Wipro Limited (WIT) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Wipro Limited Conference Call. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Aravind Viswanathan. Thank you, and over to you.

Thank you, Margaret. Warm welcome to our Q4, FY18 earnings call. We will begin the call with business highlights and overview by Abid, our Chief Executive Officer and Member of the Board, followed by the financial overview by our CFO, Jatin Dalal. Afterwards, the operator will open the bridge for Q&A with our management team. Before Abid starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995. These statements are based on management's current expectations and are associated with uncertainties and risks, which may cause the actual results to differ materially from those expected. The uncertainties and risk factors are explained in our detailed filings with the SEC. Wipro does not undertake any obligation to update the forward-looking statements to reflect events and circumstances after the date of filing. The conference call will be archived and the transcript will be available on our Web site. Let me now invite Abid to give the opening address.

Thank you, Arvind. Good evening, and good morning ladies and gentlemen. It is a pleasure to speak to you all and share the results of our fourth quarter and full year performance for fiscal 2018. I will also share our view of the demand scenario and an update on the progress of our strategic teams that I’ve been sharing over the last few quarters. In Q4, our revenues grew by 2.4% sequentially in dollar terms and 1.1% in constant currency in line with our guidance. On a full year basis, we grew 4.6% in reported terms and we’ve surpassed the $8 billion revenue mark. We entered Q4 with confidence driven by the improvements we saw in our deal trajectory, uptick in our client mining, our performance in digital and reduced headwinds in some parts of our business. However, we are disappointed at the loss of momentum in Q1 due to surprises arising out of the bankruptcies, faced by two of our clients with an annual run rate revenue of over $50 million; and their additional impact coming continuously from HPS business as more clients continue to exit the exchange market and continued weakness of our communications business units. We are confident we will return to a growth trajectory starting Q2 due to strong deal wins and order booking throughout last year and especially in quarter four coupled with continued strength in digital. Let me give you an update on our fixed strategy teams. Our digital revenues grew 9% sequentially, and is now 26.7% of our revenues. In Q4, we closed one of highest bookings yet on digital deals and one close to 70 deals over $5 million of TCV over last year. Our client mining continues to perform well. Our top 10 clients grew 5.5% sequentially and 14.8% year-on-year in Q4. We added two additional clients in the $75 million bracket, up from $50 million, taking the count to 20 such clients now. Two of our accounts crossed $250 million, which means one additional account in the $250 million bracket on a run rate basis in Q4. We continue to see traction in non-linearity, especially around our homegrown IPs like Wipro HOLMES, AssureNXT,et cetera. And for the full year, our IP revenue has crossed $100 million this year. We continue to make a lot of progress in delivering productivity through automation, and deploying Wipro HOLMES in the ramp part of transformation of our clients. We now have HOLMES deployed across 320 customers with 92 unique bots, which is helping us deliver significant service improvement to our clients across the run services in IT, testing, as well as business process services. Leveraging the cognitive capabilities of Wipro HOLMES platform, these bots have helped us automate work and generate productivity of about 8,000 Level 2 SPEs in the last financial year. Our fixed price mix has reached 58.7% in Q4, which is amongst the highest we’ve seen. As a result, our revenue per employee has increased by over 6% in the last four quarters. We continue to improve our localization levels across our markets with U.S. having crossed 55%, about 75% in APAC and Latin America continuing to be almost 100% local. We announced the divestiture of DCS business product integration of $405 million and we expect that transaction to complete in the current quarter. This strategically enables us to now transform our infrastructure services customers to cloud-based infrastructure, leveraging both public cloud where we have very strong relationships with the public cloud providers, as well as leveraging private cloud where it is required to our strategic relationship with Ensono, which is part of this divestiture. In Q4, we continued to see momentum in Wipro Ventures with 18 new deployments in various venture areas like threat management, test automation, conversational AI solutions to name a few. For the year, Wipro strategic investments in innovative solutions resulted in 68 joint venture partners. Overall, now we have 13 investments across artificial intelligence, big data, cyber cloud and IoT. Our internal entrepreneurship program continues to deliver well and we incubated 19 teams in the Horizon initiative, included five teams on technologies like additive manufacturing, autonomous vehicles and other industry platform and solutions. Now, I will request Jatin to speak on our financials.

