Infosys Limited American Depositary Shares

Ladies and gentlemen, good day and welcome to the Interest Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahendru. Thank you and over to you, sir.

Thanks, Karuna. Hello, everyone, and welcome to Infosys Earnings Call to discuss Q1 FI20 Earnings Relief. I'm Sandeep from the Investor Relations Team in Bangalore. Joining us today on this call is CUNMD Mr. Farel Parekh, CEO Mr. Praveen Rao, CFO Mr. Nilanjan Roy, along with other members of the Senior Management Team. We'll start the call with some remarks on the performance of the company followed by comments from Praveen and Nilanjan. Subsequent to this, we'll open up the call for questions. Please note that anything which you 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 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 Salil.

Thank you, Sandeep. Good afternoon and good morning to everyone on the call. Thank you for joining us today. Infosys has delivered a strong quarter and I'm pleased with our overall performance as we continue to demonstrate our increasing relevance to clients. Our constant currency growth year on year for Q1 was 12.4%, which is the third consecutive quarter of double digit growth. Our digital revenue growth was 41.9% and our digital revenue now accounts for 35.7% of our overall business. Large-deal TCV was the highest ever at $2.7 billion. Our operating margin for Q1 was at 20.5%. We saw broad-based growth across our industry segments, service lines, and geographies. In constant currency year-on-year, our telco segment grew 22.6%, our North America geography 13.5%. We continue to benefit from building deeper capabilities across our digital portfolio, especially in the areas of experience, data, analytics, cloud, SaaS, IoT, cybersecurity, AI, and machine learning. Our overall deal pipeline witnessed growth in Q1, and we can see that we're winning market share in this competitive environment. While there are many aspects of our strategy that came together to make these impressive first quarter results possible, I want to focus on how we are scaling our digital business with a few examples. For a telecom major, we are helping to build a new digital customer experience for their clients, which bring together channels such as Alexa, mobile apps, chatbots, online and contact centers in an omni-channel mode and provide improved customer engagement. We work with a large automotive client to help them navigate their digital transformation journey, delivering for them future-ready, scalable digital hybrid cloud platform that is supportive of their digital workspace. We have been engaged to deliver cutting-edge digital capabilities for a leading U.S. insurance company. We are partnering with them to build a digital policy administration services leveraging Infosys McCamish platform. We're enabling a large utility to build advanced planning and engineering systems to forecast the dynamic nature of future electricity demand to help them plan and build their grids and leverage green energy policies to make sure there's efficient distributed energy resources. I'm particularly pleased that we've opened another digital experience design and innovation studio, which was last month in Shoreditch in London, where we're able to co-create digital experiences with our clients. I'm delighted to share that our employee reskilling program, Lex, our learning platform, now covers a near 100% of our employees globally, with employees already leveraging the Lex app each week to develop their skills. I also want to touch upon some external recognition we've received. Infosys has been recognized as a leader in the SAP S4 HANA services by Nelson Hall for global API strategy by the Forrester Wave and in the public cloud infrastructure managed services area in the Gartner Magic Quadrant. Now that we see our clients' confidence in us increasing with increased market share gains, We are focusing as well on operational efficiency and cost discipline. We have now completed all our investments that we outlined last year when we started our strategic direction program. All future investments will come from within our P&L and they're not specific as one of investments that we outlined last year. Over the coming quarters, I'm looking forward to see the benefits of these operational improvements reflect in our business. Given the evolution of our business outlook, we are now changing our revenue guidance. We move from 7.5% to 9% in constant currency to 8.5% to 10% in constant currency. We retain our margin guidance at 21% to 23% for the full year. Later on in the call, Milanjan will share with you a new capital return policy. With that, let me hand it over to Praveen.

