Infosys Ltd
NSE:INFY

Watchlist Manager
Infosys Ltd Logo
Infosys Ltd
NSE:INFY
Watchlist
Price: 1 902.25 INR 3.72% Market Closed
Market Cap: 7.9T INR
Have any thoughts about
Infosys Ltd?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2019-Q1

from 0
Operator

Ladies and gentlemen, good day, and welcome to the Infosys earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindroo. And over to you Sir.

S
Sandeep Mahindroo

Thanks, Gerna. Hello, everyone, and welcome to Infosys earnings call to discuss Q1 results including the financial release. I'm Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is new member, Mr. Salil Parekh; COO, Mr. Pravin Rao; CFO, Mr. M.D. Ranganath; President and the other members of the executive management team. We'll start the call with some remarks from Mr. Salil Parekh, Mr Pravin Rao and Mr. Ranaganath on the recently completed quarter, subsequent to which, we'd open up the call for questions. Please note that anything which we say which refers 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 explanations of these risks is available in our filings with the SEC, which can be found on www.sec.gov. I'd now like to pass it over to Mr. Parekh.

S
Salil Satish Parekh
MD, CEO & Director

Thanks, Sandeep. Good afternoon, and good morning to everyone on the call. We're pleased to share with you our results from the first quarter of fiscal 2019. We are delighted that our strategic approach to focus including Agile digital and energizing the core services with automation and AI is resonating with our clients. As also is our approach to enhance the skills of our employees and the actions and localization in the markets we operate in. Our digital revenue has grown by 25% year-on-year in constant currency to reach $813 million, which is a quarter-on-quarter growth of 8% in constant currency again. Our total digital revenue is at 28% of our business. Our overall revenue has grown by 6% year-on-year, and 2.3% quarter-on-quarter in constant currency. Our operating margin was at 22.7%. We have $1.1 billion in large deals in Q1, the largest we've had in the last several quarters, of which 40% were in financial services, and we had an increase of 4 clients to a total of 24 clients now, that are over $100 million per year in revenue. And 2 of these 4 clients were in financial services. Overall, we see a good demand environment in the U.S., Europe and in Asia Pacific. In terms of sector demand, we see strength in energy, utilities, retail, insurance and manufacturing. In our Agile digital business, we see especially strong traction for the work we're doing in the cloud area, in data and analytics, in IoT and in the area of experience, user experience, client experience and employee experience. Our 2 recent acquisitions, Brilliant Basics in the U.K. and WongDoody in the U.S., are helping us expand our portfolio in this experience area and are already starting to have an impact across our clients, which in continuing traction of our automation approach and of our artificial intelligence platform, Nia, in our core services. And our approach to progressively move our employees onto an Agile platform, is seeing good traction. In a localization program, we've launched a new 75-acre campus in Indiana in the U.S., and are now planning 4 other locations in the U.S., 6 in Europe and 3 in Australia. With a strong foundation of delivery, the focus on Agile digital and AI-powered core services, we are now expanding on our strong sales and go-to-market deals. With that, I feel we have a stable start to the year, and are executing on our strategy and our 3-year transformation program. Let me now hand that -- hand it over to Pravin, our COO.

