Infosys Ltd (INFY) 2016 Q1 法說會逐字稿

Ladies and gentlemen, good day and welcome to 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 Q1 FY16 financial results. This is Sandeep from the Investor Relations team. Joining us today on this call is CEO and MD, Dr. Vishal Sikka; COO, Mr. Pravin Rao; CFO, Mr. Rajiv Bansal, along with other members of senior management team.

We will start the call with some remarks on the performance of the Company for the recently concluded quarter, followed by comments by Dr. Vishal Sikka and Mr. Rajiv Bansal. Subsequently, we will 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 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 and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

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

Thank you, Sandeep. And good afternoon, good evening and good morning ladies and gentlemen. Thank you for joining us. I'm very pleased with our overall performance for the quarter that ended on the June 30, 2015, following the below-average performance that we saw in our Q4 of last year.

On nearly every parameter, our results were on par or ahead of our plan. Quarter-on-quarter, our revenue was $2.256 billion. This translates to a quarter-on-quarter growth of 4.5% in US dollars terms and 4.4% in constant currency. The overall demand environment continues to be encouraging, barring a few select industry segments. Our volumes grew by 5.4%.

This was the best quarterly growth in revenue in the last 15 quarters and in volume growth in the last 19 quarters, excluding the effect of acquisitions. I believe these results are based on creating a deeply client-centric organization in our traditional service lines, as well as in our new initiatives and in our business-enabling functions.

In large deals and in top accounts, we've re-imagined the client experience and created new processes to bring more discipline and more focus and this is enabling us to design our proposals based on the specific value drivers for our clients. In new service lines, we are seeing widespread adoption of innovation and emerging technologies, both in the grassroots of our organization, as well as in breakthrough innovation. And this is opening up entirely new types of conversations and new engagements with our clients.

Our operating margin for the quarter was 24%, down from the 25.7% of the previous quarter, primarily on account of seasonal wage increments and Visa fees. Employee utilization was at 80.2%, excluding trainees, and there is certainly some room for improvement that we see here. We have rolled out many specific initiatives during the quarter that are targeted at improving the productivity of employees and we are seeing some very encouraging early adoption of these initiatives. We have created a strong operational focus throughout the organization and with every employee. While we are still early in our journey to become the leading next generation services company, this result gives us good momentum for the rest of the year.

Let me now talk specifically about few aspects of our performance. Growth came across the board in all of our business segments. In Financial Services, we had a record quarter under the leadership of Mohit. Under Manish's leadership, our Healthcare and Life Sciences segment saw one of its strongest quarters. In Manufacturing and High-Tech under Sanjay Jalona, key client relationships saw significant expansion. And in Energy and Communications under Rajesh, we also saw significant growth, despite the sectoral pressures. And Sandeep's Retail CPG unit had a great quarter of deal conversions. And in Delivery, with Ravi, who took over our Global Delivery Services, we have seen tremendous growth in horizontal service lines. Infrastructure Management, for example, grew by more than 7% quarter-over-quarter.

Last quarter, I talked about the changes we made to rethink our client facing sales and delivery functions and bringing together multiple parts of the organization and really enhance our RFP processes. This has begun to show results in large deal wins and in client metrics. In large deals, improving our competitiveness to win large multi-year outsourcing engagements, it is quite important to build a solid revenue base for our future growth and to establish stronger client relationships, which are so critical to our business. We closed six deals of more than $50 million each, including three deals of more than $100 million of total contract value. These include a multi-year agreement with Deutsche Bank, covering bespoke development, maintenance, digital and mobility, package implementation and testing services; an application development and management, transformation and innovation services deal with Allied Irish Banks; a BPO and SAP services agreement with a shared services unit of the Australian State of New South Wales; and in the first few weeks of July, as well, we've won a few more additional large deals.

From an account mining perspective, we instituted a strong oversight of our top accounts and a more rigorous focus on pipeline development on conversion, and on just better connecting the dots and bringing the entire power of our organization to bear on the top clients. Our top 10 clients grew by 5.7% quarter-on-quarter, compared to a decline of 1.2% in the previous quarter. We added 37 net new clients and the number of $50 million-plus accounts increased to 49.

We've now integrated our consulting partners into our top 200 accounts. Our intent here is to increase the focus on discovering and delivering new value to our most strategic client partnerships, using design thinking methods. And we are hopeful that under the leadership of Sanjay Purohit, these consulting led initiatives will show a positive trend throughout the rest of the year.

