Infosys Q2 23/24 Earnings Call Transcript

Quartr
Provided by Quartr
October 12, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the Infosys Earnings Conference Call. As a reminder, all participant lines will be in a listen only mode. And there will be an opportunity for you to ask questions after the presentation concludes. Please note that this conference is being recorded. I now hand the conference over to Mr.

Operator

Sandeep Mahendra. Thank you and over to you, sir.

Speaker 1

Yes. Hello, everyone, and welcome to Infosys' earnings call for Q2 FY 'twenty four. Joining us here on this call is CEO and MD, Mr. Salil Parekh CFO, Mr. Nilanjan Roy and other members of the leadership team.

Speaker 1

We'll start the call with some remarks on the performance of the company for Q2, Followed by comments from Salil in Milanjan, subsequent to which we'll open up the call for questions. Kindly note that anything we say with reference to our outlook for the future is a forward looking statement, which must be read in conjunction with the risks that the company faces. A full statement explanation of these risks is available in the filings with the SEC, It can be found on www.sec.gov. I'd now like to pass it on to Salil.

Speaker 2

Thanks, Sandeep. Good afternoon, good evening, good morning to everyone on the call. Thank you very much for joining us. We've had a Strong quarter in Q2. Our growth was 2.3% quarter on quarter and 2.5% year on year in constant currency.

Speaker 2

Our operating margin was at 21.2%. Large deals was at the highest ever for us at $7,700,000,000 And 48% of this was net new. Our Q2 large deals include 4 mega deals. It does not include the MOU we signed and announced for $1,500,000,000 We see that with our large deal wins in the past two quarters, we are winning market share in the area of cost, Efficiency, automation and AI. This is a testament to our strong position as partner of choice for clients.

Speaker 2

With a clear focus on client relevance, as the economic environment changed, we rapidly pivoted From delivering transformation projects to also delivering productivity benefits and cost savings at scale. These large and mega deal wins help us to build a strong foundation for our future. We continue to see the overall environment where digital transformation programs and discretionary spends are low And decision making is slow. This is impacting our volumes. The adoption of Topaz, Our generative AI capability set is helping us deliver more value and to increase market share.

Speaker 2

We're currently working on over 90 generative AI programs. Our work is with proprietary and open source large language models. We continue to make investments in generative AI as we look to help our clients navigate the way forward with deep capability. We've trained 57,000 employees in generative AI. We've announced the launch of our compensation review program for all employees Effective November 1, our margin expansion program is being driven comprehensively across the company.

Speaker 2

We have 5 areas of focus: pyramid, automation, critical portfolio, indirect cost and value. And it has 20 specific tracks within these five areas. We are delighted to welcome Rafael Nadal and Iga as our brand ambassadors. We are thrilled to be recognized on Kantar's list of most Valuable Global Brands at number 64. With the continued reduction In digital transformation programs and discretionary spend and the ramp up of our large and mega deals Towards the end of our financial year, we are changing our growth guidance for this financial year To be growth of 1% to 2.5% in constant currency.

Speaker 2

Our operating margin guidance For the financial year remains unchanged at 20% to 22%. With that, let me hand it over to Nilanjan. Thanks, Alil. Good evening, everyone, and thank you for joining the call. Q2 revenue growth was 2.5% year on year in constant currency.

Speaker 2

Sequentially, revenues grew by 2.3% in constant currency and 2.2% in dollar terms. While we saw continued softness in underlying volumes, Revenue for the quarter was supported by stronger growth in the balanced portfolio and improved realization from one timers. H1 revenue growth was 3.3% in constant currency terms and operating margins were at 21%, which is the midpoint of our Guidance range. Highlight for Q2 was the large deal TCV of $7,700,000,000 of which a sizable 48% was net new. Consequently, our H1 large deal TCV is at $10,000,000,000 which has already exceeded the total large deal signing for FY 'twenty three.

Speaker 2

I will talk about it in more details later. As announced in the previous quarter, we have launched Project Maximus, which a margin improvement plan across 5 pillars and over 20 tracks. This program has been well received across the organization, And we have been able to identify several new opportunities across the pillars. We have also seen some early benefits in some areas like utilization and optimization of overheads. We remain confident that this program will create a more meaningful impact on operating margins in the future.

