Infosys Ltd (INFY) 2017 Q4 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Infosys Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

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

Thanks, Erna. Hello, everyone, and welcome to this call to discuss Infosys Q4 and FY '17 earnings release. I'm Sandeep from the Investor Relations here in Bangalore. Joining us today on this call is CEO and M.D., 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 in 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 onto Dr. Sikka.

Thanks, Sandeep. Hi, everyone, and thanks for joining us. Let me start by covering our performance for Q4. It is fair to say that the performance during the quarter was lower than our expectations. It is seasonally soft quarter, and we saw softness in consulting and in retail and CPG in China as well as some other distractions. Any large-scale transformation takes time, but the early years requiring a delicate balance between the dual tasks of protecting and growing the existing businesses and simultaneously exploring and entering new frontiers. And evolution of the organizational culture is also a most critical and yet fragile aspect of this. With this in mind, our core business showed good performance. Our products and software offerings saw some of their best quarters. And we saw a positive client feedback with our client survey results at their highest since the survey started 12 years ago. And it has also endorsed strongly our services and software, including NelsonHall for our core services and IDC, HfS and Forrester for Mana. All are further evidence that our renew and new strategy is moving in the right direction.

We crossed $10 billion in revenue and for this, I would like to thank and recognize all Infoscions, past and present, that have helped us to reach this significant milestone. We delivered strong operational efficiencies, declining attrition over the course of the year, now in single digits for top performers, healthy large deal wins, robust cash generation and steady margins, despite a lower growth trajectory.

Our FY '17 margins are steady at 24.7%, despite the impact of salary increases, cross-currency headwinds and decline in our some of our traditional services. We were able to offset these headwinds through a strong focus on improvement in operational parameters like utilization and a tight control on costs.

For the full year, our revenues grew 8.3% in constant currency. And yet, the employee count grew only 3.3%. This is reflected in revenue per employee, including by 1.2% in reported terms and 2% in constant currency terms in FY '17 to $51,375 and is an outcome of our automation and productivity-related effort.

We had 6 large deal wins in Q4 with a TCV of $806 million, comprising $623 million worth of framework deals and $183 million worth of committed value deals. While the large deal signings trend line is in the right direction, more than 90% were in renewal in our existing businesses, and this is one metric that we will continue to monitor closely. In FY '17, we added 5 more $100 million accounts.

In Q4, the attrition among top performers in IL, in Infosys Limited, went down to the single digits, as I mentioned earlier. Overall attrition for IL for Q4 FY '17 was 13.5% quarter-to-date, a decrease from 14.9% in Q3. We continue to strengthen the management team, and I'm very happy to welcome Pervinder Johar as the CEO of our EdgeVerve subsidiary. Pervinder has extensive experience in building best-in-class software and cloud services. And most recently, he was the CEO of a leading software company in the world of business planning.

On the contribution from new areas, specifically, our FY '17 revenues from new software and software-related services, including Mana, Edge, Panaya and Skava, grew at more than 42%. Starting in Q1 of FY '18, we will report revenues on a quarterly basis from the new software and also from our new offerings and services such as digital services, Internet of Things, cybersecurity, the work we do in API economy, mainframe modernization to cloud, BI modernization and the open stacks, among others, in addition to all our present disclosures.

Looking deeper into the numbers. We can see that our strategy to help clients drive automation and innovation into the core of their businesses through our renewed and new services, software and offerings and our culture of running an education, is the right one.

Let me speak about the renewal of our core services and the delivery of new services. In Q4, we helped plants make digital cloud data and analytics and mainframe modernization a reality. And while we continue to strengthen and renew our core services, it is important to note that new services revenue continued to gain strong traction. We also continued to drive grassroots innovation through Zero Distance. In March, we celebrated 2 years of Zero Distance, and the implementation of more than 2,000 innovation ideas. Among these were key engagements with many clients, Aon, Affinity and many others. As Zero Distance evolves, we have to -- we have also focused on converting the best ideas into business solutions and intellectual property that will help us drive new opportunities across industry segments.

In digital, cloud, legacy modernization and automation, we strengthened our strategic partnerships with Adobe, Microsoft, Amazon Web Services and salesforce.com. And in engineering services through our partnership with GE, we deliver solutions in the field automation, digital trends and Internet of Things, among others. We partnered with Cisco, Hitachi Data Systems, ServiceNow, BMC, Virtustream, HP Enterprise and Huawei and others to modernize plant infrastructures to bring them their cloud efficiencies.

In Agile and DevOps, we helped several large clients transform their IT organizations enabled by our services, including our Infosys developer platform and our tooling and architectural expertise.

Internally, we leveraged our own automation solutions, and though we estimate that we saved more than 3,800 FTEs worth of effort in Q4, primarily in application maintenance, packet system maintenance, BPO and infrastructure management, bringing the total FTEs worth of effort saved in FY '17 to more than 11,600.