Thank you, Salil. Hello, everyone. In quarter one, we saw acceleration in year-on-year constant currency growth to 12.4%. This was supported by our highest ever large deal TCV. Five of our business segments Transition services, communication, energy utilities and services, manufacturing and high-tech saw double-digit year-on-year growth in constant currency. North America, Europe and rest of the world also grew double-digit year-on-year in constant currency. Utilization excluding trainees during the quarter improved to 83.1%. Client metrics remained strong. number of 100 million plans increased by 2 to 27. We completed the first leg of compensation increases in quarter one. Rest of the employees barring leadership will receive their comp increases effective July 1st. While overall attrition increased, this was largely due to seasonality since employees leave us to pursue higher studies in quarter one. We continue to focus on strengthening the employee engagement accelerated career path for top performers, greater learning opportunities, and performance-based differentiation. Lot deal win momentum continued in quarter one. We won 13 lot deals with a TCV of $2.7 billion, including the recently closed Stata deal with KBN Ambro. Three deal seats were in financial services and retail verticals. Two deals in communication, energy utility resources and services, and manufacturing vertical, while one deal was in life sciences. Geography-wise, eight were from America, four were from Europe, and one from the rest of the world. The share of new deals in overall lot deal TCV was about 55%. We have reached our localization target in the USA and have recruited more than 10,000 local employees. Let me come to the business segment. Financial services vertical continued its growth acceleration aided by recent status acquisition. We are seeing some challenges due to ongoing merger and acquisition situation in some US banks and also in capital market business in Europe and US. However, there are also growth opportunities in consumer, corporate and commercial banking, cost and payments, and wealth management driven by digital transformation and technology modernization. We remain reasonably optimistic about growth prospects in SS due to increase in win rates and increase in our large deal pipeline. Statal deal will help in strengthening our motor gate servicing capabilities through digital platforms and enhance our presence in Europe. Growth in retail is driven by large deal wins, opening new lookos and differentiation on digital deals. There is acceleration in spending towards digital, IT simplification and modernization to improve customer experience. CPG industry is seeing more consolidation and plans are asking for integrated BPO and technology services. Growth in communication segment remains strong due to ramp-ups of deal runs in earlier quarter. We continue to win large deals within this segment. With the 5G race picking up, the wireless telcos are under pressure to invest and maintain leadership. In 5G, underlying technologies such as cognitive radio, small cells and smart antennas are becoming prominent. We are already working with our customers in advanced IoT use cases. Energy utility resources and services maintained a strong growth momentum and we expect broad-based growth to continue in this fiscal on the back of continued momentum in top accounts and new account openings. Utilities is pending towards customer experience and digital transformation. Resources is pending towards BPO, IT and ERP upgrades. Manufacturing vertical is seeing some impact from global trade wars. especially in Europe with cost-cutting initiatives being in place in multiple plants. Customers are looking towards digitalization of end-to-end processes with a strong focus on weaving mobile, IoT and back-end systems seamlessly to provide a superior customer experience. In healthcare, while we have won some important deals, amending the sector and spending cutbacks will impact growth. License segment also is impacted due to cost-cutting initiatives by clients due to revenue pressures. Our digital narrative in the market continues to amplify based on the foundation of five pillars, experience, insight, innovate, accelerate and assure, and the five accelerators, proximity plus, agile plus, automation plus, learning plus and design plus. We are seeing good success in our digital business in terms of revenue momentum and order book. There is continued demand in data and analytics, cloud, SaaS, user experience, security, and IoT. In the last quarter, Infos was rated as leader in 60 digital services-related capabilities, including in modernization, IoT, experience, and security. With that, I will hand over to Neelanjan. Thank you. FY20 earnings call. Our revenues in quarter one were 3.13 billion, growing by 12.4% year-on-year in constant currency terms. This was our third consecutive quarter of double-digit constant currency growth. The sequential revenue growth in constant currency was 2.8%, including 60 BISC from Stata acquisition. Operating margin in quarter one was 20.5% compared to 21.5% in quarter four. During the quarter, the rupee appreciated by 1.1% against the USD while USD strengthened against other major global currencies, which impacted operating margins by 40 basis points. In addition, margins were impacted by 60 basis points due to compensation increase, 80 basis points due to expenses on new visas, largely for H-1B, and 20 basis points due to state acquisition. These increases were partially neutralized by increases in utilization, which helped margins by 70 basis points, increase in realization and other cost efficiencies by 20 basis points, and the minor impact of IFRS 16 adoption of 10 basis points. This led to a 1% drop in operating margins compared to Q4. Operating cash flow in Q1 was $630 million and free cash flow was $485 million after capex of $145 million. The increase in capex is in line with our previously announced plans of creating new capacities in SEZs and overseas locations. DSO for the quarter increased by two days to 68 days, largely due to the hyper-stated yields. We had similar benefits in creditors in line with the hyper-business model. The C appreciation continued in quarter one. However, our effective hedging program ensured that we had the 16th consecutive quarter of gains in non-operating income. Our hedge book was $2.5 billion at the end of the quarter. Yield on other income improved to 18.1% from 7.91% in quarter four. Effective tax rate for the quarter was 26.4% versus 26.8% for the financial year 2019. EPS increased by 3.2% year-on-year. We have made further progress on executing our capital allocation program announced in April 2018. Out of the maximum buyback size of Rs. 8,260 crores, we have completed over 70% of the buyback at Rs. 5,934 crores so far. We plan to finish the balance in Q2, notwithstanding the recent imposition of taxes on buybacks. During Q1, we also completed payout of final dividend of Rs. 10.50 per share for SI19. Cash and cash equivalents declined to $3,570 million due to payout of final dividends and buybacks in Q1 of Rs. 1,337 million. ROE has increased to 25.8% in Q1. compared to 22.7% in Q4, an increase of over 3%. As we look to be a more diverse company, we have now started including metrics of our gender ratio, which now stands at 37%. Consistent with our previously articulated objectives of enhancing returns for our investors, I'm happy to announce that the company has revised its capital allocation policy. As part of the same effective financial year 2020, the company expects to return approximately 85% of the free cash flows cumulatively over a five-year period through a combination of semi-annual dividends and our shared buybacks and our special dividends subject to applicable laws and requisite approvals, if any. We believe this progressive policy will further improve shareholder returns and provide more predictable cash flows for our shareholders. We have revised our FY20 revenue growth guidance to 8.5% to 10% in constant currency terms. We are maintaining the operating margin band at 21% to 23%, despite the rupee appreciation. We expect operating margins for the remaining year to improve versus quarter one, subject to a stable currency environment. This margin improvement will be driven by continued deployment of operational efficiencies like utilization, rationalizing the payment, on-site action mix, automation, and other overhead efficiency measures. With that, we can open up the floor for questions.

Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touch tone telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you. The first question is from the line of Edward Caso from Wells Fargo. Please go ahead.

Hi, thank you for taking my call and congrats on the quarter. Could you provide some color on why you're having such success with the large deal wins and how much of it is price and how much of it is positioning and maybe split the wins between legacy and digital? Thank you.

This is Salil. To answer the question, Ed, I think part of what we see in terms of large deals is some of the investments we've made in our digital capabilities, they come together as part of a collective where clients are looking to modernize their tech landscape and us being large incumbent players with longstanding relationships puts us in a place of advantage with these new capabilities combined with some of the areas that are longstanding projects and contracts for us. In addition to that, the way we looked at segmenting which sectors we go after and in part segmenting which potential competitors that we should look at differentiating versus. Those are techniques that have helped us and overall we see an increased engagement and intensity with our clients that is helping us. However, as you know well, large deals are by design lumpy. We've been fortunate in Q3, Q4 and Q1. to have had very strong large deals numbers. These numbers for the year, we're very confident about that each quarter, as you know, could be up and down.

My other question is, you still have close to $4 billion in cash on your balance sheet. I assume that's more than you need. You raised your sort of deployment of ongoing pre-cash flow, but what are the thoughts of potentially deploying some of the unnecessary cash on your balance sheet? Thank you.

Thanks. So the ongoing, as you rightly point out, we've made the change. What we have on the balance sheet, as you know, we have a some part of our buyback that is still to be completed. So that will be used in this current buyback. We have plans over time to make sure that our balance sheet is efficient. As we look around, we will look to see if that means doing more within the laws and regulations buybacks for that or looking at other uses if we find small appropriate acquisitions that we can look at.

Thank you.

Thank you. Thank you. The next question is from the line of Moshe Khatri from Wedbush Securities. Please go ahead.

Hey, thanks. Congrats on very strong TCV numbers. Just going back to some of the metrics that are related to the quarter, we're getting a lot of questions about organic growth, specifically the ABNM or contribution. And then how much did that actually add to the guidance raised for the fiscal year? And then a final point here, you have sustained your margin targets, but then what's embedded there in terms of ethics moves in terms of the Indian rupee versus some of the other currencies, and obviously given the fact that we've seen a reversal there in the past few weeks? Thank you.

So the ABN Stata acquisition, this was already built into our guidance at the beginning of the year when we announced it takes into account all future acquisitions. So our guidance has only got to do with our organic confidence of what we're seeing in the markets. The impact of, as in my call I said, the impact of the acquisition was 60 basis points on a sequential basis in the 2.8. So that's embedded in that. The question on... What was the question? On the margin, yeah, so we have given a guidance at the start of the year of 21 to 23, and that was when dollar was closer to 69, 50 versus the rupee. We have absorbed 40 basis points at this quarter, but we still at 68, 50 remain confident that we will be able to hit our 21 to 23. Of course, this is dedicated on the dollar remaining where it is now. Like I said, we have multiple levers and operational efficiencies. We've already seen that kicking in this quarter. Utilizations up nearly 70 basis points which had fallen. And of course, we have the automation benefits of how we can make our fixed price projects more productive. We have the whole on-site pyramid. So the number of levers we continuously deploy and that's giving us the confidence that the rest of the year, margins of 2021-2023, we'll be able to hit that.

