Infosys Ltd (INFY) 2015 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Infosys Earnings Conference Call.

As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Sandeep Mahindroo. Thank you and over to you, sir.

Thanks, Inba. Hello, everyone and welcome to Infosys earnings call to discuss Q4 and FY15 financial results.

I am Sandeep from the Investor Relations team. Joining us on this call is CEO and MD, Dr. Vishal Sikka, along with other members of the leadership team. We'll start the call with some remarks on the performance of the Company for the recently completed quarter along with some comments on the fiscal 2016. Subsequently, we'll open up the call for questions.

Before I hand it over to the management team, I would like to remind you that anything which we say which refer 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 and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

I now like to pass it on to Dr. Vishal Sikka.

Thank you, Sandeep. Hello, friends. As I speak to you today, we closed a rewarding year, but a disappointing quarter. Rajiv and I will address the details of the financial performance during the course of this call and I want to take a few minutes first to outline my thoughts on the year behind us and our outlook for the road ahead of us.

We find the external environment to be one where concerns related to currency, energy and other things as well as technological disruptions have created a sense of volatility. However, I believe that these are not structural issues and that despite these, a company that is focused on innovation and efficiency can achieve great results. I believe that the traditional model of IT services is dying, but businesses continue to look for partners who can help them grow and innovate, who can help them renew their operations and their businesses and to do so in reliable and agile ways.

Since I took over as CEO a little more than eight months ago, it has become clear to me that we have weaknesses in sales and other processes and our delivery culture sometimes lacks proactive innovation. However, I have also found that we have strengths that more than outweigh these challenges. We have an immense ability to educate and to learn, perhaps the best in the world, and we have a deep organizational desire to change and improve ourselves, as well as a great ability to recruit the best talent and to house them in exemplary client centric teams and infrastructure that is massively scalable. It is these strengths that give me the confidence in our strategy and despite the weaknesses to turn all our aspirations into commitments.

It is clear that in our operations, especially in sales, we need to execute better and we will, both to improve existing operation and to bring new solutions to market. Our recent organizational realignment has speed up senior management -- senior segment leaders to focus exclusively on planned relationships and business development. We will continue to make additional changes as necessary to further strengthen our ability to execute and deliver on our aspiration, which is industry-leading profitable growth by financial year 2017.

We have launched some specific initiatives to execute against our Renew-New strategy. We are rethinking all our client facing functions. We are doing this by streamlining our sales function by unifying delivery and by redesigning our RFP and oral processes among other things. We are establishing systematic innovation as an imperative in every project that we deliver. We have put together what is possibly the largest ever training program in design thinking. Since October 2014, about 25,000 Infosys employees have been trained on design thinking through a one day immersive class. We have also launched a ZERO DISTANCE from innovation project that everything single project manager has been given a specific pipeline innovation agenda to bring innovation to their project. More than 1,700 of our projects already follow this.

We are accelerating our products, Finacle and Edge, and our platform, Infosys Information Platform, Infosys Automation platform and Panaya businesses. We established a new leadership structure for the products and platform businesses and as a result of this focus, Finacle saw 14.2% constant currency growth quarter-over-quarter and Edge also saw significant growth. Finacle sustained its business momentum with 23 wins and 11 go-lives in the quarter including of Standard Bank in South Africa and Qantas Credit Union in Australia. On Edge, we had 12 wins and three client go-lives during the quarter.

In a short duration of less than two quarters, we have more than 100 active projects going with clients about using IIP. 15 pilots have already been completed where every pilot is an agile one taking about three to five weeks to close and four of these are already in full production. In addition, 17 contracts are in the final stages of being executed with IIP.

On Infosys Automation platform, which is our platform capabilities for bringing automation to our existing services in infrastructure management has been deployed already in nine projects and has a pipeline of 31. We are able to show almost 40% productivity improvements in our deployment with IAP. Infosys also now has a strong AI practice, which has seen a spike in the number of artificial intelligence projects over the last eight months, especially in engineering and finance, where we have proven success in providing solutions to complex and diverse problems. We are especially proud of our relationship with Boeing, where we have been working in partnership on knowledge-based engineering to develop software tools using artificial intelligence with the objective of reducing flow time in the aircraft development process. I believe that we can bring this notion of knowledge-based engineering to lots of enterprise landscapes.

Syngenta, a world leader in agribusiness, had application performance challenges in their management reporting because of large volumes of data. Infosys did a proof of concept using IIP to improve its performance by [12 times to 16 times]. Also at Syngenta, the Infosys Automation platform was used to automate SAP user authorization requests, and improve user productivity through speedy closure of authorization requests. And Syngenta also went live with the TradeEdge Dealer Management System in the last quarter to manage distributors in two states in India, and this will be rolled out to distributors across other states as well as other countries in the region over the course of next year.

With Panaya, which we acquired during Q4, we are seeing up to 50% productivity improvements in testing. At ABB in Brazil, we saved 30% on testing time; at Inchcape, we saved 50% in testing integration and documentation effort and at Coca-Cola Israel or CBC, we completed their six-month project within 2.5 months. And at Royal Resorts, we saved them 73% of effort in their [happy development] effort.