Through Zero Bench, which is our program to engage employees in value creation while between projects, more than 20,500 web packets were completed in FY '17. And with this, we continue to reimagine the very notion of the bench.

In Q4, when it comes to new software net offerings, we saw continued strong momentum in Mana, Skava, Panaya and Edge. Mana had its best quarter ever in terms of wins. In Q4, we won 27 Mana engagements, including ABN, to help them in creating their digital ecosystem. This brings total Mana customers to 50-plus and the total number of engagements in Mana to more than 150. Mana has more than doubled every quarter in the last 4 quarters of its existence.

Skava continued to grow its customer base in Q4, including winning an engagement with EMEA for their next-generation rewards management, and Design Thinking was a core part of this engagement. Overall, in FY '17, Skava grew its customer base by more than 40%.

EdgeVerve delivered a strong performance with 30 wins and 26 go lives from both Finacle and Edge. And AssistEdge, our flagship RPA platform, continues to drive this growth.

And Panaya had its best year, finishing the year very strong. In the second half of 2017, we appointed a new leadership team under the leadership of Jake Klein to go after higher-value opportunities.

There are several strong examples of customer success with our new software and offerings that we have included in our press release that went out earlier today.

When it comes to investment and ecosystem, we continue to invest heavily in AI capabilities in our AI platform, Mana. And this quarter, we added significant expertise by acquiring a highly-accomplished team of machine learning experts on Skytree, one of the early startups focused on speeding up and scaling machine learning. Skytree's founder and CEO, Professor Alexander Gray, from Georgia Tech, did some early pioneering work on massive scientific data sets and machine learning from those at NASA. Sanjay Mehta, Skytree's Head of Engineering and an IIT Mumbai alumnus, brings 2 decades of experience delivering highly scalable on premise and cloud enterprise system, and I'm really excited about the tremendous potential of our joint teams.

In addition, through our $500 million -- USD 500 million innovation fund, we continue to support startups that extend the innovation that they bring to our clients. We made 7 new investments, including UNSILO, an AI company; ideaForge, a pioneer in autonomous unmanned vehicles; and Trifacta, which enables lines of business to gain insight from growing volumes of raw data. We invested in TidalScale supporting their groundbreaking technology and diverse virtualization to reduce hardware cost for large-scale information processing. We invested in Cloudyn, which helps clients understand the cost performance benefit of moving workload to public cloud. And lastly, we continue to invest those limited partners, selecting Stellaris Venture Partners to help us gain exposure to innovative new companies in India that we can help bring into other markets.

With regard to culture. In FY '17, we introduced our RSU plan for our top performers and high-potential employees, covering approximately 25% of mid to senior employees, that is more than 8,300 employees. In addition, we restructured the compensation of senior leaders to be more performance-based with the significant portion of their compensation now coming through stock incentives. I'm personally proud of our new RSU and performance-based plans, as I believe any world-class organization must be performance driven and enable employees to be entrepreneurial and share in the successes of the company. I believe this entrepreneurism and innovation is fundamental to our success in the times ahead.

In education and training, Design Thinking training now covers more than 135,000 employees across the organization. Beyond this, we are bringing new immersive learning to AI training. We have now trained more than 2,000 people on machine learning and on our Mana platform, leveraging moves to deliver new courses at scale, introducing a new class for power programmers using the flight simulator model of experiential learning and expanding learning to the Digital Tutor's social learning platform and the Infosys learning platform.

Looking beyond business. In Q4, the Infosys Foundation committed to the construction of sanitation facilities at government schools and training centers in Tamil Nadu, Telangana and Karnataka. And partnered with the Akshaya Patra Foundation to provide sanitation kits and counseling for one year to 20,000 girls attending school in Jaipur. An endowment from the foundation to Sri Ramakrishna Sevashrama this quarter has provided drinking water and fodder to remote villages in and around Pavagada, Karnataka.

The Infosys Science Foundation, ISF, honored 6 top researchers across the world in Science and Humanities with the Infosys Prize 2016, celebrating their inspiring contribution to science and to research in the public good.

The Infosys Foundation U.S.A. announced new teacher training grants for Bootstrap, Exploring Computer Science, Uteach, Beauty and Joy of Computing and Mobile CS Principles, enabling 500 public school educators nationwide to attend free high-quality computer science professional development in the U.S.

Including the earlier commitments to Code.org and DonorsChoose.org, the 1,000 educators supported in summer of 2017 will double the number of teachers that we helped in 2016 and bring Computer Science education to tens of thousands of new students.

In addition, the foundation will continue to support Hispanic Heritage Foundation and its summer 2017 LOFT Coder Summit at Stanford University.