Speaker 2

Operating margins for Q2 were 21.2%, an increase of 40 bps sequentially, bringing H1 margins to 21%. Increase in operating margin sequentially was due to 0.5% from cost optimization benefits comprising of higher utilization, striking, etcetera, 0.3% from revenue one timers, 0.1% from rupee depreciation, offset by 0.5% It's increased due to 3rd party cost, salary related and other items. Client metrics remain strong with the number of $50,000,000 clients Increasing to $80,100,000,000 clients at $39, reflecting our strong ability to mine top clients by providing them multiple relevant services. We are rolling out FY 'twenty four compensation hikes for employees effective November 1. Headcount at the end of the quarter stood at 328,000 employees, A decline of 2.2% from the previous quarter, our focus on improving operating efficiencies has resulted in an improvement of utilization excluding trainees From 81.1 percent to 81.8%, which we believe has further room for further optimization.

Speaker 2

Long LTM attrition for Q2 reduced further to 14.6%, while quarterly annualized attrition was flat sequentially flattish sequentially. Fresh free cash flow for the quarter was robust at $670,000,000 and the conversion to net profit for Q2 was robust at 89%. Our unbilled revenues dropped for the 2nd consecutive quarter and consequently this has partly led to an increase in DSO by 4 days Sequentially to 67. Consolidated cash and equivalents of that 4,200,000,000 at the end of the quarter. The Board announced an interim dividend of 2018, an increase of 9.1% when compared to last year.

Speaker 2

EPS grew by 1.7% in dollar terms and 4.6% in rupee terms on a year on year basis. Yield on cash balances was 6.7% in Q2. ROE was 30.9%, an improvement of over 8% under the current capital allocation policy started in FY 2020. We had an excellent outcome in our large deal wins, thanks to our strong client relationships and the relevance of our service offerings. We signed 21 large deals in Q2, including 4 mega deals.

Speaker 2

As mentioned, the total large deal TCV was $7,700,000,000 with a strong 48% net new. We signed 6 large deals in retail, 5 in manufacturing, 4 in telecom, 3 in FS, 2 in life sciences And 1 in URS vertical. Region wide, we signed 12 in America, 8 in Europe and 1 in ROW. Coming to vertical segment performance. Outlook continues to remain uncertain in Financial Services sector with slowdown in areas like mortgages, asset management, investment banking, Cards and payment.

Speaker 2

Q2 growth was impacted by spend reduction in some large clients, which was partially offset by ramp ups or large deal wins In areas like cost optimization and vendor consolidation, we remain cautiously optimistic about medium term outlook due to the movement to cloud led by increased need for real time insights and analytics. Growth challenges in communications sector continues, coupled with increasing OpEx pressures, Risk of inflation, high interest rates and supply demand imbalances are creating near term uncertainties. Delays in decision making continues. Our Strong large deal signings and pipeline will help support growth in medium term. The recent deal with Liberty Global reinstates our position as a lead in partnering with clients to provide significant savings as well as innovative ways to transform the landscape.

Speaker 2

Eurus clients are taking a conservative approach to discretionary spend and the trend is likely to continue through the year. In energy, Pending remains cautious due to the economic slowdown with focus on cost takeout and ROI. Utilities, especially in North America, continue to feed the pressure from high interest rates, Resulting in delays in capital intensive programs, European utility players are continuing to make investments on legacy modernization. With the external and while the external environment continues to be volatile, manufacturing sector continued to show double digit growth year on year in Q2. Our capabilities in areas like digital transformation, cloud ERP, supply chain, smart factory, etcetera are resonating well with clients resulting in benefits With vendor consolidation in turn leading to stronger deal signings.

Speaker 2

While pressure on discretionary spend continues, there are opportunities in areas like infra transformation, cost consolidation, etcetera, which is resulting into stronger pipeline. In the Retail segment, budgets continue to remain tight with Clients continue to focus on budget consolidation, cost and efficiency, interest on Gen AI is growing and clients evaluating our Topaz offerings to modernize the Enterprise and refactor, reengineer and deploy code. While we had a very strong sequential growth in Q2, the underlying softness in volumes And discretionary expense continue. We have revised our revenue growth guidance for FY 2022 to 1% to 2.5% in constant currency terms. Our deal signing and strong pipeline lays the foundation for acceleration and growth beyond FY 2024.

Speaker 2

We retain our margin guidance band for the year at 20% to 22%. With that, we can open up the call for questions.

Operator

Thank you very much. We will now begin the question and answer question is from the line of Bryan Bergin from Cowen. Please go ahead.

Speaker 3

Hi, good evening. Thank you. So I wanted to just start with the growth guidance reduction. I'm trying to understand if the reduction Is more due to the delay of the large GL ramps versus what you had expected 3 months ago or if it's more due to incremental volume

Speaker 2

This is Salil. I think it's a combination of those points. There's The way large programs start off, there's delays in starting them. There was also as we were Signing these deals, the cycle was a bit longer in closing them, so that had a bit of slowness. And we are seeing discretionary Spend, which is coming down, and we saw that continuing on transformation programs Being slow that continuing on in this quarter.

