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, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindroo. Thank you, over to you, sir.
Thanks, Karima. Hello, everyone, welcome to Infosys earnings call to discuss Q2 FY20 earnings release. We have Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is COO and MD, Mr. Salil Parekh, CEO, Mr. Pravin Rao, CFO, Mr. Nilanjan Roy, along with other members of the senior management team. We'll start this call with some remarks on the performance of the company for Q2 by Salil, followed by comments from Nilanjan and Pravin. Subsequent to this, we'll open up the call for questions. Please note that anything which we say which refers to our outlook for the future is a forward-looking statement which must be read in conjunction with the rest of the company's papers. 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 Salil.
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 second quarter, which was robust across multiple dimensions. One, double-digit growth for the fourth consecutive quarter. Two, continued strong growth in digital. Three, expansion in operating margin. Four, improvement in operational parameters, especially on utilization and onsite-offshore mix. Five, large deal signings. Six, reduction in attrition. We grew 11.4% in Q2 year-on-year in constant currency or 3.3% quarter-on-quarter. six of the seven business segments in both U.S. and Europe grew double digits constant currency year-on-year. Pravin will provide more color on different industry verticals in just a few minutes.
Digital revenues in Q2 were $1.23 billion, constituting 38.3% 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. Operating margin improvement was despite compensation increases provided to employees and was driven by significant improvement in utilization, onsite mix, employee pyramid improvement, and tight overall cost management. Nilanjan will elaborate on this during his remarks. Large deal signing in Q2 was extremely strong at $2.8 billion. 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 H119.
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-driven growth, there are three areas within digital transformation that I want to highlight with examples of our work with clients. These are 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 a data architecture to support the sales team forecast future orders from retail outlets.
The model clusters stores and learns from 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. For a material handling company in the U.S., we're implementing a cloud-based IoT telematics product to power its transformation. We're drawing upon our experience and presence in the connected vehicles 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 this past quarter. I am also delighted to share with you a recognition that each one of us at Infosys is extremely proud of. We were rated number three on the Forbes list of the world's best-regarded companies for 2019. In closing, I would like to share that we are updating our guidance. Our revenue growth guidance moves from 8.5%-10%, to 9%-10% for the full year on a constant currency basis. We reconfirm our operating margin guidance for 21%-23% for the full year. With that, let me hand it over to Pravin.
Thank you, Salil. Hello, everyone. We had another quarter of double-digit year-on-year growth in constant currency. Growth was broad-based with six 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 digits 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 three. I'm also pleased with the reduction in attrition, which declined to 19.4%, a decline of 2% compared to quarter one. 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 remain strong. We added 96 new clients during the quarter, while number of 50 million clients increased by 2 to 61. We won 13 large deals with a TCV of $2.85 billion, which is the highest ever. Four deals each were in financial services and retail, 2 deals in communication, 1 deal each in energy utility resources and services, high tech and life sciences. Geography-wise, 6 were from America, 5 were from Europe, 2 from rest of the world. While a large part of this was renewals, these large renewals solidify our position significantly in existing clients. Large deal TCV is up by over 75% in H120 compared to H119.
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 risks and grow this business. I'm happy to share that Infosys was rated number 1 player in the HFS Top 10 BFS 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 clients stand cautious due to increase in perceived risks stemming from trade wars and geopolitical developments. While business volatility is causing decision 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 recent deal wins and steady order pipeline. Coming to manufacturing, there is stress in the vertical, especially in Europe. Impact of trade wars and weakening automobile segment is affecting supply chain. Clients are looking to leverage new technologies to bring the next wave of efficiencies in their 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 America. Communication segment remains strong for us due to large deal wins. The traditional business models of communication players are being challenged by digital natives and OTT players. These customers are keen to traverse a 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&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, Infosys was ranked as leader in six 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 am 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 Nilanjan.
Thanks, Pravin. Good evening, and welcome to our Quarter 2 FY 2020 earnings call. Our revenues in Q2 were $3.21 billion, growing by 11.4% year-on-year in constant currency terms. This was our fourth consecutive quarter of double-digit growth. The sequential revenue growth in constant currency was 3.3%, including 90 basis points incremental contribution from Stater. Operating margins in Q2 were 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 boosted the margins by 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 one.
