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Edited Transcript of HEXAWARE.NSE earnings conference call or presentation 8-Aug-19 11:30am GMT

Half Year 2019 Hexaware Technologies Ltd Earnings Call

Navi Mumbai Aug 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Hexaware Technologies Ltd earnings conference call or presentation Thursday, August 8, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Latika Gidwani

Hexaware Technologies Limited - Assistant VP

* R. Srikrishna

Hexaware Technologies Limited - CEO & Executive Director

* Vikash Kumar Jain

Hexaware Technologies Limited - CFO

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Conference Call Participants

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* Abhishek Shindadkar

Equirus Securities Private Limited, Research Division - IT Analyst

* Ashwin Mehta

IDFC Securities Limited, Research Division - Director

* Dipesh Mehta

SBICAP Securities Ltd., Research Division - Information Technology Analyst

* Sandeep Shah

CIMB Research - VP

* Shashi Bhusan

Axis Capital Limited, Research Division - Executive Director of IT and Telecom

* Sudheer Guntupalli

AMBIT Capital Private Limited, Research Division - Associate of Technology

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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 Earnings Conference Call. (Operator Instructions). Please note, this conference is being recorded.

I now hand the conference over to Ms. Latika Gidwani. Thank you, and over to you, ma'am.

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Latika Gidwani, Hexaware Technologies Limited - Assistant VP [2]

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Thank you, Vikra. Good evening to all of you. Welcome to the Hexaware Technologies Conference Call. From Hexaware, we have with us Mr. R. Srikrishna, CEO and Executive Director; Mr. Ashok Harris, President of Global Delivery; Mr. Vikash Jain, CFO.

The disclaimer has been put up on the Hexaware website. It's also there in our press release and the investor deck. I shall take that as read.

We have also put up non-GAAP numbers this time. These are to be read in conjunction with the GAAP numbers. Please refer to the (inaudible) included in that 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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Thank you, Latika. Welcome to all of you. Actually, we have one other short announcement before I begin. Vikash, please.

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

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Sure, will do that. So hi, everyone. We are pleased to announce that we have a new IR leader joining us, [Vimek Karinger]. (inaudible) used -- comes with a lot of experience on the IR space. He used to run his own IR advisory firm before joining us. I'd like to take this opportunity to thank Latika. Latika continues to be with Hexaware, and she's going to go into a different role and very much as part of the Hexaware family. [Vimek] and Latika will work together in the next few weeks to do a smooth transition. (inaudible)

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Latika Gidwani, Hexaware Technologies Limited - Assistant VP [5]

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Thanks, Vikash.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [6]

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Okay. So for those of you that are looking at the deck, we are on Slide 5. We feel very good about how our quarter was. We've had solid all-round performance in spite of what we've called out and now everybody's called out as a weakness in one segment. Not returning back, we've had an extremely nice quarter. We've had a revenue growth of about 5% in constant currency. We lost 30 bps on currencies, so 4.7% reported. And EBITDA, we've had a robust expansion in margin. We said last quarter that our margins will go up sharply. So we've executed to what we thought can and will happen. Our EPS numbers have perhaps been the best story of the lot. You'll hear more later, but apart from solid operational performance, our ETR has dropped sharply to about 18%, and most of it is sustainable for a long, long period of time. And you'll hear more how of that from Vikash later.

We've also had a robust quarter for NN wins and $36 million, and we'll talk you through some of the deals. We crossed 18,000 in headcount. This includes close to 700 people from Mobiquity. But we also had a robust intake of their shares during the quarter.

Finally, our dividend is down to INR 1.5 per quarter. We did say before for the year that we will do what we did in last year subject to M&A activity. Given that we made a substantial cash commitment for M&A and then we have some deferred payments coming up, this is the level that we are likely to stick to in the foreseeable future, which is the INR 1.5 per quarter.

So on revenue, I know you'll have question about the acquisition revenues. So clearly did include about half a month of Mobiquity revenues in this. If we had consolidated for the full quarter, which we haven't, but if we had consolidated for the full quarter, then our revenues would have been higher by $17.6 million. Likewise, if we had consolidated profits for the full quarters, our (inaudible) would have been higher by $1.7 million. So those 2 numbers we've disclosed in our detailed financials, but that's for you to help kind of figure out the organic versus inorganic growth.

So there is also -- so I'll go to Slide 6 for those of you that are looking at the deck. Revenue was at $188.5. Our EBITDA before ESOP was up to 16.5%, which is up from 15.3% last quarter. It's also up from the equal quarter last year. Last year, this quarter was 16.4%. And post ESOP is at 16.2%, and that's up from 15%. So pretty sharp and solid increases in bps across the board.

