Firstsource Solutions Limited (FSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Firstsource Solutions Limited Q3 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankur Maheshwari, Investor Relations. Thank you, and over to you, Mr. Maheshwari.

Thanks, Neha. Welcome, everyone, and thank you for joining us for this quarter ended December 31, 2021 Earnings Call for Firstsource. On this call, Vipul Khanna, MD and CEO; and Dinesh Jain, CFO, will provide an overview of the company's performance, followed by Q&A. Do note that these results, the fact sheet and the presentation have been e-mailed to you, and you can also view this on the website www.firstsource.com. Before we begin the call, please note that some of the matters we will discuss on this call, including our business outlook, are forward-looking, and as such, are subject to known and unknown risks. These uncertainties and risks are included, but not limited to what we have mentioned in our prospectus by the SEBI and subsequent annual reports that are available on our website. With that said, I now turn the call over to Mr. Vipul Khanna.

Thanks, Ankur. Good afternoon, everyone, and thank you for joining us today. Welcome. I hope the New Year has started on a good note, and you and your families continue to be safe and healthy. Here is a quick snapshot of the quarter gone by. Revenues grew 4.9% year-on-year in constant currency and came in at INR 14,638 million, or $195.4 million. Of this, approximately 4% is the contribution from the recent acquisition of Stonehill and American Recovery Services, Inc. Operating margins were 12% and EPS grew by 11.6% year-on-year. When we spoke in November, we mentioned that Q3 would be a muted quarter and that we anticipated revenue growth from Q4. Unfortunately, during the past couple of months, several factors have impacted Q3 revenues and delayed our growth trajectory. The resurgence of COVID pandemic across geographies has spiked up staff absenteeism, especially in the onshore markets, impacting fulfillment. This has also further delayed the anticipated growth in our provider business, as hospitals again prioritized COVID treatments and consumers defer elective procedures further. Additionally, a change in the timing and quantum of interest rate hikes and the more aggressive tapering of mortgage-backed securities purchases by the Federal Reserve is leading to a sharper-than-anticipated decline in the mortgage origination volumes. Considering these macro factors and the supply side challenges, we are revising our FY '22 revenue guidance to 14% to 14.5%, including acquisitions. The acquisition should contribute approximately 4% to the revenue growth for the year. Margins should be in the range of 11.8% to 12%, modestly impacted by the talent situation and the acquisitions. While I'm disappointed that we are lowering our revenue guidance for FY '22, I remain confident that we are strategically on the right track and that we have put in place the building blocks for a strong sustained growth for the future. Let's dive into the industry segment performance. Our Banking and Financial Services segment was flat year-on-year and shrunk by 2% in constant currency in Q3 FY '22. Let's talk mortgages first. As you know, this business comprises of origination and servicing segments. The interest rate volatility, [indiscernible] commentary on inflation and the likely interest rate increases in the calendar '22 have all led to a sharper-than-anticipated decline in the origination market. 30-year mortgage rates are already near pre-COVID highs in March '20 and have risen sharply from what we saw in November, December. Our clients are actively rebalancing their capacities to align with the reduced refinance volumes. The impact is greater on our onshore portfolio versus offshore. We expect the recalibration of the refi market to carry into the next fiscal. The Servicing segment remains solid, and we continue to expand our servicing capabilities and offerings. We have increased our focus on developing digital solutions to address the cost efficiency needs of our mortgage clients, and we added 3 new clients in this quarter across both servicing and originations. We also recently launched the next version of our post-closing platform in the market. This version reduces the backlog of growth quite significantly by identifying the gaps much faster. We are pleased with the market traction of this offering thus far. The integration of StoneHill is progressing as per plan. We are excited to take their capabilities to our existing clients and our capabilities to theirs. Coming to collections. Last quarter, we spoke about the record low delinquencies and charge-off rates in the credit card industry. While delinquencies remained near those record lows, the credit card spending continues to rise and is beginning to trend towards pre-COVID levels. With the revival in spending and the impact of financial stimulus waning, the market expects delinquencies to rise over the next 3 to 6 months. So while our Q3 revenues remain muted, we are seeing greenshoots of recoveries. In some parts of our portfolio, the debt placement volumes are beginning to rise. In this quarter, we completed the acquisition of American Recovery Services, Inc., or ARSI, a leading player in the legal network collections market. This company adds complementary capabilities, strengthens our digital portfolio, expands our client base, including few fintechs and helps hedge against the near-term default cycle volatility. We believe that the acquisition of ARSI will significantly bolster our market positioning in collections. I'll talk a little bit more about this in a minute. As we look ahead, we are very optimistic about the collection business. It hit an air pocket this year from the unique macro environment, but the fundamentals of this industry remain quite strong, and we expect a revival of volume in the next fiscal. Our sales effort continued to generate results. In this quarter, we added 2 new clients in the Collections business, including one fintech or a BNPL company. For the U.K. BFS segment, the last quarter, we spoke about the unfulfilled demand due to talent shortage. We have managed to address the majority of those challenges by increasing our hiring reach and opening new satellite centers in the U.K. Clients continue to focus on scaling operations onshore, but are now more receptive to nearshore or offshore delivery markets. Some of these discussions are progressing well. However, as the COVID cases rose, we saw higher absenteeism even in the work-from-home teams, impacting client fulfillment. Turning to Healthcare. The Healthcare segment grew by 28.4% year-on-year and 26.6% in constant currency this quarter and was the fastest-growing segment once again. Our health plan and health services, or HPHS business, continues to make solid strides. We spoke of the large BPaaS deals with the leading health insurance companies. The go-live went as per plan and the first batch of knowledge transition has started. The pipeline