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Edited Transcript of HEXAWARE.NSE earnings conference call or presentation 23-Oct-19 11:00am GMT

Q3 2019 Hexaware Technologies Ltd Earnings Call

Navi Mumbai Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Hexaware Technologies Ltd earnings conference call or presentation Wednesday, October 23, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* R. Srikrishna

Hexaware Technologies Limited - CEO & Executive Director

* Vikash Kumar Jain

Hexaware Technologies Limited - CFO

* Vinay Kalingara

Hexaware Technologies Limited - Head of IR

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Conference Call Participants

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* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Manik Taneja

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Sandeep Shah

CIMB Research - VP

* Tanmay Mehta

SBICAP Securities Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Hexaware Technologies Limited conference call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Vinay Kalingara. Thank you and over to you, sir.

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Vinay Kalingara, Hexaware Technologies Limited - Head of IR [2]

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Thank you, Raymond. Good evening to all of you. Welcome to Hexaware Technologies earnings conference call. From Hexaware, we have with us Mr. Srikrishna, CEO and Executive Director; Mr. Ashok Harris, President of Global Delivery; Mr. Vikash Jain, CFO.

As always, there is a full disclaimer in our press release and the investor deck. We take that as read. Any non-GAAP numbers mentioned are to be read in conjunction with the GAAP numbers. Please refer to the note which is included in the investor deck for that as well.

With this, I hand over to Keech.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [3]

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Hi, everyone. Good afternoon. We feel like we've had a solid quarter. We -- it's the first quarter post-acquisition of Mobiquity, where we consolidated the full revenues. As a consequence, you will see we have crossed what we think is an important milestone of $200 million revenue. Of course, it's quite a bit higher than that. And we feel like we are well on our way to get to what's the next important milestone of a quarterly run rate of $250 million quarterly mark.

So our revenues were $210.5 million. And actually on a constant currency, they will be close to $212 million. They will be actually $211.7 million. So there was actually $1.2 million loss in the quarter on currency. The difference of 3%, this represents 11.7% Q-on-Q growth on our reported number and 12.3% on a constant currency. And of course, Y-on-Y growth is in 20s. There are -- we think it's a solid growth given that there was a single client that we've spoken about at an event before. That single client contributed to a headwind of 2% for the quarter. So actually, ex that client, our growth would have been 13.7% or 14.3% in constant currency.

Having said that, I think that we still expected the growth to be a little bit better. And there are essentially 2 reasons. One I already mentioned. There was a single client, which contributed to a negative 2%. We did expect this client to have a substantial headwind. We've spoken about it. But yet, it was a little bit higher or more than we assumed. Additionally, I think there is some softness in banking that cut across Hexaware portfolio but also the [acquired LTP] portfolio in terms of banking customers. So it was a sector-specific issue, but again, something we should be speaking about. So -- and then the third factor is that while there is a demand issue in really one account that -- in the rest of the universe, there continues to be -- demand outstrips supply, sort of [newfound]. We've been narrowing the gap continuously, but the gap remains. So overall for revenue, good quarter, given that we had one client minus 2%. But even then, we felt we could have done a little bit better.

On profitability, EBITDA, we're roughly at the same spot as where we were in Q2. I think what we've been saying consistently is that on a full year basis, our profitability for '19 will be the same as the profitability for '18. I'm sure you have those analyses. But the quick math is this on a YTD basis for the 9 months in '19 versus 9 months in '18, the 9 months in '19 is 10 basis points lower than the 9 months in '18. This is post RSU EBITDA. So we have [cut out] the work we said we'd do. There are -- EBITDA growth will be in line with revenue growth.

The EPS however is an outstanding story. We have a quarter-on-quarter reported number growth of 21.3%. While that's a better number, I think the right number to focus on is the non-GAAP EPS, which I think is more reflective of the operational performance. The non-GAAP EPS grew at 16.5%. I think the big factor is our active and frankly I think best-in-class ETR performance. So you will see later when Vikash speaks that our ETR for the quarter is now down to 17.4%. And this is kind of as a consequence of everything else we've done but also the fact that there is some [backsheen] that came as a consequence of the acquisition. And that was very much part of the client -- the reason why [we made] investment.

Our NN wins were robust, $28 million. It is higher than what we had same period last quarter. YTD basis, again, our NNs, total for first 3 quarters is higher than what it was last quarter. I also told you last quarter that we expect that as soon as Q3, we will expect to have one -- at least one cross-sell win between Mobiquity and Hexaware. So we'll talk through some of the wins later. But in one of the wins, actually our largest win for the quarter, in that client, there is kind of 2, 3 pieces of work. One of them is to build a mobile app for this client. And that portion of the deal was won as a consequence of working with the new capabilities from Mobiquity. Our head count went above 19,000. That includes the Mobiquity head count of 700 odd, and we actually decided to step up the dividend a little bit, too, INR 2, [that is] for the rest of this year.