Higher revenue per FTE is perhaps the most important measure of the success of our strategy. As I have said before, the pricing environment for traditional services continues to see downward pressure. We will work to change the trajectory of per capita revenue upwards in the coming quarters. Traction in our Finacle and Edge units and the acceleration of the deployment of automation solutions for software maintenance and infrastructure management and in business process outsourcing services will continue to be a key part of our focus towards this objective.

In Finacle, under Michael's leadership, we won 15 deals during the quarter, including those with Corporation Bank, Indian Overseas Bank and Qantas Credit Union. Our Edge suite of software-as-a-service offerings were sold into 14 new clients in the last quarter and four of these have already gone live. Johnson & Johnson selected ProcureEdge for its worldwide sourcing operations. BT Openreach expanded its use of our assisted platform in its call centers for improving their customer service and providing analytical insights. And by August 1, we will have completed the merger of our Finacle and Edge teams into one entity to leverage synergies in product management and go-to-market models and in operational efficiency.

Our Infosys Automation Platform for infrastructure management is already live in 10 client programs and is already yielding results in the form of up to 37% increase in [effort] productivity and 17% improvement in human portion of the services. Similarly with Panaya, we have seen some great traction in this last quarter. We won 15 engagements, sold by the Infosys sales team, together with the Panaya team, in our retail, manufacturing, utilities and services segments coming together. We are now pursuing more than 137 opportunities where Panaya's cloud suite and Panaya Platform, applying it to the enterprise systems upgrade opportunity, as well as going beyond enterprise system upgrades into new areas like testing and realizing 35% to 50% productivity gains in these projects, the way they would have done before Panaya.

In terms of our mid-term strategies, from my one-on-one interactions with client executives and at our Client Conference in San Francisco last April, my sense is that our strategies and our actions are resonating well with their own priorities. And this has begun to show up in multiple engagements across the Company. We continue to make headway with our new services. We now have more than 127 client engagements of the Infosys Information Platform under Abdul's leadership with 7 in production and 16 [prior] pilot engagements already finished, in areas like predictive analytics for railroads, sales agent effectiveness, customer segmentation and driver telematics.

As you know, we also completed the acquisition of Kallidus during the quarter and there is a growing pipeline, especially in our retail portfolio for the Skava Mobile Commerce Platform. Our M&A and innovation related investments under Ritika's leadership continue in full steam. We have participated in a Series-A investment round in ANSR Consulting, a management consulting that helps Fortune 500 companies in setting up global IT centers with Infosys as their preferred partner.

Perhaps one of the most exciting activities of the quarter was our Zero-Distance initiative to bring new value to all our existing client projects through innovation. This program now touches 70% of our delivery engineers and more than 676 of these ideas have already been discussed with clients. We are tracking this very closely. This grassroots innovation, this innovation in every corner of the Company is at the core of our strategic transformation that we have embarked upon as a company. Ideas for these innovations have come in all kinds of areas, like knowledge-based IT and neural networks, early validation and performance testing, test automation using robotics, automation for cloud migration, statistical modeling for marketing campaigns and next-generation technology architectures using new [open source] technologies.

From an employee standpoint, we continue to invest in our people. We rolled out an average wage increase of 7.5% to 8% offshore and 2.5% onsite during the quarter. Attrition remains in check. On an annualized basis, attrition during Q1 was 14.2% compared to 23.4% in Q1 of 2015, that is a more than 9% improvement. There was a slight uptick in absolute terms during the quarter, although this is seasonal for this time of the year. Our total employee headcount for the Group stands at 179,000-plus people. Employee engagement efforts during the quarter were focused on project management and at the project manager layer, stirring innovation at every project in the Company. We continue to simplify internal processes and policies to make Infosys a great place to work for every one of our employees.

Employee training has always been a top priority for us. We've reinforced our curriculum and strengthened our assessment. The Infosys Learning Platform, an online real-time platform for educating our employees, which I talked about last quarter, has now been rolled out to 3,000 trainees. 480 employees have already been trained on machine learning concepts during the quarter, and I'm happy to report that our breakthrough immersion training and design thinking has now crossed more than 40,000 employees. Mr. Murthy always talked about the value of learnability as a key core value of our Company. And as you can see, we will continue to hold a steadfast focus on this all-important value.

Finally, one more point on innovation. We are seeing new ideas coming from all corners of the Company, reflecting a culture of learning and embracing change. One remarkable example is in our facilities team, which has done some incredible work on renewable energy with the goal of making our campuses self sufficient by 2018. Our Hyderabad campus, a beautiful campus, will go completely off-grid by the end of this year.

