Infosys Ltd (INFY) 2016 Q3 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 Q3 FY16 financial results. I'm Sandeep from the Investor Relations team in Bangalore. Let me start by wishing everyone a very happy 2016. Joining us today on this call is CEO and MD, Dr. Vishal Sikka; COO, Mr. Pravin Rao; CFO, Mr. M.D. Ranganath; along with other members of the senior management team. We'll start the call with some remarks on the performance of the Company by Dr. Sikka followed by comments by the leadership team. Subsequently we'll open up the call for questions. Before I pass it on 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 would now like to pass it on to Dr. Vishal Sikka.

Thank you, Sandeep. Good evening and good morning and thanks for joining our call. To start with, I want to recognize the spirit and the passion of all Infosyians, which in many ways defined our performance in the third quarter. We entered this last quarter somewhat apprehensive about what was ahead. Q3 is known for its seasonality, the furloughs, the less number of working days, et cetera and we were coming off an amazing Q2 performance and then we were faced with the devastating floods in Chennai last month. But despite all of this because of the spirit and the passion of our people, I am pleased with what we achieved and the momentum that this has created for us to end the fiscal year on a strong note. We ended Q3 of FY16 with revenue of $2.407 billion. This translates to a quarter-on-quarter growth of 1.7% in rupee terms, 0.6% in US dollar terms, and 1.1% in Q2 constant currency.

Year-on-year our revenue has grown 12.5% in constant currency. If you adjust for the one-time early termination fee paid to us by a client in the last quarter, our quarter-on-quarter revenue growth came in better than expected at 2.1% in constant currency and 1.6% in reported terms. Volume grew by 3.1% indicating a healthy momentum in the underlying business. Utilization including trainees was 74.2% and 80.6% excluding trainees. Blended per capita revenue decreased 2.5% as a result of lesser price realization. If we adjust for the one-time termination fee impact realized in Q2, pricing decreased by 1.5%. Our operating margin for the quarter was 24.9% compared to 25.5% in the previous quarter. We reported EPS of INR15.16 for the quarter and in US dollar terms EPS was $0.23. Margins were impacted due to the seasonality of price realization that is typical of the third quarter and for some other reasons that Ranga can talk about.

Attrition for the quarter decreased further to 13.4% on an LTM basis and Infosys is now home to 193,000 employees. I mentioned our utilization earlier. Our Zero Bench program, which is aimed at rethinking the notion of the bench that prevails in our industry, has seen great adoption. More than 8,000 projects have or are being worked upon by more than 4,000 people while they wait for client projects. This is giving them valuable real life experience that they then take to our clients and in the process, they are creating software assets for our own use that are of value to us. Our outlook for the rest of this financial year is positive. Therefore we are raising our revenue growth projection for the full year to 12.8% to 13.2% in constant currency terms. This is ahead of our original annual guidance of 10% to 12% in constant currency.

We expect that this will put us in a good position as we head into FY17 and on our way to industry leading growth. Ranga will touch upon some of the increased costs that we see on the horizon due to visa fees, et cetera and where we think we will end up in March. Now let me talk about some of the key developments of this quarter and the execution of our strategy to reimagine services in which we bring all that is possible with human potential together with software and services. While we still have a long way to go, we see many promising milestones. We continue to focus on changing the nature of our conversations with clients to become much more strategic and we can see this reflected in the renewal of existing large contracts, opening of new types of engagements, and net new accounts, as well as signing of large deals.

The number of $50 million plus clients grew to 51 and the number of $10 million plus clients grew to 171. We also added 34 net new clients during the quarter. Our momentum of large deal wins continued and we won four large deals in the quarter with nearly $360 million in contracted value across application maintenance, infrastructure management, and our in package systems. In addition, we won a large renewal deal of around $600 million. The pipeline of large deals continue to be healthy and in fact in the early weeks of this Q4, we have already signed new deals worth about $150 million. Our Financial Services segment under Mohit's leadership continued its strong performance with a 2.6% quarter-on-quarter growth in constant currency. China and India geographies also grew well for us in Q3.

Now turning to the heart of our strategy, innovation. We are driving innovation in two key ways, in our grassroots efforts to empower every Infosyian as an innovator through programs like Zero Distance and in our reimagining of next generation services with our Aikido service offerings. Our Zero Distance program, which focuses on driving innovation in every ongoing project that we do for every single client, has continued to grow. We now have more than 8,000 Zero Distance projects. More than 90% of our delivery organization under Ravi's leadership has already done something innovative in an existing project beyond the statement of work bringing value to our clients in every project. As recognized in many client surveys, the innovation quotient of the organization has improved and Zero Distance has been recognized in employee surveys as the most impactful and engaging movement in the Company.

