Infosys Ltd (INFY) 2018 Q3 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 now hand the conference over to Sandeep Mahindroo. Thank you, and over to you, sir.

Thanks, Gurna. Hello, everyone, and welcome to Infosys earnings call to discuss Q3 FY '18 results. Let me start by wishing everyone a very Happy New Year. I'm Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is Mr. Nandan Nilekani, Non-Executive Chairman; Mr. Salil Parekh, CEO and MD; Mr. Pravin Rao, COO; Mr. M.D. Ranganath, CFO; presidents and the other members of the management team.

We'll start the call with some remarks from Mr. Nandan Nilekani, subsequent to which we'll open up the call for questions on the areas covered by him. We'll then transfer the call to the management team for some remarks on the quarter, subsequent to which we'll open up the call again for some more questions.

Please note that anything which we say which refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks that the company faces. A full statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

I'd now like to pass it on to Mr. Nilekani.

Thank you, Sandeep, and it's a great pleasure to be here on this call. I want to make some brief opening remarks from the board, and then I'll hand over to Salil.

As you know, Salil Parekh joined as CEO and MD of the company from Jan 2. And it's barely even 10 days since he has joined, and he's already taken full charge of what has to be done. So it's great to have him onboard, and we are confident that, under his leadership, this company will scale new heights.

I also want to thank Pravin Rao, who did a great job stepping in on August 18 and making sure everything was running well, and he continues as the Chief Operating Officer. The appointment of Salil has been put to approval of shareholders with proposal ballot, which has gone out.

I also want to deeply thank Rajesh Murthy, President, who resigned from the board for personal reasons. He has personal challenges that require him to be based in Paris for a longer time. So given the travel he was dealing with, he wants to move on. And we appreciate that, and we all want to place our deep appreciation for his commitment to Infosys for the last 26 years. I had the privilege of hiring him into Infosys in October 1991. And he's been a pillar of this company, and he's a great, warm, large-hearted individual who's always done best for the company, and we wish him all the best in his future endeavors.

We also hired -- created some time back something called a Committee of Directors consisting of Mr. Ravi Venkatesan and Mr. D.N. Prahlad, to assist the CEO in discharging his responsibilities. Now with the arrival of Salil, who is full time focused right here in Bangalore, the need for this committee has -- is not necessary anymore. So the Committee of Directors is dissolved with effect from today.

Also on August 24, we had mentioned that we would be doing a shareholder consultation, and this consultation process has been conducted. Many of you may have been approached by our people either in person or through the [level] thing, and we have got very, very comprehensive, very, very useful feedback from the shareholders. So the board has taken that feedback on record, and we'll endeavor to continue to provide information and transparency that -- as expected by the shareholders.

There are 2 things I want to also talk about. I think we have just successfully complement -- completed a share buyback, and I think I want to give my congratulations to our CFO, Mr. Ranganath, and his team for having done very a complex exercise of doing a buyback across a company listed in 4 different exchanges in Europe, in the U.S., in India and, I think, doing it on schedule, on time. So the buyback has been very successful. And I also want to congratulate the finance team and Mr. Dhareshwar, who have done a great job in signing the Advance Pricing Agreement with the U.S. Internal Revenue Service and is -- again, is part of a series of actions that are done on the tax front, which I think will hold -- will help this company greatly. So I'm sure the finance team will take this forward elsewhere, and it's a great job.

And finally, I do want to congratulate the whole management team this quarter. Of course, performance has been very good. And as you all know, December is a difficult quarter because there are a lot of furloughs and leave and people are in holiday mode and Christmas parties and all that stuff. And to deliver on the revenue, to deliver on collections is a great contribution of people under Pravin's leadership; Ravi Kumar, President; Mohit Joshi, President; of course, Rajesh, CFO; and all the other leadership team who made it happen. So I think all in all, the company is well poised now. And under Salil's leadership, I'm sure he'll take it to greater heights.

So with these brief comments, are there any questions that you have on board-related matters or on any of the 4, 5 things I talked about?

Gurna, can you open up the phones for questions?

(Operator Instructions) So we have a question from the line of Ankur Rudra from CLSA.

Nandan, just one question on the board side. In your previous address, you had suggested several initiatives perhaps associated with reconstitution of the board as well. Given that the first of your tasks has been completed to everyone's satisfaction, do we expect this to continue? And perhaps before you hang your boots up again at Infosys, what are the other things you'd like to finish?

I think -- certainly, I think we have talked about it earlier also about the fact that we will continue to work on how we strengthen the board and so on. So that process is under way, and it has to be done very properly and with due diligence and so on. So I think, as and when we take decisions in that regard, we'll definitely get back to our shareholders as soon as we take a decision. So clearly, having a board and bringing in new people is one of the challenges we have. I think we also have -- Salil has to take charge and take it forward, get the company back on the path of growth. We have had a strategy refresh, which he is taking forward. He'll talk more about it. And so we have to complete that part. So I think there are a number of things that we have to get done, and I'm very confident now that the company is poised for doing those things. So all that will -- I'll be there until all that happens.

Next question is from the line of Edward Caso from Wells Fargo Securities.

Sorry, I punched in too early. I'm going to come back for the other call.

We have next question from the line of Sandip Agarwal from Edelweiss.

There's one question, and I know you have indirectly replied to that, but just wanted to know. As you mentioned, when you came that you will be there as long as you are required. So what are those markers which you would -- which would suggest that your job is broadly done? And any time frame which you think is there?

(technical difficulty)

So I had a question for Nandan. And so Nandan, when you came to Infosys, again, you said that you will be there as long as required. And I know that you have replied indirectly, but just wanted to know what are those markers which we can -- which can kind of suggest when your job is done? Or any kind of indication on the tenure you perceive will be required?

(technical difficulty)

So I will once again repeat, the third time. So Nandan, when you came to Infosys, you said that you will be there as long as required. So just wanted to know what are those markers by which we can kind of make out how much of your work is done and how long you may take? Or any indication of how you perceive what will be your tenure with Infosys?

(technical difficulty)

We changed our line, so we apologize for the inconvenience.