Now there is actually a $2.4 million of transaction expense. Last time, we pretty -- we don't know the number yet. So this is what it is, $2.4 million. Now interestingly, not -- even after taking into account the transaction expense, actually PAT improved, PAT percentage improved. And our EPS in absolute terms improved even after taking the transaction expense into account.

Now we've spoken -- in our disclosures, we've said we're going to use non-GAAP numbers for the first time. And we've given you some disclosures related to that, okay? But we do take the most pertinent number from an EPS is the non-GAAP number. We will be -- have provided you a walk at this time between reconciliation between GAAP and U.S. GAAP numbers. But essentially, as much as this quarter goes, the biggest adjustment item is the transaction expense. But on a more sustained basis, there is amortization of goodwill and amortization of intangibles coming from the balance sheet into the P&L. So again, we will explain to you how much is goodwill and how much is intangibles during the course of today, okay? In a few minutes, okay?

So the non-GAAP EPS is actually at -- they're at much higher growth levels, right? So it's about INR 5.55. It's a non-GAAP EPS. So there's substantial quarter-on-quarter growth, okay?

The revenue increase, there is a marginal ForEx headwind. The vast majority of the revenue increase came through volume growth. And there is some from calendar, and there were some headwinds from ForEx. But -- so it's a really robust quarter given the substantial volume increase that we saw.

We provided an EBITDA walk in Slide 8. What you will see is that ForEx was a headwind, visa was a headwind, SG&A was a headwind. There were some additional expenses but also some reversal of double counting for rent and some facility in previous quarter. But Q-on-Q basis, it was a headwind. Notwithstanding that, notwithstanding at least 2 major events, visa and SG&A and some on ForEx, we have the 120 bps improvement in EBITDA driven by improved operational performance on utilization, mix, but also better build rates that you can see here. So all round, solid operational performance that overcame the visa and ForEx headwinds.

So Slide 9 actually has the recon between GAAP to non-GAAP. I spoke briefly on it. There is $2.4 million, which is the transaction cost, and there is $0.3 million of amortization of intangibles and $0.1 million of NPV of deferred payments. So essentially, the total adjustments is $2.8 million between GAAP and non-GAAP. And we've also adjusted for the tax impact of that. So in a sense, the non-GAAP -- adjusted non-GAAP EPS for the quarter is INR 5.55, and that represents a growth of close to 20% over the previous quarter, 19.3% growth over the previous quarter.

The Slide 10 actually has our client pyramid now. Unfortunately, it's not directly comparable in terms of the absolute numbers because this includes Mobiquity customers. The good news with Mobiquity, we spoke about it at the time of talking through the deal that one of the things we liked about them is that they have material customers. They don't have a long tail. Their top 20 customers account for 90% of the revenue. So there's actually 4 clients from Mobiquity that are now in our top 20. The top end of the pyramid that you see here, really, the first 3 buckets have not been impacted by anything from Mobiquity. But there's one that's come -- moved from $10 million to $20 million to $20 million to $30 million in the Hexaware organic bucket, and that's been filled by Mobiquity client. That's why that's flat. So -- but in general now we have 120 clients above $1 million. But going forward, these numbers will be comparable. At least on a quarter-on-quarter basis, they will be comparable.

So I already said, we have $36 million of win. I'll call out a couple of examples, start going through all of them. One of them is a large health care insurance company in the East Coast. We are doing a private cloud implementation for them. That's just started. It's a start of the largest program we expect to continue for many quarters.

The second one, and actually it's one of quite a few that we won through the course of this year. I think we said last quarter that end of December, early Jan, after 3 years of investment, we became a partner in Guidewire. And that's been an -- the single most important driver of growth in our health care and insurance business. One of the deals that we won during this quarter is Guidewire -- several services surrounding Guidewire, managed testing, dev ops, data migration, all for creating a platform for a large U.S. insurance company.

So that's the single biggest win during the quarter is customer experience transformation for a real estate firm. In general, what you will see that the trend that we spoke -- we've been speaking about for some quarters is that our wins have become less automation-focused and less dependent on that theme and more on -- more spread between automation and our other themes as well. So you're seeing right here there's a cloud deal, there is a customer experience transformation deal. And that is a trend we've been seeing for some quarters and we expect will continue.

Our attrition, which has been a bit of a worrisome trend for us with the constant uptick each quarter, finally flattened up, and we are quite happy about this. We've been speaking about this for some quarters that there's a lot of active efforts to manage this. And this is -- we have to flatten it before we bring it down. So we've got the first step. Hopefully, it'll either stay here or actually even get better from here, so we will see. We are continuing our active efforts here, but we are quite pleased with the fact that we were able to flatten it out. Bear in mind that some of the underlying structural factors have not got better. In fact, if anything else, the U.S. labor market is even tighter and worse than what it was beginning of the year. So the structural factors remain, but we have managed to flatten out attrition at our end.

