Ladies and gentlemen, good day and welcome to the Infosys Earnings Conference Call. As a reminder, all participant lines will be in the listen only mode Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahendra. Thank you and over to you, sir.
Thanks, Karna. Hello, everyone, and welcome to Infini's earnings call to discuss Q2 FY 'twenty earnings release. We are Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is C and MD, Mr. Paila Tarek CEO, Mr.
Praveen Dao CEO of Mr. Melanjan Roy along with Adam and other senior management team. We'll start this call with some remarks on the performance of the company for Q2 by telling, followed by comments from Melendur and Praveen. Subsequent to this, we will open up the call for questions. Please note that anything which we say which affects our outlook for the future is a forward looking statement, which must be read in conjunction with the risk that the company faces.
A full statement explanation of these risks is available in our filings with
the SEC, which can be
found on www.sec.gov. I'd now like to pass it on to Selaj.
Thank you, Sandeep. Good afternoon and good morning to those on the call and thank you for joining us today. Infosys has delivered another strong quarter. I'm happy with our performance in the 2nd quarter, which was robust across multiple dimensions. 1, double digit growth for the 4th consecutive quarter 2, continued strong growth in digital 3, expansion in operating margin 4, improvement in operational parameters, especially on utilization and on-site offshore mix 5, large deal signings and 6, reduction in attrition.
We grew 11.4% in Q2 year on year in constant currency or 3.3 percent quarter on quarter. 6 of the 7 business segments and both U. S. And Europe grew double digits constant currency year on year. Karim will provide more color on different industry verticals in just a few minutes.
Digital revenues in Q2 were $1,230,000,000 constituting 38.3 percent of overall revenues and witnessed over 38% growth year on year in constant currency. Operating margin in Q2 saw a healthy improvement of 21.7% compared to 20.5% in Q1. The operating margin improvement was despite compensation increases provided to employees and was driven significant improvement in utilization, on-site mix, employee pyramid improvement and tight overall cost management. Nilanjan will elaborate on this during his remarks. Large deal signings in Q2 was extremely strong at $2,800,000,000 While a large part of this was renewals, these renewals solidify our position significantly in our existing client base.
Large TCV is up by 75% in H120 compared to H190. I'm also pleased with the reduction in attrition, which declined to 19.4%, a decline of 2 percentage points compared to Q1. Within this attrition, voluntary attrition is lower at below 18%. With our clients continuing to leverage digital drive growth, there are 3 areas within digital transformation that I want to highlight with examples of our growth with clients. Visa, Experience, Data Analytics and Cloud.
For a global confectionery company, we created digital asset management platform that helped them deliver a superior, personalized and intuitive experience for the end user. Through our digital studios, we developed this platform and ensured faster campaigns and product launches and could also efficiently manage multiple brands and their associated digital assets. For a global consumer products company, we helped them create data architecture to support the sales team forecast, future orders from retail outlets, the model cluster stalls and learn for better performing stores to suggest assortments for other stores. Such a model minimized subjectivity and brought data science to aid sales teams in order recommendations. We're a material handling company in the U.
S. Implementing a cloud based IoT telematics product to power the transformation. We're drawing upon our experience and presence in the connected vehicle space to help them manage data and draw relevant insights from it to provide better service and after sales experience for their customers. These examples among others and our strong performance in the quarter demonstrate our increasing relevance to our client agenda. We continue to make good progress
on our
localization approach as we strengthen this differentiated model to deliver digital services. During the quarter, we launched the Arizona Digital Center to accelerate the pace of innovation for U. S. Companies. We also launched a digital cybersecurity center in Bucharest in Romania past quarter.
I'm also delighted to share with you a recognition that each one of us at Infosys is extremely proud of. We were rated number 3 on the Forbes list of the world's best regarded companies for 2019. In closing, I would like to say that we are updating our guidance. Our revenue growth guidance moves from 8.5% to 10% to 9% to 10% for the full year on a constant currency basis. We reconfirm our operating margin guidance for 21% to 23% for the full year.
With that, let me hand it over to Karim.
Thank you, Salim. Hello, everyone. We had another quarter of double digit year on year growth in constant currency. Growth was broad based with 6 business segments: Financial Services, Communication, Energy Utility Resources and Services, Manufacturing, High-tech and Life Sciences, all clocking double digit year on year growth in constant currency. Similarly, both North America and Europe grew double digit year on year in constant currency.
Utilization excluding trainees during the quarter improved by 180 basis points sequentially to 84.9%. On-site effort mix reduced further to 28.2%. The second leg of compensation increase was affected in the last quarter. With this, we have covered the entire employee base except the title holders, who will be covered in quarter 3. I'm also pleased with the reduction in accretion, which declined to 19.4%, a decline of 2% compared to quarter 1.