So for those who have seen Slide 6, I'm going to skip. It's largely the summary we've already covered. I do want to talk about the revenue and the EBITDA walk. On revenue, it's relatively simple. We had 2 headwinds, and everything else was great. So the 2 headwinds are forex, $1.1 million we lost; and mix, $2.9 million we lost. With mix, it was a consequence of that one account where I told you it was causing us 2% headwind. So the mix has also changed. So then you see there is a volume increase and there is a bill rate increase. So everything is all positive here, except for the forex and for the mix. So very robust growth in volumes.

The EBITDA numbers are -- the EBITDA walk, I have a little more interesting commentary to it. So we have actually a gross margin improvement of 154 bps. But in this kind of -- we have the usual tailwinds of a calendar, which -- and these are costs from Q3 -- Q2 to Q3 coming down. So these are 2 seasonal tailwinds that always happen. In addition to that, the second consecutive quarter that we've had an improvement in margins on account of bill rates. Last quarter, I can't recall the exact number, but it was, again, 70 or 80 or maybe even 90 bps of improvement due to -- in gross margin due to bill rates. And so we see that again. The positive of the one account causing lower revenue, substantially lower revenue, is the telecom is all onshore. So mix has improved a little bit, and that's causing 30 bps. The 2 negatives from a gross margin perspective are, one, salary increments. So there are 2 parts to salary increments. There is a portion that is going to gross margins that you see here at 30 bps. There's an additional 20 bps that have gone into SG&A, which is all combined -- the SG&A decline -- a decline due to SG&A. Finally, utilization has dropped and cost us 90 bps for the quarter. Frankly, a lot could not alter, but a [lot of it] is essentially a little bit of shoring up for the future. We're building capacity or have built capacity for anticipated growth in the coming quarters including Q4. And we will talk about kind of Q4 and guidance update in a few minutes.

SG&A decline, it looks like a steady decline of one foot [perimeters]. About half of it is just due to consolidation of Mobiquity. They do structurally that -- [and if you did] structurally have a higher SG&A numbers. So in some ways, this is the new normal for us going forward. The other half, there is kind of a couple of components. There is a component on salary increase, which I spoke about already. That is just -- and that is just the majority [of the ben and rest] is increased investment in people and sales and marketing. And again, at this stage, we are really focused on setting ourselves up for 2020, and the leadership additions and team additions are happening now in preparation for that.

We did kind of refer to EPS GAAP versus non-GAAP numbers. Really, there are 2 elements that make up the difference. There are actually 3 elements. Last quarter, we had a one-off of a transaction cost of roughly $2.4 million. So that's one element. They were exempt this quarter, but in the Q-on-Q number, that number comes into play. The second factor is the amortization of intangibles. That is at $1.6 million. So this number will be at $1.6 million for the next 5 years, and then it come down for another 2 years and then it become 0. Perfect. And so this, we think should be viewed as non-GAAP and finally there's an NPV of the 2 deferred payments we have, one due in Jan of '20, and one due in October of '20. That's at 200k a month, and these numbers will go with post October of '20. So that then kind of -- it's a bridge between non-GAAP -- or GAAP EPS to non-GAAP EPS.

We're going to Slide 10 for those of you looking at this. There are 2 kind of headlines on this slide. First of all, I think we have a continued hearty growth and strengthening of our customer pyramid. Some of this is due to Mobiquity, and I'll call it out, but a vast majority is organic, right? These are all kind of LTM versus [LTM views]. So there is a Q3 2019 versus Q3 2018 but I'll pick the middle of the pyramid. I think that's in some ways the most important, the middle of the pyramid, it kind of feeds the -- it shows that we've been able to grow at least to some extent. People from the bottom comes to the bottom, and also shows then that some of these have an opportunity to grow further up. Look at the middle of pyramid, we've got $20 million to $30 million. We've gone from 1 account to 3 accounts. None of it came from that position. $10 million to $20 million, we've gone from 6 to 7. $5 million to $10 million, substantial expansion, 15 to 22. 3 of these came from Mobiquity, the rest are organic.

Now the second kind of important news in this is that as a consequence of 2 factors, 1 positive, 1 negative, the great outcome is our client concentration has reduced dramatically. So our top 5 clients now contribute to 35%. A year ago, they were at 42%. Now our top 10 now contributes to 44%, down from 52%. So in essence, a year ago, what used to be our top 5 clients are now our top 10 clients. And of course, this is due to the acquisition. That is a client or 2 that went into the top 10, but the majority went below that, and certainly not in the top 5. And there's also the steep reduction in the 1 client we've been speaking about. Both of these contributed. So we see this as an important silver lining of that negative EBIT that are -- we feel a lot better about client concentration going forward.

