Infosys Ltd (INFY) 2023 Q3 法說會逐字稿

A very good evening, everyone, and a very happy New Year. Thank you for joining Infosys' third quarter financial results. My name is Rishi. And on behalf of Infosys, I'd like to welcome all of you.

Over the next hour with our management, we're going to have our financial results commentary. We request one question from each media house so that we can accommodate everyone over the next hour. As always, we'll start with broadcast media and then move on to our other friends from media who are present here.

With that, let me invite our Chief Executive Officer, Mr. Salil Parekh, for his opening remarks. Over to you, Salil.

Thanks, Rishi. Good afternoon, and welcome to everyone who is here on the campus and everyone that's joining us online. And we are delighted to share with you that our Q3 performance was strong with year-on-year growth of 13.7%, quarter-on-quarter growth of 2.4%, this in a seasonally weak quarter for us and amid a changing global economy.

We continue to take market share. We continue to benefit from consolidation. Growth in Q3 was broad-based with most industries and geographies growing in double digits in constant currency. Our large-deal value was at $3.3 billion, the highest in 8 quarters. With 32 large deals, this is the largest number of large deals in a quarter in our history. 36% of this is net new. Our pipeline of large deals remain strong.

Our digital revenues grew at 22% in the quarter at constant currency and are now close to 63% of our overall revenue. Our core services revenue grew as well at 2.4%. We're seeing growth in both areas of our business, digital and core services. This is a testament to our industry-leading digital capabilities, including our Cobalt cloud capability and our industry-leading automation capabilities, both of which are resonating with our clients.

Our large-deals pipeline is seeing increased traction for automation and cost-efficiency programs. Strong growth was accompanied by stable operating margins at 21.5%. This was driven by healthy revenue growth and cost optimization benefits. Our voluntary quarterly annualized attrition continues to decline. It was reduced by 6 percentage points sequentially to well below 20% for this quarter.

While we are encouraged by the immense confidence and trust our clients have in us, the signs around are showing a slowing global economy. Some areas such as mortgages and investment banking in the Financial Services industry, telco, Hi-Tech and Retail are more impacted, and that is leading to delays in decision-making and uncertainty in spending in these areas. We are confident that the strength of our digital and cloud capabilities and our automation capabilities will continue to position us well in this market.

We're keeping a close watch on the global economy. Our operating model and offerings are agile to deliver value for our clients in this evolving macro environment. Driven by a growth of 17.8% in constant currency for the first 9 months of FY '23 and the strong large-deal value for Q3, we are increasing our revenue growth guidance, which was at 15% to 16%. We are increasing it to 16% to 16.5% for the full financial year, this despite the changing global conditions. We are retaining our operating margin guidance for FY '23 at 21% to 22%. We anticipate to be at the lower end of this range. Thank you.

With that, Rishi, let's open up for questions.

Thank you, Salil. We will open the floor for questions. Joining Salil is Mr. Nilanjan Roy, Chief Financial Officer, Infosys.

With that, we have the first question from Ritu Singh from CNBC-TV18.

You said you've increased your revenue growth guidance despite changing global conditions. What gave you this confidence? Why the revision up? What about furloughs, were they lower than what you were expecting from your comments in the last quarter?

Also, we've seen a significant rupee depreciation during the quarter, and yet the margins have more or less remained flat. What is the reason for that? And any visibility you have on the FY '24 growth? Because you're talking about this difficult macro environment and yet you revised up your guidance. So what are you hearing from clients in terms of their budgets? And these large deals that you say continue to be strong in the pipeline, are you seeing more renewals or newer deals that you expect to win?

And a word on attrition and hiring as well. Do you expect it to continue to trend lower? I think it's the lowest in the last 5 quarters. And also hiring is lower than the previous quarter. Is it because you're anticipating lower growth? Any comment on that as well?

Thanks for the questions. I'll try to get through most of them. On some of the points on margin, Nilanjan will jump in as well. On the guidance, our focus is really on what we see as we closed out the quarter. We had exceptionally strong growth Q-on-Q, 2.4%; year-on-year, 13.7%. For the first 9 months, we are at 17.8%. Then we had a very strong large deals. At $3.3 billion, it's the largest we've had in 8 quarters. And the number of deals is also a testament to the environment for us. At 32 deals, it was very strong. Given all of those factors, we saw that it was right to increase our guidance.

