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Happiest Minds Technologies Ltd (HAPPSTMNDS) Q3 FY23 Earnings Concall Transcript

Happiest Minds Technologies Ltd (NSE: HAPPSTMNDS) Q3 FY23 earnings concall dated Jan. 19, 2023

Corporate Participants:

Sunil Gujjar — Head, Investor Relations

Ashok Soota — Executive Chairman

Venkatraman Narayanan — Managing Director and Chief Financial Officer

Joseph Anantharaju — Executive Vice Chairman and Chief Executive Officer, Product Engineering Services

Rajiv Shah — President and Chief Executive Officer, Digital Business Services

Analysts:

Manik Taneja — Axis Capital — Analyst

Abhishek Bhandari — Nomura — Analyst

Vimal Gohil — Alchemy Capital — Analyst

Faisal Hawa — H.G. Hawa — Analyst

NGN Puranik — Enam — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Happiest Minds Technologies Q3 FY ’23 Results 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. Manik Taneja from Axis Capital. Thank you, and over to you, sir.

Manik Taneja — Axis Capital — Analyst

Thank you, operator. Good evening, everyone. Thank you for joining us today on the Q3 FY ’23 earnings call of Happiest Minds Technologies Limited. On behalf of Axis Capital, I would like to thank the management of Happiest Minds for giving us the opportunity to host this earnings call.

Today, we have with us, Mr. Ashok Soota, Executive Chairman; Mr. Joseph Anantharaju, Executive Vice Chairman and CEO of Product Engineering Services; Mr. Venkatraman Narayanan, MD and CFO; Mr. Rajiv Shah, President and CEO of Digital Business Services; Mr. Ram Mohan, President and CEO, Infrastructure Management and Security Services; Mr. Aurobinda Nanda, President, Operations and Deputy CEO, Product Engineering Services; Mr. Sridhar Mantha, Chief Technology Officer; Mr. Sunil Gujjar, Head of Investor Relations; and Mr. Praveen Darshankar, Company Secretary and Head of Legal.

I’ll hand over the call to Sunil for the safe harbor statement and to take the proceedings forward. Over to you, Sunil.

Sunil Gujjar — Head, Investor Relations

Thank you, Manik. Good evening to all participants in the call. Wishing everyone a very Happy New Year. Welcome to this conference call to discuss the financial results for the third quarter ended December 31, 2022. We trust all of you are keeping well.

I’m Sunil, Head of Investor Relations. The financial results, statements, quarterly fact sheet, investor presentation and press release have already been uploaded on our website. Please do go through when you get a chance. The agenda for this call is as follows; Ashok will begin the call by sharing his perspectives on the business environment and our results; Venkat and Joseph will then speak about our financial performance and operational highlights; after which we will have the floor open for Q&A.

Before I hand over, let me begin with the safe harbor statement. During the call, we could make forward-looking statements. These statements consider the environment we see as of today and carry a risk in terms of uncertainty because of which the actual results could be different. We do not undertake to update those statements periodically.

Now, let me pass it on to Ashok.

Ashok Soota — Executive Chairman

Thank you, Sunil, and good evening, friends. Thank you, Manik, also for hosting the call. Let me convey my best wishes for the New Year to all the participants in the call. I am happy to share with you that Happiest Minds has delivered yet another quarter of excellent performance on all fronts.

Our year-over-year growth of 26% in constant currency continues to be industry-leading. The solid growth in revenues is accompanied by a superior margin profile, which continues to be strong at 26.3%. On revenue growth plus EBITDA, the metric which we closely track, we are at 55.2%, which reflects our ability to drive consistent profitable growth. We remain on track to achieve 25% year-over-year growth for FY ’23 in terms of our guidance.

During the quarter, We have had many significant milestones. We inaugurated our new development center in Bhubaneswar Odisha with a seating capacity of 150. This center will strengthen our delivery capabilities across our business units with a new pool of talent from the region. We are simultaneously procuring land in Bhubaneswar to expand our capacity for our own campus in due course.

Secondly, Happiest Minds was selected the winner of the Best Governed Company in the Medium Category for 2022 by the Institute of Company Secretaries. You will recollect, we also won the Golden Peacock Award for Corporate Governance last quarter. This dual sweep shows how deeply corporate governance is ingrained in the DNA of Happiest Minds. We were yet again recognized amongst India’s Top 25 Workplaces in IT and IT-BPM 2022 by the Great Places to Work Institute. This was the fifth year running that we have been in the list of Best Places to Work. We continue to get recognized for our disclosure and annual reporting practices, with Happiest Minds winning gold for its 2022 Integrated Annual Report at the League of American Communication Professionals Spotlight Awards for 2022.

Venkat and Joseph will share with you both the financial highlights and our business positions. Looking to the year ahead, we continue to see strong demand. We have positioned ourselves better to fulfill this demand by enhancing our delivery capacity in every location. Our traditional areas of strength such as edu-tech, high-tech and retail continue to show sustained growth. We are increasing our presence in healthcare and BFSI with a view to sustaining our industry-leading growth rate.