Utilization has actually gone up, not exactly our desire, but I would like to see it a little bit lower than this. And that's probably where we will get to next quarter. But it did go up. It's in 80.7% for the current quarter.

The last -- the (inaudible) slide that I will talk to kind of gives you a perspective on the group, how, where it came from by geography, vertical and horizontal. There's kind of 2 things that you will see. One is that BFS is performing poorly, and I'll talk to that in a minute. The second is that you will see kind of 3 areas which are red. One is APAC; one is M&C, which is minus 2.5% Q-on-Q; and IMS, which is a minus 8% Q-on-Q. All these 3 are actually the same thing. There is a single project in APAC, in M&C sector and IMS that got over. IMS actually continues fairly robust underlying growth. You will expect to see pretty solid Q-on-Q growth immediately from Q2 onwards. Even in this quarter, even in this negative Q-on-Q, the Y-on-Y is pretty decent, 27%. It's not our highest, it usually is, but it will -- the Y-on-Y will also improve next quarter.

It's important for you to -- while seeing the IMS number -- I'm just going to recount for you the last 4 quarters' performance of IMS in terms of Q-on-Q numbers. It's at 15.5%, 9%, 10%, 21.5%, 3.5%. That's in the last 5 quarters prior to this of sequential growth. So the quarter when the 21.5% happened a couple of quarters ago was this project ramp-up, migration project that ended this quarter. But there are plenty of other things happening that will lead to extremely robust growth starting immediately. We're not concerned about that business. The M&C reduction and APAC reduction are also directly linked to this, okay?

BFS. For those of you that are kind of seeing slides, I'm on Slide 14. Slide 14, what we've done is actually just to cut -- you have all these numbers, but we've simply cut our H1 business into a BFS and a non-BFS bucket, okay? So you see that in our non-BFS, all other vertical, even though in that also GTT is not doing that robustly. In spite of that, all other verticals put together, non-BFS is growing at 17.3%, extremely robust. And in fact, couple of -- 3 of the verticals there are all growing in 20s: manufacturing, health care and insurance and professional -- high tech and professional services are all growing in 20s. Very, very, very robust growth. BFS is at 3.9%. In fact, of all the verticals, BFS got the maximum leverage from the 15 days of Mobiquity. So actually, it's even a little worse than this, right?

Now even in BFS, there's a little bit of dichotomy between one account and the rest of the BFS portfolio. We said in the beginning of the year that there is a reasonably secular softness across a number of our accounts. Last time, we said there is an improvement in some quarters, right? And so that kind of brought commentary holds. I think we started the year with a very, very broad softness. But the good news is that there's quite a number of accounts that are back to normal or close to normal (inaudible). We didn't see a lot of that impact in Q2, but we expect to see that in Q3. However, there is one account which essentially had a new CEO in the last 4 or 5 days, and as a consequence, multiple significant changes, and it's one of our largest accounts. That account is going through serious stress. It will for a couple of quarters. They're going through -- they made a decision to alter their outsourcing ratio down to 30% and execute that within a 2-quarter period. Started in June, and it will continue through Q2 -- I'm sorry, Q3 and Q4, right?

So there's only one account with a lot of stress. The rest of the BFS portfolio, with maybe 1 or 2 exceptions, is on a good path to recovery from where it was in H1. And all other verticals are on an extremely robust growth path. In fact, other verticals, we expect them to do even better in H2 than what they did in H1. So H1 is already 17.5%. We actually expect that they'll not just sustain but improve on what they did in the course of H2.

So what does all this mean put together? We kind of -- we have said we'll have growth of 20%. We now expect it in approx 19%, it could be 19.5%, it could be -- but approx 19% range. Bear in mind that this 19% is still within the original guidance range for organic growth, very much so. So it's not a change to what we started the year with.

We still expect our EBITDA to be in line with revenue growth. We've been saying that. And even though the acquisition is slightly lower on EBITDA percentage, we don't think it's that material. But there's good news on the EPS front. We think our EPS will be better than what we've said in the past mainly because of improved ETR. And you'll hear more specifics on ETR from Vikash in a few minutes.

Actually, with that, I will turn over to -- sorry, actually, I have other topic to cover before I turn it over to Vikash.

We have a few slides for those of you who want to see it offline. I'm not going to talk to the slides on Mobiquity. I will just say a few high-level things. It's about 50 days since we closed the acquisition. First off, there's been kind of no attrition and expected attrition. Attrition at a broad base is what it was before. There is 0 attrition at the leadership level. There's a lot of possibility in their leadership -- in that company's leadership and things about the Hexaware investments.

