Infosys Ltd (INFY) 2018 Q1 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 Mr. Sandeep Mahindroo. Thank you, and over to you, sir.

Hello, everyone, and welcome to Infosys' Earnings Call to discuss Q1 FY '18 results. This is Sandeep from the Investor Relations team in Bangalore. Joining us today on this earnings call is CEO and M.D. Dr. Vishal Sikka; COO, Mr. Pravin Rao; CFO, Mr. M.D. Ranganath, President and the other members of the senior management team.

We'll start the call with some remarks from the performance of the company by Dr. Sikka and Mr. Ranganath. Subsequent to which, 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 risk 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. Hey, everyone, and thanks for joining. I'm really proud of our achievement in Q1 in both the passion, focus and execution of our management team and indeed, every Infoscion to steadfastly execute and to continue on our path to transformation. We are deeply convinced of the differentiated value that we can deliver to clients, helping them leverage the power of Artificial Intelligence and Design Thinking to reimagine their businesses. And we can do this through our learning ability, our culture of innovation in which every Infoscion is empowered to be a proactive problem finder.

During the previous earnings call, I had emphasized our relentless focus and our commitment to execution in Q1. We did this, and this is reflected in the all-around performance in Q1: solid constant currency revenue growth; resilient margins despite multiple headwinds; a record cash generation; improvement in utilization to record levels; revenue productivity per person; and uptick in revenue per FTE. Ranga will provide more color on this shortly.

In Q1, our revenues grew sequentially by 3.2% on reported dollar basis and 2.7% on constant currency basis. Growth was distributed between both volumes and utilization, with volumes growing by 1.7% quarter on quarter and utilization growing 1.8% quarter on quarter.

On a year-over-year basis, revenues grew by 6% on reported dollar basis and 6.3% on constant currency basis. INR revenues declined by 0.2% sequentially due to rupee appreciation and increased by 1.8% on a year-on-year basis.

Our utilization excluding trainees was 84%, which is the highest level in 15 years, and including trainees utilization was 80.2%, which is the highest level ever.

I'm happy to share that driven by our improved performance compared to the last few quarters, we are paying higher variable pay to our employees this quarter. Consistent with recent quarters, the percentage payout will be higher at lower levels and lower at senior management and leadership levels. Within each level, we will continue to strive towards higher performance differentiation through different payout levels.

Our attrition was at 16.9% on a standalone basis as compared to 15.8% in Q1 last year and 13.5% in Q4 last year, owing to Q1 seasonality when employees leave to pursue higher studies.

We have broad-based growth across verticals and geographies, including financial services and insurance, retail and CPG and our ECS vertical. On financial services, our growth is expected to pick up in the second half of the fiscal year as the impact of increased interest rates and lower regulatory pressures in the U.S. start to reflect in our client spending.

Consistent with our commentary last quarter on higher disclosures, this quarter, we have disclosed revenues from new services and software that we started since the 1st of April 2015. 8.3% of our quarter -- Q1 revenues came from new services in the cloud-first, AI-first digital experience in service areas that are strategic to our clients and that were launched in the past 2 years. Similarly, 1.6% of our Q1 revenues came from new software that started since the 1st of April 2015, comprising of: Edge; Nia; our next-generation AI platform; Panaya; and Skava.

In management, we also welcomed Inderpreet Sawhney to Infosys as our Group General Counsel. Inderpreet brings to Infosys a wealth of critical experience in large complex global firms as well as small innovative ones from India to Silicon Valley to help us become a much more global, agile organization while upholding the highest standard of integrity and governance.

And finally, we announced plans to hire 10,000 American workers over the next 2 years and established 4 innovation hubs, with the first two in Indiana and North Carolina that we will hire 2,000 people each in the next few years. In Q1, 600-plus U.S. workers have already been hired. This is a continuation of plans that we launched in 2014, starting with 2,000 American hires to get closer to the clients, deliver new high-touch, high-value services, leverage the best local and global talent and build the next generation of innovators through world-class education and training.

Now let me share some specifics of our strategy execution. In renewed traditional services, in Q1, through our Zero Distance program, we delivered grassroots innovation, leveraging Design Thinking. And today, more than 16,500 ideas have been generated from our project teams and more than 2,200 of these have already been implemented with clients, including Myer's My Picker App in Australia for fulfilling retail orders with more efficiency and better user experience.

We are now evolving to Zero Distance 3.0 with a focus on team and solutions. From the 16,500 ideas, the team has synthesized 75-plus teams in areas like insurance claims adjudication, digital farming, cybersecurity and others with the potential for reuse, conversion into packet business solutions or an IP creation.

