Ladies and gentlemen, good day, and welcome to the L&T Technology Services Limited Q3 FY 2024 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 a touchtone phone. Please note that this call is being recorded. I now hand the conference over to Mr. Pinku Pappan, Head of Investor Relations. Thank you, and over to you, sir.
Thanks, Rico. Hello, everyone, and welcome to the earnings call of L&T Technology Services for the third quarter of FY 2024. I am Pinku, Head of Investor Relations. Our financial results, investor release, and press release have been filed with the stock exchanges and are also available on our website, www.ltts.com. I hope you've had a chance to review them. This call is for 60 minutes. We will try to wrap the management remarks in 20 minutes and then open up for Q&A. The audio recording of this call will be available on our website approximately 1 hour after this call ends. With that, let me now introduce the leadership team present on this call. We have Amit Chadha, CEO and Managing Director; Abhishek, COO and Executive Director; Alind Saxena, President, Sales and Executive Director; Rajeev Gupta, CFO.
We will begin with Amit providing an overview of the company performance and outlook, followed by Rajeev, who will walk you through the financial performance of the company. Let me now turn the call over to Amit.
Thank you, Pinku. I wish everyone a very happy new year, as well as a very happy Lohri, Pongal, Makar Sankranti, based on what you celebrate. With that, let me start with the key highlights of our Q3 performance. We grew by about 1% sequentially, with all five segments growing for the second quarter in a row, which is a good sign, shows secular growth. Medical led the growth to 2.4%, while transportation and telecom high-tech grew by about 1% each. We are pleased that two of our business units, Europe and Industrial Products, have now scaled to $200 million run rates on an annualized basis each. Our deal wins was very healthy.
Six deal wins of $10 million+ TCV, of which one was a $40 million deal, the second was a $20 million deal, a third was a $10 million+ deal in cyber. Additionally, we had two significant empowerments that we have already announced. Our operational performance continues to be strong. We improved our EBIT margins to 17.2%. Last quarter, we had talked about how we were investing in software-defined vehicles, AI, and cybersecurity. We made notable progress in each of these areas, and I shall provide details of the same in my segment commentary. In December, we held our second Client Advisory Council meeting, consisting of 16 members with a combined market cap of $2 trillion and revenue of $400 billion. We also hosted the second Digital Engineering Awards along with ISG and CNBC.
We gained a lot of perspective and insights from these meetings, which is baked in our growth strategy and my commentary today. Let me now start with transportation. We see a continuous buildup of deal discussions around new technology across all three subsegments: auto, commercial vehicles, and aero. SDV is where the next big wave of spending will happen. Last quarter, I talked about how we had started engaging with multiple customers across OEMs and Tier 1s to help them in their SDV journey. You would have also seen our announcement of partnering with AWS to accelerate the development of software-defined vehicles. I'm happy to share we won an engagement with a U.S. auto OEM to define their SDV architecture. In this multi-year partnership, we will help them in the development of the system, software architecture, and integration.
This is a milestone win for us and will help us in our ongoing SDV discussions with multiple OEMs and Tier 1s in the U.S. and Europe. I also wanna highlight that SDV is becoming relevant in commercial vehicle segment, too, which follows the same trend as auto by investing first in EV and now SDV. With a U.S. construction and mining agent, we have been working on their EV platform, and now we are helping them with their SDV architecture as well. We continue to see EV-related spending moving from new products to a product optimization, benchmarking, and performance improvement. On the aero side, we won a large deal in avionics. We are also having deal discussions with a few new logos in new-age aerospace, like electric hybrid aircraft, building on our earlier wins.
Overall, three large deal wins and an SDV win in Q3 give us a lot of comfort with strong growth continuing in transportation. In plant engineering, we had broad-based growth across FMCG, O&G, and chemicals. The key highlight of Q3 was the start of a significant relationship with BP, as part of which we will help them in operational excellence and low-carbon initiatives. This marquee client win reflects our two-decade-plus plant engineering design expertise, combined with digital transformation capabilities that we've been investing in. The broad demand trends across all three subsegments are similar, as customers invest in new CapEx due to more regionally self-sufficient supply chains, embark on plant modernization to increase efficiency, and look at sustainability investments, like reducing energy consumption and moving towards greener fuels. We are excited about the pipeline and strong customer spending outlook that gives us confidence of plant engineering growth continuing.
At Industrial Products, we are seeing good growth within machinery and power subsegments, although building automation remains unchallenged. Our demand is driven by customer investments in digital platforms, need for higher product efficiency, factory optimization, and sustainability. Life Cycle Assessment is an emerging area of demand. We are working on AI-driven automation solutions that will reduce time to market for our customers. Cybersecurity continues to be of interest, as legacy systems and products are getting connected and modernized. We are optimistic on growing in IT, which will be driven by digital products and supply chain resilience. In telecom and high- tech, we are seeing signs of a turnaround in Semicon, with the spending freeze in the past few quarters being lifted slowly. In Q3, we won a large deal with a Semicon major to consolidate their labs.
