Monolithic Power Systems Q1 23/24 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 14 speakers on the call.

Operator

Ladies and gentlemen, 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. Should be in the assistance during the conference call. Please note that this conference is being recorded. I now hand the conference over to Mr.

Operator

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

Speaker 1

Hello, everyone, and welcome to Infosys earnings call for Q1 FY 'twenty four. Joining us here on this call is CEO and MD, Mr. Salil Parekh are CFO, Mr. Nilanjan Roy and other members of the senior management team. We'll start the call with some remarks on the performance of the company for the quarter are available in Milanjan, subsequent to which the call will be opened up for questions.

Speaker 1

Kindly note that anything which we say that refers 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 our filings with the SEC, which can be found on www are at www.sec.gov. I would now like to pass it on to Salil.

Speaker 2

Thanks, Sandeep. Good evening and good morning to everyone on the call. Thank you for joining us. We had a strong quarter in Q1. Our Q1 growth was solid at 4.2% year on year and 1% quarter on quarter in constant currency.

Speaker 2

We had 21% growth in manufacturing, 14% in life sciences. Our Europe region grew by 10%. Operating margin for the quarter was strong at 20.8%. We generated robust free cash flow of $699,000,000 in Q1. Our large deals value for Q1 was $2,300,000,000 56% of this was net

Speaker 3

new. We had

Speaker 2

1 mega deal win in Q1. Our value of deals for financial services was 50% of the overall large deal value in for Q1. We announced a mega deal of $2,000,000,000 value after the close of Q1 and before our results before today. With a strong large deal and mega deal wins, we are building well for the future. Our pipeline of large deals is strong and we continue to have mega deals in our pipeline.

Speaker 2

We are delighted that Topaz, are in the range of our AI and generative AI platform is resonating well with our clients. We are working on 80 generative AI projects for our clients at this time. The work we are doing encompasses large language models for software development, text, document, voice and video. Internally, we have developed are using a new platform for software development. We are working with open source and proprietary generative AI platforms and models.

Speaker 2

We have trained 40,000 employees on generative AI. We see opportunities for new work and for productivity improvements through this technology. All of these elements are available within our Topaz set of capabilities. We see this area of generative AI and Topaz being really transformative for our clients. As we look ahead with our large and mega deal successes and our strength in cost efficiency, automation and consolidation, we feel confident.

Speaker 2

In the short term, we see some clients stopping or slowing down work on transformation programs and discretionary work. This is especially so in Financial Services, in Mortgages, Asset Management, Investment Banking and Payments and in the telecom industry. We also see some impact in the high-tech industry and in parts of retail. Even as we won 2 mega deals recently and have a strong pipeline of large and mega deals, we will receive revenue from some of these and other large deals towards the later part of our financial year. Keeping that in mind, we are changing our revenue growth guidance for this financial year to growth of 1% to 3.5% in constant currency.

Speaker 2

As a consequence of Omega deal wins, overall traction and cost efficiency, automation, are differentiated digital cloud and generative AI capabilities. We are well positioned for the medium term and especially towards the end of our financial year and the period after that, we've launched a broader and comprehensive margin expansion program. The program will work across 5 areas: pyramid efficiency, automation and generative AI improvements in critical portfolios Reducing our indirect costs and communicating and deriving value across the portfolio. Our senior leadership is mobilized on this. We're working on this program with our clients, our employees and partners, and we're taking steps for the short, medium and long term, while keeping the overall strategic direction of the company in mind.

Speaker 2

We have an ambition to improve our operating margin in the future periods. Our operating margin guidance for the financial year remains unchanged at 20% to 22%. With that, let me hand it over to Nilanjan.

Speaker 3

Thanks, Alil. Good evening, everyone, and thank you for joining the call. We entered FY 'twenty four in the backdrop of uncertain macroeconomic environment with clients reassessing their IT spend and continuing to focus on cost and efficiency programs. Q1 revenue growth was 4.2% on a y on y basis in constant currency. Sequentially, revenues grew by 1% in constant currency and 1.4% in dollar terms.

Speaker 3

Operating margin for Q1 was 20.8%, are 20 basis points lower sequentially. This was primarily due to a 70 basis points of benefit from cost optimization, including utilization, automation, which was offset by a balanced 90 basis point impact from employee related costs, including higher variable pay promotions, etcetera. Client metrics remain strong with the number of 50,000,000 clients increasing to $79,200,000,000 clients at 15, reflecting our strong ability to mine top clients by providing them multiple pay multiple relevant services. Headcount at the end of the quarter stood at 336,000 employees, which is a decline of 2% from the previous quarter. Have been backfilled by training and reskilling existing pool of talent and deployment of freshers.