for HPHS remained strong, especially in the digital intake business. The focus is now on strong execution. We are very pleased with the continued strong progress of the HPHS business. In the Provider business, the resurgence of COVID has further delayed our anticipated growth, impacting volumes and our ability to start capacity on-site at hospitals. The staffing issue is further exacerbated by the recent fed rule requiring the staff at hospitals and health systems and their partners to be fully vaccinated. If you step back and take the macro view, the hospital financials have been significantly impacted by the success of COVID wave. A recent study by the American Hospital Association and Kaufman, Hall and Associates estimated that U.S. hospitals lost more than $50 billion of net income in 2021 despite the significant government support. Keep in mind, fewer medical procedures and disruption to a hospital's normal revenue cycle directly impact the volume floor to us. Assuming that Omicron is the last of the big disruptive COVID wave and that the public health emergency program has consequently gone down, we are cautiously optimistic on the return to normalcy and revival of volumes in the coming years. Lastly, our efforts to extend the patient continuum into pharma and med devices market is yielding encouraging results. We've created a digital beachhead and added 2 clients this year. And as we speak, we are working through a decent pipeline for the pharma and medtech segment -- or the device segment, I should say. On Communications, Media and Tech segment, this segment continued to perform well. In Q3 FY '22, the segment grew by 2% year-on-year, but we grew by 1.7% in constant currency. Similar to the U.K. BFS, we have resolved most of the hiring challenges from our prior update by expanding the hiring reach and by moving some lines of work offshore. However, higher-than-anticipated absenteeism due to the COVID wave has hit this segment as well. Given the circumstances, we believe that the business has performed reasonably well and remains on a steady growth path. I'm currently in the U.K. and had a very good meeting with our largest client earlier in the week. The relationship remains very strong, and we continue to explore new growth opportunities together. Our sharp focus on scaling our footprint in the tech industry is playing out nicely. We added 3 new clients this quarter in the fintech space, including our first crypto client, and expanded to risk management services to these clients. The pipeline is building nicely and is currently at the high point for the year. Let me give you a little bit more detail on the acquisition of American Recovery Services, Inc., or ARSI. It's a leading player in the legal network collection market. ARSI was founded in 1986, providing legal collection services nationwide for the leading credit card issuers, insurance and fintech companies. The firm over the years has developed a strong partner network of attorney from across the 50 states in the U.S. to help provide legal action to resolve uncollected debt in their respective jurisdictions. Let me just take a minute and explain the high-level debt collection value chain. Once the borrower defaults, the charges of creditors have largely 3 options. One, they could call and collect, which is what we do today, which is recover outstanding due by call or digital strategies. The second is debt sale, where you sell the debt portfolio to a debt buyer for a percentage of the outstanding balance, so sell for $1 and then whatever the debt buyer does after that. The third option is legal collection, where you use a legal collection channel to file lawsuits to obtain a judgment against the charged-off debt. The legal strategy can be deployed at all stages of the debt cycle from charge-off to late-stage debt. It can be a stand-alone strategy or can be a follow-on strategy to the call-and-collect strategy. Typically, accounts with a higher outstanding balance and value are better suited for legal treatment. The legal collections market in the U.S. alone is estimated to have a TAM of $1 billion to $1.5 billion and continues to grow. This acquisition helps us build our capabilities and scale in the debt collection industries. It's firmly in line with our digital first digital strategy -- Digital First, Digital Now strategy and will enhance our platform-based services portfolio. ARSI has developed strong IP in the way prioritizes the lawsuit filing and has a proprietary platform that partner returning from used to managed case volumes. The purchase consideration for this acquisition is expected to be USD 53 million, of which $46 million was paid at closing and the balance is payable on the first anniversary of the deal linked to performance-based earn-outs. We are onboarding a very tenured and experienced team, and I'm very excited as we integrate the entity within the wider Firstsource organization. In another development, we are actively evaluating nearshore locations for the U.S. and U.K. markets to address the structural demand-supply challenges in the onshore markets. We're delighted to report that we opened our first delivery center in Mexico, creating a nearshore option for our U.S. clients, and we will go live with a large health plan in March next month. This has been a challenging year, a couple of macro factors, one, the surprising strength of the household finances and then the continued impact of public health have dented our original growth expectations in the Collections and Provider business, respectively. And then while we anticipated that the mortgage refi market would cool this year, the reduction in volumes has been sharper than what we had expected. However, we shouldn't lose sight of the progress that we have made building out a foundation that we anticipate will drive consistent top quartile growth in our industry over the longer term. We are focused on our growth framework to, one, maintain a sharp focus on the 3 core industries of banking, health care and CMP; second, modernize our offerings, particularly investing in our Digital First, Digital Now approach; and third, building a purpose-led, scalable and agile organization. Quick rejoinder. We made solid progress on these over the last 12 to 8 months. We successfully turned around our HPHS business, including the largest platform-based services deal in our history, further expanded our domain and digital capabilities with the acquisition of StoneHill and ARSI. We engineered and introduced new platform-based services like the mortgage postcodes and a few others, greatly strengthened our delivery and account management capabilities. And we recently gained inclusion in the Bloomberg Gender Equality Index, a testament of our efforts to build a holistic and inclusive growth-oriented company. We look forward to speaking to you again in 3 months, and we'll highlight our full year results and provide our expectations and guidance for the next fiscal year. I will now pass over to Dinesh to cover the financial details for Q3.