Coming to outlook -- coming to the business outlook for FY '18. Based on what we see presently, we are guiding for a constant currency revenue growth of 6.5% to 8.5%. This takes into account the normal seasonality of a stronger performance in first half of the fiscal year. Our margin outlook for FY '18 is for operating margins to be in the range of 23% to 25%. The FX considered include the recent rupee appreciation and expanding capacity in on-site development centers to mitigate any potential risks from visa regulations in the U.S. as well as the necessary investments in new services and new software [ lateral issues ]. We will continue our relentless focus on cost optimization, as we have done this past year, and accelerate automation and innovation aimed at mitigating the impact on margins.

In closing, we remain steadfast and passionate in our longer-term path to transform Infosys and to continue -- and we continue to see many positive signs that our strategy is the right one.

I will now hand it over to Ranganath for his comments on the financials. Thank you.

Thank you, Vishal. Hello, everyone. Let me start with the key outcomes for the financial year 2017. Our revenues grew 7.4% in USD terms and 8.3% in constant currency.

Coming to operating margins, we had indicated that the operating margin guidance for the year to be in the range of 24% to 25%. Our operating margin for fiscal '17 is closer to higher end of the guidance range at 24.7%. Operating margin for the year was steady despite the pricing decline, currency volatility during the year on account of Brexit and the U.S. elections and lower revenue growth trajectory during the year. This was primarily on account of a sharp focus on operation and efficiency parameters, like utilization, on-site employee cost as a percentage of revenues, subcontractor costs as a percentage of revenues.

Let's look at each of these items and see how they mold during the year. Coming to utilization, last year, we exited Q4 with utilization of 80.1% and ended the current Q4 at 82%, an increase of almost 2%. Likewise, for fiscal '17, utilization was 81.7% compared to 80.6% for our fiscal '16.

Coming on to on-site employee costs as a percentage of revenues, it reduced to 38.1% in Q4 this year from 38.6% last year, which is a drop of 0.5%. For full year fiscal '17, total employee cost as a percent of revenues was held steady at 54.7%, despite the compensation increases. Subcontractor expenses as a percentage of revenues was held steady at 5.6% revenue for the full year.

Let us now move to the second key outcome of fiscal '17, which is a robust cash generation. For fiscal '17, cash provided from operating activities, as per consolidated IFRS, grossed $2 billion for the first time ever at $2,099 million, an increase of 13% over last year. Likewise, free cash flow, which is operating cash flow less capital expenditure, increased by 16% to $1,688 million.

Looking at cash conversion, operating cash as a percentage of net profit improved to 98% as compared to 91% in the previous year. Due to strong cash generation, cash and cash equivalents, including investments to that a record high of $5,979 million.

Coming to capital allocation policy. The board has approved a revised capital allocation policy, keeping in view the strategic and operational cash needs of the company in the medium term as well as enhancing the returns to our shareholders. The details have been announced in the results press release. Further announcements in this regard will be made as appropriate in due course.

Volume growth for fiscal '17 was 10.2%. For the full year, the realization declined by 1.9% in constant currency terms and 2.7% in reported terms. Our net employee addition in fiscal '17 is 6,320, which is significantly lower than the 17,857 last year. This is reflected in the improvement in the revenue per employee in fiscal '17 to $51,375. Basic EPS for the full year was $0.94 compared to $0.90 in fiscal '16, which is a growth of 4.3%.

Coming to Q4, our revenues in dollar terms were up by 0.7% sequentially in reported terms and flat in constant currency. On a year-on-year basis, revenues grew 5% in reported terms and 5.3% in constant currency. Our operating margin for the quarter was 24.7%, a decrease of 40 basis points over Q3 '17. During the quarter, rupee appreciated by 1.4% against U.S. dollar, which impacted the margins by approximately 35 basis points. There were -- there was a positive impact of 50 basis points in account of cross currency and revenue hedges. This was offset by an approximate 55 basis points impact from decrease in realization and increase in other costs, leading to an overall 40 basis points on decline in operating margins during the quarter. Operating cash flow for the quarter was $547 million, flat at Q3 levels. Free cash flow during the quarter was $443 million. This was despite tax payments of about $45 million that was paid pursuant to demand from tax authorities in India.

DSO for the quarter improved to 68 days compared to 69 days in Q3 '17. Our hedge position as of March 31, 2017, was $1,315 -- $1,350 million.

We are guiding for a constant currency growth of 6.5% to 8.5% for fiscal '18. On operating margins, we expect our fiscal '18 operating margins in the band of 23% to 25%. In fiscal '18, apart from the rupee appreciation that we have seen, we also expect ramping up of on-site development center in the United States to address potential visa regulation changes. However, at the same time, as we have done this year, we will relentlessly focus on implementing operational efficiency parameters, especially on higher off-shoring, roll mix optimization on-site and benefits from automation to minimize the impact on operating margins.