Within this, voluntary attrition is even lower at below 18%. High performer attrition also continues to be well below company average. The decline in attrition is due to multiple initiatives spanning across more active employee engagement, performance based differentiation, promotion and growth opportunities for employees. Client metrics remained strong. We added 96 new clients during the quarter, while number of 50,000,000 clients increased by 2 to 61.
We won 13 large deals with a TCV of 2,850,000,000, which is the highest ever. 4 deals each were in financial services and retail, 2 deals in Communications and 1 deal is in Energy, Utilities, Resources and Services, High-tech and Life Sciences. Geography wise, 6 were from America, 5 were from Europe and 2 from rest of the world. While a large part of this was annual, these large renewals solidify our position significantly in existing clients. Large deal TCV is up by over 75% in H1 'twenty compared to H1 'nineteen.
Let me come to the business segments. Financial Services vertical continued its growth momentum aided by recent Stater acquisition. We expect performance in the vertical to be affected in the next couple of quarters driven by seasonality, sluggishness in Capital Markets and European Banking space. The recent reduction in interest rates in major geographies can have an impact on client revenues, which may also impact their IT spending. Our strong positioning across the digital and core services spectrum along with diversified portfolio is helping us mitigate risk and grow this business.
I'm happy to share that Infosys was rated number 1 player in the HSS Top 10 DFS Sector Service Providers 2019. The ranking showcases our maturity across Banking, Capital Markets, Risk and Compliance and across all BFS top functions. Retail segment performance was muted as plants stand cautious due to increasing perceived risks stemming from trade wars and geopolitical developments. While business volatility is causing division delays in some of our key clients in the sector, We also see this as a clear opportunity in the medium to long term to increase our client relevance. We expect to witness uptick in consumer experience, digital marketing, insights and investments in platform and remain cautiously optimistic given retail deal wins and steady order pipeline.
Coming to manufacturing, there is pressure in the vertical, especially in Europe. Impact of trade wars and weakening automobile segments is affecting supply chain. Clients are looking to leverage new technologies to bring the next wave of efficiencies in the supply chain and manufacturing operations through digital platforms, smart manufacturing and IoT. Despite the sectoral challenge, we have healthy pipeline of deals as well as new account openings both in Europe and Americas. Communication segment remains strong for us due to large deals in the traditional business models of communication players are being challenged by digital native and OTT players.
These customers are keen to travel through digital cost takeout journey in order to stay relevant in the market. We are seeing increasing pipeline for deals with a strong share of large deals. The momentum in energy, utilities, resources and services vertical improved further on the back of continued momentum in top accounts and new account openings. The growth is being led by utilities in Europe and Energy with resources seeing challenges due to M and A and divestitures. The digital portfolio continues to grow strong and is now over 38% of the total revenue, up from 31% a year ago.
In our Agile Digital business, we see strong traction for the work we are doing in the cloud area, in data and analytics, in IoT and in the area of experience, user experience, client experience and employee experience. In the last quarter, Infuys was ranked as leader in fixed ratings in the area of modernization, IoT, experience and design, AI services, Cloud Services and SAP Services, which recognizes our digital capabilities in the market. At the end, I'm very happy to announce that Infosys won the prestigious United Nations Global Climate Action Award in the Climate Neutral Now category. Infosys is the only corporate from India to earn the recognition for its efforts to combat climate change. With that, I will hand over to Milangjan.
Thanks, Praveen. Good evening and welcome to our quarter 2 FY 2020 earnings call. Our revenues in Q2 were RMB3.21 billion, growing by 11.4% year on year in constant currency terms. This was our 4th consecutive quarter of double digit growth. The sequential revenue growth in constant currency was 3.3%, including 90 bps incremental contribution from Stata.
Operating margins in Q2 was 21.7% compared to 20.5% in Q1. During the quarter, the benefit of rupee depreciation was offset by cross currency impact and revenue hedges. Higher utilization, lower on-site mix and other cost optimization measures helped operating margins by 110 basis points, while lower visa and travel costs helped another a booster of the margins under 110 basis points. These were partially offset by compensation increases, which impacted margins by 70 basis points and increases in donation and other costs of 30 basis points, leading to an overall 1.2% increase in operating margins compared to quarter 1. DSO for the quarter decreased by 2 days over 66 days due to tight receivables management.
Operating cash flow in Q2 was $522,000,000 which is a year on year growth of 19.2%. Free cash flow in Q2 was $397,000,000 which is a year on year growth of 10.3%. For H1 'twenty, operating cash conversion to net profit was 103% compared to 96% in H1 2019. Cash and cash equivalents declined during the quarter due to the completion of buyback and is still at a healthy level of 3,350,000,000. Yield on other income was 7.9%, marginally lower than the 8.1% in Q1.
Effective tax rate for H120 was 26.5% versus 27.3% in H1 2019. We completed the capital allocation program announced in April 2018. The planned buyback of INR 8,260 crores was completed on 26 August. Completion of buyback and higher shareholder payouts have led to the increase in ROE from 23.1% in Q2 2019 to 25.8% in the current quarter. Driven by our performance in X1, we have increased the revenue guidance for FY 2020 to 9% to 10% in constant currency terms.