Thank you, Abid. Good day, ladies and gentlemen. As always, it’s a pleasure to speak with all of you. Let me start with revenues. Our IT services revenue for quarter four grew 2.4% sequentially in U.S. dollar terms and 1.1% in constant currency terms. On a full year basis for FY18, our IT services revenue grew 4.6% in U.S dollar term in 2.9% in constant current terms. In quarter four, we signed a definitive agreement to divest Wipro’s hosted data center services business to Ensono, a leading hybrid IT services provider for $405 million. We’ll unlock value by transitioning eight data centers in over 900 employees in Ensono. As part of the agreement, we will make strategic investments of $55 million in Ensono’s combined entity. We expect to complete this transaction in quarter one. Let me speak about the outlook for the June quarter. For the quarter ending June 30, 2018, we have guided for the IT services revenue in the range of $2,015 million to $2,065 million in constant currency. For the purposes of outlook, we have not considered the impact of divestment of our data center business, on the revenue for the quarter ending June 30, 2018. We’ll revise the outlook for the quarter based on the actual dates of completion of the revenue operating month. In quarter four, we have recorded a provision of INR2080 million as we are impacted by the client insolvency and also impairment loss in one of our acquisitions. These events have cumulatively impacted our margin by 1.6% in quarter four adjusted for which our normalized IT services margin for quarter was 16%. This reflects the decline of 1.2% compared to quarter three owing to currency movement and lower profitability in our India and Middle East business. Our reported operating margin for Q4 was 14.4%. On a full year basis, the client insolvency and the impairment loss in one of our acquisitions that I talked about earlier had an impact of 1% on our margins. Adjusted for these events, our normalized margins for FY18 were at 16.8%. Full year normalized margin for FY18 on constant currency basis remains flattish. Our reported operating margin for FY18 was 15.8%. On currency, on the ForEx front, our realized rate for IT services in Q4 was 65.04% versus a rate of 65.7% for realized for Q2. Net impact of currencies was minus 0.05% on margins. ETR, the effective tax rate for Q4 was 20.4% compared to 21.7% in Q3. Reduction is ETR is largely due to the one-time benefit from certain losses and impairment written-off in Q4. On a full year basis for FY18, ETR was 21.8% versus 22.8% in FY17. This reduction was driven by the U.S. tax reform related benefit in Q3 and tax benefit from imperilment losses written-off in Q4. Net income, net income for the quarter was INR18 billion and for the full year was INR80 billion. Cash flow, we generated operating cash flow of INR84 billion in FY18, which was 105 % of our net income. This was a second consecutive year where we generated operating cash flows in excess of 100% of our net income. Our net cash is $2.4 billion. ForEx, we had about $2.4 billion of ForEx derivative contracts as hedges at the end of quarter four. Capital allocation, in FY18, we returned INR115 or 20 million through buyback and dividend for our shareholder, which is 144% of our net income. We remain committed to 45% to 50% of our net income to shareholders going forward. We’ll be happy to take any questions you may have.

Thank you very much. We will now begin the question-and-answer session [Operator Instructions]. The first quarter is from the line of Sandeep Agarwal from Edelweiss. Please go ahead.

Abid, I have a question which is more on the strategic side. If you see we have been trying to get that growth back for quite some time now. And every quarter or the other quarter we get some more other reason, because of which we miss that path which we have been trying to go on. But unfortunately something or other has been hitting us for quite some time now. And in spite of you know very good announcement and deal wins, it doesn’t reflect in the growth at all. And if you see last year also we have been probably one of the lowest in the large cap in terms of growth numbers. And the way we are starting Q1 again looks very painful, means we are indefinitely going to have a bad start, I would say. So what is missing or you think that we have lot of moving parts still in the business, which will keep on impacting us in we are not certain when the stability will come?