Demand is strong in the VLSI chip design space for 5G and AI-related chipsets. In addition to the clients in Palo Alto, we have now signed a $12 million deal in cybersecurity with a telecom network OEM. We are seeing a very good acceleration in our cybersecurity practice post the addition of SWC talent. This deal is our second large deal leveraging SWC in the global market. We are seeing good opportunities in network automation and digital infrastructure management as telcos look at cost takeouts and performance improvement. We are partnering with telcos to help enterprise customers leverage next-gen communication networks for industrial automation, security, and material handling. In media and ISV, we are seeing more cost takeout and vendor consolidation opportunities as focus turns towards higher productivity and efficiency.
Overall, we see a good pipeline in telecom, high tech, and expect growth to continue gradually improve as the deals get closed. Lastly, medical. We had a good performance in medical, led by the ramp-up of a large deal win that we won in Q2. Demand is driven by three key areas: digital platforms to enhance patient experience and diagnostics, complaint handling and remediation, digital manufacturing and supply chain optimization. We see a great potential in leveraging AI in healthcare. For example, we have developed an AI solution for complaints handling that is finding good traction with customers. This differentiated solution combines AI with domain-specific content and context, like regulations to improve process efficiency. You would have also seen our press release of a collaboration with NVIDIA to develop GenAI and advanced software-defined architectures for medical devices.
Overall, we believe budgets will be constrained in medical in the short term, but we see consolidation and AI-driven opportunities to help drive growth forward in the medium term. Now, a few highlights on our digital engineering and technology progress. Our engineers continue to innovate. We had a total of 51 patent filings in Q3. As you are aware, the pace of filings increased. Our cumulative filings are at around 1,250 from around 1,000 a year back. In AI, which is one of our three investment focus areas, we have filed a record of 53 patents till date across segments like transportation, auto, medical, and industrial products. We have partnered with the likes of NVIDIA, AWS, Google Cloud, which will help us create AI and automated solutions to address our customers' priorities. The result of our investments can be seen in industry rankings.
You know, in their 2023 rankings have rated us as leaders across 14 engineering domains and an overall ER&D leader for the 8th year in a row. Additionally, we've been rated as leaders in data and AI, engineering services, digital engineering services, and Industry 4.0. Let me now discuss the outlook. The common themes emerging from customer discussions is that spend in FY 2024 will either increase slightly or remain the same, but will not see declines. Second, clients are actively considering core versus contextual spends, and there will be deals as they try to move contextual work to providers like us. Number three, there will be cost takeout and value engineering opportunities on product and supply chain as customers focus on higher productivity and efficiency. The contour, size, and color of deals will change and will require deployment of next-gen skills.
As an outcome of this, we have seen our pipeline improve over the last quarter, deal velocity being similar to Q2. We are working on multiple double-digit deals in SDV, AI, digital, and next-gen comms that will help our trajectory. We are expecting strong wins in Q4, and for FY 2024, we reaffirm our revenue growth guidance of 17.5%-18.5% in constant currency. In summary, it is my belief that winter is over and spring is around the corner. With that, thank you. I will stay back for questions, and I now hand over to Rajeev.
Thank you, Amit. Good evening to all of you, and wish you a very happy new year. Our Q3 FY 2024 performance was healthy, with double-digit year-on-year growth, both on revenue and profitability and improvement in operating margin. Let me now take you through quarter three FY 2024 financials, starting with the P&L. Our revenue for the quarter was INR 2,422 crores, a growth of 1.5% on sequential basis. Our YOY growth for Q3 came in at 12.3%. EBIT margin grew by 10 basis points to 17.2%, largely driven by gross profit margin improvement. The EBIT margin is in line with our aspiration of 17%+ for FY 2024. Moving to below EBIT, talking about other income. Other income was INR 49 crores, higher on sequential basis due to one-time gain from release and consolidation of facilities.
Our effective tax rate for quarter three was 27.6%, in the range as our expectations of 27.5%.... Net income for the quarter was up 13% on Y-o-Y basis and came in at INR 336 crore, which is 13.9% of revenue. Moving to balance sheet, let me highlight the key line items. DSO came in at 102 days at the end of Q3, flat as compared to Q2. Unbilled days was 18 days compared to 16 days in Q2. The combined DSO, including unbilled, stood at 120 days compared to 118 days in Q2, which is within our target range of 115-125 days for the year.