Thank you, Vipul, and hi, everyone. Here is a quick summary of Q3 FY '22 financial performance. Revenue for Q3 came in at INR 14,638 million or $195.4 million in dollar terms. This implies a year-on-year 7.2% in rupee term and 4.9% growth in constant currency terms. On the margin front, operating margin or EBIT came in at INR 1,762 million or 12% of the revenue for the quarter, which is 10.8% growth year-on-year, and it's a margin expansion of 39 bps. Profit after tax came in at INR 1,355 million or 9.3% of the revenue for Q3. This is 11.9% growth year-on-year with a margin expansion of 39 bps. In Q3 FY '22, we generated INR 3,243 million cash from operations. Our free cash flow was INR 3,059 after existing for CapEx of $184 million. Our closing cash balance as of December 31 was approximately INR 1,898 million. DSO is slightly higher this quarter, which is at 58 days compared to 54 days last quarter. We completed 2 acquisitions during the quarter, as Vipul talked about detail about the ARSI and StoneHill. This -- purchase consideration paid for these were around INR 5,067 million. Both these acquisitions have announced payable on first and necessary linked to the performance. Net debt as of December 31 stands at INR 5,882 million or $79.1 million versus the INR 3,380 million or $45.5 million as of September 30. Tax rate for the quarter is slightly low around 16%, but we expect that for the year, it will be ranged between 16% to 19%. I'm pleased to announce also that Board has recommended an interim dividend of INR 3.5 per share or the 35% for the financial year. Total payable expected on account of this is going to be INR 2,439 million. On our ForEx hedging, we have coverage of GBP 43.3 million for the next 2 years with rates ranging from INR 108 to INR 113 per pound. We have coverage of -- we have also a coverage of $68 million on with average rate between INR 77 to INR 80 to $1. With this, we can open up for the questions.

[Operator Instructions] The first question is from the line of Nagraj Chandrasekar from Laburnum Capital Advisors.

Vipul, I can understand on the current quarter, but even by the second quarter, our Provider business was still 15%to 20% roughly below the pre-COVID rate of $120 million a year. Why was this so, even in the second quarter, despite electives being back to normal in the U.S. And how does the public health emergency specifically hit us and our eligibility business? I'm asking this because some of the larger RCM players like R1 were talking about procedures being back to normal by the second quarter 2, 3 months ago. So just wanted to understand how we were specifically hit more than the larger RCM players by what has happened.

Sure. Thanks, Nagraj. So a couple of comments, right? One, relative to public health emergency, I think that's one of the nuance, which impacts us. We play on a part of the revenue cycle or a big part of our business is just the eligibility services where we get coverage for uncompensated care for our clients, primarily through either Medicaid enrollment or other avenues which might be available. Now there, because of the public health emergency, government is providing a lot of support to hospitals for COVID treatments and others, and there has been almost like a large chunk of population which is compulsorily enrolled in -- or automatically enrolled in Medicaid because of the public health emergency proclamation. So that has disrupted the normal revenue cycle flows, right, the normal sort of portfolio of how -- what type of clients will come in and what sort of support they would need for our hospital clients. That disruption of the flow has impacted our flow, which is the eligibility services. And our hope was that in Q3, we'll see that support will wind down and normalcy will return to people coming back to hospitals. But with the resurgence of Omicron, again, we saw that a lot of hospitals prioritized COVID care. Consumers also were hesitant sort of coming back, and that ran through most of December and January. Hopefully, that kind of starts to die down. But we were expecting growth to come back in Q3 and Q4, and that's what we've seen deferred back because public health emergency is now -- for now targeted to go sometime in mid-April. So I think that's the difference between us versus some of the full scope RCM players, which might be doing different scope deals.

Understood. So I'm just -- got it. Just -- does that mean the growth we've seen Q-o-Q on the Healthcare side has all been driven by HPHS?

Majority is absolutely coming from HPHS, and Provider has had a relatively muted year.

Understood. And just on the BFSI side, if you've seen a moderation in margins which were at sort of all-time highs? Is this now a more normalized number? And what really were the drivers of this spiking up over the last few quarters? Was it driven by sort of mortgages numbers? And is the current margin a more normalized margin?

So as volumes in the refinance portion of the business, right, as they have started to tone down as we expected -- in fact, more than what we expected, we are balancing our costs. So there is a little bit of a time line between revenue dropping off and full cost action taking, and there will always be some fixed costs as well. So I think some of it is baked into our Q3 numbers and some of it will kind of come through in Q4 as well, the moderation and the margin for that. But yes, we also had -- when we were running -- when we were enjoying the higher volatile revenues of mortgage, we had a little more SGA leverage on that business as well. So that was partly driving some of the reasons. Collections. Again, as we said, we started well in Q1 and then it started dropping. That has an impact on the margins. I think next year when collection volumes come back, that will be a positive sort of tailwind to the margins for BFS, while mortgage will kind of pull it down a little bit.

Understood. And just finally, what's the absolute mortgages dollar number this quarter? And I see the total origination and refi volume in the U.S. is now settled at roughly $600 billion ballpark the last quarter, if I'm not mistaken. Do you think that is a sort of normalized number? Or did you see it having the chances of going to a $300 billion, $400 billion combined number, like you had in the first half of 2019?

Yes. So in terms of our revenue, Q3, including for a partial quarter for the acquisition, we are closer to about $50 million revenue for Q3 on the mortgage side, right? The market in terms of the volumes, I think it's a very dynamic market, by [indiscernible] admission. They've taken out the word transitionary from their inflation commentary. And they said that, "We'll have to watch it carefully and keep the policy nimble." And we're seeing most of our clients also kind of watching it. The purchase market continues to be strong in the U.S., and that, we see that demand is strong. It's more limited by supply. Obviously, as interest rates have grown, there will be some dampening of demand because of higher interest rates as the 30-year mortgage has already moved up something like 50 basis points from November to now. So I think there will be some dampening. But the purchase market continues to be strong. The refi volume as to what is the equilibrium based on the interest rate, I think that judgment has to come to say, what will play out -- what will be the volume out there. But I also wanted to caution out that there is a lag between the volumes that are coming there and what is forecasted versus how it plays out in our revenue and forecast, right? So what you got in Q3, we expect Q4 will be lower as far as refi volume is concerned.