We've had a number of interesting deal wins this quarter. I already called out one, which is actually the largest for the quarter. It is a large audit, accounting, tax, advisory type organization. We already had one of those. This is another. There's also a client that we have first cross-sell. So in this client, we will also be building a mobile app for them through Q4 or Q1. We've had more than 1 that we call out one here, one that we have more than one interesting land-and-expand type deals in the insurance space. I think earlier this year we spoke about the fact that we've become a Guidewire partner. That relationship is bearing fruit in a serious way, and it's helping us get into a number of accounts where someone else is the incumbent, Guidewire is the mentor. In some cases, we enter with migration or DevOps, but eventually, there's an opportunity to get into the core implementation.

Finally, we also had another interesting infra transformation for a leading U.S.-based furniture retail store. I''m calling it to your attention because yes, it's an infrastructure transformation and these vendors [recently up to] now, but the reason we won this is actually a mixed reality transformation for their retail experience, where we built a solution for them where potential client can reimagine their house with pieces of furniture from this [track]. They can place it in various parts of the house, see how their living room will look or their dining room would look without moving an inch from the rooms. That was a part of how and why the client got excited, and we rapidly moved from there to higher volume services infra transformation.

Attrition. Last quarter, we said it had stabilized. We don't -- we like the fact that it's stabilized but we don't like where it's stabilized. We all suffer, we don't know if it's sustainable. We'll just continue to work hard. So I think we have some good deals up for a long time on our attrition. It's come down quite sharply to 17.3%. And I'm saying sharply because this is an LTM number, which means that in quarter numbers we're actually down quite a bit. Again, we don't know if it's sustainable, yes, we are going to continue all our efforts to make sure that at a minimum it stays here or if we can bring it down further, that would be even better.

I'm sorry, utilization, we already spoke about it. We did have a fall in utilization, 1-odd percent, 80.7% down to 79%. It cost us 90 bps in gross margins. Some of the big issue in Q4, but except for a little [we expect] utilization will come back up a little bit in Q4.

Q3, there are [a billion cuts] to geo and vertical and horizontal growth. I'll call a few things because all of these numbers are obviously kind of a new baseline because this includes the full Mobiquity revenues. For the most part, from a horizontal perspective, the big growth in ADM is driven by the acquisition. For the most part, all the rest of the numbers are -- have impacted by the acquisition.

On a vertical basis, last time we spoke about the fact and actually, [I feel it was too big] for those of you who came, we showed you numbers of the dichotomy between our BFS growth and our non-BFS growth. And we told you that the non-BFS growth will not only stay as robust, but will actually even accelerate in H2. You'll see that play out here. If you look at the Y-on-Y growth or the Q-on-Q growth, what all of them have an acquired component. You see the difference between BFS and the other vertical. Sometimes, the differences are [static], like 11.7% versus 40.9% or 11.7% versus 38.6%. So that theme for us continues, but we have really 4 verticals for the most part doing exceedingly well. And even BFS [many accounts] doing well and just a serious drag from 1 client, which we expect will bottom out the next quarter in Q4.

Which then brings us to the most, I guess, relevant topic for all of you, is an update on guidance. So we -- I said right in the beginning, while we had a robust quarter, we'll be -- it was -- we think we could have done better. It came to 3 factors. The single client issue was steeper than we expected. They, on their own, cost us 2% sequential growth. So I think there's some product banking sector softness in Hexaware portfolio and in the Mobiquity portfolio. And there are still supply side issues that impact revenues.

So as a consequence, we have brought down a little bit the guidance. So before I give you the number from H2, let me give some from Q2 and then we give the guidance to what we're seeing now. There is actually a full year 50 bps impact due to currency. So in essence, this will be equated to the currency one quarter ago, then they should be read at 17.5% to 18.5%. We lost $1.2 million in Q3. That's continued in Q4, and we are projecting a further loss in Q4 based on current rates. So this takes into account all of that. So there's actually a straight 50 bps loss on account of -- full year 50 bps loss on account of currency movement from June end. And then we provided a range, and the range is based on essentially 2 factors, furloughs in Q4 pick up. There is -- frankly, there is more[uncertain] activity in furloughs than a positivity of higher-than-normal furloughs, and even beyond some of the traditional sectors like BFS and deeper in BFS. And the top 3 clients independent of that, the extent of -- and it's the same client, to clarify, there's no other client. There's just 1 client where the issue is. The direction has not changed. And we also know -- I knew it was going be intense but just how intense, that is still some variability.

With that, I will pause and hand over to Vikash.

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Vikash Kumar Jain, Hexaware Technologies Limited - CFO [4]

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Thank you, Keech. A review of the numbers from an INR perspective.

