Infosys Limited American Depositary Shares

Ladies and gentlemen, good day and welcome to 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 touch-tone 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.

Thanks, Margaret. Hello, everyone, and welcome to this earnings call to discuss Q4 and FY22 earnings release. I'm Sandeep from the Investor Relations Team in Bangalore. Joining us today on this earnings call is even-named Mr. Salil Parekh, CFO of Mr. Nilanjan Roy, along with other members of the Senior Management Team. We'll start the call with some remarks on the performance of the company by Salil and Nilanjan, subsequent to which we'll open up the call for questions. Please note that anything that we say which refers to our output for the future is a probability 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 file with the SEC. It can be found on www.sec.gov. I'll now turn it over to Salil.

Thanks, Sandeep. Good morning, good afternoon, and good evening to everyone joining on the call. Thank you for taking the time to join us today. We've had an exceptional year with annual growth of 19.7% in constant currency terms. This was the fastest growth we've seen in 11 years. We're gaining market share, we're building on our leadership in cloud and digital, and we are a part of more and more programs where our clients are looking at digital transformation. Growth was broad-based across business segments, service lines, and geographies. Each of our business segments grew in double digits. The top three grew in high teens. US and Europe grew over 20%. The North America region crossed $10 billion in revenue, while financial services crossed $5 billion in revenue milestones. Our digital revenues now account for 59.2% and grew at 41.2% for the year. Our digital revenues crossed $10 billion annualized on a run rate basis. Within digital, our cloud work is growing faster. and our COBOL cloud capabilities are seeing significant traction with our clients. Our growth has been accompanied by robust operating margins at 23%. We deliver these margins while maintaining focus on our employees with increased compensation and benefits. Our large deal wins were at $9.5 billion for the full year and were $2.3 billion for Q4. Our net new percentage was 40% for the year and 48% for Q4, helping us set up a strong growth foundation for Financial Year 23. Our Q4 revenue growth was 20.6% year-on-year and 1.2% quarter-on-quarter in constant currency terms. Our industry-leading performance in FY22 would not have been possible without the relentless commitment from our employees I'm extremely proud as well as grateful for the extraordinary efforts in delivering success for our clients. Last 12 months, attrition increased to 27.7%. A quarterly annualized attrition declined by approximately five points on a sequential basis. We recruited 85,000 college graduates in this financial year, In the fourth quarter, we had a net addition of 22,000 employees. We have an overall strong recruitment program. This is a reflection of our enhanced recruitment capabilities, solid brand, and deep penetration into various talent markets. This increases our comfort to support clients in their digital transformation agenda as we look ahead. We've initiated a compensation review exercise for this financial year We plan this exercise so that we can focus on employee segments that need greater attention while also covering a broader group with regular increases. As in the past, we will look at individual performance, skills, and market benchmarks while determining individual compensation increases. We will focus on accelerated career growth, targeted development, and opportunity to work on cutting-edge digital innovation globally. Our strategy launched four years ago has served us well. We've delivered industry-leading growth and industry-leading TSR. Looking ahead to the next phase to further enhance our leadership on the digital innovation curve, we plan to expand our capabilities in scaling our cloud business, expanding digital capability, expanding on our automation work, and increasing relevance with our large clients and tech natives. and also strengthen our employee value proposition. Our focus on staying ahead in the cloud and digital ecosystem, the focus on our employees and our cost give us strong confidence for the future. A sustained momentum in FY22, large deal wins, robust deal pipeline, and client confidence give us comfort to guide for 13% to 15% growth in FY23 in constant currency. Our focus now as we look ahead, as we build a new strategy that is looking at cloud and the digital ecosystem, our focus on employees and the costs related to the post-COVID work environment result in our operating margin guidance to be at 21% to 23% for FY23. In terms of our business segment performance, let me go through the highlights by segment. The financial services segment grew at 14.1% in constant currency with eight large deal wins during the quarter and 27 large deal wins in FY22. Our U.S. business continues to lead the growth as we work on large transformation programs. Our overall large deal pipeline in financial services is healthy across the regions. Retail segment growth was at 16.5% in constant currency As clients focus on digital and cost takeout programs, we're seeing integrated outsourcing deals and transformation programs in the areas of e-commerce, revenue growth management, supply chain, product lifecycle management. We won 16 large deals from this segment in the last year and continue to have a healthy deal pipeline. The communications vertical grew strongly at 29.2% in constant currency. We see customer experience, IT and network simplification, lean and automated zero-touch operations, time to market, and integrated data for digital enterprise as the key themes for clients in this segment. Energy, utilities, resources, and services segment growth increased further to 17.8% in constant currency. We see continued increased emphasis on digital transformation especially around customer experience, operational efficiency, and associated legacy transformation. We won four large deals in the last quarter and 18 large deals in FY22 from this segment. Growth in manufacturing segment increased to over 50% in constant currency. There were six large deal wins in this segment in the last quarter and 13 wins for the last year. We are helping clients across engineering, IoT, supply chain, cloud ERP, and digital transformation areas. High tech growth accelerated further to 20.9% in constant currency. We're seeing an increase in deals based on edge computing, digital marketing, and commerce. Cyber security is another area of focus for clients due to increased threat