Our first quarter performance gives me increased confidence that we can meet our earlier guidance that we provided for the full year of 10% to 12% growth in [financial 2015] constant currency terms. I wish to thank all the leadership team across Infosys, from sales and consulting, to project delivery and all our enabling functions. All these leaders are committed to and passionate about delivering value to all our clients and to our investors.

And now my friend Rajiv, who was recognized as the Best CFO by FinanceAsia this quarter, and in my view is the best CFO on the planet, will now take you through the financial highlights before we open up for questions. Rajiv?

Thank you, Vishal. Thanks for all the kind words. Hi, everyone. We ended the quarter with revenues of $2.256 billion, a quarter-on-quarter growth of 4.5%, reported basis. On constant currency basis, based on Q4 average rate, we grew by 4.4% and by 3.6% based on March 31 rates. If you recollect, in April, we had given a guidance of 10% to 12%, which required a sequential growth rate of 2.8% to 3.5% at March 31 rates to meet our lower and upper end respectively. Our performance in Q1 is in line with the required rate for the upper end.

I believe we have done reasonably well on the margin front in this quarter. We've been able to contain the impact of wage hike and Visa cost on our operating margins to 170 basis points through better operational efficiencies and cost optimization efforts. As you would recall, we rolled out wage hike for our employees effective April. We had also rolled out promotions in line with our quarterly promotion policy. During the quarter, our utilization, excluding trainees, went up from 78.6% to 80.2%. Onsite mix, however, increased to 29.2%. The pricing continues to remain under pressure and has declined by 0.7% quarter-on-quarter on reported basis and 0.8% on constant currency basis. On a year-on-year basis, pricing has declined by 7.3% in reported terms and 3.3% on constant currency terms.

We added [11,839] employees gross during the quarter with a net addition of 3,336 employees. We normally see a high attrition in Q1 as employees leave during the quarter for pursuing higher studies. Our annualized attrition on a standalone basis for the quarter was 14.2% as against 13.4% last quarter. And on a consolidated basis, was 19.2% as against 18.3% last quarter. However, annualized attrition on a standalone basis has declined by over 900 basis points to 14.2% when compared to Q1 of last year. Similarly, on a consolidated basis, annualized attrition of 19.2% is a 700 basis point lower compared to Q1 of last year. This highlights the positive impact of all the initiatives that we've undertaken in the last year to retain our talent.

Our cash and cash equivalents as of June 30 was $4.75 billion, compared to $5.214 billion as on March 31. The decline in cash and cash equivalents is due to payout of final dividend and payout towards acquisition of Kallidus and impact of increase in DSO days. Our DSO for the quarter went up to 68 days, something that we are watching very closely.

Last quarter, we articulated our capital allocation philosophy with up to 50% of our net profits to be distributed as dividend and balance to be invested primarily for M&A and CapEx needs. With the interest rates falling and expected to fall further during the year, we expect our interest income as a percentage of revenues to significantly be lower in current year as compared to last year.

During the quarter, we have seen volatile currency markets with rupee depreciating against US dollar and all major global currencies. For instance, on a quarter-end exchange rate, rupee depreciated by 1.8% against US dollar, 8.2% against British pound, 6.5% against Swiss franc and 6% against euro. This has resulted in a ForEx loss of $4 million for the quarter. We had outstanding hedges of $996 million at the end of the quarter. Though the effective tax rate for the quarter was 28%, we expect it to be between 29% to 30% for FY16, due to increase in statutory tax rate in India and some of our SEZ units moving from 100% tax exemption to 50% tax exemption.

We have retained the constant currency guidance at 10% to 12% for FY16, which was given in April. Due to favorable cross currency movement between March 31 and June 30, 10% to 12% in constant currency now translates to 7.2% to 9.2% in US dollar reported terms, compared to 6.2% to 8.2% that we gave in April. This is sequential growth rate of 2.3% to 3.5% CQGR from Q2 to Q4 at June 30 rates. We continue to expect our operating margins to be in the band of 25% plus/minus 1%.

With that, I will open the floor for questions.

(Operator Instructions) Edward Caso, Wells Fargo.

Congratulations on your quarter. I've sort of focused on some of the traditional businesses, infrastructure management, ADMO and so forth, which are enjoying strong volume, but they're also the more commoditizing part of the market. Is that where you're seeing price pressure and is that what's weighing on margins here? And then maybe if you could lead that into a discussion of where you are in automation, both automation of new work you're winning and automation of existing work. Thank you.

Let me start and then Rajiv can add as necessary and Pravin can add as necessary. We do see the downward pricing pressure in commoditizing areas like infrastructure, some parts of maintenance and verification and so forth. And that is why also, we believe that automation needs to come in there, probably before other areas. Also because they're also more amenable to automation. If you look at application development as a category, which used to be the primary category for Infosys 15-plus years ago, that continues to be something that is much more human-oriented, and many of these infrastructure type services continue to be ones which are more amenable to automation.

