Infosys Ltd (INFY) 2017 Q2 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Infosys earnings conference call. As a reminder, all participant lines will be in the listen-only mode and 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 would now like to hand the conference over to Mr. Sandeep Mahindroo. Thank you and over to you, sir.

Hello everyone and welcome to Infosys earnings call to discuss Q2 FY17 results. I'm Sandeep from the Investor Relations team in Bangalore. 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 and Mr. Ranganath. Subsequently we'll open up the call for questions. Please note 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. Sikka.

Thanks, Sandeep. Hi everyone and welcome to our Q2 earnings call. We had good overall performance in Q2. You will recall that during our Analyst Day in Pune in India in August, we had outlined certain expectations on Q2 performance. We had mentioned then that we would focus strongly on execution in Q2 and expected revenue growth in Q2 to be better than Q1. We had also mentioned that we would focus on certain drag factors of Q1 like consulting, Finacle, BPO, and our India business. I'm happy to report that as a result of our strong focus on execution in Q2, our sequential revenue growth was 3.5% in reported terms and 3.9% in constant currency terms. This compares to Q1 in which we had 2.2% growth in reported terms and 1.7% growth in constant currency terms. Consulting, India, and Finacle have all performed better in Q2 compared to Q1.

We will continue to monitor performance of consulting closely in the coming quarters as it still faces headwinds. Our core IT services had robust growth of 4.7% in constant currency in Q2, volume growth was 4%. We continue to see adoption of our new services by our clients and are focusing on building a healthy pipeline of our new services. I'm particularly excited about the interest from clients in our knowledge-based AI platform, Infosys Mana, both in helping them renew their core businesses and especially in helping them to explore and define new areas. I will talk more about this in a little bit. Coming to strategy execution, we have been sharing with you certain key indicators that we track. During the quarter, we had large deal wins of $1.209 billion. This includes new deal wins of $138 million and framework deals of $1.071 billion.

In terms of client metric; our Top 10 clients grew year-on-year 3.7%, our Top 25 clients grew 4.3%, while non-Top 25 clients grew 10.6% on reported terms. The number of $50 million clients increased by two to 54 while the number of $100 million plus clients increased by one to 18. We continued our strong focus on improvement in operational efficiency parameters such as utilization, onsite-offshore mix, subcon expenses, and cost optimization. Ranga will provide more details on these in his remarks. Our operating margins improved 80 basis points from 24.1% in Q1 to 24.9% in Q2. Amongst large verticals, growth was led by Financial Services and Insurance, which grew 5.2% on constant currency and Energy, Utilities, Communications & Services, which grew 7.3% on constant currency. We had robust all around growth across all geographies.

We added 12,717 employees on a gross basis and 2,779 on net basis. Headcount at the end of the quarter was close to 200,000 at 199,829. Attrition from the quarter declined to 15.7% for Infosys Limited standalone and 20% for the entire Group with high performer attrition, a particular focus for us, continuing to decline. We will continue to seek opportunities in M&A and investments and in this quarter we invested in Cloudyn, a cloud spend optimization start-up in Israel. In Pune we had also announced that in order to further enhance client focus and our agility in the market, we would create smaller industry segments in sales. We have completed this exercise and the new structure is effective as of today. Similarly we reorganized our delivery organization in April 2015 wherein we consolidated and defragmented our various service lines under Ravi's leadership.

We have seen significant benefit out of the delivery organization as seen in stronger service line focus and improved operational efficiencies and stronger ownership by the leaders. We see a similar opportunity in sales through these smaller, more agile, more focused, and more accountable industry segments under the leadership of Mohit, Sandeep, and Rajesh. Coming to the business outlook for FY17, you will recall that in Pune we said that we will be in a better position to provide the business outlook after delivering Q2 and assessing the business environment for Q3 and Q4. We had indicated then that we see more headwinds than when we entered Q2. During the course of Q2 we have seen signs of cautious client behavior, our announcement on RBS ramp-down is an example of this. Over the last couple of weeks, several of our peers have also indicated a software business environment leading to a more cautious outlook for FY17.

After considering our H1 performance and the near-term business outlook based on the visibility and our assessment, at this point in time we expect our revenue for FY17 to be between 8% to 9% in constant currency terms. Now let me share a few thoughts on the execution of our Renew and New strategy through automation and innovation and how we are fueling this through a culture of education and learning. In Renew in Q2, we made good progress on our strategy to renew our core services and help our clients renew their core businesses through automation and grassroots innovation. We are accelerating this by monetizing Zero Distance, bringing our knowledge-based AI platform Mana to all aspects of our service offering including leveraging Mana internally, and continuing to drive value from the bench.