Speaker 3

Have been recorded. Consequently, our utilization excluding trainees improved to 81.1%, which has further headroom for growth. We will calibrate the hiring for FY 2024 based on available pool of employees, growth expectations and attrition trends. Free cash flow for the quarter was robust at $699,000,000 and the conversion to net profit for Q1 remained strong at 96.6%, led by strong collections. DSO increased by one day sequentially to 63.

Speaker 3

Consolidated cash and equivalents stood at $4,500,000,000 at the end of the quarter. This is before the payout of final dividend that happened in the 1st week of July. EPS grew by 6.6% in dollar terms and 12.4% in rupee terms. Yield on cash balance was 6.71 percent in Q1. ROE increased to 32.8% in Q1, a 1.8% increase year on year, which is a reflection of our strong cash generation and capital allocation policy.

Speaker 3

Large deal momentum continued and we signed 16 large deals in Q1. TCV was $2,300,000,000 with 56 percent net new. 3 deals each were in FS, ERS and Communication, have 4 in retail, 2 in manufacturing, 1 in life sciences vertical. Region wise, this was split by 11 in America, 4 in Europe and 1 in ROW. Are now available.

Speaker 3

Coming to vertical segment performance. Financial Services vertical witnessed continued softness in areas like mortgage, asset management, investment banking, cards and payments. Large and super regional banking clients in U. S. Have been resilient during this quarter.

Speaker 3

Large banking clients are focusing on vendor consolidation, cost takeout and self funding transformation and programs. Many financial institutions are looking at outsourcing the non core business that includes taking over existing employees across technology and operations. While delayed decision making is impacting the vertical, our recent deal wins and the strong pipeline would help create momentum and opportunity for future growth. In retail cost efficiency and consolidation continue to remain top priority for our clients. There is intense focus on leveraging AI to accelerate digital transformation up for the quarter and have been successful in the past due to increasing OpEx pressures.

Speaker 3

Cost optimizations and vendor consolidations are top priority for clients who are open to innovative solutions and are asking for AI to amplify productivity. OEM clients are showing greater interest in revenue generating services, decreased time to market, increased product quality and improved customer experience. Large deal pipeline in this vertical remains very healthy. Outlook for the Energy, Utilities, Resources and Services vertical continues to be positive, are in the same period. Energy clients are coming to us for large scale transformation programs such as Digits Capability for Energy Transition and journey to net 0.

Speaker 3

Utilities clients are focused on in flight transformation programs or those required for regulatory compliance. Service clients are focused on consolidation and M and A, cloud cost optimization and legacy transformation. Our investment in Industry Clouds and Solutions in the energy and the transition area has helped us differentiate in these sectors, win multiple deals and build a very strong pipeline. Manufacturing clients are focusing on controlling their spends and awarding deals, which are focused on differentiation. Despite the volatile environment, deal pipeline is strong.

Speaker 3

Are seeing increased traction. There is a need to increase pace of migration to cloud, are increasing productivity by transforming to smart factories and transitioning to smart products. We are seeing opportunities across auto, aerospace and industrials. We have revised our revenue growth guidance for FY 2024 to 1% to 3.5% in constant currency terms. This is due to lower than expected volumes due to ramp downs in discretionary spend, coupled with lower mega deal volumes arising from delayed signings and longer ramp up times due are in the mid term with a razor sharp focus on cost optimization and efficiency improvement.

Speaker 3

As Salil mentioned, we have launched a new margin maximization program as well as are 5 pillars comprising over 20 tracks. With that, we can open up the call for questions.

Operator

Thank you very much. We will now begin the question and answer session. If you don't have a clear connection. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Kavaljeet Saluja from Kotak.

Operator

Please go ahead.

Speaker 3

Yes. Hi. Thank you. My first question is the fact that in the prepared remarks, both Nilanjan and Sadegh, You mentioned that the guidance cut is partly due to a delay in volumes or other delay in signings of But as far as I remember, your guidance at the lower end was not predicated at I don't probably not are predicated on mega disclosures, which is 4%, and 7% was predicated on mega disclosures and volumes flowing through. I'm just trying to understand if you can just delay your guidance and basically just highlight what percentage of the cut is attributable Your perception of change in view in the external environment and what percentage is really the delayed signings of mega deals here?

Speaker 3

Yes. So, Kaval, as you know, there was a guidance of 4% to 7%. Of course, the higher end of the guidance had a larger amount of The mega deals and the 4% of cost was predicated a lot on the base volumes, which by default would be in quarter 1, quarter 2. And this is where we have seen discretionary spend cuts in quarter 1 in some clients. And of course, in Q2 as well, some of that softness continues.