So Sandeep, as I had mentioned in my opening remarks, we are certainly disappointed about the momentum lost in Q1. And it is because of a few specific areas, which we have been sharing continuously. On the revenue front for Q1, primarily it is two major reasons; one is a continued fall of HPS revenues. Which right now there is a level of uncertainties simply because the legislative changes that we expected, which will enable a lot of players to stay in the market in the ACS space, and doesn’t seem to be on the horizon. And that is why our customers are exiting. Both the last quarter and this quarter, we‘ve seen a fall in the region. To give you a sense, as I’ve mentioned, our highest revenue was around over $70 million, about five quarters back, now it is in the range of low-30s. So that is the quarterly impact in terms of revenues. The bankruptcy, while the margin impact happened in Q4 as you will imagine, the revenue impact happens in Q1 where a significant part or almost all of that revenue goes away. So both of these bankruptcies, which happened in the same quarter one, in the first week of Q3 and one in the last week of Q3, both of which we account. So if I broadly answer your question, there are parts of our business where there is a level of uncertainty and restructuring that we are doing, which is around HPS, India, Middle East and the consumer vertical and some other sub-segments. But the bankruptcies have been unfortunate and simultaneous too in the one quarter, which has created additional headwind for us in Q1. Having said that, if you look at the core business and its growth, I feel very comfortable that our strategy is working, whether it is on client mining, whether it is on digital and consulting revenue growth, whether it is on some of the other levers of modernizing the core of our customers through hyper automation and deployment of homes, whether it is on bringing innovation to our customers who are venture and the deals and the successes we are seeing over there. So as you have rightly pointed out, the headline number is yet to deliver up to our own expectations. But the parts that we see, which are in good health if you noticed this quarter, both our largest business units and the banking and financial services and manufacturing and technology, on a constant currency basis, have grown by nearly 3% quarter-on-quarter, which I believe is healthy growth. Also, our energy and natural ENU business, especially the energy part, has been growing much faster. It has been dampened a little bit by our utilities business where we had couple of large engagements getting over and the new engagements ramping up is taking a little longer but it grew at about 1.6%. Healthcare and life science were the major impact of HPS is taking place, still has positive growth, which means that the rest of the business is showing a relatively healthy trend. If I talk about the order booking, Q4 has been one of our highest order books ever in terms of deals and these deals are primarily digital deals, these are very strong digital business funnel across all of our deals. So overall, from the core business and execution of the strategy, I continue to feel quite confident and positive. But as you rightly said, something or the other does show up, which doesn’t allow us to show a headline growth that we would like to see ourselves. However, after having taken the impact of these surprises in Q1, I do feel comfortable that Q2 onwards we’ll be back on our growth trajectory as we have planned.

Thank you. Next question is from the line of Sudheer Guntupalli from Ambit Capital. Please go ahead.

So over the last two quarters, we’re getting surprised by insolvencies of clients. So is there any internal assessment, which you have undertaken to see if any other client in the portfolio is also going in the same direction. And do you have any such visibility that no other clients is also heading in the same direction, that’s question number one. And question number two, I think sometime back, we were sharing a lot of optimism in healthcare and life sciences, saying it bottomed out and we lost a sizable revenue run rate, and we expected it to be rebound. However, the performance in this quarter is very muted and your commentary also seems to have changed from what it was some time back. So can you give more color on that? Thanks.

I think the commentary on the healthcare and life sciences vertical, and then I’ll let Jatin answer the earlier question. So as you rightly said, healthcare and life sciences we see in two parts, primarily one is HLS core business that we had and which continues to grow well. We also had very good order booking in that area. And the second part is the HPS business, which is the ACN, which I explained in detail. We were quite hopeful having spoken to our customers at the time when we had said that we see bottoming out, because those customers have decided to stay through the open enrollment period. The key decision that customers make is around the open enrollment period, which starts from October, November and goes through January. And at that time, we relate back what we heard from those peers to stay in the market. However, after in January when the legislative agenda for calendar year ’18 was announced, as you might already know, there was no specific focus on providing legislative clarity on ACN, based on that certain customers decided to exit that market and that has a direct impact, because our customers are the peers in this industry. And based on their exit, it has had a further impact on our revenues. And that is why while my commentary on the strength of our health business, the competitiveness of our health business across peers and providers remains positive. And as I mentioned, in spite of a significant impact even on a quarterly revenue basis of HPS, that part of the business has overcome that has shown positive growth, it does create a significant headwind on a quarter-on-quarter basis and then an overall headline number for our health business does look muted.

So Sudheer, if you recall, we had last such instance in 2008-2009, which was Lehman and Nortel. So we have a fairly robust risk management process, but sometimes such accelerated event, the results that you created is not sufficient for that specific customer. But we continue to fine tune this and we hopefully will not see such recurrence. I would think we are playing unlucky to have two such events on accelerated basis in our span of less than three months.

And one more question from my side, so FY18, you’re expecting to exit at industry matching date. I think, however, it did not happen. And regarding FY19, do you have any such internal targets or benchmarks that you can share with us?