I'm going to attempt this the fourth time. So Nandan, when you came to Infosys, you mentioned that you will be with Infosys as long as required. So just wanted to know what are those markers which will suggest that -- until how long you will be required? Or how do you perceive until when you will be there?

So -- I mean, that's a difficult question, Sandip. But I have said one phase of work that had to be done is done. We have brought stability. The board is completely united on the focus of the company. We -- Salil has joined us as CEO. I think we have -- the company is focusing on business and growth. We have done a strategy refresh, and Salil is taking that forward with his reviews. He's holding Investor Day in April. He's going to meet customers. The board will -- we have said that we are looking at how to bring in more people on the board. So that process is under way, and we'll announce that when that happens. So I think all these things are there. And so whatever time it takes, I'll be there.

We have the next question from the line of James Friedman from Susquehanna Group.

Nandan, I'm just hoping to ask -- so you -- great execution on the capital allocation steward by the board. The company still, by many metrics, relative to peers, looks overcapitalized. I was just wondering what are you going to do with the money? And if you could just describe your priorities, that would be helpful, if you're ready for that. If not, I understand.

Yes. I think we'll probably have a better sense once Salil does his whole 360-degree evaluation. But as you know, we have said that we will -- what we are going to do is prepare a capital allocation policy and update that 70% which -- of distribution and so on. But when you look at the holding and certainly also look at the M&A and all that, we'll get back to you by April.

The next question is from the line of Diviya Nagarajan from UBS.

This is again from a board perspective. What are the steps that have been taken to ensure that we do not have any further disruptions between -- in terms of management and decisions being made around -- so my question is what are the steps that have been taken and will be taken to ensure that there is no further recurrences of the issues that you've had in the last year, especially around certain areas like M&A decision? Employee compensation, we've already talked about, but any further (inaudible) -- you reconstitute the board. What are we doing to ensure that everything functions smoothly going forward?

I think the best proof of -- there has been no deception, no. You have seen what has happened in the last 3 months. Everything is stabilized. Everything is quiet. We are going on with our business. The company has performed impeccably in 2 consecutive quarters. We have a new CEO. As I said earlier, the board will be expanded at the right time with the right people, and we'll inform you when that happens. The strategy refresh has happened. I mean, I'm not really clear what your question is.

My question is, do you feel a need to set up maybe a committee on the board or something else in the company that ensures that some of the issues that cropped up last year that led to the differences between the management and the founders wouldn't occur again?

So I think that's all past. You are talking about legacy matters. I think now everything is aligned, everybody is on the same page. Really, the focus is on the future and our business, and our job is to get on with it, which is what we are doing.

Next question is from the line of Sandeep Shah from CIMB.

Just one question. I think the senior management attrition is a bit normal to a service industry, especially the IT industry. But roughly, within the last 5 to 7 years, I think that disruption has cost Infosys a lot. So do you believe -- or do you have a confidence to say that the second-line management setup is now very strong and one can successfully transition whenever such challenges comes?

Absolutely. I think Infosys has a very strong leadership, very deep bench. We have great people at the helm. We have great people who are -- also in the next level. So I'm very, very confident. I'm very confident that things will go well going forward, and I think Salil will spend a lot of time on leadership development. So I'm very confident about the future.

And at this time, I'll hand over the floor back to the management for the further proceedings. Over to you, sir.

Good evening and good morning and wish you Happy New Year. I'm Salil Parekh, Chief Executive Officer of Infosys. I'm joined here by my colleagues: Pravin, our Chief Operating Officer; and Ranga, our Chief Financial Officer, and several members of the leadership team.

It's a privilege for me to have this opportunity to lead Infosys. I'd like to thank Nandan and the board for having put their trust in me. I've been in the technology industry for several years and have always had a deep admiration and respect to what Infosys stood for. In my first few days in this role, I've been energized by the people I've met here. Whether they are individuals starting in the tech world or senior leaders, each has a real passion for their work and has pride in being part of Infosys and a deep commitment to its values. The clients I've reached out to have responded with messages that underscore and endorse the strong partnership that Infosys has built with them over the years. There's a real delight in the way they see Infosys and the work we do for them.

The market, of course, has exciting opportunities and new areas of growth. Digital disruption today is impacting all our clients as the industry is undergoing massive change. At Infosys, we have a strong foundation of our business, and as you will hear, our Q3 results confirm this. We have over 1,100 clients that trust us, 200,000 passionate employees. We work across a broad array of sectors and service offers. We are a business that's growing with high operating margin. We have exceptional cash generation and a strong balance sheet, and we are now progressing toward stability in revenues.

Building on the strategy refresh initiated by Nandan, I've launched a review that is structured around market opportunities, client relationships, deeper dimension and our service offerings. Over the next 3 months, I'll meet with several of our clients, partners and employees and work with our leadership team and the board to validate our assumptions and approach around these elements. In April, I plan to conclude this exercise by outlining our strategic priorities and reconfirming our capital allocation plan. We will have an Investor Day in April to share this.

With a strong set of building blocks and renewed energy to leverage growth in digital, we have an opportunity to build a stronger Infosys in the coming years and look forward to working with the entire team here at Infosys to be part of that journey. Thank you. With that, now I will request Pravin and then Ranga to comment specifically on the Q3 results and then come back for questions on my introductory remarks plus the Q3 results. Pravin?

Thanks, Salil. Hello, everyone, and wish you all a very Happy New Year. I will provide an update on our quarter 3 performance.

Our revenues grew sequentially by 1% on reported dollar basis and 0.8% on constant-currency basis. Volumes grew by 1.6% quarter-on-quarter while realization declined by 0.3% in constant-currency terms due to the impact of furloughs and lower working days. Overall, realization for the first 9 months of FY '18 is flat in constant currency compared to past 9 months of FY '17. This is due to improvements in our portfolio towards newer and faster-growing services and continued adoption of automation in traditional services. This also led to a 1.9% increase in revenue per employee to 53.7k during the quarter.

Client metrics were good with 79 client additions, increasing plan count and increasing number of plans across most revenue buckets. Share of new services and software improved further to 11.6% compared to 11 point -- 11% last quarter, which is a sequential growth of 6.8%. Our revenues from digital services also crossed 25% of our overall revenues. We plan to publish this metric in the coming quarters.