Speaker 3

And as you know, if you have to meet the year, quarter 1 and quarter 2 are very critical for that really to happen. So fundamentally, that's the base reason. As we exit the year, Of course, at the higher end, there was the impact of mega deals and guidance on both ends have come down. And one of the reasons that the top end that has come down is also largely also due to the delay in mega deals signing and the transition times. But the pipeline, as Salil said, is very healthy.

Speaker 3

We've got 2 under the belt, and we are confident as we exit the year. But Nilanjan, just to try to know when you basically In the last quarter, you did highlight that 1Q would be weak and you expect pickup in 2Q, whereas right now, you're saying that 1Q and Q3 are strong quarters. I'm just trying to understand the disconnect in commentary. The second part to the question, The answer is that 2 consecutive quarters, 2 consecutive misses. I guess last time around as well, there was a lot of pushback saying that the environment has deteriorated and have you built in any extra cushion Into your guidance, etcetera.

Speaker 3

So what are your learnings in the last two quarters? And what are the steps you have taken to ensure that the forecasting process Is a little bit more robust than what the guidance has the guidance cuts in the last two quarters indicate. So, Kavalh see, when we give the guidance, we see the outlook at that point of time. We have a semblance of what is a pipe. We assume some convertibility.

Speaker 3

There's an existing book of business. But like I just said, in Q1, from a sequential basis, we are lower than where we thought we would end up to be, Right. Because like I said, Q1 and Q2 was critical for us to meet that guidance. And we have seen these discretionary cuts In clients in some sector, which we've just called out, right? And that's what I would say the base business.

Speaker 3

And on the other side, there's the mega deal impact. We've got a good pipeline and some of these deals, which were supposed to kick in earlier are getting delayed later into the year as we speak. Okay. That's clear. Just a final comment, how is the pipeline After the conversion of the $2,000,000,000 mega deal as such, can you just comment on the pipeline?

Speaker 3

That will be useful.

Speaker 2

So, Kaval, this is Salil. The pipeline, we still have a good pipeline of both large deals. We have some mega deals in the pipeline as well. We see a lot of the work that we're doing on cost, on efficiency, automation, in consolidation, those are tracking well with clients. There are some transformation programs, which are funded from within the cost efficiency.

Speaker 2

Those are also something that we are tracking through. So we do see with the 2 mega deals signed, a good pipeline today of large deals and we have mega deals in the pipeline as well.

Speaker 3

And just final thing, is the upper end of the guidance band in any way predicated on future mega deal closures or it's based on the deals are closed up to now.

Speaker 2

So here, the way we've built this guidance or our view of the 3.5 is based on what we have closed today in large and mega deals. And then we have a way of estimating based on what we see into the future as an aggregate, not as a one off or not as a binary discussion, but in aggregate with what we see as the probabilities And also the probability of when that work will transition and the revenue will start. So those are what we see in the pipeline are baked into it.

Speaker 3

Thank you.

Operator

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

Speaker 4

Yes. Hi. Thanks for letting me Salish, just a couple of questions. Firstly, on banking. Your banking weakness has been there for a few quarters and now Most of the companies are showing weakness as well.

Speaker 4

Whereas if you look at the clients itself, most of their financial results,

Speaker 2

Yugesh, I think what we see in our Financial Services or Banking are part of Financial Services. There are different clients of ours that have different patterns in terms of their own pressures within their business. Some of our clients have had good results, but there are some which have had more difficult economic situations. Also with the mix from geography between Europe, Asia Pacific and U. S, when you break it down into specific sub Industry areas, when you look at asset management, when you look at investment banking, When you look at payments or mortgages, those are the ones where we are seeing the impact.

Speaker 2

Our sense is generally our clients Not spending on those projects. It's not that they're spending somewhere else. Typically, they're choosing not to spend at this time. And as the environment changes, we will see how that pattern changes.

Speaker 4

Okay. Okay. Thanks. And just a quick follow-up. The revised guidance now at the lower end, I wanted to ask you, you have already won few Mega deals and the lower end of the guidance suggests almost negative or flattish growth for the next three quarters, which would also mean that for 6, 7 quarters now revenues would be flat.

Speaker 4

So what are the assumptions for the lower end of the guidance, I wanted to know?