perception. Life Sciences vertically grew by 16.2% in constant currency. Clients are driving digital transformation of clinical trials to reduce cycle times through direct data capture, digital patient engagement to accelerate drug discovery, and reducing costs. In the last quarter, we were rated as a leader in 11 ratings in the areas of cloud services, big data and analytics, IoT and engineering, modernization, and artificial intelligence. We launched the acquisition of Oddity, a Germany-based digital marketing and experience and e-commerce agency. Together with Gondudi, this will further strengthen our creative, branding, and experience design capabilities. With respect to capital allocation, the board has proposed the final dividend of Rs. 16 per share taking the total dividend for financial year 2022 to Rs. 31 per share, an increase of 14.8% over the past year. I want to express Infosys' support for all the people impacted by the humanitarian crisis in Europe. The company advocates for peace between Russia and Ukraine. While Infosys does not have any active relationships with local Russian enterprises, we have a small team of less than 100 employees based in Russia which service a few of our global clients. In light of the prevailing situation, we made a decision to transition these services from Russia to our other global delivery centers. To support the humanitarian assistance initiatives in the region, Infosys has committed $1 million towards Ukrainian relief efforts and is launching a program to digitize Z-scale up to 25,000 individuals. With that, let me hand it over to Nilanjan for his update. NILANJAN KUMARANANAN, Thanks, Salil. Good evening, everyone, and thank you for joining the call. We navigated yet another year of a challenging environment with strong growth of 19.7% in constant currency, which is highest in a decade. The incremental revenue added this year was higher than the incremental revenue added in the previous three years together. This was backed by broad-based growth across segments and robust growth in our digital portfolio at 41.2% in constant currency. Operating margins for the fiscal year were at 23%, which was at the midpoint of a guidance band of 22% to 24%. In the backdrop of various supply-side pressures, we rolled out various measures to reduce attrition higher compensation increases, higher promotions, skill-based interventions, etc., in addition to higher subcoms. Free cash flow for FY22 crossed $3 billion. DSO reduced by 4 days to 67 days. Apex increased marginally to $290 million on the back of continued focus on optimizing the infra-creation-related spends. Consequently, SPF conversion as a percentage of net profit was 103% for FY22. SI22 ETS grew by 14.3% in dollar terms and 15.2% in INRs. Return on equity at 29.1%, improved by 1.7% over the prior year. Coming to quarter four performance, revenues grew by 20.6% year-on-year in constant currency and 1.2% sequentially. Growth was broad-based across verticals and geos and was in double digits. Although volume growth remained healthy in Q4, revenue growth in Q4 was impacted by usual seasonality, slightly COVID impact during the early part of the quarter, and the client-related contraction provision which we expect to recover in the future. This also impacted Q4 margins. Mining of large clients was extremely strong in SI22. 100 million client count increased to 38 compared to 32 in SI21. We had 12 clients giving 200 million annual revenues compared to seven in FY21. We have added 22,000 net employees, including trainees, during the quarter, the highest ever in the company's history, as we make headroom to capture the robust demand environment ahead. Consequently, utilization in quarter four declined to 87%, while on-site efforts mixed in stuff to 24%. Voluntary LTM attrition increased to 27.7%. While NPM attrition continues to increase due to the tail effect, quarterly analyzed attrition saw a decline of approximately 5% after a flattening in the previous quarter. Quarter per margin stood at 21.5%, a drop of 200 basis points versus previous quarter. The major components of the sequential margin movement were as follows. 1.6% RTC impact due to lower calendar working days, Client contractual provision, as explained above, and other writing puts and takes. 0.6% impact due to lower utilization as we create capacity for the future. 1% due to higher visa costs, third-party costs, and other one-offs which we benefited in Q3. And these were offset by approximately 1.1% benefit due to salary-related benefits, including more working days, leave costs, and others. Quarter 4 EPS grew by 9.2% in dollar terms and 13.4% in rupee terms on a year-on-year basis. Our balance sheet remained strong and debt-free. Consolidated cash and equivalents increased further to 4.9 billion at the end of the quarter. Free cash flow for the quarter was held at 761 million and yield on cash balance remained stable at 5.29% in Q4. In line with our capital allocation policy, the Board has recommended a final dividend of Rs. 16 per share which will result in a total dividend of Rs. 31 per share for FY22 versus Rs. 27 per share for FY21, an increase of 14.8% per share for the year. Including the final dividend and recently concluded buyback over the last three years, we have returned 73% of SPS to shareholders under our current capital allocation policy. Our accelerated investments in the last few years in strengthening our digital footprint Enhancing large yield capabilities, localization, talent scaling have enabled us to gain consistent market share. With the activation of digital disruptions across industries, we see further scope to engage more closely with clients and capitalize on the expanding market opportunities. We have identified areas of investments, including doubling down our focus on digital portfolio, scaling our cloud offerings, and further enhancing our capabilities in emerging technologies. We also remain committed to offer a compelling value proposition to employees through refilling incentivization and a holistic career growth. We plan to neutralize some of these through aggressive cost optimization and value-adjusting driven by service and brand differentiation. This, along with post-pandemic normalization of some expenses like travel facilities, et cetera, is reflected in the revised margin guidance for FY23 of 21 to 23%. With the pandemic hopefully behind us, we hope to see many of you in person over the next few months. With that, we can open the call up for questions.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone 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. The first question is from the line of Ankur Rudra from JP Morgan. Please go ahead.