Our additional services of application development, infrastructure management, and product engineering; all grew above the Company average. Zero Distance, which is our program to bring innovation to every project, is enabling us to deepen our existing client relationships, show differentiation to help us win new opportunities, and provide tangible examples of Infosys as a strategic partner for grassroots ongoing innovation. Zero Distance continues to cover more than 95% of our projects and is truly a grassroots innovation movement across Infosys. We are now elevating this further to drive greater value for our clients and converting these ideas into solutions. Hundreds of Zero Distance ideas are being implemented in client projects with many of these converted into new business opportunities generating commercial value for Infosys.

Regarding Mana, I am really excited to see the growing interest from clients and in the industry and we are in the process of building a strong pipeline. While we are in the early stages with revenue impact insignificant for the quarter, we saw continued adoption and client successes. Internally we are leveraging our own automation solutions to drive greater efficiencies into all of our service lines. In Q2 Ravi estimates that we saved 2,387 FTEs worth of effort across service lines primarily in application maintenance, package system maintenance, BPO, and infrastructure management. Going forward, we will go beyond automation and apply the knowledge-based AI capabilities of Mana to more complex scenarios with a focus on increasing productivity.

Zero Bench, which is our program to engage employees in value creation while they are between projects, has created more than 26,000 work packets with many of these being generated by Zero Distance ideas and nearly 12,000 work packets have already been completed by folks on the bench. This has ensured that almost all of our bench capacity is engaged and we are already seeing benefits in terms of additional revenue as well as margin improvement through the solutions created. As a result of gaining valuable experience on these Zero Bench assignments, more than 1,000 additional freshers went directly to client projects in the first half of fiscal 2017 versus fiscal [2017] first half and you also see these contribute to the improved utilization. We continued to grow, coming to new areas, in our new services and products in Q2 and help our clients to have breakthrough innovation.

In particular we are working with a number of clients and partners on leveraging new technologies especially AI technologies including machine learning to drive large scale transformation. Our AI platform Mana is key to this and we will accelerate our work in new areas with Mana. We also announced in September our new Incubation as a Service, a dedicated Infosys team that will be the innovation engine for our clients leveraging our learning experiences across industries and our work in emerging technologies. We will run this model with co-creation and collaboration with clients at the heart of what we offer founded on the principles of Design Thinking. Skava continued to help clients create new kinds of customer engagements across channels and in Q2 we launched Skava Commerce, a new standard for modern mobile-first modular e-commerce platform.

For example, Infosys and TOMS Shoes are working together to implement an omnichannel platform leveraging Skava commerce. EdgeVerve delivered a strong performance this quarter with 48 wins and 23 go-lives from both the Finacle and Edge suite of solutions across various markets. Edge products added several new clients this quarter across various solutions with AssistEdge leading with eight new wins. In Design Thinking, we continue to bring design thinking into every client engagement. For example we are working with Kohls, the large US retailer, to leverage design thinking together with our Skava platform on how to enhance customers' sales associates and the overall Kohls' experience. Coming to culture, we continue to invest in our employees and in learning and education.

In education this quarter, we added a focus on collaboration to every class that we offer in our university in Mysore. This is based on learnings from our data sciences class in which we saw that core quality was significantly improved through collaboration. Specifically we reduced the number of core issues at 35% for individuals down to 12% in a group of 10. We are also introducing new kinds of programs including Udacity Nanodegrees and Coursera for rapid upscaling when needed for the most in-demand niche skills. And for employees, we continued to roll out the equity program with the first phase to mid and junior level high performers already complete. We will be extending this to the leadership levels as we look at programs to retain our best leaders and attract new leaders to our Company. Looking beyond business, at Infosys we are deeply aware of our role in society which reaches beyond business.

In India through the Infosys Foundation, we made several investments in the areas of rehabilitation, healthcare, education, and arts and culture including handing over a residential enclave of 200 houses to families that were rendered homeless in the aftermath of cyclone Hudhud in 2014, launching an Institute of Robotic Surgery to support Narayana Health, and funding travel stipend for top researchers at IIT Kharagpur as well as sponsoring a IIT Kharagpur study about the antiquity of the Indus Valley. The Infosys Foundation USA supports quality computer science and Maker professional development for teachers via the Computer Science Professional Development week, the CS for All Community Giving program, and the commitment recently announced at the White House Summit on computer science for all.