Due to operating margin performance puts our H1 operating margins at 21.1% within our guidance band. Subject to a stable currency environment, we remain confident about the operating margin band guidance for FY 2020 at 21% to 23%. We will continue to deploy various measures for enhanced operational efficiencies like rationalizing the pyramid, on-site offshore mix, automation and other overhead efficiency levers. Consistent with the new capital allocation policy of paying approximately up to 85% of the free cash flow cumulatively over a 5 year period to investors, the Board has declared an interim dividend of INR 8, which is a 14% growth over the interim dividend of FY 'nineteen. With that, we open up the floor for questions.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer The first question is from the line of Edward Caso from Wells Fargo. Please go ahead.
Thank you. Good evening. I wanted to drill down a little bit on the banking and capital markets sector, which you clearly are doing very well in considering the headwinds. I was hoping you could break it between digital strength and core strength if you're what kind of shifts? Is the digital growth still strong there?
Is there added pressure on the core side? And maybe couch those comments within the context of North America versus Europe? Thank you.
Sure. So look, I think this is Mohit here. I think clearly on the core side, the focus is very much on consolidation. And on our traditional ADM business or testing business, that is clearly the focus area, right? If you look at digital, on the other hand, there is money being spent, I'd say broadly in 3 areas.
The first is transformation of user experience, specifically for the retail and the wealth management businesses. There's a focus on data across the enterprise. And finally, we're starting to see the beginnings of fairly significant cloud migration journey. So that's the sort of the positive news, right? We see these trends clearly more in the U.
S. Now than we do in Europe, even though we are starting to see a fair degree of public cloud migration among European banks. The other piece I'd mention is we see a lot more strength on the corporate banking side of the house. So specifically payments transformation, trade transformation, lending transformation, these continue to remain fairly strong areas across the board, right? So whether you're looking at large global banks or you're looking at the regional banks.
The areas of weakness clearly are in the capital market space. The second point I'd mention is that especially in Europe, the way the yield curve is working, right, especially with the rate cards. If you look at our bank in Belgium, for instance, that we spoke with recently, they're making about a negative 80 basis points on their deposits, right? At the same time, they're paying out something like between 10 to 15 basis points to their depositors. So we feel that this interest rate regime is going to put pressure on banking revenues and may have a downstream impact.
So hopefully, that gives you a broad enough global sense.
My other quick question here is given the tax law change around repurchases, are we more likely to see special dividends going forward as opposed to repurchase? Thank you.
Yes. So Ed, as we had announced the new capital allocation policy in July that we had increased it to 85%, we think that gives us clear runway for investors to look at a predictable cash flow regime with full dividend and just some leaving some money aside for tuck in acquisition. So I think the scope of 1 off buybacks or special derivatives definitely decreases.
Thank you.
Thank you. The next question is from the line of Divya Nagarajan from UBS. Please go ahead.
Thanks for taking my question. Congrats on a solid quarter. Salil, my question is on the guidance that we have given at the top end. We've had a very robust 12% kind of a first half number. The top end kind of suggests you're kind of looking at an 8% in the second half.
Could you kind of run us through the assumptions that you've baked in for that kind of revenue trajectory in the second half? Is this because of what you're seeing in banking and retail so far? Any surprises that you've had in any of the sectors either on the upside or the downside in the first half of the year? That would be helpful.
On the various segments, if you look at what we did in Q2, we see a lot of strength, for example, in Energy Utilities Services segment that we shared. We see a lot of strength in what we saw in telco, high-tech. So those are positives as we've gone through this year and from some of the large deal wins over the last few quarters. Mohit shared his color on Financial Services, both from a European Banking perspective and overall Capital Markets perspective. The way we look at the guidance, we try to fashion typically, as I know you're well aware, our Q3 is the December quarter with furloughs and we typically see some seasonality into that.
And that's really what we try to bake into the forecast, the guidance. We've of course increased the lower end of the guidance. And as we progress through the year and we get through next quarter and so on, we'll see where we end up. So that's really what we baked in the commentary you heard from Mohit, the positive things we shared with you on some of the other segments, what you heard about retail when Praveen shared his remarks. So all of those put together plus the typical seasonality of Q3 and H2, that's what gives us our view on the guidance.
Okay.
And I think the margin recovery seems to suggest that you're well on track to kind of reap the benefits and operating leverage from those investments that you've made in the last few quarters. How should we think about the potential for recovery versus revenue growth? What I'm trying to understand here is that, is there an opportunity for us to kind of continue to improve on this trajectory? And if you're looking at a slight moderation either because of the base effect or some of these factors that we've discussed, does that allow for that kind of a trajectory to continue?