We are transforming Infosys Consulting to be the tip of our spear. We have consolidated our various consulting units under a single global leadership. In the last few months, we have completed more than 20 client engagements in design thinking and have a pipeline of more than 100 additional ones. An outstanding success for design thinking has been the transformation of our relationship with RWE, one of the largest utility companies in Europe. Peter Terium, CEO of RWE has said this and I quote; our company and in fact, our entire industry is in the midst of a massive transformation. Given the scale of the market disruption, RWE has started our innovation journey more than two years ago. In this change journey, our interactions with Infosys on design thinking have already yielded great value by increasing the scope of what we even thought was possible. I look forward to an increasingly strategic and collaborative partnership between our companies in Silicon Valley and around the globe; end quote.

We announced 100% bonus payouts in Q2 and Q3, which I believe has helped to retain good talent. Because of this and several additional measures that we have taken for employee engagements, I'm very happy to report that our employee attrition has been contained. In May 2014, the month before [I was around], we had 2,850 exits of people from the Company. In July, we had 2,528. This year in January, we have had 1,768 exits; 1,437 in February and 1,352 in March. So, this number has come down by more than half since May of last year. And we are opening new frontiers to our business with a unique approach to investment, M&A, start-ups and with our $500 million investment fund.

As a result of all of these initiatives, I believe also that the client confidence in Infosys has increased. I have personally met more than 500 clients in more than 170 one-on-one meetings and I sense their excitement to be associated and engaged with Infosys. Some examples from this last quarter; House of Fraser, a leading retailer in the UK and a part of the Sunpower Group in China selected Infosys to deliver a strategic retail confirmation program, bringing advanced technology to their multi-channel business. ABN AMRO selected Infosys as one of its strategic partners to drive its business transformation. Infosys will deliver services across application development and maintenance, testing and product implementation in the entire life cycle. Western Union Financial Services have selected us for an 11-year turnkey project where we take end-to-end ownership to modernize, maintain and support their worldwide settlement system.

Today, we also announced two strategic investments. We have taken a stake in an exciting start-up, AirViz, in the Internet of Things area and we have entered into a definitive agreement to acquire Skava whose mobile commerce tooling platform is used by leading retailers in the United States.

I'd now like to talk briefly about our performance in the quarter that ended on March 31, the lessons that we have learned and the actions that we are taking. We closed the last quarter of fiscal 2015 at $2.159 billion in reported currency and $2.208 billion in constant currency. So naturally, I am disappointed that we could not do better compared to the guidance that we have provided for the year, despite a promising first three quarters. I am pleased of course that our cost structures have stabilized and we are able to balance investments and profitability, while returning higher dividends to investors and Rajiv will talk about the dividend as well as the bonus share matters in his presentation.

Thanks to our operational efficiency initiatives, the operating margin of the Company has significantly improved from 23.5% in Q1 fiscal 2014 to 25.7% in Q4 fiscal 2014. We will continue our focus on improving utilization on eliminating (technical difficulty) on reducing onsite employee cost as a percent of revenue and in bringing more agility into our business enabling functions. This is vital to generating the cash flows required to invest into our Renew-New Strategy.

The positive momentum, coupled with the corrective measures that I have outlined, will help us recover the loss of momentum that we saw in Q4 2015. Our year-on-year guidance for financial year 2016 is growth in the range of 10% to 12% at constant currency. The mission of our management team is to prepare the Company to achieve an aspirational goal of $20 billion in revenue by 2020 with at least 30% in operating margin. New services such as design thinking, AI and the intellectual property oriented services work will contribute, we expect, approximately 10% of revenue. We expect our inorganic investment strategies to influence approximately $1.5 billion of new revenue. And we will increase our revenue per employee to $80,000 by deploying automation and innovation in existing businesses.

We expect to generate at least 30% productivity improvements in our existing service lines from these solutions. New platforms in our Edge portfolio work on different revenue models and will contribute disproportionately to our revenue [per person]. Our goal is to bring attrition levels down to the lowest in the industry and to achieve at least 25% in diversity in our top leadership. Our aspiration is to make Infosys a great place to work, attracting the best talent in the industry globally. I'm confident that with the steps that we are taking will get us there. It will get us back to being the bellwether of our industry to being a next-generation services company, one that delivers innovation for a world that is being fundamentally reshaped by computing technology.

Let me now hand this over to Rajiv for his comments and I will come back for the Q&A session after that. Thank you.

Thank you, Vishal and hello, everyone.

We ended the financial year 2015 with revenue of $8.711 billion, a year-on-year growth of 5.6%. On a constant currency basis, based on FY14 average rates, we grew by 7.1%. If you recollect, we had given a guidance of 7% to 9% in April based on [March 31], 2014 rates. Based on those rates, we grew by 7.7%. However, our revised guidance was 7% to 9% based on September 30th exchange rate and we have grown by 6.5% based on those exchange rate.

We have delivered an EPS growth of 15% year-on-year on a revenue growth of 5.6%. I believe we have done exceedingly well on the margin front in FY15. Our operating margins for the year improved by 190 basis points on a reported basis and 240 basis points on a constant currency basis. [Move now to wage hikes to all employees in fiscal 2014]. After 25,000 promotions, which we did during the year, we increased the average variable payout of our employees from 64% in FY14 to 86% in FY15. We also did mid-year wage hikes for significant number of our employees effective October 1, 2014. We also increased our investments in training and employing engagement. All these helped us to bring down the annualized attrition from 23.4% in Q1 to 13.4% in Q4.