U
U. B. Pravin Rao
COO & Whole

Thanks, Salil. We had a steady quarter from operations perspective and continue to progress on our digital growth targets. We had 8 large based wins during the quarter with TCV of USD 1.1 billion. 7 of the 8 wins were in Americas, and 1 in Europe. We've been selling Energy, Utilities, Resources and Services, 3 in retail and 2 in the finance and services business. Volume grew by 2.6%, and realization in constant currency terms remained stable. Utilization, excluding salaries, increased further to 85.7%, which is an all-time high. Attrition increased to 20.6%, partly a seasonal phenomena, and there are still a few senior level [indiscernible]. Our senior level management is quite strong. We continue our strong recruitment drive and added 17,709 professionals during the quarter on a gross basis. During the quarter, we also rolled out compensation increases for about 85% of our employees. Now let me talk about the client sectors. Mutual transformation remains a key theme with clients across all the business verticals, and more budgetary spend gets diverted towards this area from the traditional business. Focus is on within technology to delivering business outcomes or help in strategic differentiations. We are building a strong team of digital specialists to work as a -- to [ probably just be a contending layer, cutting across all the pipe we left ] of our digital engagements. Within the quarter, we completed the acquisition of WongDoody, and this enhances our offering in creating services as well as the entire value chain of creative, production, campaign, analytics and measuring outcomes. We also launched the Design and Innovation Studio at Rhode Island and announced 5-year partnership with Rhode Island School of Design to extend our capability in digital space. A large part of our new deal wins during the quarter involve Digital, and we have a healthy pipeline. And we saw some softness in the financial services in quarter 1, driven by cost reduction pressures and in-sourcing in a couple of plants. Momentum continues for second tier and regional banks and some management customers. We planned through the years for increasing the spending, and we expect our U.S. business to outperform the portfolio in the coming quarters. And the European portfolio was soft in the quarter 1, we expect it to improve in the coming quarter. Pipeline for our deals is showing steady increase, and over 40% of large deals issued in quarter 1 was in this vertical. Overall, pricing is stable and bid sizes are higher. In Insurance, the particular spend is increasing, and insurance across the spectrum for [ modeling ] in the [indiscernible] back-end systems to improve experiences for customers. We have a robust pipeline and more focus on core platforms, modernization, digital, prospect management and vendor consolidation, rebidding of work. Growth is expected to remain robust, with strong deal pipelines and new account openings. We see that in PCV we had a standard performance driven by a ramp-ups and deals from earlier and continuous momentum with existing clients. Within the sector, PCV and logistics is showing more growth in the core retail vertical. We are seeing growing interest to invest digital, AI, RPA, analytics, cloud and cybersecurity. Europe is still growing interest in integrated outsourcing tools and new transformation programs. And retail is seeing some early signs of green shoots. There are tremendous increases, driven by [indiscernible]. In logistics, we're seeing weak demand due to CapEx reduction and all types of volatility. I see that growth in telecom sector continues to face headwinds due to competition in the industry and change in the industry dynamics. Moving to previous top line and bottom line SKUs. M&A activities, member consolidation, cost-cutting measures, resourcing and competition for legacy services are impacting growth. Some of these things are opening up in innovation areas like digital transformation, [ optical ] design networks, IoT, customer experience and cybersecurity. We think these places are seeing an upward momentum. Work in the Energy, Utilities, Resources and Services vertical continues to remain robust with momentum in top accounts, and ramp-up of previous tailwinds. Although the general picture of cost, need for [indiscernible] services continue, near opportunities in the digital space in the form of analytics, RPA, cloud adoption, cybersecurity are opening up. Stability in oil prices is a positive for the energy sector, and we are seeing pockets of opportunities, while the focus is on building differentiated capabilities. Utility sector is seeing increased spend on digital, customer engagement and cloud adoption on the back of changing regulations, especially around solar and other distributed energy resources, and the next era of a maturing Smart Grid. Subdued commodity prices are putting pressures on the resources sector. Plants are planning to embrace digital transformation to improve asset deficiencies and are looking to control data and upgrade their ERP systems for better business insights.Manufacturing continues to see pockets of higher activities in areas like ERP, cloud, digital transformation and a very modern-based sourcing transformations. Demand in Continental Europe continues to be better as clients meet their cost optimizations for their running operations, and are looking for transformation ideas for long-term benefits. With this focus on manufacturing, it's on digitalization of [ NTN ] purposes, with strong focus on leading mobile, cloud, IoT and back-end systems seamlessly to provide a superior customer experience.I will now hand over to Ranga.