The point we made also is we do see there is changes in the economic environment. We've called out, for example, in Financial Services, beyond mortgages, investment banking. We've called out the telco sector. We've called out Hi-Tech and Retail. But keeping all that in balance, there were some things that give us a lot of support. Well, we see other factors in the environment changing. But keeping all that in balance, we were ready to increase our guidance.

On attrition, I think before we go to the margin and so on, on attrition, we've seen a steady quarter-on-quarter decline for the last several quarters. We believe many of the policies we've put in place to make sure that we are more and more aligned to where our employees are focused on is helping. And of course, the overall environment is also changing in the market. So we see attrition continuing to go down.

And why is the guidance has [lower rate]? Should we see that as an indicator of why you would expect FY '24 to (inaudible)?

On FY '24, we have no comments at this stage. We will absolutely look at it at the end of the quarter in Q4. On hiring, we have the number of hiring based on what we saw on the demand, and we've also had a very strong hiring for the full year in FY '23 and also before that. And we are making sure that all of that hiring goes through our various training and is ready for deployment.

On margins?

Yes. So on margins, we've had 21.5%, and that is flat sequentially. A couple of reasons. And first, of course, you mentioned about the benefit of currency. So we got a net benefit of about 40 basis points from currency, net of our hedges. So that was one tailwind for us. We got another benefit of about 70 bps from a cost optimization, for instance, our subcon costs, et cetera.

And from a headwind perspective, there's about 30 basis points additional spend on our SG&A. And the balance, about 80 basis points, was traditional seasonality in the quarter, furloughs, partly because of our third-party costs. So these are balance, 80. So that's a broad walk about our flat 21.5% margin within our guidance, as you know, of '21, '22.

Thank you. The next question is from Anisha Jain from ET Now. Anisha sends us questions on text. Salil, the question for you is there has been a strong execution and deal win in Q3 that led to the guidance upgrade as well. Can we extrapolate this to believe that the client budget will be robust and double-digit revenue growth will sustain in FY '24? And could you give us a more -- a bit more insight on the trends you're witnessing in Europe and for verticals like BFSI and Hi-Tech?

And Nilanjan, for you, there's a question on margin, which you just answered. A follow-on question on attrition that is coming down sharply. Could there be a sharp reversal in margins from Q4 onwards? How are the pulls and pushes stacked for margins?

Thanks, Rishi. On the first part, I think we talked a little bit about why the margin was increased. In terms of what we see in the environment, we are not commenting obviously on the financial year '24 and what the guidance or growth in that year will look like. What we do see in terms of demand environment is what I shared earlier. We see some areas, for example, the mortgages area or the investment banking area in Financial Services, we see some areas in telco and Hi-Tech and some in Retail.

There is more variation we see in the European markets, more concerns on what's going on with the economy. The U.S. market is also there, but relatively less so in the U.S. with respect to Europe. We will see how this plays out because this is not a scenario where it's the same for every industry. For example, we've seen extremely strong growth in energy, utilities, that part of our business, and we continue to see that in Q3. We saw very strong growth in manufacturing, and we continue to see some of that traction in our business in Q3.

Nilanjan, the question on margin was attrition.

Yes, so absolutely. So one is, of course, as you know, if you've seen our utilization, in fact, that came as a headwind for us. We have built a large, fresher pipeline. They go through our training, like Salil mentioned, into Mysore. And they're on bench now. We are training them, reskilling them. And in fact, that will give us some headroom, in fact, for growth looking ahead.

So the question partly about do we need to hire more, so we have a very substantial bench. And I think our utilization at about 71 point -- 81.7% is one of the lowest we've had. So we have some headroom there.

So looking ahead, of course, subcon costs, we've brought them down. At one stage, we used to be closer to 7% of our revenue. We are around 8.7%, utilization and other factor. We continue to work on pricing, of course, on-site, offshore, the pyramid itself, the freshers coming in will help us. So the other levers, we will have to deploy as we look ahead in the next few quarters.