Speaker 2

So here, as Elanjan was sharing about the guidance, The approach is really focused on what we've seen in terms of volumes, discretionary projects in quarter in Q1 and an overlay then of the actual mega deals and large deals we have already won And the estimate that we're looking at. So we are some of those deals have start dates have moved out, Whereas the volume and discretionary project slowing is still in quarter. So Our view is based on how that plays out between those trends, we saw the 1% in terms of the lower end of the guidance when you combine that and then of course the higher end we talked about earlier.

Speaker 4

Thanks, Salil. Thank you.

Operator

Thank you. The next question is from the line of Ankur Rudra from JPMorgan. Please go ahead.

Speaker 5

Thank you. Salil, thank you for the updated guidance. I just wanted to get a sense of, obviously, the pass rate for the next three quarters is now moderated from maybe it could have been 2% to 4% with the same old guidance, it's 0% to 1.5 have discussed. I'm just curious about the discretionary cuts and the delays you referenced in your guidance change description. Has this happened more towards the latter half of the quarter?

Speaker 5

Has there been a linear change over the course of the quarter?

Speaker 2

So there Ankur, the way we've seen it is, there has been no difference in the pattern at the beginning or The end of the quarter, it's more focused on the industry that we referenced in our opening remarks between Nilanjan and me, we have seen in different places the Discretionary work and some transformation work where it was either slowed or stopped based on different industries.

Speaker 5

Okay. And also just want to get a sense of maybe asking this in a slightly different way. Obviously, the guidance Or is this also a difference in the way you measure the likelihood of success of when the deals ramp up or the win rate of future deals? Are just curious about that and if this guidance is more conservative in any way versus the last time you said it?

Speaker 2

So there, it's a combination, as you pointed out, of the environment in terms of the discretionary are on transformational projects in quarter. And then some of the mega deals and large deals, We saw delay in decision making in closing and also delay We've actually not seen any change in the win rate. And in fact, internally, we had a good win rate In Q1, we continue to see good traction, whether it's consolidation, cost efficiency on the win rate side.

Speaker 5

Appreciate that. Just one clarification, if you could, this $2,000,000,000 framework agreement that you referenced is your 2nd large deal. Could you clarify if this is fully contracted? And is this type of deal historically also been disclosed in your TCVs over the last few quarters or years?

Speaker 2

The deal, we have first made the announcement, as I'm sure you've seen, We have completed the contract signing of the deal. That's when the deal was announced. These types of deals were also included in the past within our large deal mix. Of course, in the past, there was no requirement of disclosing the specific values.

Speaker 5

Okay, understood. Last question, if I can. On margins, they were obviously flattish this time and it doesn't I mean, it seems like you've done well given what the growth has been. The 5 point margin maximization plan you highlighted, is this you're playing offense or defense on margins? In other words, is Infosys confident of potentially expanding margins in F24 or is this more for margin defense because growth outlook doesn't look very strong at least at the lower end of guide?

Speaker 3

Yes. So like we said, I mean, this is a 2 year program we have started. It is quite comprehensive. It's just not looking at cost. It's looking at portfolio, and this is now being led personally by Jayesh with 20 tracks, 30 leaders.

Speaker 3

Of course, our aspiration continues to be that we will aspire for higher margins than where we are today. So I mean, from that perspective, it is offensive On offense, that was offensive, but on this thing to increase our margins. That's the intent.

Speaker 5

Appreciate it. Thank you, and best of luck.

Operator

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

Speaker 6

Yes. Thanks for taking my question. Talu, just wanted to prod further on the guidance. In the last quarter, you had referred to achieving top end basis, the strength of pipeline and factors that are binary. So are those binding factors still in the pipeline are just converted, but transition is taking longer.

Speaker 6

So what I'm trying to get at is, how should we really reconcile the change in revenue guide in the last 3 months between delay and volume cuts, which is as large as 600,000,000.

Speaker 2

So there, we've already announced 2 mega deals, So which is a positive, we have large and mega deals in the pipeline. The way we've seen it is really The two points you mentioned, which is the volume discretionary work in quarter and the delay in the start of the realization transition of some of the large and mega deals, Those are what have translated to the change in the guidance.

Speaker 6

Any way that you could With those factors, how much of an impact would that have been?

Speaker 2

We will not be in a position to quantify that are further between those 2, unfortunately.

Speaker 6

So, okay. And just how would you characterize The business environment and your client conversations at the end of the quarter as compared to how it was at the beginning of the quarter.

Speaker 2

So there, it's really the way we see it is Our pipeline for large and mega deals is in excellent shape as we've closed the quarter. We see good traction for our mega deals and our large deals. The focus is much more When you're talking to clients on efficiency or cost or consolidation, we have a real traction with them. We see less discussions on digital transformation. And then In general, across the client base for those industries that I referenced in the opening remarks, we see where there are discretionary programs where the client feels that they can slow them or pause them for some time, we see that action.