Talking about cash flows, our year-to-date free cash flows were at INR 628 crore, which is at 65% of net income. This fiscal year incurred higher CapEx for technology investments and consolidation of facilities. We aim to improve collections and DSO to drive higher FCF conversion going forward. Our cash and investments stood at INR 2,273 crore at the end of Quarter 3, versus INR 2,270 crore at the end of Quarter 2. This was flat due to interim dividend payout of nearly INR 180 crore in November. Moving to revenue metrics. On a sequential basis, dollar revenue was 0.9%, both on constant currency basis and in reported terms. We saw a broad-based growth in Quarter 3, with all segments growing quarter-on-quarter, led by medical devices segments.
The segmental margin performance was better in three out of five segments on a sequential basis, with improvement in transportation, telecom, high tech and plant engineering segment. Now let me comment on operational metrics. The onsite-offshore mix was moved slightly towards onsite as compared to Q2. Offshore percentage now stands at 58.7%. We continue to work on measures to gradually improve this matrix to our aspiration of 60%. The fixed price revenue mix was 38.5% in Quarter three, higher compared to Q2 on account of movement in milestone-based contracts. In terms of client profile, which indicates number of million-dollar plus accounts, has shown a sequential improvement of two customers in the 20 million-plus category. The client profile will continue to improve in the coming quarters.
Client contribution to revenue has shown a slight improvement in the top 5, top 10 as compared to Q2. We expect revenue from top customers to improve going forward as we are running targeted programs on client mining. Headcount decreased sequentially by 582 employees on account of initiatives to improve productivity, while attrition dropped by 90 basis points to 15.8% as a result of both internal employee engagement measures and reflecting the industry-wide trends. Realized rupee for Q3 was around 83.3 to the dollar, a depreciation of circa 1% versus Q2. Before I conclude, let me give some visibility on EBIT margin trajectory going forward. Despite a challenging year, we've delivered consistent margins so far and continue to remain focused on maintaining FY 2024 EBIT margin at 17%.
This will continue to happen through a combination of revenue growth, operational rigor, productivity improvements, and cost optimization measures. Amit has already highlighted that we are seeing all five segments grow and have a good pipeline of opportunities across segments. With technology shifts towards SDV, AI, next-gen communication and cybersecurity, we will continue to make necessary investments to support capability building and future growth. Having said that, we maintain our medium-term aspiration of 18% EBIT levels by H1 FY 2026. With that, I now hand it over to the moderator for questions. Thank you.
Thank you very much. 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, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to two per participant. Should you have a follow-up question, we would request you to rejoin the queue. We will wait for a moment while the question queue assembles. Thank you. The first question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.
Yeah, hi. Thanks for taking my question, and congrats on a very solid performance. So only two questions from my side. One question is a very telling concluding statement from your side, that the winter is over and spring is around the corner. So just wanted to understand, I mean, what is what has changed vis-à-vis three months ago that gives you this confidence? I mean, the deal wins had been strong for us through the year, and we had been giving quite solid performance as well. We're looking to grow 17.5%-18.5% this year now, which we were also expecting at the end of the last quarter.
So what has changed in the client conversations or, the outlook or the demand environment, which gives you the confidence to basically say that? And then I have a follow-up question on the, basically a bit on the mathematics of the revenues. I mean, I remember the... I mean, last time I think we discussed that AWS business has some seasonality for better H2 than H1. This quarter, the telecom business doesn't appear to have grown sharply on a Q-o-Q basis. And now as per the maintained guidance, the ask rate for Q4 becomes very high, around 5%-8%. So is that seasonality in SWC more Q4 driven? And how does this maths for the guidance work out to be?
Well, thank you so much. So number one, Vibhor, when we talked in October, what I had mentioned to you was that we were polling our customers, talking to them, asking them what's happening, where is their head right now in terms of spend, et cetera. So what we have seen is, as we continue to close deals quarter-on-quarter, right, and I'd also shared with you that deals are taking longer. That has not changed. Deals are taking longer to close. We are taking double the amount of time, effort, et cetera.
We had built up a good set of deals that were in play, and that have—because just by the sheer volume of those, they continue to close on a, you know, on a regularized basis, and that's what we have announced, and you've seen that, right?
Yeah.
There are still deals in play right now as I speak that potentially could close in the next 2-3 weeks that will help us in the current quarter as well, right?
Mm-hmm.
And this is across the board, this is not just SWC. I want to confirm that. As we have talked to our clients, what we take away is that we believe that software-defined... So three things that come out at a very broad level. Number one, software-defined everything is something where people continue to create spend areas for CY 2024. Broad commentary from our customers and their action thereon have been that they don't see cuts in 2024, they see steady or slightly higher in CY 2024. So we are starting to see some of those ramp-ups for ourselves as well.
Third, people are going to a lot more, regionalized and localized supply chains, and that means a lot more work in plant engineering and digital manufacturing, and we are seeing that as well, as a positive. And finally, there is an acknowledged shortage of talent, engineering talent in Europe, and we have seen advantage of that as we've seen Europe growing for us, right? So with all that said, if I may, we do believe that, the CY 2024 should bode well. And again, we continue to work on this. We continue to have conversations. We continue to meet our clients and be in the marketplace. In fact, I'm actually heading out today night. I'm flying back. It's a very short trip. I want to stay in the market if I can.
