Ladies and gentlemen, good day and welcome to Infosys Limited earnings conference call. As a reminder, all participant lines will be in the listen-only mode. 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 and 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, and over to you, sir.
Thanks, Inba. Hello, everyone, and welcome to Infosys earnings call to discuss Q2 FY23 financial results. This is Sandeep from the investor relations team in Bangalore. Joining us today on this call is CEO and MD, Mr. Salil Parekh, CFO, Mr. Nilanjan Roy, and other members of the senior management team. We'll start the call with some remarks on the performance of the company by Salil and Nilanjan. Subsequently, we'll open up the call for questions. Kindly note that anything that we say with regards to our outlook for the future is a forward-looking statement which must be read in conjunction with the rest of the company's resources. 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 on the call to Salil.
Thanks, Sandeep. Good afternoon, good evening, and good morning to everyone joining the call. Thank you for joining our call. Our Q2 performance was strong with year-on-year growth at 18.8% and sequential growth at 4% in constant currency. Growth in Q2 was broad-based with all industries and geographies growing in double digits in constant currency. Growth in constant currency in the first half of financial year 2023 was 20.1%, compared to the first half of financial year 2022. This momentum is accompanied by a strong pipeline of large deals and the highest large deal value in the last seven quarters of $2.7 billion. 54% of this was net new.
These elements are a clear reflection of the deeply differentiated digital and cloud capabilities we've developed that are highly relevant to our clients' strategic priorities. Our digital revenues are at 61.8% of our overall revenue and grew 31.2% in the quarter in constant currency terms. While digital continues to see some strong growth rates, we are seeing acceleration in growth trajectory of our core services this quarter. This is due to our industry-leading automation capabilities and reflects an interest among clients towards cost optimization programs. We also see this in our large deal pipeline with strong focus on cost reduction programs. While we do not generally share the specific amount of our cloud revenue, we are delighted to share that in Q2, our cloud revenue was larger than $1 billion, showing tremendous strength of our cloud services, especially our industry-leading Cobalt capabilities.
Several examples of client transformation demonstrate the value we deliver. First, a European telecommunications company is closely engaging with us to accelerate their business growth and prepare for a digital future. Second, an aviation giant is working with us to digitally advance the engineering of their product development and emerging aircraft programs. Third, a fast-growing logistics company is working with us to secure their cloud environment and build greater resilience into their operations. These examples and several others showcase our commitment to deliver value for our clients and the trust and confidence in our expanding digital capabilities. Strong growth this quarter was accompanied by operating margin expansion of 150 basis points. The operating margin for the quarter was 21.5%. This was because of cost efficiencies, optimization in large deals, and currency benefits. Nilanjan will provide more color on this.
Our H1 operating margins are 20.7%. Our attrition has now been decreasing for the past three quarters, including this Q2, on a quarterly annualized basis. While the overall demand environment continued to be healthy, as reflected in broad-based growth and robust large deal pipeline, we also see signs of cautious behavior by clients due to macro concerns. Apart from slowness in the mortgage segment of financial services and the retail industry segment we talked about last quarter, we see emerging concerns in high tech and telecom industry segments in the form of reduced spend, especially towards discretionary programs. We are well-positioned to help our clients with their digital agenda and their cost agenda. Growth in our digital and our core services demonstrate that. As the macro environment evolves, both of these components of our business will help us to be appropriately positioned with our clients.
We have initiated a pivot to focused cost programs within our large deals pipeline. Our operating model and offerings are agile to deliver value for clients, in this evolving macro environment. In keeping with our capital allocation policy, the board has announced a share buyback of INR 9,300 crores, or $1.13 billion, and an interim dividend of approximately INR 6,940 crores, or $850 million. Our H1 performance of 20% growth in constant currency and robust large deal signings in Q2 give us the confidence to change our revenue growth guidance, which was at 14%-16% earlier to 15%-16%, even as we are seeing emerging concerns that we talked about earlier.
Our ability to grow at strong rates and take market share gains is a clear validation of the relevance, depth, and breadth of our service offerings and deep client relationships. We change our operating margin guidance for financial year 2023 only for this year to 21%-22%, which was earlier 21%-23%. We anticipate we'll be at the lower end of this range. With that, let me request Nilanjan to share other updates. Thanks, Salil. Good evening, everyone, and thank you for joining this call. Q2 revenues grew by 18.8% year-on-year and 4% sequentially in constant currency terms. All business segments and geos grew in double digits year-on-year and constant currency.
