Infosys Limited American Depositary Shares

Ladies and gentlemen, good day and welcome to Infosys Limited Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. 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 and then zero on your touch-tone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindru. Thank you, and over to you, sir.

Thanks, Indra. Hello, everyone, and welcome to Infosys Earnings Call to discuss Q2FI 23 financial results. This is Sandeep from the Investor Relations Team in Bangalore. Joining us today on this call is CEO and MD Mr. Salil Parekh, CEO for Mr. Nilanjan Roy, and 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. Subsequently, we'll open up the call for questions. Kindly note that anything... that he says it sets us to our outlook 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 pilot with the SEC, which can be found on www.sec.gov. I'd now like to pass on the call to Salil.

Thanks, Sandeep. Good afternoon, good evening, and good morning to everyone joining the call, and thanks for joining our call. Our Q2 performance was strong with year-on-year growth at 18.8% and sequential growth at 4% in constant currency. Growth in Q2 was broad-based with all industries and geographies growing in double digits in constant currency. Growth in constant currency in the first half of financial year 23 was 20.1% compared to the first half of financial year 22. This momentum is accompanied by a strong pipeline of large deals and the highest large deal value in the last seven quarters of $2.7 billion. 54% of this was net new. These elements are a clear reflection of the deeply differentiated digital and cloud capabilities we have developed that are highly relevant to a client's strategic priorities. Our digital revenues are at 61.8% of our overall revenue and grew 31.2% in the quarter in constant currency terms. While digitally continues to see some strong growth rates, we are seeing acceleration in growth trajectory of our core services this quarter. This is due to our industry-leading automation capabilities and reflects an interest among clients towards cost optimization programs. We also see this in a large D pipeline with strong focus on cost reduction programs. While we do not generally share the specific amount of our cloud revenue, we are delighted to share that in Q2, our cloud revenue was larger than $1 billion, showing tremendous strength of our cloud services, especially our industry-leading COBOL capabilities. Several examples of client transformation demonstrate the value we deliver. First, a European telecommunications company is closely engaging with us to accelerate the business growth and prepare for the digital future. Second, an aviation giant is working with us to digitally advance the engineering of the product development and emerging aircraft programs. And third, a fast-growing logistic company is working with us to secure the cloud environment and build greater resilience into the operations. These examples and several others showcase a commitment to deliver value for our clients and the trust and confidence in our expanding digital capabilities. Strong growth this quarter was accompanied by operating margin expansion of 150 basis points. The operating margin for the quarter was 21.5%. This was because of cost efficiencies, optimization in large deals, and currency benefits. The luncheon will provide more color on this. H1 operating margins are 20.7%. Our attrition has now been decreasing for the past three quarters, including this Q2, on a quarterly analyzed basis. While the overall demand environment continued to be healthy, as reflected in broad-based growth and robust large-deal pipeline, We also see signs of cautious behavior by clients due to macro concerns. Apart from slowness in the mortgage segment of financial services and the retail industry segment we talked about last quarter, we see emerging concerns in high tech and telecom industry segments in the form of reduced spend, especially towards discretionary programs. We are well positioned to help our clients with their digital agenda and their cost agenda. Growth in our digital and our cost services demonstrates that. As the macro environment evolves, both of these components of our business will help us to be appropriately positioned with our clients. We have initiated a pivot to focused cost programs within our large deals pipeline. Our operating model and offerings are agile to deliver value for clients in this evolving macro environment. In keeping with our capital allocation policy, the Board has announced a share buyback of Rs. 9,300 crores, or $1.13 billion, and an interim dividend of approximately Rs. 6,940 crores, or $850 million. Our H1 performance of 20% growth in common currency and robust large deal signings in Q2 give us the confidence to change our revenue growth guidance, which was at 14% to 16% earlier, to 15% to 16%, even as we are seeing emerging concerns that we talked about earlier. Our ability to grow at strong rates and take market share gains is a clear validation of the relevance, depth, and breadth of our service offerings and deep client relationships. We change our operating margin guidance for financial year 23 only for this year to 21% to 22%, which was earlier 21% to 23%. We anticipate we'll be at the lower end of this range. With that, let me request Nilanjan to share other updates. Thanks, Salim. Good evening, everyone, and thank you for joining this call. Q2 revenue grew by 18.8% year-on-year and 4% sequentially in constant currency terms. All business segments and geos grew in double digits year-on-year in constant currency. Specifically, North America grew by 15.6%, Europe by 28.5%, manufacturing by 45%, URS by 24.3%, communication by 