Infosys Limited American Depositary Shares

Ladies and gentlemen, good day and welcome to the Infosys Earnings Conference Call. As a reminder, all power-spin 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 10-0 on your touchstone phone. 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.

Hello, everyone, and wish you all a very happy new year. Welcome to this earnings call of Infosys to discuss Q3 FI21 earnings release. This is Sandeep from the Investor Relations Team in Bangalore. Joining us today on this call is CEO and MD, Mr. Salil Parekh, CEO, Mr. Praveen Rao, CFO, Mr. Milindan Roy, along with other members of the senior management team. We'll start the call with some remarks on the performance of the company by Salil, Savin and Nilanjan before we open up the call for questions. Please note that anything that we say which efforts are out there for the future is a forward-looking statement which must be read in conjunction with the risk that the company faces. A full statement and explanation of these risks is available in our filings with the SEC. This can be found on www.sec.gov. I'd now like to pass it on to Salil.

Thanks, Sandeep. Good evening and good morning to all of you. I trust each of you have had a great start to the new year and continue to be safe and healthy. I'm delighted to share that we have had an exceptionally strong quarter across multiple dimensions. This was made possible by the enormous trust of our clients and the extreme focus we have built for digital and the enormous client relevance that has created and help support digital and cloud transformation journeys for our clients. Let me share with you some of the highlights. We achieved the highest large deal wins in our history with a deal value of $7.1 billion. This includes the largest deal we signed in our history and what we believe is the largest in the IT services industry in India. This will continue to expand our strong presence in the continental European markets. Our overall deal value for the nine months of this financial year is over $12 billion, and the net new large deal value for nine months of this financial year is over $8 billion, positioning us very strongly for the quarters ahead. Revenues in constant currency grew at 6.6% year-on-year, and 5.3% sequentially, on the back of a very strong momentum we saw in H1, and large deal wins secured earlier, further establishing our market share gains. Digital revenue grew at 31.3% year-on-year in constant currency, and we have now crossed an important milestone in that digital is now over 50% of our revenue. We delivered operating margin of 25.4%, which is an expansion of 350 basis points year-on-year, and flat sequentially. Our operating cash flow was robust at $829 million for the quarter. Our balance sheet remains solid with cash and investments at $4.5 billion, which is stable sequentially after the payout of interim dividends. Recognizing continuous performance of the company and contribution from employees during these times, we are paying out variable pay for the quarter 100%. As announced earlier, we are initiating salary increases for employees, which will be effective January 1, 2021. And we are expanding our promotion cycle across all levels in this quarter. In Q3, we reached a significant milestone in our environmental, social, and governance journey by becoming carbon neutral. This is 30 years ahead of the 2050 global target set by multilateral agencies. We further reiterated our commitment to the causes of ESG by announcing our ESG 2030 vision and ambitions. Looking ahead, we continue to see momentum in our business, strong market share gain, and increased speed digital transformation of our clients. Keeping that in mind, we increase our revenue growth guidance for the full year from 2% to 3% to the new guidance at 4.5% to 5% growth in constant currency. We increase our operating margin guidance for the full year from 23% to 24% previously to 24% to 24.5% for the full year. That concludes my update. Thank you for your time. And now let me request Praveen to give you an update on our operations. Over to you, Praveen. Thank you, Salil. Hello, everyone. Wish you a very happy, healthy, and safe new year. While there is increasing optimism due to the commencement of COVID-19 vaccination, we have also seen a renewed surge of infection in various parts of the world. Consequently, majority of our delivery centers are operating in BCP mode with 97% of our employees globally continuing to work from home. Growth acceleration continued its sequential revenue growth of 5.3% in constant currency, accelerating further from the momentum seen in the first half of the year. Year-on-year growth rate increased to 6.6% in constant currency for quarter three. Three business segments, financial services, high-tech, and life sciences reported double-digit growth. We have seen several operating parameters improving during the quarter. Utilization was at 86.3%, which is all-time high level. Onshore effort mix was lowest ever at 25.2%. RPP declined slightly on a sequential basis due to seasonal factors like lower working days, furlough, etc., but increased on a year-on-year basis. Subcon costs increased by 40 basis points on a sequential basis, as growth picked up meaningfully. Let me talk about the large deal wins, which was key highlight of our quarter three performance. Large deal TCV crossed quarter two levels and marked value all time high at 7.13 billion. Share of new deals in quarter three was 73%. The net new deals we find in quarter three is more than 1.5 times of what we signed in the entire fiscal 20. As Salil said, in quarter three, we signed what is probably the largest deal signed in Indian IT services industry. Apart from this, we signed another deal of 500 million. Overall, we won 22 large deals in quarter three, 18 financial services, four deals in manufacturing and energy utilities resources and services sector, three deals in communication, and one deal each in retail, high-tech, and other segments. Region-wise, 13 were from America, seven were from Europe, and two were from the rest of the world. With this, our lot deal wins for nine months, each over $12 billion, an increase of 63% over the comparable period in the last year. Net new lot deal wins for nine months have increased by 244% year-on-year. While quarter 3 deal signings were very strong, a large value of these deal signings will start contributing to revenues in the second quarter of the next fiscal due to transition involved. Net employee addition during the quarter was more than 9,100 and share of women employees increased to 38.3%. Voluntary appreciation for IT services increased up to 10%, although lower than our comfort band of 14% to 15%. We will be implementing salary increase across all levels at up to January 1st, 2021. Budget planning for calendar 2021 is progressing normally and we expect clients to continue to focus on their digital transformation agenda. Moving to business segments, growth