Thank you, Nilanjan. The next question is from Sajeet Manghat from BQ Prime. Sajeet has a couple of questions. For Salil, he wants to know, give us a sense of the demand environment in North America, U.K. and Europe. And have you seen a trend of small deal sizes compared to what we saw in the last 2 years? Do you foresee a slowdown in deal closures?

Nilanjan, your question is again on margins, which has already been answered. So I'm not asking that again.

On the demand environment, sort of similar view. I think we see different demand environment in different industries. And even within some industries, there's a variation based on the client. We're also seeing much more demand today for automation, cost efficiency, operational improvement programs.

The size of the deals, as we see with $3.3 billion in large deals, we have a tremendous volume, 32 of those deals for this quarter. So we do see a change in the environment. But we see that both of our engines, the one for digital and cloud driving transformation and the one for automation driving cost efficiency, both are working and both are growing for us.

Thank you. The next couple of questions are from ZEE Business, Kushal Gupta; and from Harshada Sawant from CNBC Awaaz. Both are on client and IT budget spending, which we have already answered. I'll ask one question. What is the sense you're getting from your clients in terms of future pricing of deals? How concerned are you about Europe? And what impact could it have on deal flows ahead?

Pricing, maybe Nilanjan will take. I'll take the question on Europe. Europe, I think we mentioned earlier that there's differences within the European economies. We're seeing today more economic changes in the European market relative to U.S. But even so, there's a factor of the industry. We are seeing good traction in some industries, for example, energy utilities, and that's across geography, while we see some constraints which are in Hi-Tech and parts of Financial Services.

Yes, on the pricing side, of course, I think we've seen a much more stable pricing regime than historically what we've seen. And part of that has been the high inflation we've seen in these economies as well and also because of the compensation line. So some of that, we are trying to work with our clients to pass that on, and we've had some successes. One of the things that have cost things, like discounts have actually come down over the years. So I think this is a discussion we have by each client, and I think that's something which we'll continue to work on irrespective for the year ahead.

Thank you. The next question is from Reuters News from Nandan Mandayam.

I just want to know how, long do you expect the softness in BFSI to persist in the U.S.? And also if you could give us an insight into how you sort of maintain around the same growth in Europe. And lastly, could you give us an insight into what FY '24 hiring is going to look like, both in the fresher and lateral terms? Is it going to exceed what we've seen in FY '23 so far?

So on the BFSI, I think we don't have a definitive number in terms of when things are going to look different. Again, we see differences. There are parts of it, for example, mortgages and investment banking, where we are seeing some constraints on what they are doing with their business. There are other parts of Financial Services which are not seeing those same constraints. We have places where because of consolidation of partners, we're actually seeing some growth across some clients as well.

In terms of hiring, we have no comment today on our plans for FY '24. Those things, in any case, we'll not comment on the hiring number. We will, at the end of the quarter, lay out the margin -- the guidance for growth and margin for next year.

On the European terms, because some of your competitors, they've seen a sort of [ecosystem of European banking with like the spending concerns with the]...

On Europe, I think we are fortunate to see a very strong growth in Europe. We've had a good focus on that geography for the past several years, and we continue to see traction from some of the work and programs that we've started a while ago.

Thank you. The next question is from The New Indian Express, Uma Kannan.

Gentlemen, congrats on a strong quarter. So do you expect client spending to come down in Q4 and whether this includes reduction in workforce? And also one more on automation that you spoke about just now. So Infosys has good capabilities on automation, AI, MI. And how are you looking at this AI chat bot as you have invested in opening AI also? So what will be the future or how does the future look like in AI? And how this will actually help in servicing your clients better?

So I think the first part of the question was more on what we see the client spend in Q4. I think our sense is the points that we've laid out with respect to different industries and different clients is what we are seeing right now in Q4. What we see going ahead, we will describe for the financial year '24 as we come to the close of it, close of this year.

In terms of automation, we made tremendous progress, and that's one of the reasons, because we've used artificial intelligence, machine learning, we've benefited from our clients' needs to be more efficient with their technology spend. And we've been at the forefront of what is going on with automation. And that's really the reason why see both our digital business and our core services business growing.

On OpenAI, there, several years ago, Infosys had supported this initiative in a very small way through a donation. We see the progress they made. Huge congratulations to what they've done. We have examples that -- where we are using ChatGPT with client situations, and that is starting to further increase productivity and automation.

