Detailed Narrative
Q1 CY25 Performance Overview
Hexaware Technologies reported a flattish quarter-on-quarter performance in Q1 CY25. Despite this, the company achieved a solid year-on-year growth of roughly 2.5% in constant currency and 16.5% in INR terms. The quarter was impacted by over 100 basis points of revenue headwinds due to two clients moving work offshore and one program experiencing delayed start. However, the planned offshore movement contributed to margin improvement.
Profitability and Cash Flow
The company's EBITDA improved to 16.7% from the prior quarter, with absolute EBITDA increasing by 20% year-on-year. EPS also saw a healthy rise of 16.7% year-on-year. Hexaware maintains a healthy closing cash balance of $225 million as of March 31, 2025. The Effective Tax Rate (ETR) for the current quarter was 25%, with a full-year guidance of 26%.
Strategic Investments and Footprint Expansion
Hexaware expanded its footprint in Dehradun to a larger facility and opened a new 700-seater in Hyderabad. To enhance client proximity and innovation, the company also inaugurated new customer experience centers in New Jersey and London. These investments are aimed at supporting growth and improving client engagement.
Legacy Modernization (RapidX) Progress
Significant progress has been made in legacy modernization, particularly with the highly differentiated RapidX platform. After beta testing in Q4 with 2-3 clients, the platform now has a pipeline of shy of 40 clients in the Proof of Concept (POC) process. Management expects at least one or two clients to transition from POC to full-scale modernization orders after Q2, marking a key success indicator.
Market Expansion and Vertical Performance
The company is making strong progress in the Middle East and India markets, with a healthy pipeline in the Middle East and active efforts to grow its presence in India GCC. While the Banking and Financial Services (BFSI) vertical is expected to lead growth with double-digit QoQ growth from Q2, the MNC vertical continues to face headwinds. The Manufacturing, Logistics, and Consumer (MLC) vertical is anticipated to experience continued significant weakness.
Operational Metrics and Outlook
The offshore mix improved by 200 basis points sequentially, contributing to margin expansion. Days Sales Outstanding (DSO) increased to 75 days, higher than the target of 70-72 days, impacting the LTM Q1 Operating Cash Flow (OCF) to EBITDA ratio, which stood at 67% against a target of 70%. Management expects DSO to return to target by year-end and ERP costs to become a tailwind by the end of Q2. The company anticipates accelerated growth in Q3 and sequential growth in Q4, bucking the usual trend.
Key Deal Wins and Pipeline
Hexaware secured several significant wins, including a transnational bank deal with potential for $200 million per annum work and a large SAP co-transformation project in Europe. They are also pursuing two 'mega consolidation opportunities' and a potential half-billion dollar per annum outsource spend at a large global bank. Two specific deals are expected to contribute $20-30 million and $25-35 million respectively in annualized incremental revenue, with partial ramp-ups from Q2.