Speaker 2

So it was a combination of those products.

Speaker 3

Okay. Appreciate the color. And then just on margin, Noren, and understanding you have the wage increment that you just announced here, But you also have margin tailwind through Project Maximus. So can you give us some color on where you're finding comfort within the margin range that you affirmed here Sorry, I know you're roughly at the midpoint here through the first half. Do you expect to be above or below that as you go through the second half?

Speaker 2

Yes. So like I said, we had a good quarter too. And as I explained in my margin walk, we nearly had a 50 basis points Improvement from our Project Maximus on cost optimizations, and that gives us comfort for the rest of the year and that the program is, of course, this is a much longer This will take not only into this year, into next year as well. We also realize that we have apparent Inefficiencies, our utilization is still low. So these will go and help us and have cost offset the wage hikes, etcetera.

Speaker 2

So we have a good program over the next 18 months to see where we end up and of course, aspirations continue to be that to improve margins from where we are

Speaker 4

Thank you.

Operator

Thank you. The next question is from the line of Kabiljit Saluja from Kotak. Please go ahead.

Speaker 5

Hi, thank I have a couple of questions. My first question is that can you quantify the revenue one timers? And are these revenue one timers In 3rd party items bought for service delivery to clients or those are separate?

Speaker 2

Yes. See that in the margin walk, we've talked about 30 basis points impact on margin from revenue one timers. So it's Going to be around that figure or slightly more than that. So these are largely will fall through straight to margin. What is the second part, Kavan?

Speaker 5

Okay. The second part of the question is that, can you detail on the verticals to which the mega deals belong? And the other question related to the deals is that normally you expect The direction of revenue growth and deal wins to synchronize, whereas actually they are moving in the opposite direction. So what needs to change For the synchronization to happen again.

Speaker 2

Yes. So, Kamal, we don't give out which segments the mega deals Following under the second part was you're saying where will revenue and the large deal announcement synchronized? Is that the question?

Speaker 5

Yes, yes, absolutely. I mean, they seem to be moving in different directions. I mean, with the $7,700,000,000 mega large deal wins, you would have expected a happier picture On growth outlook, whereas things seems to have changed there. So what needs to change for the synchronization of growth and How are deal wins and growth to happen, yes?

Speaker 2

Sure. So I think one is, of course, mega deals, as you know, post signing, They have a runway in terms of firstly, in some cases, they may have rebadging. So that's a time it takes. Sometimes they have regulatory approval, so you can't even do people Transfer and then of course there's a transition period and then of course post transition then of course there is a transformation element or a run. So these are all steps in the process.

Speaker 2

And as you can imagine, being such large deals, these cannot override the turned on in terms of us taking over the entire landscape, So they have to be planned through entirely. And therefore, it takes a couple of quarters before they start bleeding into the revenue figures. And like I said, this will set us up well for FY 'twenty five fundamentally. And as Anil said, in the near term, In the quarter, there is, of course, the underlying volume sluggishness. And of course, we have to recognize that part as we build in our forecast for this year.

Speaker 5

Okay. And what's the deal pipeline like after the recent conversion of pipeline into a mega deal? So how does the pipeline look like? Is it significantly lighter or does it stay remarkably strong?

Speaker 2

It's a strong pipeline, of course, with 7.7, and I Thank you, Julkhan. It can't be higher than the previous quarter, but it's a very strong pipeline. And of course, we will continue to have enough in the funnel to start refilling this.

Speaker 5

Just a final question on deals. I think the past experience of mega deals and the transition of that into profitability Has not been very encouraging. But if I look at your comments and Salil's comments, all of you have highlighted that your Profitability aspiration is to improve your profitability. You want to improve your profitability. Now at the same time, you have those mega deals as well.

Speaker 5

So how does the profitability dynamics play out, especially given the past context?

Speaker 2

So, Kavan, as you know better than anybody else, when we set out the large deal strategy more than 5 years back, we were close to about 21% margin. We have signed probably $50,000,000,000 plus of large deals, and today we are 21,000,000, 21.2,000,000. So We've not seen any margin erosion because of the large deal strategy, right? We recognize over all these periods and this experience which we have, We will sign on these large deals. Of course, upfront, they will have margin pressures.

Speaker 2

And from a portfolio perspective, as you look in the deal tenure, We have our experience to say how we can improve the margin of the deals on day 1 versus say in year 5. And in a way, that's the portfolio we are able to rotate, go and get deals. At the same time, with our cost Optimization programs make these deals approach portfolio margins. And I mean, like I said, the proof for the pudding is in the meeting, dollars 50,000,000,000 of large deals later, margins Where they

Speaker 5

were? Okay. Sure. Thanks. Thanks a lot.