In rupee terms, the revenue for the quarter was INR 14,813 million, a 13.2% sequential growth, and on a year-on-year basis, 22.5 percentage. Growth in rupee terms was higher than what we saw from a U.S. dollar perspective given the dollar was strengthening during the quarter, and that helped us from a rupee currency perspective.

On the hedge, we continue with earlier in 2 policy, where we take forward covers up to 24 months in advance, higher coverage for the first 12 months and then gradually keep on reducing for the future quarters. The chart you see actually provides a compare of how the hedge rates have moved over the last 4 quarters. And as you can see, our forward cover rates are improving quarter-after-quarter, which is a good news. As of the quarter-end, we have a total forward curve of $220 million. If you convert the euro and the GBP starting to get other terms, so it's close to full $220 million of hedge curve, the majority of them being in U.S. dollars.

We have also provided the 7-quarter view in terms of forex gain or loss, 5 quarters of actuals and 2 quarters in terms of forward-looking. This takes into consideration impact of 2 items, 1 is the hedge gain or loss, the other is the fluctuation gain or loss associated with the balance sheet translation as at the quarter-end. In the current quarter, we had $2.8 million of gain, and both items actually contributed to this. So we had a gain from a hedge, from the hedging, and we also had a gain from the translation because the dollars are issued in the quarter end of September compared to the June closed rates.

For the next 2 quarters, we are expecting that we are going to be having hedge gains, and this takes into consideration assuming that the [customer close] on its own curve, and that's going to be $300,000 in Q4 and keep investing from [whichever specialty].

Moving on to the Slide #19. From a cash perspective, cash generation for us remain pretty strong during the current quarter. So we closed the quarter with a $30 million of cash. While it looks like that on a quarter-on-quarter basis, there was a $5 million of increase. What is worth noting is that this takes into consideration the increase after booking $4.5 million of working capital loan. So for Mobiquity acquisition, we have taken a loan, which was a combination of the term loan and a working capital loan. As of Q3 end the total loan, what we have outstanding on the books is just the term loan of $20 million. The other way of looking at it is that between writeoff and loans, what we have on the balance sheet from the cash balance shares, we actually have on our net cash position. So $30 million of cash, $20 million of loan, net debt of $10 million of cash, net cash position.

The other metric I want to draw your attention to when I referred to the fact that we had a strong cash conversion cycle on a YTD 9 months basis, which is why end of September '19, we had OCFO EBITDA, which is cash and also cycle of 68 percentage, which is significantly higher than the same trend last year.

Moving on to DSO. DSOs have come down by [50] and probably it's a reduction, which is driven by the build. As I had mentioned earlier, we expect our ratios to be hovering around this range. I mean it is going to fluctuate marginally quarter-on-quarter by plus/minus few days, but this is a level that we think is going to [help the step line back].

Keech already spoke about the dividend, that the dividend was a part of this -- what we are declaring is INR 2 per share, which is 100% dividend for the current quarter.

From an ETR perspective, I mean, if you look into it consistently, for the last 3 years, our ETR has reduced year after year. And even from a current-year perspective, each quarter the ETR has reduced. We expect the Q4 to continue within our guided range of ETR, what we gave for last time, which was in the range of 18 percentage. So that impact is what we have from a full perspective. We expect it to be [stable].

CapEx for the third quarter is at $4.4 million. If we add H1 spend, the total CapEx on a YTD basis is $12.5 million.

Before we open up for question Q&A, one additional point one what I'd like to mention, which we had mentioned in the last quarter. When you look into our margins from an EBITDA perspective, that does not take into consideration any of the transition impact of AS 116. So just want you to keep that in mind while -- and our transition is going to be from first of April of the next -- from 1st of January of next year.

The other piece on the ETR, there was a concessional rate regime, which was announced by the government. We have looked into it, and we [haven't any] impact. Our existing tax rates are more beneficial than the concessional tax rate which has been announced by the government, which [is why the intention is] to let go. So we continue with the existing tax rates instead of moving -- making the transition to the new rate structure.

With that, we'll open up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions). The first question is from the line of Sandeep Shah from CGS-CIMB India.

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Sandeep Shah, CIMB Research - VP [2]

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Just, Keech, wanted to understand the 4Q guidance, which is implied from the full year, is a range of 1.8 to 4.8. And the wording indicates that it all depends. So even at the lower end of 1.8, are we not confident? Or this is a worst-case scenario built at the lower end of the guidance?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [3]

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I forgot the ETR 1.6 to 1.8 is lower end, right, 4.8. It is a wide range, right? We recognize that. Unfortunately, we, at this point, don't have a handle yet on furloughs. I'm going to say a vast majority of this variance is on account of furloughs. There is some basis [to expect] that we did already assume a fairly sharp further reduction. So [just so the point's clear], we told you that this one client caused a 2% negative drop. There is going to be a further sharp cut from Q3 to Q4. That's known. So we already assumed a sharp cut, but it just could get a little worse. So there is some variability on that, and that is the smallest variability than is on bookings. That is not a huge amount of dependency at this point on bookings. But the vast majority is on furloughs [simply].