Zero Distance is at the heart of transforming at the grassroots level, our efforts towards innovation and automation. We continue to drive automation into our service lines, saving more than 3,500 FTEs worth of effort in Q1. Beyond saving FTEs, we have seen radical-use cases of Nia within our services. Nia is being used for large-scale transformation within our AMS services as well as to drive cost savings in managed projects.

Our Zero Bench program continues to thrive with 42,000 work records already created and 24,000 work records completed by the end of Q1 and is one of the key reasons that threshold utilization has gone up significantly.

Coming to new digital services, we continue to build out our new higher growth, higher margin, higher ARPU services, which are exactly in line with clients' most important business needs, and we are seeing strong traction in these. Cybersecurity, for example, is one of our fastest-growing new services given the heightened awareness at the CXO level due to recent incidents.

Coming to new software lead offering. In Q1, we saw continued momentum in Nia, Skava, Edge and Panaya. We launched Nia in April, building on and accelerating our work over the last 2.5 years with our first-generation AI platform with IAP and with AssistEdge. And now, with more than 160 AI-based scenarios across 70 clients, Nia is central to all our conversations with clients. And what started as a journey of IT-use cases has quickly evolved to strategic business areas like sales operations, demand sensing, supply chain, digital contracts and policy management and other critical business areas, where we are seeing even greater traction.

In EdgeVerve, we had a strong performance with 24 wins and 21 go-lives for Finacle and 12 wins and 17 go-lives for Edge product. We launched the pilot blockchain network for international remittances, which is already live in some banks.

Across all new areas, we continue to drive Design Thinking into all our engagements with clients and build out our strategic design consulting practice, where we are helping: BP, for example, to reimagine their HR onboarding experience; Adient, to accelerate their transformation in the rapidly evolving automotive industry; ERM, to reimagine the sustainability challenges of the future; and Spark in New Zealand, where leaders can find, frame and rapidly prototype solutions for the most important problems in their highly disruptive market.

Finally this quarter, we ramped up our efforts around the rollout of GST in India, which launched on the 1st of July. The system has already handled a peak of 1.2 million daily log-ins and 40 million page views and between 20,000 and 40,000 concurrent users at its peak. Once complete, this will be one of the largest open source projects and the largest tax project in the world.

As we speak, we are proud and humbled to be handling the digital economic infrastructure for the entire country from company formation, to direct and indirect tax. A project of such unprecedented scale and complexity will always present challenges during rollout, which we will continue to address with agility and dedication.

Coming to culture. We continue to simplify our internal processes through automation. We deployed Nia into our i-Travel system to drive efficiencies. We continued to invest in education and training, and I'm really proud to say that our second Stanford global leadership program batch graduated with 36 graduates in Q1, bringing the total graduates to 70 so far and another 40-plus in the current batch in this one-of-a-kind program to build our next-generation leaders. We have trained over 2,100 employees in Nia and Design Thinking now covers 142,000-plus employees across the entire organization.

Looking at beyond business. Some of the key initiatives of the Infosys Foundation in India in the quarter included improvements and innovation of the existing pediatric ward building of a hospital in Odisha and construction of a major operation theater complex at Kidwai Memorial Institute of Oncology in Bangalore. The foundation also partnered with local bodies to distribute and channelize water through a gravity technique in rural drought-hit villages in Andhra Pradesh.

The Infosys Foundation in the U.S. hosted its annual thought leadership conference, CrossRoads, in conjunction with our flagship confluence client event in San Francisco in May of this year. This one-of-a-kind event in Computer Science and Maker education featured 20-plus panels with 155 participants from 133 organizations across academia, policymaking and nonprofits.

The foundation also announced the 25 winners of the 2017 Infy Maker Awards in a blog written by NASA astronaut, Alvin Drew. The foundation extended its #WhyIMake Maker education awareness campaign by releasing new episodes with famous makers through U.S. TV networks and broadcasters, resulting in 3,000 nationwide airings, reaching over 28 million views.

Coming to guidance. I am happy with multiple aspects of our Q1 performance. And based on our expectations for the rest of FY '18 and our visibility at this point, we are retaining our FY '18 guidance at 6.5% to 8.5% in constant currency.

In closing, I am pleased with our performance this quarter. This all-around execution has led to a solid performance as well as strong growth in the new strategic areas. And this has further strengthened my belief that when we are focused, purposeful and empowered in our work, there are no limits to what we can achieve.

I will now hand it over to my friend, Ranga, for his comments. Thank you.