Right now, as you can see, of course we are a little disappointed in how we are entering FY19 Q1. And since impact of these two revenues is quite large, we need to refill that. While we have a strong order book, it will take us at least a quarter for being able to ramp up and then deliver revenues. So from Q2 onwards, we do see a positive trajectory on growth. But I would reserve my comment right now on a headline industry matching growth. The good news that I see internally as we dissect our business and if we look at the part of our business, which we would call as our core business, that is showing a very healthy growth although, it gets muted by some of these impacts that we have.

Thank you. Next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

The BFSI revenues that we have done for the quarter and for the year, it looks like the incremental revenue additions are pretty robust, actually not very different from even the largest peer. Any color you could throw up in terms of how BFSI looks to you going forward, and basically anything specific in terms of deals and how you see it broadly?

So I have stated that our BFSI strategy has worked well where we lead through digital transformations for our customers. We have a robust presence in the Tier 2 market in the U.S. and global banks in Europe, and other parts of the world. All of were a lot of the digital transformation that’s happening. And we’re very proud of what our teams have done in being able to capture those opportunities and deliver transformation to customers, and getting repeat business within those customers. So overall I continue to feel good about our BFSI business. And obviously, the business consists of various parts, the run part where we are modernizing the core and the digital transformation. The run part does have year-on-year productivity that we need to deliver, which seasonally happens for Wipro in Q1 and there is some softness of that that we expect coming into digital business. A part of the digital business is being a strategic partner to our customers, a part of it is book and bill business, and that we’ll have to see through the quarter. But I continue to feel very good about our BFSI strategy and our execution of that strategy and growth coming from BFSI.

Just one more if I may, the datacenter business, which we have basically sold to Ensono. Could you quantify the impact we could expect from a revenue perspective as and when that completely exits our system, and possibly margins as well?

That business is about $50 million a quarter. And there will also be a residual piece of that business that stays with us where we have direct contract with our customer, and Ensono will continue to provide services through us to end customer. So we will be able to share a little more detail when we conclude the transaction as we have mentioned in our press release, Nitin.

And will the margins for this business below the Wipro average or?

That is right, Nitin.

It’s below in Wipro average, sure. Fair enough, thank you so much.

Thank you. The next question is from the line of Vibhor Singhal from Phillip Capital. Please go ahead.

So my question was a bit on the margin front. So as you mentioned that basically for the last two quarters we’ve been in, because of client insolvencies, which had accession impact and adjusted for that, our margins for the full year will be around 16.5%. So just wanted to understand two things on that front, one is, the total impact of both of these insolvencies completely factor into our numbers right now and we won’t see any of those impact going forward? And if yes or no either of the two, what could be the margin trajectory look like towards -- over the next few quarters given that we would also have salary hikes coming in for this year?

So the number adjusted for this one-time is a 16.8%. And you’re right, the entire impact has been of this bankruptcy so far is our receivables are concerned or any exposure is concerned is already factored in the profit and loss account of ended March 31st. So there is no more profitability related impact. But as Abid spoke about it will certain have an impact on our revenue in coming quarters, and that has been factored in our guidance for quarter one.

So what give the facts, again the part of the question was that what is the salary hike that we have decided, which quarter and what could be the margin impact that we could expect on that going forward?

So I will request Saurabh to talk about salary increase. But before that on margins, our commentary is that our focus is to improve the margins through the year. And for first quarter, we’ll have the impact of the revenue headwinds and merit salary increase we’ll get from June 1, for which I’ll request Saurabh share…

As Jatin called out, increases are effective June 1st, so one month impact that will be in line industry where it clearly try and make sure that all the critical terms disclosed are expensed. We haven’t called out the exact numbers, there is still some time. And at the appropriate time, we’ll share that.

My second question is actually a bit on the growth front, relatively communications business. So Abid, if you could just throw some light -- I know in E&D of course we’ve been hit by the insolvency of one of the clients, and the healthcare business has been because impacted of the HPS. The communications business has been continually declining for the past, I would say, like seven quarters if I can see that. So I know the telecom space is going in the consolidation phase. But are there any client specific issues, because of the declines that we are seeing a little more than what we’ve seen for the peer. So any specific issues that we are seeing in that? And what could we see in that domain over the next few quarters maybe?

So our communications business has two issues broadly; one issue is customers specific in the market that we are quite dominant, India, Middle East and Africa; and the second issue is also, as you rightly mentioned, the whole industry is undergoing a transformation, and our ability to service that industry in the digital transformation and 5G and other areas. I feel quite good about what we put in place now. We have a new leader running that business. And we have a strategy that I am quite excited about. I think it will take a couple of more quarters to be able to play out. We had a good deal with in Q4. It will take a quarter or so to reflect in the margins. As you would imagine what you see from the Aircel bankruptcy also reflects in the communication portfolio. So in a couple of quarters, we should have a good sense of the progress in the communications vertical.