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Sandeep Shah, CIMB Research - VP [4]

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Okay, okay. So is it fair to say that if the furloughs are higher than expected and the sharp cut into the top client is higher than expected, we may even actually miss the lower end of the guidance as well on a worst-case scenario?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [5]

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No. I -- worse. Worse, really worse scenario could happen. But what the trend we expect at this stage is that if cut furloughs are bad and the top client is bad, then we will hit the 17. I mean, while the percentage numbers have a wide variance, if you look at it in absolute numbers, we're talking about $5 million, $6 million in absolute swing. And like I said, the vast majority of that will be swinging on account of furloughs.

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Sandeep Shah, CIMB Research - VP [6]

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Okay, okay. And Keech, if I look at the difference between the earlier guidance of 19% and that revised guidance at midpoint of 17.5%, the difference is $10 million. And if I adjust for the 50 bps of currency impact, the difference is $7 million. So that comes to 3.7% impact versus what you were highlighting, 2% impact as coming through 1 client. But the balance 1.7%, it also looks big. So what is happening in the rest of the accounts? Why the visibility has been becoming so weak on a Q-on-Q basis?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [7]

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So we cannot -- by the way, I must commend you on the [stream] of variability in math. The -- part of this is furloughs, right, and there is variability. You think of midpoint, there is some variability of a furlough built in. I will call out that there's also kind of some weakness in banking. And that's actually been there in not just our portfolio, it's also in the Mobiquity portfolio. Recall we said Mobiquity has a strong core banking presence, digital banking presence. We've seen the softness in banking, potentially. It certainly had an impact in Q3. We'll see how [the client ends up] going forward. So yes, that's the factors. So the last thing, of course, from just a math perspective, with the sharper cut in Q3 in 1 client, that also carries forward to Q4. So there is kind of a little bit of a double impact on Q3.

So -- but if you again do all the math, you will see that client volume growth is extremely strong, right? If you're doing 12% growth after negative 2% from one client, that's just enormous. We have an engine shuttle, and I think the best evidence of that engine is the data we have on vertical-wise Q-on-Q and Y-on-Y growth. We're just seeing that all non-BFS verticals are on a nice [orbit]. I mean, to be sure, everything has an acquisition impact, but you can see that there is still a material difference. And frankly, as we know, the biggest parts of our acquisition went to BFS. In spite of that, we're seeing a substantial difference between BFS and other verticals.

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Operator [8]

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(Operator Instructions). We'll take the next question from the line of Manik Taneja from Emkay Global.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [9]

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Keech, just wanted to understand a couple of things. Number one, if you could help us understand what the -- how the wage increments have been for you this year and how would they compare versus last year, and if you could talk about what you're seeing from a supply side standpoint from a go-forward basis.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [10]

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Yes. So just first to get the numbers behind us. This quarter, there's a 50 bps impact on EBITDA due to wage increases, 30 bps in gross margin and 20 bps in SG&A. So SG&A impact is kind of -- there will be no further Q-on-Q impact. It is fully baked in. On a gross margin, this impact is staggered. There is some of it in Q3. There is a further impact that will come in Q4. Our increments this year were actually higher, a little bit higher than what we did last year. We also used some different techniques for distribution, but on an aggregate level, they were higher than last year. And that's on the increments. With your question about supply side, I think of supply side just continues to remain a challenge. I mean, you will see the headline figures on macros. Unemployment just continues to inch down, and that's broad-based. Tech unemployment is virtually 0, so hiring skilled is hard. And I spoke about the 2 or 3 strategies. Pay more, create skills in U.S., create skills in Mexico. We [are amid reviewing] on all of those. But yet, the reality remains that our cost of doing business has gone up, and we are still leaving revenues on the table each quarter.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [11]

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Sure. And how should we be thinking about next year's growth given that the order intake numbers basically have been pretty similar to what we saw through the last 3 quarters of last year?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [12]

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Yes. So I come up that I've been saying this for several quarters now, right, that what you're seeing as order intake is only the NN numbers. The huge driver of growth for us is EN. I mean, we don't report on EN booking. And I'm not even sure -- and we did ask this question many times, what is your report on EN booking, and it's a little bit like digital revenue. There is no kind of good basis. They include -- revenue was not included. We include something 6 months, and then it [starts] again. How do you deal with EN booking is a [non-single] issue. We think the most -- the best kind of metric to track EN performance is just revenue growth. So the much bigger driver of growth is EN. It's not -- I mean, NN is important when we get to see [it be run at all]. NN is incredibly important. But if you look at kind of 4 years ago to now, relative scale, NN was like 90, EN was 10. Today, it would be far more balanced.