Thank you. Appreciate the comment.

Thank you. The next question is from the line of Uncle Rudra from CLSA. Please go ahead.

Thank you. Congratulations and appreciate the increase in payout ratios. To start with, maybe you could comment a bit on what drove the increase in guidance. Was this the better than expected deal wins in the quarter or any change in perception of weaknesses and verticals you're going into specifically in financial services or manufacturing? Also, relatedly, is there any reason to narrow the margin, sorry, the guidance band on revenues so early in the year?

On the guidance itself, the main reason was with the strength of growth in Q1, which was 12.4% year on year. and then that on the back of two other quarters, Q4 and Q3 of last year, being double-digit. And what we see in our pipelines, our large deal pipeline, has improved from April 1 through now. That improvement and, of course, some of the wins in the quarter, all of those things put together gave us a level of comfort to raise this guidance from 7.5, 9.5, now to 8.5 to 10%. In terms of specific segments, I think you heard when Praveen shared the view on segments, those are how we see what we see across different segments. And the narrowing of the band, our thought was Given we are one quarter into the year, as we changed or increased the guidance, we felt it was perhaps more appropriate at this stage to narrow the band given what we were seeing. Okay.

Just a question on your US or local graduate program globally. It's probably been almost three years now and you said you've achieved your initial targets. Given that you probably have a lot of learnings about this program now, Could you share what's been the experience here in terms of scalability of this type of supply, the kind of pricing, utilization, attrition kind of parameters you get, and also client acceptance, specifically compared to your traditional model on-site?

Hi, this is Ravi here. There's been quite a bit of learning on how to hire, how to staff on programs, and of course how to retain. And how do we create a trajectory into building a sustainable model for the future? Partnerships with colleges to set the training up. Going beyond STEM, we actually went to liberal arts schools and design schools, which is very new to us all across the world. And then we have started experimenting with community colleges as well, which is, again, pretty new to us and pretty new to the industry. pretty exhaustive list of learnings and how we can sharpen this model and continue to sustain it on a long term.

Specifically, could you add some color, Ravi, in terms of how scalable do you think this is going forward and where do the pricing and utilization and attrition sit versus your traditional on-site and offshore supply models?

Yeah, so it is a scalable model. A percentage of our workforce can fit into a pyramid on-site, and that's the learning. If we have to sustain and scale it further, we have to move work to a hub so that the work actually moves from a two-tier on-site offshore to an on-site near-shore offshore model. As you are aware, we are also setting up our own training facility, which will help us to sustain this momentum on a long run. The key is to the ability for us to retain and actually create a career path for them to continue with us on a long run. So that's broadly what it is. We do like eight to 12 weeks of training as we hire from schools. That can be optimized. We could further backward integrate it to the curriculums of the colleges we are hiring from. What we're doing with design schools is, again, a new track which we are learning on. So effectively, you know, I don't want to put a number on it, but what I can actually say that the myth that the pyramid has to be on-site, offshore, and we kind of think now you could have a pyramid inside it, which is only on site. And you could have school graduates who are closer, in close proximity to clients, especially when you have agile work coming your way. So that's what I can kind of tell you at a high level.

Thank you. Appreciate the call. Best of luck.

Thank you. The next question is from the line of Sandeep Shah from CGSE IMB. Please go ahead.

Yeah, thanks for the opportunity and congrats on a good set of numbers. Just if I look at last three quarters, YOY pricing increase on a blended basis, it has been positive and despite no change in the on-site, actually on-site has gone down. So is it, you believe, is it a mix led or Salim, you believe that this is with improving contribution of digital, this could be a new tailwind, which to some extent the Nalanjan has also not mentioned in one of his positive levers.

I think that Sorry, go ahead. You had something else? I think from our perspective, we see that as a very critical parameter. It's something that we think is a function of both of the factors that you mentioned, the mix and the capability. And it's something that we are working on actively. We think it's something in the medium term, immediately every quarter, but in the medium term, we think that can be something that can help us sustain and potentially even expand our margin outlook.