We have been able to show a remarkable improvement in the operating margin because of our focus on improving operational efficiencies to onsite effort mix which has come down from 30.6% last year to 28.8% in FY15. Utilization excluding trainees went up from 76.4% to 80.9% during the year.

Pricing though has been under pressure and has declined by 2.8% year-on-year on reported basis and 1.4% on constant currency basis. We have done exceedingly well on year-on-year operational parameters and margins, the fourth quarter revenues have declined by 2.6% on a reported basis and 0.4% on a constant currency basis. Pricing continues to be under pressure and has seen a decline during the quarter by 1.7% on a constant currency basis.

Our utilization has declined by 410 basis points to 78.6% during the quarter. Our operating margin for the quarter was at 25.7%, a sequential decline of 100 basis points. But, if you look at it, the cross currency impact was about 70 basis points on the Q4 margin. On a normalized basis, the margins have dropped by about 30 basis points.

We added about 14,471 employees gross in the quarter with a net addition of 6,549 employees. We have rolled out an average wage hike of 6.5% for employees in India and 2% for employees outside of India. Including promotions and other benefits, the increases will be on an average 7.5% to 8% for India and 2.5% for employees outside of India. This is in addition to the mid-year hike that we rolled out in October for significant number of our people. The Board has recommended a bonus issue of one equity share for every equity share held and a stock dividend of one American depositary share for every ADS as on the record to be determined.

We're committed to relook at our capital allocation and cash deployment policy in line with the Company's strategy of New and Renew which Vishal has articulated. We did our planning and financial model for the next five years. M&A is going to be an integral part of our strategy and as such, we would like to allocate a significant part of incremental cash flows to it. We also need to make significant investments in infrastructure and in technology assets, therefore we need to spend 50% of our incremental cash flows in M&A and new investment. Keeping this in mind, we recommended to the Board an increase in the dividend payout to 50% from the current 40% of our post-tax profits. This implies a final dividend of INR29.50 per share for fiscal 2015 equivalent to INR14.75 per share after 1:1 bonus issue. This translates to a final dividend in dollar terms of $0.47 per share pre-bonus and $0.24 per share post bonus. The Board accepted the same subject to the shareholders' approval in the AGM.

The increase in dividend payout may negatively impact our FY16 EPS by $0.01 due to lower non-operating income. Our yield on the non-operating income was at 9.04% compared to 9.24% in Q3, these are likely to come -- decline further during the next financial year due to softening of interest rates in India. Our effective tax rate would continue to be in a narrow range of 28% to 29% for the next year. During the year, we spent $11 million -- we spent $42 million towards CSR activities and $11 million during the quarter.

Our cash and cash equivalents were $5.2 billion as of March 31, 2015. Our cash and cash equivalents declined in Q4 mainly on account of $221 million towards acquisition of Panaya and acquiring -- and making investment in Nova, payment of [$560 million] towards taxes, which included a tax demand from authorities in India for assessment year 2010 and 2011, the same has been paid and we have filed an appeal with the income tax tribunal, CapEx of about $106 million. Our DSOs in the quarter increased four days, which also impacted our working capital.

We are guiding for a 10% to 12% constant currency growth in FY16. Our FY16 growth is impacted by 380 basis points due to adverse cross currency movements in the year and therefore on reported basis we are guiding for revenue growth of 6.2% to 8.2%.

While we have done exceedingly well by substantially improving our operating margins for FY15, we continued to make the investments to accelerate our growth. We had only provided an operating margin band of 25% plus-minus 1% based on the currency rates at that time. However as we know, during the last two quarters, most global currencies have depreciated significantly against the US dollar and negatively impacted our operating margins a 100 basis points. Despite that, we would like to retain the margin band that we had given earlier. Our operating margin may continue to be volatile quarter-on-quarter. As in every year, the first quarter will see the impact from increasing salaries, promotions and the investment in new visas. I expect the first quarter operating margins to be impacted by about 250 basis points.

With that, I would like to open it up for questions. Thank you.

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions).

Joseph Foresi, Janney Montgomery Scott.

I wonder if I could ask sort of a couple of high level questions, but it seems like you feel like the industry's basic old services model is, I think you had said, dying. First on the revenue growth side, what produces upside and are those coming from different areas than what were typically used to. are those coming from newer initiatives as opposed to the basic application development and maintenance stuffs. I'm wondering, how are you reorganizing the business to go after those newer areas and what's driving the upside there?

It's a great question, Joseph. So there are two parts to that. There is a renew part to that which is basically where we have on to -- where we are endeavoring to make our existing services or the existing businesses that they cater to more competitive and more productive by bringing in automation, by bringing in new technology into those businesses. An example of that is the work that for example happens in upgrading package systems or implementing package system.

We recently did a large deal where we brought Panaya into our traditional SAP practice and we won a large deal, where we will do the upgrade and implementation and management project for this SAP landscape. This is an example where you take a traditional people-intensive kind of a project offer and replace that with lesser number of people, but also at higher price, but augment that with a software, which is much higher margin. And you achieved two things, the revenue -- the cost to the customer goes down, but the margin goes up and you save people to put on additional project.

