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, you may signal for an operator by pressing star and zero on your touch-tone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindra. Thank you and over to you, sir.

Thanks, Karuna. Hello, everyone, and welcome to Infosys Earnings Calls to discuss QCFI 20 earnings release. Happy New Year to everyone on the call. This is Sandeep from the Investor Relations Team in Bangalore. Joining us today on this call is Chairman Mr. Nandan Militani, CEO and MD Mr. Salil Parekh, CEO Mr. Praveen Rao, CEO Mr. Nilanjan Roy, along with other members of the Senior Management Team. This call will be for 90 minutes and will be divided into two parts. For the first 30 minutes, our chairman, Mr. Nandan Milikarni, will talk about and take questions on the whistleblower matters and the recently concluded investigation. That will be followed by the regular earnings call format in the next 60 minutes, with opening comments by Salil Praveen and Nandan, followed by Q&A. Please note that anything which we say which refers to our outlook for the future is a forward-looking statement, which must be written in conjunction with the risk that the company faces. A full statement and explanation of these risks is available in our filing with the SEC, which can be found on www. I'd now like to pass it on to Nandan.

Thank you, Sandeep, and I'd like to welcome all of you to this call. I'm pleased to say that the Infosys Audit Committee did not find any evidence of financial impropriety or executive misconduct, and there is absolutely no change in previously related financial statements. So everything has come out clean. We have had a very thorough investigation done. This was done by independent legal counsel Shardul Amarchan Mangaldas, along with Price Waterhouse Coopers. We also had Ernst & Young as our internal auditors. And as you know, our certifying auditors are Deloitte. So this has gone through the scrutiny of all the various groups. And there is absolutely no issues of restatement or anything of that type. The audit committee has taken this very seriously and they've done a very thorough investigation. Just to give you a sense of the scale of the investigation, 128 interviews with 77 people, 46 custodians for data were nominated and their review was over 210,000 documents with over 8 terabytes of data which were processed. This investigation began when they appointed Shardul Amarchan on October 21st and concluded today. And so it's been a very intense several weeks, which have occupied investigators as well as our people, our board members, our management team, and also our general counsel in the field. Now, the investigation review was done for the period from Jan 1st, 2018 to September 30th, 2019, and the investigative team was given complete, unrestricted access to every person and every piece of information that was there, and it was ensured that the company, its director, and its employees cooperated fully and extensively in this investigation. Now, apart from the fact that we had a very thorough investigation, we have also made sure that all the key findings of the investigation are put out in the public domain. So this is not some one statement thing. This is a detailed thing. We have taken each of the allegations, be it on the business side or be it about the CEO, And on a point-by-point basis, the allegations have been answered and we have given the answers. And as you will find, I would say almost all of it, it's very clear that the allegations are unsubstantiated. There are a couple regarding one large deal where there was a question whether the method of auditing, a method of whether to use a percentage of completion method for cost or to use a straight line method for revenue recognition and for that. Now the company as a policy has been using both the SLM method and the POC method and a very large number of projects are in SLM method. However, the company from time to time based upon the nature of the contract has chosen to operate on the POC method and POC method was selected for this Both these methods are in line with both accounting standards as well as the policy of the company. And therefore we are quite comfortable that the company's actions on this have been correct. The other matter which is also related to the same contract is some service credit. And there has been a point made by the investigators about that. And here again, we have reviewed the investigation and this is about whether something has to be reversed or non-accounted or whatever. And it is very clear that it is neither qualitatively nor quantitatively material to the reported revenues of operating guidance because the cumulative effect of this is in the range of 0.02 to 0.03%. It's a very, very minuscule amount just a couple of million dollars compared to the multi-billion dollar revenue that it has. And therefore, this is not relevant and would have had no impact on any of our revenue, margin, all this stuff. So these are the only two things which are there and the audit committee has taken a view on both. So overall, we have, you know, everything else is unsubstantiated. There were also a number of allegations made about the CEO, some of which were bordering on the comics. But anyway, we have taken them one by one and shown clearly that there is no – all of them have been addressed. And we are very happy that the CEO has come out of this investigation with flying colors. And I am very grateful to Salil because Salil and his – team have had to really face a lot of questions, and they are thorough professionals, whether it's Salil, whether it's our CFO, Nilanjan Roy, or all the outstanding members of our finance department, Jayesh, Deepak Balla, Sachin Zute, Amrita Srikant, Sandeep Mahendru, and others. All of them are outstanding professionals. And they've had to deal with both closing the books as well as closing this investigation. And they have done that brilliantly with high integrity. And therefore, I think we are very, very pleased. The board, the chair, the audit committee, everybody is pleased that our management team has come out so well. And the board continues to have the fullest confidence in Salil and his management team. And we believe that this episode, this distraction, has actually made us stronger, more committed to our goals, brought us all together, and we are now very, very confident that having put this distraction to rest, we can get on with our business of running a great company. So I will stop at this point, and I'll be happy to take questions. And I will take questions, and after I finish my session, I'll hand over to Sandeep. after which we'll get down to the real purpose of this call, which is to discuss the business performance of Infosys.

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 their touchtone 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 Moshe Khatri from Wedbush Securities. Please go ahead.

Hey, thanks. Congratulations on concluding this internal investigation. Two things here. Will there be any changes to the future use of POC accounting down the road? That's number one. And number two, any color on the ongoing SEC investigation in terms of timeline and what to expect? Thanks a lot.

Yeah, thanks, Moshe. It's good to hear your voice. First of all, the company's policy has been to have both these methods, SLM and POC. It is true that the bulk of the contracts are done with SLM, but from time to time, given the unique nature of some contracts, we do use the POC method. Both are part of the policy. I'm not an expert and maybe I'm getting into dangerous waters, but I don't think there's going to be any change in this policy. On the second point, you're absolutely right. We are engaging with the SEC. The SEC, we are giving them full cooperation. Over the last several weeks, we have been giving them an update from time to time, and we will continue to engage with the SEC and take this to its logical conclusion. In terms of the timeframe, as you know, we cannot say what the timeframe will be that the HCC will see, but we are there ready and waiting and able to engage on any issue and give them the fullest cooperation.

Thanks. Again, congrats.

Thanks, Moshe.

The next question is from the line of Rod Moshe from Deep Dive Equity Research. Please go ahead.

Yes, will there be any changes in your employee base as a result of this investigation? or all the employees that were involved remaining with the company at this point?