When we talk about innovation at Infosys, we don't talk about a single department, but rather all of our sales innovators. I believe this is a unique part of our strategy to change the nature of conversations that we have with our clients. We have begun to see this idea deliver value for our clients as well. For example at TNT Express, where we manage more than 721 applications in a complex landscape, we proactively identified an opportunity through our Zero Distance program to drive more value by using the Infosys Automation Platform to monitor their mainframe based messaging applications. This is enabling earlier detection and automatic resolution of incidents and resulting in higher business stability. We are at the same time seeing strong adoption of our new Aikido service offerings across all our industries.

Clients continue to respond well to this framework as they look to us for help in renewing their IT landscapes non-disruptively. This is the key of Aikido; leveraging new platforms and technologies to open opportunities, which is the Ai of Aikido, and bring the power of design thinking to find the great problems that they need to solve, which is the Do of Aikido. During the quarter we leveraged Ki to help clients modernize their legacy architectures, migrate existing application landscape to the cloud, and leverage DevOps and agile methodologies of architectures for more agile landscapes. Commerzbank in Germany for example chose us for a multi-year application management program to develop a post trade utility for the bank leveraging principles of design thinking in the Aikido framework to simplify application architecture, to standardize and improve processes, and to drive cost efficiency.

The Infosys Information Platform surpassed 200 engagements to-date with 30 already in production. I am particularly excited about our work with ATP, the Association for Tennis Professionals, where we are helping to reimagine the tennis experience. At the Barclays World Tour Final recently, we analyzed huge amounts of data from the Chair Umpire and from Hawkeye to deliver unprecedented foresight into each match and in doing this help to transform the fan experience. Infosys is working with Hershey's to build a predictive analytics capability using IIP. We have set up a data lake of close to a terabyte and 5.3 billion records on IIP for doing advanced analytical analysis to enable real-time decision making in the supply chain area. The Infosys Automation Platform (IAP) surpassed 121 engagements with 47 already in production.

Automation is making its way more fundamentally into our services. I have said this before several times that automation and renewal are the answer to the decline that our industry is in the midst of due to the commoditization of traditional services. In this quarter we released more than 1,100 engineers compared to roughly 800 FTE in the last quarter and this was across our service lines; infrastructure management and testing as well as BPO, enterprise packages, and the engineering services BI and digital. Automation impacts every single service that we deliver. Panaya, Skava, and Edge solutions continued to see strong adoption. Our EdgeVerve unit had 24 wins and 25 go-lives for the Finacle and Edge platform offerings. With Panaya we closed 13 new joint engagements including one at BNSF, the North American railroad company, for risk-based testing on their SAP landscape.

Skava's mobility service offering for retailers had a record Black Friday weekend with traffic and m-commerce sales up by 50%. In Do, design thinking, our methodology to discover and articulate the most complex and most strategic problems of our clients, we have conducted more than 151 engagements with clients to date led by our consulting teams. For example, we helped Aimia create their new market entry strategy by leveraging design thinking to evaluate the core needs of the market and its consumers and open the minds of their teams to think of creative solutions rather than focusing on predetermined ideas. More than 69,000 of our employees have now been trained in design thinking and clearly we can see the application of this across the board in helping us build better relationships with our clients and engaging with them on their strategic transformative projects.

We continue to look for investment and partnership opportunities that bring additional value to our clients and that help position Infosys in a broader context. This quarter we completed the acquisition of Noah Consulting, a leading consulting services provider for the oil and gas industry. We also invested in WHOOP, an early stage company that offers sports performance optimization system using variable solutions and we invested in CloudEndure, a startup that provides cloud migration and cloud based disaster recovery systems. We announced our participation in OpenAI, a non-profit organization dedicated to developing and advancing artificial intelligence bringing the best of AI talent in the world together in the interest of all of us. This initiative adds an important new dimension to our several ongoing efforts in artificial intelligence.

We were named the Corporate Citizen of the Year at the ET Awards last week for our CSR initiatives and purpose driven philanthropy done by our three foundations: the Infosys Foundation in India, the Infosys Foundation in the USA, and the Infosys Science Foundation. We launched a new solar power plant in our campus in Hyderabad and now produce 7.2 megawatts of power with solar, which helps meet more than all 100% of the delivery center's requirements in Hyderabad. Before I hand it over to my friend Ranga, who had his first quarter as our CFO, I want to congratulate all Infosyians on being ranked second in the business world overall list of most respected companies especially because the award cited our belief in self as the reason for our winning. This reflects my own belief in the unlimited potential that all of us have.