As you know, several regulatory proposals are under consideration in the United States that envisage changes to visa regime. At this point in time, there is no clarity on what proposal and what form will be finalized. So our margin band for fiscal '18 doesn't include potential impact on these aspects. As in every financial year, Q1 would see compensation increases and visa cost, which we expect to play out in this quarter as well -- in this Q1 as well.

With that, we will open the floor for questions.

(Operator Instructions) First question is from the line of Moshe Katri from Wedbush Securities.

Just going back to the topic of margins, and that's been probably the most frequently discussed topics since last night by investors. This is another kind of margin reset delay kind of the market sees it here. One, appreciate some of the data in terms of what drives the lower end of the range to 23%. Is there any way to kind of quantify specifically how much incremental recruiting domestically will impact margins in fiscal year 2018? Maybe also talk about the investments. Is there also a factor on the pricing compression that you're seeing in the legacy business? Any color here will be useful just given the fact that people are worried that this is not the last reset on the margin side.

Thank you. Ranga here. So if you look at -- just before I answer that question, I also want to provide some color on the operation margin trajectory during this current year and what were some of the things that played out and how we addressed and why we are kind of expanding the margin range, right? If you look at later this year, we had set the margin guidance for 24% to 25%. And we ended up at the higher end of the guidance at 24.7%. And this was despite almost 5% reduction in revenue trajectory as compared to previous year. If you recollect in fiscal '15, our constant currency revenue growth was 13.4%. And this year, it is 8.4%, almost 5%. But despite that, we were able to hold the operating margin steady at 24.7%, primarily because we focused a lot on operational efficiency measures that I outlined like localization, on-site, employee cost, subcon and so on. We do believe that some of those levers do exist to -- exist with us today.

For example, on-site effort mix, which is close to 30%. And we have seen earlier in recent years at 27%. Every 1% reduction in on-site makes -- gives us an operating margin benefit of 40 basis points. So these are some of the areas we will focus on further in this year. Likewise, if you look at the on-site employee cost, one of the other measures we have deployed in this quarter is really to look at the -- on roll mix and fixed-priced projects. So that's how had, despite the revenue -- lower revenue trajectory and other compensation increases last year, we were able to hold the margin steady last year. Now the reason for expansion this year while -- will continue, as I said earlier, our relentless focus on the operational parameters, which we still have levers especially on-site. One is the rupee appreciation. If you look at last 2 weeks, almost, if you compare with the FY '17 average to year-end closing, rupee has appreciated about 3.3%. So that is something we need to watch out. Of course, even last year, we had huge currency fluctuations on account of Brexit and U.S. pound and euro with the U.S. dollars. We navigated that successfully. However, I think we want to kind of keep in view the trajectory of rupee and see how we navigate.

The second part, as I mentioned earlier, is also we are proactively making certain investments in the United States, especially opening certain local development centers to ensure proximity to clients and, at the same time, ability to attract local hires. One of the key reasons why many of the local hires were really -- we're not able to attract apart from many other reasons is the location certainty. For example, we expect our employees otherwise who come on visa there to move from one location to another as and when the process get completed, which doesn't give location certainty for the local hires. So there is a little [ tense ] on their part to join us because they want to be in a particular location. So we are developing these development centers in client clusters. Today, we have high concentration of clients, so that local hires could join us, be in the development center and ability to work across projects in that cluster. So we believe that this will help us in attraction. So there are a couple of operating costs, which are -- which we do believe is onetime, which is essentially in that increasing the attractiveness on local hiring. And we have made some progress during the -- in fact, some of the investment started as early as previous quarters. We have had those hirings and current deploying. So we are proactively addressing the -- that aspect. So typically, these 2 are the key aspects.

Coming to the other question and part of the question that you had is it because of the pricing decline. Even last year, if you look at the pricing decline was about 1.9% in constant currency. But despite that, we were able to offset that through operational efficiency measures and hold the margin steady. I think this additional aspect that we want to look on how do we want to mitigate any potential margin impact is also on automation. One uptick that we saw, which is probably worth noting is this year, the net headcount addition into the group was about 60% lower than last year's. We added just about little less than 6,000 employees as compared to close to 18,000 employees last year. I mean, essentially, we want to see whether this could accelerate during the year by way of automation and productivity and how much that could really provide us some positive impact. So net-net, I think the expansion of margin range, 22% to 25%, while we'll continue to focus on operational efficiencies, primarily on account of some proactive investments, onetime investments we have made -- we plan to make during the course of the year gradually as the last (inaudible).

Great. Just a follow-up. That's the other question that people are asking. Do you think -- and this is for Pravin, do you think it's too early or premature to call the spending recovery in the financial services vertical? And this something that we've been focusing on since the end of last year and post the election in the U.S.