Thank you, Vishal. Hello, everyone. Vishal has already talked about revenues and business outlook. Apart from revenues, the key outcome of the quarter has been strong cash generation and improved operational efficiencies, which is reflected in operating margins.

Let me address these one by one. Cash provided within operating activities, as per consolidated IFRS was robust at $644 million. Likewise, free cash flow, which is operating cash flow less capital expenditure, increased to $558 million. CapEx for the quarter was $86 million, reduction of $14 million from last quarter.

Due to strong cash generation, cash and cash equivalents including investments stood at a record high of $6,091 million, an increase of $112 million from last quarter despite large outflow of $522 million on account of dividend during the quarter.

Operating cash as a percentage of net profit remained over 100% for the fourth quarter in a row. Mohit and team have done a great job in collections.

Coming to operational efficiencies. Utilization, excluding trainees, increased further to 84% as compared to 80.5% in Q1 last year. Likewise, total employee cost as a percentage of revenue reduced to 54.6% in Q1 this year from 55% in Q1 last year. However, subcon cost as a percent of revenue went up by 0.9% in Q1 '18 to 6.3%, partly due to high utilization levels and nonpay talent demand.

On-site mix increased to 30.1%. Ravi's team is working towards moderating this. Ravi and team did an exemplary job in improving operational efficiencies on multiple fronts. On-site volumes grew 2% and offshore volumes grew 1.5% quarter-on-quarter. Pricing realization improved by 1.8% in reported terms and 1.3% in constant currency terms sequentially. On a year-over-year basis, which is a better comparison, pricing realization decreased by 0.5% in reported terms and a 0.2% in constant currency terms.

Our gross margins in Q1 were 36.2%, 0.1% lower compared to Q1 last year and 1% lower compared to Q4. Our operating margins for Q1 '18 is at 24.1%, which is same as Q1 last year. Sequentially, operating margins declined by 60 basis points. Appreciation of rupee during the quarter impacted the margins negatively by 80 basis points, which was partly offset by 20 basis points of cross-currency movement benefit.

Improvement in utilization helped margins by 90 basis points, while improvement in realization helped margins by 50 basis points. However, this was offset by higher employee variable pay, higher Visa and subcon costs, which impacted the margins by 140 basis points, all put together.

Yield on cash for the quarter was 7.07% as compared to 7.12% last quarter. Our hedge position as of June 30 was $148.1 million.

EPS for the quarter was 20%, which is a growth of 5.8% as compared to Q1 last year.

We ended the quarter with a total headcount of 198,553 at the group level, which is a decrease of 1,811 from last quarter. Net headcount addition was 3,006 in Q1 of last year. On a year-over-year basis, headcount grew at the group level by 0.8% while the revenues grew by 6% in constant currency and 6.3% in reported currency, which is reflected in increase in revenue per employee to $51,921.

During the quarter, the company has written down the entire carrying value of the investment in its associate, DWA Nova and Lansing. The impact of write-down of this investment on Q1 '18 profit -- net profit is $11 million.

Coming to capital allocation policy. The company reiterates its commitment to execute the capital allocation policy announced in April in a timely manner. As in with such in the capital allocation policy, the company has identified an amount up to INR 13,000 crores, about $2 billion, to be paid out to shareholders during the fiscal 2018.

As the company has a large global shareholder base and is listed in multiple countries, the manner of distribution to shareholders requires compliances and approvals in several jurisdictions. We are in the process of finalizing a distribution mechanism that complies with the applicable regulatory requirements in the best interest of our shareholders in a timely manner.

We are retaining our constant currency revenue guidance at 6.5% to 8.5% for fiscal '18. Similarly, we expect our fiscal '18 operating margins in the range of 23% to 25% as stated in the beginning of the year.

We have rolled out compensation increases for certain levels with effect on July. And hence, there will be an impact on the same margins for Q2. While the average compensation decrease -- increase is approximately 6%, our top performers have received higher increases.

With that, we will open the floor for questions.

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

Guys, you had a significant uptick in utilization rates during the quarter. I think you reached about 84% ex trainees. Maxed out here, and then what's left in terms of levers for sustaining margins within the guided range? And then I also have another follow up.

Yes. So on utilization, we have just been...

Hey, Moshe. Ravi, you want to answer this? Maybe Ravi can answer this.