The future is something that we invent, that we make as my friend and teacher Alan Kay often reminded us. People ask me about all these other factors like what is happening in the broader economy, what is happening in China, how we compare ourselves with other digital services, and so on. While all of these are important, they all remain things that we react to, that we respond to. The more important part is we are only limited by our imaginations. And in this way I am very optimistic for the path that we are creating, that we are making for ourselves as well as for our clients.

Thank you very much and I would now hand it over to Ranga.

Thank you, Vishal. Hello everyone and wish you all a very happy 2016 ahead. On the big picture, our revenues in Q3 were $2,407 million. This is a quarter-on-quarter growth of 0.6% sequentially in dollar terms and 1.1% in constant currency terms. On a year-on-year basis, Q3 revenues have grown 8.5% in dollar terms and 12.5% in constant currency terms. If you recall, in Q2 we had a one-time revenue of $23 million due to a contract termination. After taking into account that termination, our quarter-on-quarter growth is 1.6% in dollar terms and 2.1% in constant currency terms. Q3 is a seasonally soft quarter due to the impact of furloughs and lower working days. Growth in Q3 was better than our earlier expectation since the impact of some furloughs was lower than what we anticipated. We were also able to overcome the client specific headwinds to some extent.

We also had to navigate through unexpected events such as Chennai floods. However, our effective business continuity plans ensured that there was negligible impact of the same on our revenues. During the quarter, we acquired Noah which resulted in additional $3 million revenues for Q3. Volumes grew by 3.1% during the quarter, marginally lower than 3.7% in Q2. Realization for the quarter declined by 2.5% on reported basis and 2% on constant currency basis. If we normalize the impact of contract termination in Q2, decline in realization was 1.5% in reported terms and 1% in constant currency terms. Furloughs and lower working days in Q3 also impacted the realization to some extent. On a year-on-year basis, realization was lower by 4.5% in reported terms and 1.1% in constant currency terms. Our utilization excluding trainees declined by 70 basis points to 80.6% during the quarter.

The utilization including trainees declined by 120 basis points to 74.2% due to addition of trainees during the quarter. Onsite mix increased marginally to 29.5% as a result of growth in certain consulting and SI services projects, which has a higher onsite component. Our operating margin for the quarter was 24.9%, a decline of 60 basis points during the quarter. Margins for the quarter were impacted by 110 basis points due to realization decline and another 60 basis points due to drop in utilization, increase in sub-con cost, and impact of Noah consolidation. This was offset by 110 basis points due to benefits resulting from both rupee depreciation and reduction in variable pay thereby limiting the margin drop to 60 basis points. At the group level, we added 14,027 employees during the quarter with a net addition of 5,407 employees.

Attrition continues to be on the declining trend. At the Group level, annualized attrition was 18.1% as against 19.9% last quarter. The quarterly annualized attrition on a standalone basis for Infosys Limited has declined to 13.4% from 14.1% last quarter. This is at par with the lowest level of attrition in the last 15 quarters. Operating cash flow generation was stable during the quarter. We generated operating cash flow of $474 million in Q3 as compared to $480 million in last quarter. We paid out interim dividend and dividend distribution tax of $423 million and $102 million towards deferred consideration on purchase of Lodestone. CapEx during the quarter was $103 million. Hence, our cash and cash equivalents as of December 31 was $4.765 billion as compared to $4.894 billion last quarter. DSO for the quarter was 65 days.

In parallel, we had a reduction of $74 million of unbilled revenues in Q3 and they fell to the lowest level in the last two years. We saw another quarter of US dollar strength against most currencies. Rupee depreciated against the dollar by 1.1% on an average basis and 0.9% on period-end basis. US dollar appreciated 2.3% against the euro and 2.2% against the UK pound. The effective tax rate for the quarter was 27.2%. This included tax reversals due to completion of tax assessments in certain jurisdictions. Excluding this, our effective tax rate for the quarter was 30%, which is within the 29% to 30% band that we had indicated earlier. Our net margins during the quarter were 21.8% compared to 21.7% last quarter. Our EPS for the quarter was $0.23. EPS grew 0.9% on a sequential basis and 0.4% on year-on-year basis.