Since I started my journey here at Infosys almost an year ago, we have been investing heavily in bringing automation to bear across the board. And in this last quarter, we saw the first tangible results of that. We rolled out our Infosys Automation Platform, which is a collection of tools, AI-based technologies to help automate many of these routine mechanizable tasks. We rolled that out in infrastructure management to 10 clients. We had a very interesting result that came up as a result of that. These 10 clients -- the category of work that was done by people was about 1,080 people. And we replaced the work of 187 out of the 1,080 people with automation. That is a saving of about 17% in terms of the number of people, and a productivity improvement of -- we saw up to 37% in the work as a result. So what that does is, you see that in the infrastructure management going forward, we will replace the work that was offered as a people-only service into people plus this software. The software comes, that we charge for, is at a high margin. It reduces the number of people working on a given project and therefore we break out of this vicious cycle of utilization, RPP and profit margins. By creating this people-only model and transforming that into a people-plus software model, where the software is much higher margin, the number of people is less and we are able to provide the customer a more differentiated offering at a cheaper price; thereby being economically attractive to the customer and meet that cycle. We want to replicate the cycle across the board in every service.

In Panaya, as I mentioned earlier, we had 15 sales that were done by the Infosys sales team, eight in manufacturing alone. This is a great example. The financials of that are not significant yet, because 15 deals are relatively small. But the fact that our sales team has embraced this motion of selling this new solution in this new model is a very encouraging sign for the future that we're able to replace a project that would have been a people-only project in the past with a smaller number of people and with the additional Panaya software. So again, you see this pattern of replacing a people-only service with smaller number of people, perhaps that you can charge more for, with a software, so that the collective economics for the customer becomes better, the margin profile for us becomes better and we are able to free up the people to do more things of the same nature or more things of a different nature.

Going forward, we will see more and more of this. This quarter, in our infrastructure practice, we are already bringing the same practice to 4-dozen clients already. We have started that in Q2 now. And similarly in the other areas of our service lines, like in verification and in application maintenance, through our Zero-Distance initiative, I was very encouraged to see that 1,400 master projects, covering about 23,000 people, are now looking at ways to automate the work that they do, so that they can do more with less, as Professor Mashelkar used to say. This is, in essence, the key motion, key procedure that we want to repeat over-and-over again and bring to a much larger scale, as we grow forward, if we are to bring automation as a differentiator to our clients and if we are to get away from this -- sort of this downward spiral of increasingly lowering costs, this lowered RPP, further burden of utilization and so on.

As a quick follow-up realization continues to be negative. Is that losing importance as a metric here as the automation kicks in or should we start to see a positive turn in the realization metric? Thank you.

Yes, over a period of time that will happen Edward. Not immediately, but I mean, as we see the embrace of automation and the adoption of automation happen on a more widespread basis, you will see that happen.

James Friedman, Susquehanna International Group.

Hi, congratulations on these excellent numbers. Vishal, on the afternoon call, you had described the new intensity to sales, I think you had used the word aloof and detached in your characterization of the sales culture previously. I was just trying to get the sense of how much you've been able to reengineer the sales initiatives and what -- clearly have the tangible evidence here, but what are some of the methodologies that you're using to try and elevate the sales culture?

James, let me clarify that. I was not referring to -- we've never had an aloof and detached sales culture ever in our history of our Company over the last 34 years. The thing that I was referring to as being aloof and detached is the RFP institution that exists in the services industry. The very nature of an RFP and going through a proposal process is such that there is a somewhat of a distance to it, there is an aloofness to it, that's what I was referring to. One of the things, our sales team is as passionate as ever and continues to be and it has always been the case. In fact, we've had a very distinguished history of a highly -- high value, high integrity sales organization across our history. So, I want to clarify that in no uncertain terms.

Having said that, one of the things that we did in this last quarter was we did bring a tremendous focus to the way that we sell, the way that we go after the contracts and the opportunities. And one of the most visible signs of that was the work that we did in redesigning our RFP process. This RFP process that I talked about, we've been thinking much more about how do we bring design thinking to the RFP process, how do we bring a much deeper sense of client centricity and empathy for the client into that RFP process, changing the narrative, deeply understanding the strategic priorities of the clients and the value that we bring in our offerings and prepare that in a proposal that is much more attractive and that the clients can relate to. And we already saw the first successes of that in every one of the large deals that we won in the course of the last quarter and that we've won since then. We have had at least one deep change that happen as a result of this new RFP process. I hope this answers your question.