Speaker 2

So those are the 2 sort of actions we're seeing, very good traction, in fact, on the large and mega deals.

Operator

Apurva, does this answer your question?

Speaker 7

Yes, yes. Thanks.

Operator

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

Speaker 8

Hi, good evening. Thank you for taking my questions. My first question was more of a clarification. So can you just confirm the process

Speaker 2

Hi, Rakesh. This is Salil. So we're following the same approach that we followed over the last several years as we build sort of outlook of guidance that we share with the market.

Speaker 8

Great. Got it. Thanks. My second question was on the margin side. So this quarter, we had a slight decline on the margin sequentially.

Speaker 8

Wage hike is yet to be driven out. So how confident are you on holding on to the current margin or the margin which we had last year and the cost saving program also that you are going to are running or there would be more of headwinds than tailwinds on the margin side?

Speaker 3

As you saw my margin walk, right, we actually had a 70 basis points benefit from utilization, cost optimization. So we are seeing the tailwinds of that. And the big part of that we've actually put back into employee related compensation, which is variable pay, that's a big part promotion. So it's not that we are losing that to the market. That's a conscious decision for us plowed back towards employees.

Speaker 3

So as we look ahead, we are actively considering compensation Hi, guys. As well we announced it in our press conference earlier. And the new program which kicks in, we think in optimization will give us the necessary tailwind are to be well within the margin guidance band.

Speaker 8

Great. Thanks for that. My last question was around the volume commentary which you gave. So last quarter in April when we had the discussion, you had talked about that volume through the quarter, you were seeing signs of improvement. However, in this quarter, you have seen performing much below your expectation.

Speaker 8

So what has with all the specific Pockets you are seeing the weakness specifically. Is it more client specific or the entire industry you are seeing a much sharper weakness?

Speaker 3

It is client specific. Like This time, in fact, we saw slightly more resilience in the U. S.-based clients. Europe turned out to be slightly So it is very client specific actually across and it's sort of a leaking bucket in a number of clients, there's no large sort of a drop off. And this is largely that's the discretionary part, right?

Speaker 3

So it is from programs, which can be pulled back in our discretion in the nature, those are the ones we are seeing.

Speaker 8

Thanks for that.

Operator

Thank you. The next question is from the line of James Friedman from Susquehanna. Please go

Speaker 9

ahead. Hi. Thank you. So we appreciate your thoughts. Does it seem to you that the soft demand Is primarily due to macro factors, which are presumably temporary?

Speaker 9

Or is it potentially something more profound, Like perhaps related to the relevance of services or mindshare. So is this just macro and it's going to go away? Or is it a question of

Speaker 2

So this is Salil. Thanks for the question. The way we see it today, We see this demand environment, especially on discretionary that we've been discussing so far, as a function of the macro environment, we can see, for example, if you look at Different industries, manufacturing growing at 21%, other industries doing well, whereas financial services weaker. So our service portfolio, we believe works well. We've already transformed the company, have moved it predominantly into a digital business.

Speaker 2

We are very strong on cloud with our Cobalt offering. Now with generative AI and broadly with AI, we've launched our Topaz offering. My sense is those are resonating well with clients and the places where we see the constraint have been more with the macro. Even some of the large and mega deals we are winning, we are winning against fairly intense competition where we are demonstrating our capabilities, whether it's on transformation or on cost or efficiency or consolidation.

Speaker 9

Okay. Thank you for that context, Salil. I'll drop back in the queue.

Operator

Thank you. The next question is from the line of Abhishek Bandari from Nomura. Please go ahead.

Speaker 10

Yes, thank you. I have two questions. First of all, Sali congrats to you for this $2,000,000,000 mega deal. If you could share some more details around this project given that it is probably the largest announced anywhere globally. Is it pure services deal or there is an element of any hardware purchase along with it?

Speaker 10

And do you think this will get into revenue

Speaker 2

So thanks for the question. On this specific deal, what we have shared in the public domain is as per the filing with the stock exchange, it really focuses on work that we're doing related to AI and automation led development, modernization and maintenance services, We don't have anything more to add to that comment.

Speaker 10

Sure. Do you think this goes into revenue fluctuation in second half?

Speaker 2

Yes. So again, there we don't have anything more on the Specific deal, it's more the general comments we have talked about the large and mega deals. We do see in general across our large and mega deals,

Speaker 11

the

Speaker 2

revenue are coming through in terms of the transitions and revenue realization more towards the later part of the year.