With this, I conclude my observations, and I will now pass this over to Venkat. Thank you very much. Thank you, Ashok. A very good evening to all on the call, and best wishes for a New Year. The next few minutes, I’ll share with you financial and operational highlights for the quarter and the nine months ended December 31, 2022. Starting with the quarter, our revenues for the third quarter were about $45.3 million, which showed a growth of about 2.1% on a sequential basis and about 20% on a year-over-year basis.In constant currency of US dollar, the growth was 2.8% and 22.6% respectively — 2.8% on a sequential basis and 22.6% on a year-over-year basis. As you all know, Q3 is generally a seasonally weak quarter, mainly due to leave and foreclose, and on top of this, we also had an unusual increase in vacations and leaves taken by Happiest Minds. I would call the sudden increase or unusual increase as work from home effect as many of our Happiest Minds have come back to office and now are working from office at their base location. Having work from home for more than a year at every instance, they get, they are more likely to return home to spend time with family. So that’s what I referred to as a work-from-home effect. Then, we also had one lesser working day in the current quarter compared to the previous quarter and the previous year. Loss of revenues due to the above unusual circumstances, which is that one less working day and the leave, was about $1.5 million. If you adjust for that, our growth would have been well above 5.5%. Total income in rupees for the quarter was INR375 crores, which showed a sequential growth of 4.3% and a year-over-year growth of 28.2%. EBITDA at INR97 crores remained strong and steady at 26% of our total revenues. Growth in EBITDA was sequentially 3.1% and 26.5% on a year-over-year basis. We managed to address certain increase in costs, mainly people-related, through increased volumes, billing rates and, of course, a favorable exchange rate. Between EBITDA and PBT, for this quarter, we had an exceptional expense for the quarter, and this was on account of the fair valuation of warrant liability in our balance sheet. As you will recollect, we had issued warrants based on earnouts, performance-based earnouts, for the PGS acquisition that we did in January of 2021. We had recorded the original liability of these warrants at about 7.25 million payable over three years on achieving certain revenue and profit targets, and then valued it on a fair valuation of 5.1 million per Indian standards and recorded the same in our balance sheet. The same IndAS requires us to evaluate the performance of the acquired asset and revalue the warrant liability based on the probability of payment. The original liability of 5.1 million, like I said, was recorded in the balance sheet, while any subsequent changes to the same based on actual payout or improved probability of payment needing to be routed through the P&L. Based on the performance of FY 2021, that’s for the last year, we had paid out earnouts identified for that year in full, and we have taken that impact in Q2 of last year as an exceptional item. Now, we are happy to state that based on the performance on the earnouts for FY 2022, we have also become payable in full. While we are very happy that earnouts are payable in full as it reflects the good performance of the acquired assets, from an accounting standpoint, the difference between the actual payout and the fair valued original liability must be taken as a charge to our P&L. This is what we have done now and have taken an exceptional charge of INR6.34 crores. The exceptional item has had an impact of approximately 1.5% on our PBT. The above adjustment for the last year was in Q2, I referred to that earlier. And so, our PAT numbers on a quarter-on-quarter basis such as Q3 over Q3 are fully not comparable. We continue to generate healthy cash flows with almost 95% of our EBITDA finding its way into our financials as free cash. Free cash flows for the quarter was about INR93 crores, and our cash and cash equivalents were at about INR690 crores at the end of the quarter. Our financial return ratios continued to be very healthy. ROCE and ROE are at 35% and about 29.4% respectively. Coming to our performance for the nine-month period ended December 31, 2023 [Phonetic], our revenues in constant currency of US dollar grew by 26%, while our EBITDA was at 26.3%. As you can see, both these are in line and ahead of our guidance on revenue growth of 25% and EBITDA range of 22% to 24% respectively. Our revenue growth and profitability continued to be industry-leading, and we continued to beat our own expectations on margins. Some of the operational highlights for the quarter and the nine months are: we ended the quarter with 4,611 Happiest Minds, that’s our people, a net addition of 30 for the quarter and 443 for the nine-month period. Our utilization levels continued to be steady at 80.1. Attrition levels are trending down and is now at about 20.9% compared to the 23.5% in the prior quarter, considered on a trailing 12-month basis. Diversity and inclusion ratios at the end of the quarter stood at 27.7% and, on the business front, all our verticals and geographies continued to do well. We had a slight reduction in the share of BFSI, primarily on account of the loss of billing days that I referred to earlier. We ended the quarter with 230 active clients, 40 of them were $1 million-plus clients, 92% repeat business and average customer revenues of about $792,000. In this quarter’s presentation, we have included a data point, which correlates revenues versus length of client relationship. Interestingly, 50% of our revenues come from customers with whom we have had relationship of more than five years. So, it proves that we have been able to hold on to our customers and we have been able to go deeper into them. All the above, before I conclude, I would also like to address the question many of you may have on the enabling resolutions we had taken from our shareholders on raising funds through a QIP process. Work is still in process on this front and we’ll keep you updated in case of any progress. In conclusion, we had a good quarter despite certain unexpected fluctuations as explained earlier. Attrition trending down reflects easing in supply-side constraints. We continue to attract and add talent both on offshore and on-site. We have also strengthened our delivery capabilities, like Ashok mentioned, both within Bengaluru and at Bhubaneswar. I now request Joseph to share his thoughts on customers and the demand environment. Thank you, Venkat. A very good evening to all. Happy New Year wishes to everyone on the call. I’m pleased to share with you all the results of another quarter of good performance for Happiest Minds. Our business units, centers of excellence and operating geos continued to grow even in a seasonally weak quarter caused by furloughs and leaves. Without these furloughs and leaves, as Venkat mentioned, our growth would have been much higher. We continue to show progress on our customer metrics as billion-dollar customers increasing by one to 55. We added nine new logos during the quarter, ending the quarter with 230 active clients, of which 40 were more than $1 million in revenue. At a broad level, from a demand perspective, clients continue to invest in their digital initiatives, while ensuring priority to projects with strategic and immediate returns. Across verticals as well as within verticals, we see companies showing different spend proclivity based on the success of their strategy and performance. For example, a retailer may have greater propensity to spend on quicker ROI areas like driving efficiency in the supply chain or a better user experience. On the other hand, a manufacturing customer would prioritize how to recalibrate the broken supply chain or plant automation. Referenceability and scalability play a very important role when it comes to identifying and winning digital engagements. About six months back, we created a value proposition and solution to increase the efficiency of the order management system for a large bottling plant in North America. The impact of this engagement was so deep and strategic that we have been called by players in multiple other geos to help solve their order management problems. We were also chosen by another leading bottling company in North America to set up their center of excellence, leveraging the Microsoft Power Platform. Our depth in edu-tech is helping us solve some of the most challenging problems our customers are facing. The sector experienced significant disruption due to pandemic, and we have been developing various digital solutions using technologies like analytics AI, computer vision, NLP and ML to increase the adoption and efficiency of online student engagement and learning. Customers are also exploring newer technologies like Metaverse, Web 3.0 to give better student experiences and provide hybrid and immersive learning. Last quarter, we won a deal to help the workforce development company to build a platform for exclusively connecting with mentors for personalized carrier guidance. Our CTO organization started building expertise in the Low-Code No-Code space a couple of years ago. We now have built strong capabilities both in Microsoft’s Power Platform and OutSystems, which are in the leadership zones of leading industry analysts. Last quarter, we signed a deal with a leading labor and employment law firm in North America to automate and drive efficiency in their workforce deployment processes using a Low-Code No-Code platform. In another instance, Happiest Minds is digitally transforming the trading platform, again, using Low-Code No-Code platform for a Danish bank. Looking forward, our pipeline is very strong with several large deals in discussion. We continue to get called for engagements such as helping formulate digital strategies, platform engineering, transformation, modernization and enabling connectivity needs through IoT and 5G, customer experience and analytics AI. As Ashok alluded, we are confident of meeting our revenue guidance on growth based on a strong pipeline and deals signed in Q3. With this, I conclude my commentary, and we can now open the floor for Q&A. Over to you, operator.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from the line of Manik Taneja from Axis Capital. Please go ahead.