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Manik Taneja, Emkay Global Financial Services Ltd., Research Division - Research Analyst [13]

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Sure, sure. My -- if I could chip in, just wanted to understand the strong performance that one has seen in the European geography through the last couple of quarters. How much of it essentially is organic? And how much of it essentially is held by the Mobiquity acquisition? And what do you see from a go-forward perspective?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [14]

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So I mean, Europe's been strong. Obviously, this quarter numbers, every business is in it for the acquisitions. And perhaps Europe a little more so. The acquired entity business had a higher Europe footprint than the organic entity. But Europe we did very well notwithstanding that and in a very sustainable way. It's not 1 or 2 accounts driving it. It's just many accounts in many geographies and verticals that are driving growth for the year. And of course, all [the business] has not changed the fact that all the currency headwind is, of course, in Europe.

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Operator [15]

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The next question is from the line of Dipesh Mehta from SBICAP Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [16]

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A couple of questions. First of all, can you help us understand what is the organic growth? Because I think you indicated about some weakness in banking plant in Mobiquity also, so if you can help us understand what is the organic growth, which we have seen.

Second question is, IMS growth continue to remain muted even this quarter. So if you can help us understand what is hampering growth in IMS.

And the third is, in terms of your outlook, you have mentioned about 3 extent of weakness in top 3 clients. So if you can help us understand, we are more emphasizing on 1 client, whereas in your outlook, we have mentioned 3. So if you can help us clarify this part.

And the last one in hedge impact, what would be the impact in Q4.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [17]

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Okay. So let me kind of deal with the third question first. If the [end result] is not clear, I apologize. It is not 3 top clients, it is our top 3 clients. It is 1 client among top 3. So it is only 1 plant we're talking about. It is not 3 different ones. The same client that we've been speaking about from before, there's just no new client or no new issue. They did impact before, that I would actually come back to you on, I don't kind of have it top of my head.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [18]

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[What is the contact information]

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [19]

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Okay. Sorry. Vikash has our number.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [20]

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So it's going to be on a quarter-on-quarter basis, 40 basis points impact.

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Vikash Kumar Jain, Hexaware Technologies Limited - CFO [21]

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Yes.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [22]

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So like I said, if you remember, there's no further impact. This is on the gross margin. There was a 30 bps impact this quarter and there will be a further 40 bps impact next quarter. The -- I'm now going back to your first 2 questions.

Yes. Organic -- I mean, we're not reporting on organic versus inorganic, okay? You can do enough numbers to make a fair estimate. We did tell you enough data during the last quarter call to make a fair estimate. We told you how much would have been the revenues if you consolidate for 4 quarters. So you can make a fair estimate.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [23]

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Yes, I understand. The reason for asking is because you indicated some weakness in banking clients on Mobiquity also. That's why I just tried to get sense whether it was more pronounced kind of weakness in Mobiquity, then we need to understand...

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [24]

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No, it was not. It was not more pronounced in one versus other. I think it's just what I think is the central weakness theme extends to Mobiquity as well. It's not that their type of revenue, let's say, digital revenues or whatever, have been immune to that. It's very early, just 1 quarter, but that is what we've seen in this quarter.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [25]

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Last is about IMS.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [26]

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Yes. So IMS, there are -- I think if you heard our Investor Day presentation from [BC], I think one of the things you have heard is that the business is a fair mix of outsourcing and project and consulting business, and I think that's a different kind of business from what historically IMS business is all [hops] and annuity. So we still have a chunk of annuity, but there's still a lot of project work. And then finally, the project work is actually high end, and it does offer a great [percent of profitability]. But for [some of what is left], I think there is going to be some lumpiness in some quarters and some projects get [lowered], and other projects haven't quite kind of ramped up fully yet. What we feel pretty good about is that the little bit softness part that you see is of a short-term nature. The long-term growth trajectory for IMS will improve and will pick up. So it may not, in the past 4 years, it was astronomical. It was kind of [some short piece]. What we see you refer to speaking about in the next 3, 4 years, we expect it to be in the 30s or mid-40s, but it is still going to be a [substandard] improvement from what you're seeing in the current quarter.