Yes. This is Mohit Joshi. I think -- look, that's a very valid question. The way we look at it -- and this is a very U.S.- specific issue. The way we will look at it is that the sentiment has certainly improved. There's a lot more optimism because of the rate cards and because of the expectations of an easier regulatory regime. And we expect it fully to flow through into IT budgets. We haven't seen that yet. But the base of the cuts certainly seems to be a lot less than curious than a year ago. We expect that over the next 6 months, it should start going into spend. Does that answer your question?

And is that embedded in your guidance at this point?

Yes. So the guidance obviously reflects the situation as we see it now. So yes.

The next question is from the line of Rod Bourgeois from DeepDive Equity Research.

So the DeepDive Everest Group forecaster has called for the top 5 Indian firms to grow 6.3% in organic constant currency over the next 12 months. I'm looking at the midpoint of your fiscal '18 guidance at 7.5% in constant currency. If you assume that you might generate around 1 point of growth from acquisitions over the next year, your guidance is actually right in line with our market forecast. So the question I have is when you formulated your fiscal '18 guidance, did you assume that Infosys would be a share gainer or a share maintainer or perhaps, even a share loser depending on your market forecast? Our forecast implies that you're essentially counting on share maintenance over the next year. But I love to get your take on how you see your growth outlook stacking up against what you're seeing for the overall market, particularly for the top 5 Indian firms.

I think let me address that particular point. See, just to step back, if you look at the last 2 finance -- fiscal years, if you look at fiscal '16 or fiscal '17, if you exclude last 2 before that, our relative share, if you look at the -- if you compare with the NASSCOM guidance in India of our large peers, we used to grow about 50% of what NASSCOM indicated or 50% of our large peers. That's used to be until fiscal '14 and '15. Last 2 years, our handover has been to bridge the underperformance of the company, vis-a-vis the NASSCOM guidance, vis-a-vis the large peers. If you look at last 2 years, we are pretty much in line with the industry. And in fact, fiscal '16, probably, we were slightly ahead of the industry growth, both NASSCOM as well as the peers. And even fiscal '18, based on what we see, what we've announced and expectations from guidance in NASSCOM as well as the large peers in fiscal '17 also, our growth has been in line with the industry.

So last 2 years, the relative underperformance of the company, vis-a-vis, the industry growth rate, whether it was NASSCOM or the large peers, have been arrested. This year, NASSCOM has kind of shied away to give a guidance at the beginning of the year. So I think what we have stated is that they will watch the Q1 performance of all the large players and they will give their guidance post Q1. I think that is the statement they have taken. As far as our guidance, it's primarily driven by the bottom-up approach, for example, from our existing clients, the market share, the penetration that we see, some of the large deal wins that have happened in the earlier quarters, what is the ramp up that we see as well as some of the new project starts that are likely to happen during the course of this quarter and coming quarter. So it's a combination of grounds up. So in summary, last 2 years, I think our growth rate has been in line with the industry in fiscal -- and slightly ahead of the industry. But this year, we have taken primarily a bottom-up approach.

Yes. And Ron, this is Vishal. Just to add to Ranga's points. If you look at our business, it is -- and to answer your question a little bit more thoughtfully, I want to look at it from 2 different points of view. One is the nature of our business and the other one is the nature of what's going on at client. If you look at our business, we have basically around 1,000 clients. And a relatively small number, 250 of them, account for a vast majority of our revenue. And if you look at the other companies in our space, it is more or less the same kind of the situation. Basically, everybody is around 1,000, 1,200, 900 clients, something like this. So therefore, even if you look at the top 10,000 businesses in the world, our penetration relative to this is relatively small. And so there is a vast open field of opportunities for us to go. And so share gains relative to others, the way I see, is a relatively smaller part of the overall equation. And a lot more of the growth is to be achieved by being relevant to clients, especially in areas that are new and that are strategic and deeply relevant to the clients' futures.

If we do that, I think the vast majority of the growth would come from new areas and not as shares at the expense of others in the industry, but really as business wins directly with clients in unprecedented new areas. The other part of it is that the software business that we have, which is still a small part of our business but growing very rapidly, applies to much larger client base than our traditional go-to-market from services. And in this world, we expect to grow significantly over the course of this year. And this part of the business is not -- does not have the same kind of seasonal headwinds in the second half of the year than the services business does. So the applicability of this is to several thousand, potentially a few tens of thousands of customers. And so over the course of the year under Pervinder's leadership, our endeavor is going to be to build a go-to-market motion and channels to this larger client base for our software. So it is a multi-faceted situation that we see. And the way I look at this, rather than look at it from the way the industry is moving and so forth, I look at this as our ability to engage with clients in the areas of their strategic relevance, our ability to build the differentiated offerings and our ability to build the new channels into the new parts of the markets that are relevant for our software world. I hope that helps.

Yes, that helps. In the way of follow-up, can you just give us your views on 2 growth drivers? One would be new bookings, so not renewals, but the outlook for booking new contracts at new scope. And then also your assumption for fiscal '18 on pricing given that it was down last year. Do you expect it to be down again in fiscal '18?