Hi, thank you for taking my question. The first question is on the revenue guidance. Last year at this time, Salil, the revenue guidance was a bit lower at the beginning of F22. And at the time, you had much stronger, I would say, deal. I would say, you know, at least the order book was a lot stronger. You had a mega deal in the order book and perhaps a stronger exit rate. So I'm curious to what gives the confidence of giving a slightly higher guidance at the beginning of this year, given maybe a more volatile macro situation. Hi, Ankur. Thanks for the question, Salil. What we see today is the demand environment from what we can see for our client base is strong. We have for the year 9.5 billion in large deals, 40% net new. For the quarter, 2.3 billion, 48% net new, and a strong basis of expansion in dimensions relating to new client work and relating to actual expansion across different strata of clients, so within client expansion. Given all of those factors, we came to a view that we could see growth in the range of 13% to 15% for this financial year. Understood. Does this bake in any kind of reversal that you alluded to from the client situation in fourth quarter? The client situation of the fourth quarter will reverse over some period of time. We've not specified that in this. That reversal in any case is not in the range of a full year going to make a huge impact. We see this coming really from the strong demand that we're seeing. within the market from what we're seeing in the existing base of business that we have, the expansion within clients that we are seeing, and some of the new client acquisitions that we are witnessing. So putting all of those factors, we came to this view. Thank you. Appreciate the call. Just a follow-up question is on margins. Maybe to start with, could you elaborate, you know, the third-party costs which went up very sharply this quarter and last quarter? Is this the sticky new level given the nature of deals we are signing? And as a connected question, could you elaborate the sort of costs that have been baked into the F23 guidance or margins, including the wage inflation levels, the extent of the pace of the reversal of or normalization of the cost base? Thank you. Yeah, so I think one of the, you know, the large deal momentum which we get is through bundling our services with the software and the allied services and that gives us a multiplier effect in the client landscape, and also you've seen that over the last few years. So that's one of the reasons also you've seen the cost increase and has helped us in the quarter and in the year going forward. From a year-on-year perspective for FY23, you don't call out the wage impact. As Sajid said, it will be a competitive compensation hike. We will differentiate high-skilled talent, and in some cases it will be more broad-based. And, of course, around that, we have a lot of cost optimization, which we usually do. Some of them in the year past were, you know, tailwinds, for instance, the on-site offshore mix. But Subcon became a headwind for us last year, and some of these, in a way, will start, you know, going the other way in the following year. So the rate hikes will hit us early on in the year as well in quarter one itself. So that will be our initial headwind. But we have, you know, seen the overall – we have seen the overall – you know, impact of our cost optimizations. So I think we have started the discussions, as Harim said earlier, with our clients. Now, of course, this is a much longer haul. It's, you know, on the T&M side, et cetera, it happens, you know, on renewals, et cetera. But more on the SP side of the business, these are much more longer-term discussions. And, of course, these are also competitively bid. But I think the discussions have started. All our salespeople, I've actively engaged in this and looking at the overall demand, the supply front on this talent. We have started making some headway on this. Thank you, Mr. Lund.

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

Hey, thanks for taking my questions. It would be great if you can give us some more clarity on the client-specific contractual provision that you mentioned. We're getting a lot of questions on this from investors. How did that impact the revenue numbers for the quarter? Was there a margin impact as well? I think any clarity is going to be really helpful. And then just as a follow-up, looking at the margin guidance for fiscal 23, obviously we brought down the range by about 100 basis points. Are we assuming a pickup in wage inflation here? And then are we also assuming lower pricing power, which is something that actually did help in terms of levers for the I would say hardly for the past six to 12 months.

Thanks a lot. We heard the first question on the client contractual provision. I mean, just to clarify this, the numbers are very small. These are less than a percentage. So it's not a big impact overall as people are making it out. We just want to close that out. It's not a big impact, but it's less than 1%. But since you're looking at revenue growth and sequentially, I just really wanted to call it out. What are the larger questions?