Now, first of all, that is an assumption which I would like to correct. There is no evidence that this whistleblower was done by employees. Saying that it is employees does not mean it is by employees. Please understand that. And it's entirely equally likely that this was done from outside. And it is nothing to do with employees because as I said, we have complete confidence and in faith and in the integrity of our finance team and leadership. So there is absolutely no change. We have a very strong team. They continue to be there. And we will continue to build the company as we always were. As you know, under the whistleblower protection policy, we're not supposed to go around looking for who the whistleblower is. And as I also said, this could be inside or outside. We think our view would tend towards outside. And therefore, I would not get worried about this issue at all. And everybody continues and does their job.

That's a very helpful clarification. One quick follow-up. I mean, as we've moved into the digital era, the nature of deal structures have modified to some extent. Are you making any changes in your approach to structuring deals or your process of approving deals? And did this investigation shed any light on modifications to any processes that might be useful going forward?

No, I think, in fact, if anything, this very detailed investigation which examined 210,000 pieces of data and which, you know, had eight terabytes and all that, has in fact brought out the robustness and detail approach that we have, the way we approach revenue recognition, the way we approach contracts. We, of course, we are always willing to learn and improve and once we get all the details from as you know we have three auditors and one law firm here so we need to really assemble from all that but once we get all the details if there is a scope for process improvement we will do that that is the nature of how we do things we keep improving processes there is nothing specific and in fact after having this extensive investigation the fact it boils down to some couple of things itself shows the strength of the company

Great, thank you.

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

Hi, thank you. Just one for me on this section. Any material costs associated with the actual review process that are worth identifying here? So any financial impact from the actual process that you went through, just to give us a sense of any related margin direct?

No, I'm sorry. Financial impact from what?

As far as the process and the cost that the company had to, yeah.

Of the investigation itself?

Yes.

I think the cost has already been factored in our Q3.

Okay, I just was curious if it was a material number that impacted the operating performance.

No, no, no, not at all. I think while it is expensive to hire lawyers, I think on a $12 billion revenue, we can manage.

Brian Burgin, are you done with your question?

Yes, thank you.

Thank you. The next question is from the line of Sudhir Guntapalli from Motilal Oswal. Please go ahead.

Yeah. Good evening, sir. Thanks for giving me this opportunity. Going forward, is there a mechanism that we identified to ensure that genuine stakeholders of the company, be it shareholders or employees or clients or even the management team, are insulated from any more of such potentially frivolous complaints?

Boss, now, if somebody files a whistleblower complaint, And if that person chooses to also release it to the media before the company has an opportunity to investigate and come to a conclusion, there is nothing that the company can do. We are committed to higher standards of governance. We will deal with whistleblowers as they come. And we are confident that we run business in a clean and ethical manner. And we'll continue to do that.

Sure, sir. And one more question. When we talk to the clients, are there any references to this incident or any clients have expressed any concerns related to this?

When this incident happened, we did reach out to clients. We explained to them that we were doing an investigation and our clients, many of whom have been working for more than two decades, were very understanding and And now that the reports have come out and there's a clean sheet for the company and for its leadership, we will make sure that all our customers are aware of this development so that if they have any niggling concerns, they will be put to rest.

Sure, sir. Thanks. That's it from us.

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

Hi, thanks for giving me the opportunity to ask a question and congratulations on giving the findings of Audit Committee, very favorable. So, Nandan, I have just one question and I know that you have already answered it in a different way, but I would like to know the immense pain which, you know, everyone has to go through when this kind of frivolous and intentional motivated complaints are made and things are made and there is an immense suffering for all the stakeholders. Obviously, the company suffers most. They have to give so much of time to this investigation and do their job. And I understand that, you know, you follow the best policies on Visual Blur, so you will continue to do that. But the challenge is that, you know, if this thing keeps on coming, it definitely impacts indirectly the CEO, the CFO, everyone who is on the job. So, you know, it impacts our business in a very substantial way. So is there any way that, you know, at least a very limited ones actually can do this kind of disruption and most of them there is a process which can filter out whether there is any sanctity to that or anything which could be done to, you know, at least stop malafide intentions of this kind of complaints.

Well, you are absolutely right in saying that when you have such a complaint, it creates a distraction in many ways. Number one, the sheer amount of time. Remember, I talked about the number of interviews and all that. So the sheer amount of time that our leadership team and our finance team has to spend on this is a distraction from their work. Very often, they have to stay in one place to do the interview, which means they can't travel to meet customers. So that's the second issue. Third, absolutely, when you take upstanding professionals and make wild allegations about them, it can be... It can affect the morale and that's certainly something which we have to be cautious about. Some of our customers may have questions and so on and so forth. So I agree with you on that. But I think it's also the responsibility of you guys and the media because when there is a completely anonymous complaint which is deliberately leaked, before the company has been given the opportunity to process and have an investigation, then you guys also should think, part of the problem here is that the reaction of the media and investors also on very spacious stuff. I think everybody has a role to play to make sure that this kind of weaponizing does not happen.

So, Nandan, if I can add one point only, just we have same view what you have from day one. Like we have always said that, you know, nothing wrong can happen in forces, at least on corporate governance and those kind of things. We always said that the only challenge is that, you know, when this kind of thing happens also, there is a lot of pain from the perspective that, you know, the long-term value of the stock means I understand that, you know, these things as you don't take short-term view and all that. But even in the long-term view, if you take the stock, there are many parameters which are there when anyone evaluates the stocks. those get disturbed very substantially and it impacts the value of the company. So that's the reason I'm asking that, you know, there has to be some options or you can at least think of some process by which these things could be from the company side also could be limited or, you know, restricted to some extent that, you know, you give some kind of clarification immediately. I'm not saying you should do this, but I'm just saying if anything could be... Boss, boss, boss, boss.

Please, please understand. If what are the incentives? Now, suppose we have a policy. I'm just saying hypothetically. This is not hypothetically. Suppose we have a policy that every time we get a whistleblower, we issue a press release or something, there will be no end to it. We'll have 10 whistleblowers a day. And no matter how wild the allegations and no matter how unsubstantiated they are, we'll have to be issuing stock exchange notices. I mean, I don't think any company in the world can run like that. So you have to accept that when something is anonymous, unsubstantiated, and not backed by evidence, the least you can do is give the management and the board the space to investigate and get back. Now, if you don't have that, then what can I say? I mean, what do you want me to do?

Absolutely. Thank you. But I agree with you.

No, I agree with you that, you know, obviously, if something like this is there, then it creates an overhang and all. I appreciate that. But, you know, our goal is to minimize this and hopefully reach a point when we will not have any more of these things.

Yeah, absolutely. This detailed report which you have published, I think in the long term, now people will not take this kind of anonymous complaint at all seriously. That is what I hope.

I mean, your hope is, we appreciate your hope and we are with you, man.