Ron, we don't generally break down the new and services bookings, vis-a-vis, the renewed -- renewals. In large deals, we report this on a quarterly basis, but we generally don't break it down. We'll talk this through and see if in the upcoming analyst meetings, this is something that we can provide more color on to you, guys.

Okay. And then on the pricing front.

The pricing we have seen is relatively stable. On -- certainly, on the diamond material side, it has been pretty stable. And I think the -- we have some commentary on that and in the -- it's relatively stable so far than -- from what we see.

The next question is from the line of Joseph Foresi from Cantor Fitzgerald.

I just want to make sure I got this right. So what accelerates your growth rate from these levels? Is it the new areas, software and the new initiatives? Is there an opportunity to get back to, I guess, low teens? And I think you might have said something about breaking out the new versus older services as a percentage of revenue going forward. Can we get a preview on that?

So Joe, maybe I can speak at a high level. If you look at our business, roughly 65% of our workforce produces about 55% of our revenue at roughly $48,000 RPP. This is -- this part of the business is the one that is more commoditizing. This is the part, which is around maintenance, run, operate areas of the business like that. Here, the growth rates are not so strong, and the margin percentage is quite high. We have had volume growth outperform revenue growth, so far. And in this part of the business, our endeavor is to bring an extreme focus on automation to bring differentiated offering, vis-a-vis move into new cloud infrastructures, and things like this, and really differentiate on the basis of delivering much higher productivity and efficiency improvements to our client, optimizing parameters, like their old ratios and on-site mix and so forth. The other part of our business is where 35% of our workforce produces 45% of our revenue. This happens at $72,000 RPP. And here, the growth rate in the past year has been close to 20%. The growth rates are very high. The margins are higher than the margins for the industry. And if you look at software as well as a part of this, I mentioned earlier, software is going at 43% year-on-year than new software. This is the part that we wish to double down on, develop our sales competencies, go-to-market competencies and really push hard as well as bringing a real innovation bench to that Design Thinking engagement, really engaging on plans, strategic plans, bringing software into the mix and so forth. So it is really a two-pronged strategy, a portfolio-oriented strategy.

Of course, some parts of our business I have talked about consulting before and Finacle BPO. BPO has had very good performance, both on growth as well as on margin, over the last 9 months. And so we are happy about where this is headed. We want to bring some more transformational capabilities to BPO. So I think, (inaudible) something with Pervinder's leadership, we are looking forward to a double-digit growth a year ahead of us. And consulting has been -- I guess, the polite thing to say is, what is the word, headwind? And really, I mean, starting from Q1, it has been something that has -- in particular, pockets of -- some parts of our consulting, which are somewhat backwards looking, is something that Rajesh was -- took over consulting about 9 months ago has really been focusing on reshaping this in a very purposeful kind of a way. So that is really the 3 distinct parts of our portfolio, the -- really the growth emerging, next-generation new parts, which we want to really push the -- a little hard on the -- more commoditizing parts of our services, which we want to bring as much automation and Mana-led efficiencies as possible. And then the distressed businesses that we want to turn around. Ravi, you want to add anything to this?

Yes. So the growth portfolios, as Vishal spoke about at the new services, are primarily the ones which customers are significantly spending to transform their own landscapes. So either you would potentially use these services to renew an existing landscape or you would bolster an existing landscape with the level of modernization to leverage the power of new technologies. So it could either, say -- I'll illustrate a few examples. It could be a mainframe modernization program to move customers out of the mainframe to very agile newer landscapes. It could be cybersecurity to bolster the existing infrastructure network, which can -- which could make it very safe. It could be digital technologies to transform and innovate a business process. So they kind of span across. These are high-spend areas, very little talent available in the market, so you will have to build teams organically and hire with -- hire people with deep expertise. Huge headroom and therefore, the growth rates are very high. The faster you could actually take it up and invest in them and be a part of the client journeys, there would be significant spend. And hence, you could realize the value all of it.

Got it. So just so I understand, 45% of your business is growing about 20%. And then 55%, which includes consulting headwinds, right, is probably declining at a specific rate because that will get you to your overall growth rate. Is that fair?

Yes. So the balance, which is the commoditized business, while it is not growing in revenues, it would continue to grow in volumes. And that's because there is a heavy commoditization, which essentially means you would have to take cost out. You would have to make it very agile and invest into new areas. It will feed into the new areas. We see -- need to be in that business. We need to be in that business because it is an estate you want to own, so that you get the rights to actually invest into the new areas. So -- and then as the firm, we have to have the duality of taking cost out in those commoditized areas and investing into new areas and make the growth happen from the newer areas and take people out, refactor the talent and push them into new areas and new software and automation to allow the estate to be maintained by us. So it's kind of a dual strategy to go ahead. I don't think it's one against the other. We have to just do both.