Coming to the segments performance. Amongst verticals: FSI, which is Financial Services and Insurance, grew by 2.7%; Energy, Communication, and Services grew by 4.2%; while Retail and Manufacturing declined by 0.5% and 3.7% respectively. Amongst the geographies: Europe grew by 2.1%, North America declined by 0.6%, while the Rest of the World was flat. Q3 growth in Americas in Manufacturing was negatively impacted since Q2 revenues included $23 million from contract termination that I mentioned earlier. India grew by 23.1% due to ramp-up of a few projects. The growth in India should be seen in the context of a small base of business, which sees changes due to ramp-ups and ramp-downs in projects. During the quarter we added 13 clients above $1 million, four clients above $25 million, and one client above $50 million.

Our share of revenues from fixed price contracts increased further during the quarter to 44.6%. Our revenues from Top 5 clients declined by 0.3% quarter-on-quarter and from Top 10 clients decline and it was flat, actually 0.1% QoQ decline. However, on a year-on-year basis, our revenues from Top 5 clients grew by 13% and from Top 10 clients grew by 9.4%, which is higher than the Company average growth for the respective period. Coming to guidance for the quarter. Our earlier guidance for FY16 was 10% to 12% in constant currency terms. Based on our performance in the last three quarters, we are increasing our constant currency guidance to 12.8% to 13.2%. This translates to 8.9% to 9.3% growth in dollar terms. On operating margins, we expect our medium-term band to be 25% plus or minus 1% as [indicated].

And with that, we will open the floor for questions.

Inba, we can start the Q&A part.

Thank you very much, sir. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions) Edward Caso, Wells Fargo.

Congratulations on a good quarter. I was curious of the impact that you expect from the recent increase in the visa fee rates and also another company we follow indicated that there's a new bonus rule that was just enacted on a retroactive basis and we are wondering if that was impacting you.

This is Ranga here. On the visa part, there are two components to it. One is what are the additional charges for the new applications that we put, that has gone up by $2,000 per application. And there is a second component where wherever we extend the visas beyond a certain period, that component is up by about $4,000. There is some amount of clarity still required in the second piece because we have heard different versions in different notifications. However, assuming that it is $2,000 for the first and $4,000 for the second and if we assume that for the next year we will have similar additional visa applications and visa extensions; based on our current estimate, it's about 30 basis points to 35 basis points for the next year. That's our current estimate. However, this is based on the current information that we have on the visa changes. And the second part, yes, this particular thing primarily applies to our BPO employees not on Infosys Limited employees. I think the aggregate impact is very negligible.

Okay. My other question is on the infrastructure business it seemed a bit soft this quarter and it had been particularly strong in a while. Is that anything in particular to call out?

Edward, this is Vishal. Edward, the result of the one-time early termination that was paid to us by a client in Q2 was in the infrastructure area that ended up skewing that number in this previous quarter. We are growing in infrastructure very well. In fact our infrastructure offering has never been stronger and both from the perspective of the --. I mean infrastructure is the first beneficiary of automation so as the largest contributor to that 1,100 people that I mentioned saving was in infrastructure. And we have been pumping a lot of effort into bringing automation into all aspects of infrastructure management.

We are also working closely with our partners, especially Amazon and Microsoft, but also others like EMC and others in helping to bring this cloud migration and some of these next generation elastic infrastructure offerings. And also on the innovation side, we have been doing a ton of work with startup companies. We have invested in Vertex Ventures, which is an exclusively next generation infrastructure focused venture fund, as well we just did an investment in CloudEndure in the disaster recovery area in infrastructure, which is a key requirement for many of our clients. So, I believe that our infrastructure offering has never been stronger and we are quite bullish on that.

Great. Thank you.

Moshe Katri, Sterne Agee.

Congratulations and Happy New Year. Question on realization, which was down during the quarter. Can we get maybe some more details on some of the drivers here? Does it have to do with the new mix of business? And then how comfortable are we that given the new mix of business that's coming on board that we're going to be able to sustain the margins that we're targeting?

Moshe, Ranga here. If you look at the realizations on sequential basis declined by 2.5% in reported and constant currency 2%. And if you compare on apple-to-apple basis with the previous quarter after taking into account that one-time termination, then the sequential decline is 1.5% reported and 1% in constant currency. And likewise between quarter to quarter there will be couple of items which will in the short term change this decline. In our opinion, the year-on-year is probably a more broader trend. When we look at the year-on-year, in reported terms it was 4.5% decline and in constant currency terms 1.1% decline. That's the broad picture on the actual numbers.