Yes, so on utilization, we have just been working way hard on how to get this the way we have brought to. Starting from working on the quality of demand to working at the bottom of the pyramid, that's where utilization is the hardest to achieve. We still have a little more buffer around there, if I may. And then looking at the way we do role mix in our projects. Here on, depending on how the quality of demand is, we can continue to work hard on streamlining it. Remember one thing, in the last 2 to 3 years, the firm actually went through a federated sales structure in the consolidated delivery structure so that gave us a kind of a platform to make the efficiency work and to get to here. Because that helped us to take out any pockets or any silos, if I may, in the structure. So a bunch of things we would continue to do from here on to keep the momentum up. Assuming the pricing drop doesn't happen or assuming the pricing can hold up, we have a bunch of levers. The on-site mix has still gone up a little bit from last few quarters, and we might have to look at how to keep it in control as Ranga earlier said. There is still an opportunity to do more automation. We've had a good runway on automation this quarter. We're hoping to see more accelerated benefits of automation as we go forward. But what would also happen is we're also hiring talent in the U.S. And if we can actually get that talent into projects, then I think that will help us on our model. So these are a few other levers we can actually start working on from here on. And the last one I want to talk about in terms of margin is the ability to get newer services, which are much more profitable as a higher proportion of our revenues because it just helps us to keep the trajectory up.

So thanks, Ravi. Moshe, just to add to what Ravi said, when I started, we were at 76%, 77% utilization and we used to hear that the wheels would come off at 78% and then the wheels would come off at 80% and the wheels would come off at 82%. So we are at 84% now, and the wheels still haven't come off. So there's probably a little bit more room, not much, perhaps, but like Ravi said, there are the various operating parameters in terms of optimizing the execution of efficiency. But the most important one, obviously, is automation and especially bringing more and more automation into the fixed-priced projects and to the maintenance and -- maintenance projects, the large-scale managed service projects and so forth. And new services tend to make up a higher margin and especially new software. So more that we emphasize on those aspects of the business, the more of a effect that we can start to have on margin.

Just to ride on the... Sorry, go ahead.

If we look at the -- the other focus area has been on the on-site employee cost as a percentage of revenue as well as the total employee cost as a percentage of revenue. Of course, this is kind of a it's not just utilization describes this, there are also elements of role ratios in a project, for example, fixed-based project on-site is really the bulk of our focus here, how could we release top-heavy projects with more senior resources because revenue is not going to be impacted but how could we release them and efficiently redeploy in other projects with higher billing rates, and so on. This will also address better efficiencies on-site, that's one focus area for us. Not just this quarter or the last couple quarters as well. So as a result, if you look at our on-site employee costs as a percentage of revenue, it has come down to 38.5% as compared to 39.3% same quarter last year despite pricing decline, and so on. So likewise, the overall employee cost. I think these are -- and one of the element is the net headcount, of course, a part of it is because of higher utilization. Net headcount this quarter was minus 1,800 as compared plus 3,300 last quarter. And most importantly, if you look at the year-on-year revenue growth, while it has been 6.3%, the headcount growth has been 0.8%. So I think the multiple parts we need to look at, but while we appreciate and we clearly recognize the fact that operating levers in the medium term will kind of plateau out, the primary focus needs to be from the other majors that I talked about.

Okay. Just as a follow-up, so when asked about quarterly bookings or TCV in your earlier media appearances, I think Pravin indicated that you had mostly renewals this quarter and down the road, this metric will become less and less relevant given the company's increased focus on new digital areas. So one, can you confirm your commentary on renewals? And then two, are your selling efforts now will exclusively be focusing on digital and pretty much less and less on legacy services?

This is Pravin here. On the large deals that are there is similar to what we have seen in earlier quarters from an average around -- slightly around $800 million, but a big percentage of it is renewals. And over the last few quarters, we have been focusing on building out on new services and new software. And for the first time this quarter, we published our metrics on that. We believe that these are the services that will be the future for us in the coming years as we embark on our transformation journey. So the large deals and other things will probably become irrelevant for a period of time. We have -- most of the focus will be on newer technologies, ticket savings will be much smaller and so on. Having said that, we will continue to compete aggressively on large deals. We will continue to win our fair share of large deals. We are not walking away from that. But as a metric, we are focusing on fewer metrics, which will probably be more relevant in the future. Okay, just to clarify, the total TCV for this quarter is $657 million for large deals. I just want to clarify that.

Next question is from the line of Joseph Foresi from Cantor.

So everyone at this point has been talking about having digital practices. I'm wondering -- could you clarify for us what your differentiator is in those newer digital practices? And is this a case of everybody's kind of participating in this wave? Or do you feel, at some point, it's going to become a market share game like the other businesses?