There's a number of -- quite a large number of joint pipeline. Quite a number of them are in early stages, as you can anticipate, but as early as Q3, there could be 1 or 2 transactions that actually come to fruition. They aren't huge, but they are definitely of the nature of proof points for our thesis of why we did this. And we are in the process of building what we think will be a compelling (inaudible).

What we're going to do is to have an analyst meet on the 23rd September. Part of the reason why we pushed it out -- we may have otherwise done it like tomorrow. Part of the reason why we pushed it out is for us to more fully develop a joint vision on the customer experience, transmission of the acquired capabilities and our organic capabilities, and we'll be ready with that by 23rd. So we're hoping to meet all of you on 23rd. John Castleman who is the CEO of Mobiquity will also be there, as maybe a client from Mobiquity as well, okay?

So that's what I had, and I'm going to hand over to Vikash.

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Vikash Kumar Jain, Hexaware Technologies Limited - CFO [7]

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Okay. Thank you, Keech. And for the folks who are referring to the presentation, we are on Slide #21, Page #21. A brief recap on the numbers.

Revenue for the quarter at $188.5 million, sequential growth of 4.7 percentage, 5 percentage in constant currency. And as you can see on the chart, for last 5 quarters, every quarter, we have had a double-digit growth, which is a good news. Current quarter, we reported year-on-year growth of 12 percentage; in constant currency, it's at 13 percentage.

Moving to the next page. We -- here, we have our outstanding hedge position and rates. We continue with our hedging policy where we take up to 8 quarters in advance the hedges on a standard basis. The total outstanding hedges we have as at Q2 end is total to $220 million. The breakup in terms of the individual currencies were mentioned on the page here. The point to be noted here is as you could see that every quarter as we have progressed, our hedging rates for all the currencies have actually improved on a Q-on-Q basis.

The next one is on the ForEx gain or loss. And so here we present a 7-quarter view, 5 quarters in terms of the actual, and 2 quarters on a forward-looking basis. On the 5 quarters, in the actuals, we have had 3 quarters on gain and 2 quarters on losses given that we had the currency actually fluctuated and the rupee depreciated in -- (inaudible) depreciated in Q4 '18 and Q1 '19. Current quarter, we had rupee being almost stable throughout the quarter, not much of a fluctuation. And we actually had $1 million of gain into the P&L primarily driven by our hedging policy. There was a very minimal impact associated with the balance sheet translation. The $1 million, what we have here is very close to what we had back at that beginning of the quarter or close to $900,000. As at the closing break, if we take into consideration the hedges that we have open, we expect Q3 and Q4 to be having a gain into the P&L of $1.7 million and $1.1 million each.

The next one, which is on Page #24, and I'm going to be spending a couple of minutes here, is on the Mobiquity accounting. So when we announced the deal, we said that the total deal consideration was up to $182 million. So here is what we are presenting, the deal consideration, including the deferred and earnout. And the adjustments what we had to do associated with the deal is $181.9 million. The way we have planned in this $181.9 million is we had $14.7 million in terms of the assets that we have acquired as part of the deal. The intangibles what we had associated with the deal is $36.5 million, 36.5. It actually comprises of 2 items, which is covered in our detailed financials what we have published, brand of $2.3 million and customer relationships of $34.2 million. In terms of the period at which the intangibles is going to be amortized in the P&L, to (inaudible) is over a period of '18 months. And the customer relationships has been figured over a period of 7 years. So the expected charge to the P&L on a quarterly basis on a go-forward basis associated with the intangibles and amortization of intangibles is close to $1.6 million per quarter.

We had a deferred tax liability. That's an accounting requirement associated with the intangibles what we have done. And goodwill is the balancing number what we have from a deal perspective in terms of what we said. Just for the sake of clarity, goodwill is not just the P&L and it is (inaudible), but that's not something (inaudible) to the P&L.

Moving to the next one in terms of the balance sheet and other updates. You'll see that our cash balances have reduced significantly from last quarter to the current quarter, and that's apparently a function of the acquisition of Mobiquity. So we paid out close to $130 million associated with the deal in the current quarter, which has led to the drop in the cash balance.

From a DSO perspective, DSO for the quarter is 77, 3 days higher than what it was from a prior quarter perspective but very similar to the levels what we had in Q3 and Q4. We think that the DSO on an overall basis is going to be ranging around these levels.

Dividend per share, Keech already covered about it, so we had essentially INR 1.5 per share of dividend in the current quarter.

ETR is where I'll spend some time. So Q1 effective tax rate was 18.4%. Q2, our effective tax rate is 17.9%. And we expect that a significant change (inaudible) from a future perspective. Given that we are bringing down our ETR from 20 percentage, what we had made it earlier, to 18.5 percentage from a full year perspective. So that's the guidance what we're giving from an ETR for the full year.