DSO for the quarter decreased by two days to 66 days due to tight receivables management. Operating cash flow in Q2 was $522 million, which is a year-over-year growth of 19.2%. Free cash flow in Q2 was $397 million, which is a year-over-year growth of 10.3%. For H1 2020, operating cash conversion to net profits 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 INR 3.35 billion. Yield on other income was 7.9%, marginally lower than the 8.1% in Q1. Effective tax rate for H1 2020 was 36.5%, 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 '19 to 25.8% in the current quarter. Driven by our performance in H1, we have increased the revenue guidance for FY20 to 9%-10% in constant currency terms. Due to operating margin performance, full stack H1 operating margin at 21.1% within our guidance band. Subject to a stable currency environment, we remain confident of the operating margin band guidance for FY20 at 21%-23%. We will continue to deploy various measures to enhance 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 five-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 2019. 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 session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. 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. What kind of shifts is the digital growth still strong there, or is there added pressure on the core side? Then maybe couch those comments within the context of North America versus Europe. Thank you.
Sure. Look, this is Mohit here. I think clearly on the core side, the focus is very much on consolidation. 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 three 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. Finally, we're starting to see the beginnings of a fairly significant cloud migration journey. That's 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, specifically payments transformation, trade transformation, lending transformation. These continue to remain fairly strong areas across the board, right, 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, especially with the rate cuts. If you look at a bank in Belgium, for instance, that we spoke with recently, they're making about a negative 80 basis points on their deposits. At the same time, they're paying out something like between 10 to 15 basis points to their depositors. We feel that this interest rate regime is going to put pressure on banking revenues and may have a downstream impact. 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.
Yeah. Ed, as we had announced a new capital allocation policy in July that we had increased it to 85%, we think that gives a clear runway for investors to look at a predictable cash flow regime with true dividends and just leaving some money aside for tuck-in acquisition. I think the scope of one-off buybacks or special dividends definitely decreases.
Thank you.
Thank you. The next question is from the line of Diviya Nagarajan from UBS. Please go ahead.
Thanks for taking my question. Congrats on the solid quarter. Salil, my question is on the guidance that we had given at the top end. We've had a very robust 12% kind of a first half number. The top end kind of suggests we are 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 a 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. 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 factor in 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've tried 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 to next quarter and so on, we'll see where we end up. That's really what we baked in. 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 Pravin shared his remarks. All of those put together, plus the typical seasonality of Q3 and H2, that's what gives us our view on the guidance.
Okay. 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? 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. Pravin shared with you some of the specific parameters that were improving in the quarter. We also shared, I think, last quarter that all the investments are complete and behind us. There is no one-off investments that we had launched about a year or so, or a year and a half ago. Those are complete. There's no new investments. There are investments in the ongoing business, but no new one-off investments. Having said that, we have a very high-quality franchise. We feel comfortable that as we get the operational efficiency back, we will see those levers kick in. Therefore, we remain confident.
As Nilanjan shared, our H1 margin is now within the band, 21%-23%, and we remain confident as the year progresses to be within the band 21%-23%.
Fair enough. My last bookkeeping. As part of the tax rate regime change, what is the thinking on the tax holiday exemptions, and what should we be modeling in going forward for that?
Yeah. I think we've just looked at it currently for the India standalone. Of course, Infosys standalone, the India effective tax rate is less than 25, year close to about 23 to 24. I think at the moment we are saying with the current regime we will, of course, evaluate as we look ahead to the next few years of when we make a transition. For now, we are continuing with the existing tax holiday regime.
Thanks, and have a good rest of the year.
Thank you.
Okay. Thank you.
The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Hey. Hi. Thanks for taking my question. Just wanted your thoughts on BFSI and retail put together. If you look at the second quarter in terms of growth, excluding Stater, it appears that it's relatively weaker than the earlier Q2s that we have seen in the past. From that perspective, do you think that both BFSI and retail have been relatively weaker versus what you would have thought earlier?
This is Pravin here. I'll talk about retail and then Mohit will comment on the BFSI. On retail, we believe that this 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 we see a sense of nervousness in the retailers, and we have seen the spend come down. This segment in general will continue to be volatile. Last year for us, retail was a fantastic year. We had double-digit growth, first quarter was soft and second quarter continues to be soft. It's difficult to predict when the sector will revive because it's purely dependent on the macro as well as the sentiment. That'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. They continue to invest while trying to take out cost in other parts of the business. We continue to stay engaged with them and given 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. In terms of the growth, it's expected to be volatile till there is some clarity on the macro.