Joseph, that's a great question. I have -- for the last couple of years, I have said that -- when people ask me how much of your business is digital, I always say, "It is 100%." Because we like software for digital computers and -- joking aside, the reality is that as you said, there is always an adoption curve in these things. And at any given point in time, there is an emerging set of services, emerging set of technologies that require a new skill development, new capability development and bringing new solutions and even new IP into the market to do that. And on the one hand, we have to commoditize and bring a large-scale through these technologies as much as possible. And on the other hand, we want to do that as early as possible when typically the scale and skill development is not there yet. So if you look at today's status, for instance, virtual reality and augmented reality technologies or voice interfaces, I mean, Electra or the Amazon voice service just cost 15,000 skills that are available for Electra in -- by the end of June. Or if you look at the various voice and chat interfaces, AI and machine learning technologies, autonomous driving technologies, one of the programs that we have put in place here is to train several thousand people in autonomous driving technology. Earlier today, I demonstrated one of our indigenously built golf cart -- autonomous system called -- for the golf cart. And that was done right here in our Mysore facility by our engineering services team to train our employees on autonomous and technologies -- autonomous driving technology. So there is always this emerging set of areas where the sooner you can start building capability and skills, the better you can monetize the higher value, higher margin, higher ARPU kind of services. And so coming back to the point there, 8.3% in new services, and the 1.6% in new software is all examples of services and softwares that we did not have on the 1st of April in 2015. So that is completely new revenue from the last -- a little bit more than 2 years. And if you look at the $2 billion in growth that we have had since then, this is -- $1 billion of that $2 billion has come from the new software and new services. And this is something that we are really proud of. And so we are counting on a much higher growth in these areas, which tend to be the AI-first, cloud-first kinds of areas, cybersecurity, IoT, things like this where we are building next emerging capabilities. And earlier today, somebody asked me about this, how does this compare to the digital revenue, and we did -- despite my repeatedly saying that everything we do is digital, we benchmarked our services compared to the way other peers of ours who are in the industry, and that number is approximately 23%. So approximately 23% of our services revenue -- our revenue is from these digital services and the 8.3% and 1.3% that I talked about is a part of that 23%.

Got it. Did you give a number on the growth rate of the 23%?

No, not yet. The -- I mean, the growth rate -- this is the first quarter that we have done this fine-grained auditable reporting of these numbers. So going forward, you'll be able to measure the growth rate. But when it comes to the new services, what I can say is that the revenue from this was zero in April of 2015, so that means that all of the $30 billion now is new.

Got it, okay. You talked about confidence in the rebound in financial services in the second half of the year. Are these actual conversations or contracts? Do you have visibility to that? Or is that more of a macro call and the fact that interest rates have gotten a little bit better and the spreads have widened a little bit for banks?

Yes, Joseph. Pravin, why don't you answer this one?

Sure, Vishal. Joseph, so at this point in time, this is a belief that we have. Again, as you rightly pointed out, based on the macro trends that we're seeing and also from the greater degree of client confidence that we're seeing. And this is a very U.S. specific thing, right? If you see our results in Europe and in Australia, we continue to have a very strong performance for the sector. For insurance, we continue to have a very strong performance.

Okay. And then the final one for me, I mean, we saw pricing tick up. Can you give us an update on the pricing environment? And how you think about that in relations to margins going forward?

So the way we see that is, obviously, the new services demand a higher pricing premium. And so the more that we focus on those things, the better. And by bringing automation into the traditional services and being able to get more productive at it, that is another way that we can stem this declining pricing type. So those are some of the factors that have gone into this.

Next question is from the line of Bryan Bergin from Cowen and Company.

A bit of a follow-up here on the competitive dynamics in the new service areas. Are you mostly sole-sourcing a lot of this work?

Yes. Pravin, you want to answer this?

Yes. So new services, the challenge is not as much about demand. It's actually about how do you build talent and capabilities to interest them. Because a large part of that is already available as opportunities in the market. With the existing customers, a lot of them, which are very contemporary and new are actually coming to us based on existing relationships. It's likely mature ones, which actually need -- I would say, a sense of steady state. Those are the ones which actually go through a procurement process and RFP process. But if we can call it out early, we, obviously, have a shot here. But the key messages in new services, majority of them is all about how do you build talent and competency pools to fulfill them. That to me is the key. It's not much as the demand, but it's as much about how do you build capabilities to fulfill the demand.

Yes, and this is Mohit here. I just want to add one small point to this, it's we're able to use our own software, right. Those discussions that get to be more of sole-sourced discussions. So if we're able to sell our Nia platform or sell the idea that use case around Nia apply, then we sort of attach the new services will be sole-sourced. So, for instance, for a U.S.-based bank, we were able to sell consulting and our Infosys signification platform because they were looking to incentivize their field force for a greater cross sell. So something like this will be sole-sourced.