Speaker 10

Got it. Thank you. Thank you, Shaili for that. Nilanjan, my final and second question is to you. So you commented that the salary hikes are under active consideration.

Speaker 10

So do you think this year the hike cycle could differ compared to our usual cycle? And

Speaker 2

it could

Speaker 10

be more linked to when the growth comes back, We probably will be in a more better position to get the high store employees.

Speaker 3

Well, like I said, we are considering everything. Nothing to add more than that really in terms of timing or anything like that.

Speaker 10

Okay, got it. Thank you. All the best.

Operator

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

Speaker 7

Thanks. In general, it seems like Europe has been holding up really well relative to

Operator

Moshe Kasim, may interrupt you. Sorry, please use the handset. You're not very clear. Yes.

Speaker 7

So far, Europe has really been holding up well, much better than the U. S. Can you talk a bit about what you're seeing in Europe, may be areas where you are seeing some strength in terms of verticals. I'm assuming the U. K.

Speaker 7

Is a big part of it. And, is that trend continues based on what you're saying, I. E, is Europe still holding in there or is it also slowing down? That's my first question. Thanks.

Speaker 2

So thanks for your question. This is Salil. We saw good traction And we've seen that over the last several quarters in Europe, as you pointed out. We've seen that especially in the manufacturing segment. We've had good traction in multiple geographies in Europe.

Speaker 2

So we've had good traction in the Nordics. We also announced a strategic win in the Nordics, which was public a few weeks ago. We have good traction in Germany, as you referenced, good traction in UK. So we've had good traction so far. Now the macro environment, we feel, As Niranjan also pointed earlier, it's definitely something that is affecting overall In Europe, so we are seeing within the segments we referenced, for example, Financial Services and the sub segments there, in telco, in some parts of retail, those being impacted in Europe as well, And we'll see how that plays out into the future.

Speaker 7

Okay. And then my follow-up is about an article that came out this week in the local media in India suggesting that there is an uptick in demand are for lateral hires from the industry and these hires will probably start happening in the month of October and on, does that make sense to you versus What you're seeing out there in terms of demand and pipeline and the ramp that's kind of as you said, it's kind of slower than expected?

Speaker 2

So for us, my sense is, again, some of the comments you might have heard earlier from Nilanjan, our utilization has gone up. Our total headcount number is reduced. And we believe we have some headroom for the utilization to go up further. So that would be the context in which we are operating.

Speaker 7

Understood. Thanks for the color.

Operator

Thank you. The next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Speaker 12

Yes, hi, thanks. As well as just wanted to kind of probe a bit further on the change in the guidance and I'm just are focusing on the lower end of your previous guidance. It does not look like the miss in Q1 from what you guys kind of thinking about last quarter was that meaningful for the guidance at the lower end to come down so drastically. So Is it fair to assume that the incremental slowdown which you have witnessed is more front ended, I. E, in Q2 or was there an expectation of a meaningful pickup In the business in second half, which is now no longer there.

Speaker 2

So on the guidance, again, some of the comments that Nilanjan shared earlier, We saw in Q1 the volume and discretionary projects slowing. And based on that, plus the delay in some of the large or mega deals are starting up in terms of revenue. We felt that, that would that has given us have the view of the lower end of the guidance. What we see really is a function of the way The volume in the discretionary project evolves. The macro environment, as we look out,

Speaker 12

Sure. Similarly, on similar track, is there something we need to kind of pre visualize in terms of Sensitive of large deal TCV which we disclosed, your commentary on pipeline and large deal wins continues to remain very robust, but There is a fair bit of pain which you are kind of talking about from a discretionary side, which would be coming out of the large deal number. So can you share the impact on overall TCV or is that something which you would

Speaker 2

So there are some distinctions. What we are seeing in the large deals, Mega deals wins in the pipeline and what's more recent in the past quarters was more on cost or efficiency or consolidation. And so that work is continuing. What we referenced on the slowdown is more on discretionary projects, which are projects or transformation projects, which are from before, which could have been paused or slowed down by the clients and specifically in the industries where we reference the impact, those are the ones we are seeing. So they're not, in a sense, correlated with the large deals that we're looking at today.

Speaker 12

Sure. And if I may just ask one clarification, Is there any impact in terms of your growth guidance from any client specific issue, specifically as Nilanjan Kind of highlighted in Europe in terms of client insourcing or kind of slowing down business to you in any vertical?

Speaker 2

So there, what Nilanjan was referencing to is not That it is client specific as in a 1 or 2 clients. It was more in terms of clients within that Industry vertical and more now shifting in What we had in the U. S. To the European market. So it is not that we have a specific one or 2 clients where we've seen This impact showing up from.