Yeah. Hi, this is Mohit. Look, I think when speaking to Edward question, I think I've given you a perspective on the sub-sectoral 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. Even if you have a couple of clients, for instance, that are looking at their discretionary 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. Hopefully that gives you a perspective.
Sure. Thank you, Mohit and Pravin. 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.
Sure. Thank you so much, and all the best.
Thank you so much.
Thank you. The next question is from the line of Vibhor Singhal from PhillipCapital. Please go ahead.
Good evening, sir. Thanks for taking my question, and congrats on a solid quarter. 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. Just wanted to basically understand your perspective on how it's going to impact. I'm sure we're looking at significant growth going ahead given the kind of hiring that we've done. Basically, how do you believe the growth is going to pan out? Also, what could be the margin impact? 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? Do you think that's all baked in into the guidance as well?
I think, as you said, Nilanjan has reiterated that the margin will remain in the 21%-23% band. 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 freshers in India and about 700-800 people in U.S. from colleges. Laterals we hired close to 7,000. About 5,000 plus in India and about 1,500-2,000 in other parts of the world. It's consistent with what we have done in the past. I don't see any material change to that. Our hiring will be dependent on the growth, and we have already factored that in in the guidance.
Sure, sir. Sir, just lastly, the attrition has definitely cooled off from the last quarter. We know that first quarter is generally seasonally quite weak in terms of attrition. Given that we've already taken so much measures towards 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 20 levels? Maybe something which we are more comfortable with?
The attrition for tech services is about 19.4% with both voluntary and involuntary. If you look at voluntary alone, it's about 18%, when we compare with quarter two of last year, it is lower than that. Definitely we are seeing some marked improvement. At the same time, some of the interventions that we have done to address this in the last one or two quarters have helped us. It's something we have to continue to do on an ongoing basis. This is an area where we'll continue to watch out and focus on. At this stage, we are very encouraged with the successes that we have seen, and we are hopeful that it will continue to trend in the right direction in the coming quarters.
Sure, sir. Thanks for taking my questions. Wish you all the best.
Thank you. The next question is from the line of Joseph Foresi from Cantor. Please go ahead.
Hi. 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? 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. 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. 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 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 an 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 executives 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. 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. 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? How much is pricing a factor across both the digital business and your traditional business?
In terms of digital work, typically, these are new projects or new midterm, long-term contracts. They are definitely things that we are winning in a very competitive environment. In terms of the pricing, I think we'd shared, maybe in the last quarter's discussion, a margin for our digital business is higher than the margin for the company overall. We feel confident as we shift more and more of our portfolio to digital, that should be a benefit to our margin.
Okay. Just lastly, the pieces of the business that aren't digital, are you seeing pricing pressure on the traditional maintenance stuff? Maybe you can give us an update on the non-digital business and how that's performing. Thanks.
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 a discussion.
Thank you.
Thank you. The next question is from the line of Viju George from JP Morgan. Please go ahead.
Thank you for taking my question. I had a question on your unbilled sales. In the last four 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 really caused such a massive jump for the company of your size in H1.
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. 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 Hypers acquisitions, there was also an increase because their business model had also an increase on the unbilled. These are two large reasons for this increase. If you see our collections overall, I think that's the number to look at. Our collections continue to be very strong. Our DSO for the quarter actually was down by two days. I think that's the key metric to show the health of the business.
Yeah. Nilanjan, 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 four quarters to FY 2019, it was kind of 10%, 11%. As a percentage of incremental sales annualized, it's doubled. Is that possible? How is it practically possible for a company as large as Infosys? Has there 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. In fact, we monitor very closely. In fact, all the unbilled of the previous quarter is mostly billed in the next quarter. There are new set of milestones which come, so it's not as if it's a legacy which is increasing. We look at the aging of this very carefully. 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, like I said, Hyperscale data.
Sure. One more question on your TCV. I think Pravin 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. In general, this is a metric which is volatile. In some quarters, we have a lot of net new. In other quarters, we have a good percentage coming from renewals. The way we look at it is, it's important for us to win renewals because it helps in retaining our business and solidifying our presence. At the same time, winning net new will also help in capturing market share. We focus on both, but in general, it varies from quarter to quarter. For this half year, I think, the net new was about 35%.
Net new is 35%.