The second question had to do with your margin guidance for fiscal 23. And we're asking if this actually factors an acceleration in wage inflation into fiscal 23 and maybe a lower pricing power, you know, also kind of not factoring into those numbers.

Okay, so again, Moshe, we've lost bit of it, but I could make up something you said about wage inflation as well. So, yes, in quarter one, we will do a compensation hike as well, both offshore and on-site. And like I said, it will be competitive. We will benchmark this, differentiate on talent side as well, and that's something we have seen over the last year has helped us. especially towards, you know, people on the higher skills side. So that is working for us. The overall margin guidance reflects a number of events, right? So one is, of course, we talked about the, you know, some of the normalization of the, you know, pandemic benefit we had got on travel and facilities, and some of that we're seeing is going to come back as well. And secondly, of course, we are seeing some of the, you know, headwinds in terms of, you know, on-site offshore, which we think we got a large benefit last year. So we have to see how this opens up in the rest of the year as it rolls out. But on the other hand, with our recruitment engine really kicking up now, subcon costs we have seen has actually plateaued during this quarter, and of course we think over the rest of the year we should be able to pull back costs on subcon lines. Automation remains very core to our cost optimization every year. We've taken out between 3,000 to 4,000 people automating and putting in bots and this is per quarter I'm talking about. So I think we have a very comprehensive plan. We've talked about pricing as well. And 21 to 23 is a reasonable margin band. We think we are comfortable to operation for next year as well. If you recall, even pre-pandemic, in a way, we were at 21 to 23. I think we ended FY21, which was a year before pandemic, at 21 points, if I'm not mistaken. So we are in the 21 to 23, and it's a comfortable range we are happy to be in. Understood. Thanks.

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

Yeah. Hi. Good evening. Just two questions from my side. The first one was on the guidance. So if I understand right, typically you have very high visibility for the next two quarters. And if I look at the last year net new deal wins, it's actually lower than the prior year. So I was just wondering, is the mix of much smaller deals which don't reflect within the overall large deal win numbers that you were talking about, is that a much higher number? Is that how we should think about it? And second, is it the pipeline of larger deals that could come through that's giving the confidence or is it the smaller deals? So that was the first question.

Thanks for the question, Salil. The We are not specifying today the different types of deals within the mix. A few points to give some color on it. First, the pipeline that we see today is the largest pipeline we have in terms of large deals. So that gives us good confidence. Our net new for the year is strong. We have good momentum exiting this year, financial year 22, which gives us a good foundation for next year. And we see continued traction within clients as we're expanding, as we're consolidating, as we're gaining market share. So that gives us an added boost. Hopefully that gives you a little bit more color on that, Tim.

Sure. The second question was in terms of how are you seeing on-site wage inflation broadly when you compare the prior year? Do you see that at a much higher level for the industry in the US? Just wanted your thoughts on that. And finally, any specifics on the financial services space which are relatively softer and Life Sciences, we actually saw a sharp drop for the quarter.

On the wage inflation outside India, it's definitely higher than what we were seeing last year, and that will become part of how we factor in our overall compensation increase. There's inflation numbers in most of the western geographies which are higher today than they were 12 months ago. On financial services, while in the quarter we saw the Q on Q was lower, the overall demand environment remains very strong for us in the segment. We see good pipeline there. There were significant large deal wins for the year and in the quarter, and we remain confident with the growth in financial services. In life sciences, Conversely, we had in the previous quarter several one-time large deals that had come in, and that's what came through. It's a smaller unit for us, so it was much more volatility in that. But the underlying business and life sciences, the demand still looks in good shape.

Sure. Thank you so much, and all the best. I'll keep the flow.

Thank you. The next question is from the line of Keith Backman from BMO Capital Markets. Please go ahead.

Yes, thank you. I wanted to ask a question about what are your assumptions on both attrition and utilization? How should we be thinking about those trends over FY23? And specifically, if you could correlate it, what's the impact in terms of your margin guidance that you've provided here today of 21 to 23?

Yeah, so I think firstly on the utilization, we are still at the higher end at 87.5. We want to bring this down. Now, having said that, a lot of this will happen through the influx of pressures, right? it's not a dollar for a dollar in that sense. The utilization will start impacting more. We're putting in pressure. We'll still have a margin headwind, but if you're looking for a map behind it, there's no straightforward relation because it's not one-for-one in that sense in terms of wage cost versus utilization. It'll be at the lower end. So that's first. On attrition, yes, we think that this should come down in the following year. The impact of what we're seeing now the impact of putting stressors in, not only by us but by the entire industry because it is to a bit a rotational turn issue across the industry and as the industry puts in pressures, there is a new source of supply across the industry as well. And of course, finally, the interventions which we are doing now as well. So that's all factored into our, you know, 21 to 23. Of course, we are also looking at investments, like Salil said, around cloud, around digital capabilities, and therefore, that's also baked into the next year.

Okay, just to clarify, and then I will see the floor, does attrition come down for the industry or emphasis or both?