Moshe, Happy New Year. Beyond the specific numbers that Ranga talked about, I mean if you look at on the yearly basis I think declined by 4.5% on reported terms and 1.1% on constant currency. So, there is clearly a larger scale structural downward trend here that is at play and I have been talking about that obviously for the last several quarters. I mean there are of course seasonal fluctuations in this and some quarters where it goes up and some where it's not as bad, but generally there is no doubt that there is a declining pricing pressure. And my sense is that there are a whole bunch of operational levers that we can press, we can improve to improve this around the utilization obviously, but also the onsite mix and the [roles] and things of this nature. But clearly the big thing to be done here is automation and I mentioned I am encouraged that we have demonstrated the saving of about 1,100 engineers in the last quarter because of automation. We need to bring this number up significantly and we are working on that.

As we look to the financial year ahead of us, this is one of our key priorities to vastly expand the scope of automation both in terms of how we bring it to all our projects, I mean so far we have been applying it to a subset of our projects which are more fixed price in nature and so forth, but to also apply this to a much broader range of projects. But also going beyond that to a higher quality of automation meaning going beyond the more mechanizable repeatable tasks to the tasks requiring more of the troubleshooting diagnostics, the more complex understanding of text, natural language processing, machine learning kinds of activities; which help us get into the higher level kinds of tasks that our people perform. And even in application development, which is a much more non-mechanizable kind of a task, to improve the experience of the developers, to simplify the tooling, to find framework that can simplify the developer's experience. So, automation is the long-term counter to this structural downward pricing pressure that we see.

Just as a follow-up, the PCB number was significantly below what we've seen a quarter before. You did indicate during I think your press conference that you had a couple deals that were signed later after the quarter closed. Was there a deal slippage issue here? Maybe you can kind of give us some more color on that.

Couple of the deals slipped out of Q3 into Q4, we have in fact signed them. I mentioned earlier we have already signed $150 million worth of those and we are on the verge in the next few days of signing another one, but I don't read anything into that and we had a holiday season and so forth. These are long-term projects so it doesn't matter. I mean we see quite a healthy pipeline in large deals of getting close to $3 billion that we see right now. And when we look at Q3, we did about somewhere little bit more than $300 million or something like this, $367 million worth of large deals already. And then if you count one large Financial Services deal that we did, which by our technical definition we don't count in this manner, but it was in the neighborhood of $600 million. So, they do add up. Already the defined deals add up to close to $1 billion anyways and then we have done more now. So, the win ratio in deals has improved significantly compared to the past and we feel quite good about what is happening in the large deals area.

Thanks for the color. Congratulations.

James Friedman, Susquehanna International Group.

Let me echo my congratulations on the good start to the calendar year and to the fiscal year. I want to ask about the strategy regarding mining the top clients. That's really served you well over the first six quarters of your tenure, Vishal. The Top 10, 5, and 1 did decline just marginally as a percentage of revenue in the fiscal Q3. I guess my question is as you look to achieve your mid and longer-term objectives in 2017 and out to 2020, how important are the top clients in the initiatives to get you to your plans?

They are very important, James. The Top 5, 10, and 25 clients are a very key focus area for us. I keep an eye on that myself and our entire leadership team does as well. The numbers that you saw in the last quarter were a result of the seasonalities that I talked about. In fact our relationship with our top clients has never been stronger, has never been more strategic than it is now. We are quite excited about the kind of engagements that we are starting to get into with our large clients in the new areas in design thinking, in structural programs, in large scale landscape renewals, in mainframe modernization, things of this nature.

If you look at the revenue from the Top 5 clients, there was a 0.3% decline quarter-on-quarter and in Top 10, it was 0.1% quarter-on-quarter. But on a year-on-year basis, the revenue from the Top 5 clients grew by 13% and for the Top 10 clients grew by 9.4%, which is both are higher than the Company average growth and our top most client has grown by 21.5% on a year-on-year basis. So from a mining perspective, from a strategic relationship perspective, the top clients continue to be a huge area of strength for us, of growth for us, and I can say unequivocally that our relationship with the top clients has never been stronger.

I want if I could follow up with one from the overnight. I think Pravin had mentioned that he anticipated budgets would be flat to down for calendar 2016. You're saying you signed $150 million already year-to-date. I guess my question is, is $150 million a lot or a little? What reference point would we have for that as you start the calendar year at least?

I mean it's just the first working week of the year so I think we are excited about that obviously, but we don't read anything into it. It is just the way that the signing of these deals ended up happening. We have already been verbally awarded several hundred million worth of deals already within this year. So like I said earlier, we are feeling good about the large deal pipeline. In terms of the response that Pravin gave earlier and Pravin can add to this, we do see a downward pressure on the budgets especially in IT. And the imperative that IT, and late last night I was talking to one of our clients in the US in Texas, there is this ongoing priority to find savings in the ongoing renewal of their landscapes and then using those savings to fund the growth initiative and things like that.