[Operator Instructions] The next question is from the line of Mohit Jain from Anand Rathi.

Sir, while I was not clear about the organic growth numbers. So how much contribution have you added for 2022 in terms of actual varies?

So we said we've done about 5% year-on-year, of which 4% came from inorganic. So a modest 1% year-on-year came from organic.

So when you say modest 1% 3Q '21, you're closer to INR 185 million, INR 186 million. And at this time, we have reported INR 195 million. I think almost INR 70 million has come in organic, which seems to be on the higher side.

So let me just do the math. Yes. About INR 77.5 million has come from inorganic.

And that includes StoneHill?

And ARSI.

For few days, contribution of ARSI?

No, we actually got more than that because we signed the contracts sort of earlier. So we got more than that revenue in ARSI.

So ARSI, we integrate for 1 month? Or how should we read it?

ARSI was closer to a month -- slightly less than a month, but yes closer to a month.

Closer to 1 month. And the other one, StoneHill Group is integrated for almost 2 months. Is that correct?

Yes. Slightly less than 2 months, but yes.

1.5, okay. And sir, from a 4Q perspective, like what is our outlook because of the sharp revision, downward revision? There is a revision in the last 2 quarters as well. But where do you think any outlook on '23, would be helpful. Like are you guys are bottoming out? Do you think there will be some pressure in first half 2 dueling then you may see recovery towards second half?

Sorry, you're talking about second half in terms of next year or second half...

Like do you expect to sort of bottom out in 4Q? Or do you think this will continue in the first half of next year? And then we should actually expect some recovery towards the second half of next year?

Yes. So Q4, right, if you look at it, obviously, you will see an impact. That's why we have brought the full year guidance down to the 14% to 14.5%. Taking the full quarter impact of the acquisitions, I think next year -- the fourth quarter will be growth over what we saw in Q3, right, because of the impact of these acquisitions. But in terms of the outlook that you asked, I think I had mentioned earlier, I think Collection is starting to turn around. We're starting to see green shoots of sort of higher volume. Obviously, they won't show up in the revenue for Q4. But I'm cautiously optimistic that will start to climb up through Q1 and kind of continue to climb through Q2, the volume recovery that is. Second, Provider, again, a little bit of a variable on hopefully, Omicron dies away as is for now tending to be and there's no reversal of this declining trend. With that, we expect that Provider should start to come back to normal, especially if the public health emergency finally closed down in April. HPFS is continuing strong. Mortgage servicing is continuing strong. Europe is strong. The only variable is definitely Q4 for mortgage refi will be lower. I expect that it continues -- the refi will at least be lower in the first half of H1, right before it stabilizes. So when you add all it up, we haven't done the full forecast, but I would expect that next year, most businesses will be -- will start to end upward barring sort of the refi portion of the mortgage business.

And from the total mortgage [indiscernible] you spoke about, I think, $50 million is the revenue for 3Q. You are obviously expecting a sharp decline next quarter. Where do you sort of expect it to settle down?

At this point in time, the way we have kind of modeled out -- actually, I should say, without acquisitions, mortgage is about $50 million for the quarter.

Without acquisition? What did you say?

Without the acquisition.

Without the acquisition, okay.

Without the acquisition, right? Now as we go to Q4, and then we have the full impact of the acquisition, we expect the -- at this time, we're modeling about $45 million, $46 million, including acquisitions.

And then we study from there till the time we...

Well, we will see some softness from there on as we go into next fiscal because of refi volumes, right? So we'll see some softening from that level as well.

The next question is from the line of Dipesh Mehta from Emkay Global Financial Services.

Just want to get sense about the organic business. I think you've partly answered INR 7.5 million is the acquisition. So in a way, you are employing this quarter, we have sizable sequential decline. And probably even Y-o-Y, we might be down or might be hardly any growth. And -- so if you can help us understand, our mortgage business is lucrative. Mortgage business is not explaining full weakness. And obviously, we know the -- some of the factors which are not doing well. But surprisingly, there are not separation factors, which are negating that insights. So if you can help us understand structurally what measures you are taking, which can negate some of the headwind, right? In business, you are -- in any given period, you have some headwinds, you have some tailwind. But for us, negatives are outweighing positive. So if you can help us what steps you are taking which gave you sustainable growth over medium term.

Yes. No, great question, Dipesh. So look, as I look at our portfolio, right, if I just step back and look at our portfolio of the 5 large operating businesses. This year, HPHS had a strong year. CMT had a strong year. Europe, which partly whole as to CMT, had a decent year, right? There were some staffing issues, et cetera, which kind of took away some of the revenue opportunities. But Collections was impacted with a very unique economic environment. Provider, because of continued COVID. And then Mortgage, we expected, but it's gone a little bit worse than we anticipated because of how the markets moved and how inflations come up in the U.S. economy. So effectively, 2 of the businesses were buffeted or faced macro headwinds, which, I think, will play out, which should ease out next year, right, both for Collections and Provider. Organically, in terms of our effort, the stuff we're doing is that we have invested. We've taken the time for our Provider business to strengthen our offering, strengthen our teams on sales and account management. And we've integrated patient matters into a better platform. And I think as markets come back, we have a more broader offering, which covers the entire patient payment experience, as opposed to just we were doing chunks of collections and chunks of eligibility. Now we will do the patient experience. So I think provider, we have done a lot of work to kind of make sure that we have a broader offering and a more strengthened team as the market comes back. As far as Collections is concerned, I think the acquisition of ARSI gives us tremendous capability on the complementary side. Today, we just did one part, which is the early stage. Now we can do the third leg of the value chain, which is legal collection. And we do intend to take this broader capability to a broader customer set beyond the credit card segment, into fintechs, into utilities as well. And we are also actively deploying some investment into U.K. to take the collection capability out of U.S. and take it to the U.K. market. Again, early days, right, to kind of keep there. That's on the Collection side of it. Keeping on with the CMT focus that I've been talking to you about. I think it's been a complete organic build, coming cold into the market from a standing start. While revenue-wise it's taking time, but I'm very encouraged by the kind of logos and the kind of work we're signing up. And I think that will start to kind of gather momentum into next year. And that will be all net new growth given the new growth sector of the fast-growing sector has a very small revenue base into this year. Whatever we get next year, majority of it will be net new growth. And then lastly, on Mortgage. The StoneHill acquisition is almost -- 2/3 or more than that is towards servicing. So it kind of strengthens our Servicing portfolio. So while we'll deal with the volatility of the refinance market, I think we continue to focus on the Service portfolio, so that we kind of continue to have a more stable revenue mix as well as that share increases as far as overall Mortgage is concerned. So those are some of the specifics in terms of actions across the businesses so that we can somewhat limit the -- or better deal with the macro impact that we saw in 2012.