Manik Taneja — Axis Capital — Analyst

Hi. Thanks for the opportunity. Just wanted to get more clarification regarding the annual growth outlook that Ashok reiterated, given the moderation in terms of growth that you’ve seen in the third quarter and Venkat called out that there were certain one-offs around higher holidays as well as lower number of working days. But even if I want to take that into account for us to get to a 25% growth for the full year in constant currency terms would mean that this quarter has to be much stronger on a sequential basis. So just wanted to understand the visibility that we have on that front, and then I’ll come back in the queue for further questions.

Ashok Soota — Executive Chairman

Venkat, go ahead.

Venkatraman Narayanan — Managing Director and Chief Financial Officer

Yes. Hi, Manik. Yes, we have considered that, parts of the leave are lost. They don’t come back, so that impact has also been considered. We have looked at our pipeline. And it’s on that basis that we are still holding because right now we have 26% and our guidance is 25% with respect to the top line number. So we are reasonably confident of meeting that number, Manik.

Manik Taneja — Axis Capital — Analyst

Sure. Just one clarification on that front. 25% is on CC terms and, in the first nine months, what was the y-o-y CC growth that we’ve achieved?

Venkatraman Narayanan — Managing Director and Chief Financial Officer

26%.

Manik Taneja — Axis Capital — Analyst

Okay. Okay. Sure. Thank you.

Ashok Soota — Executive Chairman

So we do have a little question in effect still, but we don’t think we’ll even need the question to tell you the truth.

Manik Taneja — Axis Capital — Analyst

Sure.

Operator

Thank you. The next question is from the line of Abhishek Bhandari from Nomura. Please go ahead.

Abhishek Bhandari — Nomura — Analyst

Sir, thank you for the opportunity, and Happy New Year to the management team. Sir, I just have one question. Our margins are tracking much ahead of what we thought, 22% to 24% band. And with supply side easing, likely there’ll be more, so I’d flip on it. Have you considered dropping the margins and investing in sales to possibly accelerate growth both on medium-term? Why or why not would you take that approach?

Ashok Soota — Executive Chairman

Sure. I’ll just take this first, and then if either of you wants to add. I don’t think these are either our issues. We are generating as much as we can, and we’re investing as much as we need to. So, if you see our strategic discussions, with all the time looking for new areas in which we can make strategic investments. And if you look at it over the years, look at the things we’ve added. We create and incubate new technologies, you don’t get a return immediately on those. Even in this last year, I think as Joseph pointed out, we’ve invested in LCAP, NCAP, no code. We invested in Metaverse, and so on and so forth. So we are always doing new things. Earlier, we did — we were amongst the earliest to get into IoT and then we did blockchain, so we keep developing new capabilities.

When we build them up to a certain level, we move them from an incubation mode into a center of excellence, and we create new centers of excellence. And that process has not stopped. So we’re not saying, hey, we are looking at margins. And if we reduce something because that’s actually, if I may say so, sometimes the wrongest thing to do. If you think you can get more business just by reducing your price, I think you’ll hurt yourself terribly. But if you can use your margins to keep on investing, which is what we do, then you’re doing and you’re in a good place, you’re in a happy place, and that’s exactly where we are.

Venkatraman Narayanan — Managing Director and Chief Financial Officer

And just to add on to what Ashok said, there are a couple of other areas where we’ve continued investing. In the last couple of years, we’ve been building up our domain capability, and we’ve brought on board seasoned domain heads. And they’ve been building their business analyst teams, because we feel that it’s going to be in the next phase of digitization, it’s going to be extremely important to understand and speak customer’s language and have these business analysts who can be interpreters for our technical team. So we’ve not hesitated to make that investment. And again, from a sales angle, we’ve been getting on — bringing on board client partners and account managers to help grow our accounts. So, Abhishek, we’ll continue making investments.

Abhishek Bhandari — Nomura — Analyst

Thank you, sir, and all the best for 2023.

Ashok Soota — Executive Chairman

Thank you. Thank you, Abhishek.

Operator

Thank you. The next question is from the line of Vimal Gohil from Alchemy Capital Management Private Limited. Please go ahead.