Got it. Okay. And is there an FTE or cost takeout target for FY '18? How should we think about your progress there?

Are we talking about the automation lead take outs or the broader ones?

Yes. I think you talked about maybe 11,000 in total in FY '17 roughly. And I'm wondering, is there any targets that you've set internally that you could share with us for FY '18 on headcount reduction through automation?

Joe, the -- so far, we have been reporting the FTE number, which is -- because the FTEs that we released got assigned to other projects or moved to other -- sometimes other service lines or upscaled themselves to higher-order services and so forth, this is really not a very good proxy for automation. As we get really serious about bringing automation in a massive way into our -- but the numbers, of course, I mentioned 11,300 plus number or something like this over the course of the last 12 months, that is a very significant number, which means that the impact is happening. And you see that in the revenue per employee improvement. You see that in the fact that the revenue growth has significantly outpaced employee addition. So it is working. But now, we really need to take this to a whole different level, and that is going to be the end over the course of this year. So do we have any goals for it? Mike will also say is that the agile minimum viable way of working on these initiatives is to not have artificial goals that constrain our thinking.

The only goal really is 100%. We want automation to come to 100% of our projects, 100% of our fixed price projects, 100% of our large client engagements where we have a meaningful chunk of the business process or the application landscape that we can transform by virtue of automation. I mentioned earlier 50-plus Mana engagement. Of these, something like -- well, Sandeep, correct me if I'm wrong, 28 are in the Mana for IT area, where we are already doing IT work together with Mana. So obviously here, Mana becomes the system, which helps automate the operation of the systems. And the number of people is far smaller that work on the Mana platform. And the other ones are in the new areas of Mana, which is in a different category, the Mana for business, where you build breakthrough applications. But coming back to automation, so really, our goal is to launch a massive campaign, a top-down one starting with our big account engagement on the fixed price projects and the bottom-up one, which is a -- in particular instance of our Zero Distance campaign to really bring automation basically into 100% of that 45% of our workforce -- sorry, 45% of our -- 65% of our workforce. It produces 55% of our revenue, which is amenable to automation. That is the endeavor, and I look forward to updating you guys on how we progress on that front.

Okay. And last quick one for me. Can you give us any color how big Mana is and who you're competing within that product?

It's one-of-a-kind, man. No, everyone and their uncle has an AI platform these days. And from the time that I studied AI as a student to now, it is a very -- everyone calls their tool kits, AI platforms. And there's a time and this amount of excitement in the world of AI these days. Every day, there is some breakthrough of the other that is delivered, the kids are open AI, which is an open consortium in the world of AI. There's some really extraordinary work last week in, really new frontiers and unsupervised learning. We have an amazing example at a bank here in Asia, where we built a Mana-based solution to process NDAs, nondisclosure agreements, for this bank. And they had a small team of lawyers, I think between 10 and 15 junior lawyers that used to process these NDAs. And with Mana, we can automatically process them. We launched this and then (inaudible) around-the-clock. And we figured out it's got modification through the NDAs, if those modifications are acceptable or not. And we do all of that automatically and completely eliminate that portion of the work done by this team of lawyers. I mean, this is not administrators, filesystem admins or operators of standard operating procedures, some things like this. This is lawyers that we are talking about. So it's really an exciting field. And I mentioned that we acquired this team of 8 PhDs from Skytree under the leadership of Sudhir. And we like to think that -- I mean, if you look at the IDC report that just came out on Mana or the Forrester report or the HfS report, that will give you some more insights on how it is doing compared to the others. But beyond that, I like to think that it's one-of-a-kind platform.

Next question is from the line of James Friedman from Susquehanna.

I just wanted to start with a housekeeping question, Vishal. I want to make sure I heard you right with regard to the first half, second half seasonality. You're talking kind of quickly there.

The -- let me mention exactly what I said. What I said was this takes into account the normal seasonality of a stronger performance in the first half of the fiscal year. We have chosen these words carefully and perhaps, Ranga can add to whatever I have to say here. What this says is that if you look at the traditional services business and if you look at our performance over the last many years, the first half of the year typically has stronger performance than the second half of the year. And that pattern we have factored in, as we have learned about our guidance experience over the last few quarters as we look at the 6.5% to 8.5%. Having said that, the software business, obviously, is immune from the seasonality. And the software -- as the software business becomes bigger, we expect that more of this as we transform the software business towards bookings-oriented and subscription-oriented business. We expect that more of this will happen towards the second half of the year. And as we get more visibility, we'll change that. And we believe that new services are on a steep ramp up. And again that we expect will still have an impact again as time goes forward and so forth. But the statement I made was that the guidance that we have provided today takes into account the normal seasonality of the stronger performance in the first half of the fiscal year. Does that makes sense?

Yes. And then just my follow-up. I understand you gave a commentary about your anticipation on financial services. Are any of the other verticals contemplated to either decelerate or accelerate this fiscal?

