Infosys Limited American Depositary Shares

Ladies and gentlemen, good day and welcome to the Infosys 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 touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindru. Thank you and over to you, sir.

Thanks, Karuna. Hello, everyone, and welcome to InfoBiz Earnings Call to discuss Q2 FY20 earnings release. This is Sandeep from the Investor Research Innovation Team in Bangalore. Joining us today on this call is UNMD Mr. Salil Tariq, CEO of Mr. Praveen Rao, CEO for Mr. Milindan Roy, along with other members of the senior management team. We'll start this call with some remarks on the performance of the company for Q2 by Mr. Followed by comments from Yolanda and Praveen. Subsequent to this, we'll open up the call for questions. Please note that anything which we say with justice or output for the future is a forward-looking statement, which must be read in conjunction with the risk 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 those on the call, and thank you for joining us today. Infosys has delivered another strong quarter. I'm happy with our performance in the second quarter, which was robust across multiple dimensions. One, double-digit growth for the fourth consecutive quarter. Two, continued strong growth in digital. Three, expansion in operating margin. Four, improvement in operational parameters, especially in utilization and on-site offshore mix. five large deal signings, and six reduction in attrition. We grew 11.4% in Q2 year-on-year in constant currency, or 3.3% quarter-on-quarter. Six of the seven business segments in both US and Europe grew double digits constant currency year-on-year. Praveen will provide more color on different industry verticals in just a few minutes. Digital revenues in Q2 were 1.23 billion Constituting 38.3% of overall revenues and witnessed over 38% growth year-on-year in constant currency. Opening margin in Q2 saw a healthy improvement of 21.7% compared to 20.5% in Q1. Opening margin improvement was despite compensation increases provided to employees and was driven by significant improvement in utilization, on-site mix, employee pyramid improvement, and tight overall cost management. Nilanjan will elaborate on this during his remarks. Largely signing in Q2 was extremely strong at 2.8 billion. While a large part of this was renewals, these renewals certify a position significantly in our existing client base. Large TCV is up by 75% in H120 compared to H190. I'm also pleased with the reduction in attrition, which declined to 19.4%, a decline of 2 percentage points compared to Q1. Within this attrition, voluntary attrition is lower at below 18%. With our clients continuing to leverage digital drive growth, there are three areas within digital transformation that I want to highlight with examples of our work with clients. These are experience, data analytics, and cloud. A global confectionery company, we created digital asset management platform that helped them deliver a superior, personalized, and intuitive experience for the end user. Through our digital studios, we developed this platform and ensured faster campaigns and product launches, and could also efficiently manage multiple brands and their associated digital assets. For a global consumer products company, we helped them create a data architecture to support the sales team forecast, future orders from retail outlets, the model cluster stores, and loans for better performing stores to suggest assortments for other stores. Such a model minimized subjectivity and brought data science to aid sales teams in all their recommendations. For a material handling company in the U.S., We're implementing a cloud-based IoT telematics product to power transformation. We're drawing upon our experience and presence in the connected vehicle space to help them manage data and draw relevant insights from it to provide better service and after-sales experience for their customers. These examples, among others, and our strong performance in the quarter demonstrate our increasing relevance to our client agenda. We continue to make good progress on our localization approach as we strengthen this differentiated model to deliver digital services. During the quarter, we launched the Arizona Digital Center to accelerate the pace of innovation for U.S. companies. We also launched a digital cybersecurity center in Bucharest in Romania this past quarter. I'm also delighted to share with you a recognition that each one of us influencers is extremely proud of. We were rated number three on the Forbes list of the world's best regarded companies for 2019. In closing, I would like to share that we are updating our guidance. Our revenue growth guidance moves from 8.5% to 10% to 9% to 10% for the full year on a constant currency basis. We reconfirm our operating margin guidance for 21% to 23% for the full year. With that, let me hand it over to Salil. Thank you, Salil. Hello, everyone. We had another quarter of double-digit year-on-year growth in constant currency. Growth was broad-based with six business segments, financial services, communication, energy utility resources and services, manufacturing, high-tech and life sciences, all clocking double-digit year-on-year growth in constant currency. Similarly, both North America and Europe grew double-digit year-on-year in constant currency. Utilization, excluding trainees during the quarter, improved by 180 basis points, sequentially to 84.9%. On-site effort mix reduced further to 28.2%. The second leg of compensation increase was affected in the last quarter. With this, we have covered the entire employee base except the title holders. We'll be covered in quarter three. I'm also pleased with the reduction in attrition, which declined to 19.4%, a decline of 2% compared to quarter one. Within this, voluntary attrition is even lower at below 18%. High-performer attrition also continues to be well below company average. The decline in attrition is due to multiple initiatives spanning across more active employee engagement, performance-based differentiation, promotion, and growth opportunities for employees. The client matrix remains strong. We added 96 new clients during the quarter, while number of 15 million clients increased by two to 61. We won 13 large deals with a TCV of $2.85 billion, which is the highest ever. Four deals each were in financial services and