Our presence in markets is leading today. We want to make sure that we are as much in the marketplace with our clients as possible, and that gives us a little bit of confidence, as we stand today.
Got it. Got it. Very helpful for the detailed explanation. My second question is, you could take, please, in terms of the math for the Q4, which appears to be quite high in around 5%-8%. So is that going to be a seasonality thing driven by SWC? Is that going to be a recurring feature of the business now, that we have this, when you had mentioned it's to to be better than H1?
So thank you so much, Vibhor, to ask that. So let me state this. My math in constant currency is approximately between 4%-7% sequential growth. And I can confirm to you that, as we stand today, I am fairly comfortable between that 17.5%-18%, and we are working towards the upper half of the range. There is a number of deals in play. We are anticipating some large deals that will add revenue in quarter four. In addition, there is a ramp-up anyway committed for quarter three deals that have started. So I hope that gives you a complete answer.
So just, I mean, just to extend on that, so you got that math. So that 4%-7% growth you're saying is going to be a broad-based growth, and this is not necessarily driven by some seasonality in SWC?
I am confirming that the 4%-7% growth will be secular across verticals, barring medical, which I said will be muted in the immediate term.
Got it. Got it. Thank you so much, Amit. Thanks for taking my questions, and I wish you all the best.
Yes.
Thank you. A reminder to all participants, you may press star and one to ask a question. Ladies and gentlemen, you may press star and one to ask a question. Our next question is from the line of Dipesh from EmKay Global. Please go ahead.
Yeah, thanks for the opportunity. 2 questions. First, just want to understand about the two impairment agreement which we highlighted. Can you just provide more detail whether the deal which we announced, that is part of that deal or these are two separate things? And this quantification may be separate. So if you can provide some sense about the quantification or maybe potential size of this engagement, and whether it is different than the way we earlier used to have deal signings. If you can provide some context to it. Second question is about the medium-term aspiration, $1.5 billion, which we indicated. Can you provide some sense? Because it still requires significant growth trajectory to continue. So like Q4, we expect 5%-odd QGR kind of thing for next four quarters, if you can provide some color around it. Thanks.
Thank you so much. So let me address the $1.5 billion first, and then I'll go to the others. Our aspiration to be $1.5 billion remains. It did bake in some amount of inorganic part, and therefore we are evaluating it. So please allow us, when we come back in April, at the end of March to March quarter to come back and give that clarification to you. So we have an active M&A pipeline as well. So please allow us till March to come back and give that clarification completely to you. But the aspiration is there, it still remains, number one. Now on empanelment, et cetera, I'll answer it two ways. So there are 6, 10 million-plus deals, okay?
Of that $60 million, one is a $40 million deal, the second one is a $20 million deal. The third one, which I want to call out, is a cyber $10 million+ deal, and then there are other three other $10 million+ deals. In addition to this, there is an empanelment with BP. We are calling it an empanelment. It's the beginning of a relationship which we will work together on and build up in the areas of green energy as well as digital transformation. We will work with them, and we are going to work very hard to see how we can get this to a top ten client for ourselves in the next few, shall I say, a new next few quarters, and let it go. You know, for us, we need to let the story play out.
But we are working very hard with our customer, developing that relationship. There's a team already working, and it will contribute positively to the revenues of the company for FY 2024. The second one, I would request my President, Markets, to talk about a little bit, and that is an empanelment for software-defined vehicles with an auto OEM. Alind, over to you, if you want to give a little color on that.
Right. Thank you, Amit. So we, as you're aware, we have made a broad investment in SDV over the years. We have created some solutions. This is one of the fulfillments that has come through. There is an increased traction that we have on SDV. There is a lot of work which is going to be done by the OEMs as they take control of the complete vehicle history and future. We are one of the selected parties. The ramp up has actually already started in different geographies. We expect it to continue over the next few quarters with a majority of that happening between this quarter and next quarter, and then it will stabilize or it will grow as we see the demand come back. But we're excited about this.
We also, well, I can confirm to you that there is another one that we are working on with a major Tier 1, which we should see in the next few weeks, come through as well. Both of them add to the SDV story that we are developing, and this is to be played out over the next year.
Thank you.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. Our next question is from the line of Ravi Menon from Macquarie. Please go ahead with your question, sir.
Hi, thank you for the opportunity. I just wanted to ask about automotive. You know, do you think that if the European Union you know, dilutes the 2035 sunset for ICE engines, that could be potential headwinds in the traction we've seen in automotive?