So let me ask it differently. We -- I think your back or year-end update, you always used to say business, considering overall portfolio, we can deliver low to mid-teen growth on a sustainable basis, on an organic basis. That is what you expect the business to deliver. FY '22 seems to be weaker. But considering all these puts and takes, how far we are from delivering those kind of number on an organic basis?

Well, Dipesh, if you look at it, it's a fair question, but now that I'm guiding to 14% to 14.5%, we're still going to -- we're still looking at between 10% to 10.5% organic growth to come this year despite the significant sort of headwinds that we've had. So to that extent, if you think about it, last year, you guys had asked us and challenged us that FY '21, a lot of the majority growth came from Mortgage. This year, if you look at it, Mortgage had pretty small growth, right, low single-digit growth on a net year-on-year basis, although run rate will be lower. So all the organic growth that we've seen has come from the investments that we put in 2 month into Healthcare and CMT and stuff. And I think that robustness will continue to show into next year as the volatile revenue plays itself out, and it's a more stable and sustainable revenue which comes into play.

Sorry to interrupt, Vipul. But if I do adjustment for Mortgage, business from FY '21 to now, you have significant headwind entering into FY '23. '22, because we are sales -- because our exit rate was very high in mortgage. Once we exit FY '22, we have a significant headwind to get that double-digit organic growth. And that's why I asked this question.

So again, we haven't -- we are going through a robust budgeting process. I don't have the numbers yet to give you for the next year growth. I'm giving you direction and qualitative answers from how the numbers are playing out, right? I think the foundation for the business is solid in sort of 4 of the 5. It's the Mortgage volatility, which is kind of creating some noise. But otherwise, the business is are all on the sound footing. Once you kind of pause and look at the map, you can see what the organic will come out to be.

Fair point. Can you give me a couple of data points? What would be the servicing mix -- or servicing revenue this quarter out of Mortgage, 53 million weeks, you said, including acquisition?

This quarter, the servicing is closer to 40%.

Okay. And the split between provider and payer.

It's closer to -- it's half and half with maybe HPHS being slightly higher than 50%.

The next question is from the line of Manoj Bahety from Carmelian Asset Advisors.

Sorry, I was on mute. A couple of questions. First one is if I look at the headcount, the headcount is going down, and that is something like maybe due to attrition. But if the head count starts going down, especially in your business, are you factoring in a lower growth momentum? Or it is because of higher efficiency or higher digital-enabled solutions or services, which you are providing? How do we read this number?

Manoj, So clearly, as we talked about, right, as some of the volumes have declined this quarter on mortgage and last 2 quarters, we've been seeing softness in Collections business. We've kind of managed our headcount, right, as attrition has happened. We've not refreshed some of the positions, right, to make sure our headcount is in line in this. So I think it reflects that majority. But yes, ongoing basis, there is a lot of effort at automation, both in terms of what we contractually commit to our clients as well as for our internal efficiency. Also, keep in mind that the acquisitions that we have done, although they had a small impact in the third quarter, more in Q4, they both have platform-based services at the core, right? So their revenue runs on a different trajectory than our business. They're both -- majority of their business an outcome basis and delivered through platforms. So they have a different revenue to headcount sort of dynamic compared to the rest of our business. And that will also have a positive impact on the revenue to headcount relation and overall as those are fully integrated in Q4 in our results.

So this headcount number is inclusive of your acquisition from Empower, which you acquired or ex of this?

Inclusive.

It is inclusive. So organic-wise, it's a much bigger drop, right?

Dinesh, this is inclusive, right, the headcount?

Yes, it's inclusive. That's right, yes.

Okay. So on an organic basis, is it much bigger drop than this number?

We've added slightly less than 400 people through these 2 acquisitions.

Okay, okay, okay. And my second question is like if I have to see mortgages reduced from a medium-term perspective, especially looking at the way the U.S. macro will unfold, interest rate starts going up. I don't know whether delinquencies on credit cards will again go up with the rising spend. And also, in terms of your refinancing business, like which will have a structural headwind at least for next 1 or 2 years at least. So how you are going to mitigate these kind of headwinds, especially on Mortgage business, which is a large proportion of your revenues as well as, I think, on the base side also, it is having a good growth. So if you can answer this question.