Just one last question on HPS. You mentioned that the revenue for that is probably down to around $30 million run rate. Do you think it would have bottomed out? I mean, is it safe to call out that it might have bottomed out right now or could we see more weakness in that business?

Right now on the HPS piece, I would -- anybody's guess would be as good as my guess, because a couple of times we felt that the customers that we had now there will remain in the market. We have a very good product and offering, the only thing that the customers choose to exit that market we can do very little except just provide those transition services. So I certainly do feel very positive if there is legislative clarity the product that we have is very strong and we can gain market share whether all of the customers who have left us are very happy customers, they’ll be happy to comeback and work with us. But I wouldn’t be able to get unless there is any legislative clarity on how ACA will pan out in its next task.

Thank you. The next question is from the line of Shashi Bhushan from Axis Capital. Please go ahead.

We have gone through tough time over the last two quarters due to clients bankruptcy, which I understand is not in your control. But what I want to understand is how is our risk-assessment team approach these events. Do we have any early warning system wherein we systematically cut our exposure to some of these clients gradually? Like if this Indian telco, this was eventuality waiting to happen. Why we didn’t started cutting our exposure gradually over the last four-five quarters to soften the impact?

Shashi, there are couple of points I’d like to highlight. I think both customer bankruptcies that took place where the contracts which were long-term in nature, so effectively when we had entered, those contracts were entered about 10 years back or five or six years back. And when we had entered them, we were in good shape. We also have had situations that some of our global or local customers have gone through such situations, but we have been able to successfully reduce our exposure or completely cover our exposure. We have at least two or three other cases. I don’t want to name those customers, I can’t name those customers. And last incidence we had was 10 years back, which is unfortunate it has happened, but we manage this actively and we’ll continue to fine tune and manage that into future as well.

Thank you. The next question is from the line of Sandeep Shah from CIMB. Please go ahead.

Abid, just in the last conference call, you said that most of the transformation and restructuring is over, and you feel excited for the growth in FY19 on a W-on-Q trajectory to first improvement and then the Y-o-Y. But the guidance for the 1Q does not indicate, which I agree you have given some explanations. But if we look at the telecom as a impact, which you’re counting as more than $50 million impact. So if I do divide by four quarters then the impact on the 1Q guidance would be 70 basis points versus your lower end of the guidance is 2.3%, so still if we look at the impact of 1.5% is coming outside the bankruptcy client. So what explains that and why still we call it out as seasonality? Because I just wanted to understand, if we look at the concentration of your business in terms of services mix, seasonality should not impact you much now going forward in the 1Q, which generally is strong quarter for the industry?

Sandeep, apart from the client bankruptcies, the softness in revenues continues from the HPS business where we’ve factored in our guidance further drop, and from our India and Middle East business. Which while we put all the, I would say, the basics of our restructuring in place with the new leadership team and a strategy in terms of what we want to go after, there is a significant install base of our business, which is running out and it is the timing issue in terms of the new digital transformative business in the area of cloud applications and design and digital that we are acquiring versus engagements getting over in terms of some of the IT infrastructure, service maintenance contracts, and product based services that we have traditionally had in the Wipro Infotech business, which is now moving to the cloud or because of our strategic shift, we are not acquiring new deals in some of those areas.

But Abid, do you believe that then the order book momentum has to further improve, because such things may continue for you as well as for the other vendors. But other vendors are able to manage while our order book momentum which we keep saying that it’s strong, but it’s not helping in terms of fighting with these headwinds?

So I agree Sandeep that, one is the order book momentum, second is the time to revenue conversions from order book, both become factors in the correlation that you have with order book versus the revenue momentum. As well as some of these some anticipated impacts become a little difficult to immediately recover from. But in the medium term, we are very hopeful of recovering it. And seeing larger deals and seeing digital deals coming up. So you should be able to see growth returning from Q2 onwards. Q1 has been a disappointment for us, and we’ve learnt and we’ve put in place mitigation plans.

And if I understood correctly what we’re saying is the revenue impact of the two bankrupt account, especially on the telecom, would be felt in the 1Q and it would be largely over and 2Q onwards, those impacts may not be there, or if it’s there it maybe immaterial. So what has led to 8% decline in telecom in this quarter? Is this a client outside the bankruptcy account?