Thank you. The next question is from Haripriya Suresh from Moneycontrol.

I have one follow-up on ChatGPT. Just wanted to understand if Infosys at some point -- I know OpenAI has since shifted from nonprofit to for-profit. Will Infosys look at putting more money? And how do you think it will impact coding and service delivery as well?

Another question is you had a very strong quarter, but do you think we'll go back to a single-digit growth? And Nilanjan, just wanted to ask, last quarter, you had mentioned that in H1 FY '23, you had hired 40,000 freshers. 50,000 was the target for this year. How many freshers were hired in Q3? And has that target been revised?

On the first one, I think we have a huge focus and commitment through the past several years on automation, artificial intelligence, machine learning. We have no plans today which relate to anything in terms of an investment in any activity. But we are looking at the way to really work with and partner with, and there are many technologies which enable a way to do low-code, no-code enhancement of or efficiency of building code faster. So we're looking at all -- or we are working with several of them to make sure that we work with our clients on it.

In terms of growth?

On growth, we don't have a guidance for FY '24 at this stage. What we have is really the focus on Q4 and for FY '23.

Yes. On the freshers, I think the 50,000, we are short of that now, but I think we should be around that number by the time we end the year. So we have continued to hire. Yes, I think about 46,000 I think we've done, if I'm not mistaken.

Thank you. The next question is from Veena Mani from The Times of India.

So a couple of questions on the HR front. With attrition coming down, would the pressure on giving out more bonuses and increments ease out for you? And also on this quarter's variable pay, I'd like to ask you, on an average -- on an organization average level, what is it going to be? And if it is 100%, what part of your workforce will be covered in that 100% variable pay bracket?

And also on the utilization, excluding trainees, it's at 81.7%. Is it largely because even in the existing projects, clients want to ramp down, want to bring down the number of build resources? Or why is it exactly?

Yes, sure. So I'll take the second and then the first one. So 81.7% is largely because of our fresher's bench. That is the biggest reason and because we've been hiring so many freshers through the year and putting them into training. So there's no reason that over a period of time, they will start going into production because you can't overnight put a new project and have them with all the freshers.

And like we've talked about in the past, it is an investment we are ready to make because you can't overnight flip the model of putting freshers. And so we are ready to make that investment and then start leading them into the production projects and rotate existing headcount. So we are not so concerned. Over a period of time, that will start actually helping us.

The second thing about variable pay, we don't disclose the amount of variable pay during the quarter, and that's just something in the past we've looked at as one of the -- how we pay out to each quarter on performance.

About [special ops] and promotion...

Yes, that's been going on. Yes, absolutely. In fact, one of the projects of -- and is helping us during this attrition has been this whole project internally about predictability of promotions, and that continues unabated as people reach a certain seniority. And in certain levels, we are continuing that.

Thank you. The next question is from Sai Ishwar from The Economic Times.

So Salil, in the press release, you have said you've gained market share. Could you actually explain in which markets or in which functions are you gaining market share? And also about the deal win, it's come at an elevated number right now, right? So do you think going forward, it is sustainable? And also, could you tell us what worked this time? Do you think your automation capabilities helped in terms of winning a lot of cost-based deals? Could you just give us more color on the deal pipeline and the wins?

So on what are the reasons for some of these deals that we are winning or the size and scale of it, I think you're absolutely right, the automation piece, the fact that we have a real strength and industry-leading capability has absolutely helped us. We think we are gaining market share because if you look at the growth, average growth over the last 12 months, 24 months, 36 months, including in this quarter of the industry and you look at our growth, we think we are ahead of the average. So we are gaining market share from people who are below that average.

And it's in multiple areas. We've gained tremendous market share on cloud because of Cobalt, on the digital areas on data, on analytics and also on cost efficiency and automation because we have the ability to take large platforms and programs and make them more efficient for our clients.

Thank you. The next question is from Ayushman Baruah from The Financial Express.

Salil and team, wishing you a very happy New Year, first of all. So most of the financials have been asked. So I have something from a technology point of view. Last year, we spoke a lot about metaverse, right? Infosys has also has invested into it. So how do you see the adoption among clients? Is it still in the initial phases? Or have you seen the adoption pick up? That's one.