Thank you so much for that. Look, I would look at the automotive spends coming out actually in multiple areas. It's not just electric. The transportation spends are coming out in software and connectivity. They're coming out in electrification, of course, hybridization. They're coming out in connected mobility, in the area of additive manufacturing and in interiors, right? So there are multiple parts. In fact, think about a car as an experience zone, a transmission zone, and a connected zone. I mean, that's broadly how you look at a car. So there are various kinds of spends that are happening, and we believe that that should continue. Also, please realize that the kind of work that we get is generally about on a model year, that's about four years out. So these short-term blips here or there don't impact the design cycles.
If anything, we have, there are a lot more planned, et cetera. So at this stage, for quarter four, for next year, we do think transportation will continue to grow across automotive and commercial vehicles.
Great. Thank you for the detailed answer. On aerospace, you know, you have been empaneled by Airbus, if I recall right, as one of the strategic vendors. You know, I know that unlike, say, one of our competitors, we don't have any manufacturing facility as such. Do you think this is a disadvantage for you in aerospace compared to peers who have that capability?
No, because, look, manufacturing is a very different ballgame. We are not a manufacturing entity. We are a engineering entity, engineering and technology entity. We are in fact, seeing, in the aerospace and rail, right, both of those, and one of our wins, $40 million-plus win has been in comms in, in the rail network area. We believe that, you know, there's a lot to be done on connectivity around, there's a lot of stuff to be done in avionics. And we'll see how things progress.
Thank you so much, and best of luck.
Thank you. Next question is from the line of Bhavik Mehta from J.P. Morgan. Please go ahead with your question, sir.
Thank you, and happy New Year to the management. Three questions. Firstly, you know, just on the quarter itself in Q2, like, what surprised you positively and negatively in terms of the demand across the various verticals? Secondly, you know, last time you had spoken about pressures in telecom, high-tech and then even medical. Now, you highlighted that medical still remains under pressure, but it will be worse over in terms of demand for telecom, high-tech and then even do we start to see more activity from there on?
Lastly, on the guidance, you know, 4%-7% trade for the fourth quarter, how much of this confidence is coming from the deals which have already won and you start ramping up, versus deals you are aiming to close in this quarter? Basically, trying to understand what is the risk that you, you miss the guidance when you report in April. Thank you.
So let me address it this way. The positives that we saw in the current quarter was number one that all five segments grew, right? And that is important for us. Number two positive sign for us was the lowering of our our our attrition rate, because our attrition rate came down further. Third was positive was 53 patents that we have filed in in AI, if I may. And then there's a lot of others in terms of the deal wins, et cetera, that we have had. The negatives, very honestly, if I look at it was that I would have potentially hoped the number of vacations and the number of furloughs could have been slightly lower and would have helped us a little bit in this quarter.
But no harm done, because I do see that work-life balance is becoming very important for colleagues across the world, and people are taking serious vacations, right? Or seriously taking vacations. So we are seeing that impact coming in the last two years on us, and it's a trend. I'm seeing that, and on a different conversation, I'm happy to dwell more into details, but we've seen that post-COVID, people taking a lot more vacations than they normally do. So, so that, you know, was not strictly negative, but that was one of the things that would have hoped for differently. Now, let's go to guidance and our confidence. So if I look at it, it's a 4%-7% growth sequential that we are looking at constant currency.
So if I take 4-7, I think four to about, you know, 5.5 odd, do the translation, right? Because I talked to you already about the fact that the lower end of the guidance I'm fairly confident about. It's the upper end of the guidance, guidance that I'm working towards. So you translate that to the quarter, and that's what I'm working towards. We'll see how it goes, and we'll keep you appraised as we move forward. It always includes the lower end of the guidance includes already the stuff that is ramping up, and the upper end will include stuff that we'll win and we take forward.
Okay, very nice. So just on the vertical, is telecom, high tech, and plant engineering. Look at it from here on, we see some pressure out there, like we have in medical.
I'm sorry, can you repeat that, Bhavik? It was a little unclear.
I was asking if telecom, high tech, and plant engineering verticals have you reached the bottom over there and will we start to see growth from here on, or do you still think it will be a gradual recovery, which might take, you know, six months?
Thank you. So plant engineering, we are hiring very actively, and I do believe that you will see growth from here on in plant. I don't see a problem in plant. High tech as well, you will see, you know, will be, will be there. It'll be a slightly more gradual than plant. Plant will pick up faster, and prior to high tech in terms of percentage growth.
Okay, that's helpful. Thank you.
Thank you. Our next question is from the line of Akshay Ramnani from Axis Capital. Please go ahead.
Hi. Thanks for taking my question. So first question is on the geography side. So Europe has been doing very well for us for past four, five quarters, so... And US at the same time has been flattish. So can you explain this dichotomy and help us understand which verticals in Europe are doing well, and which verticals in US are pulling the growth down?