Sandeep, I’ll request Milan, who runs our communications business.

So there are two aspects to this, Sandeep, one is of course the bankruptcy that we that Abid alluded to. The second is that there has been a continuous shift in the underlying business of telecom companies across. So what we’re actually trying to do is to put together a plan, we’ve already put together the strategy, which will look at this underlying business. And there are three key changes there. The first one is that there is readiness for 5G networks, which is happening and there is continuous shift in the priorities the telecom companies to move from 4G to 5G. Second is that there are underlying businesses, which are using telecom as a pipe and the new businesses require an amalgamation of network and IT happening together. So that’s the second part. And the third part is that the consumers obviously have more and more clarity, so there are over the top players, et cetera. So it’s very important for the customers to be able to look at how to predict where the customers are going. And therefore, the strategy for us has been around network modernization as something that we’re clearly looking at. We’re looking at how to make sure that network and IT work closely together. Specifically we are looking at the digital BSS space. And the third part is in analytics. So again all of these are strategies that we have put together. And we are able to therefore look at how things are going to go forward. In the quarter for specifically to answer your question, there has been a few of these elements that have taken place, which has not worked out for us. So there has been an issue of IP taking away some of our numbers, we’ve got a couple of projects which have gotten completed, which we are in the process of ramping up. So that ramp up will happen in a quarter or so. And the third one is on the bankruptcy. So there is an element of the three things which I talked about which has caused the decline. But we have identified that and we have an ability to look forward, which we feel confident about gaining back.

But just the clarity, if the bankruptcy account has impacted you in the Q4 and the client has declared the bankruptcy. Then why the revenue should fall down in Q1, because in that scenario it should have gone to zero in Q4 itself?

Sandeep, there’re two impacts due to the bankruptcy, one is the margin that we’ve to take a write off which has been taken in Q4. A very small part of the ramp down has happened in Q4, because as you know, we announced the bankruptcy for the communications side only in the last week of the quarter. So the ramp down happened for a week or so once it became clear to us. The major impact on revenue is happening in Q1. The major impact has been completely taken on margins in Q4. So there’s impact in two different quarters, one is for the write-off the second one is for revenues.

And just on the margins, Jatin. If I look into the metrics, utilization has improved materially, fixed price has improved materially offshoring has also improved. But despite that on an adjusted basis, your margins have declined by 120 basis points. Of which I understand 50 basis points is to currency. But what is the balance 70 bps and why despite all these tailwinds, has not able to defend that 70 basis points decline. Because I think this business is not that big enough that will give you a 70 basis points in fact on a consolidated basis.

Sandeep, we spoke about it, I think the fundamentally about 50 basis points in ForEx and 50 basis points is in India and Middle East business. But overall, as we spoke about it, I think we have two positions, one position is where we are improving farming. We are improving offshoring. We are improving fixed price projects. We are improving productivity. And overall, that puts us in good building block from margin standpoint. Other is some of this impact, which have come in, which were one-time in nature but there also volatility in some parts, which is India, Middle East and HPS, which has caused the impact in quarter four and which has flown through that remaining basis point that you spoke about. And that makes up the walk of 120 basis points or so.

Thank you. I would request Mr. Shah to come back in queue for follow-up question. We’ll move to our next question, which is from the line of Dipesh Mehta from SBICAP Securities. Please go ahead.

Just want to get your comments on outlook for two services, specifically about business processing and product engineering, because you used to be having very strong product engineering baked in. But if I look last couple of years, the revenue growth momentum doesn’t saw good tracks. And if you can help us understand what is playing out there? Thank you.

Dipesh, I’ll request Balu, our Chief Operating Officer to comment.

Dipesh, on the business process services part of it. We have looked at that -- if you look at the BPS services that we offer, there are services that we offer, which are core services for the organizations, as well as the platforms that we offer for some of our healthcare customers. HPS is part of that platform services. So the BPS performance should we looked at in the context of the decline in revenues that we saw in HPS. Again, just to reiterate what we have mentioned earlier, because of the uncertainty in the administrative environment, the customers have left the markets. They have been impacted by customers on our platform, but they left the market itself in terms of servicing. And that has caused the decline in the HPS revenues. So BPS revenue decline is -- to be in the context of HPS decline. However, we do see good growth momentum for our core BPS services. On the engineering services, we continue to be a very strong player in engineering services. It has been our traditional strength area as well. And if you look at current quarter, you see the momentum picking up on the engineering services right now. And there are certain adjustments that we’ve made in terms of our service portfolio for the product engineering services that delivers that’s in the markets right now. We have seen a significant momentum in managing the IP for third-parties, which is significant momentum in the consumer electronics and the health space. And we do need to pick up momentum on some of the automotive spaces, right now. But we do see -- you look at the current quarter on the product engineering services, you can see the momentum picking up right now.