Yes, thank you. And then just one follow-up. Rajiv, could you revisit your SEZ conversation? I didn't quite follow what's going on there, but what that implies for the tax rate going forward?

No, if you would -- in India, we have a tax exemption for all the software services exports that we do from Special Economic Zones. So, the tax regulation in India says for the first five years, we get 100% tax exemption. And from the sixth year onward, we would get 50% tax exemption. Some of these SEZ units were set up five years back and they are moving to 50% tax exemption during the year. As a result of that, the effective tax rate is likely to go up because of this profits moving from 100% tax exemption to 50% tax exemption. In addition, there has been an increase in the statutory tax rate in India, and that is another reason why the effective tax rate is likely to go up this year.

Joseph Foresi, Janney Montgomery Scott.

I guess my first question here was, could you give us some idea of what portion of your business is in some of the newer offerings like digital versus some of what you're seeing on the commoditization side?

There is a tremendous sense of ambiguity what digital exactly means. When you look at it philosophically, when Nicholas Negroponte wrote the great book Being Digital and look at it in that sense, everything that we do is digital. So I would say that 100% of our revenue is in digital. But when we look at it in the sense of digital and what it is doing to the industries that we serve, for example, to retail and how digital is enabling a completely new set of experiences for consumers in retail environment, or how digital is about bringing mobile devices and transforming the experience of the consumer, or how digital changes the manufacturing industries towards becoming much more, where software becomes embedded -- I mean if you look at the dashboard of an S-Class Mercedes today, the entire dashboard is a digital one. There are no knobs and switches and needles that used to be there. So in that sense, there are tremendous opportunities that we see in how the physical world of our clients is becoming transformed by digital technology. I mean we see a great set of opportunities there.

I mean, so we do a lot of business in these new areas. Almost all the work that we're doing in the digital technology space is in these kinds of opportunities. Almost all our design thinking work that we do, almost all the analytic work that we do is in these kinds of engagements, in these kinds of areas. So once the industry settles down on a better, more precise and more realistic definition of what they mean by digital, I mean there are massively varied distributions and how companies characterize their digital revenue and I think it is frankly, in my view, it is nonsense. And once they have that, then we'll be able to more precisely articulate the parts of our business that are in those areas. But let me just for now say that as the world around us becomes increasingly digital and increasingly driven by this transformation of the physical experiences into virtual ones. we are seeing almost all our growth coming in -- in almost all of those areas, we see tremendous growth in our business.

Well, I mean I agree that there needs to be a -- I'm sorry, go ahead -- did I cut somebody else there?

No, go ahead Joseph.

Yeah, I agree, there needs to be standard definition on the digital side, but I guess my question is, as you see these projects develop in digital, are they new incremental business, does it impact your visibility at all and how should we think about them from a margin perspective? I'm just trying to get an idea of sort of how you compete versus some of the other players who are obviously claiming fairly good growth rates and large percentages of their revenue from digital.

The way I would characterize that is the new engagements, so from our consulting team, the way we are reorganizing and setting up our consulting is in two distinct categories. Towards the renewal of the existing businesses, we have created the theme of what they call knowledge-based IT, which is an overarching program to help transcend and renew the existing landscapes, the IT landscapes of customers and the new area, which is all about -- I think all about what you have been referring to as digital, which is around how do we help transform our client's businesses in strategic new areas. So in retail, that means redefining the experience of the consumer, creating more omnichannel, as well as rethinking the physical spaces that consumers going into. I mean, if you notice, in the retail world, many chains have been closing down their stores and things like that, but many others are actually rethinking the physical store as a great new kind of a digital experience and we are helping many of our retail clients with these kinds of changes. Or even in banks or telcos and people who have retail presence, and in hospitals, physical spaces are becoming increasingly digital and we're seeing a great growth happening in these areas. Or if you look at some of the other industries, around CPG, where you optimize the supply chain, using completely digital technologies, where in the past there was a lot of physical presence and so forth, or in energy with digital oilfields, everywhere we see that the new of the equation of renew and new, almost inevitably ends up being all about digital.

So the way I would put it is, the product and platforms business, all the IP-led services business, the design thinking business, almost all of the new and parts of the renew will all be about this so-called digital transformation of businesses and the rest will be about the renewal of the existing landscapes to move it to the cloud and things like that. So the key ends up being is, which part of the customer's business which used to be physical or analog is now becoming digital or virtual and how do we put a bracket around that, and I think that is a good way to measure what this means and in our case that would be again the good way to measure that.