Speaker 12

Sure. I think that's helpful. Thanks for taking my question.

Operator

Thank you. The next question is from the line of Surendra Goel from Citigroup. Please go ahead.

Speaker 12

Yes, good evening. So I know that you don't share this data point, but could you give us a directional sense of how ACV annualized attract value trends would have moved or would compare YOY given the changing nature of deals towards the

Speaker 2

Thanks for the question, Surendra. We are not in a position to share that information.

Speaker 12

Okay. And on this recently announced mega deal in the sense

Speaker 2

The one that was announced after the quarter before the results?

Speaker 12

Yes, yes.

Speaker 2

Okay. So again, we are not announcing the net new in a specific deal. What I mentioned earlier was a type of work and that's what we can say in addition to what we filed with the stock exchange.

Speaker 1

Sure. Thanks, Henry.

Operator

Thank you. The next question is from the line of Prashant Kotari from Pictet. Please go ahead.

Speaker 11

Yes, hi. A couple of questions. One is, when looking at the revenue growth guidance this year, It seems will be growing maybe worse than the peer group that we track even in terms of the deciding on management compensation. How do we think about that? I mean, are there things that we need to do in order to regain the kind of competitiveness in the market, so we can continue to out are out there or you think it's all down to discretionary demand being weak and therefore there's nothing much that we can do and we just need to wait for the cycle to come back?

Speaker 11

That's your first question.

Speaker 2

So there, we have a view with our portfolio that it's a portfolio of services that works well with our clients. We absolutely have the intensity in the client environment with our large and mega deal wins to be back into the growth mode that we've been in for the last several years. We also have, as you know, a high base for comps. Q1 of last year was 21% growth year on year on the previous year, Whereas the environment of the other peers were not there. So all of those factors coming into play, We are very much of the view that we have what we need and we are continuing to go into new areas like generative AI or continue investments in cloud to build out what we want what our clients are looking for to continue with the growth situation.

Speaker 11

Okay. Thank you. So if it is kind of more about the To the environment then, what would be a good kind of a leading indicator that EOD use may be internally to figure out this weak discretionary demand phases

Speaker 2

So internally, we have several and elements we look at, these are not typically data we share externally. But in terms of the overall sort of translation of that is what we translate into the guidance then.

Speaker 11

All right. Yes, which is presenting a bit of a weak picture as of now. All right. Okay. Thank you, Manjh.

Operator

Thank you. The next question is from the line of Bryan Bergin from TD Cowen. Please go ahead.

Speaker 13

Hi, good evening. Thank you. I wanted to ask on the margin expansion program. So I understand this is a 2 year initiative. Can you give us A sense of materiality, just how are you thinking about the potential cost savings or an approximate margin expansion potential that you expect to achieve from these pillars?

Speaker 3

Yes. So we can't really quantify it. These are 5, we think, critical track, perspective, we have a lot of scope as well. We understand with generative AI and our ongoing automation projects, which we have that's continuously and actually with generated AI, we think we can up the productivity from baseline even more. Some of our portfolios in our mix, how do we improve margins that to a dedicated head team looking at these accounts?

Speaker 3

And finally, the indirect cost side and how do we keep a cap on that, looking at more efficient buying, procurement, savings, etcetera. So it's a quite a holistic approach, like I set across 20 tracks, and these have been kicked off. Can't quantify the number at this stage, but like we said, aspiration continues to be to improve our margins in the medium run.

Speaker 13

Okay. And then my follow-up, I understand you've gotten a lot of questions here on the fiscal 'twenty four growth outlook. Just trying to clarify everything here and maybe tie all these questions together. Is it right to say that at the low end of your 2024 growth guidance that you're assuming a worsening of volume reductions

Speaker 2

The way we've constructed this guidance, We see that there is a change or a difference in the environment in the decision making. We have seen some of the impact in some of the industries that I that we shared earlier. And we will see How that volume discretionary work translates itself over time. So we baked in Some range of possibilities into that. We want to see how those possibilities play out.

Speaker 8

Thank you.

Operator

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Speaker 5

Yes. Hi, good evening. Thanks for the opportunity. So Nilanjan, the employee headcount is down 3% over the last two quarters, But the absolute employee cost is up 2%. So what explains that dynamic?

Speaker 3

Yes. So like I said, this time, we have put about 90 bps, I think, of impact. You don't see the entire thing in employee cost, because even third party costs have come down. But if you see about 90 Basis point, actually more than 120 and then 90 basis points is actually in employee costs. Variable pay is a big one, which we have upped Consciously in this quarter, a little bit of promotion than the other of course other items, balancing items.