Operator

Thank you. The next question is from the line of Moshe Katte from Wedbush Securities. Please go ahead.

Speaker 6

Thanks and congrats on very strong TCV bookings for the quarter. So if we're trying to kind of figure out The conversion pace of some of those large deals that, I mean, I guess at this point, it seems that we haven't seen a lot of that conversion happen. But When do we start seeing that reflected in better topline growth? Is the March quarter next year And it could be the quarter when we could actually see better comps for top line growth because of those conversions. Is that the right way of looking at it?

Speaker 2

Yes. So there are a number of deals in this pipeline. Some will start in Q4. Some which we signed last quarter have already started coming a bit of that into Q3. So it is it's not like one day we suddenly have These 21 deals, which of course have rebids inside.

Speaker 2

So they are phased. And in terms of even ramp ups, you will see it's not that You hit the run rate on the day of the revenue booking, right? Some of them take a longer period. So it's a combination of all that.

Speaker 6

Okay. And do we and these are just to be clear, these are the deals that are funded with The calendar 'twenty three budget, you don't need calendar 'twenty four budget to continue funding these deals. Is that the right way of looking at it as well?

Speaker 2

Sorry, can you repeat that? I couldn't hear that Moshe?

Speaker 6

Yes. So the deals that you've won this year are funded with calendar 'twenty three budgets. I just want to confirm that, I. E, you don't really need the approval calendar 24 budgets to continue funding these deals. Is that the right way of working at it?

Speaker 2

Yes. So it's many of they have already come out of existing budgets, but Many of these are actually cost takeout programs in this environment, right, vendor consolidation cost takeout. So actually, we

Speaker 5

are giving money back In

Speaker 2

a way to the organization, which is why in a way we are winning these deals, right?

Speaker 6

Yes. Good. And then the final question, Do you have any view, maybe Sudil can talk about that, about calendar 24 budget cycle that probably should start Maybe by next month. Do we feel that the budget cycle is going to be on time? Do you think there's going to be budget delays, Which is what happened earlier this year.

Speaker 6

What are you seeing at this point based on some of the quant conversations that you're having? Thanks, Mark.

Speaker 2

Thanks. Yes, this is Salil. The way we are seeing the client conversations today, We don't see a change that's come about. There's a lot of constraints with clients whether it's on transformation programs Or discretionary projects, which are significantly reduced or slowed down. So that thinking is continuing on.

Speaker 2

As you pointed out over the next few weeks, we will get a better sense if that's changing either Improving or not for the following year. But at this stage, that's the mindset we are seeing. And there's that attention on cost And efficiency, which also continues as we are seeing in discussion. So the conversations that we've been having over the last few months Is the same tone we see as they go into the end of the year for next year's budgeting? We don't see a change in that at this stage.

Speaker 2

Understood. Thank you.

Operator

Thank you. The next question is The line of Kumar Rakesh from BNP Paribas. Please go ahead.

Speaker 4

Hi, good evening. Thank you for taking my question. My first question, Salil, was

Operator

Am I may request to speak up a bit? Your audio is a little low.

Speaker 4

Yes. Is this better now?

Operator

Yes. Go ahead, please.

Speaker 4

Thank you. So Salil, my first question was around the volume performance during the quarter. You did talk about that it is under pressure and last quarter also you had talked about. So during the quarter, how the volume performance you saw through the quarter? Was it further deteriorating since where we saw last quarter?

Speaker 4

And Is your guidance implying that there would be further deterioration outside of the seasonality in the coming two quarters?

Speaker 2

So the volume specifics, I didn't share. I mentioned that there was continued Constraints or pressure on that. What is happening, if you step back a little bit is There's impact on revenue, which is from slowing or stopping of discretionary work And all the transformation programs. And then we have on the other hand with The large and mega deals, some of those starting off that giving us benefit on the revenue side. So there we saw the volume constraint from the first part of that in this quarter.

Speaker 2

In the coming quarters, you know that Well, we will have in Q3 the usual seasonal impact with the end of the calendar year holidays and so on. And typically for us, for Infosys, Q3 and Q4 are softer quarters in any case. We anticipate that. We don't have a view which is different from that. That's how we are looking at it going in.

Speaker 2

But these things are Changing as we go through each quarter. So we were fortunate. We delivered a very strong quarter, but we are just as we look out, we can see the pressures With the clients and that's what gives us the reason to be watchful on both those sides.