This is just (inaudible) in terms of the way that (inaudible) is structured and the transaction-related expenses, which were (inaudible) for us be taken as an accident reductions into our P&L, which is helping us reduce from a -- which is helping us reduce our effective tax rate for the current year.

We expect a lot of it to continue even from a future perspective, but we are not guiding to this level from a future perspective. I'll come back to that in terms of the future, but we definitely expect that a significant (inaudible) to continue even from (inaudible).

CapEx, what we incurred during the quarter is $4.6 million. This is in addition to [$3.1 million] what we had incurred in the Q1. So overall, what we had incurred in H1 is close to $8 million of CapEx.

So that's what I had from a finance perspective. One comment what I would like to make on the margins before we open up for Q&A, is on the AS 116 accounting for leases. In terms of accounting for leases, a lot of our peers have already started taking that impact from 1st of April because the accounting started in with effect for the financial year starting 1st of April. Given we have an accounting year which is from January to December, the AS 116 is going to be applicable to us from 1st of January, 2020. So all the margin numbers and accounting numbers what we have shared does not have an impact of 116 into it. So wanted that to clarify because for a lot of the companies who are our peers, 116 are definitely going to crop up in their percentages starting this quarter.

So with that, we are going to open up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We have a first question from the line of Sandeep Shah from CGS-CIMB.

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Sandeep Shah, CIMB Research - VP [2]

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Congrats on the good execution. Just, Keech, wanted to understand that the 50 days of acquisition in the bank. How is the -- your experience with the existing client set of Hexaware? How -- any white space creation where you can see that this can be to an addressable market increase within your top accounts or within the existing accounts?

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

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(inaudible) there is no doubt that it can, okay? There's absolutely no doubt that it can, right? I mean, the market data is pretty clear. Companies are spending money on creating digital products. That market is growing at the mid-20s or early 20s compared to the rest of IT market, which is low single digits. And within that, actually, the mobile portion of it is growing faster than other forms of digital products. So there's no doubt that we can create new markets in our customers.

It's early days, but we already have pipeline, our pipeline, and actually the pipeline goes both ways. We have opportunities in their current customers, and there is opportunities for Mobiquity capabilities in historical legacy -- historical clients. So both are there. Like I said, we expect, not for sure, but we wouldn't be surprised if we have, at least, one proof point before the quarter is out.

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Sandeep Shah, CIMB Research - VP [4]

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Okay. Okay. And just on the organic growth, which we have restated at 12% to 14%, still the ask rate in the next 2 quarters is still a reasonably like mid- to high -- mid- to low single-digit as a whole. So looking at your order pipeline, plus the deal cancellation, are we on track to do that? Or do you believe the growth may be more Q4 dependent versus a Q3 dependent?

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

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Actually, we'll have a pretty good Q3 for sure. And we've had a good Q2. We will have a pretty good Q3. And Q4, we'll also have growth. So I mean, we will have some of the usual Q4 headwinds of fallers and all that, but notwithstanding that based on the ramp-up of the orders in hand, actually, we'll have growth in Q4 as well, but we'll have a pretty robust Q3.

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Sandeep Shah, CIMB Research - VP [6]

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So this is for business outside of Mobiquity, right?

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

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Yes. Yes. I mean, you will see both numbers together, but our organic business is growing pretty -- will grow pretty robustly in Q3, and it will also have solid growth in Q4.

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Operator [8]

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We have next question from the line of Dipesh Mehta from SBICAP Securities.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [9]

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Just wanted to understand the weakness that you alluded about BFS particular client. So can you provide some color, which is totally unexpected kind of situation. And when you said 30% is outsourcing they plan to do in 2 quarters? Where they are currently? And what kind of decline you foresee? And maybe how (inaudible) and you foreseeing that client environments? Second thing is about insurance bill, which earlier, I think, we alluded, might be not trending up or might not be there from Q4. So considering all this together from BFS and then the incidence vertical, how one should look at from a momentum perspective, in DSS, particularly from medium-term perspective? Because earlier, we indicated some headwind in secondary mortgage, largely because of higher attrition which we face.

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

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Yes. See that's why kind of we broke it up as much as we could in one slide, where we showed you the momentum in rest of the verticals. So first I want to reiterate, if you look at our non-BFS verticals, in aggregate in H2, they grew at 17.5%, 17.3%, and we expect it to get better in H2 than they did in H1. Not just the same, we expect it will get better. So we are in actually wonderful performance, wonderful momentum in those verticals particularly. In BFS, beginning of the year was a kind of bleak all round. At this point, outside one account, a lot of other accounts have started picking up. We actually expect to see growth, decent growth in Q3, and in general, in H2. But there is one account I called out. So we're aware and true to that goal, it varies on the program, some programs are at 50, some programs are higher, 60, 65 in terms of outsourcing.

