Summary of earnings call for Firstsource Solutions Ltd published on 01 Aug, 2025
Firstsource Solutions Limited
Q1 FY26
Call date · July 30, 2025
1 · Management Commentary
Key Positives
- Revenue grew 23.8% YoY to Rs.22.2 billion (US$259 million); 19.2% YoY growth in constant currency.
- EBIT margin at 11.3%, up 10 bps QoQ and 30 bps YoY; net profit at Rs.1.7 billion.
- Four large deal wins and 17 new logos added (highest in three years); nine strategic logos added.
- Strong cash conversion: OCF to EBITDA at 102%, FCF to PAT at 196% (both highest in six quarters).
- Attrition rate declined to 28.9% (down 13 percentage points over eight quarters).
- Recognized by Everest Group as fastest-growing BPS company (organic revenue); ISG “Booming 15” for third consecutive quarter.
- Raised lower end of FY26 revenue growth guidance to 13–15% in constant currency.
Key Negatives
- Europe revenue down 7% QoQ due to seasonal softness in UK utilities; retail & utilities portfolio declined 3% QoQ.
- Headcount declined by 156 QoQ; margin expansion remains gradual despite offshore shift.
- Margin impact from wage hikes expected in Q2 and Q3, though management remains confident on guidance.
Forward Guidance
- FY26 revenue growth guidance raised to 13–15% in constant currency (excludes Pastdue Credit Solutions acquisition).
- EBIT margin guidance maintained at 11.25–12% for FY26; target 50–75 bps YoY margin improvement.
- Capex: Added new seating capacities in Mumbai, Bangalore, and Gurugram in Q1.
- Pastdue Credit Solutions (UK) acquisition for GBP 22 million expected to close in Q2, subject to FCA approval; expected to be margin and EPS accretive.
- Continued investments in AI, automation, and UnBPO playbook; plan for 2/3rd of volume hiring to be automated by March 2026.
- Wage hikes in two phases: junior employees from July 1, 2025; middle/senior management from October 1, 2025.
2 · Q&A Highlights
Q 1 (Composite): What drove the increase in revenue guidance, and how does management view demand conditions and growth visibility?
A (Management):
• Guidance raised based on clear line of sight to business; strong pipeline and record new logo additions provide confidence despite macro uncertainty.
• Demand environment remains broadly unchanged, but differentiated UnBPO propositions are resonating and driving growth.
Q 2 (Composite): How will wage hikes and ongoing investments impact margins, and what are the key levers for margin expansion?
A (Management):
• Wage hikes to be absorbed in two phases; margin band of 11.25–12% maintained.
• 37 margin levers identified, including further onsite-to-offshore shift, automation, employee pyramid optimization, and cost rationalization.
Q 3 (Composite): What is the M&A strategy, especially regarding the Pastdue Credit Solutions acquisition and future inorganic growth?
A (Management):
• M&A focused on capability gaps or distribution access, not revenue for its own sake; preference for EBIT/EPS accretive deals.
• PDC acquisition expected to be margin accretive; further details post regulatory approval.
Q 4 (Composite): What is the outlook for the BFS and healthcare verticals, and how are margins expected to evolve?
A (Management):
• BFS flat QoQ, 7% YoY growth; strong pipeline in both North America and Europe.
• Healthcare margins impacted by ramp-up costs and payer/provider mix; expect normalization and improvement as deals mature.
Q 5 (Composite): How is the UnBPO and AI strategy translating into deal wins, revenue mix, and pricing models?
A (Management):
• UnBPO and AI-led solutions are driving differentiated wins and outcome-based commercial constructs.
• Over 50% of business now from nonlinear commercial models (vs. 75% industry billing on time/materials); expect further shift.
Q 6 (Composite): What should investors track as headcount becomes a less relevant growth indicator?
A (Management):
• Focus on guidance, deal wins, new logo additions, and growth in large client relationships as better indicators of business health.
Q 7 (Composite): What is the margin profile of the collections business, and can PDC’s higher margins be replicated?
A (Management):
• Existing US collections business has higher margins than PDC; further details on PDC post-acquisition closure.
3 · Other Key Numbers
- Revenue: Rs.22.2 billion (US$259 million); 23.8% YoY growth (rupee), 20.7% YoY (USD), 19.2% YoY constant currency.
- EBIT margin: 11.3% (up 10 bps QoQ, 30 bps YoY).
- Net profit: Rs.1.7 billion; diluted EPS: Rs.2.4.
- Operating profit: Rs.2.5 billion (up 26.8% YoY).
- OCF to EBITDA: 102%; FCF to PAT: 196%.
- Effective tax rate: 20.6% for Q1.
- DSOs: 65 days (vs. 70 days previous quarter).
- Cash balance (incl. investments): Rs.3.1 billion (as of June 30, 2025).
- Net debt: Rs.11.2 billion (June 30, 2025); Rs.13.2 billion (March 31, 2025); Rs.9.7 billion (June 30, 2024).
- Hedge book (as of June 30, 2025): GBP 88.5 million @ Rs.112/GBP (12 months); USD 179.1 million @ Rs.86.7/USD.
- Headcount: 34,495 (down 156 QoQ); 80% of gross hires offshore/nearshore.
- Attrition: 28.9% (TTM), down 13 percentage points over eight quarters.
- Large deal wins: 4 in Q1; 17 new logos (9 strategic).
- Average deal size from new logos up 16% over last four quarters.
- ACV from multi-year, sole-source, non-linear deals up ~5x over five quarters; average large deal size up >40%.
- Top 5 and top 10 client revenue share down 5% and 8% respectively over last four quarters.
- Pastdue Credit Solutions acquisition: GBP 22 million (upfront + 12-month earnouts); expected to close in Q2 FY26.
- Awards: Ranked among India’s Top 100 Best Companies to Work For (2025), Top 100 Inspiring Workplaces (US & UK), Top 3 Indian employers in UK (Grant Thornton).
- ESG: Achieved ‘A’ score in CDP Supplier Engagement Assessment; 2025 ESG report released.
Note: This is an AI generated summary of the earnings call. There may be inaccuracies in the summary. Please refer to the original transcript before making investment decisions.