So even though the budgets are flat to declining, if we are able to be agile to be able to redeploy projects and resources and if we are able to transform both the help with the renewal of their existing landscapes, to simplify these, move to the cloud, find the savings, find the optimization and in parallel serve their needs, their burdens on the next generation digital client oriented strategic initiatives around creating new experiences for consumers and so forth; then even though these budgets are under pressure, our growth can continue to be strong. And that is something that I wanted to make sure that the declining pressure on clients' budgets is not the same as our inability to take advantage of that.

This is Pravin here. Just to add, I don't think there is any disconnect between the two metrics because whenever the budgets are under pressure, clients will look at more outsourcing and will look at cost savings. And today when you look at the business and IT operation side of things, there's tremendous pressure on cost. Clients are typically looking at 15%, 20% savings for doing similar things and that eventually will translate into large deals. So, you will continue to see a healthy pipeline of large deals and particularly more so when there is lot of pressure on the budgets.

Thank you.

Keith Bachman, Bank of Montreal.

You've mentioned that Infosys you believe can achieve industry leading growth as you look out over the next 12 to 18 months I think starting after the conclusion of this March quarter. I want to try to revisit what do you think industry growth potential is if you look out over the course of the next 12 plus months?

I mean right now our visibility based on what we have said concretely on the near term is that based on what we see from the point of our business execution within this quarter, we'll get to 12.8% to 13.2% in constant currency terms for this current financial year. And we'll share our guidance for the next year in the April timeframe. But looking at where the industry is at and where the atmosphere and the clients is at, I feel quite confident that we'll get to the industry leading growth in the coming financial year.

Okay. Let me try a different one then. You've mentioned that if we normalize for the payment that occurred in the previous quarter, you've given some constant currency realization, you've also indicated that year-over-year realization was down about 1% which was due to pricing. Is that what we should expect going forward do you think? You said that pricing pressure will probably be part of what you face. Should we be thinking about realization trends down in the 1% range year-over-year as we look out over the next couple quarters or over the course of calendar year 2016?

This is Ranga here. Yes. If you look at as you've said, we had a reported basis 4.5% and a constant currency 1.1% and at least this is the trend that we see in the short term. But it is difficult to predict over a long horizon or even in the medium-term horizon what could be the trend line be. But at this point in time, yes, this is a broad trend that we see at this juncture; but it is difficult to kind of translate into medium-term trend line.

Okay. Thank you. I will cede the floor.

Arvind Ramnani, Gordon Haskett.

From a pricing perspective, Infosys has been quite vocal about its willingness to be flexible on pricing and we are even seeing that in your overall pricing. Now are your existing clients, particularly ones coming up for renewals, asking for pricing breaks? And the second thing is you mentioned through automation you had saved about like 1,100 engineers. Does it translate to about like $50 million or $60 million or can you just give us some context of what does that translate into dollar terms?

On the 1,100 people that we saved, it is too small a number right now. I mean that's like around 1% of our delivery force so it is difficult to start to put a tangible number on it. As we get closer to that point where the numbers become more substantive and we can start to assign dollars and percentages to them, we'll let you know. I expect that to happen over the next few quarters if not sooner, but that is --. What was your other question?

Are your existing clients, particularly ones coming up for renewals, are they coming and asking for pricing breaks or is the pricing mostly among kind of new client signups?

This is Pravin here. On the rate card perspective, we are not seeing any clients coming back and asking for any price discounts by and large. It's only when the deal comes up for renewal whenever it's a competitive bid, there is aggressive pricing because of the competitive nature of the deal and clients clearly expects 30%, 35% savings. So, that's the trend we are seeing and that's where we are when we talk about pressure on pricing on the business and IT operation side of business, that is the reality we are seeing. But on the rate card, there is not too much of a pressure.

So, would it be fair to say these are mostly kind of new client signups?

It's a mix of both. I mean there are some deals where we are the incumbent and when it comes up for renewal plans put it out for competitive bid. There are deals where we are not incumbents. So, it's a combination of both. And over the last few quarters when we look at large deal wins that we have announced, it's been a mix of new logos as well as new wins in existing clients.

And just a separate question. I realize at this point some of your clients are still finalizing budgets. However, do you have some sort of initial feedback on budgets and how are you feeling this year compared to last year when it comes to kind of client budgets?