On the margin, I think you saw what Nilanjan shared. There's a real focus and attention on cost and operational parameters. And Praveen shared with you some of the specific parameters that were improving in the quarter. We also shared, I think last quarter, all the investments are complete and behind us. So there is no one off investments that we have launched about a year or so or year and a half ago.
Those are complete. There's no new investments. There are investments in the ongoing business with no new one off investments. Having said that, we have a very high quality franchise and we feel comfortable that as we get the operational efficiency back, we will see those levers kick in. Therefore, we remain confident.
Again, as Niranjan shared, our H1 margin is now within the band 21 to 2023 and we remain confident as the year progresses to be within the band 21 to 2023.
Fair enough. My last bookkeeping, as part of the tax rate regime change, is there any what is the thinking on the tax holiday exemptions? And what should we what should we be modeling in going forward for that?
Yes. So I think we've just looked at it currently for the India standalone. Of course, since the standalone, the India effective tax rate is less than 25%, we are close to about 23% to 24%. So I think at the moment, we are saying that the current regime, we will of course evaluate as we look ahead for the next few years of when we make the transition. But for now, we are continuing with the existing price holiday regime.
Thanks and have a good rest of the year.
Thank you. Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Hey, hi. Thanks for taking my questions. Just wanted your thoughts on BFSI and retail put together. Because if you look at the Q2 in terms of growth, excluding Stata, It appears that it's relatively weaker than the earlier Q2s that we have seen in the past. So from that perspective, do you think that both BFSI and retail have been relatively weaker versus what you would have thought earlier?
This is Praveen here. I'll talk about retail and then Mohit will comment on the BFS side. On retail, as we believe that Amundi is one sector which is probably much more very closely linked to the consumer sentiment. Given all the macro challenges that we are seeing or macro talk that is going on as well as reduction in consumption, trade wars and so on. I think there is a sense of we see a sense of nervousness in the retailers and we have seen the spend come down.
And this segment, in general, will continue to be volatile. Last year, for us, retail was a fantastic year. We had double digit growth, but Q1 was soft and Q2 continues to be soft. So it's difficult to predict when the sector will revive because it's clearly dependent on the macro as well as the sentiment. So there's something we have to wait and watch.
At the same time, we also see a lot of opportunities in the sense that retailers are trying to compete aggressively against the likes of Facebook and all the new age companies. So they invest they continue to invest while trying to take out cost in other parts of the business. So we continue to stay engaged with them and even our value proposition and strength on the digital, we remain confident that we will be able to capture the spend that's there in the sector. But in terms of the growth, it's expected to be volatile till there is some clarity on the macro. Yes, hi, this is Mohit.
So look, I think when speaking to Ed's question, I think I've given you a perspective on the subsectoral and the geographic distribution that we see. There is a lot of volatility. And I would add that this is also a sector that is heavily concentrated. So even if you have a couple of clients, for instance, that are looking at the distribution spend more closely or that are looking at reducing the spend on the core, it amplifies the impact on us. We've already identified the areas of weakness in terms of European banking or in terms of the very low spend in the capital market space.
So hopefully, that gives you a perspective.
Sure. Thank you, Mohit and Praveen. Just one more. What would be the proportion of net new deals on the total TCV?
The rebate is close to 90%. So the net new would be about 10% this quarter.
The next question is from the line of Vibhor Singhal from Philip Capital. Please go ahead.
Good evening, sir. Thanks for taking my question and congrats on a solid quarter. So just one question from my side. In terms of hiring, we've seen very strong hiring in this quarter, adding around close to 7,000 software professionals. So just wanted to basically understand your perspective on how it's going to impact I mean, I'm sure we're looking at significant growth going ahead because of if we given the kind of hiring that we've done.
So basically, how is it how do you believe the growth is going to pan out? And also, what could be the margin impact? I mean, given that we would have probably hired these guys spread over the quarter, could we expect some sort of, let's say, pressure on the margins going quarters? Or do you think that's all baked in into the guidance as well?
No, I think I mean, as you said, Nilanjan has reiterated that the margin will remain in the 21% to 23% band. So there's no change to that guidance, and we are comfortable with that. In terms of hiring, this quarter, we hired about 14,000 people, roughly about 6,000 professors in India and about 700, 800 people in U. S. From colleges.
And laterals, we had 47,000 again, about 5,000 plus in India and about 15,100 to 2,000 in other parts of the world. It's consistent with what we have done in the past. So I don't see any material change to that. Our hiring will be dependent on the growth, and we have already captured that in the guidance.
Sure, sir. And sir, any just lastly, any I mean, the attrition has definitely cooled off from the last quarter, but we know that Q1 is generally seasonally quite weak in terms of attrition. So given that we've already taken so much measures to thwart the attrition level that it is, but as it still remains about 21%, Any further levers or steps that we intend to take to probably bring down to sub-twenty levels or maybe something which we are more comfortable with?