Yes. So I think two parts to your question when you talked about the impact on the credit card, right? So clearly, as spend rises, right, as people step out and start to do discretionary spend on credit card and which is substantially an unsecured loan, and with inflation starting to kind of impact household finances, delinquencies rates will rise, right? Right now, they are way off the normal delinquency or historical deliquency rate. But they will rise, and we're starting to see that. And in normal economic environment, there is a -- somewhat of a hedge between our Collections and Mortgage business, right? '22 was a very unique year where both kind of went in one direction of course, right? So next year, I think they'll return to some element of natural hedge between the Mortgage and Collection business. That's just one comment. The second comment on the Mortgage side, yes, as interest rates rise, refinance economic change for average homebuyers, right? They go for a refinance and it makes sense. It's interest load, they save some dollars and they go for a repricing. But when interest rates go high, there is no incentive for them to seek a refinance, right? Then you're down to sort of the normal purchase transactions. Or there will always be a population of home buyers, who've had historically higher rates or whose credits improved, and then they're eligible for lower rates and they come in for refi, right? So there is a core refi, there is core purchase and then there is a volatile or the more opportunistic refi buyer, who comes in because there is an interest arbitrage opportunity for them. I think the third portion is what is dropping off now, right? And they all repeat the cycle, 3 to 5 years, right, as interest and go as top line. So we are sort of starting the end of that cycle. Whether it takes 3 months, 6 months, 9 months to work its way through the system, we'll kind of see. But I think there is a core element to our Mortgage business, the servicing as well as the core volumes of refi, which is strong. With the acquisition of StoneHill, we are adding 2 new lines, quality control and due diligence. Due diligence especially plays in the secondary market purchases, which is unlinked to what's happening in the core market. And especially with the MBS purchase lower by federal reserve, the secondary market activity increases, right? More investors buy pools of loans and they need due diligence services on them and they need QC services on them. So I think that was the whole reason we also were keen on that acquisition to make sure we are building foil for additional growth lines there. And I think for servicing, more efficient refi, a more efficient financing. And then QC and due diligence are the building blocks for now for us. And second, clients still are doing a reasonable amount of financing and refinancing with them. As we kind of push more efficient solutions, after this initial shock of capacity wears off, clients have to look for lower cost options. And I think that's where offshore and digital comes into play, that you become an answer for your clients in a declining market more. So I think those are the factors which we think will help us bucket some of the declines that we are seeing this quarter and potentially going into next year as well.

Sure, sure. And lastly, on ARSI, if you can give some more color in terms of some quality parameters of the target? Where are you seeing the potential? Where are they right now in terms of revenues, profitability? And how do you see that it is going to unfold over next couple of years?

Sure. So look, it was a founder-led company. They had a good portfolio. Two of their largest clients overlap with us, right? We also serve them. We serve the early collection needs. These guys serve the legal collection needs for 2 of the largest banks in the U.S. So that's a good synergy for us to kind of combine. They had a decent go-to-market, but I think it was -- from our standpoint, the way we would run our business, we will increase the investment in the go-to-market and extend the sales and the account team. We want to take them to our clients, and we want to push hard on the fintech side, as fintechs become more influential players in the lending side of the market. I think giving them holistic collection solutions, both early stage or call and collect or legal stage -- legal collection option. That's one of our strategies. And then obviously, when we marry our digital collections with their abilities, we need to play out. But our thesis is that low balance debt, which is typically, let's say, utilities or BNPL, if we can do legal collections with a very strong digital intent, it brings down the threshold of what debt you can take, right? Then it makes a little bit more economic sense to do for lower debt, right, as well because we were able to do digitally. So I think there is potential to grow that business, expand it into other parts of the banking chain and maybe take to other industries. Margin-wise, they are slightly lower, somewhat lower than our target margins, we kind of know that. And we think as we get there, as more scale comes in, as we put in a little bit more technology and more leadership discipline on cost management, over the next 4 to 6 quarters, we'll kind of bring them on parity to our margins. All of that is kind of baked in how we evaluated this business. So I think that's how we're kind of looking at that business.

[Operator Instructions] The next question is from the line of Mihir Manohar from Carnelian Asset Advisors.

I wanted to understand whether the numbers are...

[Operator Instructions]

Yes. Yes, sure. So Is it audible now? I mean, I want to understand the split between refinancing origination and collections. So among the BFSI domain, what is the split in these 3 categories, refinancing origination and collections?

So I think there are 3 parts to our Banking and Financial Services business, right? There is a Mortgage business, which in turn is made up of origination and servicing, right, which we said is like a 60-40 split between them. Then there is Collections, which is largely a U.S. business today, as is the Mortgage, as we call it. And then there is a Europe Banking and Financial Services business where we serve retail and commercial banks. Those 3 combined are our BFS business. So in that context, can you ask your question again, please?

Yes. Sure. Understood. So I just wanted to get the split on that. And I mean, broadly among these 3 divisions, which divisions has higher margins?

Which division has higher margins? I think both Mortgage and Collections generally run at the same margin levels. Europe, our margins are somewhat lower because of the higher onshore component of that business, right? And it's pretty much majority debt business or [indiscernible] contact center. Europe tends to be somewhat lower, but Mortgage and Collections are generally in parity.

Okay. Sure. Understood. And just one last clarification. So I think you lowered -- the last time you had granted for $14.5 million to $15.5 million, and that was including the acquisition of StoneHill. But this time, the guidance that we've given also includes the acquisition of ARSI, right? So last time for the clarification that I wanted, last time, the guidance that you had given was without the acquisition of ARSI, right? Is that understanding correct?

Correct. At that time, we were still -- we haven't closed the deal. We were still in the due diligence phase of that, yes.

Okay. And that is still -- I mean, close to 10% of our -- I mean, the size of that company is close to 10% of our revenue. So in that context, the downward revision guidance is even more like what a downward revision was there in 2Q, right?

Correct. So at that time, we had given including one. But yes, we have downward revised now the organic guidance to about 10% to 10.5%, and then about 4% will come from these 2 guys combined for the quarter baked into the full year full year guidance.