Thank you. Thank you, Nandan.

Thank you. The next question is from the line of James Friedman from Susquehanna. Please go ahead.

You know, most of my questions have been answered. I'll go back into the operating. But I do want to ask, Nanan, from your prepared remarks, do you have any sense of what the motivation of the whistleblower might have been? Was it nefarious in nature? And are there any repercussions for them?

Well, you know, we have to be very, very careful on these things because, You know, especially under U.S. law, the whistleblower is well protected and rightly so because you need strong whistleblower protection to ensure that genuine malpractices and fraud come out. And I appreciate that. But what happens often is that because of those strong protections, we are also not in a position to, you know, speculate on who could it be and so on. So we are also bound by what we can do. But we will, I think, you know, once this whole thing is settled down, we will look at the law again and see what is possible. But I think at this point, we are not going to speculate on who it could be.

Okay, thank you.

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

Yeah, just one question. As a method of investigation, whether the current investigators who carried out the report, whether they had a right to ask for those evidence like video and the email which has been claimed by the whistleblower letter has been just given to the regulator from the regulator or they have not been allowed to do that as per the regulatory hurdles?

No, look, please understand that in this whole episode, the claim on evidence is only in the letter sent to the Whistleblower Protection Office of the SEC. And that letter claims that there is a pen drive, one with emails and one with some phone calls. Now, we have not received that. We said that also in one of the statements we issued late October, early November. And as you know, the regulator also says If you ask the regulator about something, they say we can neither confirm nor deny the existence of this. So you don't get any visibility from the regulators. We don't have the information, nor has the whistleblower thought it fit to provide this information to the investigators. So as far as we are concerned, we don't know if such evidence exists and we'll be happy to see it and look forward to the whistleblower sending us this information. Okay. Thank you. All the best.

Thank you. The next question is from the line of Keith Bassman from Bank of Montreal. Please go ahead.

For this section, my questions have been answered. Thank you.

Thank you. The next question is from the line of Joseph Frazee from Kent Hall. Please go ahead.

Hi. Most of the questions have been answered, but I just had kind of two quick ones. It sounded in your earlier remarks like you thought it might or the whistleblower might have come from outside the company. I'm just wondering why you thought that. And then just as importantly, if the person or entity continues, you know, how do you expect to handle that and or copycats?

Thanks.

Well, first of all, you know, I mean, as I said, beyond the point we can't really investigate where it's coming from, We are saying that our finance leadership team is innocent. They have the highest integrity. They have not done this. That much I can say categorically. Now, I mean, and therefore, we would tend to believe that perhaps there is an external hand in this, but again, you know, because of the fact that we are constrained from actually getting into it, I can't comment more than that. Now, if there are company wants to do some copycat thing, we'll have to deal with it. You know, I think we are fully prepared. We have nothing to hide. We run a company with high ethical standards. We run a robust balance sheet. Here, in this whole situation, I mean, just think about it. Three months of investigation, 210,000 emails, whatever X terabyte, petabyte of data, and all that we have is something which is some $2 million write-off. So, I mean, so clearly shows that this company has very, very robust processes and checks and balances. So we're completely confident about the way we run our business. And I'm sure that once that confidence is there, then, you know, even if somebody tries something, then, you know, it won't have any credibility.

Yeah, no, I guess my concern was like if it was a short seller or somebody else who's trying to create volatility in the stock, if they kept doing it, you know, what, if you had any plans in place to handle future, you know, accusations. But, you know, that's why I asked about the copycats.

Yeah, I mean, I can't help you there.

Thank you.

Thank you. The next question is from the line of Shashi Bhushan from Access Capital. Please go ahead.

Yeah, thanks for taking my question, and congratulations on favorable verdict from the investigation that helped resolving most of the queries raised by Mr. Blower, sir. Do you think this would be sufficient to take care of most of SEC queries? I'm sorry? Do you think the internal audit that we have run would be sufficient to take care of most of the SEC queries that would come?

Look, boss, I can't comment on how the SEC will view this. All I can say is that we have done a very thorough analysis and rigorous investigation. The investigating legal firm and the investigating auditing firm has been given complete access to every email, every conversation, whatever it is. And they have been encouraged to interview. In fact, many people have had multiple interviews so that they get to the bottom of all this. And over the last several weeks, our legal counsel has been updating SEC about the developments. So I think now it's really for that conversation to happen. I'm really sorry I cannot read their minds, so I can't say what it is, but we are comfortable that we have a very thorough, extensive, and comprehensive investigation, and we hope that will give us in good stead when we engage with them.

So one on the business side, you know, our aggressive sales pitch has helped regain some market share, but there were deals like asset and employee takeover where Infosys was not trading earlier and that has been a big contributor of growth in FY19 and 20. So do we see any change in our stance for the same after this episode?

I think this is really a business question and I will request Salil to answer it maybe in your session. But fundamentally whatever strategy that is being followed whether it is large deals, employee takeover, all the strategies followed by management is completely endorsed by the company. It is the official strategy of the company presented to the board, and the board fully backs these decisions.

Very helpful, sir. Thanks a lot.

Thank you. Ladies and gentlemen, now I hand the conference back to Mr. Sandeep Mahendru for further proceedings. Over to you, sir.

Thanks, Nandan, for providing your comments on this aspect. Thanks for your time. We now move to the second part of this call, which is on the recently concluded quarter and the commentary on business. I would request Salil to give his opening remarks, subsequent to which Karin and Nandan will talk before we open up for Q&A.