So this is the kind of transformation that we see on the existing business. And in parallel, the new areas are fundamentally higher value, higher margin kinds of areas. This is where we build complex applications for complex problems using new platforms like the work with IIP, the Infosys Information Platform, or the design thinking engagement where we basically work with clients on identifying their next-generation problem and then working on rapid solutions for that. These are the kinds of things that are higher value, they are typically served to new lines of businesses whether it is marketing or sales or strategy and so they are high value, high margin projects.

However, as I mentioned earlier, we have approximately 250 of these types of engagements going, but this compares to more than 30,000 projects that we have in the traditional business. So this will take some time to become a material revenue driver. So in the meantime, the revenue has to come from a significant improvement in the productivity and in the differentiation of the existing stuffs that we do.

Does that make sense?

Okay. It does make sense.

I guess, the second question, and this has sort of been one that -- some of your predecessors have gotten before. Given your high level of profitability and the fact that there it seems like there is significant headwinds including pricing pressure over a long period of time, why not adjust the margin profile lower in the short term until those new projects that you're working on can kick in and provide productivity, why try to maintain that level of profitability when clearly it seems like people are resetting the bar at a lower price point?

No, Joseph, we have done our analysis and it is not that the margins are impacting our growth or if you recollect about a year back, our margins dropped to about 23.5%, but that didn't result in higher growth for us. We continue to make investments wherever it's required, we have a very flexible investment policy. The priority is to accelerate the growth of the business and whatever the investment needs are, they have been fulfilled proactively on a case-by-case basis. And the reason why we gave a margin band, and we started giving a margin band for the last three, four quarters, precisely for that reason, so that we wanted the flexibility to be able to make investments as and when the opportunity arises.

So I think we are absolutely aligned that we need to make investments to accelerate our growth, but it's not that the margin is impacting our ability to make the investments.

Okay. And then the last one from me, just specifically on pricing, we've heard a lot of different commentary on pricing, some look at it as stable, some look at it as declining. I'd like to get just sort of your view on what pricing is doing, but not just in the short term, but over the long term and if it's impacting those 30,000 projects that you described, maybe you could address that versus a long-term margin profile?

So maybe, Joseph, I can start and Pravin, if you can add something. In the short-term, we see a tremendous pricing pressure coming and I don't think this is something that is temporary, I think this is a structural thing that is going to impact the way the services have been done. It creates a, what I have in the past referred to as a, downward spiral, where cost continually come down and we've become increasingly competitive in yesterday's model, not realizing that we are -- if I could use that analogy a bunch of horse carts and to compete with in automobile. And in this case, automation is taking over major parts of the business, it has to, it is a natural order of things. We have to embrace that, we have to embrace the situation that people become the managers of exceptions and operators of the automation rather than operators of the system, we have to evolve towards that.

And on profitability, and I think longer term when you think about this, you realize that as we evolve towards that kind of a model where people become much more productive and able to deal with these kinds of processes with automation, then our, in fact, margins don't need to suffer because we can continually bring a combination of people and software to the services world and augment and amplify people's abilities with software.

So I see this very clearly and I see that this is an irrevocable trend and we have to embrace that because if we don't, then we will get disrupted, and we already see that happening in the industry and in the results that we have seen recently.

Keith Bachman, BMO Capital.

Yes, I had a few, if I could. The first one relates to the previous question, but you are anticipating constant currency growth in this current fiscal year 10% to 12%, which is meaningfully above what you've consistently generated during the past fiscal year including this quarter. What's the bridge that enables you to get to constant currency growth of 10% to 12% this year, because many of those activities you just described in the previous question, I think, are longer-term objectives, but I'm curious how you bridge it this year?

They are, but I mean -- as I mentioned in this example, and we saw several examples, some of those I outlined during my preamble where the addition of automation has resulted in results already where we can monetize the software and reduce the number of people working on a project and thereby make the overall offer more competitive. We see that happening in bids already, we see that happening in projects already. And my sense is that in the early part of the year, it is all based on the pipeline and the outlook that we see, it is all about execution efficiency and getting our job done. And as we evolve towards the second half of the year, more and more effects of this automation, more and more effects of the new -- as well as some of the new kinds of projects will start to contribute to the revenue.

So we see the 10% constant currency achievement as being not that far off from what we have already done, if you look at over the last few quarters.

Okay. Then, Rajiv, effective transition to you, you mentioned perhaps 250 basis points impact to margins in Q1. I wasn't sure what the source of, is it just a volume variance or is that an investment and should we still be thinking even with 250 basis points you've been talking about, 25 basis points plus or minus, is that still the right average for the year, which means you end significantly higher than that?

Every year, the first quarter, every IT company will see a drop in margins because of employee wage hikes, promotions and (technical difficulty) visas, and typically the impact is about 250 basis points. And as these impacts and the growth starts coming in the subsequent quarters and when you start hiring people from the colleges, the average per capita costs are dropping again during the year, and the margin starts going up. So, and the visa investment is typically in the first quarter and is not the end of subsequent quarters. So that's the reason of first quarter margins are typically lower and we end up -- exit rates are pretty high.

Okay. But it still is the right process to equal 25% operating margin plus or minus for the year?

