we will be next year, and we'll provide color on that when we come back. With that, I will pause and open for questions.

[Operator Instructions] Our first question will come from Prateek Maheshwari with HSBC Securities.

Firstly, I just wanted to check again on your vertical-wise growth. So you said there is some contribution from SMC in your manufacturing vertical. The Health and Insurance also grew very strongly this quarter. So just wanted to understand if there is anything and what's driving the growth?

On M&C, I think even if you exclude the contribution from SMC, it would have still grown quarter-on-quarter, which actually is a very positive sign for us because that's really been the one that's pulling us down. It will take a few quarters of -- quarter-on-quarter growth for us to get back to full year growth. But I think we have begun that journey in M&C. On H&I, I mean, we were operating with our leader for a quarter or so. Shantanu was awesome. So I feel very good about our long-term prospects in H&I.

Okay. And the other one was, Keech, on your acquisition of CyberSolve. So while IAM, I think it's a good opportunity and you mentioned that the growth rate will be about 15%, right? So I just wanted to understand, so the company has grown the growth or revenue has been stagnant for -- in the recent years. So with Hexaware, what kind of growth will it be for that business? And also if you could share the margins of that business?

So on growth, I mean, it is a project-based business, okay? So IAM itself, they are a specialist firm in that. So the work that we do in CyberSolve is to onboard customers onto IAM platforms. And actually, we have a platform that automates and reduces cycle time quite a bit for onboarding new applications on the IAM platform. But it's a project business, okay? What I think for us, it means is two things. One, we have quite a number of clients who are in this IAM journey. In fact, even right now, for a while before we bought this, we've been partnering with some firms and subcontracting work. So the demand from our existing customers is a known pocket of demand, okay? The second thing is that the team actually comes with a much broader set of capabilities, okay? And combined with that, we think we can do more than the project work. It actually gives us a really good place of trust and seat at the table with the clients from where we can expand. So that will improve growth. On margins, Vikash?

So Prateek from a margin perspective, at an EBITDA level, the margins are largely comparable in the same ZIP code as what we have on the organic side of the business. However, from an EPS perspective, initially, it is going to be marginally dilutive. That's because of the acquisition accounting, we have to take the amortization of intangibles into the P&L. But quickly, it is going to be EPS accretive very soon.

Okay. And last question is on your basically High Tech and Professional service. So basically, I just wanted to understand, so you were saying that there was a consolidation opportunity and then there is some budget cut, right? And so just wanted to understand if there has been -- basically your work would get delayed or there is a cut to your work as well?

So there are two different clients, okay? One where we won a consolidation deal earlier in the year, okay? And we've been gaining substantial market share in that client and we're growing, okay? The growth kind of plateaued for Q3 because while we were consolidating, there was a budget cut, okay, which coincided with the beginning of their fiscal year, which is our quarter 3. But that in some ways, the bottom is already there, okay, for that customer. It didn't degrow. It just was muted growth of flattish for the quarter. But we're already kind of at the bottom there, and we will continue to grow from this point. The original can optimize a consolidation, gaining market share remains very much intact. There was another client who had a significant budget cut, which I think kind of the big impact for us was in Q3 that just passed. There will be a smaller impact in Q4. And by the way, much of this was known to us largely. And actually Q4 will kind of bottom out for that client as well. That's why I said in aggregate, there will be choppiness for 1 to 2 quarters. One has already passed, one more ahead of us. But after that, there will be growth in this particular segment.

I think I'd just like to add one thing. You had a question with respect to the growth on CyberSolve, which Keech addressed. The other aspect associated with it is if you look at our valuation, the assets in this space generally trade at valuations, which from a multiple of the revenues are pretty high. From a valuation perspective, the EV of this asset on a revenue base last year, they did close to $26 million is $66 million with an upfront payout of $35 million and the balance $31 million is linked to next 3 years of performance. So it's a judicious use from a capital perspective where acquiring the right capabilities with a very strong management team and good set of logos, but the payouts are all linked to future performance, which obviously are meaningful targets in terms of the growth that we have agreed with the management, which is coming in. So it's the capability acquisition, what's happening from a revenue perspective, what we think can happen from a future perspective, but at the right valuation, which is very important to understand.

Our next question will come from Manik Taneja with Axis Capital.

I had a couple of questions. First one is with regards to some of the near-term challenges that you've highlighted in your Professional services customer base. Do you think that becomes an impediment to overall growth in calendar year '26, especially given you also mentioned that you would expect CY '26 to be better versus CY '25? That's question number one. The second question was with regards to our segmental margin performance. If you could help us understand the puts and takes with regards to some of those movements, especially in verticals wherein you are starting to pick up growth like banking and even from a professional services standpoint, do you think some of these pressure leads to some pressure on margins? Those would be my questions.

The short answer to your first question, will be [a speed] of headwind for growth in '26? The answer is no. Worthwhile reiterating of the two clients, one of them, I think the bottom is already behind us in Q3. And the other one, there was one part -- actually, the bigger part of the headwind was in Q3, a smaller part will be in Q4. Both of these were largely known and will be behind us when we finish Q4. So it will not be a headwind for us in '26. In fact, it will be a growth driver for us in '26. On the segmental margins, at the highest level, there isn't a material difference that is worthwhile kind of looking at in any level of detail, but I don't know, Vikash, would want to add some color [indiscernible]

Yes. So from a segmental margin perspective, if you look the two items in terms of the quarter-on-quarter movements were in two areas. One was in H&I, the other was in M&C. H&I, as I gave the commentary while giving the performance update for the quarter that some of this growth will taper down from a next quarter perspective. That's primarily because the license revenues, but we had a jump in the current quarter, a material portion of that was in H&I as a vertical. Similarly, the M&C, I did call out that M&C, the underlying business from a organic basis grew and at the same point of time, it was helped on account of SMC. SMC being 100% offshore-centric business comes in with a margin profile, which is better than a mix of both on-site and offshore. So that helped us in terms of improving the margins.

If you could just help us understand any seasonality around both SMC and the cybersecurity acquisition that you announced today?

I mean when you speak about the seasonality, if you look into our business, the key seasonality is associated with calendar where Q4 is seasonally a weak quarter on account of calendars and furloughs and then Q2 and Q3 are the strongest in terms of the calendar. I think that's the similar seasonality what we have in this business, nothing outside of that.

Our next question will come from Abhishek Pathak with MOFSL.

I think my question was pertaining to the range of outcomes that we expect in CY '26 with regards to the 4 large deals that we've been talking about. I understand one of those deals has been closed. So kind of understand sort of with and without those deal closures, how do you sort of think about CY '26 going forward, right? I mean if they close and they don't end up closing, what's the range of growth outcomes we are kind of looking at?