And then last question for me, sort of a quick one. On the profitability side, I understand the margin profile for this year and sort of what you've given for the guidance for the bracket there. But as digital becomes a larger piece of your business and you balance it versus commoditization, where do you see or how do you feel about the profitability of the business and present margin levels over a longer period of time? And you don't have to give us a number, but I'm just sort of trying to get an idea of sort of what you think is sort of a realistic level?

I think that so far the visibility that we have operationally over the rest of this year, we feel comfortable with the 25%, plus or minus 1% guidance that we've given. If you look at beyond that, earlier -- in response to one of the earlier questions, I mentioned that the formula that we are following is of taking a people-oriented proposal, which was 100% driven by people, and transforming that into a lesser number of people plus software, and we charge for the software, as we do for Panaya or IAP or IIP or the other platforms. So that equation changes in a way that instead of 100% people at a certain rate and so forth, towards a lesser number of people plus software, it does three things. First of all, it lowers the cost to the client and it helps our service become more differentiated, more attractive, because we can lower the price of the software, you have a lesser number of people, so you have more room to maneuver. Second, it actually helps us improve our margin, because the software is at a much larger margin and we have lowered the number of people who are in the part of the proposal. And third, it frees up the people to do more, to do more of the new kinds of things, like the digital things that you were talking about and to do more projects of the same nature.

So this cycle we want to repeat over and over again and my expectation is that if we are successful at scaling up this cycle, as we have done -- the early work of that in this last quarter with Panaya and with IIP and so forth, then we will see the margin profile actually not come under pressure and in fact increase. And that is why I have laid out our aspiration of getting to 30% margin by 2020. If we are successful at replicating and scaling up this virtual cycle of going from a people-only model to people plus software model, then we will be able to increase our margin profile without compromise and that is our assumption.

Ravi Menon, Elara Securities.

Gentlemen, congratulations on a great quarter. So, the first question is on the high number of laterals that we've seen as a proportion of gross hiring over the last three quarters. Do you think that this is investment in your new areas, maybe in the Infosys Information Platform, trying to extend Panaya into -- you making it useful for other ERP packages as well, like Oracle, getting Finacle ready for the US launch, things like that, or is this also kind of a rejig of the employee pyramid with new capabilities, new skill sets that you require in your traditional areas of business?

This is Pravin here. Let me respond to that question. So, what you're seeing is a short-term phenomenon. So, we're seeing many transformation and need for investing in newer areas. So, while we try to ramp up on capabilities and cross-skilling people internally, so there is some dependence on external hires. And some of these areas are also on some of the newer technologies where you may not have too many people, but over a period of time, once we are able to cross-skill our people, we will see reduced dependence on -- we will see those lateral numbers coming down. We'll continue to be reliant on our people, training them, reskilling them and they'll be able to scale up and take on some of the new technology roles.

And if I might have a follow-up for that, can you give us a rough timeframe of when you think Finacle could be launched in the US and similarly Panaya's extension for Oracle and other platforms?

We've already achieved, from a functionality point of view, a lot of the capabilities that we need for the US market. We already have successful clients. Of course, we have talked about Discover Financial as a great success story that we've had with Finacle recently and we've done additional deals in the US as well and we are scaling up our presence there, primarily from an implementation services perspective. So, we are very confident that Finacle will be able to address the -- certainly the Tier 3, Tier 4 banks in the US market, which is a huge opportunity for us. We believe that Finacle is a great core banking platform. We believe that it is the best core banking platform on the planet, and we are continuing to invest heavily in this, in Michael's leadership, and we are very confident about its capabilities in the US market. I mean, as you may have seen recently, many analysts voted Finacle as the best banking platform in the world. We have recently ported it to the Azure platform, Azure cloud platform with Microsoft. And we are also working with Oracle to move Finacle to the Oracle cloud and we expect to see growth in the US in the coming quarters.

Keith Bachman.

One more thing before we get to the next question. [Sanjay] what where you saying? Panaya 30% is already in the Oracle space.

Keith Bachman, Bank of Montreal.

Rajiv, for you, if I could. If you could talk a little bit about, you mentioned operating margins are expected to be -- continue to be expected to be 25%, plus or minus. If you could talk about some of the puts and takes relative to the quarter you just reported, and particularly address, how does the pricing and commoditization that you're seeing in the business impact that, but if you could deal with some of the puts and takes as you roll out here over the next couple of quarters to the operating margins?