Understood, understood. Sure. And the start of the guidance that you had given at the start of the year was without any inorganic component. Correct?

Largely, yes.

The next question is from the line of Shradha from [ Mishin ] Market Securities.

One clarification on this market business, the run rate of $50 million...

That was somewhat unclear.

Is this better now?

Yes.

So this mortgage business run rate of $50 million, is it without acquisition this time? Just one clarification here.

The $50 million that I mentioned to you for this quarter is without the acquisition.

Okay. And Vipul, you mentioned that StoneHill was consolidated for 2 months, right -- broadly 2 months, less than 2 months. But when I see the BSE filings, I see that the acquisition got completed only in the month of December. And the ARSI acquisition got consolidated in the last week of December. And there, again, you are saying that the numbers are consolidated for broadly a month. So just wanted to check how is that possible that the acquisition has got closed late. So how are we accruing for the higher duration for both these acquisitions?

So I think the export accounting terms we're required to go through the agreements which we have signed with those guys. For StoneHill, we have agreed -- on 9th November, we have closed the deal. There are some administrative things needs to be closed, which was the pending. So from the control point of view, we have started getting control from that point. And as per the agreement, all the profitability and everything accrue to the Firstsource. And the same applies to ARSI also because we were in discussion. There are things which is got pending due to the Christmas holidays and all. I think from the promoter angle point of view, we have did close. Accounting suggested that practical purposes, you need to take [indiscernible] when you have a control of those assets. And that's the reason we accounted at these months.

Okay. And secondly, ARSI had revenues of close to $72 million that was the last year that we reported for them. And we did indicate that we have some client commonality in the sense that 2 of their largest client overlap with us. So do you think we can expect this entire $72 million to get added to our top line? Or will there be some let-off because of some client commonality?

Not because of client commonality, because we do completely different things for the same clients. But there is the collection softness that we see in our business in FY '22. Because they come later in the default cycle, right, we will see the softness of collections in terms of lesser volumes, which flew into the delinquent bucket in '22, will reflect in some softness in the ARSI business for next year, in FY '23 because that's how the cycle works. They're sitting on a large portfolio, right? So that kind of buffers it. But there will be some softness from FY '22, flowing into FY '23, and then it will come back up again. So there will be -- from the $72 million that you mentioned, there will be -- we expect there will be some downturn. And obviously, there will be some element of -- goes down when you do an acquisition for a founder-led company. There'll be some softness in few which we have backdated, right, coming into next year.

So would it be possible for you to quantify what should be the reasonable revenue to be built in for ARSI for next year?

We are working to do the details, right? When we come and talk to you for the next quarter when we give guidance, we'll try to kind of isolate that out.

Right, it's right. And Vipul, just on the large HPHS that we signed last quarter, how is the ramp-up going on? And is it broadly on top? And do we expect good revenue attrition to flow from this deal in Q4?

Yes. It's on track, right? All these milestones, as we had agreed with the clients and our IT partner -- IT services partners are on track. We have done -- there was a small portion of rebacks that we had to do, that's happened on the milestone, and the first batch of knowledge transfer is on track. So yes, we expect Q1 revenues to come in -- or sorry, Q4, Q1 calendar Q4 fiscal revenues to be on track from that piece.

Right. So $15 million, $16 million is the kind of annual run rate that we were talking of. So broadly, that would be the run rate, right?

$15-odd million, yes.

The next question is from the Rahul Jain from Dolat Capital.

Basically, I have a question regarding some perspective, if you could share for FY '23 because if we factor in the guidance that you have suggested for this year, we may have 300 or close to 200 to 205 on a Q4 basis. But based on various comments that you have shared for FY '23, we may see some downtick on the numbers that we will have for the RC going into FY '23, also for the Mortgage business in general. We expect Collection and Provider business to improve only, I believe, by Q1, which can also see some kind of delay because that's just an anticipation at this point. So with so many headwinds and no real kind of a trigger driver for the revenue stream in FY '23, what kind of a growth band or range one should kind of put into FY '23 with multiple headwinds coming into play?

Rahul, I think you've captured some of the things that I've commented on. I think ARSI will not be any significant, but I was just giving a sense that it won't be an uptick right away. There will be some downtick before it comes back. And also, I'm not sure I would agree to say there are multiple headwinds. I think Mortgage is one headwind. Mortgage refi is one headwind that we have to grapple through as we get into next year. But all other businesses, right, both Collections and Providers, which have been impacted this year, I think it should start to ease off. Collections, definitely starting to ease off already. Provider, still kind of on the fence depending on how Omicron kind of downplays. But I think, in general, the foundation for that business is strong. And there was earlier comments of some of the other players who are broader offerings, they're starting to see normalcy back. I think we'll see that as well, albeit with a little bit of a lag. And I think HPHS in a strong [indiscernible]. You'll see some of the wins that they've done, the benefit will come through. As well as U.K., right, our U.K. business is working on a decent pipeline. I think that will have a good solid year next year as well. So I would not -- in my head, I don't characterize as multiple headwinds. I characterize as sort of one headwind and the rest, right, we obviously faced the brunt of it in Q4. And I think it will diverse and sort of ease off as we go into the next fiscal. In terms of actual growth guidance, I'm very conscious of that we need to come and give you credible guidance. So I don't want to sort of hazard a speculation yet until I've gone through a proper budget and kind of tested it a couple of ways before I come back and give you the growth guidance.