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Operator [27]

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The next question is from the line of Madhu Babu from Centrum Broking.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [28]

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So on Mobiquity, so how are we seeing the growth outlook? I mean it's -- so it used to grow at 25% CAGR. So should we say that, that kind of momentum is what we are targeting internally?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [29]

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So I think even the last time -- the last couple of times, we have spoken about [Mobiquity] we expect the -- I mean, we expect robust growth, but for it to kind of dip a little bit from the historical 24% type CAGR because higher sales. So we expect it will taper a little bit, but high growth, much higher than the prior to acquisition level activities.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [30]

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So within our pipeline, what makes it work out to, again, move that to 15% organic growth? Because this year, it might end up like 12% kind of growth. We have done 15% in good times. So any couple of deals which can swing in sales for next year, which can put us back on that kind of growth?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [31]

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Yes, I mean, frankly this year, we had, I think, more than our fair share of difficulties with top 5 clients. We've had 3 different client issues in 3 years. In essence, every year, we are seeing a 3%, 4% overhang for the last few years. Some people ask me the question, hey, is there something specific to Hexa because of which you're having all these client issues? The answer is no. We shared some of the data on the Investor Day. We continue to remain on top of the pile in customer satisfaction, both as measured by us and as measured by third parties. So I think a year that we don't have these issues, we will comfortably do about 15%.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [32]

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Okay. And last one on the BPO. Sir, I think the hiring, how much is BPO? Because we have seen a substantial increase in BPO headcount over the last couple of quarters.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [33]

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Yes. I think that the hiring pace just slowed down just a little bit. But on the other hand, you're now seeing the holistic growth, and you're seeing the lag. So there is actually quite a material lag between when the hiring happened and when the growth has happened. To be sure, the growth -- the hiring continues to be strong. But just kind of not -- we have a couple of large contracts that we had hired early for. That's kind of the...

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [34]

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There's LTM, we added 2,300 employees organically, excluding Mobiquity. How much of that would be BPO, sir, in the last 12 months? 2,300 organic headcount addition approximately?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [35]

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So I would say roughly half.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [36]

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Yes. Okay. 1,400 is on the BPO side. Okay.

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Operator [37]

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The next question is from the line of Tanmay Mehta from SBI Securities.

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Tanmay Mehta, SBICAP Securities Ltd., Research Division - Research Analyst [38]

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I just wanted to understand if you could give some more color on what's happening at the top end. You integrate BPO. So is it more pronounced in the current quarter than the previous quarter?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [39]

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First of all I would clarify, that is the reason I called it out specifically as top 3 is that literally on quarter-over-quarter basis, the position of the client in our portfolio is changing. So it is currently in our top 3. It was higher 1 quarter ago. So the commentary I've given before, there's no change in the commentary, and I will repeat it for good measure. They have a new CEO who came in, I think, June. So kind of the new CEO did 2 things: slash the budget, one; and two, said that outsourcing cannot more than 30%. And the third impact is that all of this has been integrated in 2 quarters. So for us, in some ways, mayhem started in the last 2 weeks of June. So there was some Q2 impact. And then kind of the significant impact we had in Q3, and we will have a further significant impact in Q4. This is normal. The impact in Q3 we are now quantifying was a negative 2% on the overall company growth, and there will be another substantial negative impact in Q4 -- for the Q3 to Q4 impact. But we expect it to stabilize at the end of Q4, so this minus 2%, or actually more in Q3 and Q4, that headwind will go away from Q1.

So I do want to add further commentary, which I think is important. We've lost no market share. In fact, we may have gained some through these last 3 or 4 months. We are pretty sure we've not lost any market share. We continue to be -- they have 6 or 7 strategic vendors. They categorize them into key categories, A, B and C categories. There are 2 people in category A, and we are one of the 2 in category A in terms of quality of delivery. So it's important to understand we've not lost market share and whatever business is coming down is not as a consequence of quality of delivery.

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Operator [40]

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(Operator Instructions) Next, we have a follow-up question from the line of Sandeep Shah from CGS-CIMB India.

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Sandeep Shah, CIMB Research - VP [41]

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Yes. Last time, Keech, you said that in the banking capital markets, things are improving outside this top 3 client. But this time, you are saying it has been broadened. So what has gone wrong on a Q-on-Q basis in terms of estimating that?

Secondly, in terms of margins. At the EBIT level, we are at 13.7% for the full year, 9 months of CY 2019. And in the fourth quarter, is it fair to say headwinds should be higher than the tailwind? So the exit rate would be much weaker to enter into the next year. So how are you looking at it in terms of targeting the EBIT margins on an ongoing basis as a whole?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [42]

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Yes. So let me start with your second question. We will have a drop in profitability in Q4, okay, from Q3 level. But that's no surprise. That's happened every year for us for any number of years. It's just a consistent pattern. That's why we encourage all of you not to look at quarterly run rates on profitability and make estimations. If you estimate this from Q3 it's too high. If you estimate this from Q4, it will be too low. We always said, please take a look at the total average for the year, and we said we will maintain profitability full year average last year. The same, we will look full year average this year. Until now, we are basically, for all practical purposes, we are the same, we are 10 bps lower at this point compared to figure average last year for 9 months.