That's a good question, because we are seeing pricing pressures, and we're seeing very, very competitive pricing environment in almost all of our large deals that we are bidding for. But you also have to understand that as we embrace automation and we talk about more effort productivity, some of that would contain the impact of pricing pressure that you see in the market. Second is training and retraining or reskilling of people. Our subcontractor expenses and personnel revenues have actually steadily gone up from 2.5%, 3% couple of quarters back to 5%. As you know, subcontractors are a multiple of the employee cost per capita and that is another lever, which we're focusing on in terms of training and reskilling our people, so that we're able to replace high cost of contractors on projects, which would give us a margin lever. We have spoken about utilization and that we would like our utilization to be 83%, 84% and today we are operating at about 80%. So that's another 4% lever that we have. Role ratios are very important. In the last couple of years when our growth was muted, it did not give us enough opportunities to correct our role ratios, because employees do expect promotions, even if there is not growth; that's an issue of the industry. The industry -- the competition was doing well and to retain the best talent that we had, we do a lot of promotions; roughly about 25,000 promotions last year.

So as we see an acceleration in our growth, we believe that we'll be able to achieve a much leaner and better role ratio. So, there are enough levers that we've on the margin front in the medium to long-term. In the short-term, yes, it creates a problem, because when you're in the middle of a quarter when you're looking at your investment needs to accelerate the growth, look at the needs of the projects in terms of staffing and the technology assets that they need, at the same time, you've to work within a very narrow margin band. There is a fine balance that we have to strike on a day-to-day basis. And I think over the last five quarters, we have struck a good balance. Honestly, I would not want to improve the margins at the cost of investments, and which will lead to better growth. So every single investment is looked at from a return perspective, from a ROI perspective and if it makes sense in the medium to long-term, we would go ahead and make the investment, even if that means that in the short-term or the near quarter, you would see a dip in the margin.

So, I think our philosophy on the margin is very clear. We would want to -- as Vishal had articulated, by 2020 we would want our margins to be about 30% operating margin. It's a long journey. And in the near term, we have to balance our needs very, very carefully.

Okay, I did want to come back to the 30% margin aspiration in 2020. If you think about the next five years, roughly a point a year, so to speak, but how do you get there, because you've talked about adding IP as one of the key variables in machine learning and automation. I would assume as you acquire more IP though, that you'll start to bump into some of the software vendors who are also your partners, would then become, I would think, some level of competition. But maybe if you could address, how you anticipate getting to the 30% in some of the bigger pockets?

I think that from a software vendor perspective, if you look at the platform layer, more and more of the platform technologies that are relevant in the modern world continue to be open source. So maintenance and delivery offerings around open source software, where we add value to existing open source software and any contribution that we make also goes back into open source and our IP is on solutions built on top of it, I think is a model whereby we can prevent ourselves from getting into the trap of, on the one hand competing with legacy or incumbent vendors and on the other hand continuing to monetize our IP.

From the perspective of application development and custom solution development, one of the benefits of being at Infosys is that we have the tremendous scale to bring these kinds of custom or highly micro-vertical solution -- industry-oriented solutions to life, in a way that a pure package system vendors cannot. And I think when I came here, that was one of the most attractive things I found about Infosys is that, that opportunity exists, and being able to, at a very massive scale, bring unique IP-based differentiated solutions for narrow parts of industries. For example, one of the amazing solutions that we've built using AI technology is a solution to balance an aircraft. And we've been working on this and it is amazing, and we can -- an airplane's weight, when engines are mounted on it can be balanced. And we have built AI systems to do this in a much more accelerated way than was possible using previous techniques. This has probably 10, 12 customers that use that, but it has an extremely high value to those 10, 12 customers. And we can afford to do point solutions, highly niche industry specific solutions for these types of things. And usually the new kinds of problems where software is making its way for the first time don't have package system under anyway. So we believe that that strategy of being open to whatever exists in the client's landscape, being a partner to everybody, being open to everybody and yet being able to carve a niche for ourselves by building differentiated IP-based solutions is a right strategy, which manages to get around these existing pitfalls that we see in the world today.

Rishi Jhunjhunwala, Goldman Sachs.

Couple of questions. First on the sharp rebound in the growth in this quarter, just wanted to understand a bit more on how much of that would you attribute to on-ground demand actually picking up versus we executing much better in this quarter, and just trying to keep the seasonality aside, we understand that typically June is a better quarter.

Rishi, my sense of it and perhaps Pravin and Rajiv and any of our leaders who are sitting here can add their perspective on it. My sense of it is an obviously better execution, a much more focus that we brought along with the changes that we put into the organization to -- again to focus ourselves in a very deeply client-centric way is primarily the reason for the result that you've seen. And some of it I would also attribute to the strategic initiatives that we have put in place over the last three, four quarters, which are now starting to bear fruit. But that is not -- but a much larger percentage of the change that I would attribute to is to the better execution and to the initiatives that we put into place. I see lots of people nodding their heads around the room. So, I don't think anybody wants to add anything to that.