And number two is that last year, we also heard a lot about moonlighting, right? So over these months, has Infosys firmed up any policies around moonlighting yet? That's it.

So on meta, I think we are starting to see, as we discussed last time, some projects, some programs, especially as it relates to AR, VR in the manufacturing context, on a shop floor context, in an education training context and maintenance context. It's small right now, so it's not a large part of what we do, but we are seeing a steady sort of improvement on that.

On people doing gig work, we've made a clear statement a while ago. We are very much of that same view. We've built internal capabilities to support that. We've had a program, which internally we call Accelerate, which was put in place some years ago. And that program is being used to make sure it's done. We want to ensure, while doing all of that, client confidentiality is always maintained. But outside of that, we want to make sure that the employees have the ability to do some of this to improve and enhance their learning.

Thank you. The next question is from Haripriya Sureban from The Hindu BusinessLine.

Salil, you spoke about client spending. But specifically when it comes to cloud, we hear that people are looking at looking -- taking a real look at their cloud spend and maybe even rethinking how much they're spending on it. So what is it that you see on that front? What is your reading on it? And given the current environment, are customers looking at vendor consolidation? And would that be helping you going forward?

On cloud, it's a significant part of what we see within our digital portfolio. We have seen good growth in digital all through the year and including in Q3. We don't split out the cloud growth specifically, but it's in good shape for us as the cloud business is growing based on Cobalt.

Overall, we have seen that there is a focus in some of the industry or some verticals that I mentioned earlier, where there is more attention to what should be done with these transformation programs and much more focused now on how to be more cost efficient. So that's going on as an overlay, but the cloud remains a strong part across all industries.

And your vendor consolidation?

On vendor consolidation, we see a tremendous benefit for us. We see many large enterprises are starting to look at things which are more in selecting a very small set of partners. And in many of those cases, Infosys becomes the preferred partner for our clients.

Thank you. We'll move on to the next set of questions from journalists who sent on text. The first is from Jochelle Mendonca from ET Prime. Jochelle's question is one thing that we have seen is Salesforce talking about a slowdown and there is talk about a slowdown on the hyperscaler side as well. Given that you're a strategic partner to these companies, what are you hearing from them and your clients about the cloud, which has been a big driver of growth?

And the other question is, given the uncertainty, could you give any color on how close to the growth your customer teams or any steps that you have taken to be able to capitalize when we see an upturn?

On the cloud, I think it's similar to what we were just sort of mentioning. Essentially, there is still emphasis on what is going on with the cloud. There is just different parts of the industries are doing things differently. So if you look at, for example, in energy or utilities clients, if you look at manufacturing, we see a huge movement today already with cloud with all of the components of our Cobalt capability. But in some other industries, it's less so. And therefore, overall, there's obviously less in that.

In terms -- what was the...

The other one was on the uncertainty. Could you give any color on how close to the growth your customer teams or any steps that you have taken to be able to capitalize for the time when we see an upturn?

So there, I think we are positioned well with the fact that we have a very strong digital transformation capability. And even today that our clients are looking at it, that capability will become more and more critical as and when the overall economy also changes. And in that same time, the focus on cost efficiency will give us benefit. That's something that we can work on with clients to rationalize what they're doing with their spend across the technology platform.

Thank you. The next question is from Shouvik Das from Mint. Shouvik -- Salil, for you, the question is the per employee consolidated revenue declined further to $54,000 level, down over 6% Y-o-Y. Does this show that employee costs have still remained high in the sector despite falling attrition rate? And is this something that we expect to see coming in the coming quarters as well?

For Nilanjan, a couple of questions. You've raised guidance for FY '23 on the back of a strong quarter. However, the number of active $100 million-plus deals reduced by 1 during the quarter. Is that a factor of uncertainty coming from North America and Europe? And do you expect such large deals to remain muted or even decline through the next quarter? This was already asked.

And there's another question. Revenue from India saw a 5.4% Y-o-Y constant currency decline; while the rest of the world, including Europe, saw growth. What is the reason for such movement in market metrics?

Okay. So I'll start with the India. So India is a very small portion with about 2.5% of our global business is from India. And a lot of the work we do with our clients is also volume and transaction-led. So you will see these pluses and minuses on a quarter basis on the growth figure. But like as I again said, it's only 2.5% approximately our revenue.