So to follow up in terms of order book, is it possible to break down the contribution from the standard deal as well as, Salil, in the order book, do you believe the recent increase in the global tariff war or any impending Brexit is leading to any kind of a scenario where you believe the order book traction may not may slow down in the coming quarters or you believe no the decision making has not getting impacted because of this and some comments on the pipeline if you can give some color on quantitative how q1q and yy in percentage term it has improved on the status we've not stated externally the decoupling of the order book but nilanjan shared with you

in terms of the quarterly revenue and the year-on-year revenue impact that we've talked about. In terms of Brexit, we've seen today that our business in the UK has remained reasonably in good shape. We don't see any particular change in our business mix today. We think once all of this Brexit discussions settle down, if anything, we will start to see some acceleration. But we don't see any change, or at least it's not something we've decoupled to make it something of a concern within our pipeline. The overall pipeline, we've not shared the stat externally. I stated to give some color earlier that from April 1 through now, we've seen a good growth in the large deals pipeline that we have. And that's part of the reason why we see some potentially increased traction in the coming quarters.

Okay. Okay. Thanks and all the best.

Thank you. The next question is from the line of Brian Burgin from Corbin. Please go ahead.

Hi, this is actually Jared Levine on for Brian. Can you talk about, I know you discussed prior the sequential drivers to the decline in margins, but can you talk about the year-on-year bucketing of the decline in operating margins, please?

I think the big ones that we continue to mention, which we said in our last call, I think first is the increase in the comp-related costs over the years, which is about 210-odd basis points, and this is a combination of investments we have made both in our sales force, and that's something which we ramped up. The other one is the impact of the higher subcon costs, which you've seen over the last year, progressing at about 50 bits. The offset of that has been the rupee benefit, about 40 basis points. We've got another benefit of the RPP, the rate question prior to that, which is about 50 basis points. And of course, the special quarter one impact, which is 80 basis points on the higher visa cost, because we did not have that many visas last year. So that's about 80 basis points. So that gives us the overall 320 bps. I think if you see the quarter on quarter, I think that's a more... a situation which is to understand where we came from, how we ended last year, and what is our go-forward plan in terms of improving our margins to hit our guidance of 21-23. Got it.

Thank you. And then just one more quick follow-up. In terms of the digital deals you're winning, are there any kind of digital projects in particular, like IoT or cloud deployment, particularly winning, you know, taking a great share of kind of the projects currently?

Sorry, I didn't follow that. What was the question about the digital?

Yeah, within digital, are there certain particular projects that are accounting for a great share of the wins, like is IoT or cloud deployment? What's kind of making up the mix of digital wins currently?

So to share with you, we have five broad areas within digital that we've outlined over the last year or so. Two of those areas we believe are going to start to become very large businesses, and we see a lot of traction in those areas. One of them is the area of cloud. This is both cloud services, which are through our strategic partnerships with AWS, Azure, and Google Cloud, or with some of the SaaS leaders such as Salesforce or ServiceNow. And another very strong area for us is the area of data and analytics. Having said that, we also have strength in the other areas, for example, in the digital design and experience, in the area of cybersecurity, and in the area of IoT. Each of these are seeing good traction. So there's no one that stands out, but the first two I mentioned, I think we start to see good scale benefits from that as well. Perfect. Thank you.

Thank you. The next question is from the line of Ravi Manan from Ilara Securities. Please go ahead.

Hi. Thank you. So, you know, if you just back out what we think would be a five-year kind of contribution from state, it looks like, you know, your PCV is about $1.6 billion or so. And then if you assume that there are no other kind of rebanging deals in there, surely that should help margins going forward. Would that be concurrent with your view?

So we won't decouple the large deals in the stats we've shared outside. We do see that a lot of what we're selling in the large deals that Praveen shared a stat earlier are net new. And in that sense, we feel good about how the margin profile of those deals will evolve.

I think Millington said in his comments earlier that you're looking at the margins improving gradually over this year. So that's why I asked this. Secondly, are you worried at all about the attrition being a little high this quarter? So year on year two, it's up slightly. So given your utilization is also inching up, where do you think you'll be comfortable with utilization given the current levels of attrition?

So attrition is something that is an area of extreme attention for us. We want to make sure that we take all the actions that we need to take to make sure this is within a level that is comfortable for our business going forward. Having said that, in Q1, as Praveen has shared, we've taken very strong measures And some of the attrition that's in here is what we call involuntary attrition. And some of the attrition in this stat is also for individuals who leave to go for graduate school or higher education. And that is somewhat seasonal. If you look at our attrition stat, it takes all of our businesses into account. It's not just the IT services attrition. And so if you look at the attrition we are focused on. We have a lot of measures we've put in place to start to address that. In addition to making sure that there is all the hygiene factors, we're also focused on really driving the opportunity set for our employees to a broader base and that improves the value connection that employees will have with us. And we think over the next in the medium term, over the next few quarters, that should start to see some impact.