Okay. So, do we provide details by vertical and geo? Okay. So I'll give this thematically, right? So if I look at Europe today, Europe is growing on the back of three or four things. Number one is transportation. Number two is, there is growth happening in, partly industrial products and partly plant. There is not a lot of medical in Europe. It's very small. So that's where you're seeing the growth areas coming from, and digital manufacturing, which plays into industrial and plant as verticals and even in transportation. So we are seeing that growth, these four areas. So transport, industrial, plant, digital manufacturing, which is horizontal, is where we see growth in Europe. And you are right, the team has done very well.
We are proud of the team, and thankful to our delivery and sales leaders that have together made this happen. If you remember, some quarters ago, there was a question with your Europe strategy, right? I promised you that we will come around, and I'm happy that that growth is visible and very visible. Now let's go to the U.S. The U.S. has got all five verticals, right? In the U.S., we've been constantly challenged in the, shall I say, in the high tech area, telecom and high tech area. At one time, there was a weak Semicon, there was a weak ISV, and that had been the problem. In the current quarter...
So, you know, currency-wise, it has shown a degrowth, but I want to confirm to you that from a geography standpoint, which includes some India, currency billings, or rupee currency billings, U.S. has grown. Not at the same pace as Europe, but it has grown. Leading the growth in Europe, in U.S. today, is plant engineering, is transportation, right now, IP, and medical, while high-tech has been pulling it down. I do have confidence that we, as we move forward, into the subsequent quarters, there are some deals that are being talked about within the U.S. and in Europe, and, as they fructify, you will start to see this balance getting better. Last, ROW, I do want to confirm that Japan in constant currency grew for us yet again in this quarter.
You will continue to see growth in Japan, and Japan is largely focused on automotive, IP, and a little bit of high tech, and all three of those have done well for us. We are trying to build medical in Europe and in Japan. We are trying very hard. It takes a little bit more time because this is a conservative sector. Work continues to be done in this area. But I assure you, same time next year, I should be able to give you more in medical in both these areas.
Thanks for that detailed answer, Amit. So, another dichotomy which I wanted to tie was your comment on the winter being over and the headcount metrics, which we saw reducing this quarter. So I guess last quarter also, we fell short of our initial target of getting 758 net adds. This, in H2, we were supposed to onboard one thousand additional resources, but looks like it didn't happen in Q3. So can you help us reconcile this dichotomy of a good demand visibility but a reducing headcount in Q3?
So winter and spring also comes with wearing sweaters and taking them off, and wearing jackets and taking them off, right? So part of delayering happened as winter got over, so we have delayered the. On a serious note, we have reduced some areas, we have consolidated certain areas and functions, and you have seen that impact in headcount reduction in support staff between last quarter and this quarter. That is over. What we had to take as actions is complete. So you will see positive headcount going forward, but we are improving our utilization in billable headcount, and we have taken, though we don't announce it, the exact utilization numbers anymore, but we've actually improved utilization by more than a hundred basis points, and that has helped us in being able to bill more as we move forward.
You will see positive headcount as we go forward, and that's part of our balancing act as we move forward to take it forward. I also want to confirm to you that we have taken about, we have made whatever offers we had made to campuses, we will honor all of that and conclude getting everybody on board with the time we end March. We have made close to about 1,200 offers for next year to freshers already, and we are actively looking at how many more we need as we move forward.
Thanks for taking my questions.
Thank you. Our next question is from the line of... Sorry for the interruption. Ladies and gentlemen, you may press star and one to ask a question. Our next question is from the line of Abhishek Shindadkar from InCred Capital. Please go ahead.
Hi. Good evening. Thanks for the opportunity, and wish everyone a happy New Year. So my first question is on the organic growth. I know you may not, you know, dissect the number the way, you know, we would like. But, you know, if I had to ask you that, what you, you know, what we did till now and your commentary of a fourth quarter, is it a fair assessment that, the organic growth, for the current year is relatively better, than what we had thought at the start of the year?
So, Abhishek, a very happy New Year to you as well, my friend. See, look at it this way, that, see, we've actually merged the whole thing, right? In fact, I was telling the board also today, if you say SWC for me now, it's actually an accounting method that I'm having to do it externally, you know, do it for purposes of comparing stuff. But I can tell you that operationally, it's all one team now. There are people that were supporting our India programs are now actually been deputed to support the cyber win that we have had, where we have started work, right? There's a telecom project, with an operator and OEM that we had won, two quarters ago, last quarter, right, Q2, and same team is supporting them as well.
I look at some of the work that we... In fact, I have had to fly in a couple of people from India into the Middle East to have conversations on some comms approaching. In fact, some of our international talent has worked hard to win this, and domestic talent to win this, $40 million win that we have had, et cetera. So difficult for us to parse it, but I do want to say that, our overall growth that we've had this year, of course, you know, we've had surprises, and, we've continued to share with you whenever we have seen those, et cetera. But as you move forward, I believe it's one team providing a lot more secular growth as you see things go forward.