The second one was about the revenue, I can take the first one, the revenue per person. I think that's just a reflection of our utilization over the year, which was about 88%, and now we are at 81%. So that's just the math of the overall RP as such. So our margins have, like I said, quarter-on-quarter, remained stable. So that's a different way to look at the metric because we've also hired freshers during this time who are sitting on bench and are in training in Mysore. But from a productive perspective, we have seen that utilization factor come down by only about 1.5 bps -- 1.5% during the quarter.

Is there something else?

No, that's good.

That was it? Okay.

Thank you. The next question is from Shivani Shinde from Business Standard. In continuation to the earlier question on cloud, can you give some color on cloud deals? If cost transformation deals have gone up, why is the core revenue down in reported terms? Also, can you give some color on the TCVs won this quarter?

On the deals, first, the reported terms has a lot of currency in it. So we always look at our business on a constant currency terms. We think that's a metric which is more stable and more indicative of how the underlying business is doing. So the key for us there is the core is growing this quarter on a constant currency basis.

We don't typically give out the average TCV on our deals. The reality is we have a huge large-deals number at $3.3 billion, and that makes a big difference as we look ahead into what is going on with the future of the business. On cloud deals, those really come back to what is the view of individual clients and within industries, what's happening and then the overlay of the cloud as an ecosystem.

Thank you. The next question is from Reshab Shaw from the Informist. For Salil, you said Europe sees more stress, but segment revenue shows the region's share of revenue is going up. Going forward, do you see that changing? And what are the reasons that drove large deals even as you said there were delays in decision-making?

There, on Europe, to the earlier question about what is the overall economic environment, we see the economic environment across the world slowing. Within that, relatively, Europe seems to be more slowing than the U.S. today. For our own work, Europe is very strong. We've had a really good platform there put in place over the last 18, 24 months. And we are seeing the benefits of that coming through today and also some of the large programs that we launched in that last 18, 24 months' time frame.

Thank you. The next question is from Debasis Mohapatra from Deccan Herald. For Nilanjan, despite a fall in attrition and benefits coming from operational efficiency, why did operating margin not improve in Q3? Are large deals margin-dilutive in nature? When can we see revenue per employee inching up?

Yes. So I think I've answered many of those. So we've given our margin work on the 21.5% sequentially as well. And the other one was on large deals continue to perform well. You will see our overall strategy over the last 4 years since the large-deal strategy was put in place. At 21.5%, we're actually well above where we started in FY '18. So despite all the large deals, we have seen that as we go through the deal cycles, we've seen the improvement in margins. And of course, new deals come into the funnel with lower margins, but that's a mechanism we have actually mastered, and I think that's something which we do every day.

Thank you. The next question is from Rohit Chintapali from Businessworld. This is a similar question in case you want to add any more color to it. Your revenues from North America have declined sequentially and they've improved only marginally in Europe in Q3. This is in line with ICRA's report that predicts moderation of growth in the IT sector over the medium term. How do you plan to address these key markets as you expect tough times ahead?

So I think at constant currency, I don't know where -- this again reported. So we are pleased the -- again, if you look at our constant currency, we have grown in all the 3 geographies as rest of the world, in Europe and in North America. Of course, the growth rates are different. But we are seeing a very strong pipeline in all the markets, like Salil had mentioned.

Thank you. The next question is from Harichandan Arakali from Forbes. Two questions. One is on hiring in the context of looming recession that I think, gentleman, you've answered. The next question is while there is the nuance of Infosys Cobalt and other such capabilities which may be useful to clients, overall, what does the recruiting scene look like in the coming few months?

On recruitment, I think we have already mentioned first that we are increasing our growth guidance. We've talked about the recruitment that we've done across this year already. And as we see the demand environment building up, as we see utilization inching up, we will make sure that the recruitment utilization and the way we are training all of the college graduates makes it an efficient model for us to grow with them.

Thank you. With that, we come to the end of this Q&A session and the press conference. We thank our friends from media for joining us today. Thank you, Salil. Thank you, Nilanjan.

Thanks.

We appreciate it.

Thank you.

Before we conclude, please note that the archived webcast of this press conference will be available on the Infosys website and on our YouTube channel later today. Thank you very much, and have a good evening.