Speaker 4

Thanks for that. My second question was during the press conference, you did talk about that Infosys is working on proprietary large language models. So clarification is, are these models that you're working on Infosys own or these are for clients or your So ecosystem partners and what kind of models, use cases and data set you are using for them?

Speaker 2

So there what I was referring to was proprietary models from our partners. So we are not developing Large language model of our own. We are working as you know again, there are a large number of these models which are already in the market. Some of them are proprietary and some of them are open source. We are working with both types of those models.

Speaker 2

Typically, we are working in what's called The narrow transformer approach, which really we start to see Data sets, which are little bit more enterprise focused, which allow enterprise A large client to take advantage of that data set for their own activity. And the applications, Again, you've probably seen that. We are seeing applications on, of course, software development, on text, On voice, on video, so we are seeing applications today on all of these areas, actually working on all of these areas And that is for the clients and then we're doing some work inside Infosys as well for our own activities.

Speaker 4

Got it. Thanks. That's very helpful.

Operator

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

Speaker 2

Yes. Thanks for the opportunity. The first question is, Nilanjan, in your opening remarks, you mentioned that The mega deal wins and the robust order book signing will help us to accelerate the growth in the beyond FY 'twenty four. So is it fair to say most of the deal wins of this year will have solid support in terms of the growth pickup in the FY 'twenty five? Yes, I mean, these will translate into revenue one day.

Speaker 2

So like I said, they will start in FY 'twenty five and like somebody else answered, of course, it's not like on one They all start together, so they will have a run up. But absolutely, they are we'll some of them will start even sooner in FY 'twenty four towards the fag end.

Operator

Thank you. We move to the next question that is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Speaker 7

Yes. Hi, good evening and thank you for the opportunity. I had two questions. So one is On discretionary spends, yesterday, I think your peer had mentioned that They don't think discretionary spends recover even in 2024. Just wanted your thoughts on how are you Thinking about this overall, and in the context of this, well, we have seen very strong deal wins this time around.

Speaker 7

And obviously, those are deals that would have been Under the hood for maybe the last 12 months, which have all closed, when you look at it going forward, Do you think that deal activity per se could sort of slow down? Is there a risk there? Or if you could give some context in terms of pipelines versus how it was before these deals closed and how is it today? Is there a lot of replenishment that needs to be done to reach back the same level? Yes, that's the first question.

Speaker 2

So on the first part, we don't have a view on financial year 2024 In terms of volume and so on, what we are sharing today is what we've seen for example in Q2 And what we observed from that, keeping in mind some of the seasonality of this coming quarter And the end of our financial year. On the pipeline or deal activity, As Nilanjan was sharing, we see a good pipeline. Of course, the deals we have closed have come off of the pipe come out of the pipeline, But it's still a good pipeline for us. There's a lot of interest from clients in cost and efficiency and automation, Which is where many of these large and mega deals have come in. There's a good interest in consolidation, which is where Some of those deals have come in and we continue to gain market share in that.

Speaker 2

So we feel good about it. And there is that continuing interest in that type of work?

Speaker 7

Sure. The second question was The underlying assumption on the guidance, if I understand right, is that the revenue accretion from these large deals will be very minuscule This year and you have headwinds on the discretionary side. The bigger accretion should really happen maybe Next year. So this year is very minuscule. That's a very fair assumption?

Speaker 2

Yes. So I mean, the definition of miniscule can vary the definition of miniscule can be quite different. But yes, I mean, it's more largely in FY 'twenty five, absolutely.

Speaker 7

Yes. So I meant on a quarterly run rate basis, would it be minuscule of that coming into the revenue versus what you originally thought? That was the context.

Speaker 2

Yes.

Speaker 7

Sure. Fair enough. And lastly, In terms of the headwinds on discretionary, which verticals really stand out in terms of where you are seeing the maximum pressure? That's the last question. Thank you.

Speaker 2

Yes. I think as we mentioned the 3 verticals, I think you can see it both sequentially, you can see it year on year, you can see it with the peer group. It is financial services, it's mortgage, it's asset management, it's parts of retail, it's communication. And I don't think we are any different from Any of our peers, I think everybody is calling out these three verticals as being soft.

Speaker 7

Sure. Fair enough. Thank you so much and all the very best.

Operator

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

Speaker 1

Yes. Hi. Thanks for taking my question. Just two questions from my side. We started the year with the guidance of 4% to 7% for FY 24, And we've basically downloaded that guidance second time this time around.