Thanks, sir. Thanks for the elaborate answer. My second question again, you know, is more about FY 25. I know it's a little early, but, given your comments that, you know, standing in FY 2024 January, you appear to be more confident than in January 2023. So if I take those two comments and again go back to the organic guidance that you started off last year, would it be fair to assume that, next year's guidance, at least the base case scenario, should be the starting point of last year?
So, Abhishek, my request will be, please allow us another couple of months, to go back, talk to clients, look at how things are going, because it's a developing situation. We, of course, are, optimistic, but I want to be a little cautious here. That's why I said spring is around the corner. I didn't say spring is here, right? So allow me to travel to spring is here and come back to you. Please allow us April, and I promise you that we will again come back, provide a detailed color, to you on where we see things. But like I said, initial client conversations, CY 2024 looks to be better than CY 2023. No reductions that I've heard of.
Great. Thank you for taking my question, and best wishes for the year.
Thank you.
Thank you. Our next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead. Mr. Sandeep Shah-
Yeah, thank-
Your line has been unmuted.
Yeah, thanks. Thanks for the opportunity. Amit, just the first question is, one of your large peer on the engineering R&D has called out that, he's seeing green shoots on the discretionary engineering R&D spend. So are we also witnessing the same, and if yes, is it across most of the industry segments which we operate?
Sandeep, I will say that if I look at the five segments, right, that we operate in, I definitely see more regionalized supply chain creating more opportunity in plant engineering and digital manufacturing. If I look at high tech, we do believe that AI as well as Semicon will play a better part in FY 2025 and CY 2024, as opposed to others, right? If I look at industrial products, there is some pain still in some subsegments, but anything connected to oil and gas seems to be growing. If I look at transportation, OEMs are doing well. Select tier ones are in a problem, but there are select tier ones that have transformed themselves in their business models and are doing well, right? If I look at medical, I continue to see them being cautious.
Conservative, not cautious, but conservative, but there is enough and more work to be done, you know, once they get off this, get over the conservatism, if I may. One reality also is, Sandeep, that legacy spend is not growing, and that has been part of the challenge that we've had in FY 2024 as well. That. And, you know, the spending that we are doing, investing in creating AI solutions, in building next gen COEs, tying up with AWS, Google, and NVIDIA, filing these patents in AI, all this is to be able to refresh the skill set.
We've actually trained more than 2,000 people already in AI, and the whole goal is we are aware, we know legacy spends will continue to go down, and we will. So what, so I may answer it another way, in three years' time, 60% of what we are doing today will be different while we continue to grow. We have to acknowledge that, we have to invest in it. If we invest in it, and we, first we acknowledge it, and then we invest in it, I can promise you growth will continue. But if we continue to depend on legacy spends, it will be a problem. So that, those wheels of change are turning. Like they say, you know, change the wheels on the bus while it's running. That's what's happening right now.
Okay. This is really helpful. Amit, is it possible to share the split in terms of legacy revenue versus digital revenue for us?
See, again, I may again say it another way. More than 60% of our revenue is digital, but what was-
Okay.
digital, digital three years ago, today has moved to being into support mode and therefore wants to be minimized. So look at it as this way. See, there will be more optimization. And when I shared with you a case last time with some of you, there's a GenAI model that we have created for, it's called our AI framework that we have created, and it's on our website. And we were able to take a particular test case and a machine that we were testing in 1700 hours, we were able to do it in 176 hours. So that's the kind of cut that we're looking at. So unless you are clear, unless you are able to ramp up, unless you are able to provide more value, and like we have done, we've gone into hard.
So, GenAI is not just software and data, it's actually hardware, which is, which is HPC, high performance computing, embedded software development, as well as AI, apps and data. And that's why you've seen us tie up with NVIDIA, with AWS, Google, because we believe in this four-layer architecture, and that's where we think we will, we will prevail and be relevant as opposed to others.
Okay, thanks. Thanks for the detailed answer. Just one observation. If I look at the fourth quarter of FY 2023, my comments, including SWC, we have grown at 10.4% sequentially, and within that, almost 74% of the incremental growth has been driven through SWC. But I think this year we are saying fourth quarter growth may not be skewed towards SWC seasonality. It would be evenly spread out. Is it the right way of looking at it?
So SWC does have a seasonality in Q2, so quarter four, and that will be there. But I'm confirming to you that the other three verticals other than high tech will also grow. And, you know, this is a quarter in play, so we'll see what percentage they grow at.
Okay. Okay. Thanks, thanks, and all the best. Congrats on a good execution.
Thank you. Our next question is from the line of Girish Pai from Nirmal Bang Equities Private Limited. Please go ahead.
Yeah, thanks for the opportunity. Amit, when you said the winter is over, is that applicable only to you or for the broader ER&D players in the market?