Yes. This is Mohit. So let me just reiterate the commentary on financial services. As you've seen in the current year rate, so for the current quarter, we grew on a reported basis by 1.4%. But actually, if you exclude Finacle, the growth on the services business was 2%. If you look at the entire year, the growth is double digit, which we believe is very strong, right, I mean, compared to what was expected at the start of the year and come back to where our peers are landing up. I think we remain optimistic about financial services for the next 12 months as well. I think our story about the renewal and new, about automation, AI, but also about Design Thinking and digital is very resonating very well with our clients. So that's the sort of brief perspective that we have on financial services. As I mentioned, in the U.S., we see a lot of optimism, and we expect it to convert into higher IT expense. Our European business, in any case, has been extremely strong for the past 2 or 3 years. And despite the fact that the banks there are slightly less optimistic than U.S.-based banks, we have a lot of headroom for growth. The banks in Europe are still behind the curve in terms of technology adoption. So that gives us a lot of room to sell our existing and our new stack of services. And we have a very healthy business in the rest of the world, including in Australia. So that's just a quick, maybe more of a geographic rather than a sub-vertical snapshot. But hopefully, it gives you a perspective.

Next question is from the line of Keith Bachman from the Bank of Montreal.

I'm going to throw in 2 questions -- or ask 2 questions, if I could. The first is on the margins. You said something I was hoping you could clarify because I also didn't catch it quite -- but it sounded like you said each 100-basis point shift to on-site negatively impacts margins by roughly 40 basis points, if I heard that correctly. But the longer-term view is why wouldn't that persist. And what I mean by that is you're trying to go increase your digital content, which I think is more onshore labor than offshore. And the visas may or may not play out. But it would seem that you're trying to position more onshore labor in response to that. So if you could just clarify: a, did I hear that correctly; and b, why wouldn't that be a longer-term issue that would thereby put pressure on margins over sustained period of time?

Keith, this is Vishal. Maybe, I can start and then Ravi can add to this. The -- if you look at the overall situation with the workforce, there are 3 distinct forces at play here when you think about on-site and the relativity on talent and skills. One is the fact that the -- as you said, the newer services, digital and so forth, require more up close, zero distance, hands-on engagement, local talent and things like this. The other one is that we have a huge amount of talent present in the larger volume of services that I mentioned earlier, 65% of the workforce producing 55% of our revenue. And in that part, we can significantly optimize the on-site mix and bring much more automation to bear and free up more capacity on site. And the third dimension is the visa dimension where we need to hire local anywhere. So we believe that one of the things that Ravi has been working on is a very -- it's not a straightforward thing, but a very well-talked through plan to optimize along these 3 dimensions to make sure that we are really maximizing the on-site mix when it comes to -- maximizing -- maximally optimizing the on-site mix when it comes to the commoditizing services. We are growing without compromise because of the higher value offsetting the on-site cost when it comes to the new services and taking advantage of the fact that because of the visa-related matters, we have to get more local hiring than any way to ensure that, that is done in a very purposeful and carefully talked -- through way locally. Ravi?

To add on to what Vishal said, one is -- like Vishal said, which is the digital and the new services come at a substantially higher margin than the traditional services. So on-site is, in fact, more profitable, And I mean, so incremental growth that we see, it is beneficial to having those services on-site. Coming back to the other part, the second part of the business segment, what I will be referring to was really on the fixed price projects, right? We undertake a lot of fixed-price products on-site. By reducing the -- then, of course, the revenue is pretty much fixed and we have more flexibility in offshoring as well as changing the roll mix in that fixed price project. So that's what we are zeroing in on. So I hope that clarifies.

It does. I'll ask my second question, then I will see the floor. Vishal, have you seen any evidence -- there's -- I would suggest they're submitted. There's a lot of confusion, at least, that we pick up on what the HB1 (sic) [ H-1B ] issues may or may not mean. Have you seen any evidence of customers that are, at a minimum, pausing before they'll execute contracts with any of the Indian providers or any delays? Any characterization that you could give in response to the uncertainty on the H-1B issues?

Yes. I think it is too early. There is nothing material, so far. There's a lot of curiosity, a lot of interest. A lot of clients want to know what's going on with the whole H-1B situation. The -- they want to know -- I mean, they are not, obviously -- because of the fee -- working with companies like ours is not just about outsourcing or taking costs out and stuff like that. But it is about really bringing capabilities and innovation that no one else can bring. And so there is no rethinking of that. It is simply that -- for example, if there are workers that would be impacted by it, then clients would think about ways of ensuring that the workers -- that the way you structure the contract and so forth, take into account all of that and so forth. But so far, I have not seen anything material. And so proactively, we are building our approach and our plans. And perhaps, the President have something to add to this. You guys want to add anything to this? I guess, they don't.

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

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

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