Yes. So, as you said, we had given a band of 25% plus-minus 1% earlier, we are seeing a cross currency impact of about 100 basis points, but considering what we're seeing after the very impact of pricing and other things, we still believe that 25% plus-minus 1% is achievable next year.

Okay. And the last one from me just, consulting, I think, you said as the tip of the spear and yet many of the consulting area seem to be a bit slow. How do you plan on differentiating in-fees consulting activities as you look at the next one to two years with a bit of a challenging economic environment still have it lead to the growth objectives that you've identified?

Keith, our history with consulting has been a chequered one. It has primarily been based around package systems and providing services -- more tactical services around package system. My sense is that consulting has to evolve towards a tip of the spear where we can have a strategic dialog with customers about where their business is going and use that as the basis to create a more overarching and more holistic engagement with the client. We see that happening already. I mentioned that we have a tangible pipeline of more than 100 of these design thinking projects.

As we speak right now, we have two clients in our Palo Alto office, one, a large logistics company and one, a very large CPG company, both American companies, sitting with our team in Palo Alto and Stanford, working on identifying important strategic problems for them with our consulting team as well as with our design team and that kind of a transcendence of the traditional known business towards one where you can have a strategic dialog, it will create a high value even if it is a small project that is a high margin project, but it creates a strategic engagement at the very top of the client and then that provides the ability to get downstream revenue from the more traditional project, because we are engaged at the very top.

So that is one part of it and on the traditional package system part of it, what we are working on is a few very crisply defined packages or templates where we can renew the existing system landscape of our customers around ERP system, around the knowledge-based engineering type work where our teams can start to transcend the packages and instead start to engage on solving the business problems, no matter what package is used. So we are carrying out this transformation; Sanjay Purohit is our new head of consulting and he is carrying out this transformation as we speak, and it is driven primarily by evolving into a strategic consulting organization where we work on the next-generation projects as a basis to drive also the projects in the here and now.

Does that make sense?

Yes, it does, okay. All right, thanks very much, gentlemen and best of luck to you.

Moshe Katri, Cowen & Company.

Congratulations on the significant contraction in attrition rates. I think that was pretty impressive. There is definitely a lot of skepticism, Vishal, over the guidance for fiscal year 2016. So if it's possible, I just want to ask a couple of questions in that regard, and maybe it's going to clarify some questions. First of all, is there any M&A contribution factored into that 10% to 12% constant currency growth guidance?

No, no, there is not. Only the ones that they have already acquired, so that would be the Panaya acquisition as well as what we announced today, the Skava acquisition, because these are small. So if we were to do any bigger acquisition that would make a change to this and we would modify the guidance to include that. So this 10% to 12% does not include the guidance.

So would Panaya be adding about a 100 basis points or so for us?

No, actually -- see, when we acquired Panaya, we acquired a multiple of about 6 times and now, we have some aggressive plans for Panaya in terms of the revenue growth this year. But we would not want to share the numbers separately for Panaya this year and going forward.

But it is not a large amount, it's a small amount, it'll be lower, right? Moshe, if I might add, if you look at 10% as a baseline there, it is not that difficult to see how we could get there, given the areas of focus that I have talked about. It basically averages out to what -- if you do a quarter-on-quarter model of the growth on a quarter-on-quarter basis at a uniform rate, that will be 2.8% quarter-on-quarter growth over four quarters. So that's not significantly different from what we have done before. We did what, 2.4% in the last?

Yes, if you look at in FY15 on a constant currency basis, our sequential growth rate for four quarters will float to an average of 2.4%. And I think guidance of 10% to 12% constant currency, it is between 2.8% to 3.5%. So it is going up from 2.4% to 2.8% to meet the lower end of the guidance.

Okay, and that's fair and then maybe it'll be helpful if we kind of understand what happened during the quarter. Vishal, you spoke about loss of momentum, you spoke about a disappointment. Is there anything that happened throughout the quarter January, February, March that kind of got you guys at that disappointment, was there any sort of issue with specific clients, specific protocols, project ramp, any color there I think will be helpful because people are looking at the exit of Q4 and that's why I think there is that skepticism about getting to that inflection point to get to that acceleration?

So, I mean, we did see -- we've entered the quarter with a higher expectation of volume and as a result you see also the utilization has come down between that and the pricing. We did see a significant ramp down as well as -- just slowdown economically in many industries beyond energy and telecom, we also saw in other areas, slowdown. Maybe, Praveen, you can talk about this.

At the beginning of the quarter, we had a decent pipeline and in fact we did recruit people for our expected pipeline and planned utilization. We did anticipate slowdown in energy because of oil prices, but our pipeline in other verticals seemed to be decent, but across the board, we saw postponement of projects, planned ramp ups didn't happen and we lost a couple of deals as well. So it's a combination of things, we can't ascribe it to a single vertical because if you look at it, almost all the segments have degrown, so we got something which we didn't anticipate in the beginning, we're looking at the pipeline.

But as Vishal said, when we look forward, the pipeline continues to be decent. We have many initiatives in place to improve the sales effectiveness, we are focusing a lot on better qualification of deals, we are focusing a lot on increasing the conversion rate of planned deals and some of the initiatives around productivity and all, we believe, will help us in improving the win rate. We are also focusing lot more on mining the accounts better, some of our top accounts have not really grown. So we have a bunch of initiatives and looking at the pipeline, we seem really confident that if we execute well, we should be able to reach our guidance.