Okay. Would it be fair to-
Yeah, we did 2.7% in quarter one, 2.8% in quarter two, and about 35% was 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. You are right. If you look at the last few 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 Apurva 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 2-10. It seems like a decline for this quarter. Anything which is incrementally different?
As we shared, we've increased our guidance on the lower end from eight and a half to nine. We think the overall discussion with the segments, which as you heard from Mohit, in terms of financial services, you heard what Pravin shared on retail, that is something that we have to be watchful about. We have strength, which we shared earlier on energy utilities, on telco, high tech, those are positive. We shared typically the second half in our sector. Our second half, so Q3 and Q4, is typically softer than the first half, especially Q3 with the discussions around furloughs and so on. 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.
As the quarter progresses, 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, Salil. Nilanjan, on the margins, how do we see that, the second half trending within the band? Any headwinds, tailwinds that you're looking at? Perhaps you can call out the title holder impact, which will be coming in third quarter.
Yeah. 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. That's what we are looking at. From the title holder is not a material impact. Most of, as you know, people, this is less than probably 1% of the overall headcount. It's a relatively small impact. Otherwise, I think we have a very robust, like I said, 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. There will continue to be headwinds in terms of discounts or wage hikes, but I think we seem to have gotten to a rhythm of making sure that we are able to take out these costs in time.
That's where we are.
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 if you're looking at the organic growth numbers? I know you haven't disclosed these. Organically, was the sector up sequentially year-over-year? Any sort of color here will be helpful. If you do want to disclose it, how much did the acquisition add to growth during the quarter? Thanks.
I think, we haven't really disclosed the two numbers separately. You also have to keep in mind that Stater was a client of ours prior to the acquisition. There were certain revenues that accrued to Infosys prior to the joint venture as well. We're not breaking out the numbers separately.
Okay.
Okay.
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, we don't see any change in the last couple of weeks from what we're discussing, which is a quarter-end view. Of course, it's only two weeks, so we don't expect to see any change in that timeframe.
All right. 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 that we have seen any seasonality in the renewal, it varies from quarter to quarter depending on the context. I don't think there's any seasonality to renewal or net new.
All right. Thank you.
Thank you. The next question is from the line of Abhay Moghe from Bajaj Allianz. 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 four to five quarters, your revenue growth year-over-year had been increasing, whether you see USD 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 a couple of percentage points even lower by the time we reach Q4. 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 give a conservative guidance. What is it?
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 one. Second is on the margins. Over, say, you're running a good cost-cutting program and over the next four to six quarters in a constant currency terms, you know next year also wage hikes, visa cost, everything will be there. Over the four to six quarters, you think margin would look up from current levels? You think that whatever the headwinds are, whatever cost-cutting programs you have, it will neutralize? Those are the two questions from my side.
On the revenue, as we shared earlier, I think we have a good set of growth over the last four quarters. We know that typically there's some seasonality in the last quarter of the calendar year, our Q3. We also know that there'll 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. We've had several good quarters on that. It's not a predictable view in terms of where the large deals numbers goes and how the renewals. More and more net new in the coming quarters in the pipeline.
We have confidence that as we get into the next fiscal year, we're 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've 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 four to six quarters, which is in that sense in the next fiscal year. For this year.
We believe our operational 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. We will see the benefits of that, and we will be within our margin guidance. Already for H1, we are within the margin guidance, and we will have that for the full year as well.
Thanks a lot.
Thank you. The next question is from the line of Ravi Menon from Motilal Oswal. Please go ahead.
Gentlemen, congratulations on a good quarter. Two questions. First on your margin levers. Your utilization is already close to the highest it's ever been. Do you think that we can actually push this any further? What other margin levers are we looking at during the term? Secondly, related to that, what's been the variable payout like for the quarter? One more question, a follow-up after this, please. Thank you.
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've had the utilization upwards of 85% plus. We typically tend to operate in a range between 83%-85%. At this stage, we are comfortable, but whenever there's a need, we have shown the ability to increase the utilization so as to not to leave behind business on the table. At this stage, we are comfortable, and we are not really planning to increase it further. We have that flex available in case there's a need.
On the variable payout for the quarter?
No, I don't think we comment on it.
Mr. Ravi Menon, are you done with your questions?
Sorry, I was waiting for the answer for that. You would not comment on the variables payout in the quarter? Is that right?
Yeah, sorry. We normally don't disclose the variable.