Specifically, North America grew by 15.6%, Europe by 28.5%, manufacturing by 45%, URF by 24.3%, communication by 18.4%, and retail by 15.4%. Digital revenues constitute 61.8% of total revenues and grew by 31.2% year-on-year in constant currency. Revenue growth was 20.1% in constant currency terms in H1 2023 over H1 2022. Client metrics remain strong with year-on-year increases in client count across revenue buckets. Number of $50 million clients increased by 15- 77, while number of $100 million clients increased by 4 to 39. Number of $300 million clients increased to five from two in the quarter 2 last year, reflecting our strong ability to mine top clients by providing them multiple services.
Employee count increased by approximately 10,000- 345,000. Utilization excluding trainees was 83.6%. Onsite effort mix remained flattish at 24.4%. Quarterly annualized voluntary attrition came down further by another 2.5% during the quarter. This is also starting to reflect in reduction in our LTM attrition numbers, which reduced to 27.1% compared to 28.4% in Q1. We expect attrition to reduce further in the coming quarters. Q2 operating margins stood at 21.5%, an increase of 150 basis points Q on Q. The major components of the Q on Q margin movement were as follows.
The margin tailwinds comprising of 70 basis points comprising of rupee depreciation, partially offset by cross-currency, 90 basis points from cost optimization, including large deal optimizations, RTP increase, etc., partially offset by lower utilization. 40 basis points from reduction in subcon spend. This was offset by headwinds of approximately 40 basis points from compensation-related increases and impacts. Q2 EPS grew by 11.5% in rupee terms on a year-on-year basis. Our balance sheet continues to remain strong and debt-free. Consolidated cash and investments were $4.8 billion at the end of the quarter. Free cash flow for the quarter was $589 million, implying conversion of 79% of net profits. Free cash flow generation is typically low in Q2 due to higher tax payouts in both India and the U.S.
ROE increased by 1% year-on-year to 30.8%. Yield on cash balances increased to 5.8% in Q2. DSO increased by two days sequentially to 65, reflecting higher billing done during the quarter. Coming to segmental performance. We signed 27 large deals in Q2 with a TCV of $2.74 billion with 54% net new. 5 large deals were in financial services, 4 each in retail, communication, energy utility resources and services, and high-tech segments, 3 in manufacturing, two in life sciences, and one in other vertical. Region-wise, 18 were in the Americas, six in Europe, one in India, and two in the rest of the world. Growth in financial services segment continues to be strong, backed by large deal wins, account expansion, and new account openings.
We continue to see an acceleration in cloud adoption in the FS sector and are working with many of our clients in cloud migration, cloud management, and other cloud-related platform deals. In retail, we are seeing focus on digital consumer engagement, supply chain transformation initiatives, IT cost operations, legacy modernization, and new in-store capabilities. There are, however, some pockets of slowdown in decision cycles, especially for fashion apparel, retail, and general merchandisers. We have a healthy mix of outsourcing and digital deals. In communication segment, we are seeing healthy order pipeline and deal conversion, but we expect cost pressures from client side with impact on budgets, especially for traditional services due to macroeconomic concerns. Energy, utility, resources, and services segment reported robust and steady growth backed by strong deal wins. The cost takeout initiative continues to pick up momentum in the vertical.
Manufacturing segment growth continues to remain strong and broad-based, along with steady flow of new deals. We see continued tech spend by customers driven by the need to increase security posture, migration to cloud, increasing productivity by transforming to smart factories, transitioning to smart products, and other broader digital transformation initiatives. In smaller verticals like high-tech as well, we are seeing some increasing cautiousness among clients around discretionary spend, and consequently there have been some delays in deal closure. For digital services capabilities in Q2, we have been ranked as leader in 19 ratings in the areas of public cloud, PaaS, design experience, automation, and data and analytics. We remain committed to maximizing our total shareholder returns and in line with the capital allocation policy of returning 85% of free cash over the period.
The board has recommended the following: an interim dividend of INR 16.50 per share for FY23 versus INR 15 per share for FY22. This is a 30% increase in dividend per share. Buyback of equity shares of up to INR 9,300 crores through open market route post approval of shareholders at a maximum buyback price of 1,850. We believe our progressive capital allocation policy continues to provide predictability to our shareholders. Although there is a gradual abatement of staffing cost pressures, they continue to exert pressures on the cost structures and hence will need to be countered by our various cost optimization measures, including rationalization of sub con, flattening of the pyramid, increasing automation, reducing on-site mix, and engaging with clients to increase pricing.
