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Edited Transcript of ZENSARTECH.NSE earnings conference call or presentation 22-Oct-19 10:30am GMT

Q2 2020 Zensar Technologies Ltd Earnings Call

Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Zensar Technologies Ltd earnings conference call or presentation Tuesday, October 22, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ajay Bhandari

Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer

* Harjott Atrii

Zensar Technologies Limited - Executive VP and Head of Cloud & Infrastructure Services

* Navneet Khandelwal

Zensar Technologies Limited - Senior VP & CFO

* Sandeep Kishore

Zensar Technologies Limited - CEO, MD & Director

* Vivek Ranjan

Zensar Technologies Limited - Senior VP & Chief Human Resource Officer

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Conference Call Participants

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* Amit Chandra

HDFC Securities Limited, Research Division - IT Analyst

* Madhu Babu

Centrum Broking Limited, Research Division - Research Analyst

* Mukul Garg

Haitong International Research Limited - Research Analyst

* Santosh Sinha

Axis Capital Limited, Research Division - Assistant VP of IT, Telecom and Internet Research

* Shashi Bhusan

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

* Suraj Subramaniam;Airavat Capital Advisors LLP;Co-Founder & Managing Partner

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Zensar Technologies' Q2 FY '20 Earnings Conference Call hosted by Axis Capital Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Santosh Sinha from Axis Capital. Thank you, and over to you, sir.

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Santosh Sinha, Axis Capital Limited, Research Division - Assistant VP of IT, Telecom and Internet Research [2]

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Thank you, Ramon. Good evening to everyone. On behalf of Axis Capital, I welcome all the participants to the conference call. Today, we have with us, Mr. Sandeep Kishore, CEO and Managing Director of Zensar; Mr. Navneet Khandelwal, CFO; and other leadership team members.

They will start with overview of the company performance for Q2 FY '20 and then we can switch to Q&A session. Thank you, and over to you, sir.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [3]

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Hello, and good afternoon, everyone. Thank you for joining today to discuss Zensar financial results for quarter 2 fiscal '20.

On the call, I have with me from the Zensar management team Ajay Bhandari, Head of Strategy and Corporate Development; Navneet Khandelwal, CFO; Vivek Ranjan, CHRO; Prameela Kalive, COO; Harjott Atrii, Global Head of Cloud and Infrastructure Services; Venky Ramanan, EVP and Head of Hi-Tech and Manufacturing; and Shirshendu Deb, Global Financial Controller.

I'll give you a brief overview on quarter 2 fiscal '20, which will then be followed by an update on other financial metrics from Navneet, post which we will open the floor for questions. I trust all of you have had a chance to go through the detailed Q2 fiscal '20 financial results and the factsheet that we released yesterday.

Let me take the opportunity to present some details. We delivered $152.3 million in overall revenue in Q2 fiscal '20. In constant currency, the Q-on-Q revenue growth was 0.3%, Y-o-Y growth was 14.1%. In U.S. dollars, the revenue de-grew by 0.7% sequentially and grew by 12.8% year-on-year.

Q2 revenue was impacted due to few large projects completion with 2 of our top clients. Our revenues CQGR over the last 10 quarters, including quarter 2 fiscal '20, remains in the top quartile to the industry at 3.7% in constant currency and 3.6% in U.S. dollar terms.

Our revenue for the core business remained stable on quarter-on-quarter and posted a healthy growth of 15.5% on a year-on-year basis in constant currency. Our core business is now 95.8% of our overall quarter 2 fiscal '20 in U.S. dollar terms.

Both gross margin and EBITDA witnessed a healthy increase on Y-o-Y. Gross margin grew by 11.9%, while EBITDA grew by 17.2% in USD. Q2 EBITDA stood at 14% of revenue. On a Q-on-Q basis, GM and EBITDA de-grew by 1.7% and 2.3%, respectively.