So, it's a mix of execution and the environment, is that what it is?

Yes.

Exactly.

Okay, last question on pricing. Which part is it the pricing pressure -- which part of the business is it affecting the most and is it predominantly on renewals of legacy deals or this is pricing on new deals that are coming on board?

It's at both, I mean if you look at -- I mean, rather than renewal or new, I would like to characterize it at as, in the business IT operations space when you are looking at infrastructure management, application development and maintenance, quality assurance. So, that business has become commoditized, so there is tremendous pricing pressure. So, it could be renewal of your existing deals or it could be even new deals at new prospects. So there is tremendous pressure there. So there definitely we are seeing pressure.

In other areas, I mean, and you look at package implementation or when you look at some of the newer areas like analytics and all, while it's a competitive situation, but there we are able to get better pricing because of the tools you have, because of the capability you have and so on. But a big part of the pressure is on the commoditized on the business IT operation side of the business and as Vishal said in the beginning, that's a structural shift that has happened in the industry, that segment is commoditized. So we don't expect that situation to change.

Omkar Hadkar, Edelweiss.

This is Sandip here from Edelweiss. Thanks for the opportunity. Sir, I have a couple of questions. One, I think you have already answered a part of it, but just wanted to know a bit more. The way we are looking at the automation part and the artificial intelligence part, I think, it will take some more time before it can become meaningful and in the meantime, you already mentioned that growth has to come from the traditional side. But, how are we doing things differently to ramp up that? One.

Secondly, taken the pricing pressure in that space, if you see the commoditized space, even if you ramp up, will it be meaningful enough to get us that growth? And second part of my question is, when we talk about our aspirational target of 2020 -- $20 billion by 2020 and if you assume even 12% growth in FY16, the required CAGR probably to do this is 16%, 17%. So do you think this industry is at a place where you can expect 16%, 17% kind of growth, not only for Infosys but does the industry gives that kind of potential?

So, Sandip, let me take that in two different parts. I think the way that you see this materialize, I think the key question that you have is, how do you see this actually take shape. There are three parts to that. The first one is simple bread and butter, operational efficiency, getting better at deal mining, getting better at deal -- better pitches, redefining, redesigning the RFP and orals process. Many things of this nature that we are putting in place that simply helps us get better at competing and pricing and things like that. That is sort of the basics of the business.

The second part of it is where we are already bringing automation to our existing services. So, I mentioned the example of the package systems work where we are bringing in Panaya. We are also bringing the Panaya type technology to other areas like verification, like application maintenance and things of -- and infrastructure management. We are bringing this thing that we call the Infosys Automation platform that we are currently working on around 35-plus customers with. I mentioned the example from Syngenta, which again helps to make infrastructure management more competitive by lowering the number of people by increasing their productivity and by adding a software component to this kind of an IMS deal. So that gives us an ability to differentiate in our existing IMS service packages.

So that has already started and that will continue to make our existing services more competitive. So that increases the win rate in our existing deals and makes the offerings -- the services more differentiated and that will lead to a revenue growth and that is the primary basis of the revenue growth that we see. That and, of course, the operational is getting better at working and how we have streamlined our operations and things like that.

The third dimension is a new stuff, the IIP project. We did a project with -- this last quarter, we went live with what we have done with RECO, we have done lots of projects with companies like Hershey and so forth with IIP also, Syngenta, we did a pilot with IIP. So we have several dozen engagements with IIP already going on. Again, this is not a material part of the revenue, but it is adding up and these are high margin projects. Similarly, the design thinking and their projects. So this will -- probably over the course of this year, this will not make a material difference to the quarter and to the year, but we'll start to show up towards the end of the year.

So the sum total of all of that, and I think that also builds up the momentum that we need to get going. The biggest part of renewal that we are doing is we have launched this more like and referred to as a kind of a cultural shift where we are engaging with all project managers in the Company. Day before yesterday, I had a call with 18,000 project managers and we have a very straightforward template to bring innovation to every single project that is going on in the Company. We believe that this will improve our ability to innovate.

For example, if you look at BPO, today we have BPO services where we run operations like procurement or finance and administrative processes and so forth, we are (technical difficulty) getting ready to launch a forecasting service where we can offer on top of IIP the ability of our BPO customers to forecast on the processes that they have.

So my sense is that with all of this renewal of our existing services, we will be able to A, differentiate the offerings much better and we bring in these additional revenue streams around what we have already been doing, which get us to that revenue growth. This is our assumption and of course, time will tell, but where we are sitting, the way we modeled it out, we feel confident in the -- at least 10% constant currency growth over the years.

Yes sir, thanks for that. Just one small question related to that. If you see the way things are moving in the industry, we are moving towards more and more artificial intelligence and in my view, as well -- article intelligence will become key component of the IT services part as well at some point of time.

So the biggest challenge I see is that we have three parts of the pyramid where employees are, and probably in the middle of the pyramid, there has not been much of change in last few years. So don't you think that there either should be a very big churn in that middle of the pyramid to get this thing going or achieve our target or you will have to probably give a huge training exercise to this part of the pyramid? So in both cases, probably the cost will go up temporarily. So what is your sense on that?