So the attrition for tech services is about 19.4% with both voluntary and involuntary. If you look at voluntary alone, it's about 18%. And when we compare with Q2 of last year, it is lower than that. So definitely, we have seen some marked improvement. But at the same time, some of the improvements that we have done to address this in the last one and a half to quarter has helped us.
It is something we have to continue to do on an ongoing basis. It is an area where we will continue to watch out and focus on. But at this stage, we are very encouraged with the successes that we have seen, and we are hopeful that it will continue to turn in the right direction in the coming quarters.
Thank you. The next question is from the line of Joseph Foresi from Cantor. Please go ahead.
Hi. So my first question is just around the revenue growth acceleration. You've seen an uptick the last couple of quarters. Do you believe that you're taking maybe market share from some of your competitors? Or is it the fact that digital is growing as strong as it is right now?
I'm just trying to get a sense of what seems to be causing the uptick in the numbers and should we be thinking of this as a high single digits, low double digits, more low double digits business?
I think on the growth part of what we're seeing in the growth is we have a set of offerings which are really close to what the clients want to spend in their digital transformation journey. And these relate to specifically areas we've highlighted in the past, whether it's data analytics or cloud or experience or IoT or cyber and so on. And that's where we've seen growth, which is possibly higher than where the overall market for those sort of services is growing. We also see a strong push on automation, which is helping where we have good strong core businesses with clients and they see a benefit from this coming into for us to come into their enterprise and display the value of the automation. Having said that, we know that all of those things also require an intense focus as we put in into the large deal program and ongoing activity to execute against that.
We genuinely believe today that we have a very strong position within the minds of our clients, tech and now sometimes the marketing executive spend, which is helping us to drive our growth. In terms of what this means as an ongoing business, we are not sharing any view at this stage beyond the end of this fiscal year. But as we come to the end of the year, obviously, we'll start to talk a little bit more explicitly on the next fiscal year.
Got it.
Okay. And just a couple of quick follow ups. Are these new engagements? Or are you taking market share from others when you talk about the digital practice? And how much is pricing a factor across both the digital business and your traditional business?
So in terms of digital work, typically these are new projects or new mid term, long term contracts. They are definitely things that we are winning in a very competitive environment. In terms of the pricing, I think we've shared
maybe in
the last quarter's discussion, our margin for our digital business is higher than the margin for the company overall. So we feel confident as we shift more and more of our portfolio to digital that should be a benefit to your margin.
Okay. And then just lastly, the business that or the pieces of the business that aren't digital, are you seeing pricing pressure on the traditional maintenance stuff? And maybe you can give us an update on the non digital business and how that's performing? Thanks.
So there we believe we have an extremely strong set of capabilities across all of our service offerings that still comprises 62% of our business. It's a very strong business, a long foundation there. However, the automation play allows us to ensure that the clients are getting an ongoing productivity benefit. We do see some pressure which comes into play in pricing or discounts on an ongoing basis and especially when we start to see medium term and long term renewal contracts that come up for discussion.
Thank you.
Thank you. The next question is from the line of Viju George from JPMorgan. Please go ahead.
Yes. Thank you for taking my question. I had a question on your unbilled sales. Last 4 quarters through FY 2019, it was like tracking at between 21, 22 days. It shot up to 27, 28 days in the first half of this year.
I just want to try to understand what will it cost such a massive jump for the company of your size in H1?
Yes. So actually, the way we look at revenue, these are based on activity and effort, whereas billing milestones are agreed with clients in advance based on delivery dates, and that's the way billing actually happens. So there are certain times mismatches between the revenue and the billing milestones. These are largely client specific, so they have their pluses and minuses. And therefore, that's one of the reasons we also had because of the Stater and Hypress acquisition, there was also an increase because their business model had also an increase on the unbilled.
So these are two large reasons for this increase. But if you see our collections overall, I think that's a number to look at. Our collections continue to be very, very strong. Our DSO for the quarter actually was down by 2 days. So I think that's the key metric to show the health of the business.
Yes. But Niranjan, I just think when you look at this in terms of incremental sales, it has jumped to almost 24%, 25% in H1, whereas in the 4 quarters to FY 'nineteen, it was like kind of 10%, 11%. So as a percentage of incremental sales annualized, it's doubled. So is that possible? I mean, how is it practically possible for a large company of for the company as large as Infosys?
Has it been a change in policy or are you sort of trying to recognize with clients far more often revenue recognition milestones in a way different from what you used to do earlier?
No, nothing like that. So in fact, we monitor very, very closely. In fact, all the unbilled of the previous quarter is mostly built in the next quarter. And there are new set of milestones which come. So it's not as if it's a increasing.
We look at the aging of this very, very carefully. And like I said, this is a combination of in a few clients where you have a difference in the billing milestones versus the revenue recognition and like other high percent data.
Sure. And one more question on your TCV. I think Praveen indicated that maybe 10% of the TCV is net new, which means that 90% is renewals. How does this sort of compare with maybe averages of the recent past?