In quarter 2 fiscal '20, EBITDA for the core business is at 14%. Our PAT grew by 0.2% on a quarter-on-quarter basis and declined by 16.4% yearly largely due to higher ForEx gain that we had in quarter 2 of fiscal '19.

Our digital revenue continued to follow great momentum and has crossed the 50% mark for the first time with a growth of 3.5% sequentially in constant currency terms. Digital now accounts for 50.1% of our overall revenue.

Most of Zensar platforms, solutions and services are now featured in leading advisers and analysts reports such as ISG, Avasant, Gartner, Everest, IDC, Forrester and more.

Our Application and Digital Services business witnessed a healthy quarter-on-quarter increase of 3.6% in constant currency, rising on the back of our digital services revenue, which grew by 7% sequentially in constant currency.

Core application, traditional services grew by 0.1% sequentially in constant currency. On account of a large transformation project completion in a key client, our cloud infrastructure business declined by 15.8% sequentially in constant currency. We, however, continue to remain very positive about our cloud infrastructure business that has a strong pipeline, and we expect to convert that in the medium term.

In regional business units, the growth was led by South Africa market, followed by Europe. South Africa grew by 23.4%, while Europe grew by 5.1% sequentially on constant currency. U.S. declined by 3.3%, primarily due to the impact of our retail and cloud infrastructure business. All regions posted good yearly Y-o-Y growth.

In terms of vertical, financial services led by insurance grew sequentially by 15.2%, followed by hi-tech at 1.1%. Retail and consumer services declined by 7.7%, owing to project completions in large accounts and delays in start of some key engagements, all in constant currency terms.

We continue to remain committed to winning at scale as we maintained our large deal momentum into quarter 2 by winning deals across regions from existing and new clients. In quarter 2 fiscal '20, we booked deals worth more than $120 billion TCV, including renewals. Our overall pipeline continue to remain healthy at over $1 billion mark.

We continue to put focused effort to scale up strategically into our top-tier high-growth accounts, and we have continued to invest in enhancing the business value we provide to these clients through our -- across spectrum services in applications, digital and cloud infrastructure. As we have mentioned earlier, our focus is to mine the high-growth top-tier accounts with multiple services and win net new deals with our differentiated proposition in digital, AI, human experience and secure cloud infrastructure services.

Our revenue from top 20 clients remained strong with the quarter-on-quarter and year-on-year growth of 1.5% and 24.8%, respectively. However, as mentioned earlier, due to project completion with key clients, quarter 2 fiscal '20 from top 5 and top 10 clients witnessed a sequential decline of 1.8% and 3.2%, respectively, while maintaining strong year-on-year growth of 15.4% and 19.1% in dollar terms. Our respective mining strategy has also yielded very good results as 3 new clients joined the $5-plus million [cadre] and 2 new clients were added to $1-plus million category this quarter. As of quarter 2, we now have 93 $1 million-plus accounts, 23 $5-plus million and 9 accounts of $10-plus million per annum.

In terms of innovation and intellectual property, our total patent filing now stands at 96, with 11 patents having been granted. Zensar continues to get included across board this quarter by reputed industry analysts for our capabilities. Challenger in Digital Masters Avasant RadarView 2019; niche in Gartner's Magic Quadrant for Oracle Cloud Application Services, Worldwide 2019; Gartner Critical Capabilities for Oracle Application Services, Worldwide 2019; Hfs mentions Zensar as a rising mid-tier company; Global Data covered Zensar Return on Digital Conclave Advisers and Analyst Day; challenger in Avasant's Blockchain RadarView; innovators category in Applied AI and Advanced Analytics Services RadarView; major contender in Digital Interactive Services PEAK Matrix by Everest; mentioned in Gartner Market Guide for Blockchain Implementation Services; mentioned in Blockchain Service Providers Toolkit; niche player in Gartner 2019 Magic Quadrant for Data Center Outsourcing and Hybrid Infrastructure Managed Services, North America; Zensar listed in Gartner Critical Capabilities for Data Center Outsourcing and Hybrid Cloud Managed Services in North America; Zensar's Smart Autonomics Platform was featured in a 451 Research report in September 2019.