During the quarter, we rolled out compensation increases for our mid- and senior management team in various geographies. I'm pleased to report that our decent performance in quarter 3 has enabled us to pay the highest level of variable payout over the last 9 quarters to our employees. Attrition declined to 15.8% for stand-alone operations and to 18.7% for the entire group. Gross additions for the quarter was 12,622, and our employee count crossed 200,000.

Operating margin for the quarter was stable despite compensation increases and higher variable pay. Ranga will outline this in detail later in the call. We had 8 large deal wins during the quarter with a TCV of $779 million. While the large deals didn't increase sequentially, our share of renewals within the same was larger this time.

Turning to client budgets for 2018. In financial services, there are some signs of improvements in spending trends, led by increased discretionary spending. In high-tech and insurance, we expect a lot more focus on optimization of nondiscretionary expense, whereas in RCL and manufacturing, we expect higher focus on transformational initiatives. Growth in America was impacted due to furloughs that were witnessed in the December quarter.

Coming to view of the verticals and service lines. Digital continues to remain top agenda for our plans, driven by tech disruptions. The pace of digital transformation continues to accelerate as consumer behavior evolves. We are seeing strong demand for digital services across markets with plans investing in customer experience, new commerce models and digitally connecting the enterprise. Many large transformations initiated globally are still led by digital.

Spending sentiment in retail and financial services industries has improved in digital despite their ongoing sectoral issue. Growth in financial services was impacted in quarter 3 due the higher-than-normal furloughs, budget cuts to large plans and transition under way in some large deals which will then create revenues over time. Barring this, we see good traction and stability in spending. Deal pipeline is strong. Our strategic engagement with the plans continues to grow while new services are helping to increase our wallet share. Growth is expected to pick up in calendar year '18.

We witnessed strong performance in insurance led by growth from top clients and ramp-up of large deals won in previous quarter. There's a demand for core system modernization and increased digital adoption and improving customer experience. Retail and CPG verticals delivered a strong performance in quarter 3, driven by new opportunity conversions leading to higher volumes, especially in the CPG sector. Overall, the sector continues to face secular challenges, particularly in U.S., led by Amazon phenomena. In CPG, there is an increased consolidation, which is also opening up new growth opportunities.

Discretionary spends are gaining momentum, led by growing interest in areas like artificial intelligence, retail store operations, (inaudible) options, RPA and analytics. These are being funded through spending cuts in support and internal (inaudible) spending. (inaudible) recognized our strong execution (inaudible) through our investments in Skava, Nia and industry partnerships.

Growth in manufacturing vertical in quarter 3 was flat due to furloughs in the U.S., offset by growth in our European business. Overall, sector demand remain moderate despite some pickup in activities in ERP and infrastructure cloud services due to M&A in the sector. We are focusing significantly on new account opening and deeper penetration to expand our portfolio.

Business activity is higher in Europe than the U.S., with European plans undergoing a wave of outsourcing to reset their cost of operations. Plan spending is more visible in digital, cloud, IoT at the expense of traditional IT areas. Plans are looking for digitalization of end-to-end processes with stronger focus on mobility, IoT and back-end systems seamlessly to provide a superior customer experience.

Telecom sector expenses have been growing in terms of cybersecurity, artificial intelligence, 5G and cloud computing. Cable companies are prioritizing funding to digital channels via self-services, omnichannel, artificial intelligence and (inaudible). Telcos are focusing on the combination of cost-cutting, productivity improvement and transforming the core of their network to be virtual and move to real-time provisioning of services.

BPM services had another strong quarter with quarter-on-quarter growth of 4.5% and year-on-year growth of 17% in the quarter done. Overall, demand for BPM services remains moderate due to commoditization and automation -- (inaudible) expectation on automation-related efficiency gains increasing due to increased RPA adoption. However, our ability to build together vertical-specific solutions and capabilities in a customized manner for industry verticals, together with process and technology competency, is a differentiator. Our win rate in digital, analytics (inaudible) space are strong.

Net-net, our performance in quarter 3 on multiple dimensions, revenue, stable margins, solid client metrics, improving revenue per employee, declining attrition, superior cash generation and improved operational efficiencies, [confirm] our belief that the impact of management changes over the last few months on our performance has been negligible. All this, coupled with stability in management, makes us

(inaudible).

Thanks, Pravin. Hello, everyone, and wish you all a very Happy New Year. In Q3, the company again demonstrated its resilience in performance on multiple fronts: revenue; operational efficiency; profitability; cash generation; significant closures on tax matters; and, most importantly, consistent implementation of capital allocation policy. Our relentless focus on improving operational efficiency parameters yielded results in this quarter as well. We had a broad-based improvement in multiple operational efficiency parameters: utilization percent, on-site mix percent, revenue productivity per employee, subcontractor cost as a percentage of revenue, leading to a healthy and stable operating margin. Our operating margin for the quarter improved sequentially to 24.3%. I'll be providing more details on this shortly.

During the quarter, in line with the capital allocation policy announced in April 2017, the company successfully completed its equity share buyback program of 30,000 -- INR 13,000 crores, approximately $2 billion. The company's tender offer to buy back about 113 million equity shares from eligible holders of equity shares received a good response from shareholders. The aggregate equity shares bought back by the company amounted to 4.92% of total equity shares outstanding. The entire funding for the share buyback was done out of the cash on the balance sheet.

During the quarter, the company closed significant tax matters, including Advance Pricing Agreement, APA, with the United States Internal Revenue Service. This agreement covers financial years from 2011 to 2021. I will share more details shortly in this regard.

So let me talk about revenues. Our revenues for the quarter were USD 2,755 million. This is a sequential growth of 1% in dollar terms and 0.8% in constant-currency terms. In rupee terms, the revenues for the quarter were INR 17,794 crores. This is a sequential growth of 1.3%. As compared to Q3 of last year, revenues grew 8% in dollar terms, 5.8% in constant-currency terms and 3% in rupee terms. When we compare revenue growth in the first 9 months of fiscal '18 as compared to first 9 months of fiscal '17, the revenue growth was 6.5% in dollar terms, 5.6% in constant-currency terms and 2.1% in rupee terms.