Additionally, the Foundation announced new grants to support the largest CS teacher organization, the Computer Science Teachers Association; recognize excellence in CS teaching through awards; and to support The New York Academy of Sciences. We continue to be very proud of our work in our communities. In closing, I would like to hand it over to Ranga to provide more details on the financials before coming back for Q&A. Thank you.

Thank you, Vishal. Hello everyone. Let me start by saying that in Q2, we have focused further on improving the operational efficiency of our business and we continued our emphasis on healthy cash generation. I'm happy to report that we have seen an improvement on both these fronts during the quarter. Our revenues in Q2 were $2,587 million, it is a growth of 3.5% on reported basis and 3.9% on constant currency basis. On a year-on-year basis when compared to Q2 of fiscal 2016, revenues have grown 8.2% in dollar terms and 8.9% in constant currency terms. H1 2017 revenue growth as compared to H1 2016 was 9.5% in reported terms and 10.5% in constant currency terms. Volumes grew by 4% during the quarter as compared to 2.2% in Q1 2017. On quarter-on-quarter basis, onsite volume grew by 3.1% and offshore volume grew 4.4%.

Realization for the quarter increased by 0.2% on reported basis and 0.7% on constant currency basis compared to Q1 of FY17. On a year-on-year basis, realization declined by 3.6% on reported basis and [3.8%] on constant currency basis as compared to [Q1 of 2016].

Operational efficiency parameters, several of them improved during the quarter. Our utilization excluding trainees increased by 2% to 82.5%. Similarly utilization including trainees went up to 77.7%. Over the last six quarters, utilization excluding trainees has been consistently above 80%. Onsite mix reduced to 29.7% during the quarter and we are focusing on bringing this down gradually while there could be quarter-on-quarter volatility. Subcon expenses were 5.4% of revenues in Q2, similar to Q1 2017 levels, but lower than 5.5% in Q2 of 2016.

Employee benefits cost as a percent of revenue was 55.7% as compared to 55.3% in Q1 2017 primarily on account of compensation increase and higher variable pay that we paid to our employees this quarter offset by better utilization. On a comparable basis to Q2 FY16, employee benefits cost as a percentage of revenue was [64.7%]. Our collections were healthy and DSO for the quarter was healthy at 64 days as compared to 66 days in Q1 2017, a reduction of two days. Our operating margin for the quarter was 24.9%, increase of 80 basis points over Q1 2017. Improvement in utilization and onsite mix contributed 100 basis points to margin improvement. This was partially offset by increase in third-party software costs, which negatively impacted margins by 60 basis points.

The benefit of onsite cost optimization initiatives and lower visa charges, which was slightly offset by impact of higher variable pay and compensation increases resulting in net positive impact of 40 basis points. So, overall it led to 80 basis points expansion in margin. Our emphasis on healthy operating cash flow generation continued this quarter. Operating cash flow generation was strong during the quarter partly helped by tax refunds of about $50 million. We generated operating cash flow of $553 million in Q2 as compared to $481 million last year same quarter. Our cash and cash equivalents as of September 30 was $5,349 million as compared to $4,918 million last quarter. We added 12,717 gross employees during the quarter with a net addition of 2,779 employees. The quarterly analyzed attrition on a standalone basis has also decreased marginally to 15.7% from 15.8% last quarter.

At a Group level, annualized attrition was 20% as compared to 21% last quarter. As you know, Q2 saw currency volatility especially in the backdrop of Brexit. We managed to navigate the volatility effectively. On a period-end basis, USD appreciated by 3.6% against British pound and depreciated by 0.3% against euro and 2.2% against Australian dollar. Our hedge position as of September 30, 2016 was $1,037 million. We expect near-term volatility in cross currency and rupee and we continue to manage the same through appropriate hedges. Yield on cash balances was 7.77% in Q2 2017 compared to 7.82% in Q1 2017. We expect the yield for FY17 to be approximately 7.5% compared to 8.6% in fiscal 2016 due to interest rate environment in India. The effective tax rate for the quarter was 28.8%. Full-year effective tax rate projection is expected to be around 29% for fiscal 2017.