retail, two deals in communication, and one deal each in energy utility resources and services, high-tech and life sciences. Geography-wise, six were from America, five were from Europe, and two from the rest of the world. While a large part of this was annuals, these large annuals solidified our position significantly in existing clients large dcv is up by over 75 percent in h120 compared to h119 let me come to the business segments financial services vertical continued its growth momentum aided by recent stator acquisition we expect performance in the vertical to be affected in the next couple of quarters driven by seasonality luggishness in capital markets and european banking space The recent production in interest rates in major geographies can have an impact on client revenues. It may also impact their IT spending. Our strong positioning across the digital and core services spectrum along with diversified portfolio is helping us mitigate risk and grow this business. I'm happy to share that Infosys was rated number one player in the HSS Top 10 DFS sector service providers 2019. The ranking showcases our maturity across banking, capital markets, risk and compliance, and across all the effects of our functions. Retail segment performance was muted as clients turned cautious due to increase in perceived risk stemming from trade wars and geopolitical developments. While business volatility is causing division delays in some of our key clients in the sector, we also see this as a clear opportunity in the medium to long term to increase our client relevance. We expect to witness uptick in consumer experience, digital marketing, insights and investments in platform and remain cautiously optimistic. Even recent deal wins and steady order pipeline. Coming to manufacturing, there is stress in the vertical, especially in Europe. Impact of trade wars and weakening automobile segment is affecting supply chain. Plans are looking to leverage new technologies to bring the next wave of efficiencies in the supply chain. and manufacturing operations through digital platforms, smart manufacturing, and IoT. Despite the structural challenge, we have healthy pipeline of deals as well as new account openings both in Europe and America. Communication segment remains strong for us due to large deal wins. The traditional business models of communication players are being talent by digital native and OTT players. These customers are keen to traverse the digital cost take-out journey in order to stay relevant in the market. We are seeing increasing pipeline for deals with a strong share of large deals. The momentum in energy, utilities, resources and services vertical improved further on the back of continued momentum in top accounts and new account openings. The growth is being led by utilities in Europe and energy, with resources seeing challenges due to M&A and diversification. The digital portfolio continues to grow strong and is now over 38% of the total revenue, up from 31% a year ago. In our agile digital business, we see strong traction for the work we are doing in the cloud area, in data and analytics, in IoT, and in the area of experience. User experience, client experience, and employee experience. In the last quarter, Insurace was ranked as leader in six ratings in the area of modernization, IoT, experience and design, AI services, cloud services, and SAP services, which recognizes our digital capabilities in the market. At the end, I'm very happy to announce that Infosys won the prestigious United Nations Global Climate Action Award in the Climate Neutral Now category. Infosys is the only corporate from India to earn the recognition for its efforts to combat climate change. With that, I will hand over to Niranjan. Thanks, Savin. Good evening and welcome to our quarter two SI20 earnings call. Revenues in Q2 were 3.21 billion, growing by 11.4% year-on-year in constant currency terms. This was our fourth consecutive quarter of double-digit growth. Sequential revenue growth in constant currency was 3.3%, including 90 BIPs incremental contribution from Stata. Operating margins in Q2 were 21.7% compared to 20.5% in Q1. During the quarter, the benefit of rupee depreciation was offset by cross-currency impact and revenue hedges. Higher utilization, lower on-site mix, and other cost optimization measures helped operating margins by 110 basis points, while lower visa and travel costs helped boost the margins by 110 basis points. These were partially offset by compensation increases, which impacted margins by 70 basis points, and increases in donation and other costs of 30 basis points, leading to an overall 1.2% increase in operating margins compared to quarter one. DSO for the quarter decreased by two days to 66 days to type receivables nine months. Operating cash flow in Q2 was $522 million, which is a year-on-year growth of 19.2%. Free cash flow in Q2 was $397 million, which is a year-on-year growth of 10.3%. For H-120, operating cash conversion to net profits was 103% compared to 96% in H-119. Cash and cash equivalents declined during the quarter due to the completion of buyback and is still at a healthy level of 3.35 billion. Yield on other income was 7.9%, marginally lower than the 8.1% in Q1. Effective tax rate for H-120 was 36.5%, versus 27.3% in H1-19. We completed the capital allocation program announced in April 2018. The planned buyback of Rs. 8,260 crores was completed on 26 August. Completion of buyback and higher shareholder payouts have led to the increase in ROE from 23.1% in Q2-19 to 25.8% in the current quarter. Driven by our performance in H1, we have increased the revenue guidance for S5-20 to 9% to 10% in constant currency terms. Due to operating margin performance, puts our H1 operating margin at 21.1% within our guidance band. Subject to a stable currency environment, we remain confident of the operating margin band guidance for FI20 at 21% to 23%. We continue to deploy various measures to enhance operational efficiency, like rationalizing the pyramid, on-site offshore mix, automation, and other overhead efficiency leaders. Consistent with the new capital allocation policy of paying approximately up to 85% of the free cash flow cumulatively over a five-year period to investors, the Board has declared an interim dividend of Rs. 8, which is a 14% growth over the interim dividend of S519. With that, we open up the floor for questions.