Vimal Gohil — Alchemy Capital — Analyst

Yes, sir. Thank you very much for the opportunity. Sir, I just wanted to understand a bit on our cost this quarter. If I were to look at our employee cost and we sort of deployed — or rather we hired quite a few freshers over the last few quarters, and we do see that as a percentage of sales or rather the quarter-on-quarter growth in employees has been slightly faster as compared to revenues despite the fresher addition. While our margins are [Indecipherable] margins are trending well ahead of our own expectations or guidance. But do we see this as an additional margin lever going forward, given the fact that more freshers will get deployed and that could see some benefit on the margins?

Ashok Soota — Executive Chairman

Hi, Vimal. Happy New Year.

Vimal Gohil — Alchemy Capital — Analyst

Happy New Year.

Ashok Soota — Executive Chairman

We’ve added about 220 — 15 to 20 freshers in the last quarter, and typically they go through a standard training cycle. And it takes anywhere between nine to 12 months before they can touch billability. So, that cost gets absorbed for the next, I would say, two more quarters. They would be in our — they’re going through the training session. So that’s not going to impact profitability in the next two quarters, whereas there will be a cost of both training and their pay cost. But, yes, you’re right, post that, slowly they will get into the billable workforce. And we’ll soon be able to find jobs and positions for them and then build them. So, in the long run, that’s a way to manage our pyramid. And until now, this is after about a gap of three or four years, we are going and getting so many number of freshers and trying to build a pyramid basis the competition [Phonetic].

Venkatraman Narayanan — Managing Director and Chief Financial Officer

And also, Vimal, don’t forget that the last two quarters, on one side, we have hired freshers and you might say, yes, the cost of your pyramid has improved, but it’s also the two quarters where we gave very generous increments. And we’ve absorbed that and still kept our margins in the same level. So, one thing is balanced with the other.

Vimal Gohil — Alchemy Capital — Analyst

Understood. Understood, sir. Sir, I just wanted to check on Product Engineering Services. It’s one of the largest portions of our business. If you could comment on how client product roadmaps are panning out? I have been asking this question to other peer product engineering companies as well. They have given quite a positive review. Just wanted to get your sense as to how our clients are looking at product development projects, given the current macro environment, just highlight that. Thanks.

Venkatraman Narayanan — Managing Director and Chief Financial Officer

So, I think I’ve addressed this question last time as well, Vimal. We have seen, maybe in the second or third — second quarter, one of our companies that was more in the early stage, they took a little bit of precautionary measure and ramped down. But outside of that, we’ve not really seen any of our customers affecting major ramp-downs. We’ve seen some seasonal trends in November, December in terms of activity easing up because of holiday season. But again, seeing uptick, and as I mentioned in my earlier commentary, the pipeline continues to be strong cutting across all three views. But what customers are doing is, they are keeping a very close watch on what we are investing in and how it will be used by the end customers, how quickly they’ll be able to monetize it, and therefore prioritizing features, functionalities and modules, which will help them get quicker revenues or make a bigger impact from a customer acquisition standpoint.

Vimal Gohil — Alchemy Capital — Analyst

Understood, sir. And sir, last question, if I may, from my side. If you can just quantify how much we will be spending on our acquisition of land and delivery center from how much of a balance sheet cash outflow could we see over there? Any idea there?

Ashok Soota — Executive Chairman

Yeah. That’s a state-sponsored scheme, so where they’re giving the land under the SEZ in Bhubaneswar. So we have been allotted — that’s an in-principle allotment. We are going through the terms and conditions, but it’s at a favorable price. It will not be a significant cost in terms of land, and it will be a 100-year lease — 99-year lease kind of an arrangement.

Venkatraman Narayanan — Managing Director and Chief Financial Officer

To give you a number there, I think they have said about INR40 lakh an acre kind of a thing, but there are other costs that you have to add on with it.

Vimal Gohil — Alchemy Capital — Analyst

You won’t be able to give a number, sir, at this point, total number?

Ashok Soota — Executive Chairman

It’s not also appropriate. We haven’t even signed the deal. We’ve seen plots. In fact, I myself have seen a plot or two when I went to Bhubaneswar for the lovely inauguration we had with the Chief Minister. And they’re very pleasant people out there very eager to get us in. And it will take us a few weeks, I would imagine, maybe a month or two, to finalize the specific plot. And with that, we’ll get the idea of what the exact cost is. But it’s not going to be a cost which is material in context of any of our future plans. I mean, the sort of money we may have to spend on a future acquisition will obviously far outweigh anything we spend on this. I mean, there is no comparison at all.

Vimal Gohil — Alchemy Capital — Analyst

Understood, sir. Thank you so much. All the very best. I’ll return to the queue.

Ashok Soota — Executive Chairman

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Faisal Hawa from H.G. Hawa. Please go ahead.

Faisal Hawa — H.G. Hawa — Analyst

Can you hear me?

Venkatraman Narayanan — Managing Director and Chief Financial Officer

Yes.

Faisal Hawa — H.G. Hawa — Analyst

So, sir, this question is for Mr. Ashok Soota. So, if there are just one or two adjacencies that you feel are very much necessary and which you would like to fill up, like tomorrow or — so, I mean, which are those two or three adjacencies that you’d like to fill up through an acquisition or whatever it takes, where you feel that the company is clearly lacking?

Ashok Soota — Executive Chairman

Yeah. See, I’ll tell you, that is a beautiful part of where we are. We could fill up and strengthen a vertical. We could fill up and strengthen a horizontal, where — which we believe is growing and we don’t have this thing. We could go and fill up a geo, where we don’t have adequate presence. So, the requirements are actually, if you ask me, or the potential is more a question of getting the right target. Actually, in any of these things, which I just mentioned to you, be it a vertical, be it a horizontal, be it a geo, if you got the right target and we’re able to close at an appropriate price and we feel there’s a good cultural match, we would just go ahead. So we have plenty of — what am I calling is potential choices, but to get the right choice in an acquisition is always the challenge. And as I’ve mentioned before, you start with 50, you bring it down to a shortlist of five, and then you will be able to manage one, or one, maybe two. And that’s the process we’re on. I must say, we have taken a little time. We haven’t done. We are able to achieve this year’s growth rate so far, really it’s organic growth. But I’m sure we are approaching close enough to saying hopefully we’ll conclude some deals as we go ahead.