Our net margins during the quarter were 20.8% as compared to 20.5% in Q1, an expansion of 30 basis points. Our EPS for the quarter was $0.24. EPS grew 3.8% year-on-year basis and 5.5% on a sequential basis. Coming to clients and business segments. Our number of $100 million clients continued to increase this quarter, it increased to 18 from 17 last quarter. Likewise $50 million clients increased by 2 to 54 clients. Active clients now stand at 1,136 as compared to 1,126 last quarter. Coming to margin expectations, we will continue to optimize the operational efficiency levers on an ongoing basis. We have said in the medium term our operating margin expectation is in the range of 24% to 26%. Considering the expectations on growth trajectory for the second half of the year and as revenue growth is one of the key determinants of margins, we expect fiscal 2017 margins to be in the range of 24% to 25%.

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

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

I was wondering could you just talk about the change in the outlook? Is that more economic or structural? I know this came up at one of your competitors, I want to get your view on it and maybe you could describe why?

It is largely based on a couple of client specific headwinds as well as a couple of service lines like consulting and BPO where we expect the growth to be lower than what we had anticipated at the beginning of the year. I would not say it is structural. The structural change that is happening in our industry is widely known. I've been talking about this for the last two years and that has to do with a very pervasive and fundamental downward spiral that the industry as it has been is going through; which is based on the pricing pressure, the rapid acceleration of the rate cuts, the decline in pricing realization, and so forth; which is being fueled by a variety of reasons and so forth. That is one structural thing. But otherwise, this quarterly fluctuation that we see has nothing to do with the structural thing.

Okay. And then my second question is I appreciate the color on the margins for this year. Just given some of the structural things you just talked about, what do you expect from a marginal profitability standpoint over the long term? I know that you've given some color about perhaps some innovation helping the margins, but I was wondering what you thought about the margin profile over the long term?

Let me first take that question. Yes, in the medium term as you rightly said, we continue to reiterate 24% to 26% and as you know, the margin is a derivative of three principal components. One is of course the revenue growth itself, second one is the pricing decline, and the third one is to what extent the pricing decline could be offset through operational efficiency, and the last one of course is the automation piece. As we have seen in this particular fiscal as we have said several times, our primary focus this fiscal has been on how do we look at all our operational efficiency levers, which could be levers for margin improvement in the short term to medium term, but in the long term the real levers that we have is really automation. If you look at for example, we need to look at the two pieces of the spectrum that we have for improving the operating margin.

The near-term to medium-term spectrum is really the operational efficiency and so on and also in some of the projects how do we through our productivity improvements we could really improve margins even in the ongoing project; but in the longer term, it's really the automation. Let me first address the first part. As we have been saying over the last four quarters, we have continued our sharp focus in the levers that we have in operational efficiency whether it is utilization. It used to be in the late 70%s as recent as over six quarters ago, then consistently over the last six quarters we have kept it above 80%. This quarter it's further improved by 2.5%. Likewise subcontracted expenses used to be 6.3% and we brought it down to 5.6%, then 5.4% and likewise the onsite employee cost as a percentage of revenue and so on.

We do believe that the trajectory of these operational efficiency indicators over the last three, four quarters has been moving in the right direction and we do believe we have some more levers; but as you said, this is for the short term to medium term. For the longer term, automation is one which can give us a more sustainable margin improvement and Vishal has been focusing and the Company over the last couple of quarters has been focusing. Even there if you look at the automation, the first phase of automation typically focuses on offshore at the lower end of the pyramid kind of jobs. You will not really see significant impact on P&L if it is only offshore at the lower end of the pyramid. For meaningful impact on operating margins to automation, we need to really see across the pyramid in both onsite and offshore reduction in the effort through automation. So, that's where the current focus is.

I think Vishal, go ahead on what's [caused] this.

Longer term when you look at the margin situation, there are two key things that are going to have a structural impact. Ranga already talked about automation. The key there is to ensure that the productivity improvement that we can achieve through our Mana platform outperform the downward trend in the pricing. If we are able to do that, we will improve the margins; if we are not, then margin will continue to decline and to be under pressure. It's as simple as that and I think it obviously to a very clear (technical difficulty).

This is conference operator. Sir, we can't hear you. Sandeep Mahindroo, can you hear me? Ladies and gentlemen, there seems to be a disconnection from the management line. We request you to please stay connected while we have the management reconnected. Thank you. Ladies and gentlemen, we have the management reconnected. Over to you, sir.