While H1 growth was strong, we expect H2 growth to be impacted due to seasonality comprising of furloughs and lower working days. The revenue guidance for the year is changed to 15%-16%. As we mentioned in the last quarter earnings call, FY23 operating margin would be at the bottom end of the guidance band. We are now narrowing the guidance range to 21%-22% for FY23, and we expect to be at the lower end of the range. With that, we can open the call for questions.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may enter 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. Anyone who has a question may enter star and one. We'll take our first question from the line of Ankur Rudra from JP Morgan. Please go ahead.
Hi. Thank you and good evening. The first question is, you know, Salil, you mentioned the macroeconomic conditions. In that context, could you elaborate how realistic or conservative your guidance is for the second half? Also, what has been the nature of the client conversations in the last month or so? Have you seen any sort of impact on the pipeline refill rate in this period?
Thanks, Ankur. This is Salil. On the guidance, I think what we saw was very strong large deals in Q2. We had great growth in Q1 and Q2. We continue to see overall our pipeline for large deals is quite strong. In fact, it's larger than it was in the last couple of quarters. We also see the macro points that I shared earlier, specifically mortgages in financial services, some aspects of retail or high tech or telecom. Keeping all that in mind, we came with a view on the guidance, which is from the 14%-16%, moving it to 15%-16%, which is the higher end of that band.
The conversations with clients, we've seen for this quarter, our digital business has grown over 30% and our core services has also grown. We've seen our pipeline a good focus on cost programs and on the growth programs. There are clients in different sectors at different intensity looking at both of those. The conversation depends more on the context that the client is in. We feel that given these two engines that we have, we are somewhat well prepared for the evolving macro environment.
Thank you. You know, Nilanjan, it's really great to see the margins back in the band and the extent of margin recovery in the quarter. Could you elaborate if there were any special interventions that were taken that drove this change in the quarter, perhaps with respect to wage increases or something else, and if there's any one-offs within this? Thanks.
Yes, Ankur. As we explained, I think our cost optimization engine continues to chug along well. I think, you know, working on the pyramid, you know, on sub con, I think, I mean, this was something which was very apparent. You would have also seen the numbers, you know, Q-on-Q. I think it's been overall the continuous focus across, and we've seen that, you know, benefit helping us. But, you know, for the year, as you know, we are still at 20.7% and, you know, we have a guidance of 21%-22%, and we said we'll be at the bottom end of that range. We still have ways to go. Of course, this is gonna continue to be the conversations on pricing, et cetera, with clients. That continues to be ahead.
Like I just mentioned in the earlier press conference that, you know, our discounts definitely have come down. We continue to push our, you know, sales force teams, you know, how to go and approach clients on this. Like I said, this is a long haul on pricing, but at least the discussions are started around this.
Just one clarification. In your margin breakup that you'd highlighted before, the impact of compensation increases seemed a bit light. Is there any change in the compensation change trajectory over the next two or three quarters? Or if you don't mind maybe elaborating that part a bit more.
No, there was nothing because this is largely for the Q1 had the biggest impact. This was more for the mid-senior level of folks. I don't think there's anything, unusual in that.
Okay. Appreciate it. Thank you. Best of luck.
Thank you. Our next question is from the line of Moshe Katri from Wedbush Securities. Please go ahead.
Hey, thanks for taking my question and good quarter. Salil, would you point to clients being cautious beyond longer sales cycles and delayed deal closures? Are we also seeing project deferrals or project cancellations, or we're not there yet? Obviously this would be us playing the 2008 kind of slowdown playbook. I just wanted to get some more color on that.
Hi, Moshe. This is Salil. I couldn't hear properly, but just what I understood was, are there any project cancellations or other such things in the quarter? If that's the question, we didn't see any project cancellations in the quarter. We saw some slowness in discretionary spend within the macro segments that I mentioned. For example, in high tech we saw that. We saw some in telco. We had mentioned last quarter in mortgages within financial services, and the retail parts of retail industry. That's how we saw it for this quarter.
How would you categorize the discretionary spend? Is it predominantly cost takeouts?
No, for that, the discretionary spend are more spend, which support transformation programs is the way we see it. For the cost programs, those are different, more let's say targeted or fixed spends.
Okay. Do you have any views about the budget cycle for next year? Do you think we'll see any sort of slippage, i.e., rather than budgets being all set and ready sometime, you know, by January, maybe you'll see some sort of a slippage there because of the macro?