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Thanks, Pravin. Hello, everyone, In Q1 we had broad-based financial performance on multiple fronts, and we continued our strategy on key financial parameters. Let me start with a few of them. First, our operating margin for the quarter was 23.7% at the higher end of margin guidance of 22% to 24%. I'll provide more color on this shortly. Second, free cash flow was robust and was up 32.1% quarter-on-quarter to $552 million. Third, our return on equity further improved and was healthy at 25.5%, an increase from 22% of Q1 in last year. Fourth, EPS growth year-on-year was 3.9% in dollar terms, and 9.1% in rupee terms. Fifth, due to continuous productivity improvements, utilization and increase in digital share, revenue per employee increased year-on-year 5.7% to $54,878, which is one of the highest in recent years. Salil and Pravin have already talked about digital revenues, dealings, client metrics and business outlooks. Now let me come to revenues, price realization and margins. Revenue from Q1 '19 were $2,831,000,000, growth of 2.3% in constant currency terms and 0.9% in dollar terms on quarter-on-quarter basis. In repeat terms, the revenue for the quarter was INR 19,128 crores, which is a sequential growth of 5.8%. As compared to Q1 of last year, revenues grew 6% in constant currency terms, 6.8% in dollar terms and 12% in rupee terms. Price realization remains flat in constant currency terms on a quarter-to-quarter basis. Operating deficiency parameters continue to improve, utilization was at a new high of 85.7% as compared to 84.7% last quarter.Our continued efforts towards improving on-site mix resulted in the on-site mix decreasing further to 28.6% this quarter as compared to 30.1% same quarter last year, with the lowest level in last 14 quarters. Our focus on optimizing on-site employee cost, including sharper focus on productivity, on-site pyramid and others, localization and optimization measures likely decreased in the on-site employee costs as a percentage of revenue to 37.9% in Q1 as compared to 38.3% in previous quarter. At the beginning of the financial year, we had planned several investments in digital to leverage opportunities, enhance investments in U.S. talent localizations and other local markets to revitalize sales for tapping marketing opportunity and refocus talent. These investments are being made in a gradual manner to leverage business opportunities. Operating margin in Q1 was 23.7%, which is near the high end of the guidance range of 22% to 24%. Operating margin for the quarter declined 100 basis points, sequentially. During the quarter, the benefits of rupee depreciation were partially offset by cross-currency headwinds leading to a net benefit of 100 basis points on the currency front. This was fully offset by the compensation increases that were effective April 1 for 85% of our employees. Operating parameters, including utilization and on-site/off-shore mix improved during the quarter, which helped operating margins by 40 basis points. However, that was offset by investments in building on-site talent supply chain, including subcontractors, higher sales investments, cost of new hedge fund reserves and increase in other business overheads, all of which impacted margins by 140 basis points. So overall, there was 100 basis points reduction in operating margins sequentially. We ended the quarter with a total headcount of 209,905 employees, which is an increase of 2.8% from last quarter. Gross headcount addition increased to 17,709 from 12,329 last quarter. The subcontractor expenses this quarter stood at 6.8% of revenue as compared to 6.1% of revenue last quarter. As you know, the subcontractor expenses are driven primarily by utilization levels and on-site talent demand. Cash generated from operating activities in Q1 as per IFRS consolidated was $631 million, and we paid $64 million of taxes as per the APA entered into the United States IRS earlier in 2018. Capital expenditure for the quarter was $79 million, which is about INR 537 crores. Free cash flow, which is operating cash flow less CapEx for the quarter, was $552 million. Cash and cash equivalent, including investments, stood at $4,202 million, which converts to approximately INR 28,774 crores. Debt to date outstanding for the quarter, stood at 66 days compared to 67 days last quarter, decrease of 1 day led by better collections. Q1 witnessed huge volatility in currency market, and we managed to navigate the trend effectively. Yield on cash for the quarter was 7.2% as compared to 7.29% last quarter. Hedge position as of June 30, was $1,956 million. In Q1, the EPS declined 6.5% sequentially in dollar terms and 2.1% in INR terms. As compared to Q1 of last year, EPS growth stood at 3.9% in dollar terms and 9.1% in INR terms. As you would recall that in March 2018, based on the conclusion of strategic review of portfolio of businesses, we had initiated identification and evaluation of potential buyers for Panaya and Skava and reclassified their assets and liabilities as held for sale. During the quarter, we continued negotiations with potential buyers of Panaya. On remeasurement, including consideration of progress and negotiations on offers from prospective buyers for Panaya, the company has recorded a reduction in the value of disposal group held for sale amounting to $39 million in respect of Panaya. This impacted the net profit for the quarter by $39 million, and EPS for the quarter by $0.02. During the quarter, the company executed its capital allocation policy for -- announced earlier by paying a final dividend of INR 20 -- 20.5 shares (sic) [ INR 20.5 per share ]. With this dividend paid to shareholders for fiscal '18, the 70% of free cash flow was distributed in line with the capital allocation policy. The company also took steps executing the capital allocation policy announced in April 2018. As per the policy, out of the $2 billion, identified to be paid to shareholders, approximately $400 million was paid out as a special dividend in June 2018. The balance [indiscernible] on top, $1.6 billion will be paid out to shareholders for fiscal 2019 in such manner to be decided by the board. Further updates on this will be provided in due course. The board in its meeting held on July 13 has considered, approved and recommended a bonus issue of 1 equity share for every equity share held in the stock dividend of 1 American Depositary Share for every American Depositary Share held as on the record date yet to be determined. Consequently, the ratio of equity shares underlying the ADSs held by the American Depository receipt holder would remain unchanged. The board approved and recommended the issuance of bonus shares to celebrate the 25th year of company's public listing in India and to further increase the liquidity of its shares. The bonus issue of equity shares and ADS will be subject to the approval of shareholders and any other applicable statutory and regulatory approvals. We voluntarily delisted our ADS from Euronext Paris and London. The primary reason for voluntary delisting from Euronext Paris and London was the low average daily trading volume of Infosys ADS on these exchanges, which was not commensurate with the related administrative expenses. However, our ADS will continue to be listed and traded in New York Stock Exchange as before. Coming to operating margin guidance for fiscal '19, we're retaining our operating margin guidance in the range of 22% to 24%. Coming to revenue guidance in constant currency terms, we continue to retain 68%. And based on March 31, 2018, rates, we retain in U.S. dollar terms, 7% to 9%. With that, we open the floor for questions.

Operator

[Operator Instructions] The first question is from the line of Joseph Foresi from Cantor.