Sequential volume growth for the quarter was 1.6%. As compared to Q3 of last year, the volume growth was 6.2%. Pricing realization for Q3 improved by 2.2% year-on-year in reported terms. On a year-on-year basis for first 9 months of this year as compared to the first 9 months of last year, which is a relevant comparison, pricing realization improved by 0.8% in reported terms and was flat in constant-currency terms.

We ended the quarter with a total headcount of 201,691, which is an increase of 3,251 from last quarter. During the first 9 months of this financial year, the net headcount increased by 1,227 employees as compared to net additional 5,719 employees in first 9 months of the last year. While our revenues grew 6.5% in the first 9 months of the year as compared to first 9 months of last year, you would notice that the headcount increased by just 1% during the same period. This is primarily on account of lower headcount addition due to higher utilization and productivity improvements. As a consequence, the revenue per employee crossed $53,000 mark this quarter. It improved further to $53,620 -- $53,676, a sequential growth of 1.9% and year-on-year growth of 4.8%.

Coming to operational efficiencies. Utilization excluding training increased further to an all-time high of 84.9% as compared to 81.9% in Q3 last year. This is a full 3% improvement. Efforts towards moderation of on-site mix has led to on-site mix decreasing to 29% in this quarter, which is the lowest level in the last 11 quarters. On-site mix stood at 9 -- 29.8% in Q3 of last year. Our focus on optimizing on-site employee cost, including sharper focus on productivity, on-site pyramid and other cost optimization measures, led to the decrease in the on-site employee cost as a percentage of revenue to 38.3% in the first 9 months of this year as compared to 59% in the first 9 months of last year.

The subcontractor expenses were lower this quarter at 5.9% of revenue as compared to 6.2% last quarter. Subcontractor expenses are driven primarily by higher utilization levels and on-site talent demand. Our operating margins in Q3 is at 24.3%, which increased sequentially by 10 basis points.

Soft currency, including revenue hedges, benefited the margins by 50 basis points. Reduction in professional charges and other G&A expenses helped margins by an additional 60 basis points. This was offset by higher compensation costs and higher variable pay, impacting the margins by 80 basis points. Decrease in pricing realization net of improved on-site mix impacted margin by another 20 points, leading to an overall improvement of 10 basis points sequentially.

In accordance with the Advance Pricing Agreement with the United States IRS, the company reversed tax provision of approximately USD 225 million made in previous periods. Further, in line with APA, the company expects to pay approximately $233 million of taxes due to the difference between the taxes payable for prior periods as per the APA and the actual taxes paid for such periods. This amount is expected to be paid over the next few quarters.

The reversal of tax provision of $225 million had a positive impact on the consolidated EPS for the quarter ending December 31 by approximately $0.10. As you know, the U.S. tax reform has reduced federal tax rates for corporations from 35% to 21% effective January 1, 2018, amongst other measures. During the quarter December 31, 2017, this has resulted in a positive impact of about $27 million on account of tax credits pertaining to deferred tax liabilities on [branch] profit.

Healthy cash generation continued during the quarter. Cash provided from operating activities as per IFRS consolidated was $657 million. Free cash flow, which is operating cash flow less CapEx, for the quarter was $593 million. For the first 9 months of FY '18, free cash flow was robust and increased by 23% over the first 9 months of last year as compared to the revenue growth of 6.5% in the same period.

Cash and cash equivalents, including investments, stood at USD 4,538 million, which converts to approximately INR 28,987 crores. During the quarter, the company paid out interim dividend of $526 million and paid out INR 13,000 crores, approximately $2 billion, towards share buyback. Also during the quarter, the company received cash refund of approximately $100 million or INR 643 crores due to favorable orders and audit closures in India. DSO for the quarter decreased by 1 day to 70 days compared to 71 days last quarter. CapEx for the quarter was $64 million and

(technical difficulty)

With that, we open the floor for questions.

(Operator Instructions) First question is from the line of Anantha Narayan from Credit Suisse.

I had 2 questions. My first question was addressed to Salil. We do appreciate the fact that you just spent a few days at Infosys. But based on your discussions during the recruitment process and based on what you often see from your Capgemini days, do you foresee any area where significant investments need to be made?

Anantha, thank you for that. As I said, the time spent over the next 2 or 3 months is going to be around the 4 pillars, which will build upon the strategy refresh that Nandan has launched. Coming out of that will be the set of strategic priorities that we want to drive, and we will hold an Investor Day in April to talk about it. At this stage, I've not developed any clear view in the few days I've been here in terms of the question you asked for investment reasons.

Okay, that's probably fair. And for my second question, has Rajesh's portfolio been reassigned?

At this stage, the portfolio, I will work directly with those areas. Over the coming days and weeks, we will find a way to more efficiently distribute it.

Next question is from the line of Pankaj Kapoor from JM Financial.

My first question is on the implied guidance for the next quarter that seems to be quite broad for the fourth quarter. So I'm just curious why we have given a broad range. Is it something to do with the environment or any client-specific situation, which makes you a little uncertain on the near term?

This is Ranga here. If you look at the first 9 months revenue growth as compared to the first 9 months of previous year, we are growing at 5.6% in constant currency. And our guidance is 5.5% to 6.5%. I think we are focusing on Q4 execution. And to just answer your prior question, I know there are no specific client concerns that we are sourcing at this juncture.

Okay. And, Ranga, if you can give some color in what kind of tax rate we should presume for the next couple of years given the APA as well as some of the tax benefits that you mentioned can come to us post the changes in the U.S. taxation.

(inaudible) the APA part, as you know, and as we announced earlier this week, APA provides better predictability because the methodology of both allocating the revenues and computing the pretax income is laid out. So as we've said in the earlier press release, we expect overall effective tax rates to be lower about 100 basis points on account of APA for the period covered under APA, which is 2011 to '21. Now coming to the broader U.S. tax reform, there are multiple elements in the tax reform while there have been very preliminary assessment at this stage. But overall, we feel that this contribute to the United States.