Today what we are seeing is within our large deals pipeline, there's a large number of programs which are cost related, and we see our own core services growing. What it shows us is there is an interest from clients on both some elements of digital and now also on elements of cost. The budget cycle, this is the quarter in which we will start to get a sense for the calendar year budget. It's not something that we have within our grasp from the previous quarter. In the next few months we'll start to see that.
Okay. Just final point, just a slight detail. Can we get the number in terms of subcontractor costs for the quarter as a percentage of revenues?
Just a second.
We're down 10.1% now, right? From 10.5%.
All right. Thank you very much.
Yeah. Did you get that, Moshe?
Yes, I did. Thank you very much.
Thank you. Our next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.
Hi. Thanks for the opportunity. I had a question on what is happening in the manufacturing vertical in terms of margins, because we had a $46 million incremental revenue addition, but our segmental profitability bumped up by almost $49 million. That seems to have helped our margins by almost 100 basis points last. Wanted to get color on what exactly is happening there. Then clarification on our cloud revenues. You mentioned it's now above $1 billion. Is it on a quarterly basis or on an annual basis?
Yeah. The manufacturing margins, I think, the same question I think many of you had in the previous quarter, and we took heed of that advice. We have worked on making sure our manufacturing margins across deals and large deals and just to show that, yes, we have plans on how deals evolve over a period of time, and that should give us comfort, which it has over the last four, five years of how we approach large deals and large deals margin improvements. Of course, the other cost optimization levers across the entire manufacturing, which help the in other sectors as well. The second question, I didn't clearly get.
I want to get a sense in terms of the cloud revenues that you mentioned of $1 billion+. Is that on a quarterly basis?
It's one quarter. It's for this quarter, $1 billion+.
Okay, thanks. Thanks a lot.
Thank you. Our next question is from the line of Jamie Friedman from Susquehanna. Please go ahead.
Hi. Again, let me echo the congratulations on the robust results. I'm sorry to come back to the macro, Salil, but in the instance that there were a recession, is that contemplated in the guidance?
To answer your question, in the way we've looked at it today is the guidance for our financial year, which is two more quarters. We've kept in mind what we've done in Q1 and Q2 and the very strong large deals number that we had in Q2 with a 54% net new. We also kept in mind the seasonality which I know all of you know. For example, in this our Q3, there will be some impact with furloughs. Typically, Infosys has more seasonality in Q3 and Q4. Then we built in what we see today of the macro environment, specifically, those industry segments that I talked about where we see some of the slowing.
Keeping all that in mind, we built this guidance for the revenue growth, given where we are. That's what we factored in to the guidance update.
Okay. In terms of the potential transition from transformational work to cost containment, you're obviously very well positioned for both. Is there a gross profit or margin difference for the same quantum of work, like a dollar of transformation versus a dollar of cost containment? How do we think about the margin implications from that transition?
They’re first, as you pointed out, we see growth today in both of these engines, which is a huge positive for Infosys. It’s something where we are very differentiated from many of our peers. The margin profile is not so much differentiated on the type of work. There are different scenarios in the margin profile. For example, depending on the scale of the impact, the industry, the geography. In general, we will see that at an aggregate level, aggregate cost programs, aggregate transformation programs will have a similar margin outlook. We don’t consider today that that pivot itself has any positive or negative impact on margin.
However, as Nilanjan was pointing out, we have a very strong internal cost program, which he and the team have put in place, and that will continue to give us benefit in either of the scenarios.
Thank you so much. I'll drop back in the queue.
Thank you. Our next question is from the line of Bryan Bergin from Cowen. Please go ahead.
Hi. Thanks. This is Zack Ajzenman on for Brian. First question we have.
I'm sorry to interrupt. Sir, may we request you to please, switch to a handset mode and speak. We are not able to hear you that well. Thank you.
Hi. Thanks. First question that we have is on the revenue per full-time employee. It looks like it's trended lower for multiple quarters now. Can you give us a sense of the dynamics here, what the expectation is going forward?
Yeah. I think this is actually reflecting our utilization as well. Like I mentioned, in fact, pricing has been actually stable to positive this quarter. The revenue per employee is across the entire headcount of the company, and we have put so many pressures in both in our training programs and Mysore and on the bench. This is just a you know mathematical number around revenue per employee. It's not indicating anything about pricing really. Okay. I've just been handed a note. There's also a cross-currency impact as well as you can imagine, because only 65% odd of our revenues are in dollars. 35% are in currencies outside dollars, and those have, of course, depreciated. Just from a pure metric we will also automatically come down.
Understood. Makes sense. Our follow-up is more of a broader one on the macro. More industries are seeing caution now. We heard high tech and telecom this quarter in addition to what we heard in the prior quarter. Are there any other specific areas that are expecting to get worse going forward based on line of sight here?