I think overall the sense we get is budgets will by and large remain flat, in some industries maybe marginally up, but by and large flat or marginally down. Only industry where we can talk with confidence where we are seeing lot of pressure is on the energy side where there is lot of pressure because of the oil prices, there is definitely pressure on budget cuts. But in other cases, budgets are typically flat. On a client-by-client basis it varies little bit and it's similar to the trend we saw in the last year as well. In some sense the notion of budget, the annual budget and sacrosanct of the annual budget which we used to see in the past is no longer there. Given all the volatility, many times we are seeing budget resets on a quarterly basis and that is what we would expect given the continued volatile nature of the business. Overall every client is looking at taking cost out and repurposing that savings into newer areas, new transformation areas, and so on; and that pattern we expect to see in this year as well.

I'm hearing from many firms that they are growing and expanding their captive allocations in India and as they are sort of expanding the captives, do you look at it as a positive because you have a role in expansion or do you look it as a negative where some of the work that would have gone to Infosys is now going to a captive?

It's not such a big shift that it makes any material difference to what we do. We have in fact been helping some of our clients with setting up of their operations. So with a couple of large companies in the financial services industry, we have in fact been recruiting and training their employees as well as taking over more of their work so creating a true symbiotic partnership where our employees and their employees work together seamlessly and of course we have exceptional expertise in infrastructure and facilities and the operating environment, which helps out a lot. So we see both kinds of movements where in some cases our clients do sort of captives, but in other cases they hand over their captives to us or even we provide them help and services in establishing their captives. There is also some of the work that we have been doing. We invested in this ANSR, which is a new kind of a setup creation entity here, and Ritika who heads our M&A and Corporate Venturing, she visited these folks in the last couple of days. That is an exciting new dimension. But again, these things are all not of a large enough scale that it makes a difference right now.

Thank you very much and good luck for rest of the year.

Joseph Foresi, Cantor Fitzgerald.

I wonder if I could ask the pricing question a little bit different. Has your go-to-market or the pricing that you typically use in negotiating deals, are you now changing that philosophy and pricing more aggressively to take market share as we start to see some of the work get commoditized?

Absolutely not. In fact we believe that as we improve our engagement with clients and as we bring more and more sophistication and high value into our proposal process and into our engagements, we see that we actually end up having much more differentiated conversations by doing that. So obviously there is a pricing pressure especially in areas where we already have existing relationships or even when we end up getting new opportunities, but the key is always to get ahead of that wave. That wave is there, we know that it is coming and it is already here.

But the key is to be ahead of that by virtue of a combination of automation that helps improve our productivity faster than the decline in the curve and by virtue of innovation that helps us especially move our people and our capabilities higher up in the value chain towards things like more innovative projects, more next generation experience, and intelligence systems oriented projects or in particular using things like design thinking and helping identify the most important problems, the most game changing kind of opportunities for clients. So I know that there are folks in the industry who talk about the fact that we are sort of lowering prices and so forth. I want to categorically deny that and talk instead about the fact that we are relying heavily on our innovative offerings in Aikido and so forth that become more and more a part of the mix that we offer to the clients, which makes our propositions more attractive.

And then just on digital, I know you stayed away from percentages of revenues from digital, but maybe you could give us some idea of what that investment is costing you and any kind of color around the financial associated with how you're participating? So in another words, are you having to invest heavily there? Is that coming in at a lower margin and any goal posts you care to put around percentage of revenue or growth rates?

So, I haven't stayed away from percentages at all. In fact I have consistently said that 100% of our revenue is digital. We write software for digital computers. Now joking aside, I think what people mean by digital is areas where traditionally were heretofore physical experiences and engagements are becoming digitized for the first time like experiences inside stores or creating new channels which were not there before for engaging with clients and so on. And these kinds of projects, we have tremendous expertise and tremendous growth happening in these kinds of projects. We do a lot of work in there. Obviously Skava, the technology that we acquired, helps us get a tremendous leap ahead. I mean they had nearly double the volume on mobile commerce over Black Friday that just went by and so on.

So, we don't see any particular need to invest any more than we are already doing there. We'll continue to do that as a part of our normal course of business. I mean this is a service line for us and it is doing well. We have the right ability to teach people there and wherever necessary we hire and we obviously also acquire where necessary. It is true that the nature of those projects is different from the traditional large IT projects or outsourcing projects. These are smaller projects using more fragmented collection of technologies and so forth, but that is the way that particular part of business is. One other dimension of that business is something that we are extremely excited about and we have done a lot of leading work on, which is in the area of the digitization of the physical world as manifested in the manufacturing and engineering areas, Internet of Things and creating digital trends and things like that.