Thank you, Nandan. Thank you, Sandeep. Good morning and good evening to everyone on the call. This is Sandeep. Before I share with you the update for our strong quarterly results, I'd like to share a few remarks. I would like to thank the board and London for their trust in the way they are driving the business and for the conclusion of the investigation, which showed no financial impropriety or misconduct. I would like to thank all the employees of Infosys and our leadership team for being steadfast in their support of me and the work I'm doing here. I would like to thank my family and friends for their guidance in the last few months. They have been a little strength for me. Going forward, my objective remains to continue working with commitment and integrity and with inclusiveness. I look forward to working with our clients and helping them transform their business with a new digital future and in that process, build the emphasis for the next decade. With that, let me Share our results update. I have a few comments to make there. As I shared earlier, a very strong and successful quarter. We delivered another quarter of all-around performance in Q3. Revenue growth was strong in Q3. Digital revenue share crossed 40%. Operating margins expanded for the second consecutive quarter. Cash conversion was very strong. Deals signing were healthy. And attrition reduced during the quarter. We grew 9.5% year-on-year in Q3 in constant currency terms. Growth in the first nine months of this financial year is comfortably in double digits at 11.1% over the same period for the entire year. In Q3, both the U.S. and Europe doubled their fees on double-digit growth, and most of our business segments witnessed another quarter of double-digit growth in constant currency terms. Our digital revenue grew at 40% in Q3 in constant currency terms. Digital revenues crossed $5 billion annual run rate and were at $1.32 billion in Q3, constituting 40.6% of overall revenues. As we shared with you at the recent analyst meeting, our digital investments across the five pillars is deepening our engagement with clients, reflecting in strong growth in this area. We have a healthy portfolio of large deals signing in Q3 at $1.8 billion. The 56% increase in large DCV in the first nine months of this year over the same period in the prior year is a reflection of our client centricity and the benefits of various investments we've made over the past two years. This is also visible in the growth in client metrics, especially with the $100 million client count increasing by 5% to 28%, and a $200 million client count doubling in the last one year. Operating margins in Q3 expanded to 21.9% compared to 21.7% last quarter. Valenjin will elaborate on the margin with intakes and cash generation during his remarks. I'm pleased with another quarter of reduction in nutrition which declined to 17.6%, a decline of almost two percentage points compared to Q2. Within this, voluntary attrition is lowest at 15.6%. Our digital capability, along with our large deal engine, continues to be the growth driver for us. Let me share with you a few examples. A leading European telecommunications provider selected us as their preferred IT partner, to deliver several digital and data initiatives for the next five years. We've been selected by the Australian Federal Government Services Australia to digitally transform the entitlement calculation engine for the nation's welfare system. The program will replace a significant portion of a 30-year-old platform, modernizing the way Services Australia calculates entitlement for Australians needing government support. The European Chemical Company has obtained our services to digitally transform 19 of their data centers spread across six countries. Such large-scale transformation to modernize existing technology investments and make them digital for the future are increasingly becoming a priority for our clients, and we are deeply invested in serving their expanding needs. Driven by double-digit growth in the first nine months, We are updating our financial year 2020 revenue guidance. Our revenue growth guidance moves from 9% to 10% to 10% to 10.5% on a constant currency basis. We are retaining our operating margin guidance at 21% to 23% for the financial year 2020. With that, let me hand it over to Kavita. Thank you, Salit. Hello, everyone. Wish you all a very happy new year. Our growth momentum continues despite the seasonal weakness with year-on-year growth of 9.5% and sequential growth of 1% in constant currency terms. Four of our major business segments block double-digit year-on-year growth in constant currency. Both North America and Europe also do double-digit year-on-year in constant currency. Utilization excluding Chinese declined during the quarter by 50 bps to 84.4%, reflecting seasonal weakness. On-site effort mix reduced to 27.7%, a further decline of 50 bps compared to last quarter. Our effort system attrition continued to show results. On a standalone basis, Attrition reduced by another 1.8% sequentially to 17.6%. Voluntary attrition was even lower at 15.6%. Enhanced focus on increasing employee engagement, performance and skills-driven value proposition, and improving diversity will continue. Client metrics continue to be strong. We added 84 new clients during the quarter. Number of 100 million clients increased to 28. We won 14 large deals with a combined PCV of 1.8 billion. Out of this share of net new deals was 32%. Seven deals were in financial services, two deals each in communication and manufacturing vertical, and one deal each in retail, energy utility, resources and services, and other segments. Region-wide, eight were from America, five were from Europe, and one from the rest of the world. Simulative large deal wins in nine months stand at $7.4 billion, which is 56% higher than nine months of the last fiscal. Moving to the business segment, while the headwinds persist in financial services, there has been sequential growth in North America, aided by stable customer spend and new deal wins. We saw significant impact of Hello in Europe and rest of the world regions. The commercial and corporate bank, consumer, cost and payments, wealth management and custody, multi-gate portfolios of our business are seeing good traction across geographies. We expect pressure to continue in the near term, driven by market volatility and pressure in spending in the business segment. Retail segment performance remained muted with continued cautious spans of plans. There is acceleration in spending towards digital IT simplification and modernization, which are priorities for plans. We are proactively investing in creating assets to help our plans maximize value to price from their digital investments. Manufacturing performed strong with continued momentum from existing plans. However, weakening economic outlook and the effects of trade wars have led to increasing scrutiny on spending plans. Infrastructure cloud services are seeing traction, and in application-related services, focus is on mobility and data analytics. Our deal pattern is strong with good share of large deals and new account openings across geographies. Strength in communications has been continued due to past large dealings, Plans are prioritizing funding in their customer reach-out and transformation initiatives through digital channels, self-services, omnichannel, AI, and chatbots. We are also seeing increase in spending around cybersecurity and network virtualization. Momentum in energy utilities, resources, and services verticals often slightly due to seasonal weakness and some plan-specific issues. We continue to bring deals in this segment and have a robust order pipeline. Automation, RPA, operational insights and technology-led innovation are becoming mainstream in resources and utilities. Service reliability, cyber security, compliance and safety are attracting highest spends in this space. Our digital portfolio is growing bigger and stronger. Digital revenues grew by over 40% year-on-year in constant currency in quarter 3 and now constitutes more than 40% of our overall revenues. We see increase in demands towards data and analytics, cloud, SaaS, user experience, security and IoT. We have inaugurated a new digital innovation center in Dusseldorf, Germany to focus on next generation business needs such as SaaS, as well as cloud-based services, IoT, 5G, AI and machine learning. In the last quarter, influence was ranked as leader in eight ratings in the areas of IoT and engineering services, modernization, makers of Dynamics, ServiceNow, and Doctain Services. With that, I will hand over to Milind. Thanks, Salim. Good evening, everyone, and welcome to a quarter three FY20 earnings call. Let me start by wishing everyone a very happy new year. Our revenues in quarter three were $3.24 billion, which is a constant currency growth of 9.5% year-on-year. The year-to-date constant currency growth is 11.1% compared to the same period last year. Similar to prior quarters, growth was broad-based with U.S., Europe, and many business segments growing double-digit year-on-year. Our revenues from digital crossed 40% during the quarter. Operating margin in Q3 was 21.9% compared to 21.7% last quarter, an improvement of 20 basis points. During the quarter, the rupee depreciated against the dollar by 1%, but was offset by reduced contributions from revenue hedges, leading to a net 10 basis point benefit in operating margins due to currency. Cost optimization measures, including improvement in on-site mix and operating average, hence margins by 50 basis points. This was offset by a drop in utilization, some of it seasonal, and RPP, which impacted margins by 40 basis points, leading to a 20-bit increase in operating margins over quarter two. We will continue to focus on improving operational parameters like nationalizing pyramid both onshore and offshore, improving on-site offshore mix, mean and automation, and other cost optimization measures. DSO increased by seven days, although unbilled revenues also on the other hand reduced by four days. Cumulative cash flow till December was $1.55 billion, which is a growth of 7.4% over the same period last year, aided by a tax refund of $221 million. Cash and cash equivalents at the end of the quarter was $3.42 billion. Yield on investments was 7.77%, 20 basis points load in Q2, reflecting declining interest rate environment in India. We paid out $577 million interim dividend during the quarter, including DDT. Return on equity has increased to 25.9% in Q3 2020, and increase of 270 basis points year-on-year. This is due to the completion of share buybacks and increased dividend payouts for our shareholders. Given by our performance in the first nine months of the year, we have increased our revenue guidance to 10% to 10.5% in constant currency terms. Operating margins for nine months ended December are at 21.4%, firmly within the guidance range of 21% to 23%, and hence we are retaining our operating margin band for FY20, at 21 to 23%. With that, we open up the call 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 one on the touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. 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 Avinash Ganesan from SBI Pension Fund. Please go ahead.