Bryan, this is Salil. I think what we are seeing today is in the areas that you just mentioned, and that reflects in some of the discretionary spend, which is slowing. We also see that the large deals pipeline is at a very strong level. We see somehow some balance in the cost programs also becoming a part of the large deals pipeline. In terms of the macro, we see those areas as of today. We are watchful, and you know, sort of making sure we have early signs if any other areas show this sort of a point in the future.
Thank you.
Thank you. Our next question is from the line of Keith Bachman from BMO. Please go ahead.
Hi. Thank you for taking a question. I wanted to ask you about the sensitivity of your margins to revenue growth. More specifically, what I wanted to see if you could address is we look out over the horizon to calendar year 2023. If revenue growth were to slow to something like 10%, just to pick a number, how sensitive is that growth rate to margins? Specifically what I'm asking, could you let attrition and/or lower subcons, could you reduce the subcontractors and/or just let attrition take your headcount lower such that you could maintain your 21% kinda operating margins?
Just any characterizations on how we should be thinking about the sensitivity of operating margins to the growth rate, which I think you can tell by the question a lot of investors are concerned growth will continue to slow as we look a little bit longer term than your fiscal year. Thank you.
Yeah, I think you I mean, answered most of the question yourself. The reality is that we can pivot our operating model quite fast. Fundamentally in the IT services business, the operating leverage, you know, element is quite, you know, small compared to other fixed cost businesses. You can in terms of more of the points like you've mentioned, right? Firstly, your intake of laterals, your intake of freshers, gradual attrition, the subcon, all these four, you know, literally by quarter you can pivot on these and to get your cost structure in line. I don't think it's a big, you know, drag unlike, you know, high fixed cost industry. In that sense, I think in the past also we've seen it.
A perfect example I would say is looking at the COVID period, where in six months pretty much everybody in the industry, you know, when they were seeing negative growth, had pivoted at least on the margin front. Of course we didn't see degrowth during that time. Nonetheless, even the slower growth at that time we were able to pivot our entire cost model.
Okay. Yeah, to be clear, I wasn't asking you to guide margins. I was just asking for the sensitivity when we think about it, but I think you're answering that you can manage your cost structure regardless of the revenue growth rate, to sustain margins even if growth were to slow. Okay. Any comments more specifically on, you know, how we should be thinking about attrition as you exit the year? You said you would move it lower, but you know, should we be thinking, you know, kind of a point a quarter or how should we be thinking about attrition as we look out to the end of your fiscal year? That's it for me. Thank you.
Yeah. I think like, Salil has mentioned, you know, three consecutive quarters of decline, 2.5% decline in this quarter itself. Indicators going into Q3, because we have in a lot of geographies like a 90-day notice period, and that gives us a reasonable view of what's coming ahead. We continue to see that, you know, a good figure of attrition going down.
Okay. Many thanks.
Thank you. Our next question is from the line of Aniket Pande from ICICI Securities. Please go ahead.
Hi. Thank you for the opportunity. I just have two questions. Salil, wanted to understand the trend of your TCV number. Wanted to understand how the mix between cost optimization and transformation deal trends changed since last three quarters. Has the deal tenure increased now as compared to before?
Thanks for the question. This is Salil. First, on the large deal pipeline itself, are you asking on the TCV we declared as large deals?
The trend between the TCV actually.
The large deals.
How the mix has changed between cost optimization and transformation.
Yeah. There, on the large deals itself, we have looked at it within our numbers. That's not information that we have shared outside. What I can share with you is what we see in our pipeline today is a good focus on cost programs. We are also seeing because of the growth of core that I shared earlier, that we have both sides growing. Of course digital growing over 30%. We also see now the cost programs which core reflects in part are also growing.
Thank you. Last question. If I turn to pricing, right? Just wondering what the tone and tenor of pricing conversation have been and how they have progressed since last two quarters. Right now, how are you building in? Thank you.
Yeah. Like we said, you know, it's horses for courses. It is client specific. It is whether there's a new deal, is it a renewal, is it a FP deal? Is it a T&M? Is there a COLA clause? It is really, really complex. One message clearly I'd said is that we have actually first seen discount, which used to be a quite, you know, a large eroder of pricing, you know, in terms of renewals, et cetera. That definitely has come down. There's a lot more focus with this on the client, and the clients also appreciate that because they're seeing the same impact on their attrition, et cetera. These are some of the things we've seen.