Our global head count has now reached 10,219 as of quarter 2 fiscal '20, net addition of 1,081 associates on a yearly basis. Our attrition rate stood at 17% as of quarter 2. We've been enabling business process transformation for our clients by perfecting the processes ourselves. Zensar, for the past 3 years live their commitment to help organizations in their digital transformation. In the process, Zensar itself became a 100% digital organization. Our Return on Digital NeXt platform and solutions have been an integral part of all our deal wins so far, and more and more clients are benefiting from this platform.

The next step in the journey is to enable transformation through our AI-driven solutions. We've committed to this promise of Living AI, where we will make 100% of all Zensar platforms driven by AI. We've also started taking these solutions now to our clients. In H1 fiscal '20, we've had a total order booking of $280-plus million, which includes multiple large wins from our existing and new clients. Overall, we see a stable demand-side environment from a strategic point of view, and we continue to keep investing in business to ensure sustained growth.

With that, I will now invite Navneet, our CFO, to provide update on key finance data, after which we will open the floor for questions. Navneet?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [4]

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Yes. Thank you, Sandeep. Good day, everyone. Welcome to this call. In addition to Sandeep talking about the business, I will take you through some of the details on financials.

In the second quarter of FY '20, we have reported revenue at INR 1072.3 crore which reflects a sequential growth of 0.6 percentage and Y-o-Y growth of 13.3 percentage in rupee terms. This is our 10th successive quarter of positive sequential growth in INR terms. In U.S. dollar terms, the reported revenue is $152.3 million, reflecting a decline by 0.7 percentage sequentially and an increase of 12.8 percentage annually. In constant currency terms, for the quarter, company grew by 0.3 percentage sequentially and 14.1 percentage Y-o-Y.

For H1, our operating cash flow stands at $27.5 million, which is a year-on-year growth of 164 percentage. Operating cash flow stood at 119.2 percentage of PAT for H1 of this year as against 40.9 percentage of PAT in corresponding H1 of the previous financial year. The U.S. dollar realization during the quarter has been INR 70.4 per dollar against INR 69.5 in the previous quarter. The year before in the same quarter, it was INR 70.1.

Our gross margin for the quarter was 29.1 percentage as against 29.4 percentage of previous quarter. The effective tax rate for the quarter is at 28.5 percentage as against 28.4 percentage in the previous quarter. For the current quarter, billed DSO stood at 57 days against 68 days in the previous quarter, while DSO, including unbilled, stood at 102 days against 104 days in the previous quarter.

The total amount of outstanding hedges as of September 30, 2019, was equivalent to USD 170 million against $145 million in Q1 of FY '20. As of end of this quarter, our cash and cash equivalent balance was $60.6 million against $72.9 million in Q1 FY '20.

With that, I come to the end of my presentation and open the house for questions and answers.

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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 Madhu Babu from Centrum Broking.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [2]

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Sir, a tepid quarter on revenue, so how much was led by offshore shift and lower hardware and pass-through revenues?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [3]

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Sorry, Madhu Babu, can you repeat it, please?

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [4]

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Yes, so this was a tepid quarter on the revenue front, how much was led by the offshore shift in the [port] mix and the lower hardware pass-through revenues because I see your cost of material declining quarter-on-quarter?

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Ajay Bhandari, Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer [5]

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Yes. So there, Madhu, the overall services mix is positive in the sense that the number of products that we sold declined fairly substantially this quarter. So more services got sold, so there is a positive shift reversals in this quarter.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [6]

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Sir, would there be any furlough impact in 3Q or 4Q? Or are we expecting growth rate to accelerate from 3Q onwards?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [7]

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No. Furlough is normally into quarter 3, Madhu Babu. It's not there in quarter 2. So you will see. It's pretty standard in our industry. You will see the normal furlough impact in quarter 3.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [8]