Speaker 1

So just I mean in the last call, this call, we had mentioned that Maybe in the first guidance, there were some assumptions there, which did not play out and we were we had a fair bit of conservative numbers into the 1% to 3.5% guidance which we had given last time. So just want to understand that, I mean, we have been getting good deals all along, especially in this quarter. And as you mentioned that, Mohan, you have some of the views at any time. So what has changed from the time that we gave the first guidance to this time In terms of the projects that we have that we are already having the existence, is the discretionary part of that which is being put on hold much larger than anticipated? Is there any one [SPEAKER SRINIVASAN VENKATAKRISHNAN:] Single or a couple of large projects which have kind of stopped contributing the amount that we had accepted.

Speaker 1

Anything from that color would be really helpful.

Operator

[SPEAKER SRINIVASAN

Speaker 2

VENKATAKRISHNAN:] So there is no one project or one specific client that is Where this is coming from? I think as we look at each quarter, we look at the combination of The two streams on discretionary work and on digital transformation and other programs, How that's slowing down, where it's slowing down, what the volume implications are. And then we look at How the large and mega deals are coming into the revenue stream. And that's what's leading us. As we look out, when we see changes in the discretionary work Or we see some slowing down of decision making for closing deals or slowing down In the start or ramp up, those are the factors that come into play as we look at the revenue outlook.

Speaker 2

And then as we come into this time of the year especially, we look at The seasonality in Q3 and Q4 and how the thinking is In the client buying environment, so that's really the combination of things that we do. There's not any one Activity which has led to that change for us.

Speaker 1

Got it. Any specific pockets of weakness which you have seen deteriorate at a much sharper rate than anticipated? It could be maybe vertical wise Or maybe a specific domain, let's say cloud adoption or any other domain, what is it across the board?

Speaker 7

So the

Speaker 2

way we see in terms of industries, We have a similar sort of view from last quarter, the ones that Nilanjan outlined within Financial Services, Mortgages, asset management, if you look at high-tech, Telco, some parts of retail. So those are the ones. We've not seen any sort of dramatic Changes in that, but those are the ones that where we see the impact.

Speaker 1

Got it. Sure. Great. Thank you so much for taking my questions and wish you all the best.

Operator

Thank you. The next question is from the line of Ashwin Mehta from Ambet Capital Private Limited. Please go ahead.

Speaker 5

Yes. Thanks for the opportunity. Niranjan, just one question in terms of the 3rd party bought out items that seems to have added almost 75 odd 1000000 This quarter, so do you see this item sustaining or it kind of falls off? And is this one of the reasons for your weak guidance?

Speaker 2

Yes. So like I said, this is sometimes integral to our strategy as well, because we are doing large Scale transformations and sometimes they have elements of licenses of software, hardware and size. And therefore, I mean, our guidance takes into account both volumes and any impact of any of that kind of the portfolio, a non Headcount portfolio as well.

Speaker 5

Okay. Okay. And in terms of wage hikes Next quarter, what is the impact on margins that you see or the quantum of wage hikes that you're giving out?

Speaker 2

So we just rolled it out. We cannot say what's going to be the impact, but it's like we said, it's effective 1st November.

Speaker 5

Okay. Fair enough and all the best.

Operator

Thank you. The next question is from the line of Kaurav Lateria Morgan Stanley. Please go ahead.

Speaker 8

Hi, thanks for taking my question. First one is that, does your guidance factor in the Current environment remaining similar in the next two quarters or it kind of further deteriorates from here because it's Kind of implying a decline sequentially over the next two quarters. So just trying to understand what's the underlying assumption on the current environment?

Speaker 2

I think the way we're looking at the guidance is Typically, Q3 and Q4 are seasonally weaker quarters. So that is something we factored in. In addition To what I was sharing earlier, the slowing of discretionary transformation and With the large and mega deals, seeing how the ramp up will look like as it converts. But we've looked at more what we see seasonally weaker Q3 and Q4 from Our historical perspective.

Speaker 8

Got it. Secondly, you froze a couple of mega deals in the last few months. Now when you look at your large deal pipeline, how do you characterize this? Do you still have Mega deals that you're pursuing which can close in the coming months?

Speaker 2

So there we've Closed 4 of these mega deals that I referenced earlier. We have A good pipeline, we are not detailing beyond that the type of deals. What we see is the deals that we've closed have come off, but there's a huge appetite with clients For cost and efficiency and those tend to be larger within even our large deals pipeline. So yes, we will see some of those larger deals going ahead there.

Speaker 8

Got it. Last question to Nilanjan that the project Simas, that you talked about, is it fair to say that the full benefit would accrue to the company in fiscal 25, and it just started to kind of trickle into the numbers in recent quarter, but the full benefit will accrue in FY 2025?