COLA clauses, we are seeing a large implementation of that being able to push some of the COLA increases. In some cases, it is you have to show more value to customers in terms of digital rate card, what are you able to offer to clients in terms of transformation dollars? Like I said, it's varied across clients. Like I said, it's gonna be a long haul. We've never said it's gonna be easy, and that continues.
Thank you.
Thank you. Our next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.
Hi, good evening, team, and thank you for taking my question. My first question, Salil, was for you to help us understand on the deal win side. We have seen quite a sharp acceleration in deal wins, especially in the new deal side, which has almost doubled both quarter-over-quarter and Y-o-Y basis. At the same time, we are talking about some caution coming in at some of the verticals and some of the clients taking more cautious turns. In that context, what is driving the sharp increase in our new deal wins? Is it that these discussions for caution are still at the CXO level, and we are yet to see the impact of that in the deal wins? Or these concerns are getting compensated by higher focus on the cost side?
Thanks, Rakesh. Salil, the deal wins, I think, represent the strength that we have on both sides of the capabilities on digital and on core automation. What we are seeing today is we have the ability to be appropriate for clients, depending on what macro they are facing. As the overall macro evolves, we have both sides, let's say, ready for that. There, my sense is we have sort of a differentiation from our peers with this approach. We've also put a little bit more emphasis within our pipeline on proactively looking at automation cost deals with our clients. That is what's driving it.
Having said that, it's also to be kept in mind that large deals are deals which are over INR 50 million for us, and we've always maintained that there is no sort of quarter-on-quarter trend on this. It's more to look at, you know, four-quarter period and gives you a sense. That's also something to keep in mind.
Got it. Thanks for that. Second question was for Nilanjan Roy. You have talked about margin band, and margin coming closer to 21%. We have already done 21.5% in this quarter. That effectively implies we are not expecting sequential margin improvement meaningful from here on. That is in the context when we are talking about that the supply side concerns have started easing and our subcontracting cost is also coming down. Where do these two points meet when the supply side issues are resolving, but we do not expect margin to expand from here on this year?
Yeah. I think firstly we are at 20.7, right, for H1. Like we said, it's tight, given the guidance to 21%-22%. We also going into Q3, Q4 in a seasonally weak quarter as well because of furloughs and working days. Those are straight away a drop down to margins. Yes, we are seeing some of the benefits which we are getting from a lower attrition figure. All these basically play into, you know, the guidance which we have given, for the year.
Got it. Thank you. That answers my question.
Thank you. Next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.
Yeah. Thanks for the opportunity. Two questions. First, about moderation in revenue growth trajectory, which you are implying from the revised guidance. Can you help us understand, you alluded to some of the segments which are likely to be softer. Even after considering, there seems to be some sizable moderation which is happening in next two quarters. If you can provide some sense whether any specific industries where you are seeing more weakness or client-specific situation. Second thing is about the deal intake. Now, you indicated about cost efficiency program and cost takeout programs is showing uptick kind of thing. Do you think it would lead to higher deal TCV closures in next few quarters?
Any mega deal which you can, let's say, how the mega deals pipeline is shaping up, and if you can provide some progress or clients are deferring to take those kind of decisions? Thanks.
Hi, this is Salil. I didn't follow all of it. The first one I think is talking about the future Q3, Q4 growth in the segments. If that's the question, we won't give more color for future growth firstly by quarter or by segment. Overall, I go back to what we shared earlier that the macro environment has some areas which we are looking at with more caution. Overall demand, the large deal pipeline is strong. Both sides of our engine, both engines are doing well, digital and core and automation. I didn't follow the next point.
The second question was about the cost efficiency program or the cost takeout. Generally, they are large in TCV because of senior and overall volume efficiency which clients are generally expecting. Considering the mix is now tilting toward those program compared to discretionary digital program, do you think deal TCV will be showing uptick, which we have seen even in Q2, which is 7-quarter high kind of deal TCV?
On the cost optimization, if I follow what you're saying, we see good discussions of that with our clients. In some of the industries, we see more of that in others at a moderate level. That's where we are seeing a good traction which is also showing up in the growth of core services. Deal TCV, again, to us, you know, quarter by quarter it can go up and down because these are deals over $50 million, and these deals take some time to build up, as the lion's share is at 27 deals in Q2. If I look more on an annual cycle, you know, there's a good way of looking at large deals across.
On a quarter-on-quarter basis, we don't have a like a simple way where we forecast it. It can go up and down.
Let me rephrase the question. Do you think the size of the deal between digital and cost takeout, by nature cost takeout will be larger in size or you don't think any such trend?