One last question for me. You've spoken about how data will actually help you kind of broaden the approach in Europe. Given the uncertainties with Brexit, this is something that, do you see the mortgage market as still being attractive and are you seeing some interest and potentially some leads come through already?

Hi, this is Mohit Joshi here. I think I should point out that Stata is primarily focused on the Dutch market and the Northern European market, right? So not so much on the UK market. So to that extent, I don't see Brexit as having an impact on Stata itself. I think the second thing is we see a huge opportunity globally, not just in Europe, in the entire mortgage servicing market, but also the mortgage origination market. If you look at Europe, for instance, in Germany, 98% of all mortgages are currently being serviced by the banks themselves. We think that this number over time will move to what we see in the U.S. The majority of the servicing is done by third parties. Stata is the strongest and largest mortgage servicer in Europe. With Stata, we're also building a very significant front office that is origination capability and middle office that's underwriting capability. So we think it will be a powerful proposition for us within Europe and the capabilities that we have, even if it's not the platform, the capabilities are applicable globally. So that's my perspective on the opportunities that we have.

Great. Thank you.

Best of luck. Thank you. The next question is from the line of Parag Gupta from Morgan Stanley. Please go ahead.

Hi, good evening, and congratulations on a strong quarter. I had two questions. Firstly, Salil, maybe if you could just talk about the localization efforts in the U.S. You've done a commendable job in achieving your targets. I just wanted to understand, now that you've got to a reasonable level that you had initially set out for, do you think that that is good enough incrementally to start taking away some of the efforts involved from a subcontracting perspective, or do you think that the skill sets are still very different and the subcontractors would still be required to meet the demand that you've won over the last few quarters.

So the localization work has indeed been positive and we're delighted with the progress it's made. However, it's the first step of a very long journey and we have plans in the medium term on how we think our business model will evolve. In terms of subcons, Yeah, I think it's not so much and or, it's much more that both will exist. The skill sets that we see in the market today for which we're winning work, we have a tremendous capacity of those skill sets, but there's always some demand which comes in where the fulfillment needs to be done on a relatively quick basis. we have some operational levers that we're putting in place, including localization as one of them, that will help us to adjust the subcon usage. For example, looking at aging of subcontractors that can give us benefits again in the medium term into a margin.

Okay, got it. My other question was, you know, my understanding for your margin guidance of 21 to 23% for this year, was premised on the usual wage hike cycle that you've already set out on. But given that your attrition rates are running high, is there a risk to your margin guidance if you have to go out for out-of-turn wage hikes, promotions, or other incentives?

We are fully committed to our margin guidance. There will be a lot of business situations, plus and minus, but we will deliver our margin guidance. Great, thank you.

Thank you. The next question is from the line of Divya Nagarajan from UBS. Please go ahead.

Thanks. That's on the quarter and the order is doing it. Two questions from my end. If I strip out the stated contribution, banking seems to have been a little soft. How do you, you spoke about dealings being strong, but we saw that in the last quarter as well. From a reported basis, how should we see the banking revenue organically trend through the year? That's question number one. And two, what are the preconditions do you think that really get your acquisition down to a more manageable number according to you?

Sorry, I didn't catch the second question. This is Mohit. Let me address the first question on banking. I think that is not true that banking was soft even after excluding Stata. And obviously, we haven't broken up the Stata number for this quarter. But if you see the trend in Q1 of last year, year-on-year growth was 3%. this climbed to 8.3% in Q4, and even excluding starter, it continued to climb in Q1, and obviously with starter it was significant double digit growth, so that is not true that we had weakness in the quarter, even excluding starter. And could you repeat your second question?

First question, I was actually talking from a sequential basis. Yes, yes. No, even sequentially.

Even sequentially, while we haven't broken out the number, I can confirm that, you know, we had growth even excluding Stata.

And on the attrition, what are the preconditions under which you think your attrition will come under control? What do we need to see in terms of organizational metrics for you to come to? What does get you there to a more manageable number in your view?

See, historically, this is Praveen here, historically attrition, we have been comfortable with attrition in the range of 13 to 15%. These are normal, when these are during normal times when there are less disruptions. But today, we are living in an environment where there is a lot of disruption, technology disruptions happening. There is an increase in adoption of newer technology. There is a shortage of skills. So to that extent, we are seeing a higher degree of attrition given the shortage of talent. So as Salil had said earlier and as I had also said earlier in my press conference, there are many things we are doing to bring it down. Significant part of the attrition is at lower levels. So during the current comp review, we have hopefully addressed some of it. There are a lot of efforts we are doing in terms of increasing the engagement, increasing rewards, looking at high performers, creating more opportunities. Many initiatives are underway, and we are hopeful that over a period of time it should come down. But eventually, I mean, once things stabilize us and once the talent gap actually minimizes, then I think we'll probably go back to 13 to 15 percent. But in the short term, it'll be slightly on the higher side.