Faisal Hawa — H.G. Hawa — Analyst

And sir, you are almost the elder statesman of the industry. And I always see so much fullness and so much enthusiasm in you. So, where do you feel your experience is really proven to be invaluable in this industry, which is so rapidly changing?

Ashok Soota — Executive Chairman

Yeah. Well, I’ll tell you one thing. Our whole approach is to track change. And if you’ll notice this year, not this year, when we defined our vision, we said that this industry will go through more change in the next 10 years than it has done in the previous 10, which is making a very sweeping statement. Because when you look at the degree of change in the last 10 years, look at the things we’ve had. And I’ve already enumerated the new technologies which came in, the new solutions which came in, and so on and so forth, the new business models we helped to create.

So we are saying, we will plan and prepare for that change. And that is why we created that 10-year vision by looking ahead. I can’t give you the specifics of it. Firstly, because they’re not going to get articulated in a few months. Also, then they will consider multiple scenarios where the change will take place. Then within that, we’ll select a few potential opportunities. Then we’ll go ahead and zero in on what we think will be the business plan to meet that change. And there I think when we do it because we are doing this methodical process, I believe we’ll be ahead of the industry in examining that, because we are anticipating. We’re saying where is the change, where we will be proactive about it, just as we have been as when we started Happiest Minds. We after all then became the first company which could say we’re born digital. And in the same way, we want to be in the forefront of what we think is going to be the next future change.

Faisal Hawa — H.G. Hawa — Analyst

So, in your opinion, it is possible to create another behemoth in the IT industry in the next 10 years itself, provided you track the change constantly and execute it very methodically.

Ashok Soota — Executive Chairman

Yeah. What do we mean by behemoth in a sense? Frankly, I mean, we are not going to become TCS, Infy, it takes time. And frankly, I’m not sure that we are even saying, hey, that’s what we’re targeting. Today, with many of them, I don’t have to name the companies, there is only one or two all of those companies whose profitability is a little higher than us. And when you consider all of the factors, their size and ours, that means operationally we making as much as them. So in a sense to me, that is what we really need. To do to continue to sustain a high-value company, commensurate with our size and not earn after growth for the sake of saying, hey, we want to be $1 billion. Yes, we’ve set a target of saying, by the end of this 10-year vision, we would like to be $1 billion. That doesn’t sound very ambitious also, I must say. But then at the same time, if we can do better than that, that’s even better. But if we go and set a number and then start trying to achieve that number and for that we do things which are not functional, then it may turn out to be a disadvantage. So we’ll set a vision and, like in the past, we’ll try and improve on that.

Faisal Hawa — H.G. Hawa — Analyst

Thank you, sir, for answering my question so articulately. Thank you so much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Manik Taneja from Axis Capital. Please go ahead.

Manik Taneja — Axis Capital — Analyst

Thank you for the opportunity once again. Sir, just wanted to pick your brains around our operating metrics performance and the performance that we see in certain verticals. So, given what one is hearing around the high-tech vertical and the requirements going on in that vertical, how do you see this just vertical performing for both us and the industry over the next 12 to 14 months? There is an expectation that we might probably see a significant amount of large cost optimization deals in this particular segment. So if you could help us understand what your thoughts are on this front.

And the second question was, at a broader level, the industry faced significant labor cost pressures and was able to pass on the labor cost pressures in terms of higher pricing, given the customers were also seeing higher inflation in their own markets. How do you see that situation evolve when will you think about calendar year ’23 and calendar year ’24?

Ashok Soota — Executive Chairman

Sure. On the first question on high-tech, I think the best person to really answer that is Joseph, but I’ll give you one or two perspectives. And again, on how those various macro factors may affect margins, I think Venkat is a better person to respond. I may add to it after his reply. But here, let me lead with this. See, I’ll tell you, actually a lot is made of the play of what’s happened to the large high-tech companies. They grew enormously during the pandemic, maybe disproportionately so. Everybody suddenly seem to meet together on the Teams calls and Zoom calls and travel stopped — now travel, by the way, is booming. So it’s a vertical that we should all be looking at. You can see this from the way of claims are running jam-packed full capacity, so market changed.

Now, we were never in the market that these guys were. We were delivering — we were using some of those platforms to deliver our solutions. But that wasn’t our business anyway. So we were not — we are not impacted like in a sense the top five companies — and they have — top five high-tech companies. And they have a disproportionate impact on the — what you may call is the technology index.

Our technology plays the way I see it, our technology businesses are driven by one startups. All of them in one form or the other creative platform. And that platform then becomes the means to deliver the solution. And that’s all high-tech. So that has not slowed down if anything is accelerating every day. So we are not seeing any of the slowdown in that sector at all. But let me turn this over to Joseph, who’ll give you perhaps some [Indecipherable].

Joseph Anantharaju — Executive Vice Chairman and Chief Executive Officer, Product Engineering Services

Sure, sure. I think, you covered a fair bit. Just pouring a little bit more clarity to the first point that Ashok made. If you see some of the large high-tech companies that made disproportionately large investments in terms of headcount for some new initiatives, which really haven’t taken off in the market. And I think that’s one of the areas that they’re rationalizing. And the second is, all of these companies, they have an annual process of looking at — moving out or weeding out a percentage of their workforce, and that’s also getting reported out here, so I think when you keep looking at it from that context. But if you look at companies in specific sub-segments of high-tech, whether it’s networking companies or security companies, there are several sub-segments where they continue to invest and continue building their products because there is still demand out there. And as I mentioned earlier, we’ve not seen — really seen a flag off in demand. It’s just the companies are being very strategic and careful about where and how they invest.