Speaker 2

So like I said, there is a very complex program. There are number of tracks. So they have new ideas as we See, each quarter, so you will see an impact over, like I said, maybe 18 months of this program and throughout I'll be tracking it every quarter. And like I said, in some time, you will see a faster benefit like utilization, for instance, is clearly something which is Here and now, so you'll see some of that impact even faster, but some of course take longer to materialize.

Speaker 8

Thank you.

Operator

Thank you. The next question is from the line of Keith from BMO. Please go ahead.

Speaker 9

Hi, thank you very much. This is Keith Bachman from Bank of Montreal. The first question I have Sorry to interrupt you. Your voice is

Operator

A little bit muffled, can I request you to use the handset more closer to you?

Speaker 9

Yes, absolutely. So you've mentioned a few times that Discretionary spend or discretionary projects are a reason for revenue guidance and reporting. Can you tell us what percent of your revenues would you characterize As being sourced from discretionary areas, is it 30% of total revenues, 40% of total revenues? Any Rough estimate you could give us on how much of your revenues are generated from discretionary sources?

Speaker 2

Yes. So we don't really give that number out in public domain. So I think that's where we are. Of course, generally, we have fixed price projects. We are more committed.

Speaker 2

The T and M side of the house will have a bit of variability into it, but we don't give the discretionary, really.

Speaker 9

Okay. The 7.7 percent the second question is the 7.7 percent large deal TCV. Within that number, do the clients have the ability to cancel those contracts? And what is if it's Yes. What's the cancellation rate been over the last few quarters versus historic norms?

Speaker 2

See, these are largely signed contracts. They take time to ramp up. So we have not seen any real cancellations really. They may take longer to ramp up than originally Infosys, but there are no cancellations there.

Speaker 9

Okay, okay. Fair enough. Perfect. And then my last question is, As you think about, Infosys in TCS and Accenture and other IT services organization are experiencing challenges Growth, so it's an industry wide issue. Against that backdrop, when you think about Pricing that your clients are willing to accept, have you seen any changes in like for like pricing When you're negotiating with clients for large deals or otherwise, has that changed at all?

Speaker 9

Or is the like for like pricing Remain fairly steady even in this week macro backdrop.

Speaker 2

Yes, I think you're right. I think largely it's been stable. Of course, in some quarters, you can see few clients are coming back and asking for discounts. But I think overall, even if I look back, it has been in terms of the annual renewals, etcetera. I think pricing has been more stable Over the last year, 2 years as a general trend, I would think, in the industry.

Speaker 2

Of course, deal to deal, they are it gets completed hard. But overall, I don't see a deteriorating

Operator

The next question is from the line of Yogesh Agarwal from HSBC. Please go ahead.

Speaker 10

Yes. Hi, guys. Just one question on large deals, which have been extraordinary, almost 2, 3 times of your past run rate. Was curious, what is the share of large deals from existing customers versus new? Can you just give some context there?

Speaker 2

So there again, we share the net New amount, which is 48%, but we don't share what is from new client versus not new client.

Speaker 10

Okay. So, Salid, the reason I'm asking is it's very intriguing that clients are not spending on small discretionary projects, But avoiding such mega contracts, so is it possible since this year everyone is cautious, they are just clubbing a lot of smaller projects Thanks. Awarding in larger deals, which means next year we will effectively have 2 years of catch up on discretionary spend.

Speaker 2

Some of these deals Have been publicly announced. These large programs are a combination of Many times are cost or efficiency automation programs and sometimes are programs which take all of that, let's say, The saving that the client is likely to accrue and from that fund some transformation programs. So these don't appear from our interactions to be a consolidation of smaller discretionary work. These are large independent programs. And that's why we feel first that in that space, which is today Really more active, this cost efficiency space.

Speaker 2

We seem to be gaining market share. And that those With the way they're being set up and what we see, give us a good foundation for our future.

Speaker 10

Great, Renaud. Thank you so much, sir.

Operator

Thank you. The next question is from the line of Vivek Ghedda from SBI, Mr. Sun, please go ahead.

Speaker 2

Hi. Thanks a lot for the opportunity. Shailesh, in fact, just on your comments that you just made, I just wanted to get a sense of the market share gains that you have been talking about Currently, because of these large deal events, could you give us a sense of how these market share gains have been versus the past? Are you seeing quite a bit of acceleration out there and how to think about it? So there, We are seeing more discussions on cost or consolidation.