Speaker 5

Yes. So just a clarification there. So in the context of the are deteriorating environment and attrition sort of falling. The assumption was that employee cost would be something relatively easier to manage. And obviously, because the performance company wide performance itself is lower, the variable also should be lower.

Speaker 5

So what's driving the dynamic on

Speaker 3

So we look at this holistically. I think, I mean, we are here and we don't look at just 1 quarter and decide these decisions. We're looking at the overall environment and attrition, etcetera, and that's a decision we collectively take. It's just not in a quarter to quarter basis. We have enough headroom in our utilization to grow volumes.

Speaker 3

And therefore, the attrition which we see is not entirely replaced by lateral hiring. A part of that happens through lateral hiring, and we continue to reskill and move up our fresher bench and rotate people through projects. So That benefit we continue to get. And like I said, the 70 bps benefit, which we are seeing is coming partly Because of improved utilization, right?

Speaker 5

Sure. And lastly, the $2,100,000,000 deal that we announced, In which vertical is that? If you could clarify that, that will be helpful.

Speaker 3

No, we don't mention that really on what vertical is.

Speaker 5

Okay. Thank you so much and all the very best.

Speaker 9

Thank you.

Operator

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

Speaker 12

Yes. Hi. Good evening. Thanks for taking my question. So, Sunil, two questions from my side.

Speaker 12

One on the talking on the guidance part again. I mean, for long, I think the guidance that Infosys gives is kind of seen as a benchmark for the industry and a read across for the entire sector as well. I mean, and the sharp part that we had this time. Just wanted to understand, the putting on hold of discretionary spend and other issues that you mentioned that caused us to lower the guidance. Do you see that as a very Infosys specific thing?

Speaker 12

Or do you see it more of an industry across the board that maybe other companies are not seeing it right now, they might be following Next few quarters or is it something in the nature of our portfolio because of which you probably feel that it was a strict because I mean, in the last 3 months, because other companies that have reported, there might not have been such number of difference in the guidances, with the kind of shipment in the sharpness that we have seen, we haven't seen that kind of a change in commentary over the past 3 months by any other player per se. So would you like to basically give some color on how readable is this environment that has caused us for this deterioration to the other companies in the sector or the industry.

Speaker 2

So there, My sense is, if you look at our Q1 number, we have 1% quarter on quarter growth, which from what I've seen across the industries, maybe one of the strongest quarter on quarter growth, We have a clear view of what we see as we've been discussing on large and mega deals giving us strong are slowing in Q1. So I don't have a sense for the other are players, but that's how we see it. And if I look at Q1, we have a good outcome in terms of a solid quarter. And looking at the industry, maybe higher growth Q on Q than many others.

Speaker 12

Got it. Got it. And in terms of conversations with the clients, I'll just follow-up on that. In terms of conversation with clients, I think you mentioned it before in the call as well. I mean, how I mean, what is the overall general conversation like when they put this discretionary part of the lease on hold?

Speaker 12

I mean, do they want to do it given the weak macro at this point of time? Is there any rethinking on the part of whether they need this kind of spend at all, are those original decisions being questioned itself, but to begin with, what exactly is the nature of The conversations with the clients which are putting these spends on hold.

Speaker 2

So here, What we've seen is, again, in the industries we referenced before, whether it's financial services or telco or high-tech, where clients or the industries are going through a difficult environment themselves in the macro, are looking for help or support from their partners like us, where they put some projects, which they perceive to be not immediately relevant for them, on a pause or slowing, those are the discretionary works that slow down. And we will see as the environment changes what happens there.

Speaker 12

Got it. Great. Thanks for taking my questions. I wish you all the best

Speaker 3

in the rest

Speaker 12

of the year.

Operator

Thank you. Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for their closing remarks. Thank you and over to you.

Speaker 2

Thanks. This is Sali. I just want to close out. Thank you, everyone, for joining us. In summary, for us, Sali, we've had a solid Q1, very good Q on Q growth, solid margins, excellent large deals and mega deals and wins.

Speaker 2

This sets us up very nicely with some of the delays and the volume slowing are more for the later part of the year. We've also got incredible traction in generative AI with AT projects and the Topaz work resonating with clients, we've now put in place A stronger program on margin expansion, which is in play. Putting all of that together, we see, this is a year where we'll make that difference translating to mega deals and large deals. And as we come towards the later part of the year, showing the realization of all of those. So thanks again everyone for joining in and look forward to catching up at the next quarterly 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.

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Monolithic Power Systems Q1 23/24
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