I don't have the exact number. But in general, I mean, this is a metric we do for that. In some quarters, we have lot of net new. In other quarters, we have good percentage coming from renewals. Way we look at it is it's important for us to win renewals because it helps in retaining our business and quality to find our presence.
At the same time, winning net new or large help in capturing market share. We focus on both, but general, it varies from quarter to quarter. And for the half year for this half year, I think the net fee was about 35%. Net fee was 35 percent.
Okay. But would it be
fair to 2.7 percent. Yes, we did 2.7% in quarter 1, 2.8% in quarter 2 and about 35% gross net new.
Got it.
Would it be fair to say at
least for this quarter the percentage of net new is generally a lot lower than it might have been in the recent past? Hello?
Yes. I mean, you're right. I mean, if you look at the last two quarters, probably the 10% net new is probably on the lower side.
Okay. Sure. Thank you and all the best.
Thank you. The next question is from the line of Apoorva Prasad from HDFC Securities. Please go ahead.
Thanks for taking my question. I want to know what's really constraining us to increase the top end of our guidance despite the strong momentum across verticals. Are there any client specific issues that you're looking at? I'm looking at the top 2 to 10, it seems like a decline for quarter. So anything which is incrementally different?
As we shared, we've increased our guidance on the lower end from 8.5% to 9%. We think the overall discussion with the segments, which as you heard from Mohit, in terms of Financial Services, you heard what Karim shared on retail, and that is something that we have to be watchful about. Then we have strength, which we shared earlier on energy utilities, on telcohigh-tech, and those are positives. And then we shared typically the second half in our sector, our second half, so Q3 and Q4 is typically softer than the first half and especially Q3 with the discussions around furloughs and so on. So given all of those factors in mind, we took advantage to increase the lower end of the guidance, keeping in mind that this is really where we see the rest of the year going.
And as the quarter progresses, we will see as Q3 progresses, we will see where we end up and come back to you at the end of the quarter on the next steps.
Thanks for that, Suril. And Niranjan, on the margins, how do we see that in the second half trending within the band? Any headwinds, tailwinds that you're looking at? Perhaps you can call out the titleholder impact, which will be coming in the 3rd quarter?
Yes. So I think like we said, we are at H1. We are at 21.1%. We are within the band, and I think this is a good place to grow from here, and that's what we are looking at. From the title holder, not a material impact.
Most of, as you know, people that this is less than probably a percentage of the overall headcount. So it's a relatively small impact. Otherwise, I think we have a very robust, like I said, the cost takeout program. Like I said, on multiple utilization pyramid. And I think we're quite confident that this is a machinery which has to literally churn out every quarter.
So there is there will continue to be headwinds in terms of discounts or wage hikes. But I think we've seen to have gone to a rhythm of making sure that we are able to take out these costs in time. So that's where we are.
Okay. Thanks and all the best.
Thank you.
Thank you.
The next question is from the line of Moshe Katri from Wedbush Securities. Please go ahead.
Hey, thanks. Congrats on very strong execution. Going back to BFSI, is there any way to figure out what if you're looking at the organic growth numbers? I know you haven't disclosed these. But organically, was the sector up sequentially year over year?
Any sort of color here will be helpful. And then if you do want to disclose that, how much did the acquisition add the growth during the quarter? Thanks.
Look, I think we haven't really disclosed the two numbers separately, because you also have to keep in mind that Stata was a client of ours prior to the acquisition. So there were certain revenues that accrued to the entity to emphasis prior to the joint venture as well. So we're not breaking out the numbers separately.
Okay. And then kind of
looking at this on a
forward basis, has anything changed since the end of the quarter in terms of sales cycles, pipeline conversion rates, any sort of spending or project in terms of project funding?
Maybe you can talk a
bit about those trends since the end of the quarter? Thanks.
When you say end of the quarter, you mean the last couple of weeks, right?
That is correct.
Okay. No, no, no. We don't see any change in the last couple of weeks from what we are discussing, which is our quarter end view. Of course, it's only 2 weeks, so we don't expect to see any change in that timeframe.
All right. And then the last question. Obviously, the renewal number in terms of bookings was pretty high this quarter. On a forward basis during the next two quarters, looking at your pipeline, I'm assuming that's going to be a trough in terms of mix and during the next two quarters, we should see a larger mix of renewals in terms of bookings. Is that correct?
No, I don't think we have seen any seasonality in the renewal. So it varies from quarter to quarter depending on the context. So I don't think there's any seasonality to renewal or net new.
The next question is from the line of Abhay Moggi from Prajajalans. Please go ahead.
Congrats on sustaining good execution. I just had two questions. First is on the revenue growth. If I see over the last 4 to 5 quarters, your revenue growth year over year had been increasing, whether you see dollar terms or CC terms. This quarter, it is lower than the last quarter and the way you have given the guidance, it is likely to be couple of percentage points even lower by the time we reach Q4.