So Joe, this is Vishal again just to answer your question again. Longer term when it comes to margin, the one key thing as Ranga talked about is automation and there we have to ensure that the improvement in productivity because of automation, because of our AI platform Mana, outpace the downward curve of the pricing pressure that we see. If we are able to outpace that, we will improve our profitability; if we are not, we will not. And this is something that is I believe the most fundamental issue that is facing the industry and I believe on this measure, we are continuing to make good progress because of expanding the sophistication of our AI platform and so on.

The other longer-term aspect of margin is to ensure that our new services and our software-based offerings continue to gain scale and continue to gain traction because these are high value, high margin kinds of offerings and the more of those that we can embrace, and that includes in some cases opening up new go-to-market channels and so forth, the better off we'll be on the margin. So, our margin thesis is based on these three observations as Ranga talked about. One is that the industry is under a structural decline in margin pressure, which impacts our core business. Number two, automation and AI can help us dramatically improve our productivity and if we are able to outpace the downward pricing pressure as a result of that, then that much the better. And number three, our ability to offer new services that are high value and high margin that can help us improve margins over the long term. Thanks.

Okay. And then just on pricing, have you seen any change in pricing and could pricing become a bigger problem if the demand environment stays depressed obviously for an extended period of time? Thank you.

Yes, we have. In fact we mentioned that in our press release the downward pricing pressure has continued to intensify over the course of the last two years. Perhaps Ranga, you can provide the numbers of how the pricing decline has happened over the course of the year.

I think in our opinion, the relevant indicator would be really the year-on-year for a longer period because there could be quarter-to-quarter volatility in pricing, which sometimes could not be the ideal indicator. So for example last year if you look at entire FY16 over FY15, the pricing decline in constant currency was close to 1.5%. Now likewise if you look at on a half year basis this year H1 2017 over H1 2016 in constant currency basis, we have seen a pricing decline of 1.6%. So, we are seeing in this range of 1.5% to 1.6% even this quarter so that is something that we have seen in the first half of this year.

Keith Bachman, Bank of Montreal.

The first one is growth dynamics for the industry. If you thought about the combination of the leading Indian based IT service providers such as with yourself, TCS, and Cognizant; what do you think the growth rate would be for the industry as reflected by those participants in calendar year 2017? You guys are guiding to call it 8% to 9% year-over-year growth. TCS if you take constant currency was closer to 7% recently. Is that the right range you think for calendar year 2017 for the industry?

Keith, this is Vishal. I have absolutely no idea. Of course we can tell you what we see in our situation and everyone will have their own situations and guidance based on that. We have shared our outlook. What I can say broadly is that the entire industry is under the structural change that is going on, the downward pricing pressure. I've been talking about this for the last two plus years and it has only become more intensified, more accelerated, more steep; and I think we are all seeing the results of that play out in various ways across the industry and it's going to be a very difficult transformation for the entire industry.

If you look at our performance in Q2, of course we did extremely well in our core services and that core services improvement is a direct reflection of the fact that we are able to bring in automation, which is still in the very early stages; but we are also bringing a culture of innovation and I think that dual transformation is going to be absolutely essential for the IT services companies to be able to be relevant in the times ahead. We have to improve our productivity through the power of automation and AI and we have to in parallel be able to take that freed up capacity because of AI and deploy that towards innovation and creativity. If we don't do this, then we are going to be a victim of this downward pricing pressure. It is as simple as that.

Okay. My follow-up actually relates to that. In terms of the pricing pressure when we listen to other leading providers, the comments are pricing pressure is fairly consistent. You're suggesting that pricing pressure is actually increasing. Is a, the reason you think in different perspectives and b, is the pricing pressure mostly in what we would characterize as legacy areas of ADM and outsourcing and BPO? Is that where the pricing pressure areas are showing up or is it even in the new areas that we would simply characterize as the digital areas?

Yes, exactly. What I mean by that is not in terms of the amount of pressure on any of that, I think we can do the analysis on that and we can all see what that has been like and perhaps it is increasing, perhaps it is not; but it is certainly becoming much more pervasive and rate cuts and so forth are becoming much more frequent, that's what I see. And exactly as you said, the new service areas around digital experiences, the adoption of AI and AI solutions and clients; these are the areas where there is high value opportunities, which we have to go after and build the capabilities and the skill for.

Moshe Katri, Wedbush Securities.