Sorry, a quick follow-up to that. With attrition being where it is and your first quarter margins outside the guidance range, could you give us a sense on which half of the guidance span you'd be more comfortable with at this point in time?

On the guidance, our guidance is 21 to 23. So at this stage, we are not further narrowing or segmenting that guidance.

Fair enough. Thanks and all the best for the rest of the year. Thank you.

The next question is from the line of Joseph Varese from Cantor Fizzling. Please go ahead.

Hi. My first question is just around some of the market share shifts. I know you talked about this a little bit at the beginning of the call, but maybe you could talk about any changes in your approach to What piece of your customers' businesses are leaving some of your competitors and going to you? And what you've strengthened to kind of strengthen your position in the end market?

Here it's more with respect to the traction. The comment I made there was with respect to the traction we're seeing for a digital business. To give you one example, with Microsoft, we've been named as the number one partner globally for this year. It's a shift where our capabilities on all of their product sets, so from Azure to Office 365 to all of the workplace toolkit, our approach to driving that into enterprise space is something that's gaining traction. So it's not so much taking away from another competitor. We think we're gaining market share in a space that's growing, but our growth is higher than what the overall growth for that space is. And we see similar type of traction in other elements of the Fiverr as the pentagon of our digital focus. For example, we see that with some other SaaS players. We see that in a lot of agile development work that we're doing on different toolkits. We see that even for the work we're doing for S4HANA. So there are different places where we start to see more and more growth through those investments or capabilities that we are building or have built over the past.

Got it. Okay. And then going back to financial services, we have seen a couple of different players have troubles with some of the banking budgets that they are dealing with at the big banks. And then we've seen a lot of news about what's going on in Europe and the banking system there, yet you haven't put up some really good numbers. So maybe you could talk about your positioning in financial services and comment a little bit about some of those shaky budgets that we've seen at those big banks.

I think, look, it's been a mixed bag. You've seen some weaknesses, obviously, in the capital market space, both on the buy side and the sell side. And you've seen some challenges, obviously, in Europe. For us, though, this quarter, you know, we continue to do quite well in Europe. But on the flip side, some other sides of the business, like the consumer banking space, the commercial banking space, corporate banking, mortgages, I think these businesses are seeing good traction. I think, as Salil mentioned, Look, for us, it's a mix, right? We're obviously seeing significant traction in the cloud space, in the entire digital transformation journey for banking. Obviously, the new centers that we're building out, like the studio in Shoreditch, are really helping us engage with banks from a branch transformation perspective, from a digital user experience perspective. On the data space, obviously, there's a huge focus on data monetization, data mining. Banks are starting to move to the cloud, and they're obviously is a significant revenue opportunity for us. So I'd say it's a mixed bag, right? You have certain areas of the sector where you have some weaknesses, actually including the life and health insurance business. But other sides of the business, the traditional consumer businesses, the traditional corporate banking and transaction businesses are seeing a lot of investment. Finally, from our perspective, I think there are two other pieces that are helping us from a growth and a mindshare perspective. The first is that we have a very powerful product business in Finical, and Finical is obviously gaining significant traction globally. We had a great quarter in terms of PCB bookings, expansion in North America, and expansion in the European markets. So that is one unique differentiator for us given the strength of the product and the renewed interest in digital engagement, the renewed interest in omni-channel hubs. And the second piece I'll point out is the new starter acquisition. And as I previously mentioned in response to another question, we're really building out sub-sectoral capability in a fairly significant way and specifically for the mortgages space. And mortgages really are the largest revenue line for our banking clients. The fact that we're building out significant mortgage front-to-back capability I think is another example of a unique differentiator.

Got it. And sorry, I'm going to try and sneak one more in because it builds on what you're saying. Are you taking market share in the U.S. from companies like FIS and Fiserv? How are you getting traction there? And with a lower margin profile, do you feel like you're more competitive in the pricing environment? Thanks.

So, look, I think, you know, if you look at the U.S. space, more broadly speaking, absolutely. I think growth in the U.S. in financial services has been very strong for us. Most of the time, FIs and us, we don't really compete in the same spaces. And so I don't think that they're a significant source of market share gain for us. Thank you.

Thank you. The next question is from the line of Ashish Chopra from Motilal Oswal Securities. Please go ahead.