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Sir, that is what I was asking, whether we will have a seasonally soft quarter in 3Q also or we will see some acceleration in growth front?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [9]

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We, of course, don't give any guidance. There are projects. You see roughly half and half of our business is time and material and projects here. And our endeavor is to convert the pipeline that we talked about and make sure that we win in the front half of the quarter. And depending on that, we certainly have to make sure that we deliver the growth.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [10]

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And last one, sir, this $1 billion pipeline you're saying, so that does include the renewals part also? Or is it net new which you're pursuing?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [11]

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It includes the larger renewals, not the smaller one. So every time we announce the deal wins, the deal wins include the larger renewals, the $10-plus million deals renewal are included in that because it goes through a fairly rigorous vendor procurement process. So that is included in those deal sizes.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [12]

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Okay. And margin execution has been steady this quarter, I think. So should we see margin stabilizing or improving from here on?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [13]

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Our guidance has always been on the core operating business. We have said that we are working towards getting to 15%. We are at 14% now. And in the management team, we are all very focused and committed to get that 15% in the immediate quarter.

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Operator [14]

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(Operator Instructions) The next question is from the line of Mukul Garg from Haitong Securities.

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Mukul Garg, Haitong International Research Limited - Research Analyst [15]

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Sandeep, to start with on the retail side, it has been steadily declining for almost 5 to 6 quarters now, what is your sense kind of given that macro commentary in U.S., Europe are still -- still is quite weak? And there's still a lot of Amazon impact, do you think retail will remain weak for some more time? Or are we reaching close to the bottom?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [16]

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Mukul, our sense is that you called it out from the industry commentary, retail is soft, whereas the whole Amazon effect, which certainly is adding to it. And I do believe that retail will remain soft for some more time to come. Our focus clearly is, as you'll see, to really shift the pivot towards the financial services and our technology businesses, which is what we have been doing. At the same time, within retail also, we are doing micro sector, so that we don't just focus on the big-box retailers. Traditionally, the business and what gets directly impacted by Amazon and Walmart are the big-box retailers. So there are specific sector growth opportunities available, particularly in retail technology and somewhat in CPG as well and we've been pivoting towards that. But macro situation in retail, from where I see, I do believe it will remain soft for some more time.

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Mukul Garg, Haitong International Research Limited - Research Analyst [17]

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Understood. Also, when -- if we look at the deal win TCV number for this quarter, it was a bit lower than your recent history of about $150 million to $200 million quarterly run rate. Are you seeing delays in deal decisions coming in as we have heard from larger peers? If yes, then how are you compensating for the longer additional cycles? Are there any adjacencies which you guys can start tapping into besides your core areas of operations to kind of make up for this gap?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [18]

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So there are multiple questions in that. Number one is, yes, $120 million was at the lower end of what we normally do in the deal booking itself. And that happened because some of the deals that we are fighting, we are in very advanced and mature stages, there, decisions have been delayed by the clients. So that's one. That caused that issue of why is it $120 million compared to anywhere north of $150 million that we normally do.

The second is our Cloud Infrastructure Services business, which has been an exceptional performance for us for several quarters now. We completed a project, as I called out in the early phase, and that is a good growth driver for us in both our existing accounts as well as in our new accounts. And we have a unique, differentiated proposition there. So we feel quite confident that based on our existing account -- the top 20 accounts, as I called out, actually grew quite well on a quarterly basis as well as on a yearly basis. And we today only have close to less than 20% penetration of Cloud Infrastructure Services into those top-tier top 20 accounts. So it looks quite good from where I see that our growth opportunity with that and also into the technology sector. It's still quite robust. Those are sectors where the decisions are not as much delayed and impacted as you'll see in the retail sector, in some part of financial services, not all.