So whether this quarter is an indication of growth returning or -- because if I look full year, as well as last couple of year, growth rate was very muted kind of thing. So if you can help us what went wrong and what we did, because I am not very clear about what exactly played out over last couple of quarters?

So on the engineering services, you do see a change of the major services that are being offered right now. There is a change in terms of what you look at the semiconductor services and storage areas, there’s a change in the product design and capacities that are required for healthcare and licenses products. And that is a change, that’s the transformation that we are continuing to make for the offerings that we are doing in the product engineering space right now.

Thank you. The next question is from the line of Ashish Chopra from Motilal Oswal Securities. Please go ahead.

Firstly, just a clarity on the guidance. So Abid, what you’re also alluding to maybe part of the 1Q guidance also embedding some kind of productivity benefits that have a seasonal kicking in given the first quarter within BFSI run segments?

Yes, it is part of our -- if you noticed, Q1 has historically been soft for Wipro and that is based on some of the results that we have of our contracts that are annuity productivity discounts committed to customers and some of the large pieces.

And the second question was on the margins. So Jatin, you did you mention that the focus is on probably improving it quarter-on-quarter from here on. But just wanted to get a little bit more granularity as to how do we look at it. Because I guess in the first quarter, this weaker revenue traction because of the headwinds we discussed, the BFSI impact and probably also the India and Middle East segment, which will have that seasonal weakness, and the one month of wage hike. I think all of these are adding up as headwinds, and probably some more wage hikes than in the second quarter. So I just want to understand that, I mean there has been a lot of levers that play already in the numbers with metric such as fixed price and utilization. So going forward, do we expect that probably this quarterly expansion of the margins maybe slightly more back ended as compared to right from the beginning of the year considering that maybe headwinds shape up?

So as we say quarter one certainly will have headwinds on revenue and MSI impact that will be something that we’ll have to work through. And going forward, the revenue momentum itself, as well as some of the good work we have done on automation and productivity would be, in my view, a key margin expansion on levers for large part of our business. Other things are that the external noise or the volatility that we have on India, Middle East business, some of that stabilizes itself would be additional lever. And lastly, we are all growing our digital business, which comes with a superior pricing. So that would be a medium term lever as well. And that’s how we see our margin as we look at next two quarters.

And just lastly from my side on the consumer vertical. What would be the outlook over the next term? Do we expect the softness to continue for a bit, or should we expect it to further out?

Srini is on the call, and I’ll let him take this one.

So if you look at retail as an industry, I think it’s stabilizing with pockets of strength that came up through the holiday season. Now, what we see as a brick and mortar retailer, I think they’re perfecting the omni-channel models, and that also helping them compete against online retailers. The opportunity following is a little distant where we are helping our retailers in the customer experience and also helping in the efficiency through hyper automation. So one is on the front end, the retailers expected the brick and mortar are evolving and also there is a lot of focus on inventory level through subjected initiatives, which is also an opportunity that is presenting to us. Net-net I would say that retail as in industry is stabilizing and also investing into both in the front end and the inside, which I would see as an opportunity for us to move forward.

Thank you. I will request Mr. Chopra to come back in the queue for follow up question. We’ll move to our next question, which is from the line of Nitin Jain from Credit Suisse. Please go ahead.

This is Anantha actually. Abid, I just have one question for you. So as you rightly pointed out during your opening remarks, you’ve done some pretty good job with mining your top side clients, but clients beyond the top five have done fairly bad -- poorly this year. FY17 that would actually deliver where the top five clients did not do well and the others did well. And if I just go back a few years, this has actually been the case for the most of the years. And one or the other does well and the other does not. So my question to you is, do you think about those, and is there any reason for this or is it just a luck of Wipro?

Can you repeat the last part of your question, what exactly is the question, Anantha?

The question, Abid, is why is it that even in our situation where your top clients do well and the others don’t, or the other way out as it has been the case for the last many years, and if I see stock in FY18 and in FY17?