Congratulations on a great set of numbers and also for giving the clarity on the whistleblower front. Just my only question was, what is the outlook on the BFS space and the retail space?

This is Avinash here. We have... I had a muted soft quarter in the US. On a sequential basis, it was flat, and on a year-on-year basis, it grew just over 6%. We have seen more than anticipated furlough impact in Europe and the third world. However, on the positive side, we have seen some growth in North America, banking in North America. That's been a mixed bag. We expect some degree of softness to continue in the coming quarters. But we have a very strong franchise. We have a very diversified portfolio across geographies and segments in this space. And also in the last few quarters, a big percentage of large deal wins have come from this space. So we are very confident that as and when we start seeing updates, we'll be able to capture it. Similarly, on CRL space, this quarter, two quarters, we saw growth coming back. We had a 1% cost and currency sequential growth. Though on a year-on-year basis, it was about 2% to 3%. We expect, hopefully, this will start, I mean, this increase and increasing growth will sustain over the quarter. But having said that, this space normally is very volatile and very susceptible to changes in consumer sentiments and so on. And we continue to see a record number of store closings and so on. So we expect some degree of productivity to continue in this space, but hopefully we have come up with a series of weak quarters and hopefully the positive quarter we have this quarter will continue in the next few quarters.

Okay, thank you. That was helpful. That's also amazing. Thanks. Thank you.

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

Thanks for taking my question. On the contract flows, I think if you look at the nine-month trend that we've seen in net new deals, I think last quarter we did see a low of around 10% of net new deals. This quarter it's about 30%, which has been much higher new deals in the last year. That, when combined with some of the softness that you've just alluded to in some of your key sectors, I'm trying to understand what will then keep our revenue run rates where it is right now. What is needed to kind of keep this momentum up as the next few quarters come in?

Hi, Salil. I think the way you're looking at it is the way we are thinking around business in terms of what What are the drivers for our growth as we shared at the end of the day and throughout the past year or so? The main focus has been large deals and digital expansion. To continue that momentum, we need to have that working through the next few quarters and obviously in the future. Our pipeline today is quite strong, so we have a good sense of where that's coming from. There remains significant connect and trust from our clients, and we are engaging with them on several of the new programs, and that's where we think we have to go more and more. Obviously, the way to drive that, our focus is to close out our financial year in March and then start to think about the next fiscal year and what that's going to look like. Given the overall environment, some of the comments that Praveen made about banking, financial services, and retail.

Fair enough. Congratulations to you and Nilanjan and the rest of the management team for a positive closure on the investigations. And I'll come back for follow-up questions at this time. Have a good rest of your day.

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

Hi, thanks again. I wanted to ask on the core. Can you comment on the acceleration and the decline of that quarter to negative 5%? Just what are the key drivers there?

So as you saw in the note, our core business had a negative growth in this quarter year on year. And we have had in the past few quarters more in the range of zero or zero plus type of growth. A year ago, it was lower single digits. What we're seeing or that's demonstrating to us is the client buying is more and more in the digital area. Our business in the core services is extremely strong and competitive, and we believe that even here we have a situation where we're ahead of where some of our peers are. But the spending with clients is more focused on digital. And with our reorientation investments and really market connects in digital with our partners and with our clients, we start to see some benefits where the digital is growing and therefore helping the overall company.

Okay, thank you. That was helpful. And then on margin, as far as the outlook goes and as it relates to your initial three-year investment and turnaround plan, would you say, of course, that that has progressed to your plan? I'm not asking for formal guidance beyond fiscal 20, but how should investors think about the margin drivers going forward from here?

Well, like I just mentioned earlier, the first call, this industry forever will face two cost headwinds. One is the cost pricing pressure, And second is the wage inflation. Usually the wage inflation, especially in India, will get offset, hopefully, by currency in the long term with the real estate potential. But basically, how do we make up the balance margin? This is cost optimization. We've laid out a very aggressive cost optimization plan. We discussed it in detail in the analyst call. A couple of things which are quite routine for the industry, we all know about the primadiration. We talked about the on-site offshore mix. But two things we are driving, we think, quite uniquely. One is the setting up of the innovation hub in the U.S. I think that's quite unique for us in that space because that allows us to build a full stack pyramid in the U.S. unlike a very top-heavy pyramid, which is there for most players in this segment. Another thing which we're doing very aggressively, and you'll see our numbers on subcontracts, which are well below our peer set, You know, subcons are quite necessary in this industry to make sure that there is, you know, short-term demand is being met or there are special skills. But what we've been doing now is at the tail end of the subcons, we're trying to replace them either with our own employees, so the hiring lead time, which is usually shorter for these, we will meet up with our own employees, or replacing these or converting some of these subcons to our own employees. So you see our subcon costs have been quite moderated in the last few quarters. So we have a host of activities, you know, on cost optimization across 21 tracks running simultaneously. And, you know, this will have to be on this year in and year out. We talked about digital pricing as something we are looking at, and not that we think we command dramatic premiums, but more that we shouldn't be leaving any loose change on the table when we're looking at pricing of digital talent because it's quite scarce. So, like I said, this year we are at 21.4%. For the nine months, we're sticking to a 21 to 23. And we'll come back to you next year as we look at it and we set up a new FI program.

Thank you.

Thank you. Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Yeah, hi. Thanks for taking my question. A couple of questions, actually. One is how much did the acquisition of IceTech contribute for this quarter?

I think 3 million.

3 million, sure, thanks. The second is in terms of the cost savings that you alluded to, Nilanjan, you had mentioned $150 million of cost-saving target for the year. How much of that have we sort of achieved in the first nine months?