I wanted to get some color looking at your TCV for the quarter that was very significant, I think it was north of $1.2 billion. I think last quarter you were north of about $800 million. Maybe talk a bit about if you're looking at some of the deal flow that's coming through, which part is renewal, maybe we can get some sort of an average, which part is new logos? And then you also mentioned a framework agreement, maybe you can kind of explain what that actually entails? Thank you.

We have won six deals worth about $1.2 billion plus. Two of the deals are traditional committed deals and four are framework deals. By framework, we mean there is a very clear expectation and in some sense informal agreement from the customer that that's the kind of revenue we'll make over the deal duration, but there is no contractive commitment so that's why we have separated it out. And in terms of the deal; out of the six deals, two deals have been from new logos and four of the deals have been from existing clients; but this varies from quarter-to-quarter. For instance as we reported $880 million plus last quarter is we had 10 deals and there also the split between new and existing would vary. So, it varies from quarter-to-quarter so we can't conclude on a quarterly basis.

What part of the $1.2 billion in terms of percentage was renewal this quarter last quarter's?

We actually don't report the renewal versus net new because sometimes it's a mix. In some of the existing accounts as well, part of it could be renewal because even when we renew we will get the incremental revenue, it becomes a bit complicated. So, we typically don't. We always says what is new logo and what is existing customers, but we typically don't get into how much is renewal and how much is new.

Just to add to what Pravin said. Look, as Pravin mentioned, at times we may have what we qualify as a framework contract. So for instance for a large financial services company, we signed a framework of close to $0.5 billion, but basically this is revenue. We have been doing multiple projects with them and this is a commitment from their side to keep the revenue at the [$0.5 billion] over the next five years. So while this is not really revenue because it protects existing projects to an extent, this is the expectation of business (inaudible) give to us over the next five years.

Okay. And then as a follow-up looking at the discussion about margins that we had, in the past we spoke about a cushion of about 500 bps to 700 bps that could actually help us sustain the EBIT margin range that we kind of focused on. Utilization is at around 82.5%. The real question here is how comfortable are we that that cushion is still there and how badly do we need automation to come through to help us kind of sustain that EBIT margin range that we focused on in the past? Thank you.

Ranga here. I think there are multiple levers that we talked about earlier. For example if you look at 82.5%, that's the overall number including onsite and offshore; while onsite is higher, offshore is still lower below 80%. So we have some levers there, but of course there could be quarter-to-quarter volatility as I said earlier, but that is something that we are focusing on. And onsite mix is something and we have seen onsite mix in the range of 27% as recent as about one-and-a-half to two years ago. So, every 1% decline in onsite effort mix can give 50 basis point straightaway in operating margin. But of course currently that is 29.7%, it marginally came down from 29.9%. So that is a much more gradual one, but of course 27% is something that we have done recently, 27%, 26%.

So, that's the trajectory that we will be watching very closely. Likewise if you look at our onsite employee cost and subcon expenses for example, maybe 6.3% at the high and it has come down to almost 1% in the last three quarters. And we do expect that some of the subcontractor expenses are required to meet the short-term demand so that we don't have a challenge. At the same time we do believe that there are [markers] which can be addressed through better supply chain planning and more importantly looking at the margin of subcontractors, which we did this quarter for example. Likewise we have the onsite employee cost structure, the onsite pyramid. Onsite pyramid is something which we are focusing on. The pyramid has to reflect the concomitant billing rate for the pyramid that is there.

So we are seeing especially on the fixed price projects onsite, think how we could in a fixed price project when a particular project is there, how do we make sure that we have the optimal onsite pyramid. Can somebody senior there or mid-level really stand redeployed in other new projects essentially giving that much additional flexibility onsite because once the person is out of the fixed price project on the cost side, while it will come down on the revenue side and there is no impact, can they be redeployed elsewhere onsite in a new project. And also we are looking at for the higher end of the pyramid whether the current billing rates are adequate, should they be moved to different projects.

So, there are many other elements that we have been doing over the last couple of quarters because our onsite employee cost as a percentage of revenue you would notice on a comparable basis if you look at some of our offshore players is on the higher side. So we are looking at it in a way that it won't hurt growth, but at the same time gives us flexibility to work on it. So in sum and substance over the last three or four quarters, this has been our focus and at least the trajectory of these indicators have been helping us in the last four quarters. We continue to do so in the short to medium term.