Okay, that's helpful. So do you change your approach at all as it relates to industry alliances and potentially increasing M&A in new service areas to accelerate growth there?

Yes. So Bryan, when it comes to -- so acquisition of talent, as Ravi talked about, acquisition of skills, using agencies, subcontracting and also using equity hires and acquisitions as a strategy to hire some of this talent is something that we are working on. The longer-term sustained approach, obviously, is to develop our own training and as I mentioned earlier, we have built the world's largest ever Design Thinking training, and we have trained more than 142,000 people on this. So similarly, we are now working on developing more detail, more deeper design engagement kinds of initiative. And so that you can participate in the transformational journey of the clients and not just be on the receiving end of a particular services project or something of this nature. And then when it comes to M&A and so far, obviously, those are all mechanisms available to us to develop more capability and more talent in this. The Skava platform also helps in getting into some of these areas as does the Nia platform in bringing AI capability, and so that the software can amplify our productivity, our profitability and our ability to build new kinds of scenarios.

Okay, that's helpful. My follow-up, just on the GST contract, can you comment on scale of that? And really, I guess, the -- whether it's kind of a onetime type of contract or if that carries forward as you continue to implement solutions there? I'm just trying to understand how that may have impacted the quarter.

First of all, for this quarter, the incremental revenue from GST was negligible. It was less than $3 million, that is one point. So GST hardly provided the incremental revenue this quarter. Second, if we look at the ROW incremental revenue that we saw this quarter, it's primarily from Australia, which is a very profitable market. Coming to GST and the trajectory, as you know, GST has 2 phases, build phase and maintenance phase. We're pretty much at the fag end of the build phase then the maintenance phase would kickstart. And the trajectory is also from the one, which is kind of a more we do not expect too much of lumpiness, much more gradual progress. They're all linked to certain milestones and deliverables. So that's what we visualize on GST at this point.

Next question is from the line of David Koning from Baird.

And I guess, first of all, the margin this quarter was a little bit above the midpoint of your full year guidance. Usually, Q1 is the low point, and I believe a lot of that maybe has do with the timing of the wage increases. But is it fair to think this year Q1 might not be the low point of your margins for the year?

This is Ranga here. I think if you look at this year's Q1, 24.1% is same as last year's same quarter, it's 24.1%. As I was telling -- we were impacted by 80 basis points on rupee, which was offset to some extent by the cross currency by 20 basis points. Large part of margin uptick was also due to the utilization and the pricing realization, which gave us 90 basis points and 50 basis points. And we increased the variable pay to employees this year based on the revenue performance. So sequentially, that plays some of these subcon costs for additional headwind of 140 basis points. So that's the broad math. But coming to your question, we have actually announced the compensation increases effective July. And the compensation increases or the incremental delta would be around 0.7% to 0.8%. That would be the broad impact on these compensation increases.

Okay. So Q2 might be sequentially down a little bit based on that?

That is one, and the compensation increases. Of course, as you know, the margin trajectory for any quarter apart from this comp is also a factor of how much was the sequential revenue as well as some of the -- how the trajectory of rupee, and so on. And some of the other levers that we talked about. I think it will be a combination of all these factors.

Okay, great. And then just maybe one follow-up. The interest in other income remains quite strong, the yield is good, obviously, on cash in India. Was there anything one-off in the $127 million of interest other that might not carry into the following quarters? Or is that a pretty good base to keep building on in future quarters?

I think there is nothing unusual about it. It consistently -- it has interest income and other -- the income from the other investments that we have. At the same time, we also have this hedges, right. Any profits made on hedges also flow into Other Income, and it has been consistent across all the quarters.

Okay. And I guess, finally, just real quick. Is July the new ongoing wage-increase quarter? Like you think in future years, that's going to be the same timing?

I think what we have, if you look at the last year, while for the junior employees, we started early, and for the senior employees, we kind of gradually split it over quarters depending upon the progress of the revenue trajectory last year. And in our BPO business, that has been there for quite some time. This year, of course, we have done from effective July. And so we would, at this point in time, see all the increases effective July.

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

My first question was with regard to Pravin's comment about the $657 million of large deals TCV. I guess, my question is, is there -- if you look at that on a vertical basis, is there anything in there, Pravin, that suggests that there'll be an acceleration in BFS consistent with what you're contemplating for the second half?