In terms of cost optimization, I think the cost optimization that we are seeing is that when companies are reducing their workforce, they are looking at their partners or their offshore centers to actually continue because the work is still there and it needs to get done. They’re looking at their partners of offshore centers to continue delivering, and there has been no impact and, in some cases, they’ve actually increased their team sizes. So, we’ve not really seen a huge cost optimization exercise. We’ve seen more of moving to lower cost centers, and that in a way is actually helping — with some of our customers helping Happiest Minds out.

Venkatraman Narayanan — Managing Director and Chief Financial Officer

And on the margins front, Manik, you talked about how the price and it’s linked to inflation. We have largely moved away from a cost-plus pricing or a people-cost-plus pricing model. It has been right from the start, a demand-based pricing based on the technology and the demand for that particular technology kind of a pricing. And suffice to say, we have always been at a premium compared to a cost-plus pricing model may be followed by bigger brothers around. But — so that’s on the pricing model. So, it’s never been negotiated saying this is the cost of the person and we charge a margin on that front, unless there is some small sort of infra deal or something like that. But for a large part of our business, it’s been demand-based pricing.

With respect to inflation and how it affects us, until now, we have seen it being positive because we are largely offshore, 95% of our people continue to be offshore. So to that extent, when there is a huge cost increase in the US, the largest geography where there is an inflation of 8% to 10% in wages and there is a huge number increase on the wage cost, obviously the offshore center in our ODC model or work with an offshore service provider looks that much more attractive. So that’s continuing. And even if it eases, I think all the other positives for working with offshore partner will continue.

Margins on top of these two levers, there are so many other aspects like competency, then pyramid, on-site onshore mix, geography mix, all of them seem to be building on what we have until now. And so, don’t expect any margin shock from that slide, except for maybe the exchange rate, the way the rupee has moved has been favorable for the export industry from India and it continues to help all of us.

Hi, Manik. Does that answer your question?

Manik Taneja — Axis Capital — Analyst

Yeah. Thank you for that detailed response. So also wanted to understand, given the underlying macro volatility, how should we be thinking about this impacting players of our size, given the fact that is spread across multiple verticals and multiple segments? That was question number one.

And the second question was, do you think, while we’ve talked about a 25% CAGR, we’re in line with our $1 billion revenue target over multiple years. Do you think there is a possibility that our growth rates in the near term essentially end up being lower to that trend line growth?

Ashok Soota — Executive Chairman

Okay. Shall I just take that in overall level first, Venkat, and then maybe you can comment. Let me take your second question. See, I’ll tell you. When we guide towards, let’s say, $1 billion by 2031, and we also say we’ll grow compounded 25%, there is one factor which we never state. You might say, it’s likely elephant in the room, but it’s there, and that is what is the impact of acquisitions in that. So, so far, we’ve been able to do this with marginal contribution from acquisitions.

Going ahead, there will always be a lumpy impact. So when you say, will we go low, but if we do a good acquisition, we may go higher. I don’t think we can predict like they’re saying year-to-year. We are not seeing a slowdown in demand. So we’re therefore not saying, we actually even see a slowdown taking place even in organic growth, but there may be adjustments. But at the same time, those adjustments we will more than makeup by the acquisitions we will do. And here so far, I would say, fortunately, we’ve been able to sustain it on a virtually organic basis. So that was the response to this thing.

Then there was a question on volatility, which may be, Venkat, you can respond to.

Venkatraman Narayanan — Managing Director and Chief Financial Officer

Yeah. On volatility, we have to look at the repeat business, Manik. 92% of our business is repeat. The second thing is the metric that I talked about, 50% of our business is coming from customers who have been with us for greater than five years. So, one, we look at our customer base, we look at the number of global corporations, 40 of them — 56 — 50 plus of them; $1 million customers, 40 of them; length of relationship, five years plus giving you 50% of our business; average repeat business is 90% plus; and your average customer — revenue per customer is about $792,000 to $800,000. So all of this shows how we are closely working with our customers, customers who are of a certain consequence for us, and how we’re growing with them.

So, volatility will be there, within your customer base of 230. You could have ups and downs. You could have issues with a certain customer. But I think the way the sales teams work, the BUs work, they are quickly able to cover it up with either a new customer in the pipeline or trying to grow, eke out growth from an existing customer. So we’re not saying that everything is hunky dory and everybody is growing.

[Technical Issues] So there are cases where there can be adjustments in one customer, which is there in the number of customers that drop off on a quarterly basis. So volatility is there. We managed to manage it with the relationship that we have with existing customers and the new MM pipeline that we create.

Ashok Soota — Executive Chairman

And just to add to what Venkat mentioned, Manik. And if you look at many of our customers, we’ve been working with them for over five years. 50% of our revenues come from customers who have been with us for more than five years, repeat is 92%. And what this means is that we’ve been working on multiple versions of the platform, and so this core knowledge and IP that our team has built, which is critical and essential for them to continue adding functionalities and delivering what their customers need. So that in a way leads to stickiness in terms of the team and the revenues.

Operator

Thank you. The next question is from the line of NGN Puranik from Enam. Please go ahead.

NGN Puranik — Enam — Analyst

Hi, Ashok. I have a question on…

Ashok Soota — Executive Chairman

Hi, Puranik. How are you?

NGN Puranik — Enam — Analyst

Good, good. I have a question on your size, scale and strategy on building the $1 billion goal. This is how do you create a annuity towards building $1 billion goal. So, in terms of services, solutions that you have, what more you need to add to? Because the old school of scaling was very different. So you used to have AS 400 mainframe, then you have the ERP systems, and so many of those things included IMSS all help them to get into $100 million far more quickly. So, what’s your strategy to get into 100 — because Venkat mentioned that there are relationships which are greater than five years. So, are you happy with the way their growth rate have scaled? Is there anything that you need to do better because you have a strong horizontal, you can build good verticals on that foundation?