Oh, the size of the deal. Sorry, I did not follow that. No, I don't think so, because sometimes there's a very large digital transformation program at a client, and sometimes there could be a large modernization plus cost efficiency program. Sometimes there could be only cost efficiency program. There is not like one is larger and one is smaller like that.
Understood. Thank you.
Thank you. Our next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.
Yeah. Hi, good evening. Thanks for the opportunity. I wanted to ask on the client performance this quarter. I think most of the revenues have come from the non-top 25, and top 25 has been relatively soft. Just wanted your thoughts on, is that what you're seeing? Do you see that softness sort of continuing? Do you think, you know, the remaining can sort of hold up? That's the first question. The second one is, do you think the
I think over the past two years, there were a lot of smaller sized deals that sort of was a reasonable mix overall, and that sort of led to faster velocity and deal conversion, deal to revenue conversion. Do you think, in the new sort of setup wherein it's more cost optimization, the deal to revenue conversion should slow down or there's no such purpose there? Thank you.
I'll start with the second one. In general at a higher level, there is no big correlation between the conversion of a deal to revenue. Sometimes there is an immediate large impact because there is early transformation, sometimes there is rapid transition, and other times it's more drawn out in the size of these specifically large deals which are more than $50 million. There is no real like a conversion like that which is, you know, you can correlate it to something. The first point was on, I think, the top clients, right?
Top clients. I think the question was about those 25 clients, you know, the decline from 36.3 to probably 35.3. No, I don't think there's anything reading in that. In fact, I'm also seeing it for the first time. One thing to be kept in mind is also there's a lot of cross currency applicable during this time, right? So there could be clients in certain geographies, right, like Europe, et cetera, who could be in the mix. Nothing we have seen unusually in the top 25 slowing down or anything like that. Sure. Fair enough. Just one last quick one from my end. How big is capital markets for us within the financial services piece?
Because I thought that should normally be a cause for concern, but I haven't heard that in any of the calls so far. Just wanted your thoughts on the same.
There, we typically don't break up the segment beyond what we have given in Financial Services. We have a very good business in capital markets across the board, but whole Financial Services has retail, insurance, asset management and capital markets, among other things.
Sure. Is there any slowness that you're seeing within that piece or, maybe that wasn't a call-out at all? Just curious.
The ones we called out at this stage were related to what I shared earlier, which was on mortgages and financial services, parts of retail, high tech and telco.
Sure. Thank you so much, and all the very best.
Thank you. Our next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.
Yeah. Thanks for the opportunity.
Sorry to interrupt. Mr. Shah, this is the operator. May we request you to switch to headset mode, please, and speak? Thank you.
Yeah. Am I clear now?
Better, sir. Thank you.
Yeah. Just if I look at the to achieve the guidance, it's compounded Q on Q. Our screen says 0%-1.2%, which means-
I'm sorry, Mr. Shah. Your voice is fading again. Maybe if you can rejoin the queue.
Am I clear now?
This is better. This is fine, sir.
Yeah, yeah. Can I start now?
Yes, please. Could you repeat the question, please?
Yeah, yeah. The ask rate to achieve the guidance is 0%-1.2% in the next two quarters, which looks softer despite a strong deal wins. Also, we are talking about more cost optimization deal coming along with the digital deals. Is it a client specific issue or is it higher than a normal furloughs are refactoring or this is more a conservative way of looking at things because of the higher macro issue in the second half? I have a follow-up, which I will ask later.
First, what we are seeing typically, as you know, the Q3 has furloughs. We have not estimated anything higher or lower. We've essentially had a sort of a similar estimate to previous years. We typically have both Q3 and Q4 more seasonality for us in the past year, so that's what we've estimated. Then for the macro, what I shared earlier is the sort of color that we've put as we were developing the guidance, and then we factored in the large deals. There is no, let's say, additional view to say whether it's conservative or not conservative. It's those factors we've taken into account and developed the guidance.
Yeah. The follow-up is the question to Nilanjan. If I look at we are implying, EBIT margin guidance of 21.3% in the second half versus 21.5% in the second quarter. This is a Q-on-Q decline versus Nilanjan, your first quarter comment was, into Q3, Q4 Q-on-Q, we may see a Q-on-Q increase in the margin. The way we are in terms of the utilization as well as likelihood of lower subcontracting costs, likelihood of lower pass-through costs, is it fair to say again on margin we are conservative or there are some additional cost headwind which we should be aware about?