It will be both. I don't think we are in a silo in the ecosystem. We are all interconnected. My attrition is somebody else's lateral and somebody else's attrition is my lateral. And therefore, if the industry has to come out of this, it is fundamentally through volume has to be through pressure. There's no other source of volume. Volume in the industry in the long run has to be only pressure. And therefore, as we start pumping in more pressure, send them for training, put them into the bench, then lead them into production, I think that cycle takes time. And you're seeing already the benefits of this, not only with us, you're also seeing that with the industry as well.

Okay. Many thanks. That's it for me. Cheers.

Thank you. Thank you. The next question is from the line of Sudhir Guntupalli from Kotak Mahindra AMC. Please go ahead.

Yeah, good evening, gentlemen. Thanks for giving me the opportunity. Nilanjan, you made a comment that pre-pandemic we were at 21.5% margin and our current margin guidance stand is also somewhere around that. So should we read this margin downgrade as more of a structural reset in the company's aspirational profitability going back to pre-COVID margin levels? Or should we see this more of a one-time downgrade for FY23 led by transient supply-side pressures.

Yeah, so as you know, we only give, you know, the margin guidance for the year, 21 to 23 and 21 to 23, of course, on the same guidance range. But FY20 was for 21.3%, so that we're not saying it's going to end up, but the comfortable range we are in for FY23, 21 to 23. So I think nothing more than that. And we've talked about the investments we are going to make not only on a talent, you know, this is a robust demand environment. We don't want to lose, you know, highly skilled talent. So we are rolling out, you know, interventions there. We are rolling out interventions on the sales side, on the marketing side, on the digital cloud. So there are multiple interventions, and we've seen the success of that over the last four years. I mean, the results are in front of you, and that's something which we've looked at and baked into the margins for next year.

An extension of this question, the current exit margin rate in March 22 and margin downgrade for FY23, it gives a bit of a deja vu feel of the exit margin and guidance situation exactly three years ago in March 19. In fact, we were not staring at so many margin headwinds like we are now, barring a bit of an elevated attrition at that time. So my question is, is it fair to assume that for the next four quarters, margin trajectory will trade somewhat of a similar path like during FY20? where the current delta in growth will likely take care of the delta in margin headwinds? Or do you see any major divergences in terms of how the pattern may play out over the next four quarters?

I think you're five steps ahead of me now on this. So I think, like I said, on the margin side, you know, we know there's going to be a quarter one impact, right? We know there are more longer term cost optimizations we can put. There are shorter terms is what will happen. So I think it's a It will be a multiple impact of all this, and of course, growth will always help, and we've seen that the impact of growth on operating leverage also has helped in the past. So it's a combination of all this. Thank you, sir. All the best for the future.

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

Thanks for taking my question, and congrats on what's been a great year overall. Looking forward, I think this question's been attempted in different ways by some of the earlier questions that came through. But if you were to kind of think about your guidance on revenue for the full year and think about what are the puts and takes in terms of any delta that you might see on demand, how comfortable do you feel that you have a push in? I think if I also look at your past RACs record, you've taken up guidance pretty much every year consistently multiple times during the year. Is there room for, is there enough buffer on both sides of the equation is my first question.

Hi, Riya. Thanks for the question, Salil. The way we looked at our growth guidance, we really tried to take a look at where is the demand today, where is what we've done with large deals, what we're seeing across many of our accounts. For example, if you see some of the statistics that we share, number of accounts over 100 million or 50 million, they've seen big movements over the last 12, 24, 36 months. So we have some view of how that will move in the coming year and then how we are working on new account acquisitions and focus. Those are the things we built in to build the guidance and That's the approach we take every year in April as we look ahead. And then as the year moves, as we get other information, we try to then see how best to communicate what we are seeing in the demand environment. It's the same approach that we follow. So it's difficult, for example, to say what does it mean with a cushion and not cushioned. Because at this stage, what we see is what we are sharing, which is the 13 to 15 on the growth. And then every quarter, with the broad-based connections we have with clients and interactions across the industry, we will continue to share what we see with respect to the demand environment.

Got it, got it. And on the margin side, I think you've spoken repeatedly about investments and investments for future growth. Could you kind of, if you were to split your margin that you've taken, you know, your guide down roughly by a percent, could you split it into what would be the contribution of the investments and what is really the contribution of all the other metrics that you talked about that are likely to reverse?

Yeah, so there are lots of, like I say, every year, we have headwinds on, you know, compensation. We have, you know, headwinds, like I said, on the, that's the biggest one. We have headwinds on, of course, now this year coming on the travel margin. and the facility side as things open up. On the other hand, we have the cost optimization program, which has been running, you know, quite well across all these years, automation, on-site, offshore, you know, subcon, again, it works against us. And then, of course, the investments which we are going to make, and these will start during the year. These will be behind sales side. This will be behind digital meters. This will be behind cloud capabilities. This will be behind people in centers on higher skill side. So it's a combination of all this, so we're not really calling out the separate impact, and all of that has been considered overall into the modern structure.