So Anantha, I can’t speak of last many years, but I can talk about the last eight quarters. And over the last eight quarters, as we put in certain best practices around client mining, I had talked about integrated services; single access that we approach customers with across all of our service lines and driving the strategy, which is primarily modernizing their core; proactively bringing offers to them in terms of how hyper automation can deliver cost leadership and productivity and better customer service to them; and then enabling their future by bringing design-led digital services and innovation, which is primarily around not only the IP that we internally create but also our Wipro Ventures and other IP. I think all of that has resulted in excellent feedback from our customers. Our customer satisfaction over the last 24 months, has improved by over -- the NPS figures have improved by over 18%, our revenues and of course we ask a lot of questions in our service to our customers in terms of their intent to spend and that has shown positive trend. And the actual results have shown a positive trend. Now there may be a case of a customer or two, because of their own strategic reasons, they might be facing headwinds and hence they might reduce spend and a customer or two may go up or down. But as a portfolio, I feel quite comfortable that our set of large customers have grown significantly higher than the overall company average. And most of these last customers, as you would imagine, is part of our overseas core business whereas some of the headwinds that we faced, which have been impacting us, whether it is some of our acquired entities or the India and Middle East business, that is not where some of these customers fit. The only area, which I can think off of prior to the 24 months where large customer impact had happened on us, was in our E&U segment where we had significant large customers in the energy space, which had ramped down due to the oil prices at that time. You’ve seen some of those customers also come back and increasing their spend with us, including we helping them in cloud transformation, including we helping them with some of their digital transformation and their upstream, their downstream and retail side of the business. So I kind of feel good about our ability to approach customers proactively and consultatively, provide proactive propositions to create demand over there. If you look at the growth of our consulting business, our digital business which has growing very well on the back of what we have been able to do with our large customers. So while there are issues that we are addressing in some part of our portfolio, the core part of our business, which has a significant proportion of our revenues, coming from our large customers, makes me feel quite comfortable overall.

And just one final clarification from Jatin. Jatin, did you mentioned that payout strategy is going to be 45% of your net income?

Yes, we are -- I mentioned 45% to 50% of our net income, and that we should see over a block of years as we always spoken of.

Thank you. The next question is from the line of Sandeep Shah from CIMB. Please go ahead.

Just one question on this data center business which we are hiring. Is it EPS neutral or positive? Because looking at the payout and the margins, which is lower than the company average, my sense is it could be at least EPS neutral or marginally positive.

Sandeep, it would be positive to EPS.

Thank you [Operator Instructions]. The next question is from the line of Rahul Jain from Emkay Global. Please go ahead.

My question is pertaining to the hive off of the business that we did to Ensono and we did one such transition last year as well. So just wanted to understand, is the core idea behind this divestment, is it to made Company more linear and with a thought process that to construct a structure, which will be more relevant from a future perspective. And would the high growth business engine going forward, is that is the thought. Then what are more pieces left in the existing revenue base, which may see that kind of action going forward?

So just to talk broadly about the strategy, we’ve had very large portfolio, which has made us very successful in the past. But there are certain parts of the portfolio where we see the need to make a strategic shift. For example, in the data center business, if we look at what our customers want. They want to be cloud enabled for them. And hence in the long run, we having -- and data center business is a scale business. So as more and more cloud enablement happens, even those customers who want to be on private cloud or on-premise data center, are better served by data center providers who is having a lot of scale who can provide the price comparativeness, to us in the order to be able to be competitive and efficient for our customers. So as part of that strategy, we thought it is best that we simplify our portfolio, make ourselves future ready, to be able to provide cloud transformation services to our clients and have the option through the strategic alliance with Ensono to be able to provide private cloud or on-prem services through the partnership. And that is the objective. If you remember, we are also cutting out a large amount of tail business in our India and Middle East, which we call as the product led services business to small and medium customers. So there are various parts of our business where we have done a strategic review in ’18 that it makes our business simpler. As you rightly said, it makes our portfolio much bigger, attuned to the future driving growth and focusing on our core customers, which could be sizeable and deliver better margins and growth to us. So it’s a part of an overall thought-out strategy that we are executing.

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

Thank you all for joining the call. In case we could not take any questions due to time constraints, please feel free to reach out to the Investor Relations team. Have a nice day.

Thank you. On behalf of Wipro Limited, that concludes this conference. Thank you for joining us and you may now disconnect your line.