And next question is from the line of Edward Caso from Wells Fargo Securities.

Your utilization has been running record levels here. How high do we raise the bar? I mean, how much more is there to go? And, Salil, welcome.

This is Ranga here. As you know, utilization, if you look at the last couple of quarters where we have been focusing, that's gone up significantly, as you rightly pointed out. We are at 84.9%. Same quarter last year was 81.9%. So a full increase of 3 percentage. But from here on, the run rate balance I agree is quite limited. And that's the reason why we are also in addition to utilization focusing on other elements, which we had talked about. For example, earlier, quarter 3, we had talked about on-site mix moderation. And if you look at over the last 3, 4 quarters, the on-site mix has come down from 30% to 29%. So I think still early on the on-site employee cost as a percentage of revenue for the first 9 months has come down to 38.3% from 39%. So we are looking at multiple levers. But to specifically answer your question, yes, on the utilization front, certainly the run rate's limited.

Great. And I had a question about access to people in the United States. I believe you're sort of working still with the fresher model in the U.S. to a large part. How is that going? Are you able to access people given the very tight labor market for IT professionals in the U.S.?

This is Pravin here. As you are aware, we are committed to recruiting 10,000 people over the next 2 years. And in the last 2 quarters since we made that announcement, we have made good progress. We have been going to Tier 1, Tier 2 colleges, open-access community colleges, and we have had a fair amount of success in recruitment. So we don't see that as a challenge. We are also setting up innovation and technology hubs, and we have already inaugurated the (inaudible). We'll announce shortly in Raleigh, North Carolina. So we'll probably over the next few quarters, we will identify 2 or 3 more locations to do that. So our U.S. talent plans are really under way and kicking well, progressing extremely well. And at this stage, we are not seeing any significant roadblocks.

Next question is from the line of Apurva Prasad from HDFC Securities.

So I had a question on the client metrics. So if I look at the top 10 and top 25, it seemed to decline in this quarter. Should anything be really read into this?

This is Ranga here. I think that seasonally, the sequential quarter basis, there will be some changes. But I would encourage to look at in 9 month over 9 month metrics or the year-on-year metric. For example, if you look at the top 25 accounts, if you look at -- they grew 4.8% quarter-on-quarter compared to the last year. That is Q3 of this year versus Q3 of last year. So I think -- and also Q3 typically has furloughs. Some of our top clients have second furlough impacts during the quarter, which can, in the short term, can distort these numbers. But overall, I think a better indicator in our opinion is to look at the Y-o-Y change. So Y-o-Y top 25 has grown 4.8%.

Sure, that's helpful. But if you can talk about if we're gaining share within top accounts.

Yes, this is Pravin here. I think in many of our accounts, we are definitely gaining share. There is a lot of effort in terms of mining accounts better. And if you look at the last few quarters, we have had significant wins in large deals as well, and a good percentage of them are rebates and renewals and so on. So there have been a lot of focused efforts in the last few quarters. And in most of the accounts, we are in the top 2 from a market share perspective.

Next question is from the line of Arvind Ramnani from Citibank (sic) [KeyBanc].

This is Arvind Ramnani from KeyBanc. Salil, welcome to Infosys. We are pleased that Infosys was able to recruit you. You have terrific background and reputation. And I know it's probably premature to comment on your priorities at Infosys, and you'll give us an update in April. I'm sure you certainly have a view of the industry given your background. So my question really is what is your view of the IT services industry? And specifically, what are the key opportunities and risks? And how do you think the industry should address these risks?

Thank you, and thank you for the question. I think with respect to this sector and the industry, the good news is there's significant areas of growth opportunity today in the market. As you know well, these areas are broadly classified under the name Digital. But they cover a lot of different things for different people, so the areas of data and analytics, IoT and industrial Internet, the whole area of cloud from SaaS to hybrid cloud management to the migrations, digital customer experience, security, AI, machine learning. So these are massive areas of opportunities for growth in the sector. In terms of areas where there's challenges, I think the overall sector is shifting to a much more business-driven tech agenda. The builder -- the buyer is not just the CIO, but it's also the business user. And so many of the ways and means of interacting with clients is to evolve to look at that. So that's my perspective on the sector. It's an exciting sector, but there's a transformation in the sector. And the players in the sector need to have agility to be playing in these new areas.

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

I'd like to ask a similar question to the past one, but I'd specifically like to focus on gross margins. If you look across the IT services industry, with very few exceptions, including Infosys, gross margins continue to erode and go lower. And I'd like to understand your perspective on what's the opportunity for the Indian-based providers to at a minimum stop the gross margin erosion? And how you think the mix plays out as you're trying to increase the amount of business from Digital, which I think near term erodes margins? How do you balance that new market opportunities for the Indian-based providers? So the real question is, can you talk a little bit about gross margin issues in the industry and how the Indian-based providers combat the erosion to the gross margin line?

This is Ranga here. Yes, you're right. I think the gross margin declines have been quite visible. If you look at our cost structure, as you know, 80% of our operating expenses, even the cost of revenue expenses is the employee cost. Now if you were to slice that employee cost, 40% -- not yet -- close to 40% of our revenue is from on-site employee cost. Add to that another 16%, 16.5% offshore. So a total of 56.6%. So the key thing here is how do we ensure that for the on-site costs that we incur, what are the corresponding billing rates concomitant to the cost equity income, which essentially means going back to the pyramid. Now a way to look at it is here is the (inaudible) service, here is the pyramid, can I optimize the pyramid, make sure, for example, right now, we are hiring the freshers in the United States as part of the pyramid in the on-site, a need we still have on pyramid structure with freshers intake at the bottom of the pyramid. What do we mean here? So there are some opportunities coming, and even the propensity of the clients to affect fresh graduates on-site is slowly picking up. So that's one way to look at the -- addressing the on-site employee costs. The second way, which is also more sustainable, is really as you pointed out, how could we price our new services, including Digital, at higher price points? As you would notice, even this quarter, sequentially our new services grew close to 7% sequentially, 7x the regular company growth, and it's almost now 9.9% of our revenue. Now if this robust growth is coupled with higher price points for these, would it also be beneficial to address the gross margin? So in summary, I think we need to look at the revenue mix, how much of that revenue mix is coming from -- the incremental revenue mix comes from the new services, which are more profitable. And at the same time, how do we address the pyramid as well as the cost structure issues in the core IT services? We need to do both hand in hand. So that's really the way to look at the gross margin.