Right. So maybe I need to put this in a different manner. So first thing is that, a, the allocations on the inorganic side are coming in an area which we know that, at least from a near-term perspective, are not going to be an attractive asset. Of course, the valuation are also very attractive at which we might have done this transaction, which also suggests that the run rate is expected to go down. So, a, of course, this is a definite positive from a very long-term perspective. But that is one thing, which is -- which I found little -- are not very ideal, given that we are also dealing with the revenue deceleration, so as to call it, looking at the number what we delivered in FY '21. And secondly, from the perspective that provides also, like, I think right from the beginning of the year, we were very hopeful about that this could be a driver for the business. But this has not played out. And we -- none of us have any control about from a virus perspective. So in -- given those things in mind, do you think the current year organic growth of 10%, 10.5%, which you said is something what we can have into next year or higher? Or you can say it's too early to even give any numbers related to that as well?

Yes. Again, as I said, right, we need some more time. As we come to Q4, we'll kind of come and talk about the guidance for next year in terms of growth percentages. Just to kind of -- a little rejoinder on your point, I think you've captured well. I think these are good valued acquisitions. I think legal collections is a little bit of a fragmented market, and I think it is an opportunity for us to come in and apply the scale of a well-run enterprise and kind of make inroads into that market. So I think notwithstanding the unique collections environment, right, of robust household finances causing low delinquencies, so it will have some impact. But overall, I think not long term, but sort of I would say short to medium term, it's a good business. And likewise, Mortgage, as I mentioned, StoneHill players in the market segment which is not as directly correlated to refinance, right? QC somewhat is, but due diligence is completely unrelated. And QC is also done for more complex -- either purchase transactions or more what I call as nonconventional or jumbo transactions, right? So it's not as correlated to the refinance or interest rate sensitivity. So I think both these are good additions to our repertoire that we have added adjacent capabilities that allow us to get growth. I just wanted to correct that perception that we bought in the segment, which haven't done well. I think we've baked that in, and I think this kind of helps us kind of add new capabilities even in those segments. So that's how we look at it rather than just a pure value buy.

Yes. I appreciate the color. Just, if I may -- just to ensure my understanding, can we say that now because the kind of a portfolio that we have around in the mortgage, in a normalized scenario, let's say, beyond FY '23, now that kind of portfolio we have irrespective of the cycle of the mortgage, we should be able to have some growth on a sustainable basis? Or you think it still be -- we'll have volatility but lesser volatility given the portfolio that we have?

100% the latter part, Rahul. I think as this -- we enjoyed this volatile revenue, right, for the last 18-odd months, right? It did play out. But the core of the finance volumes and servicing and what we are adding, I think this is a very solid portfolio. And once this -- especially when you look at beyond FY '23, we absolutely have to look at it as a growth portfolio.

The next question is from the line of Dipesh Mehta Emkay Global.

Just one question. You indicated mortgage revenue to be around INR 45 million, INR 46 million next quarter. That is including acquisition or ex acquisitions?

Including acquisition.

So in a way, you're implying roughly 30% decline in origination business on a sequential basis?

Your math is way ahead of me.

Because I assume the servicing business is a stable business.

Yes. So yes, okay. If you take from that perspective, Dipesh, yes, servicing is stable. The origination, we talk about 30% today.

So 30% is in origination business. And if I compare that with your historical, so we are back to Q4 FY '20 kind of run rate from where we have seen significant uptick in our revenue. So from that context, now we have signed some agreement with one of the anchor client and where Firstsource made some equity-related payment and other things. Now any conditionality change to that thing, where because I think in future performance also, it was linked to some kind of equity-related payments. So if you can provide some sense about how economics works for those relationships?

So yes, so those relationships, as we had said, right, there were 2 parts to it. Bulk of the payment was pertaining to sort of what was historical, right, going back to the 2018 agreement, right? So almost 4 years of kind of playing into that. As we go into the future, there is a variability to the payment that we had given, which is linked to certain spend levels, which are lower -- significantly lower than the historical levels. So as long as we get that base revenue, right, the variable portion of the payment will be paid. Otherwise, it won't be paid.

Any sense you can provide us? Because that number will be there in the -- I'm not sure, FY '22 number? Or it will come only in '23 now?

FY '23 now. It will come in FY '23.

Okay. And last question is on the Collection business. Can you help us understand the Collection business run rate?

Collection business run rate?

Organic revenue run rate. Because your -- if I look your non-mortgage BFS revenue, and if I adjust for the run rate of the equity, sir, it seems to be very weak. And that's why I just want to get sense what explains that weakness?

So look, Collections, I had told you in Q2 that it's going through a historically low volume period, right? And it's been a very soft year compared to what our growth expectations were for that business. So Q3 December quarter, if I look at Collection business without acquisitions, we would be on the run rate of somewhere between INR 15.5 million to INR 16 million, I think.

Roughly INR 16 million.

Is that -- Ankur, that's right. Correct?

Yes.

So then the weakness appears to be in U.K. BFS. Can you help us understand what is -- why the weakness in U.K. BFS because it is generally stable business?

Very small weakness. It wasn't anything material or any major factor there, Dipesh, primarily due to the talent situation that we had talked about, plus the higher absenteeism, which meant some revenue loss. There was just minor weakness because of -- a minor...

Yes, you say that thing for CMT as well as U.K. BFS. How that sits and whether it is returning to normalcy or yet if you have any indiscernible]?

I think it's better now as we come into the second part of January, as U.K. and U.S. both have started declining numbers. We're starting to see the shrinkage factor, as we call it. That has started to come down.

So Q4 should be relatively better performance from those parameter perspective?

Correct.

Thank you very much. As there are no further questions, I now hand the conference over to the management for closing comments.

All right. Well, again, thank you, everyone, for joining. Thank you for your continued engagement and great questions. Again, as I said, somewhat disappointing quarter in the guidance. But I remain very confident that we have the right foundations, and we welcome your questions and engagement with us. And we'll come back and talk to you in another 3 months. Thank you.

Thank you very much. On behalf of Firstsource Solutions Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.