Well, I guess we are well on our way to see the annual target. So maybe hopefully we can be slightly above that, but we are quite confident in the 150 number.

Sure. And the other thing was on the DSO. It's been sort of trending up over the past many quarters. Anything, is that a reflection of the large deals or how should one think about it? Should we assume elevated levels of DSOs going forward?

So I think last quarter we were, you know, the increase in, you know, unbilled. So if you see in different construction with unbilled and unlearned, there's actually the overall DSO unbilled, unlearned, and AR is actually only up one day. So A lot of this is as we build the client, we need to collect it in the future. So we have about, I think, 100 million production unbuilt as well. So it has to be in conjunction with that.

Yeah, I'm looking at that, but over a longer period. So if I take a four-quarter rolling period, it seems that it's sort of improving, sort of increasing every quarter.

Yeah, there have been some increases. And I think if you see in the industry as well, there has been a little bit of increases. You know, we have seen clients asking for a little bit more headroom, but I think there's nothing... I'm really concerned about it.

Sure. Fair enough. And thank you so much. I think I'll come in for a follow-up.

Thank you. The next question is from the line of Keith Bachman from Bank of Montreal. Please go ahead.

Yes. Thank you. I wanted to ask two questions if I could. I wanted to go back to margins for a second. You've had – this is your – Second straight quarter of sequential margin increase is still down year over year. And should we therefore assume that as we look forward to margins, if you continue to have flat to up sequential margins, that you can hold these levels as we look into the next fiscal year? And any specific comments you want to offer on March quarter on how we should be thinking about the puts and takes associated with the operating margins?

And then I have a follow-up, please.

As I said earlier, we are still holding on to, you know, 21 to 23, you know, and we are at 21.4, and that's the way we look at the overall market for the year. So I don't think at this stage we'll be able to, you know, give an outlook on where we're going to end up, you know, this year in the quarter four or next year. By next quarter, we will give you an outlook into 21, SI21, but we may turn off.

Okay. Any puts and takes you want to call out for the March quarter, in particular on operating margins?

No, nothing really.

Okay, okay. Then as I think about the revenue guidance that you've provided, you have raised it per this quarter, but if I still look at what's implied for the March quarter, it still suggests a sub-seasonal growth relative to the last two fiscal years for the March quarter on a sequential basis. Is there anything you want to call out on why you've talked about the pipeline being pretty rich, but any reason why it would be associated with growth in March quarter?

This is Salim. The way we've looked at the guidance is, given the strength we've had in the first three quarters, the current pipeline reconvergence and the revenue output we see internally for this coming quarter Q4. We felt comfortable to raise our guidance for the full year and of course also narrow the ban. The specific quality of the segments is more, I'll refer back to what Shaheen said, the comments on financial services and retail which gave you some more color on and then the real strength we have in several other of our segments, which are all doing double digits or more, and the color that we share on those as well.

Okay. All right. That's it for me. Thank you.

Thank you. The next question is from the line of Pankaj Kapoor from JM Financial. Please go ahead.

Yeah, hi. Thanks for the opportunity. Jilanjan, Salil had mentioned in the press meet that there are plans to replicate the on-site pyramid that we have developed in the U.S., now also to Europe and Australia in the coming year. So I was just wondering if you can elaborate on this in terms of what kind of a scale we are looking at and what kind of investment this will require. And what's the plan of funding this investment? Will it be through the normal period or will there be any incremental investment that will be going into this?

This is Praveen here. Similar to what we did in the US, we have started the journey in the rest of the world as well as in Europe. In Europe, in April, we started a hub in Romania. And in October, we opened in the field of Germany. Similarly, in Australia, we will start with Melbourne and Sydney where we already have a presence. We are not looking at any significant incremental investments. We will probably do it at a much lower pace than what we did in the U.S. U.S. we have a context. Here, more and more we will do in the context of the client. Wherever we have a client concentration or a client requirements and that's when we will do it. So, this will probably take slightly longer than what we did in Australia. you have to carry minimum investment.

Got it. And second, just on a structural basis, as we get into 2020, your attrition rate are, of course, coming down and looks like there have been some work on the pyramid as well. These subcontractor costs appear to be also stabilizing. So is it fair to assume that the supply side pressure this year are far lower compared to what we had last year?

This is Salim. On the supply side, there's definitely a significant demand for people. I think the attrition improvement is frankly a function of the program that Robin launched, and he shared some details in the earlier session, but he also shared that at our analyst day, which really comprehensively looks at how we engage with employees in this new era where the value proposition for employees is very different. So that's really what's driving it. I think our approach to subcontractors is much more tailored to make sure that, as Melanjan said, we're replacing subcontractors with recruits as we see demand stability. So we see supply pressure fairly strong. I don't at this stage yet, but we'll see how the next year or two look in terms of demand . And that will also give a benchmark for the supply side.

Okay, so I just want to basically clarify my question was more in terms of the kind of outlook on the wage hike do you expect this year. You think it will be relatively lower compared to what we had last year and any kind of intervention that we had to do last year in terms of specific skill sets, those kind of interventions may not be required.

Okay, I don't know what to ask. In terms of the salary increase, the decision will be made a bit later. We're not in a position to comment on the next fiscal year salary increase yet.

Okay, thank you and all the best.

Thank you. The next question is from the line of Joseph Frazee from Kentor. Please go ahead.

Hi, two questions for you. One on demand. Any thoughts on the sustainability of the growth rate within digital? And do you feel like the business has reset at this higher, high single-digit annual growth rate?

So again, the thinking we have is more focused on how we are working with our clients and fulfilling their digital needs. we understand that the digital market as a collective is growing in the range of 15% or so. So our target would be to gain market share there. Based on the last few quarters, clearly we are this quarter at 40%. I don't have a sense today of, for example, in financial year 20, what our growth approach is going to be. and certainly we don't outline externally what our three-year growth outlook could be. What is clear though is we seem to be winning market share in digital, and now that's been demonstrated in the past at least six or seven quarters. And so my sense is if we can continue that, we will have the benefit of gaining market share overall. And then all of the other factors, for example, what the share of financial services in retail, global macro, and so on will come into play. And that will drive how the overall growth case will look.

Okay. And then my second question is just, again, to go back to margins. Any reason to think that margins would not decline over a longer period of time? I mean, you cited the pricing pressure in probably most of your business. Wage inflation is And then clearly you've got the need to invest to handle the digital movement. So, you know, from these levels, even though you're not giving any color or guidance on it, any reason to think that margins would improve or stabilize here? Thanks.