And then the capability issue that you raised, the crucial aspect of this in order to stay ahead of the pricing downward curve is to ensure that the AI platform is able to bring automation led productivity improvements to even the more complex kinds of work that people. perform. Not just the L1 and L2 support task which are easier to mechanize and easier to automate, but to the more complex, the more imagination requiring tasks about cognitive such as application maintenance or maintenance or even application development and product engineering and those kinds of things and certainly of course more complex forms of end-to-end testing and things like that. And our endeavor is to continue to develop those capabilities in Mana that build those kinds of complex automation capabilities in.

James Friedman, Susquehanna International Group.

It's Jamie at Susquehanna. I was wondering in terms of your forward guidance, are there any verticals that are contemplated to decelerate or accelerate? Can you give us some color? I realize you don't guide on a vertical basis, but if you can give us at least some color about what you're contemplating in the second half on a vertical basis, that would be helpful?

So maybe our three presidents of sales are here, perhaps they can comment on this.

This is Sandeep. I can give color on Hi-tech Manufacturing, Retail, CPG, Logistics. I think if you look at retail, CPG, and logistics; they are broadly trending together. They are volatile; we had a great Q1, we had a flattish Q2. But if you look at the incremental revenue and market share captured, it's perhaps higher than most industry peers as retail goes through a disruptive time. Q3 for these industries is usually weak because of the holiday season and most of these companies are focused internally towards getting the holiday season right. But as consumer spending picks up, at least the early signs are that we will have a good holiday season and I think Q4 is going to be much better for them. Manufacturing and hi-tech have furloughs and rampdowns in Q3.

This is also seasonal and the parts of manufacturing that are usually trending towards servicing oil and gas, energy clients, et cetera have trouble. But industrial manufacturing have lots of M&A going on and therefore there's good uptake in M&A work. Across all these industries if we approach them as traditional IT services providers, then discretionary spend will be tight and we will have some trouble. However, we are seeing especially in these sectors a big uptake in our people plus software strategy. They're far more amenable to more powerful, more disruptive CapEx led spending; our offerings like Skava, Mana, Edge, et cetera. They have the most uptake in these areas. So, I'm very optimistic as we move into Q3 and Q4 other than seasonal trends that these new models will pick up and drive growth in these industries. I will pass it on to Mohit for his (inaudible).

So, this is Mohit Joshi. I'll cover financial services and then healthcare, insurance, and life sciences. So financial services, as you would have noticed, for the past few quarters we've had really a very strong performance. For the current quarter also even if you strip out the Insurance piece, financial services quarter-on-quarter grew at over 4.5%. Growth for us was very broad-based so this was across industry sub-segments, this was across geographies, and across service lines. I think our key message of industrialization, which matches with the new agenda for our clients; and the message of new, which is around digital disruption, around design thinking, around new AI use cases; I think that is resonating very strongly and our competitive position is very strong. So in a number of consolidation deals for instance, we have won large pieces of work.

On the flip side in terms of the headwinds, we had spoken about a large project rampdown and as has been happening over the past few quarters, the low interest rate or the negative interest rate regime has meant that client spending has been more on a start-stop basis. But I do want to underscore the very strong performance we've had in the past few quarters and the very strong competitive positioning that we have developed in this industry as very strong [moats] for us. So, that's on financial services. Insurance, again like I mentioned we have done extremely well, growth has been over 5%. There's a lot of focus among our clients on digital distribution, on claims and policy admin modernization, on customer acquisition. And insurance is a sector where we're leading with client acquisition.

So we have an existing portfolio of clients globally, but the new account acquisition in this sector has been particularly strong and that leads me to be optimistic about the outlook for our business in this sector for the next half year. Healthcare we have done exceedingly well, we had double-digit quarter-on-quarter growth. And again in healthcare as well, growth is backed by very strong new client acquisition, a huge amount of interest in our clients in our innovation and automation agenda. In healthcare we're seeing significant opportunities in care management, Medicare and Medicaid expansion, international expansion, and obviously compliance. So we have a very strong team and a strong client franchise in healthcare, which is also reacting very well to some of the things that Sandeep spoke about in terms of robotic process automation and in terms of AI.

Life sciences is a business where if you recollect in Q1, we had spoken about a very large consulting led program coming to an end and we had a little bit of an overhang of that in this quarter as well. We are seeing some amount of insourcing by some of our key clients and there is the spend in this industry itself, which is challenged. But again life sciences over the past two years has been one of our highest performing businesses with strong double-digit growth in both the years, again a strong client franchise. So I do expect that in the next half year, this will perform well above industry average.