Now my question over here is this trend that you are seeing, is it like you have the revenue visibility and you see the trend going down in year over year growth or it is more like a cautiousness or a conservativeness because of macro concerns and you want to have give a conservative guidance. So what is it like lower revenue visibility and some conservatism or you have the visibility and you're saying that no, it will be trending down? That's question number 1. And second is on the margins like, or say, you're running a good cost cutting program. And over the next 4 to 6 quarters in a constant currency terms, you know next year also wage hikes, Visa cost everything will be there.
But over the 4 to 6 quarters, you think margin would look up from current levels or you think that whatever the headwinds are, whatever cost cutting programs you have, it will like neutralize? Those are the
2 questions from my side.
On the revenue, as we've shared earlier, I think we have a good set of growth over the last 4 quarters. We know that typically there's some seasonality in the last quarter of the calendar year, our Q3. We also know that there will be some difficult comps for Q3, Q4 versus previous Q3, Q4 based on deal wins and so on 12, 18 months ago. Keeping all that in mind is where we've come with the guidance. Our large deal wins is still robust.
It is lumpy, of course, the large deal wins. So we've had several good quarters on that. But it's not a predictable view in terms of where the large deal numbers go and how they renews. More and more net new in the coming quarters in the pipeline. So we have confidence that as we get into the next fiscal year, we are starting to build a base of deals that can help us for that.
Beyond that, there is no other sort of color on the revenue from our side. That's how we built the guidance. In terms of margin, we have a very clear view, which is for Q3 and Q4 and for the full year. We have no view today on the next 4 to 6 quarters, which is in that sense in the next fiscal year. For this year, we believe our operation efficiency approach is working well and will deliver good benefits.
We believe that we have essentially a high quality franchise and the investments are behind us. So we will see the benefits of that and we will be within our margin guidance. Already for H1, we are well we are within the margin guidance and we will have that for the full year as well.
The next question is from the line of Ravi Manan from Motilal Oswal. Please go ahead.
Gentlemen, congratulations on a good quarter. Two questions. First on your margin levels, your utilization is all close to the highest it's ever been. So do you think that we can actually push this any further or what other margin levers are we looking at near term? Secondly, related to that, what's been the variable payout like for the quarter?
And one more question, a follow-up after this, please.
Yes. On the utilization front, we are comfortable where we are 84.8%, that's where we landed. In the past, we have had quarters where we had the utilization upwards of 85% plus. So we typically tend to operate in a range between 83% to 85%. So at this stage, we are comfortable, but when there are best in need, we have shown the ability to increase the utilization so as to not to leave behind business on the table.
But at this stage, we are comfortable, and we are not really planning to increase it further, but we have that flex available in case there's a need.
And on the variable payout for the cloud?
No, I don't think we comment on it.
Mr. Ravi Menon, are you done with the question?
Sorry, I was waiting for the answer for that. So you would not comment on the variable payout the quarter? Is that
right? Yes. Sorry, we don't we normally don't disclose the variable. Sorry, sorry. I didn't
quite hear that. Yes, sorry. And then just a clarification on why do you think that you should include data within the digital Confirm Defy read neometrics, right? I think that's what that's where the revenue has fallen in. So your thought it's primarily a BPO, because there is a software platform which we are using for the BPO, but why classify this revenue as digital?
Sure. So if you look at the pentagon that we've been working on as our key strategy for digital for the past 18 months, you will see that vertical platforms is clearly called out as one key element in digital. And this is very clearly a vertical platform. It is not a BPM offering. There is a mortgage origination and mortgage servicing platform.
So there is significant IP in the platform. And the pricing, like any vertical platform, is very clearly outcome linked.
All right, great. Thank you and
best of luck.
The next question is from the line of Sumit Jain from Goldman Sachs.
So firstly, I wanted to So firstly, I wanted to understand in your revenue growth guidance of 9% to 10%, are we including the recently closed Ashtech, the Irish BPM acquisition? And if yes, can you quantify that?
So first, that work is a business transfer approach. So it's very much part of our business going forward, and we've not disclosed the specifics on that. Nonetheless, it's a very small part of our BPO business.
Got it. So it won't have any material impact on your revenue growth trajectory in December quarter?
That's right.
And secondly, I wanted to understand around the subcontracting costs like we have seen for the last 3 to 4 quarters. It has been in the range of 7.3% to 7.5% levels. So going forward, do you think that reducing subcontracting costs will be one of the margin levers given that we have now a full strength of local hires in U. S?
So I think subcontracting is an integral part of the business model. I think as we look for talent overseas and especially talent at immediate requirements, we need subcontractors. But as you see for this quarter, we have actually been able to hold down our subcontractor cost. So what we actually do is also rotate many of the subcontractors back onto our payroll. And therefore, we continue to get a new set of fresh contractors, but yet we'll take them back.