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Mukul Garg, Haitong International Research Limited - Research Analyst [19]

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Understood. And are there any adjacent areas which are easy for Zensar to enter? I know you guys have a very tight area of operation. But do you think it is maybe physically viable to tap into newer areas to make up for any gap in the retail and the client-specific issues?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [20]

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The new market segments, we are not going in right now. I think we have enough opportunity, I believe, into hi-tech manufacturing, into financial services and some sectors of retail. What we are definitely focused on is to bring new service offerings to our customers. So remember, digital consulting is a new service offering, which we've launched close to 2 quarters ago, and it's done quite well. It is effectively the wedge that helps us get into large scale digital transformation program enterprise-wide. So that's one area. Automation, particularly the whole autonomics and automation into the ITSM space in cloud infrastructure, is the other area where I think we have enough room to grow into the new age next-gen cloud infrastructure services. And I will -- if -- I'll call Harjott to maybe add some commentary from his side. So those are the 2 big call-outs that I can do. Harjott, do you want to add a couple of quick comments from your side?

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Harjott Atrii, Zensar Technologies Limited - Executive VP and Head of Cloud & Infrastructure Services [21]

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Yes. In terms of the deal pipeline in the adjacent areas, we consistently see a lot of transformation -- technology transformation that's going in the customers' data centers as well as the digital platforms as well. So that continues to be a growth area. And our value propositions of services catalog is aligned to where the customer spend is, which is primarily with regard to cloud transformation, cloud migration, industrial experience management.

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Mukul Garg, Haitong International Research Limited - Research Analyst [22]

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Got it.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [23]

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That Mukul, the areas, I'll just take maybe a quick minute to also bring the human experience-led adjacency area in the whole CDO/CMO space, the 2 acquisitions that we have done, they are now completely integrated as part of our service offering now for a couple of quarters, the Indigo Slate acquisition in the U.S. and Foolproof in the U.K. They're part of our core offering. And with that, we've also opened as part of our digital proposition itself into the existing accounts. So they are now actually well entrenched into over half of our existing account.

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Mukul Garg, Haitong International Research Limited - Research Analyst [24]

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Got it. One final question if I may ask was you specifically mentioned that part of the weakness this quarter was because of a large project going into execution. So was that something which is baked into the numbers and we will not see any further correction because of that particular deal? How should we read and look at that? Is that something which was a pretty big data, which you guys have implemented and then the execution at higher margins will be steady-state now?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [25]

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So in terms of cloud infrastructure deal, which got completed, and that's the reason why you saw that impact into our CIS business, which de-grew by 15.8% sequentially in constant currency. Very large transformation projects into one of our top 10. So on one hand, we have delivered it almost probably 30 days ahead of schedule, and we're very hopeful that we are going to win additional business on account of that. It's just that, that additional business actually did not come into quarter 2. So to that extent, yes, there was -- there is always this misalignment in terms of the deal closure and the project completion, but it will come back. These are project completion issues, which you always face, but I'm pretty confident that it's going to come back up pretty soon.

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Operator [26]

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The next question is from the line of Shashi Bhusan from Axis Capital.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [27]

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In terms of deal pipeline, how is this new micro-vertical of retail specialty retail kind of stuff that we're trying to get into looks like as of now? And can we expect this new sub-vertical to drive the turnaround in retail?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [28]

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Harjott?

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Harjott Atrii, Zensar Technologies Limited - Executive VP and Head of Cloud & Infrastructure Services [29]

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Well, Shashi, we have been concentrating on this micro-vertical now for 2, 3 quarters. If you look at the history, we were traditionally focused on big-box but that's where bulk of the decline is happening, so we have started focusing on smaller and niche retailers where it's is not really being impacted by Amazon. We are taking both our e-commerce as well as our supply chain offering to them. We are getting good traction. It has partially mitigated the declines, which has happened in some of the big-box retailers. But it's not, at the moment, reached a stage where it can completely mitigate the decline. So it is buffering up the decline, but it's not still a big business which can result in a reversal of the decline in retail. So it's still kind of wait and watch for us.