So you see the CEO, who joined I think like 30, 40, 45 years ago the consequence of that. So overall momentum's pretty good. I mean, this will bottom out in Q4. This account will bottom out in Q4. So once it bottoms out, it actually looks pretty good. Because all our other verticals are growing like high teens, maybe even bridge teens, and rest of BFS, from Q3, we expect will do reasonably well, certainly not be -- certainly quite a bit better than what they did in H1. And which really leaves us with one major drag, which is this one account, and that account will bottom out in Q4. In fact, they will grow from -- so there's a couple of different factors happening there. One is the big drive to get outsourcing ratio down to 30%, but there is also, they were over strength of budget Q1. And the new CEO came and said, "Hey, don't expect what happened in previous years that will give you more money." So you have to stick to budget, which we dare to cut quite a bit in Q3, Q4. That's what we anticipate will happen to the account. But once they do that, they have to come back to average in Q1. So there could be some growth going into Q1. But even if there's no growth, if it simply stabilizes and bottoms out, actually, we're in a pretty good shape because the rest of the business is doing very well.

Now, notwithstanding all this, the fact that I just said those account will go down, Q3, Q4, will bottom out in Q4, notwithstanding that, because the rest of the business is doing so well, we actually expect to have robust growth in the rest of the year, which I said earlier, I'm reiterating, that is notwithstanding this account going down.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [11]

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Just to get clarity, earlier, we indicated some weakness in capital market and secondary mortgage. So now, outside of this client, rest of the client, you are seeing growth trajectory returning and stability coming there?

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

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Correct. Correct. And this client is in secondary mortgage.

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Dipesh Mehta, SBICAP Securities Ltd., Research Division - Information Technology Analyst [13]

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Okay. Okay. And the second question is about the margin. I think earlier, we indicated about recovery in margin entering into Q2 onwards kind of. Now we have seen a decent uptick in margin. What would be the medium-term kind of margin trajectory because our margin performance remains fairly volatile across quarters. So if you can help us understand what would be the broad range where we should operate?

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

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So -- I mean, I can kind of slightly disagree that our margin performance is volatile. There is actually a reasonably well-set cyclicality to our margin. Our Q2 and Q3 are decent. Our Q1 and Q4 are lower. And we said every year, okay, don't look at what is the Q1 or Q4, don't look at what is the Q2 and Q3, the numbers for the full year is going to be somewhere in between. In fact, usually, Q3 tends to be the best, a little bit better than Q2. And either Q1 or Q4 tend to be the worst depending on calendar and so a reasonably well-set pattern. But what tends to happen is because Q4 and Q1 are consecutive quarters, it's just the sense that, oh my god, margins have fallen and it's not going to recover, but we keep telling you very confident margins will recover. So there is -- there is volatility, yes. But it's not -- it is within this factor. If you go back and look at a number of years, it is going to be largely within this bracket.

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Operator [15]

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We have next question from the line (inaudible) from Emkay Global.

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Unidentified Analyst, [16]

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Keech, just wanted to understand your commentary on sequential growth further. So in recent years, typically, the June quarter, which has the best sequential growth. Do you think we'll probably have a slightly different trend this quarter given some of the challenges on the financial services side have reduced recently for you?

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

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When you say the June quarter did you mean calendar Q3?

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Unidentified Analyst, [18]

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June Q3 or June Q2 of calendar quarter. Can you comment on this?

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

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Well, yes. I mean, so Q2 or Q3 -- between Q2 and Q3 both tend to be quite robust, right? I think, I'll -- given this year's context, I think Q3, we expect, at this point, certainly will be better than what Q2 was. So Q3 will be our most robust. We also expect that unlike in usual years where, because of a lot of cyclical headwinds, Q4 is either flat or very low growth, we actually expect that trend to get bucked this year.

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Unidentified Analyst, [20]

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So just to carry further with regards to the discussion by one of our financial client customers, which you think is on the mortgage lending side. I suppose this customer was largely on-site center delivery. And I think that much you have spoken about possibly to be turning towards on an incremental basis to higher offshore delivery. So will this also be efficient to our margins from an overall basis?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [21]

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Yes. So there is kind of 3 good things in this basket, okay? The first is what you said that our offshore ratios will improve and hence, it's a bit of a tailwind to our margin percentage. The second is that our client competition right at the top is going to reduce. It's going to bit of dealers' car business. And the third is, we take -- the fact is that not returning that, we expect to see a robust H2. And once this bottoms out in Q4, then we could have a really nice H1 next year. So that's all the good news that we see in the bad news here.

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Unidentified Analyst, [22]

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(inaudible).

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [23]

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Yes.

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Operator [24]

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Sir, do you have any further questions?