Next question is from the line of Ashwin Mehta from Nomura Securities.

I had one question on BFSI. One of your peers indicated that there's near-term uncertainty on BFSI driven by clients finalizing their digital architecture, and secondly, deciding allocations between in-house and outsourced. So you seem to be sounding much more positive near term in terms of BFSI. So what exactly is driving this optimism? Is it deal flow? Is it portfolio differences? So some color would be helpful.

This is Mohit. So if you look at it, the insurance growth has been very strong. I guess your question is more on the banking piece. And what I'll say is while there are individual clients, right, the individual clients may have ramp-ups or ramp downs. But overall, the overall spend position is stable. And while we expect that there'll be some sort of movement, right, from more of a regulatory spend, more of growth-related spend, but we're quite comfortable with the position that Pravin had shown. But for our calendar year '18 perspective, we see spend as being -- has been stable for the sector. In certain sectors or in certain subsectors like in regional banks, for instance, we've seen that fact that clients are having to do a lot of catch up. So they're investing significantly more in terms of their digital or their mobile strategy. In some other subsectors like asset management, for instance, where about 1.5 years ago, we've seen fairly significant cuts. We've seen those sectors come back competitively from a spend perspective. So the overall picture is not as hazy or as negative as it was a year ago. And if you've seen from our performance in Q3 itself, compared to our peer group, we have done well. So obviously, it is mixed, right? It is mixed across subsectors and geographies.

This is Pravin here. I just wanted to add, I just wanted to reiterate that while in quarter 3, our performance was muted, particularly in banking space, but that's primarily due to higher-than-expected furloughs and slowness in ramp-up of some of the large deals that we have had in the past. Our competitive positioning in the space is pretty strong and reflected in the kind of growth we have had in the last few quarters. And as Mohit said, we remain positive on the segment, and we expect to see calendar year '18 spend come back and much better than what we have seen this year.

Okay. And just one more. In terms of wage hikes, you had pushbacks in the cycle this year. Going into the next year, what is the wage hike cycle that you're looking at?

So we will also start thinking about next year. Right now, our focus is on executing on quarter 4. But sometime during this quarter, we'll start looking at next year on the (inaudible) revenues, the costs and wage hikes and et cetera. So we'll probably be in better position to comment on it at the beginning of April.

Next question is from the line of Viju George from JPMorgan.

I think all my questions have been answered. A very warm welcome to Salil. Okay. That's it.

Thank you.

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

Salil, congratulations. I wanted to ask on the large BFS deals that give you a better 2018 calendar outlook. Can you comment on the type of deals that those were, including the kind of activities that you're doing there whether they're net new work, whether they're more traditional or digital engagements?

So look, I think from a BFSI perspective, right, like I said, there is a pivot that is happening now more from regulatory-oriented spend to more a digital-oriented spend this year, right? So that is one key thing. The second thing is if you look at the fact that we have platforms as well. So whether you look at McCamish or you look at Silicon, there's a significant demand for platform-oriented businesses. So that's the second piece. And the third piece is the overall sector sentiment, right? There are individual banks that are still looking at cost cuts. But the overall sector sentiment is positive, and that is based -- that reflects the commentary that we made today.

Okay. And Salil, understanding you just started, can you comment your personal views on M&A as an avenue for growth in the current digital services environment?

Again, the view I've taken is take the next 2 or 3 months to begin to relook at our strategic refresh along the 4 dimensions, the markets, clients, people and service offerings. Given the environment and given that we have a very strong balance sheet, we will look clearly at M&A as a very strategic opportunity. But no decisions have been made. We're starting to evaluate that carefully to be further sort of prioritized around the April Investor Day.

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

Ranga, I just want to mention that was a great response that you had with regard to employee cost to the earlier question. I had a more straightforward question, Ranga. I didn't hear you say it. But is there some change in your tax rate assumption going forward based on the dynamics in the U.S. tax market?

This is Ranga here. I think what I was commenting earlier or a similar question earlier was on account of signing up our Advance Price Agreement, we expect our overall effective tax rate to be lower by about 100 basis points for the period covered under APA, which is 2011 to '21. Coming to the second part of your question on the U.S. tax reform, there are multiple elements to the U.S. tax reform. One is, of course, the reduction in the tax rates by several others. We have made preliminary assessment of the impact, and based on the preliminary assessment, the impact is neutral for us.

Got it. Just writing that down. And then, Pravin, I wanted to ask you one as well. With your prepared remarks, you commented on the improved dynamic in European outsourcing, not a new narrative. But clearly, there's results here for it. Where are we in that journey, Pravin? How do you see that as we move forward for the next, I don't know, the next line of sight in European outsourcing?

So I think when you are looking at what's happening in the market, there is tremendous focus by our -- by plans across industries in terms of transforming their businesses and investing in newer areas. So this is actually pressurizing them to look at ways and means to cut cost and review the cost on the other side of the business, and it is actually translating into Nordics. And as compared to North America and Europe, they have been probably not as aggressive as North America. And so that's actually today translating into a much more aggressive push for the consolidation in Nordics and so on. On the other side of the business, (inaudible) they can throw back on saving the business. So that is the phenomenon we are seeing, and we have been fairly successful in passing to this opportunity and converting fair amount of this piece that have come our way.

Next question is from the line of Diviya Nagarajan from UBS.

Just a clarification on the demand outlook. So on the demand outlook, could you just help me understand between the BFS segment and the retail segment, where do you have greater confidence in outlook of your recovery? Is my understanding correct that you are more confident about BFS or retail? Or could you just correct me if I'm wrong, please?