Ashok Soota — Executive Chairman

Sure. There are a lot of fundamental things you asked in that question. One is, of course, as you yourself are noticing, the definition of annuity changed. All those so-called multi-year contracts barring borrowing IMSS, they actually virtually disappeared. But what has happened is, yes, annuity may be in the context of project which may last, but more importantly, it is in context of how long you kept your customer. And you know how long that business growth will be. Venkat gave you an average for, 50% [Phonetic] of our business comes in five years. But there are many customers we’ve had for 10 years for that matter. So it’s not that any of these customers come and disappear, and some of them are amongst our largest customers. So, we’ve got tremendous continuity in those customers. And that to my mind is the best form of annuity. And I’m sure [Phonetic] IMSS has, of course, been continuing to grow. At that by definition is like the old definition of annuity, which said, all right, you can get to a multi-year contract.

Venkat or Joseph, do you want to add to that?

Venkatraman Narayanan — Managing Director and Chief Financial Officer

No, Ashok. I think that also touched on my previous response, sort of also gives the basis for annuity, the fact that when you start building platforms, whether it’s in the high-tech space or cutting across because most of the customers are building platforms now, if you look at it from a digital perspective. And you don’t — unlike SAP implementation, we don’t build a platform and stop. We got to keep adding new features and functionalities because the demand from customers and employees and other stakeholders keep coming in and they keep changing. We have newer technologies — and the pace has increased. And we have to adopt these technologies. So there’s constant work going on, on successive versions of platform. And once you build a platform, you have the IP and the knowledge and the relationship — working relationship, which allows you to keep working on successive versions. And the relationship continues, which in effect becomes annuity.

Ashok Soota — Executive Chairman

Absolutely. Yeah, that’s exactly it. The key difference, Puranik, if you’re asking the old days is really the fact that Joseph mentioned. It’s really that the business has moved into platforms. And once you start, you never stop. There are new features, there are new models, there are newer applications sitting on the platform, and it continues.

NGN Puranik — Enam — Analyst

So when you say platform, is it the generic platform or is it the monetizable platform you’re talking about?

Ashok Soota — Executive Chairman

No. Joseph, you might want to just clarify with a few examples.

NGN Puranik — Enam — Analyst

I want to understand, is there — are there powerful platforms which can be significant revenue earners over time?

Ashok Soota — Executive Chairman

Yeah. Sure.

NGN Puranik — Enam — Analyst

Are there any $100 million platform in overtime?

Ashok Soota — Executive Chairman

Already different [Indecipherable].

Joseph Anantharaju — Executive Vice Chairman and Chief Executive Officer, Product Engineering Services

Just to answer that question, Mr. Puranik, the customers that we’re working with building platforms for, many of them are platforms that are generating $0.5 billion, $1 billion, $2 billion, $3 billion in revenue and the customers are building it to monetize and to make revenues of them. Most of them are in the SaaS model, so you can have a wide range of customers. The implementation cycles and the implementation cost involved is lower. So, you’d be able to on-board customers more quickly and customers would have a higher propensity to adopt these platforms. And as Ashok pointed out, the work doesn’t stop. You need to keep adding new products — sorry, new applications, new customer experience and things like that. So you are constantly working with the customer on engineering and building additional functionalities into the platform.

NGN Puranik — Enam — Analyst

So these are the customer-specific platforms, they’re not replicable platforms.

Joseph Anantharaju — Executive Vice Chairman and Chief Executive Officer, Product Engineering Services

Yeah. I’ll give you two, three examples actually, Mr. Puranik, that would help. One of our customers is, they have in their tech space helping — providing content and various other educational materials to nurses, including recertification assessment, etc. And they built up an end-to-end platform that will help them to build the content and deliver the content to these nurses, and they’ve tied up with nursing institutes. And they have to capture all of this data that the way the nurses are going through, the test results, etc, into a data platform, which would then allow them to give feedback back to the nurses, help them in their learning journey. So that was a platform out here, right, that’s one example.

Another example is, a customer that we’re working with, they built a platform to help measure whether in online advertisement, the efficacy of the advertisement, whether there’s fraud happening and they go back to companies that are using these advertisements, whether CPG, retail or any other company. Again, that’s a platform which all of these advertisers would be able to use to make sure that their ad strategies are efficient and there is integrity in it. That’s all. I’ll take a couple of examples to give what kind of platforms we work with.

NGN Puranik — Enam — Analyst

So, the interesting thing is that what you can pick up from this experience is to design and architect a platform of your own for different industry. Is that what [Speech Overlap] longer term?

Ashok Soota — Executive Chairman

That’s a different issue. That’s a completely different business.

NGN Puranik — Enam — Analyst

Different? They’re completely different?

Ashok Soota — Executive Chairman

I’ll tell you one thing. I’ll give you — let me — Puranik, let me just address this. You’re asking on numbers, can we generate revenue of $100 million, $500 million, etc? Actually, Joseph answered that. Our customer may generate $100 million, $500 million, even become a $1 billion entity.

NGN Puranik — Enam — Analyst

Yeah, I understand.

Ashok Soota — Executive Chairman

Let’s assume in our case, the platform we developed for the customer, let’s assume that it leads to — ranges may vary from $1 million to $8 million or $10 million or whatever, but let’s assume the average is $5 million, it lasts for 10 years. Then we are generating from that single platform $50 million of revenue, because we keep enhancing it. That gentleman and the customer may go and generate $100 million, $200 million, $500 million, that’s their business.

NGN Puranik — Enam — Analyst

Correct.

Ashok Soota — Executive Chairman

But can we create a platform which we can sell, you’re virtually saying as a Platform-as-a-Service, that’s a different business altogether. And you must appreciate that when you do these, these platforms in today’s day and age is the customers’ crown jewel. They’re not wanting you to go and sit around. You can make a Platform-as-a-Service. It could be a new business altogether. But then, we would be doing this not with the given customer, but we will be doing it with a view to saying, hey, are we entering into that business? And that’s a different issue altogether.