So I think if we get this going as a strong model, we'll be able to keep the cost under control and yet able to hire talent on demand. So that's one of the levers we've operated this quarter on margins as well.
Got it. That's it from my end and also good for the remainder of the year.
Thank you.
Thank you. The next question is from the line of Brian Bergin from Cowen. Please go ahead.
Hi, thank you. I wanted to ask on the progression of your strategic relationships. If we think back 2 to 3 years ago, the prior management team had commented that it thought it was having strategic discussions and conversations at around, I think it was around 50 clients at the time when there was 1,000 plus. What do you think you are today as far as the mix clients where you're really having strategic discussions? And how do you expect this to progress?
I'm sorry, I didn't follow the questions. It was about strategic relationships we have with our clients.
Yes. Well, you think you are perceived as a change engine and a strategic partner in your client base. Before you kind of started on this journey, it was a small percentage of the client mix. I'm curious how you perceive that today?
We may be a bit optimistic in how we look at it, but we absolutely perceive that we are more and more part of the strategic thinking of our clients. One of the things we've observed in the recent past is many of our clients are looking at us more than they're looking at some of our competitors. And especially with some of the investments we've made in digital, some of the focus areas on automation and the relationships that we have built in terms of the alliances that we have with our strong partners in the tech world. That's helping us to be perceived more and more central to the agenda of our clients.
Okay. And I wanted to ask, as far as digital contributing to large deal TCV, can you give us any metrics there, really a sense of how digital deals are changing in size and scope?
No, we
don't really break up the percentage of digital in the lab bill. Digital is definitely a part of large deal in the sense that every large deal, there is business as usual, but there is also expectation will transform and migrate to cloud and so on. So there's definitely digital element, but we don't really break out what is the percentage of digital in the
market. Okay, that's fair. Just last one here. Within BFSI, can you just comment on how insurance and U. S.
Regional bank performance is?
Yes, I think, look, on the whole, regional banking continues to be an area of growth for us. Clearly, there is some M and A activity going on, there is a little bit of a freeze until legal day 1 happens. But we feel that regional banks are fairly robust. We feel that there's a lot of technology investment that's going into the sector as they look to compete with the larger universal banks. And finally, I feel that for regional banks, we also have very compelling story in terms of our services, our platforms like the starter platform in Europe and the fact that we have the world's largest banking software platform in clinical, right, which is really gaining fairly significant traction.
So the Vision Bank story continues to be a good one for us. And insurance, I think sorry, did you have a question on insurance as well?
Yes. If you can just touch on how your performance is in that subvertical?
Sure. So look, I think insurance continues to be continues to grow steadily. I don't think we're seeing any significant acceleration or any significant growth beyond the average in that sector, but it remains a strong and stable sector for us. We also feel that the headroom for growth continues. And again, like in banking, the McInish platform has been gaining very significant traction, and we have a fairly sizable pipeline of opportunities there.
Okay, great. Thanks.
Thank you. The next question is from the line of Dipesh Mehta from SBI Cap Securities. Please go ahead.
Yes. Thanks for the opportunity. A couple of questions. First about if on Luke Resto fall, after a couple of years of healthy growth, growth rate seems to have moderated. So if you can help us what is playing out there and how you expect rest of all to grow?
Second question is about the margin. Earlier, Infi used to have an industry leading margin. Now, considering the specific investment phase and one off investment phase, which we invested to return back to industry leading growth, by if you can provide some color by when you expect Industry Drilling margin also to be achievable or now we are fine with where we are and focus would be more on growth than margin? Thank you.
On the rest of the world, there is India and when the rest of the world India is a very small part of the business and our focus is on very limited products, very selective on what we bid for India, so that we'll continue to see volatility there. On rest of the world, we have had good run over the last few quarters, as we said. This quarter, we have seen lowdown or a negative group. But this is not a secular trend. We expect I mean, at least at this stage, we are not seeing anything material.
Hopefully, the growth should come back in the coming
What was the other question? On margin. Yes. So growth margin
What is the base?
Yes, maybe I can repeat. Now we achieved industry leading revenue growth and revenue growth trajectory seems to be at least last 4 quarter, we returned to double digit growth rate. But if one look at margin profile, we are still not achieve industry leading kind of goalpost. So if you can help us, Anders, now whether we will stick with where we are or we have aspiration to again achieve industry leading margin profile? Thank you.
So on that, my our view is very much that a lot of the operational measures that we've talked about through this call are getting in place and giving us benefit, which gave us a nice improvement in our margin in Q2. We have a clear guideline in terms of guidance for this year. Beyond this year, we will come back and have a discussion at the end of the year when we talk about our guidance for next year.
Thank you.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for their closing comments.
We would like to thank everyone for joining us on this call and spending time with us. Look forward to talking to you again. Have a good day.
Thank you very much, sir. Ladies and gentlemen, on behalf of Infosys, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.