Yeah, hi, thanks for the opportunity and congratulations on a good quarter. Firstly, maybe, Nilanjan, if you could take this, on the wage hikes impacts in this quarter, the impact was, I think, close to 60, which is what you said. And in the media comments, you also mentioned that there was deferral of wage hikes for certain, I think, bottom of the pyramid employees as well into the next quarter. but typically we've seen second quarters wage hike impact being lower, but is it expected to be on similar lines or different this time around?

So like Praveen had also said, I think we always have a staggered impact of wage hikes. Some portion of the wage hikes was deferred, but like I said, that's built into what we are seeing as our predictions for the rest of the year. So I don't think there's anything unusual or aberration in that.

Okay. And secondly, Praveen, as far as the net new share is concerned, I would be assuming that the starter would be entirely in the net new and the percentages would be different if we were to exclude the starter?

Yeah, starter would be entirely net new.

Okay. And just lastly from my side, I think towards the end of the quarter, you had announced a partnership with Pan American Life Insurance Group. sort of, I think, on the policy administration side. So just if you could throw some light on the nature of that deal. And we've seen your peers announce a lot of deals on the insurance platform of much larger sizes in nature.

So just wanted to know if this would actually compare in the similar space or would be... So look, I think, you know, we are seeing a huge interest and this is true for our peer group as well. As you look at the life insurance and annuity business, There is a significant amount of interest in using third-party processors, in making sure that the closed book, at least, is being done by a more efficient producer. In reality, what has historically been more of a processing business, now there's a lot of interest in also a better user experience, more of a front-end transformation piece. And we feel that this is an area which will see significant growth. We're fairly optimistic about the McCamish platform that we have. We've also modernized it very significantly and there are significant deals that we're seeing in the pipeline which will really allow us to build on the growth that is being seen in the marketplace.

Thanks for taking my questions and all the best.

Thank you. The next question is from the line of Sandeep Agarwal from Edelweiss. Please go ahead.

Hi, thanks for taking my question and congratulations to the management team for an excellent quarter. So a couple of questions, Salil and Praveen from my side. First on the digital side, we are growing at 40-42% and our proportion is continuously rising and I understand that the business has changed and it is not fair to chip apart the growth rates and understand but just wanted a little bit of clarification on this side. The way we are growing and the way our order book clearly is tilted towards the newer technologies are we going to see a phase where the leakage from the non-digital piece will come to a halt and that will lead to a much higher growth than what we are seeing structurally going forward, although size obviously is a concern. And I'm not asking for a specific guidance, but I'm just trying to understand whether the growing proportion of digital will lead to a structurally better growth going forward. And second question is, When you meet your client, what is your sense how much they have penetrated in terms of spending on the digital? Is it a very, very early stage or it is a little bit in the middle phase? How do you foresee that? Another question which I had was on the attrition side. We have generally seen that when you have two, three, four quarters, good quarters, then the attrition rate just should come off. I have seen that in the last four or five quarters tremendous amount of effort has been made both on hike side and the promotion side and also to some extent I think the stock option side. And still we are not seeing any kind of control on the attrition number. In fact, they are worsening. And so my concern is that is there a substantial portion of involuntary piece in this or you think the voluntary piece still is high? And I'm not asking specifically for this quarter because if this continues then our dependence on external resource will not come down and subcon cost may remain elevated which may not allow us to beat top end of our margin anytime soon. Thank you.

Okay. So there are several points that you shared starting with the structural piece. We have a view on The digital addressable market and the growth rate, we'll update it in the coming quarters when we have another session for analyst day. If you recall, we shared it's about $160 billion market growing at 15%. So that's the piece that we are investing in and we see some traction there. On what you talk about and what we've defined as cost services, we've not declared the growth rate, but I think the market view is available if you look at what's with third-party agencies who have a lot of data like Gartner and others. And it's fair to say that that market has a more challenged growth environment today. In that context is how we've developed a strategic approach, and that's what we're executing to. We have a view on where this might go medium term, but we've not actually shared any of that externally. We think the way that we are driving this, for example, the 12.4% growth in Q1, that's a good indication of what are the sorts of things possible when many things come together in a fortuitous way for us in a quarter. In terms of the attrition, there is we've talked about operational efficiency and we have now more and more intense focus on involuntary attrition as well. There's been some element of what is termed a seasonal because of higher education. And when you start to strip that out, we see the attrition numbers, while not improving, they're stable. And so we still have work to do to make sure they start to trend down.

Thanks. That's all from my side.

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for their closing comments. Over to you.

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

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