And second question is, over the past four to five years, we have seen that consistently we've been starting the year well. However, in Q3 and Q4, the growth seems to be tapering off, and I'm not talking about again the sequential seasonality, but even in year-on-year growth terms, it tapers off in the past few years. You mentioned in the morning that you would hope and you would work towards rectifying that growth trajectory or the trend. Just trying to understand, first of all, what is the issue that even year-on-year growth actually tapers off, and secondly, what steps you can potentially take to make sure that the second half is -- the deterioration doesn't happen as it has happened in the past years?

We are acutely aware of this. We have looked into this, our management team has been thinking about this over the last few weeks and the last quarter or so. For whatever sort of reasons, this has been the case in the last several years and we are aware of this and we are working hard to make sure that this year is not a repeat of that, again by pipeline building and client centric focus, looking at getting better visibility into the future of projects and the opportunities at the clients and so forth. But the other reason that I'm cautiously optimistic that the second half of this year will not have the same fate as the second half of the previous year, certainly relative to the previous years, is that the initiatives that we've put in are consistently picking up steam and while these are still small, I mean on IIP, as proud as we are that we have 127 projects, on Panaya we have 137 engagements, on design thinking we've more than 100 engagements, but together all these add up to like 400 projects out of a baseline of 8,500 projects. And so, as important as these are, they are still small, but there is a consistent rise in the adoption of these.

And therefore, we believe that as we get into the second half of the year, more of the growth will come from these kinds of initiatives and the Zero-Distance will have picked up more momentum by then and so forth. So that will also help in addition to the operational excellence and the deep scrutiny on this particular scourge that we've had in the past that that will be okay. So I feel -- as I sit here today, I feel cautiously optimistic, I feel aware of this problem that we have had in the past years and cautiously optimistic that we'll be able to do better this year.

And do you think that by nature these revenues are less seasonal than the traditional services that we do?

I don't think so. I mean maybe Rajiv and Pravin can add their insights into that. I come from the point of view that great solutions and great innovation is of a timeless nature and when times are bad, you need innovation and when times are good, you need innovation. There are some furloughs and things like that that happen in our Q3 in the manufacturing industry and other kinds of things, but we know them in advance and we know that and we should be able to -- with appropriate forecasts and better planning, we should be able to mitigate those. That is sort of how I -- at a high level I look at it, but obviously, an organization of 180,000 people continually goes through the same exercise every year. So, there must be some set of reasons for that and we're working hard to make sure that this year we don't have the same fate as the previous year.

Dave Koning, Baird.

Hey guys, great job and I just have a couple of short-ones. But the acquisition contribution from Panaya and Kallidus or whatever, how big were those in the quarter? Maybe how much sequential growth that that drives to?

The incremental growth from the two acquisitions that we've done is only about $7 million during the quarter. Skava and Kallidus were closed -- deals were closed only on June 3, so it's only a one month revenue. And Panaya and Kallidus is a small acquisition. They are very strategic acquisitions, but they don't really add much to the topline in the initial stage, but they have a huge multiplier effect on the entire business of the Company. So in terms of your question, it's only about $7 million incremental revenue that is factored into the revenues.

And somebody else asked about the tax rate, the 29% to 30% this year. Is that sort of what we should expect going forward now? Is that all normalized?

It seems so, because the increase in tax rate is primarily because of statutory -- increase in statutory tax rate in India, which I don't see it coming down unless the Government of India in the next budget has to bring it down, and also the fact that some of the units would move from 100% tax exemption to 50% tax exemption, I would believe that this is here to stay.

And then lastly, just the sub-contractor portion of expense, that ramp I think it was the highest it's been, maybe averaged a little over 5% of rev. What's driving that and maybe is that something we should expect to stay elevated?

Yes, this is Pravin here. See, at times, when there is need to ramp up quickly on particular skills, if we don't have internally, we may need to deploy subcontractors and sometimes, particularly in quarter one and quarter two, our quarter one and quarter two, we also at times have a very high percentage of Visa utilization. So we don't have too many people with Visas. So that means that either we have to recruit or we have to use subcontractors in the short period of time, till we are able to backfill. So, what you're seeing is something because mix of mismatch in skills, as well as pressure on the Visa, but over a period of time, we should be able to bring it down.

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

We would like to thank everyone for joining us on this call and spending time with us. We look forward to talking to you again during the course of the quarter. Thank you.

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.