So, like I said, you know, our first task of this year, you know, as we entered FY20, was basically stabilization of margins. You saw how we came off at the end of quarter four, and that was on the back of a lot of investments. We have made both on the same side. We have seen the, you know, dividends of that paying out, the impact of that on large yields, on new account opening, how we split our hunting and farming teams. So we've really seen those investments paying out. We've talked about the innovation hubs and setting that up and how they're leading to an improved cost structure for us as well as being a magnet for attracting client businesses. So I think this year's target was basically coming to a stabilization mode, and I think that's where we are looking ahead, is how we make sure we are consistently delivering. Like I said, this is a treadmill. We need to ensure that the cost optimization tracks continue to deliver year in and year out. So there's no reason why we think that strategically or even in the long term, the business should have lower margins. We've seen, you know, we've talked about a lever of pricing. We've always talked about digital talent. So we should be able to price this new talent appropriately, get, you know, appropriate premiums related to the cost. So these are some of the things we are looking at. And like we said, we'll come back to that in the next portion.

Thank you.

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

Hey, thanks. A couple questions here. Given the fact that you're the first company in the space to kind of report this quarter. Maybe you can share with us some color that you're getting from clients about spending intentions for calendar year 2020. Maybe some rough numbers in terms of what do you expect spending to look like year over year. And then also maybe some color in the budget cycle for 2020 as well. Thanks.

Hi, Moshe. This is Salim. The We have started to get a sense with our discussion with clients that it is relatively early in the calendar year 20. And our own cycle, we are now starting to build our own financial model for our next fiscal year starting in April. So we don't have a sense today that is robust that I can share with you what that external view is. We should have a better sense when we come back to you in the April cycle.

All right, that's fair. And then second question is, I think the biggest highlight for the quarter was the growth in digital that you had, some pretty big and impressive numbers. Is there anything to pull out here in terms of what's driving that? I mean, this seems to outperform some of your other peers in terms of growth in digital. Are you doing things differently? Are you getting better traction, win rates, et cetera? Maybe you can comment on that. Thanks a lot.

Sure. The thinking for us on digital, as you may know, there are five areas of digital we are focused on. Three of them we see incredible traction today, the three being what we call experience, which is really how clients and end users connect with technology and move on. I think, beyond sort of more run-of-the-mill experience to really intuitive human experience thinking with digital studios all across the U.S. and Europe and Australia. The second is the area of data, which is from our insights capability on our digital. And again, we see extremely good traction on the data side. We see clients really responding well to our capability there. And we also see an extremely high-margin business with a good growth. And the third is cloud, where we built, I think, very strong partnerships with the three big cloud players globally. We also built very strong partnerships with the staff players. And their own growth is, in some ways, reflecting on us. and giving us tremendous traction. So those are the three big areas for us today that are getting the most impact in terms of growth.

Thanks for the comment.

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

Yeah, thanks for the opportunity.

Just wanted to understand, if you look at the new business winds of Q2 and Q3, looks lower versus what it used to be in the earlier quarters.

So is it an early indication that entering CY 2020 clients are more cautious in terms of IT spend, especially on the new initiatives? So I'm not sure where you are drawing the conclusion, because next year, if you look at last year's ETC, we went, the next year was 32% higher than what it was the previous quarter. And obviously, I mean, to look at the last two quarters, there are some quarters where we had higher net new and some quarters where renewals have been higher. As Salim mentioned earlier, there are probably two drivers for our growth. One is not beans, and we not only have to win our share and defend the last part of the renewals, but also new net new. And we also have to capture a lot of share on the digital side. And as long as we are able to do that, we feel that the momentum will continue. Okay.

And just to follow up, is it any change in trend of deal closure where decision-making cycle has been getting elongated? Even the election year coming in the U.S. as a whole. So any impact in terms of decision-making of a plan?

Not at this stage. Decision cycles have remained the same in the last few quarters. We have not seen any changes. Okay. Actually, last bookkeeping question. The tax rate has gone down. So I do agree there is a refund angle as a whole. But is there any, apart from that, benefit coming out of the new tax regime in India? And what could be the normalized tax rate going forward? As you said, at the beginning of the year, guidance on EPR was between 27 to 28. We got two benefits here this year. One is that in the last quarter, there was a clarification on the U.S. deep tax. So we got a one-off benefit there. Plus, in India, in one of our subsidiaries, we have decided to go for the new tax regime, which is a 25% lower tax rate. So we got a benefit of, I think, approximately about $24 million between these two during the quarter. So our normalized would be about 27%, but these are two one-offs we got in this quarter. Thank you and all the best. Thank you.

Thank you. The next question is from the line of Arvind Ramani from KBCM. Please go ahead.

Hi. Thanks for taking my question. I have a couple of quick questions over here. When you look at your client conversations this year versus last year, there's certainly been a lot more changes. Your mix towards digital has changed quite a bit. How are you feeling? I'm not looking for necessary guidance for next year, but how are you feeling about the demand environment this year relative to last year?

Again, as we shared earlier, the real work on that will start to happen in this next few weeks for us. We will start to put together a little bit more systematic view from all of our segments and our service lines to understand what that looks like for the full year. It's a little bit early in our cycle for me to comment on that.

Okay, great. And then, you know, I know this was already asked, you know, the previous question, the previous person already asked about this being an impact on elections. And, you know, any color you can provide? I mean, has this come up at all in any client conversations or about sort of planning? Do you expect any new term delays?

I think you're referring to U.S. elections, right? Yes, yes. For us, nothing has come into that sort of client discussion mix to suggest a change in direction as a result of that at this stage. So we don't have any specific client shift that we can tell. Maybe as the year progresses, we'll see something.

All right. Thank you, and good luck for 2020.

Thank you. The next question is from the line of Babur Singhal from Phillip Capital. Please go ahead.

Yeah, good evening, sir. Thanks for taking my question. Sir, I just had one question on the manufacturing division. So our manufacturing division has reported quite strong growth in the last six quarters on a Y-on-Y basis. So just wanted to check any headwinds or ugly signs of any weakness that you might see because of the slowdown in the auto segment that we have seen, especially in the European markets? Or is it like we're not seeing anything of that sort as of now in our client base?

Overall, they had a good run in manufacturing this quarter. It was one of the segments where we saw a much higher sequential quarter-on-quarter growth. And for the year, actually, it had a double-digit growth. So we have seen very good action. I would say that we do see some hotness, particularly in the auto sector, given all the trade wars. Even though there has been some slowdown on the trade war side, some resolution, but still there's some uncertainty. And this is also impacting the industrial segment where there's dependency. On the other hand, when you look at aerospace, there's a huge auto backlog, and there's the pipeline storm. But despite this softness, the softness has existed in the last one or two quarters, but we have done well in this segment on the back of our wins that we have had in the recent past. So while there is softness, we feel comfortable. I guess we feel that we are in a good space in this segment, and we expect this time to continue.