This is Rajesh and I'll give a quick commentary on the industries I look after. So I manage resources, energy, utilities, telecom, and services business for Infosys. The resources and energy industries are clearly still reeling under the impact of low commodity prices and low oil prices. On the oil side, this morning the price has gone marginally above $50. But overall the industry is actually craving stability and I think there's been a series of ups and down and that is not really a good sign for companies to open up their wallets and make investments. So in these two industries, it is really about operational efficiency and looking at cost takeout. I think a lot of that has been done. At least the oil industry has been practicing this [Fit for 40], how companies can still continue to be profitable at $40 a barrel.

But I think overall with the demand being what it is and the gap between supply and demand still quite significant, I think this is something which will probably continue for some time. The best performing sector for us is the utilities industry. This is where we had our maximum growth. Overall the ECS segment recorded a record 7% plus growth this quarter and it was primarily driven to a large extent through the utilities industry. This is where we're seeing opportunities on two fronts. One, of course utilities are also trying to get leaner and get more efficient and that's where we're seeing a lot of uptick, but we are also seeing utilities spending a lot in transformation of how they are engaged with their clients. And one of the big investment areas for utility and a huge opportunity for us is how customers who have legacy systems and operated their back-end systems for long periods of time are now having to create front-end layers; which are more nimble, more agile; so that they can respond to the client needs more.

So we're looking at a disambiguation of the systems, which is creating a lot of opportunities for us. On the telecom side, again huge pressure on both topline and bottom line because of the nature of the industry, because of the competition; and here it has been quite cyclical. Last quarter we had a bumper quarter in telecom, this quarter it was relatively muted. So, overall the ECS segment has done very well this quarter and we expect the momentum to continue in Q3, Q4 as well. I've been told to keep quiet now.

Ravi Menon, Elara Securities.

Vishal, I'd just like to ask you if you find certain parts of the service line more receptive to improving win rates and your proposition of the new areas or the new way of thinking that you're bringing about and some parts maybe less so like for instance infrastructure management services perhaps being less susceptible to that versus application development?

Perhaps Ravi, you can provide this answer to Ravi. Overall what we see, Ravi, is the growth across all the service lines and of course they all have different characteristics and different value propositions. But generally we are seeing strong growth in all the service lines driven by different parameters. In application development and maintenance, it is driven by improving the productivity through automation and bringing experience improvements through design thinking. Infrastructure management is all about automation and cloud and so forth. Perhaps Ravi, you can talk about it. The question was around which service lines are more prone to innovation and higher margin and attractive traction.

So, all service lines have some way of looking at automation and innovation. The ones which are more amenable for automation are application development and maintenance, enterprise package applications, infrastructure services. But having said that, each and every other service line does have an opportunity because we're looking at the complete value chain of the services spectrum. Each of them has a new part of it. Just to give an example in engineering services, the digital twin is the new of what we could do in engineering services. In application development and maintenance, we are seeing quite a bit of work on legacy modernization. In digital experience, taking a process and digitizing it. In BPO services, we have a lot of new offerings in digital media optimization and creating insights and analytics. So, each of the service lines I believe do have an opportunity to innovate or an opportunity to automate, we just have to look for it.

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand over the floor to Sandeep Mahindroo for his closing comments. Over to you, sir.

This is Vishal. So, just to close. We had a great Q2. We are proud of our execution. As we said both in August and at the end of the prior Q1, largely internal factors had got us to the point of our performance in Q1 and we focused on those, we overcame them. We had strong performance of 4.7% constant currency performance in our core services as well as improvements in all the operational parameters and continued strength in our new areas. So, I'm really satisfied with the way the team has performed and the results that we have achieved. While we see some headwinds as we look at the next two quarters, which has brought us to the revision in our guidance downwards to 8% to 9% in constant currency for this year, and obviously we will strive to ensure that we deliver a great performance in these two quarters.

When we look beyond that, what we see is that our industry is going through a fairly structural transformation and when I look around, I find that our Company both in terms of renewing our core services with automation and grassroots innovation as well as winning new services that are the defining areas for our business and for our client; in that all important parameters, we are doing very well and that gives me more than anything else the comfort for the future. So, thank you very much and we look forward to seeing many of you in the course of the quarter and then in the next earnings.

Thank you very much, sir. Ladies and gentlemen, with this we conclude today's conference call. Thank you for joining us and you may now disconnect your lines.