The other thing we've been doing also has been focusing on other adjacent areas in retail like retail tech, et cetera, which has less seasonality, which is not really impacted by Amazon to further -- for further decline in the traditional retail business. It's been a good trend. I mean we've added a few retail tech clients. We've added a few micro-specialized retailers. And we -- right now, even more so, we are very focused on building our pipeline there.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [30]

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So this weakness is likely to persist for a couple of more quarters. So in that context, sir, in terms of resource, if there is weakness in retail vertical, how fungible are our resources from one vertical to another?

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Ajay Bhandari, Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer [31]

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Very fungible, Shashi. The [level of] utilization has gone up to -- gone up 170 basis points to [84] partially because of the fungibility there. So we have a supply chain business in retail, which came out of our Keystone acquisition, that actually is continuing to do well. So there, we don't really have a challenge of a decline.

The e-commerce business, which was declining, shifted from ATG to full-stack micro services development almost 4 quarters ago. And that skill set is basically fungible across finance, hi-tech, anywhere, which is one of the reasons why the utilization has gone up. So we don't really have a challenge of redundant skill at the moment. It's a question of identifying new areas of retail, which are in demand, which are growing and focusing the growth and pipeline there.

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Shashi Bhusan, Axis Capital Limited, Research Division - Executive Director of IT and Telecom [32]

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And just one on macro stuff. Are we seeing slowed down decision-making, especially in U.K. because of the Brexit uncertainty?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [33]

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So Shashi, no. The answer, so far, has been no. Our U.K. business, as you've seen, even last quarter, grew by 5.1%. Some of it's Europe, but 90% of that is actually U.K. So no, we haven't seen it. Although, in client conversation, it's down now. Now as we all are -- it's like wait-and-watch on what actually happens in the -- on the law and the policymakers and how they decide. But so far, we have not seen any such impact.

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Operator [34]

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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 [35]

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Sir, what is the outlook on the top accounts because of the trade war issues still going on?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [36]

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So I think the tariff decision by the U.S. government has been pushed out by 90 days. Our exposure to the tax factor is 50% of our business. So if the tariff decision do come in, I do believe there will be some impact. We have to really find some methods of mitigating it.

The second is, I do also believe that there is the shift between CapEx and OpEx spend because some clients that we talk to have started to anticipate that some tariffs will be impacted. And hence, they may prepone their CapEx now and push the OpEx to a later date. So it's difficult to comment, but should the tariff increase happen, it -- we will need to bake that into our whole business plan itself. Clients are talking about it. That I can tell you.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [37]

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Yes, because the top accounts, they're almost 25% of total revenue, so do we -- we do need some -- any adverse -- yes?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [38]

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Yes. So let me call out just that, specific answer is no. There is no impact on the top account, if you follow the commentary that the top account has also been giving, that they have a very diversified global supply chain, and that risk is mitigated. However, the exposure that we have -- we have another 25% exposure outside of that into the technology sector. So I was actually giving you a broader commentary, not on the account of top 25. Let me also call out Venky who heads our Global Hi-tech Manufacturing business to add some comments that he may have.

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Vivek Ranjan, Zensar Technologies Limited - Senior VP & Chief Human Resource Officer [39]

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No, Madhu. Adding to what Sandeep just mentioned, overall, as much as that conversation with the clients include that, specifically to the question on top account, like Sandeep mentioned, the answer is no at this point of time, at least for the immediate quarter that we are seeing into because of the pipeline discussion, because of also the mitigation plans that we have in terms of being as much global on distribution as the client is. So to that extent, we are pretty positive that we do not see any impact in the top clients in the upcoming quarter.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [40]

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Sir, and one more thing on IMS, I think it's been quite some time we invested on the platforms, and we have outsourced the consulting firms. So is that like we are getting more of a project-based work that once we complete, there's a pause [in all that]? Or -- so how is the traction in the [overall alignments] after that platform business?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [41]

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Yes. So I'll let Harjott answer that specific question, Madhu Babu, but I do believe that traction is actually quite good. We are now featured in almost every single industry analyst research report and the deal advisers, getting invited to the deals. The deal pipelines are -- close to 25% of our total deal is the cloud infrastructure. Harjott, do you want to add any specific color, particularly on the autonomics and automation platform that we've built?