Got it. My last question, if I may. So should I assume that your increased visa costs that you've had in Walmart have like a percent impact in the quarter? The higher visa applications is to kind of offset some of the subcontracting pressures that you've had Now with travel opening up in the Western market?

Yes, so as I mentioned, the impact was a combination in the margin walk of Visa. It was third-party cost, another one-off which we enjoyed in quarter three. That was the 1% in the margin walk which I took.

Got it. Thanks. I'll come for follow-up if there is any time and wish you all the best for the year. Thank you.

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

Yeah, thanks for the opportunity. The question again is on margins and the investment that you spoke of. I was just wondering, are these similar to the investment that you had done in 2018-19, so more of one-time kind of investment, or these are more regular investment, which anyway you keep doing in the business?

Hi, Pankaj. Thanks for the question. This is Salil. I think the way we're looking at it is, you know, we put in place that strategy a few years ago. We built out deep capability across multiple areas. That was what we did in the first sort of six months, a year or so. We are now seeing over the last four years a good impact of that approach. We now want to, we see a tremendous demand environment which we see across cloud areas of digital automation and some of the new digital tech companies. We want to take that and build the capability deeper in those areas. We consider that now a one-time approach in this next few quarters to get it mobilized. It's not something which is going to be a continuous new activity for us. And then we want to, again, like we did last time, shift into building capability from the operating business itself. But since we see an inflection point in what we see as the opportunity set, we want to make sure we take advantage of that, keep our leading position with market share growth that we've had over the past three, four years, and try to build on that for the coming three to five years.

I understand that. And the other question also was on your guidance on the revenue side. What kind of outlook you are building in on the macro concerns around what's happening in the Eastern Europe or even the larger macro worries around the inflation in your end markets? Are you taking any impact of that maybe in the second half of the year? or the guidance is more on an as-is basis, and in case if there is any incremental deterioration in the macros, that would be probably incremental to whatever the guidance that we have given.

Today, what we see is the points that you mentioned are in the macro environment, but as we look at our demand environment, we don't see any impact to it, and we don't have a clear view of how to make an estimate for, let's say, Q3, Q4, if it will be at what level and so on. Based on that, we have built the guidance today and we will evolve it as we go through. We feel comfortable given what we are seeing in the environment that this is the sort of growth that we will see in the range of 13 to 15. We don't see really an impact today in many of those factors in the demand environment today.

Understood. Thank you and wish you all the best. Thank you.

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

Yeah, hi. Thanks for taking my question. So, Philip, a couple of questions again on the European part.

So, my first question is that, as you have already mentioned, that our exposure to Russia and the travel geography that we have now is very limited.

But just wanted to pick your brain on the... as we work for a lot of multinational clients who have operations across countries and in parts of Russia and Eastern Europe as well. So what are the conversations with those clients like? I mean, are they looking to maybe, I mean, is there a possibility of them maybe curtailing down their spend to some extent or is there some negativity in the conversation that is creeping in? And a second, a more longer-term question on the same geography is that over the last two to three years, I mean, in fact, more than that, last four or five years, we have seen Eastern Europe evolve as a destination for hiring for a lot of companies, maybe in data analytics and many other domains. Do you believe this situation, the current war conflict situation, has pushed that back by maybe a few quarters or years? Or do you think it's a temporary situation and once it resolves,

the attractiveness of Eastern Europe regarding hiring for those specific domains will still come back as it was before. I think I caught both the questions. Let me just repeat what I've understood. First was, is the situation in Ukraine impacting any demand in European clients? If that's the question, currently our conversations and discussions with clients in Europe don't see any impact on the demand environment for us because of this situation. Of course, as we go through the next few quarters and so on, we will see how it plays out depending on the duration and so on. On the second one, the recruitment situation. So we have centers, for example, in countries in Eastern Europe, and we see that growing quite well for us. Today we have, of course, no center in Ukraine. But the other areas we've been expanding in and that has developed quite well. We don't see today an impact for what we are seeing. There might be obviously impact with centers in Ukraine. So our centers, which are in other geographies in Eastern Europe, we are seeing good growth in those centers. So if I were to specifically ask countries like Hungary, Poland, or Austria, they would continue to remain attractive destinations for us to hire and go on business with them. So Poland and Romania are the locations where we have centers and we are actively recruiting and scaling up in those locations. Got it. Thanks for taking my question.

Thank you. The next question is from the line of Ravi Menon from Macquarie. Please go ahead.