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Sandeep Shah, CIMB Research - VP [43]

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Keech, last year was 14.4%, and the first 9 months is 13.7%, plus you are saying Q4 will decline on a Q-on-Q, so that will be a flat Y-o-Y margin, right?

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Vikash Kumar Jain, Hexaware Technologies Limited - CFO [44]

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Last year was 14.5 percentage. Current year is 14.4 percentage.

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Sandeep Shah, CIMB Research - VP [45]

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I think CY '18, we had a reported margin of 14.4.

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Vikash Kumar Jain, Hexaware Technologies Limited - CFO [46]

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Sandeep, the number what Keech was giving to you was from an EBITDA perspective. So that's the number what we are conducting. The last year was 16 point -- 15.9 percentage, and the current year on a YTD basis is 15.8 percentage.

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Sandeep Shah, CIMB Research - VP [47]

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Okay, okay, okay. Because even in 1Q next year, we will have some wage inflation pending, right? So that's why I'm saying the run rate on a Q-on-Q basis, we are actually growing at one of the lowest in terms of the EBIT margins.

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Vikash Kumar Jain, Hexaware Technologies Limited - CFO [48]

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So Sandeep, last year also, Q4 had a wage increase impact, right, because we have not changed our wage increase cycle. So our wage increase is coming in 2 quarters. Some of the impact comes in Q3. The balance impact comes on the Q4 perspective. I mean, that's a similar kind of a trend to the current year. If you look at Q2, we had a wage increase impact, Q4 we will have another wage increase impact. Obviously, if you look at it from that perspective, you could.

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Sandeep Shah, CIMB Research - VP [49]

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So in April, May, it will -- sorry, [down] for March, there is no wage hikes, right? It will be completed by December '19 itself?

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Vikash Kumar Jain, Hexaware Technologies Limited - CFO [50]

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Correct.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [51]

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So one thing you said that there will be a further impact in the Q1. There will be no further impact in Q1.

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Sandeep Shah, CIMB Research - VP [52]

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Okay, okay. And just on the capital markets, Keech, if you can...

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [53]

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Yes, yes. So I think there are. My worry as I said last time is that -- in H1, it was fairly secular in terms of cautiousness. We said now there are many accounts and many pockets that cannot have better, but not [cause for bottom line]. So I think that means that there are -- I think it's not like every account is on a negative trajectory. I think kind of there are still accounts that are on a positive trajectory. But it's hard to draw the line exactly what does [engage] it is going to be up versus flat or down. So it is not -- they're not hugely different, but there is some estimation error in terms of -- we did think it'll be slightly stronger. Also bear in mind that Mobiquity came with a higher percentage of "banking" revenue than we have at all in our -- or had at all in [our income] in the past. So that's the other piece that contributed. Like I said, the softness in the banking sector extended to the Mobiquity portfolio also.

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Sandeep Shah, CIMB Research - VP [54]

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Okay, okay. And just last question on the order book, Keech. Is it possible to say that fourth quarter generally seasonally higher for the new business order book from new clients, the trend may continue even in this quarter?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [55]

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Yes, that's certainly the hope. I mean, it's been true for a number of years that our fourth quarter annual intake is higher. Last year, it was not true if you kind of discount off the one large deal. But outside that, it has been true. So -- and it's a fair expectation at this point for us to -- that, that continue to be true.

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Operator [56]

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(Operator Instructions) The next question is from the line of [Amishi Gesh] from [Elara].

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Unidentified Analyst, [57]

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Hello, am I audible?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [58]

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Yes. You are.

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Unidentified Analyst, [59]

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Just a quick question. You talked about retaining your market share in the BFSI customer, and you also spoke about challenges both in your existing as well as the acquisition portfolio. So the question is, have you retained your stand-alone market share? Or it's the main market share?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [60]

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Well, I think I've got 2 different comments that are perhaps being considered. When I spoke about retaining market share, that was with respect to the single large client. That client has nothing to do with Mobiquity. So that single large client, the point I was making is, even though we are dropping revenue substantially, we are not losing market share, and in fact we may be gaining market share. And we continue to be rated as one of the Class A vendors -- one of the 2, sorry, Class A vendors -- service vendors from our cost. So that's the point I was making about market share. It did not have to do with a broader portfolio.

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Operator [61]

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Thank you very much. That was the last question. I would now like to hand the conference back to the management team for any closing comments.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [62]

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Thank you all, and we look forward to speaking to you next quarter. Happy Diwali.

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Operator [63]

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Thank you very much. On behalf of Hexaware Technologies Limited, that concludes the conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.