No, I don't think it's conservative. I think we are realistic in our margin projections. We see, like I said, certain headwinds. We see some impact of furloughs. Like I said, yes, some of the attrition impacts will come, but those are more long-term impacts. Some of that will be in sub-cons, etc. Also of course, with the seasonality of the volumes, of course the levers in that sense, you don't have growth as a lever really in terms of, you know, operating leverage and attrition to dramatically change your margin profile. So SG&A, for instance, you know, is one of the things where you have some operating leverage. So these are multiple things and that's all factored into the figure which is given for H2 and full year.
Okay. Just last thing on the variable pay, it looks like in the first quarter we might have paid 70%. How was the variable pay payment in the second quarter? Is it a headwind or a tailwind on a Q-on-Q basis?
On variable pay we don't share that number externally. As you know, we will come back with what we do from an internal basis when we disclose it internally.
Okay. Thanks and all the best.
Thank you. Our next question is from the line of Manik Taneja from JM Financial. Please go ahead.
Hi. Thank you for the opportunity. Just had one clarification question related to the margin performance or the margin improvement this quarter. When one looks at our cost schedule, it appears that subcontracting expenses are down by about 120 basis. While in your opening remarks you stated that subcontracting expenses are down 40 basis. Just to understand, is some of the large deals cost optimization being captured in the cost of technical support contractors?
Yeah. I think that is the cost as a percentage of revenue, but the impact on margin is what is the premium you are paying to subcontractors or own employees. It's just not a mathematical impact of, you know, subcontractor costs coming down from 11% to 10%. You know, by that token, if we can bring down subcontractors to zero, our margin can go up by 10%. This is just a premium you are paying to subcontractors which is impacting your margin. That's the 40 basis points.
Sure. One last question was with regards to the hiring that we've seen through the year. We've already hit the full year hiring target, in terms of the fresher intake. How are we thinking about the fresher intake in second half of the year, given the fact that there have been some media reports of companies in the sector delaying fresher onboardings?
Like I said, we will be at 40,000 in H1. We will be above the 50,000. Of course, we'll get back later on, you know, what the number is, but we will go above our 50,000.
Sure. Thank you and all the best for the future.
Thank you. Our next question is from the line of Ravi Menon from Macquarie. Please go ahead.
Hi. Thank you and congratulations on excellent margin performance this quarter, especially considering that utilization has dropped. Could you talk a bit about how you see headroom for utilization and margin improvement, as attrition has started to decline?
Yeah, sure. I think at 83.6%, you know, we are much lower than what historically we've been. But part of it, in a way is that, the freshers which we have gotten, we want to make sure that they are learning both, you know, of course, in our training facility in Mysore, plus on the bench. We are very cognizant of not putting them into projects on day one. Therefore, we are ready to take a hit on, you know, the margins and utilization on account of this because this we know is a long-term investment for us. At the end of the day, we strongly believe the industry can only grow through this fresher intake, year-on-year, and then that's an investment we are ready to make.
Over a period of time, of course, we know we can, you know, demand picks up and we are able to train them, we can rotate them into projects. We are quite comfortable. Of course, we want to get this figure slowly inching back towards our more comfortable 85 area.
Great. Thanks. When you talked about concerns starting to emerge in industry verticals like retail, high tech, telecom, and the manufacturing subvertical, have we actually started seeing project cancellations or are we just seeing slower decision-making for new programs?
Today we are seeing where there are discretionary work, then we see slowness in that area. We will keep a watch on anything else that starts to develop in those specific industry verticals.
Salil Parekh, should I read that to mean there have been no cancellations yet?
We don't see cancellations of programs. We see slowness in the discretionary part of the programs.
Okay. Great. Thank you so much. Best luck.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference back to the management for closing comments.
Thanks everyone for joining us. Just a few comments from me to close out. In summary first, we really have both sides, both engines in our business, digital and core growing, which is very strong for us. Digital capabilities and Cobalt are resonating, and core and automation, we believe we have a leading, industry-leading set of capabilities, and that makes us ready for the evolving macro environment. We had large deals of $2.7 billion, which we are delighted with, and we had a very strong margin performance of 21.5%. So margin is clearly part of our focus, and we have a strong internal cost program that will help us drive all of these things.
Attrition is coming down, so we see a huge impact of the initiatives that we'd put in place some time ago. Overall, we feel we had a good quarter, and we are well positioned for the environment that's coming ahead, in whichever scenario that evolves in that environment. Thank you all for joining, and we'll catch up in a quarter or so.
Thank you, members of the management. Ladies and gentlemen, on behalf of Infosys Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.