Sorry. I didn't quite hear that. Yeah, sorry. Just a clarification on why do you think that you should include Stater within the digital component? If I read your metrics right, I think that's where the revenue has fallen in. You thought it's primarily a BPM. There is a software platform that you are using for the BPM, why classify this revenue as digital?
Sure. 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. This is very clearly a vertical platform. It is not a BPO offering. There is a mortgage origination and mortgage servicing platform. There is significant IP in the platform. The pricing, like any vertical platform, is very clearly outcome linked.
All right, great. Thank you, and best luck.
Thank you. The next question is from the line of Sumit Jain from Goldman Sachs. Please go ahead.
Hi, thanks for the opportunity. Firstly, I wanted to understand in your revenue growth guidance of 9% to 10%, are we including the recently closed Eishtec, the Irish BPM acquisition, and if yes, can you quantify that?
First, that work is a business transfer approach. 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. It won't have any material impact on your revenue growth trajectory in December quarter?
That's right.
Secondly, wanted to understand around the subcontracting cost, like we have seen for the last three to four quarters, it has been in the range of 7.3%-7.5% levels. 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.?
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. As you see for this quarter, we have actually been able to hold down our subcontractor costs. What we actually do is also rotate many of the subcontractors back onto our payroll. Therefore, we continue to get a new set of fresh subcontractors, but yet rotate them back. I think, if we get this going as a strong model, we'll be able to keep the costs under control and yet able to hire talent on demand. That's one of the levers we've operated this quarter on margins as well.
Got it. That's it from my end. All the best for the remainder of the year.
Thank you.
Thank you. The next question is from the line of Bryan Bergin from Cowen. Please go ahead.
Hi, thank you. I wanted to ask on the progression of your strategic relationships. If we think back two to three 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. Where do you think you are today as far as the mix of clients where you're really having strategic discussions, and how do you expect this to progress?
I'm sorry, I didn't follow the question. It was about strategic relationships we have with our clients?
Yeah. Where you think you are perceived as a change agent 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. I wanted to ask, as far as digital contributing to large deal TCV, can you give us any metrics there, really give 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 large deal. Digital is definitely a part of a large deal in the sense that every large deal, there is business as usual, but there's also expectation we transform and migrate to cloud and so on. There's definitely a digital element, but we don't really break out what is the percentage of digital in the large deal.
Okay, that's fair. Just last one here. Within BFSI, can you just comment on how insurance and U.S. regional bank performance is?
I think, look, on the whole, regional banking continues to be an area of growth for us. Really, where there is some M&A activity going on, there is a little bit of a freeze until legal day one happens. 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. Finally, I feel that for regional banks, we also are a very compelling story in terms of our services, our platforms like the Stater platform in Europe, and the fact that we have the world's largest banking software platform, Finacle, right? Which is really gaining fairly significant traction. The regional bank story continues to be a good one for us.
Thank you.
Insurance, I think I'm sorry. Did you have a question on insurance as well?
Yes, if you could just touch on how your performance is in that sub-vertical?
Sure. Look, I think insurance 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. Again, like in banking, the McCamish platform has been gaining fairly significant traction. 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 SBICAP Securities. Please go ahead.
Yeah, thanks for the opportunity. A couple of questions. First, about if one look rest of world. After a couple of years of healthy growth rate seems to have moderated. If you can help us, what is playing out there, and how you expect rest of world to grow? Second question is about the margin. Earlier, Info 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. If you can provide some color by when you expect industry-leading margin also to be achievable, or now we are fine with where we are and focus will be more on growth than margin. Thank you.
On the rest of the world, there is India and then the rest of the world. India is a very small part of the business, and our focus is on very limited products. We are 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 a good run over the last few quarters as we said. This quarter, we have seen a slowdown or a negative growth. This is not a secular trend. At least at this stage, we are not seeing anything material. Hopefully, the growth should come back in the coming quarters. What was the other question?
On margin.
Yeah.
Go ahead, Dipesh.
Yeah, maybe I can repeat. Now we achieve industry-leading revenue growth, revenue growth trajectory seems to be, at least last four quarters, we return to double-digit growth rate. If one look at margin profile, we are still not achieve industry-leading kind of goal post. If you can help us understand now whether we will stick with where we are or if we have aspiration to again achieve industry-leading margin profile. Thank you.
On that, 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'd like to thank everyone for joining us on this call and spending time with us. We 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.