18.4%, and retail by 15.4%. Digital revenues constitute 61.8% of total revenues and grew by 31.2% year-on-year in constant currencies. Revenue growth was 20.1% in constant currency terms in H123 over H122. Client metrics remain strong with year-on-year increases in client count across revenue buckets. Number of $50 million clients increased by 15 to 77, while number of 100 million clients increased by 4 to 39. Number of 300 million clients increased from two in the quarter to last year, reflecting a strong ability to mind top clients by providing them multiple services. Employee counts increased by approximately 10,000 to 345,000. Utilization, excluding trainees, was 83.6%. On-site effort mix remained flattish at 24.4%. Quarterly, annualized voluntary attrition came down further by another 2.5% during the quarter. This is also starting to reflect in reduction in our LPM attrition numbers, which reduced to 27.1% compared to 28.4% in Q1. We expect attrition to reduce further in the coming quarters. Q2 operating margins stood at 21.5% and increased of 150 basis points Q1-Q. The major components of the Q1-Q margin movements were as follows. The margin tailings comprising of 70 basis points comprising of rupee depreciation, partially offset by cross-currency, 90 basis points from cost optimization, including large deal optimizations, RPP increase, et cetera, partially offset by lower utilization, 40 basis points from reduction and sub-conference, before offset by headwinds of approximately 40 basis points from compensation related increases and impact. Q2 EPS grew by 11.5% in repeat terms on a year-on-year basis. Our balance sheet continues to remain strong and debt-free, Consolidated cash and investments were $4.8 billion at the end of the quarter. Free cash flow for the quarter was $589 million, supplying conversion of 79% of net profits. Free cash flow generation is typically low in Q2 due to higher tax payouts in both India and the U.S. ROE increased by 1% year-on-year to 30.8%. Yield on cash balances increased to 5.8% in Q2, DSO increased by two days, sequentially to 65, reflecting higher billing done during the quarter. Coming to segmental performance, we signed 27 large deals in Q2 with a CCB of $2.74 billion, with 54% net new. Five large deals were in financial services, four each in retail, communication, energy, utility resources and services, and high-tech segments. Three in manufacturing, two in life sciences, and one in other verticals. Region-wide, 18 were in the Americas, six in Europe, one in India, and two in the rest of the world. Growth in financial services segment continues to be strong, backed by large yield wins, account expansion, and new account openings. We continue to see an acceleration in cloud adoption in the FF sector, and are working with many of our clients in cloud migration, cloud management, and other cloud-related platform deals. In retail, we are seeing focus on digital consumer engagement, supply chain transformation initiatives, IT cost operations, legacy modernization, and new install capabilities. There are, however, some pockets of slowdown in business cycles, especially for fashion apparel retail and general merchandisers. We have a healthy mix of outsourcing and digital deals. In communication segments, we have seen healthy order pipeline and deal conversion, but we expect cost pressures from client side with impact on budgets, especially for traditional services due to macroeconomic concerns. Energy, utility, resources, and services segment reported robust and steady growth. The cost-takeout initiative continues to take momentum in the world. Manufacturing segment growth continues to remain strong and broad-based along with steady flow of new deals. We see continued tech spend by customers driven by the need to increase security posture, migration to cloud, increasing productivity by transforming to smart factory, transitioning to smart products, and other broader digital transformation initiatives. In smaller verticals like high-tech as well, we are seeing some increasing consciousness amongst clients around discretionary spend and consequently there have been some delays in deal closure. For digital services capabilities in Q2, we have been ranked as leader in 19 ratings in the area of the public cloud, tax, design experience, automation, and data and analytics. We remain committed to maximizing our total shareholder returns and in line with the capital allocation policy of returning 85% of free cash over the period The Board has recommended the following. An interim dividend of Rs. 16.50 per share for SPI 23 versus Rs. 15 per share for SPI 22. This is a 10% increase in dividend per share. Buyback of equity shares of up to Rs. 9,300 crores through open market route post-approval of shareholders at a maximum buyback price of Rs. We believe our progressive capital allocation policy continues to provide predictability to our shareholders. Although there's a gradual abatement of talent cost pressures, they continue to exert pressures on the cost factors and hence will need to be countered by our various cost optimization measures, including rationalization of subcons, flattening of the pyramid, increasing automation, reducing on-site mix, and engaging with clients to increase pricing. While H1 growth was strong, we expect H2 growth to be impacted due to seasonality, comprising of furloughs and low working days. The revenue guidance for the year has changed to 15% to 16%. As we mentioned in the last quarter earnings call, F523 operating margins would be at the bottom end of the guidance band. We are now narrowing the guidance range to 21% to 22% for F523, and we expect to be at the lower end of the range. With that, we can open the call for questions.