I think that to a large degree, I mean if you look at the utilization and the existing fixed costs that we have already incurred in the training infrastructure, I mean within the P&L that Rajiv just described we trained 25,000 people on design thinking, this was not like a MOOC, this is a one-day immersive design thinking program that was created by George and John Kembel and Scott Doorley who are from the d.school at Stanford.

So we have already done that and similarly things of this nature that we are doing, we can create large scale training kinds of offerings without incurring significant additional cost, but we will incur -- put the additional investments as necessary, as you know, innovation is something that I believe is essential to companies, certainly to our Company. So we will not for a second shy away from investing in the kind of innovations that are necessary in order to get these areas moving. So training is in particular something that is exceedingly important.

Dave Koning, Baird.

I guess my question, just as we look kind of sequentially through the year, is Q1 because Q4 was a little soft, did something spot into Q1, so Q1 should be a little better than normal or should have fallen to kind of that normal 1% to 3% sequential range that it pretty typically falls into?

Rajiv here. We don't give quarterly guidance, I would not want to give a color on how we see Q1 right now. But, we have looked at our pipeline, we have looked at this pipeline in our existing business, the booked business and all the investments that we're making to change gears and opportunity, and we believe that 10% to 12% is possible too, because -- yes that would mean that the first quarter has to be a good decent quarter, but we are doing -- we want every quarter to be good and every quarter to be better than the previous one.

Having said that, I would just say that our annual guidance we believe, so we should be in that range.

Okay. There wasn't really anything that that got pushed out from Q4 into Q1 that creates anything unnatural or un-normal right, though?

No, not in that. I mean there is always a deal that we are in center for, but nothing material like that.

Yes, okay. And then the other thing is your other income line just -- mostly the interest you earn on your cash has ramped significantly over the last four or five years and now it's like 20% of your pre-tax income. I don't think we should model it quite as high in fiscal 2016 given some of the gains I think that you've got and some of the FX moves and stuff in fiscal 2015, but I guess is that the right way to think of it to just -- maybe give us kind of a normalized 2015 number which we can kind of model fiscal 2016 off of?

See, the other income has two components. One is the interest income on our cash balance. So last year, we have been -- we have done a great job in terms of ensuring that our yields on the investments that we have made up is pretty high. But as you would know, most of our money is in banks in India and the interest rate in India started softening and the yields will likely to come down next year and that was a pressure on our operating income.

Secondly, the exchange gains and losses depending on your -- hedge position that you take every quarter, we have been lucky in the last year and we have done a good job, our treasury team has done a great job in terms of ensuring that we are positive on the exchange differences. That is something which is very difficult to predict because you take hedge positions across multiple currencies, costs against USD, INR and there is always a thing (technical difficulty) take on the currency. So we really cannot model the exchange gains that we will actually get next year or whether there is going to be losses depending on the volatility on the currencies. But on the interest income, interest rates are softening in India and yields are likely to come down.

Second is we have started making investments into acquisitions and investments or innovation fund which is going to be on the cash balance. We have also increased the dividend payout ratio. So based on that, we would start (inaudible) total profit started declining over the years. But the right way of measuring the business definitely would be the operating margins.

Okay. And can we assume that if you make an acquisition, because the rates have been so high on your cash that it's a lot harder to make an acquisition accretive like you could actually do dilutive deals from an EPS standpoint whereas if you think a lot of US companies can buy stuff at just giving up 1% cash returns or something, quickly make things accretive that you could actually make dilutive acquisitions, is that fair?

No. I mean, the strategy is not driven by trying to increase our earnings for the quarter or the year, it is in line with what our strategy is, we want to make strategic investments, we wanted to grow fast with the Company, having multiplied impact on our traditional business, we definitely look at how much time will it take for us to get the payback period or what is the -- how much that will take to get the EPS accretive. So yes, in a year when you make an acquisition, it would tend to be EPS dilutive. But I think we are very, very sensitive to that part and we make sure that wherever we invest money, it is done properly for a longer term and in the longer -- in terms of the longer-term strategy.

Rishi Jhunjhunwala, Goldman Sachs.

Vishal, just a question on the overall discretionary spending, right, it seems like you've been doing some full day workshops with some of the top clients that you have. Just wanted to get some sense in terms of what are the saying around where the discretionary spending is going to go incrementally. What we hear is, seems like most of it is going towards digital and if that's the case, then assuming that the Indian IT services companies generally are not 100% equipped to cater to that kind of demand. Are we looking at another one or two years of subpar growth in general, just because the discretionary spending bit is going to be coming in a lower share to the Indian companies vis-a-vis some of the other peers?

That's a very good question. My sense is that the discretionary spending is going towards what you could said next-generation growth area for businesses or new growth areas. These are typically based around software, around computing technologies, around digital, new ways of acquiring customers, new kinds of experiences for consumers and things of this nature, new ways to connect to them and exploring the markets and so forth.

So I mean, we did the Skava acquisition precisely for this reason and so we do see a lot of growth in this area and it is not that there is anything particular to India where we have any reason to believe that we cannot cater to that. I think the structural issue around the revenue decline and the pricing pressure and so forth is more around the back-office operating areas where things have become a lot more competitive and you have to assume that the pricing pressure there will continue.