Thank you for the opportunity. I just want to clarify on this pass-through cost. Should we not think of this as like a margin tailwind whenever these pass-through costs reduce? Because I assume that customers have the option, let's say if it's a ServiceNow software, they can procure it themselves. So I would assume that these are done at zero markup. Would that be correct? Yes, but these are long-term contracts, and I think the value proposition which we have is how we bundle services with these software. So it's just not sort of a one-off sale. I think that's the, you know, proposition with us is that we can integrate this into the cloud, into the vertical stacks, et cetera, and bundle that with the services which we have. So that's the way we look at it. But my question was whether what should we assume as a margin for this? Should we assume that this is a margin payment? Should we think of this and adjust for the margins accordingly? Assume that this is a zero margin because the client can actually procure that and just ask you to implement it, correct? But as you see, the overall market for software as a service, this is going dramatically, right? And that's something where we can come in and add this value. So it's just not one client with one software. There are multiple clients. There are horizontal softwares. of various kinds as well. So I think, like I said, this is a proposition which we have which is quite unique for us. So you just can't see it as a one-off intervention with one client. So are you saying these are software that you own? This is your intellectual property? I thought these were third-party items bought for service delivery. No, these are, like I said, these are software which are, of course, owned by the SaaS vendors, but the bundling of services which we do with this, that is the value proposition we give to our clients. I'll take this offline. That's fine. The second question is on, if you look at the incremental revenue this quarter, we've added about $30 million. Last quarter, we added more than $250 million, if I remember correctly. And this quarter, the increase in cost through cost is $40 million. So just for that, your services revenue has actually dropped in a surprisingly strong demand environment. So how should we think about it? I mean, has it Is it that certain projects have come to an end? And this is across the board, right? I mean, we've seen decline in licenses both in North America and Europe, but it's not as if there is one vertical that should drag you down or a particular client.

I mean, it seems to be revenue increment that we saw across the board. So how should we think about that?

Yeah, so I think, like we said, certainly volume growth sequentially has been very strong, first point. Second point, if you see a year-on-year, it is 20.6% versus 19.7% for the year, right? Our numbers for exit year-on-year are higher than the average for the year, number two. Our volume growth frequency is higher. We've added 22,000 people this quarter. And I'm assuming many of these are being hired to look for future demand, right? And then put them into production. So that's the third signal you've got. Fourth, if you just see from a revenue perspective versus the volume sort of increase we've seen, We've talked about the seasonality of quarter four. And if you look back over the last five, six years, we've always had a seasonality of revenue versus volume in quarter four because of the working day calendar impact. We've seen some initial part of the COVID leave in the initial part of January impacting us. We had this one-off we just talked about with the commercial contract for one client. And of course, there are some other puts and takes. So I think I don't think you can just see quarter four in isolation. We wouldn't have given a guidance of 30 to 15, which is probably the highest guidance we were given at the start of the year from any part in the last 10 years at least. So I think all the demand indicators and landmarks are looking very good. So one last question, utilization. You were talking about cooling it down a little. What would be a good range that we should think about coming down to about 85% or so, would that be sufficient or should we think even lower? Yeah, so around about 85% is a number. It may go up or down in the quarter, but that would be somewhere where we would be more in the comfort range as well. All right. Thank you so much. Best of luck.

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

Hi. Thank you for taking my question. Nalanjan, I believe that you mentioned in... your prepared remarks that you are anticipating that the subcontractor costs are plateauing. I was just wondering why you're concluding that. Is that visa-related, or is there something else we should be aware of?

Like I mentioned, our subcontractor costs have pretty much plateaued at around 11.1, 11.3, I think, in this quote, as a percentage of revenue. However, from an exit, just in a headcount perspective, it has actually come down And one of the reasons for this whole ramp-up of subcons is our recruitment engine actually was a bit behind, so we were hiring 11,000, 12,000 people each quarter, and the balance demand was being fulfilled by subcons. With us now getting into this mode of hiring pressures, we added 22,000 people, you know, because on an exit basis, you know, it's very close to about 7% of the exit headcount already. And therefore, as we look ahead, we will continue to push on the pedal in terms of recruitment, and replace many of these subcons either through a replacement system or what we call a program of subcons to hire which you offer them a full-time employment within the company. So we've been doing that. We have been at the lowest of the industry, you know, in 2019-20. So we know where we have to get at. It may take us some time, a few quarters, but we know that's a margin we can press on.

Thank you. And then I believe Niranjan, you also had quantified the client contract provision. I'm afraid that the call was a little muffled. Could you repeat the percentage impact if you stated it?

So it's less than a percentage, and we think over a period of time this should come back.

Got it. Thank you. I'll drop back in the queue.

Thank you. The next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Hi, good evening. Thank you for taking my question. My first question was more around the margin and the guidance which we have reduced a bit. So is this a reflection of some of the transient impacts which we are seeing, especially about some of the things which you talked about, supply-side constraint and the investment which we are making? Or is there a structural change in some of the cost structure of the deals which we are making? When we have strong growth, some of the additional costs which comes along with that through third party and other things are essentially pushing our margin down.