Look, I do believe, and somebody quoted our peers, a larger peer as well, about green shoots. You heard us talk about somebody talks green shoots, somebody says winter and spring. So broadly, I think that, you know, I do see that. So let me put it this way, right? And I'm not being biased because I'm responsible for L&T Technology Services or an engineering company. I say it general for the industry. Look, I do believe that ER&D has a different cycle than IT. ER&D is being leveraged by customers far and wide to create new revenue streams, A. B, to be able to fortify their market positioning with more better products. And C, at times showing up their bottom line by being able to improve the supply chain, part.
So there is a direct correlation to top line and bottom line by ER&D. So I have seen in my more than a decade in this sector, that this sector actually helps clients pull out of a bad year. It helps clients in improving and changing their, their services to their customers, and therefore, it's a tool. So I would see, see that the green shoots or winter done, spring around the corner, seems to be an industry phenomenon that you should look at. Again, to be seen as we move forward, and baby steps, step by step, as we move forward. I assure you, as we come back to you in April, we have conversations with you between now and then, we'll continue to keep you appraised, and, and as we move forward. But one reality is that there's a lot more...
The pipeline is bigger than we had same time last year, than we had same time last quarter. We continue to ideate, we continue to reconfirm, et cetera, and continue to create proposals and take it to our customers, and value propositions.
Okay. My second question, there have been a lot of media reports around slowdown on the EV side. There's some discussion around inventory buildup by BYD and all that. So is that having any impact on the auto ER&D services side?
Look, EV, there's no... I mean, and, and I'm sure you guys read a lot more on this subject, that EV component suppliers are in a problem because a lot of those components are being provided from China at different price points to what European and U.S. tier ones are able to provide at. That is creating a mix, a kind of a shift, where a lot of US and European OEM or tier ones are trying to get to lower price points on the equipment, on the components that they are supplying, buying, by doing value engineering, et cetera. So there is that spend that is there. But there is a bigger spend in software-defined vehicles that is coming out by the OEMs, and a lot more work happening on the SoC side for automotive that is there.
I believe that, overall, the spend may remain the same, the color of it may change from one pocket to another.
Lastly, there you mentioned about 4%-7% as a range for growth for 4Q. Does the 7% depend on some of the deals that you're going to win in the quarter, and 4% is broadly in the bag because it's based on your done by Q3?
My dear friend, I should say it like this: I do feel very comfortable with the lower end of that 4-7 range that we have talked about. But I can't say it's in the bag because I'm not invoiced it yet, right? The quarter is not over. But I'm reconfirming to you that the lower part of that 4-7 is, I'm comfortable with. The upper part of the 4-7, we are working towards, and there are deals in the quarter that have to be closed, and we'll, there is an immediate ramp up to those, and we know what those are, et cetera.
Thank you. Mr. Girish Pai, may we request you to return to the question queue for follow-up questions? Our next question is from the line of Surendra Goyal from Citigroup. Please go ahead.
Yeah. Hi, Amit. Happy New Year. So on, on, the billable headcount reduction of 2% sequentially is not usual ahead of 4%-7% sequential growth in the coming quarter, at least based on what we have seen in the sector in the past.
Sorry, sir.
What are... Sorry?
Sir, your audio is not very clear, sir. May we request you to use the handset?
Yeah, I am using the handset. Is it any better now?
No, sir. Did you say something now, sir?
Can you hear me?
Yes, sir. Please go ahead. Now, it's better.
Yeah, Amit, Happy New Year. The billable headcount reduction of 2% is not usual ahead of sharp recovery, 4%-7% kind of growth, at least based on what we have seen in the quarter in the past. So I'm just trying to understand, what are we missing here? Is the nature of deals changing significantly? Are there more system integration-driven deals or anything, anything that we should be kind of aware of when we are thinking about?
Sure. Thank you. So, the following are the things between quarter three and quarter four that you should think about. Number one, the number of working days in quarter four are higher than quarter three, and the number of leaves and furloughs in quarter four are much lower as compared to quarter three, right? So that's one reality. The second one is that we have optimized headcount, and we have been able to improve utilization, and we will continue to do that as we move forward. Third, we have had people join us earlier in the quarter now, rather than later in the quarter, and that will again give us that. And there will be an element of system integration that will come in as well.
It's all those four playing out together, if I may please.
Yeah, understood. Thank you.
Thank you.
Welcome.
Ladies and gentlemen, that was the last question of our question and answer session. I would now like to hand the conference over to Mr. Pinku Pappan for closing comments.
Thank you, everyone, for joining us on the call today. We hope we were able to answer most of your queries. We look forward to interacting with you down the quarter and helping you understand more about our journey. With that, moderator, we can close the call. I wish everyone a very good day and, you know, goodbye from all of us here on the management team. Thank you.
Thank you. On behalf of L&T Technology Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.