Sure. That's really helpful. Thanks for my questions. That was all from my side. Wish you all the best.

Thank you. The next question is from the line of Apoorva Prasad from HDFT Securities. Please go ahead.

Thanks for taking my question. I had a question on the core services and products piece that seems to be declining at a faster pace. Can you attribute anything to that? Is there probably increased competitive intensity in renewals?

I didn't follow the question. You said it's about the core services? Or the decline in the core services?

Yeah, the decline in the core services, that seems to be increasing, which was flattish about a couple of quarters back. That has gone to almost 6%.

Yeah, so we talked a little bit earlier about the cost services outlook. What we are seeing today is really a reflection of where we see our clients spend. Our clients spend more and more on the digital portfolios. And with that spend, there's less on the cost services. Our sense is that what we see here is still much more robust in terms of our differentiation and cost services than some of our peers. Having said that, we remain going ahead in the function of what we see in the market in terms of the increasing shift to digital, which seems to be the secular trend, and that will drive the cost services. As you rightly said, the last few quarters we've seen something in the zero, zero plus range, or maybe a year ago in dosing indicators. So we do need to watch it carefully and see where it goes. But we also want to reposition our portfolio towards more of our digital business, which today, as we shared in earlier calls, has a higher margin profile. So, definitely, we think this helps us to reposition our company, as also the clients tend to reposition.

Right, that's helpful. Thank you.

Thank you. The next question is from the line of Sudhir Kuntapalli from Motilal Oswal. Please go ahead.

Yes, thanks for giving me the opportunity again. If you look at the sequential growth in the top client and top 10 clients and even top 25 clients, growth looks pretty muted, especially in the top client. So growth in this quarter seems to be largely driven by clients below top 25. So any color on this will be helpful.

So I think in this quarter, given the follow-up impact, I don't think it's right to draw any inference. We are not really concerned about this because there's a And the first is from sector to sector and plans to plan.

Sure, sir. And second question is, we have ramped up our U.S. on-site headcount over FY19, and we have been talking about the potential back-ended productivity improvement among these employees, which can drive up margins. Any qualitative insights into this will be helpful.

I think the attempt is, I mean, there are two things, right? One is we are trying to deal with our business by doing more local hiring, having a much larger local presence. And secondly, from cost perspective, just making sure that while we ramp up on the local side, we build a pyramid. So we have done reasonably well. As we have mentioned in the past, we have recruited more than 10,000 people, and a good percentage of them are associates from campuses. And so far, the utilization of these people in projects have been decent, and it's probably much better than what we had anticipated earlier. So we feel confident, and with our unique model of having hubs, we are able to locate these associates and deliver products to the client. We feel reasonably confident that this model is working. So not only are we able to de-risk the risk that we have, but we are also able to contain the cost by building a pyramid. And I think that effort will continue. But difficult to quantify at this stage because we are only in the journey. We are just about relating things in the journey. It will take some time for this to stabilize.

Sure, sir. Thanks and all the best for the rest of the year.

Thank you. The next question is from the line of Dipesh Mehta from SBI Cap Securities. Please go ahead.

Thanks for the opportunity. Sir, if one look at the growth number from Q1 to Q2, implied Q4 kind of thing. We are seeing almost 4% deceleration from YOY perspective in constant currency. Despite very healthy, strong deal during this period. So if you can help us understand how one should look the momentum deceleration entering into next year, that is question one. Second question is about energy and utility. In earlier your prepared remark, you indicated about some client specific issues. So if you can provide some more color around it, whether it is likely to sustain or it is temporary, whatever color, if you can provide something. Thank you.

On the first part, as you might know, in some of our earlier calls, we shared that the first half of the year growth was higher year on year than the second half of the year, and that's really the way this is progressing. We don't see any change in the traction with clients. There is some base effect that starts to creep in into Q3 and then in the ongoing quarters. But we don't see any clear change in the locating connect with our clients at this stage. For the following year, we'll be in a better position to comment at the end of this quarter when we come back in April. On the second part, we will just, you know, on the short segment, we have had a successful, several quarters of successful double digit growth. We have the first quarter where we have seen negative growth on the quarter-on-quarter basis and less than double digit growth. And partly because of, as we said earlier, partly because of the seasonal weakness, the follow-up impact. And in a couple of grants, one is we have de-scoping in a particular large program, and in another account, we have seen some level of enforcing. But having said that, even the traction that we have seen in the past, this is not a secular trend, and we expect the growth to come back in the coming quarters. Thank you.

Thank you. The next question is from the line of James Seidman from Cisco HANA. Please go ahead.

Hi, Praveen. I just want to make sure I understand your message, your observation with regard to North American BFS. You were going kind of quick there. Are you saying it's getting better? Because you talked about the geographic region of BFS. What was your comment again about North America, specifically banks?

If you look at our performance this quarter, a big impact has been from Europe and the rest of the world, partly higher than expected for low and slowdown, particularly in Europe due to uncertainties around Brexit. On the other hand, if you look at North American banking segment, we have seen growth.

So that's what I meant, and in the last couple of quarters, we have seen growth come back in North American banking space, and that was the comment I made.

Got it. Okay, that's what I thought. And then with regard to communications, is that 5G or is it too early to conclude that? I know 5G, according to you, populates a lot of different verticals, but is that related or is there something else going on? Thank you.

I think in communication, at least the growth has been largely contributed by some of the broad dealings that we have had in the past, and that's contributing to the growth. We do find a lot of investment in 5G. Obviously, there's tremendous pressure for everyone to invest in 5G. We see opportunities there, but the ticket prices are still small. Most of them are... in pilot spaces and so on. The growth is coming from traditional businesses as well as the digital transformation opportunities. But in this segment, if you look at it on one hand, there is tremendous pressure on them to invest in 5G. At the same time, the revenue per customer is decreasing. They have to compete with digital natives and OTT providers. So there's a significant amount of investment in digital , AI, and so on, particularly in customer service space. And that's where the investment is, and today I think the growth is coming through those investments, not necessarily from 5G. While investment is there, but from a ticket price perspective, it's been small.

Great. Appreciate the color. All the best. Thank you.

Thank you. Ladies and gentlemen, this was the last question for today. I now hand the conference over to Mr. Sandeep Mahendru for his closing comments. Over to you, sir.

Thanks, everyone, for joining us on this call. We really like your questions and answers. We look forward to talking to you again. Have a good day.

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