momentum accelerated in financial services with wrap-up of past bail-wins focus on accelerating the digital transformation agenda for many of our large clients, and opening up new accounts across various sub-verticals like mortgages, regional banks, wealth and retirement services. We see multiple opportunities in cloud, data services, and creating new digital bank capabilities as things improve post-COVID. Finnecal continues to grow steadily and has firmly established itself as one of the best banking platforms in the industry for digital transformation. ETL segment continued to improve with increased volumes in Q3 despite seasonal softness and year-on-year growth turning positive. The deal pipeline remains healthy and we are seeing opportunities around vendor consolidation and captive monetization. Performance in communication segments also improved sequentially, although media, entertainment, advertising, and OEM segments remain under pressure. We have won three deals in the segment in the last quarter and continue to have strong pipeline of deals. Parts of energy utility resources and services vertical continue to face a difficult environment due to stress in segments like oil and gas, education, publishing, travel and hospitality, etc., while utilities remain relatively steady. Based on the recent deal yields and deal pipeline, we expect to see stable performance in the coming quarters. Manufacturing had a standout quarter, both in terms of deal signings and revenue momentum, which improved meaningfully despite continued disruptions across subsegments. As deals ramp up over the coming quarters, we will see superior revenue momentum for this segment. We expect spend to grow in the newer areas of digital, data, cloud, and security, and reduction in run-the-business areas. Infosys DPM has grown at double digits with strong pipeline of both traditional and digital DE. The digital portfolio also saw strong growth of 31.3% year-on-year in constant currency and crossed 50% share of overall revenues. In the last quarter, we have known Infosys modernization could Infosys live enterprise application management platform, both part of Infosys Cobalt and Infosys Applied AI. Three acquisitions completed in the last quarter, GuideVision, one of the largest ServiceNow Elias partners in Europe, Zurecon, Adobe Platinum partner in the US, and Kaleidoscope Innovation will further enrich our capabilities and offerings in the digital space. We've also been rated as leader in 17 services related capabilities across the digital pentagon areas by industry analysts. The global pandemic has gone from threat to opportunity as clients have gained confidence in their own resilience and now embrace the opportunity to accelerate and often radical reimagination of their own businesses. Infosys with its strengthening capabilities and expanding area of offering is becoming the preferred choice for customers in that journey. With that, I will hand over to Neelanjan. Thanks, Praveen. Good evening, good morning, everyone. I would like to wish you all and your families a season's greetings and a safe and healthy 2021. Q3 was another successive quarter marked by continued acceleration in revenue with the highest Q3 sequential revenue growth in the last eight years. Our unwavering execution over the past three years against our navigating a next strategy with client relevance at the core supported by digital operational excellence, cost and cash management, is clearly the driver of this all-rounded performance and reflecting in our total shareholder return appreciation during this period. Revenue for the quarter stood at $3.52 billion, a growth of 5.3% sequentially in constant currency. This translates to 6.6% growth year-on-year and 3.5% growth for nine months in constant currency. Operating margins stood at 25.4%, were up by 3.5% year-on-year and stable sequentially. Sequential margin movement in Q3 comprised of 100 basis points improvement due to better operating parameters like utilization and on-site mix and other cost levers. 20 basis points benefit due to cross-currency movements, partly offset by rupee appreciation. These benefits were negated by a 50 basis points impact of transition and rebadging costs for recently won deals, 20 basis points increase in costs relating to employee promotions and compensation corrections, and the balance repeat dips impact due to a combination of higher subcons, one-offs, and others. Our trading margin for nine months stood at 24.5%, which is 3.1% higher compared to the 21.4% margin for nine months at the last fiscal. As mentioned last quarter, we will see higher costs in Q4 as we implement the salary hike for our employees effective January. Q3 EPS grew by 12.5% in dollar terms and by 16.5% in INR on a year-on-year basis. Nine-month EPS grew by 10.6% in dollar terms and 16.9% in INR on a year-on-year basis. Return on equity increased further to 27.4% and improvement of 130 basis points over the last year. DSO measured on an LTM revenue basis remained stable year-on-year. while increasing four days quarter-on-quarter. Connection remained strong and helped in generating operation cash flow of $829 million. Coupled with lower capex of $57 million, SPF for quarter three increased to a record $772 million, a growth of 15.1% year-on-year, and a growth of 40% on YTD basis. Free cash flow conversion remained strong at 109% of net profit and 113% for the nine months. We continue to maintain a strong debt-free and liquid balance sheet. Cash and investments at the end of Q3 were $4.5 billion, in line with the previous quarter, despite paying $687 million of half-yearly dividend during this period. Yield on cash balances continued to decline due to moderating interest regime in India. The yield was approximately 6% in Q3. Q3 also marked the 22nd consecutive quarter of positive products income, despite significant currency volatility close to the open. Driven by strong deal wins and revenue performance in the first nine months, we are again increasing revenue guidance for FY21 to 4.5% to 5% in constant currency terms from 2% to 3% as I did earlier. We expect operating margins for the full year to be in the range of 24% to 24.5% compared to the previous guidance of 23% to 24%. Amidst these numbers, it would be remiss of me not to mention the landmark achievement in quarter three of attaining carbon neutrality as a company 30 years ahead of the Paris Accord. This was a journey we embarked in 2010, and we are extremely proud of the commitment shown in achieving this goal. In the last quarter, as Salil mentioned, we also announced our first ESG vision of 2030, a holistic approach of integrating our business model with the extended stakeholders, impacting environment and climate, communities and societies, employees and shareholders. We believe our robust and measurable target towards the pillars of environment, social, and governance will help us setting new standards in this area. With that, you can open the call for questions.