I think we are fairly confident about BFS being -- again the current work we have seen this year and it's coming back. We had another good quarter on the retail and CPG side. We had a good quarter after several quarters and primarily driven by a lot of opportunities in European retail in some specific companies and also from North America. But when you look at what's happening in the space given all the sectoral changes, there is a lot of investments going on. And our ability that we are able to bring our capability to bear, we should be able to capture some of the investments that are out there. Unlike BFSI, it's -- in my mind, it's only a little bit early to comment whether the spend will continue for retail, but we are hopeful at this stage.

We take the next question from the line of Dave Koning from Baird.

I guess, first of all, just to make sure we're clear on this. In Q4, other income should come down maybe 1/3 sequentially or so because of the cash you just used. And then what should the share count be in Q4 just so we get that right?

Yes, on the share count, it came down by 4.92%. That was exactly the buyback. And if you look at our fact sheet, we have provided the weighted average shares post buyback. And coming to the first question, yes, to some extent, the other income is impacted by the interest income that we earned from the balances. So that is something that -- we paid out $2 billion and also the interim dividend during the quarter. So to that extent, yes, the other income comprising interest income can have -- can see some change.

Okay, okay. And then -- and I guess, secondly, one more thing on the tax rate. If we add back the $225 million to Q3, your tax rate this quarter would have been 30%, which is the highest in many years. Is that the normal tax rate now that like -- to kind of start basing everything off of? Like was there something that's changed a little bit to make it higher now on an ongoing basis than it's been?

No, actually on an ongoing basis, as I said in our overall effective tax rate last couple of quarters, that has been 28%, 29% range. This particular quarter apart from this as you know, we had -- as we have disclosed in the financial statements, our subsidiary BPO paid dividend to us. So there is a dividend distribution tax, those that can be offset against our dividend distribution tax. But technically for accounting purposes, we had to take (inaudible) show it as the tax expense.

So how should we think about, though, like, so if -- I mean, obviously there's a lot of moving parts between tax reform, the APA benefit and stuff. I mean, does that all aggregate to a pretty normal ongoing tax rate around 28%?

Well, I think coming to the APA as we have disclosed earlier, because of the APA, we expect our overall effective tax rate to come down by 100 basis points for the period covered under the APA which is 2011 to '21. Now we have also made preliminary assessment of the U.S. tax reform and the measures proposed under the -- rather, approved under the U.S. tax reform. Our preliminary assessment indicates that the overall impact is neutral for us. So there are 2 parts: the tax reform impact is neutral, the APA is about 100 basis points deduction to the overall effective tax rate for the period covered under APA.

Next question is from the line of Ravi Menon from Elara Securities.

While it's too early to ask of you for -- from you regarding Infosys strategy since you've been a long-term industry participant (inaudible). In your view, have Indian IT firms been slightly slow to adapt to the technology shift under way? And do you think that there's a change required in the model itself as new technology requires a different kind of skill set profile, deep technical expertise in multiple elements of the stack, good domain expertise as well? And would you view these as not being compatible with traditional pyramid model for Indian IT services?

Thank you. I didn't catch the second part of the question, but let me start with the first. I think it's difficult to characterize all companies whether they're from India, from other geographies in the particular grouping with where they stand on the transformation journey. There are different nuances of different companies. In general, the market I think there's a lot of work that's going on in different components of the digital spectrum. As you know well, there's a whole component around the marketing and interactive side. There's a component around the industrial Internet, and there is a component around cloud and its different iterations. And different companies across the sector, not just from India or others, have strength that has developed in specific areas. That's the way at least I've seen how the industries evolved. So I don't have a view of one group being in a position which benefits or does not benefit. And the second part of your question, I didn't catch. If you could repeat that, please?

Yes. The second part was is there a change required in the model itself as new technology requires a different kind of skill set profile with deep technical expertise in multiple elements of the stack, good domain expertise as well? And do you think that this is not really compatible with a traditional pyramid model for Indian IT?

Well, first, I think the pyramid model applies to almost every business I've seen within the IT sector whether it's from India or from anyone else. In general, I think the skill sets that are needed in some of the newer areas require that there needs to be some level of re-skilling or, indeed, if you are recruiting from college, that type of skilling that needs to come in. So those implications I think are independent of where the company is from. It depends on the portfolio that the company has in terms of its current service offer. So again, the pyramid, I think, approach at least applies to most companies that I'm familiar with in the sector.

Great. And Pravin, just a quick question. In the press conference, you mentioned that Infosys is positioning Nia with some new thinking. Could you please elaborate on that statement?

Can you repeat the question, please?

In the press conference, you mentioned that Infosys is repositioning Nia with some new thinking. Could you elaborate on that?

Yes. We have had -- as you are aware, we have had good success with Nia over the last few quarters. But at the beginning of last quarter, when we did the strategy refresh exercise, we looked at all aspects of our business, including Nia on what is working and what is not working. And one of the opportunities we found in Nia was right now, we are approaching this more as a horizontal solution, different looking at what is happening and the differentiated position of Nia, different (inaudible) our ability to monetize would be much better if we are able to build vertical solutions on top of Nia. So that is a strategic fit that we have done, and it's been probably a quarter since we have done that and that's focusing on executing on that.

Next question is from the line of Sandip Agarwal from Edelweiss.

Yes, so I have a question with probably Pravin or maybe Salil can also add. So first of all, welcome to Salil, and best of luck for you in your new role, and thanks for giving me the opportunity to ask a question. So my question is a little bottom up. What I'm trying to understand here is that with Europe firing better than earlier and digital doing well, BFSI looking optimistic, retail looking good and energy with oil prices going up and again communication probably is not worsening further, will it be safe to say that CY '18 looks much more promising than CY '17 and probably the worst of the growth is behind? I am not asking for any guidance but just trying to understand.

Yes, it's perhaps too early to comment on that. As I said earlier, right now, our target is to make sure we execute on quarter 4. But obviously, in the last few years, quarter 4 has been an initially tough quarter. And this time, we wanted to make sure that we exit at a decent rate, which will help us going forward. At the same time, in this quarter, we'll have the benefit of Salil getting into details about the strategy refresh exercise as well as (inaudible) time and he will also step back and take a look at the pipeline and the future. So April is perhaps the better time for us to respond to this question.

Next question is from the line of Mukul Garg from Haitong Securities.