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Harjott Atrii, Zensar Technologies Limited - Executive VP and Head of Cloud & Infrastructure Services [42]

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So the Smart Autonomics Platform we have built is one of the differentiated value proposition we have for the CIS business. And that also serves as a [wedge] play. So we go into the customers' data center and digital platforms and implement the technology transformation. And once we complete that transformation, we'll also do the run and operate value proposition for them. So we are leading with change and transform and then bring the energy business with run and operate and giving a total cost of value proposition to the customers.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [43]

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Okay. And sir, lastly, on the cash flow. Net cash has declined quarter-on-quarter. So what is the CapEx and the payout for the earlier acquisitions this year?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [44]

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So the CapEx for this year what we have done currently about $6.5 million, which is disclosed in our factsheet. The quarter-on-quarter decline in cash is on account of primarily 2 reasons. Number one is, we paid the final dividend of about $6 million during this quarter. Number two is, we have paid an earn-out of about $5 million in the current quarter pertaining to our acquisitions. We do have further estimated payouts totaling up to $5 million in the balance of the year for acquisition earn-outs depending upon they're meeting the target.

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Madhu Babu, Centrum Broking Limited, Research Division - Research Analyst [45]

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Okay. So the $10 million in earn-out and $12 million in CapEx for the full year, can we take that as a broad estimate?

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Navneet Khandelwal, Zensar Technologies Limited - Senior VP & CFO [46]

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Yes, again, I will not make a forward-looking statement on that because CapEx will continue as based on our needs, so I will not straightway extrapolate it that way because earn-outs are also based on achieving the targets in those acquisitions.

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Operator [47]

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(Operator Instructions) The next question is from the line of Suraj Subramaniam from Airavat Capital.

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Suraj Subramaniam;Airavat Capital Advisors LLP;Co-Founder & Managing Partner, [48]

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I have 2 questions. The first one is, what was the organic year-on-year growth for your core business, which, as you said earlier, is now about 95%, 96% of sales. So what was organic growth of that maintenance business be for this quarter?

And the second question is, you mentioned a few quarters ago, obviously, that [you announced] the noncore sort of business, but for the last [update], it's about 5% of sales. Could you give an update on that? How should we think about how this 5% of sales be put out over time?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [49]

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Suraj, let me call on Ajay, but to give update on our third-party maintenance business, which is clearly called out by us as the noncore and we've been working towards making sure that we find a profitable home for that business. To answer the first part of the question, I think all of our business in this fiscal -- this quarter, actually, is all organic. The last acquisition that we did was over 14 months ago. So every business is now -- its baseline is the same, apples-to-apples now. Ajay, do you want to comment around MVS?

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Ajay Bhandari, Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer [50]

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Yes. Suraj, you would have seen as part of our disclosures that we are currently going through a reorganization of our U.S. NPD structure where we are making certain changes to ensure that the MVS business, which we have identified as noncore, is housed in an entity and the rest of the businesses are basically housed in another entity, so that process is on, which we expect to conclude another 60, 70 days. The focus right now is to revise the revenues and profits of that business. And if you have noticed, there has been a slight improvement in the revenue of that business in this quarter. And so once the business is in a revenue as well as profit cadence, we will take a call on when to divest those. At the moment, the focus is a strong showing of the business, growing steadily and is profitable.

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Operator [51]

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The next question is from the line of [Abhishek S] from Elara Capital.

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Unidentified Analyst, [52]

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Just one quick question. Was the quarterly performance in line with what you were anticipating at the start of the quarter or the performance changed during the quarter?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [53]

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Abhishek, the short answer is no. We -- as we mentioned earlier, we still expect the quarter -- the project completion to be going as per schedule, but we are also expecting the clients to provide the next transformation project, which got delayed. So no, we didn't expect that the quarter will be tepid and soft. We were expecting a better quarter.