The last part is I think quite clear. If you feed actually a large deal strategy, which we announced I think by 19 or beginning of 18, and we were doing about 3 billion large deal and that time margin was at 20. We went from $3 billion to $6 billion to $9 billion to $14 billion. So, large deals actually went up. Even our margins went up. So, some of that impact which people fear. Of course, when we go into large deals in the initial part of the cycle, of course, headwinds are there because clients want cost savings up front. But we are clear of the deal tenure, how do we price the deal, so that over a period of time, we are able to take out costs from our various levers which we have and you know, come closer to the portfolio margin. So that's something we've been doing for the last three, four, five years, 10 years, 40 years in this industry. I think the impact we're talking about is much more about the investment we want to make around what we've seen in the past, the success of what we've done. And we think that this robust, you know, demand environment, these are new capabilities we should invest in as we progress. And of course, the usual headwinds which we talked about. The biggest differentiation is the pandemic, you know, cost normalizing, right? And I think you all have the numbers in terms of travel and utilization on-site offshore. So some of those you already have subcontracts. So you can start triangulating what's going to come back on return to normal.

Got it. Thanks for that. Our large deals in switch fee report have been steady between $2 and $2.5 billion for the last few quarters. So I understand a lot of the deal activity is also happening in the smaller size, which is not getting reflected here. So would you give sense on the overall deal size, how that's been trending, or would you consider sharing that data on an ongoing basis?

So, this is Salil, thanks for that question. I think at this stage we are not sharing that data outside. Our focus was to share some of the areas which we had made sort of a change in a few years ago. For example, the digital revenue percentage and the large deal value. What you mentioned, of course, is accurate. We have tremendous activity across all deal sizes. We have a very robust overall pipeline and also a very robust conversion with NetNew there, which also feeds a little bit into the earlier discussion on revenue growth guidance.

All right. Great. Well, finally, I think I heard that you talked about 85,000 pressure hiring, which you have done this fiscal year. Any target which you have set for next fiscal year?

For next year's campus recruiting, we've not communicated that beyond saying that we will do more than 50,000 campus recruits for next year. As we go through the year, we will communicate more on that. But today we see an active campus recruitment program.

Got it. Thanks for that. I'll call back.

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

Yeah, thanks for the opportunity. Most of the questions answered.

Just wanted to understand the gap between the utilization including trainee and excluding trainees as big as 700 basis points. and we are adding freshers for not so many quarters.

So is it fair to say, and with that, you are also expecting subcontracting cost savings. Is it fair to say second half of F523 margin may have more upward bias? I think the lag may also be a tailwind versus first half.

Yeah, like I said, these trainees have to go through, you know, their whole, you know, my source tent, etc., Then they go to the bench, they get, you know, reskilled on speciality skills, and then they lead them into production. So it takes some time as well, and this is why one is, of course, excluding trainees and including trainees as well. You see the gap. So we have, of course, an increase in the overall trainee count as well between quarter to quarter. We have not been deployed in projects. But from a margin perspective, I'm not sure this is a big part of the headwind of, you know, H1, H2. I think, of course, H1, because of the comp, is up front, one which happens, right? And you can go back two years and see that as well. But overall, you know, for the year at 21-23, we are, you know, quite comfortable. Okay, okay. And just a clarification, Nilanjan, just further to what Ravi has asked. So even if you look at the revenue growth, it's a partial decline. But at the same time, you are also saying the volumes have gone up. So is it the offshore effort in this quarter has not actually gone down? So why the volume growth is not getting reflected in the revenue growth X pass-through as a whole? So is it the realization in this quarter is slightly lower? No, there are some routine puts and takes. Like I said, one is always if you go back, you will always see the seasonality of working calendar days, right? That's a straight revenue without volume. Correct, because that's just a rate cut impact. The second one is the COVID initially part of the year. The third one is the one contract, you know, this thing, contractual provision which we made for a client. So I think these are the, you know, areas where you've not seen that volume benefits flowing into revenues. We're trying to correlate that. And like, you know, Saleh also said, we have these strong sequential quarterly volumes. Okay, okay. Thanks and all to this.

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

Thank you. This is Salil. Thank you everyone for joining us. I want to just reiterate a couple of points we all discussed and mentioned. First, FY22 was an extremely strong year for us. Close to 20% growth, 23% margin. We are clearly taking market share and really connecting very strongly with our clients for all their digital and cloud work. As we go ahead, we want to focus on the ever-expanding opportunity set in cloud, digital, data, analytics, automation. And in doing that, we want to make sure that we remain leader in the pack and continue the market share taking that we've been doing. We also want to focus on our employees with increased engagement and increased methods of working with their compensation increases and career progressions. Putting all of that together, we come to a growth guidance of 13 to 15% for this financial year 23 and a margin guidance of 21 to 23. We have a strong outlook and we look forward to working with our clients and employees for this outlook to be delivered in financial year 23. Thank you again, everyone, for joining, and look forward to catching up during any of the one-on-ones in the quarter. Take care.

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