This is Mohit here. I think, look, BFS has always been a fairly significant contributor to the overall larger deal volume, not just for this quarter but consistently for the past 6 to 8 quarters. And that's the trend that even this quarter's vertical break up will show. In terms of larger deal pipeline and larger deal momentum, I think we are seeing reasonable momentum. Deal cycles have become a bit longer, especially in the U.S., where decision time frames are taking longer. But there is nothing unusual or radical that we see there. The confidence about -- and again, I think Joseph had asked this question earlier, why we are making call. And it is primarily a macro call, it is primarily a macro call, which is supplemented by the discussions that we're having with our clients and while -- you would notice that we have not seen a significant uptick in their budgets, there's a lot more confidence, there's a lot more pressure from business on discretionary spend. There is a lot more focus on spending on new technology areas like AI and digital. And so it is a subjective call based on those factors. Finally, I'll also mentioned that given the fact that in this financial services business, we have such a huge concentration of clients, right, just 1 or 2 clients can really make or break a quarter, $5 million or $6 million or $10 million increase or decrease for a single client can really impact the sequential growth. And in this case, we have a couple of clients where growth has been lagging for the past 3 or 4 quarters, and we expect that in these clients, specifically speaking, that their spend will pick up in the second half of our financial year.

And just to add to that, James... Yes, go ahead.

No, no. I apologize. Sir, go ahead.

So just to add to that, it is not -- we are not giving up on large deals. We are simply saying that the large deals and the commoditizing services are going to be increasingly be not so relevant. And that's why we are publishing and focusing on the new services and new software areas. When it comes to large deals, wherever there are large deals, obviously, we'll be vigorously and with a lot of focus and attention competing for those. We have spent a lot of effort in becoming much more competitive and winning large deals by using better solutioning, bringing AI and especially bringing Design Thinking into the solutions into more deeply understanding the problems and the root of the large deals that are being proposed and also in our engagement process. And so far, you see a significant improvement in our large deals wins and conversion rates over the last many quarters. But having said that, it is just the commoditizing services and going after big projects, which is it's not something that we see as a strategic area as much as we see the new services and the new software. So this is what you are seeing in our commentary.

Yes, that's helpful context. And then Ranga, I just wanted to ask about the subcontractor cost. I realized that, that may be to some degree be a function of the utilization heat, but where -- because it was up 100 basis points year-over-year on my math. Where should we anticipate that traveling to -- over the course of the year?

Yes, you're right, our primary uptick -- if you recollect a few quarters ago, it had gone up to 6.3, I think Q3 of FY '16, and we have very consciously brought it down to 5.3 2 quarters ago, and it started again inching upwards. One of the key pieces is really the higher utilization levels. And the second one is typically what we have tried to do is priority to subcon costs, fund new services where the billing rates are higher and the margins are better. So one way to put -- move away from the subcon costs in the other services and more towards this. At least, that is one at least, even if it is as a percent of revenues is high, one approach has been, could we at least look at the profitability of those subcon costs, sub-con expenses and redirect the expenses to more profitable service lines. So that's one approach. But in the short term, we do see this being at these levels until we have much more efficiencies in talent planning kicking in and as our on-site hiring picks up.

The next question is from the line of Anil Doradla from William Blair & Company.

A couple of questions. Vishal, you've talked about 10,000 employees in the U.S. and I think your initial focus is a couple of thousand. So where are you today -- I mean, in terms of have you started kind of the job requisitions, are they out today? And what is going to be the mix between experienced and new hires here?

Anil, Ravi can answer this.

So thanks for the question. So we have a -- we put a plan for 10,000 hires in 2 years. We wanted to do it in 4 to 5 centers depending on how we get there. We've put a set of criteria on how to establish those centers. I've earlier spoken about how the model which we operate on, which is an on-site offshore model will kind of morph to an on-site near shore offshore model and the near shores enter the ones which we are talking about, which is primarily the innovation and technology hubs where we believe clients and -- Infosys employees and clients can come together and work in an agile fashion. So then the experienced talent, which we hire in the U.S. is an ongoing process. That hasn't stopped, but will continue to go forward. We would hire for deploying to client sites. Now the next step of hiring is to hire into the centers so that we could transition into the on-site nearshore offshore model and use them under the cluster of clients, which are in and around those centers. So last quarter, we did almost 600-plus. We've already hired 600-plus joiners last quarter. We've already hired around 500-plus from campuses across the U.S. They want to join us -- and the first batch has actually joined us, and they will continue to join us for the next few months, and we'll keep hiring down the year -- until the end of the year. So the idea is to train them there, build those capabilities and actually tap them into projects in the treaty or model I spoke about. And a lot of it is in contemporary skill. So we are actually hiring them in and around the clusters of where those locations are, and then we are going to train, tap and push them into projects. So the journey has already started, campus hiring is round the year. The experienced talent continues, that's the normal thing that continues to happen for our client locations and then the third pillar, which we'll get in is refactoring talent in adjacent areas. So that's third pillar in the 10,000. Pressures, experienced hires and refactored talent. So that's something we'll kick off as well. So we're doing a local enablement, local training, local hiring and then deploying into projects.