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Unidentified Analyst, [25]

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No, thank you, and all the best for the future.

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Operator [26]

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So we have next question from the line of Abhishek from Equirus.

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Abhishek Shindadkar, Equirus Securities Private Limited, Research Division - IT Analyst [27]

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So, Keech, should we read the drop in the development expenses on a sequential basis are related to the market customer that you are referring to? Or anything else has happened on that side?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [28]

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So I want to make sure I know what you're referring to. Are you referring to our ADM business or an expense line item?

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Abhishek Shindadkar, Equirus Securities Private Limited, Research Division - IT Analyst [29]

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The software and the development expenses.

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Vikash Kumar Jain, Hexaware Technologies Limited - CFO [30]

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Oh, okay. Yes. So that's a reduction in our subcontracting costs and that's partly driven by the fact that our business mix shifted -- there is a significant shift from on-site to offshore. So on on-site, to keep our cost structure variable, we have a lot of subcontractors. And with the business coming down in the on-site as contracting charges have come down.

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

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Yes, certainly linked to this customer too, not only that customer, but probably a good chunk is linked to that customer.

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Operator [32]

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So we have next question from the line of Sandeep Shah from CGS-CIMB.

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Sandeep Shah, CIMB Research - VP [33]

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Keech, just wanted to understand, looking at the macro, do you foresee any further instances where clients are slightly jittery in terms of releasing the IT spend or slowing down the (inaudible) in terms of the deal wins or deal awards and all that. So any -- across any segment because you called out capital markets at the start of the year, but are you seeing any kind of signs of similar thing in the other industry segments?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [34]

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Not at this point. However, capital markets, some of the events in the last one week, we haven't fully digested. I don't think our customers have. I don't yet have a view on what that could mean. Just logic trend-wise, anticipation of the fact that there will be further reduction in interest rates has gone up. That's a negative for capital markets, for asset managers. So bisect capital markets is a negative. They make money on interest rates. So both of these are kind of fully baked in, because that's just happening in real time, right? But we haven't seen impact in others, especially in our portfolio, I mean, you've seen the numbers, 17.5% growth. Like I said, we expect that to improve to H2.

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Sandeep Shah, CIMB Research - VP [35]

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Okay. Okay. And just on the capital allocation, you said that the current dividend per share, per quarter will continue. And that you also assume that in the fourth quarter, likely trend would be to go with the interim dividend rather than any further higher final dividend, right? So one can you foresee that... Yes.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [36]

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Yes. I mean, the Board will make a decision each quarter, but that's the -- likely. We usually don't do an additional; we just do interim. This is what we are likely to stick to for a while.

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Sandeep Shah, CIMB Research - VP [37]

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Okay. And just last, H2 generally, is for you better in terms of new accounts, new wins. Will that similar trend would be visible even in this year, especially in the fourth quarter?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [38]

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Yes, that's usually the case, right? But we can never predict for sure new wins. But yes, in general, that tends to what happens. People keep postponing decision-making and then they have to do it before the year is out, so they do it. That's what we expect will happen this year too.

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Sandeep Shah, CIMB Research - VP [39]

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Okay. Okay. And just a follow-up to that, I think, in the existing accounts, we have done good in CY '18, where we were able to win some larger deal wins. So those trends are continuing? How -- can you give some update? How are we progressing in terms of existing client mining?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [40]

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Yes, thanks for asking that question, actually. So our existing trends -- our trends for existing clients pipeline and existing clients, and I've been giving that commentary for some quarters now, does not change. It continues to become better. I think it's a very sustainable secular trend that our clients are recognizing that we can do more. They are inviting us to more and more initiatives, virtually anything material that they do, we get invited to and a lot of customers. And so pipeline for existing customers better, our win rates are improving, so we are doing very well with existing customers.

Our dependence on NN for growth is, in the balance, a lot lesser now than what it was 3, 4 years ago. It's still an important part of our growth, but in balance, it is less important than what it was before.

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Operator [41]

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We have next question from the line of Ashwin Mehta from IDFC.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [42]

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Just had one question in terms of the Mobiquity business. Is there any seasonality to this business in terms of what quarters are stronger, what are weaker?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [43]

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So there isn't like a business seasonality, but there is a lot of (inaudible). They don't take -- historically, they have not taken a risk on fixed price. Even if they take accountability for delivering a product, they charge on T&M. So there is some calendar risk variance to that business, but there isn't a cyclicality on top of that.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [44]

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Okay. And the second one is, in terms of the reduction in guidance from '20 to '19. So it's largely due to this client? Or the impact because of this client is actually higher and we are making up for it from the rest of the business?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [45]

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It's actually the latter. Impact on this on account of that client is actually quite a bit higher than that production. But we are doing better-than-expected everywhere else. So it is the latter.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [46]

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Okay. And this reduction is largely based on the CEO's rating and not necessarily something to do with one of the businesses looking to in-source?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [47]

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No, actually it's nothing to do with client. We have 2 clients in that same vertical that are neighbors. And our client is actually doing okay. They are not -- they were doing just more okay in H1, but they are actually looking quite robust in H2. So it's in respect of the new CEO (inaudible). So the -- so it's you need to describe.