Ranga, the first question is on the on-site mix that you have highlighted as one of the drivers which kind of further improved. Should we look at this on a near-term basis? Or do you think there is space for improvement even on the medium term, especially on the back of the upcoming hiring, which you have committed in the U.S. over the next 2 years?

This is Ranga here. Yes, over the last couple of quarters, I've said that we are focused on-site mix, and it has moderated from the level of credit spend to 29.8% and 29.4% last quarter and now 29%. However, the on-site mix is, as you rightly said, is also a derivative of the business mix and, for example, certain service lines like, for example, test chamber, infrastructure management make themselves more amenable for on-site mix moderation. Typically, they have larger companies that's offshore. However, some of the new services as the large -- the consulting and other services typically are a bit heavy. So I think the business mix change is one factor if you look at it at the broadest level, which can have an effect on the off-site mix. But most specifically, what we have also done over the last couple of quarters is to look at more granular (inaudible) level and also look for opportunities for the on-site mix moderation. And the focus primarily has been on the fixed price projects because in case of a T&M, when we tried to moderate the on-site mix, there is an impact on the revenue that is quite linear. But in case of the fixed price projects, the moderation of on-site mix to productivity and others do not -- they merely impact the revenue. So I think we need to work on multiple components here. So that's what we have done. So we don't to kind of give any specific target for the medium term or something, but we will continue to work on it.

So maybe if I can ask this question a slightly different way. You are planning to hire about 10,000 employees in the U.S. over the next 2 years. And if you look at your recent net hiring levels, they do not suggest a significant ramp-up of hiring in India itself. So won't that work against optimization of on-site mix further in the medium term?

No, I think -- let's go into the hiring part. Hiring part necessarily is not always net head count, right? It is also a churn of people. These are dependent (inaudible) independent people. So to some extent, that will also address the replacement of I think people on certain projects. It does not necessarily mean that the entire 10,000 is totally incremental to the existing. So I think there are a couple of pieces there as well. So overall, our focus on on-site mix is a combination of business mix as well as in DFV projects in the current service portfolio by service plan. How do we address that, I think that will be the result of these 2 elements.

Understood. And if I may ask one question to Pravin. Pravin, you mentioned that Digital is now close 25%, and you will probably give us more break-up about the growth going forward. But can you help us understand what you are seeing there in terms of size now? Digital has been one of the sector areas in the market for a while now. So have you seen digital actually scaling up and becoming a large business line by itself? In terms of new orders, we recently -- we heard one of your larger peers talk about a reasonably large digital deal win. So are you also seeing something similar?

I'd say as we've said earlier, our share of revenue from digital has crossed 25%. We will probably start reporting that in the next coming quarters on an ongoing basis. In the last couple of quarters, we have started talking about new services and the share of revenue from that, and that is a success of digital. And as you have seen this quarter, it has grown by 6.8%, and today, it's about 7.6% of our revenues. So that is a kind of growth trend. Overall, we have grown at 1%. Growth from new services and software has been about 6.8%. So that is the kind of impact we can see. And digital is a common theme across industry verticals because everywhere we are seeing plans looking at new business models, improved customer interface, digitization and so on. And the definition of digital also sometimes is very broad. So one part of (inaudible) about cloud. And if you took a look at a really large deals, there's an element of cloud in that. And if you use that hypothesis, then there are already, I mean, in the past also there have always been many large deals that have significant component of digital in them. So I would not like to comment. We continue to see traction. We continue to expect increased momentum in digital across verticals, but I would not like to really comment on the size because on the basis of that mission itself, we have already seen (inaudible).

Next question is from the line of Sandeep Shah from CIMB.

Welcome, Salil, and all the best. Just the question is in terms of the 4Q guidance. So if I look at the higher end, it is 3.1% Q-on-Q growth while last 4 years, if you look at except for 1 year, 3 quarters in 3 years, we had a sequential decline. So what gives you confidence to retain your higher end of the guidance at 3.1% at this time? So what could be the tailwinds which can result into some amount of optimism or breaking the jinx?

No, I think we should not read too much into this beyond the fact that only one fact, which I would like to mention here is, if you look at the first 9 months of this year, the revenue growth as compared to this first 9 months of previous year, in constant currency, they have grown at 5.6%, and our current guidance is 5.5% to 6.5%. And as you know, we had reviewed the guidance last quarter. So I think right now, as Pravin had mentioned earlier, the deal momentum that we have seen in the earlier quarters, we are focusing on ramping up some of them. And I think the focus is clearly to have good execution in Q4. At the same time, we are also very -- as you rightly mentioned earlier, we are very much aware of that fact that the exit rate of Q4 is important and that will really be important from the FY '19 point of view. So we are all working towards the execution.

Okay. Just the last question. On the large deal pipeline, some of your peers as well as industry consultants is that the pipeline is robust and the decision-making or conversion of the pipeline is actually accelerating or increasing. Do you also witness the same? And is it broad-based across industry segments?

This is Pravin here. The pipeline is strong. I agree with that assessment, but the (inaudible) cycles continue to be strong and continue to be long. It takes anywhere from 6 to 9 months from the beginning to close from an average. So we have not seen any accelerated decision-making. And, by and large, this is broad-based. Obviously, we are seeing a lot more. We have seen in the past that much more large deals in the ECS space and in the [FX] space. We have seen (inaudible) in manufacturing and (inaudible). I don't -- we don't see any pattern in that, and it really depends on when these come up for renewal and renewal cycles and so on.

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

Thank you. This is Salil. Thank you, everyone, for joining this call today, and thank you for the warm welcome. As you have heard, we have had a strong performance in Q3. All of our metrics indicate the underlying business is in good shape. Overall, the fundamentals of our business, growth, operating margin and cash generation, are really in a healthy position. We also have a pristine balance sheet, which has been used in the past and we will continue to use in the future as we evolve the capital allocation policy. Our governance now is stable. And with that, we now look at the strategic priorities that we'll lay out at the April Investor Day. That's what I wanted to share with you from our call today. Overall, as a company, we have all of those elements coming together. We look forward to meeting with several of you at the April Investor Day, and thank you again for joining in.

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, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.