Great. And I think, Ranga, you talked about focusing on new metrics. Now these business models are changing, you're seeing a lot of automation in new digital technologies. Are there some metrics that we, as an industry, are not looking at today could potentially be part of your kind of financial model? Are there some metrics that you might introduce over the next, call it, year or two as the business models change?

Well, I think primarily we chose a service line that we look at. It's extremely important for us to focus on 3 key elements, which is the per capita revenue. Per capita revenue of a service line as well as the on-site mix of the service line and the profitability, which is resulting to both put together. Now what we have attempted this quarter is really by calling of new services, we want to give a view to the investors on the trajectory of the new services as a percentage of the total revenue as well as the incremental revenue. For example, this quarter, we've stated it is 8.3%. So next quarter, the investors would be getting their perspective on how this trajectory of 8.3% both if relative and absolute terms is changing. Now as we move forward in couple of quarters, certainly, as some of those services become a critical size. For example, about 6 groups of services contributing to 8.3% and one of them might even pick up in a related, let's say, 4%, 5%, et cetera. At that point in time, we want to call out some of the 3 metrics that I talked about. So essentially, I think that would be one -- that's one thing clearly on our mind in the coming quarters.

Okay. So as it becomes bigger, each of these could be further broken down by some of the metrics that you're talking about?

Absolutely.

The next question is from the line of Shashi Bhusan from IDFC Securities.

About 2.5 years back, when we started the journey towards the transformation, which had acquisition as an integral part. However, there has been no acquisition over the few quarter. Is there any change in strategy? Or we're not finding the right (inaudible) at the right price? Can you elaborate on our newest strategy for the same?

Hey, Shashi, it is more of the latter. It's finding the right company than the right price. The right companies meaning companies that are companies of tomorrow with technology and Advanced Technology, strategic areas that we want to be in, we're not buying companies from yesterday. And the right price, obviously, is the right price. So that combination is not easy obviously, but we are committed to it. Last quarter, we bought a small company called Sky Tree, which had very unique machine learning expertise to make it a part of our Nia platform. And wherever we see opportunities like this, we'll continue to do that. But we do wish to see acquisition as a key part of our story going forward, but not -- we don't want to buy backward-looking technologies, we don't want to buy market share or revenue growth, we want to buy purposeful technologies for the future.

Sure. And the second question is related to -- coming from 2 quarters of low single-digit growth due to client specificity, so this quarter performance was a good positive surprise, I would say. Would it be fair to say that top line specificity is already behind? And follow up to that is our second half tend to be weaker over the last few years barring a few exceptions. Given our deals and pipeline, any color on the same how it looks in the FY '18?

It's too early to talk about the second half of the year. Although as our software business becomes bigger, obviously, some of the seasonality would not apply. But, obviously, it would continue to apply to the services business. And in terms of the -- what was the other question?

Other question was client specificity.

Yes. In some of these super large clients, we already have a very large market share, and so that's where we are, but we are generally adding. So when I started, we had 12 $100 million accounts. That number went up to 19 previous quarter. And now, 18. And the 18 is just because one client had a couple million dollars movement so it put them out of the $100 million number from the quarter. But I'm not particularly worried about that. We have a dedicated focus on top clients. And the second tier, below the top 25 are actually going quite robustly. So we want to continue to make sure that there is a healthy balance there between the focus on the top clients and the second tier ones. There isn't anything -- I know some of the analysts have written about this, but I don't see anything, in particular, in what's going on with the top clients that we can talk about.

Sure. Any reason why we have stopped sharing some of the client buckets like $200 million and $300 million, even top clients in this quarter?

I think we kind of wanted to focus on the $100 million-plus, and $100 million-plus typically includes $200 million and $300 million. But if the question is, if there is a decline in the number of $200 million or $300 million quarter clients this quarter, no, that's not the reason. Because we have seen the same number of $200 million clients and $300 million clients in this quarter as it was last quarter. There is no decline there. $100 million, there is a decline by 1, which was a narrow miss by maybe $2 million or something. So beyond that, there is nothing more to read to it, and we'll continue to publish the $100 million, which is our core focus.

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

We would like to thank everyone for joining us on this call. Wish you a good weekend ahead, and look forward to talking to you again.

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