Speaker 2

And when you for example have Win, as we've had over the last few quarters in consolidation of partners with the client, There's a significant change that changes the market dynamic within that client. And then we put all of these things together between some of the large programs you got on cost efficiency and then on consolidation. It looks like we seem to be gaining traction. We have a very good capability set on automation And clients are appreciating that. So that seems to be the reason why we believe or we think that it looks like we're gaining market share in those But is there a way to think about somewhat 1?

Speaker 2

Is there a way to quantify from the sense that Are you seeing that client budgets are actually not increasing, while you potentially are winning more deals versus what Your peers, HR? Difficult for us to say on a So the macro level, but I think generally speaking, the client budgets, at least we don't see those Increasing at that this stage. Got that. Secondly, I also wanted to get a sense of Tenure of some of these large deals that you have won, and in the context of how it has been historically. So while there have been, let's see, Probably logical to expect that these are long tenure deals.

Speaker 2

But if you could give us a sense of how ACV growth has been versus the TCV growth? So there, some of them with the disclosures we've done have that information. But we don't generally speaking share that information for the aggregate and certainly not Vis a vis what was going on in the past. But for the specific ones where we've had the disclosures, we've shared that information. Got that.

Speaker 2

Just lastly from my side, I just wanted to also get a sense on this third party items Bump up that we got was 30 basis points, which is relatively lesser than what we see here. Is that different items and how to think about that? Absolutely. They are different items. And in the way in the margin walk, I also talked about the one time having a positive impact and The license sales, etcetera, having a third party cost having a downward impact on margin, we are different.

Speaker 10

Got it. Thanks a lot.

Operator

Thank you. The next question is from the line of Abhishek Kumar from J. M. Financial. Please go ahead.

Speaker 2

Yes. Hi, good evening. Thanks for taking my I was also trying to deconstruct this quarter's growth. It seems to me there is a volume decline Just showing by the headcount decline and small increase in utilization and so Is it the realization which has helped us or some of the one time Which you mentioned and it has been asked in the previous questions also. Or is it that some of the smaller deals Like $50,000,000 less than $50,000,000 which we don't disclose.

Speaker 2

The uptick in those deals are kind of inflow of those deals Has kind of dried up significantly, which is basically resulting in mega deals needed to kind of sustain the volume growth. So Faiza, as I in my opening remarks, I said that we are continuing to see softness in the underlying volumes And the revenue for the quarter was supported by stronger growth in the balanced portfolio and improved realization from one timers. Okay. So my question also was, while I know we don't give the numbers But the contribution of $11,000,000 deals in our revenue contribution or pipeline, How has that changed? The reason why I'm asking is, it seems that without the mega deal or large deals ramping up, There is a sustained pressure on margins, and these deals could be it could be difficult to time when really these deals will ramp up.

Speaker 2

So in the absence of that, The contribution of smaller deals, has that really kind of changed as a proportion of revenue over the last few quarters? So we don't give out this information yet. Okay. Thank you and I'll go ahead.

Operator

The next question is from the line of Apoorva Prasad from HDFC Securities. Please go ahead.

Speaker 2

Thanks for taking my question. Salil, I had a question on the headcount, which how should we really think about That's progressing over the next few quarters. It's been down 5% over the past few quarters with utilizations that have been flat, so should we Expect that to play. Yes. So you have to triangulate across volume, attrition, new hiring And utilization, I mean, the broad message is that even with the utilization increase today to 81.8%, we still have headroom to improve the utilization further.

Speaker 2

So that should give you a sense of things to come. And of course, we continue to monitor overall volumes, etcetera. So there is enough headroom and this is helping us in margins, like I said, at the beginning, right? This is at margin lever which we can use. Right.

Speaker 2

And secondly, any vertical call out in the One timer in revenue that Sudhak said earlier?

Speaker 1

Purva, do you have any other question?

Operator

Apurva, your line is muted, I guess. Do you have any other follow-up questions? Ladies and gentlemen, that would be our last I now hand the conference back to the management for their closing remarks. Thank you and over to you.

Speaker 2

So thanks, everyone. This is Salil. Thank you for all your questions and the interactions. I just want to close on a few points. First, We've had an incredible quarter on large and mega deals really with $7,700,000,000 the largest we've seen In the company for a quarter and this gives us a good foundation for the future.

Speaker 2

The quarter itself was great In terms of sequential growth and operating margin, we've got a comprehensive program on margin Expansion, which is in place with several large components and tracks running across The company and we continue to invest in generative AI where we're making great connects with clients, especially leveraging Topaz. So those really are the main points from us. And thanks very much again for joining in for the call.

Operator

Thank you very much, members of the management. Ladies and gentlemen, on behalf of Infosys, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.

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Earnings Conference Call
Infosys Q2 23/24
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