And again, when we look at the long-term future of the Company, we see this breakdown between, as I mentioned, a relatively small amount of inorganic growth, but about 10% growth from these completely new kinds of areas and when you look at the remaining one, we are basically talking about 13%, 14% cumulative growth rates. This is one of our aspiration, I mean obviously, if we do 10% to 12% this year, that leaves us five more years to get to those kinds of growth or something like that, time will tell that. But we want to sort of steer the Company, make that sort of a knock star for us and steer the Company in that direction where we look to get to $20 billion at 30% margin and $80,000 per employee. Because we want to get into this next generation kind of a services model where people are surrounded by much better software around them and then we use that to create much more efficient services in the operational areas, but we create much more high value services in this next generation area.

Thanks. And just one quick question on capital allocation, right, you've increased the payout ratio to 50%, you've talked about investing in acquisitions and building technology and infrastructure and all of that can pretty much be funded through the massive amount of cash that you generate on an annual basis. Just wanted to get some sense around, do you have anything in mind in terms of the cash that you are currently sitting on which is also quite a hefty amount?

No. It's just the perspective. You may call it a hefty amount, you see what we did this time was, we put our financial model for five years based on the targets that Vishal has articulated, (inaudible). We have looked at the investment needs of organization, we have looked at the needs to make M&A, areas we need to make M&A and some of these areas are -- the multiples are pretty high, look at the needs to make investment in terms to employees, infrastructure, technology assets and all the investments typically have to be made two or three years ahead of time in terms of our infrastructure, land and everything else.

When we made our financial model, we looked at our cash flows. We felt that we need to keep that cash and that is something that we would need to hold -- the cash that we generate every year, 50% would go towards paying dividend, the balance 50% we spend towards M&A, which is strategic M&As and towards investment in multiple areas of the business.

Having said that, it does not mean that in case we come across an opportunity which is much larger in terms of M&A or investment, we would not do that. That's what this $5 billion would help us, it's also for derisking, it's also for ensuring that we are able to take good decisions, strategic decisions based on the news of the hour and we don't have to run around for cash.

So I think the way to look at it also is that over the last 12 months, we increased our dividend payout ratio from 30% to 50%, a [67%] increase in dividend payout. Our profitability has increased during the year, our EPS grows at about 15%. If you look at on year-on-year basis, the dividend payout has increased significantly for the shareholders.

Edward Caso, Wells Fargo.

If I did my math correctly, taking the midpoint of the 2016 guide and then working up to the 2020 numbers, you are somewhere between 18% and 20% CAGR revenue growth, with or without acquisitions, not that far apart. Now, automation is driving down deal sizes, the new efforts tend to be smaller deal sizes and you've got a lot of large numbers problem. So how do you get to 18% to 20% revenue growth in years two to five in the plan?

I think, Edward --.

So Ed, I don't know, we can probably connect offline and look at the math because our number shows about 17% CAGR over the next five years, including the M&A part. So if you exclude that, it comes at what, 15%.

And then of that 15%, if you had done further breakdown, separate the new from the renewal of the traditional ones and renewal comes to between 13% and 14%, which we believe is much more doable and the new one has to ramp up to about a $2 billion business and we see the path to getting there.

Now, there is a very big difference between having certain aspiration and making an operational plan for that, it's too early to obviously do that. Right now, our visibility is for this year and our general guidance that we want to get to industry-leading growth by financial 2017, which is what we have said since the time when Mr. Murthy came back. So we are holding on to that, but we have said this as an aspirational goal and it is something that we believe with a mix of capabilities that we can build and the services (technical difficulty).

I just got a clarification from my team. I think that $20 billion by 2020, what Vishal was referring to was a calendar year 2020, not a financial year. So when we change that, that change the math.

Okay, great. Thanks. And if you could also talk a little bit about operating cash flow, it was the first negative quarter that we seen in -- as long as we got models, they have been going back a long time. Obviously, there appear to be something about tax payments, but seems like it was sort of negative across the board. Was there something unusual this quarter and does that have implications for cash generation going forward?

If you exclude the booking that I explained, our [cash position] has been strong, we spent -- we did acquisition of -- we completed the acquisition of Panaya during the quarter and the investment that we made in Nova that was about $221 million, CapEx of $106 million, which is kind of -- CapEx and the working capital movements are kind of normal. What is exceptional item in this quarter was a payment of tax, which is we paid [$561 million] out of which toward the tax demand received from Indian tax authorities are roughly about $280 million, which is for the assessment year 2010/2011 and -- NASSCOM as the industry body and all the companies have been appealing against the orders of income tax authorities in India and have been -- have gone into appeal, but we need to make the payment to avoid interest accumulation on this demand. So most of us make the payment and then we go into appeal and that was the payment that we made during the quarter.

Thank you. Ladies and gentlemen, that was our last question. I now hand the floor back to Mr. Sandeep Mahindroo for closing comments.

Thanks, everyone for joining us on this call. We look forward to talking to you again.

Thank you. Ladies and gentlemen, on behalf of Infosys, that concludes this conference. Thank you for joining us and you may now disconnect your lines.