That is an area where we have been growing significantly our engineering services work, which is largely in that area had significant growth in the last quarter. We have announced a strategic partnership with GE, we are doing a lot of work with companies like Mitsubishi in helping design airplanes using new techniques; airplane structures, fuselage structures, and so forth; working with companies like Alstom and others. So, overall this endeavor of the software eating the world or the physical infrastructure becoming digital is a huge area of growth for us and I believe that we are well positioned in that area.

And then last one from me. We've talked about margins in a plus or minus 1% band, we've seen pricing obviously start to continue to decline, we've got some visa costs coming in there, and then there's some investment in kind of upgrading the skills for digital. Are you still comfortable with that band going forward or how should we think about the margin profile over the long term?

So for now, we are comfortable with that band of 25% plus or minus 1% and our aspiration is to get to 30% by 2020 and the more time that goes by, the more comfortable we feel in seeing a path to get there. Obviously we are not going to get there in the near term, but we do feel comfortable that with the moves that we are making, we have a trajectory to get there. If that ever changes, we'll let you know; but for now I feel quite comfortable with that. Ranga, you want to add anything to that?

Yes, Vishal, that's right. We continue to reiterate our medium-term goal of 25% plus or minus. If you look at the first nine months of the current year, we have been at 24.8%. I think at the same time there are certain short-term levers and certain levers which by definition are more medium term in nature. For example the short-term lever is really in terms of utilization where utilization as you notice is 80.6%. However if you looked at about a year ago, we used to be in late 70%s, now consistently in the last four quarters we have been just above 80%. And we believe that there is scope for us to improve our utilization beyond what we have at the current level. Likewise if you look at our onsite mix is at 29.5%, it has gone up by 1% year-on-year and we do have some levers there, but that's a more gradual lever than the utilization. Likewise the subcontractor costs or the onsite ratios and employee costs as a percentage of revenue. These are some of the levers. Something like utilization is more short term and productivity improvements that Vishal touched upon really is the lever to automation that we hope to kind of counter some of these pressures, but that's more like medium term.

Okay. Thank you.

Rishi Jhunjhunwala, Goldman Sachs.

Vishal, one question around the demand environment going into next year. So if you look at it, there is clearly macro uncertainty around the world. We have seen kind of commoditization in the maintenance business and discretionary hasn't picked up that well and clearly there are some vertical specific headwinds that the industry is facing. So with all that in the backdrop, do you see any areas which can potentially take demand higher next year versus this year or is it going to be more a function of wait and watch?

Rishi, we operate our business in this greater economic environment and there is obviously a lot of anxiety that is around what is happening in China and with oil and things of this nature. But by and large there are huge growth areas in the world around us, there are huge growth markets, as well as in the big disruption that is happening. I mean if you just look at the mainframe footprint in the world around us, there is a massive mainframe footprint and we are very uniquely positioned to help our businesses safely, reliably, non-disruptively move off of this old mainframe stuff towards modern agile dramatically cheaper cloud infrastructure and other opportunities, I mean the conversation that we were having with digital earlier in the previous question. So could there be things that happen that affect us all so badly that things goes south, of course. But looking at the way I see the near-term future I see that when the times are bad, there is need for innovation and when the times are good, there is need for innovation.

And the second thing is more on your target or basically aspiration over a five-year period on revenues and margins. So clearly looking at the current trajectory, we are kind of on track to achieve $20 billion and we have acquisitions and other things to achieve around that. But on the margin side with the medium-term range that we are talking about, is it fair to assume that a large part of the margin improvement will be back ended and that too despite the potential acquisition revenues that we might have over the next three to five years? Just wanted to understand basically how it can potentially play out and then result in improvement in a revenue per employee metric?

The way I see that I mean it is still early and this is still an aspirational goal; $20 billion, 30%, and $80,000 in revenue per employee. But as time goes by and we get closer to it, it gets more in reach, and we start to see paths to get there. My sense is that a curve that points to $20 billion will show up first, then the curve that points to the 30% margin, and then the curve that points to the $80,000 revenue per employee. Right now if you look at the situation, the revenue per employee is in fact going down because the pricing pressure is higher and the utilization and operational improvements haven't kicked in yet and in particular the benefits of automation haven't kicked in yet enough to compensate for that. But I expect that that will happen. Although again in terms of the slopes of those three curves, the first curve to flatten out will be the revenue growth curve, the second one will be the margin, and the third one will be the revenue per employee. That is my sense right now.

Great. Thank you and best of luck.

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

Thanks, everyone, for spending time with us on this call. We look forward to interacting with you again. Have a good day.

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.