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Unidentified Analyst, [54]

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Okay. And the cost of -- with -- what were the reasons for the delay in the project as you highlighted in the answer?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [55]

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These are large, complex transformation programs for the client. So many a times -- and this is a client which is in public sector and their decision-making processes are quite involved, and there are unforeseen delays, which happened in the decision-making process, and that's exactly what happened.

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Operator [56]

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The next question is from the line of Amit Chandra from HDFC Securities.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [57]

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Sir, my question is, if you look at the BFSI vertical, we haven't seen that the performance of the vertical is pretty strong in the last 2 quarters led by Cynosure and big deals that we have won. And if I see the incremental revenue Y-o-Y, so 70% of the incremental revenue is coming from BFSI vertical. This vertical has been doing well. So what is the outlook here? So have you seen some moderation here or still could be having (inaudible) are still the ramp-up on this?

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Ajay Bhandari, Zensar Technologies Limited - Executive VP & Chief Corporate Development Officer [58]

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So Amit, This is Ajay. The BFSI vertical, I mean, most of the growth is led largely by the insurance business, predominantly the property and casualty business, which was -- which has come out of our acquisition of Cynosure and the Guidewire capability. Growth has been relatively broad-based. So I would say, it's more U.S. and I would say, a bit of South Africa. You're aware that in South Africa, we do have a large percentage of the insurance clients there. And so the growth has come on the back of some very good farming that we've done, which is reflecting in the top 20 growth as well. And a lot of new wins in the Guidewire business predominantly in the U.S. [When we got it right], we are fairly confident that the capability that we've built whether it's in Guidewire or in property, in casualties, [in generalizing and closing] an extended life and annuity, it's strong enough to sustain healthy growth over the next few years.

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Amit Chandra, HDFC Securities Limited, Research Division - IT Analyst [59]

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Okay. And sir, as we have raised 50% revenues individually, so I know it's a substantial chunk of our business, can you provide some like -- put some suggestions that if you can provide additional breakup of digital, which can help us to understand and I believe that's better, sir. So some of the peers have started doing it. So if you can do it, then it will be better for us to understand. So that is one position.

And now on the margin front that we have been seeing that around 1, 2 -- scale up these margins in the core business to 15%. But there you're saying this since last many quarters, and the actual progress on that has been pretty slow. So how do you see then the -- I know the margin view has been very, very limited with -- it is with the -- it is mentioned at 84%, 85%. So what are the additional margin levers that we have and also so that we can scale these margins higher from here?

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [60]

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So Amit, this is Sandeep here. There are 2 pointers I can give. Number one is here, we're very, very focused and committed on that 15%. This was a wage hike quarter for us. And in spite of tepid revenue, I think we did a pretty good job in terms of managing the operating margin, also all the way up to the [CAG] level in spite of the fact that we had wage hike and we had much less ForEx gains to play on Indian [overall] business.

Second is if you've seen our movement of on-site to offshore, it actually went up this quarter, and I still think there is room for us to do more.

Third is our cloud infrastructure business as we've called this out earlier, when we start to deliver this at scale, the level of automation and nonlinearity of business will drive additional margin. So yes, we have reached 84-plus percentage on utilization. But I do believe that there are levers available as well. The other point, I also want to call out, which we had mentioned on this forum several quarters ago, that we are constantly working on reducing our subcontractor cost as a percentage of revenue, which, again, you would have noticed, we have worked all the way every single quarter to bring it into a manageable level. And I still think that there's room there also for us. So I do believe there are reasonable levers available for us in the midterm to actually get to that 15%.

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Operator [61]

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We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

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Sandeep Kishore, Zensar Technologies Limited - CEO, MD & Director [62]

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Well, thank you very much for being with us on the call and look forward to talking to you again in next quarter. Thank you for joining.

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Operator [63]

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Thank you. On behalf of Axis Capital, that concludes this conference. Thank you for joining us, ladies and gentlemen. You may now disconnect your lines.