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [48]

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Okay, okay. And just one last small clarification. In terms of Mobiquity business, you indicated around $17-odd million of quarterly run rate. So we can assume proportionate contribution for half the month?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [49]

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No. sorry -- well, how to put it, the $17.6 million, to be specific, would have been the contribution for 5.5 months, not for the half year. So it would be 5.5 months. What we said is that, if we had consolidated -- we consolidated Mobiquity for what, half a month, right?

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Ashwin Mehta, IDFC Securities Limited, Research Division - Director [50]

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Yes.

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

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If we consolidated for the full quarter, then our revenues would have been higher by $17.6 million.

Don't forget the contribution for final month's worth, 2, 2.5 months' worth was $17.6 million.

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Operator [52]

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We have next question from the line of Sudheer from AMBIT Capital.

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Sudheer Guntupalli, AMBIT Capital Private Limited, Research Division - Associate of Technology [53]

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Bill rate improvements actually contributed almost 90 basis points in terms of margin improvement in this quarter. So is this broad-based or driven by any specific segments in terms of verticals or any particular segments?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [54]

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Well, I think it's more driven by skills than segments. We've been speaking for some time that we see an opportunity to kind of get better rates in pockets from some customers. I think it's more a function of that. And I think some of these skills, the consumption across verticals is fairly secular.

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Sudheer Guntupalli, AMBIT Capital Private Limited, Research Division - Associate of Technology [55]

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Sure. And my second question is, in terms of utilization, I think, we are almost at 81%. And in terms of attrition, close to 18%. So given these 2 variables, how comfortable are you in terms of any possible risk to margins going forward?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [56]

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Yes. I mean, we feel good. We've said many times over, we think, there will be a sharp improvement in margin from Q1 to Q2, and we'll sustain that or maybe slightly improve that in Q3. And I think, we continue to say that. We have the same pattern every year, Q1 is low, Q4 is low, Q2 and Q3 are good, so we don't see a risk to this range for Q3. So between Q2 and Q3, just so you know, there's going to be some puts and takes, right? We -- obviously, the visa cost, to some amount of ongoing visa rental cost, but the big chunk of visa annual costs that are not going to be there next quarter.

The (inaudible) we'll partially take it back next quarter. We'll have a full wage rate impact in Q4. So that's some of the major puts and takes that actually calendar is going to be slightly better in Q3 than Q2.

So yes, we feel pretty good about where the margins will be in Q3.

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Operator [57]

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We have next question from the line of Shashi Bhusan Axis Capital.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [58]

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Congrats, good quarter on all fronts. If I look at the new [D-RIM] in H1 CY '19 and compare it with H1 CY '18, the growth is hardly like mid-single digit. So what is driving the confidence for a stronger growth in H2? Is it the pipeline that could translate into stronger bill win? Or the ramp-up of some of the deals that we have already won in CY '18.

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [59]

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So it's the latter. So but there are some pipeline differences always. But a lot of what we're talking about is orders in hand, which -- transition is going on, orders continue to start through until the end. So it is -- much of it is based on orders in hand. There is some, but not a huge amount, of differential pipeline.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [60]

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So sir, in that case, if the deal win momentum doesn't improve in the second half compared to the second half of CY '18, there could be some distribution and (inaudible) in CY '20. I know it's slightly part of it, but still?

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [61]

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Yes. In general, what you said is true. However, our CY '18 bill had a blip (inaudible). We had a $110 million quarter in Q4. But that $100 million client is essentially not doing the contract in the same form and fashion. They're just doing automation not the notes also. It is materially different.

So not simply comparable, but in general, yes. If the deal momentum for H2 is not good, it will not have an impact on '19 revenues. It may not even have an impact on H1 of '20, but have an impact on H2 '20.

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Operator [62]

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(Operator Instructions)

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R. Srikrishna, Hexaware Technologies Limited - CEO & Executive Director [63]

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Wonderful. Thank you all. We actually took a little bit longer in our commentary than usual because we have more things to walk through. So we were actually prepared to go a little bit later in the Q&A if needed, but it looks like there isn't. So thank you all, and hopefully, we will see all of you on the 23rd September. Look forward to that.

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Operator [64]

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Thank you. Thank you very much, sir. Ladies and gentlemen, on behalf of Hexaware Technologies Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.