NGN Puranik — Enam — Analyst

So, you don’t have any plan to develop your own platform? [Technical Issues]

Ashok Soota — Executive Chairman

They’re all our own platforms. The way I see it, when every business we are doing, now this is a platform.

NGN Puranik — Enam — Analyst

Platform, okay. No, no, my question is a little different, because you have your own platform [Technical Issues] serve the customer, where the services can be sold to many customers. It’s replicable in terms of application.

Ashok Soota — Executive Chairman

Yeah. Then it would be a different business altogether.

NGN Puranik — Enam — Analyst

Different business altogether.

Ashok Soota — Executive Chairman

And we really have to examine [Speech Overlap]

NGN Puranik — Enam — Analyst

I think, in the process, you developed…

Joseph Anantharaju — Executive Vice Chairman and Chief Executive Officer, Product Engineering Services

Let’s create one more thing. Ashok, if I can add [Speech Overlap].

Ashok Soota — Executive Chairman

Yeah, please.

Joseph Anantharaju — Executive Vice Chairman and Chief Executive Officer, Product Engineering Services

So we do have — yeah, we do have what we call the solution accelerators for IP, right? When there are several platforms, we work on a digital content management for various large research company, which is replicable across other research. So, there are sets of solution accelerators as well as IPs or smaller sets of platforms that we have, which are replicable across customer organizations. And if you look at from our numbers itself, about 10% of our revenue comes from those solution accelerators for IP business.

NGN Puranik — Enam — Analyst

Excellent. And you license it out or how do you — or use it as a productivity tool or as a — or directly you’re licensing that?

Joseph Anantharaju — Executive Vice Chairman and Chief Executive Officer, Product Engineering Services

We provide it as a service. We provide it as a service.

NGN Puranik — Enam — Analyst

Provide as a service. And these are all, how do you build them? What is the way to monetize that?

Venkatraman Narayanan — Managing Director and Chief Financial Officer

I think that, again, the example I gave you for digital content management, it is based on the number of reports we generate, right?

NGN Puranik — Enam — Analyst

I see. It’s interesting. So, you’re already in a platform path already?

Ashok Soota — Executive Chairman

Yes, yes. That is true. That is true.

NGN Puranik — Enam — Analyst

Multiple creators can create a platform — large platform.

Ashok Soota — Executive Chairman

Correct, correct.

NGN Puranik — Enam — Analyst

So you have a separate platform team or is it a team for a particular vertical who generates all this?

Ashok Soota — Executive Chairman

Again, Joseph, Venkat, Rajiv, if you want to speak, either of you?

Rajiv Shah — President and Chief Executive Officer, Digital Business Services

[Technical Issues]

Ashok Soota — Executive Chairman

Yeah. So, as part of overall — sorry — as part of the overall organization structure, we do have a small R&D team that will continue to explore what we can develop as our own solution accelerators. This team will constantly keep looking at and identify small white spaces, as Rajiv has explained, and we keep looking each year what more new solution accelerators we can build and how do we enhance. Just like a product roadmap, each of them will have their own road maps.

NGN Puranik — Enam — Analyst

And this can be eventually a Platform-as-a-Service as you develop your own?

Ashok Soota — Executive Chairman

Yes, that’s true. And maybe it is strongly tied with our annual strategies and each year we will be looking at them. And sometimes they collaboratively can work together. And as Rajiv shared, we can actually take it as a 60% pre-fabricated and fill the remaining components and features that client requires.

NGN Puranik — Enam — Analyst

One question I have been wanting to ask you, Ashok, is about why you’re present in BFSI?

Ashok Soota — Executive Chairman

If you’ve heard me out here, I have said that we’ve been able to sustain our growth through very strong presence in a few verticals. And I added that there are a couple of which we are now going to focus on a lot more. One of them is BFSI and the other one is healthcare. And in both of them, we’ve added very strong domain presence. And we believe that this will now become the focal point to take us forward.

NGN Puranik — Enam — Analyst

So it’s a very large vertical?

Ashok Soota — Executive Chairman

That is true. They are very true. They’re both very large verticals. Healthcare is growing at a rapid rate. BFSI has been very, very large, and obviously the largest. At the same time, the newer opportunities require very specific strategy because we are not in the game of — we have 500 people working for X bank and 1,000 people working for another, that’s a different business altogether.

NGN Puranik — Enam — Analyst

But why you are late in the BFSI vertical because there’s been already…

Ashok Soota — Executive Chairman

We are late in entering — firstly, we are not interested in the market, let’s be clear that. It’s not our digital strategy. [Speech Overlap] was difficult to penetrate when we came in. Now, we have built capabilities where we’re able to take these to the market through, let us say, the fintech offerings which we are developing.

NGN Puranik — Enam — Analyst

Very interesting. Thanks a lot, Ashok. Wish you tons of happiness and great health.

Ashok Soota — Executive Chairman

Same to you. Same to you.

NGN Puranik — Enam — Analyst

Thank you.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Manik Taneja for his closing comments.

Manik Taneja — Axis Capital — Analyst

Thank you, operator. On behalf of the entire team at Axis Capital Limited, we would like to thank the management of Happiest Minds Technologies for giving us the opportunity to host this call.

I’m going to pass the call to Sunil for any closing comments. Over to you, Sunil.

Sunil Gujjar — Head, Investor Relations

Thank you all for joining us today. We thank Axis Capital for hosting the call. We look forward to interacting with you. You can reach out to us on ir@happiestminds.com. Have a good evening. Bye-bye.

Ashok Soota — Executive Chairman

Thank you, everyone.

Joseph Anantharaju — Executive Vice Chairman and Chief Executive Officer, Product Engineering Services

Thank you.

Operator

[Operator Closing Remarks]

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