J
Joseph Dean Foresi
Analyst

I was wondering if you could talk about Financial Services. The performance there was obviously below some of your peers, and we've had some pretty good data points that things were picking up. I think you talked about some cost reductions, but you thought it was going to reverse. Maybe you could just delve into those cost reductions on the client part and why you think you it would reverse?

U
U. B. Pravin Rao
COO & Whole

This is Pravin here. In Financial Services, we had a soft quarter primarily due to enforcing and reduced spend in couple of accounts. Having said that, we have seen a very strong pipeline, about 40% of PPS on our buildings that we had this quarter were from this sector. And after several quarters, we have seen good demand in the commercial in Americas. And we expect the growth in Americas in the coming quarters to outperform the rest of the other geographies for this sector. While Europe was soft in quarter 1, we expect the momentum to come back in the coming quarters. Given our competitive position in this space and the diversified portfolio that we have across geographies and subsegments, we remain optimistic about this space.

J
Joseph Dean Foresi
Analyst

And then I want to get some background on digital. You've given some color on what percentage of revenue it is. How are you competing for the digital dollars? Curious just to what emphasis is competitive advantages there? And are these open bids? Or are you getting the digital dollars from existing clients?

S
Salil Satish Parekh
MD, CEO & Director

Well, digital, as you referenced, we've had a strong performance in Q1 with the growth and the scale of the business expanding. Today, we are seeing our clients move to digital. We see a lot of traction that comes from one of the 5 areas that we've designed on experience, data analytics, IoT, cloud and cybersecurity assurance. Some of those projects are competitive. Many, which are in our existing strong client relationships are places where we are proactively seeking and building those client digital work. We're also introducing to our clients 2 of our recent acquisitions, 1 Brilliant Basics in the U.K. and second WongDoody in the U.S., and this is forming the base of our experienced pillar within the digital space.

J
Joseph Dean Foresi
Analyst

Okay. And then just lastly, I was wondering about the margins. Utilization, I think I've never seen it higher for the front. I think it's 86%, excluding trainees. So I was wondering what is the biggest margin driver at this point. And can utilization go higher from this particular level and how do you offset the pricing pressure going forward?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Hi, this is a Ranga here. If you look at the margin, as you know, it sequentially dropped by 100 basis points. If you were to break it up currency, in the rupee, net of the cross-currency was 100 basis points of positive impact, which was entirely offset by the compensation hikes that we announced for 85% of our employees effective April 1, and we gained there both 40 basis points on account of utilization improvement as well as the on-site mix. As you know, on-site mix has considerably come down for the last couple of quarters, and it is now 12-quarter low. That gave us about 40 basis points. Then we had additional investments that we made, including from the G&A as well as increased subcontractor expenses amounting to 140 basis points. The net decline was 100. So as we announced in the beginning of the year, we continue to make -- while we continue to make gradual investments in digital, at the same time, we also continue to optimize. One of the elements that I would like to highlight here, for your notice, which I also highlighted, is the per capita revenue improvement. It has happened on 3 or 4 accounts. Well, of course our gross margins for the digital business is higher than the core IT services, and -- but as the percentage share of digital increases that gives us some benefit on the gross margin as well as the operating margin. Second, if the -- some of the service lines which are more amenable to automation, like, testing, maintenance and infrastructure we're able to kind of intensify some of those productivity improvements, and of course the utilization itself. So I think a combination of these factors have been drivers. As I was telling earlier, the utilization, we believe that they're -- the runway is limited from here, but other levers that I talked about, we continue to focus.

Operator

The next question is from the line of Rod Bourgeois from DeepDive Equity Research.

R
Rod Bourgeois

Yes. So your constant currency revenue growth guidance conveys that you expect some upcoming growth acceleration. I wanted to ask if you can elaborate on the sources of that growth acceleration. And if you can specifically share your thoughts on how much of the acceleration outlook is coming from improved trends in the market versus improvement in your competitive performance outlook?

S
Salil Satish Parekh
MD, CEO & Director

In terms of what we see in the demand environment looking ahead, we've had an especially strong quarter in retail, the demand environment in that segment for us remains positive. We also saw good traction in energy, utilities, our services business, manufacturing, insurance. As Pravin mentioned, it was demand coming back in the U.S. geography, and in Europe we still see a good demand and in Australian market as well. To the question on where we see the distinction between our role and the market view, I think the strong traction we're starting to see on digital, coupled with some of the investments we're starting to make in our go-to-market and digital footprint give us some level of confidence and this would be one of the areas where we'll see continued growth. Also our core services, which is powered by artificial intelligence, which is giving tremendous productivity improvement to our clients and to us, see a good traction in the market, and we believe, we are very competitive in that space in the market. Between those combination of things we see the demand environment is quite solid at this stage.

R
Rod Bourgeois

Great. And if you break the demand environment into consulting deals versus outsourcing deals or project-based deals versus long-term contract deals, where are you seeing the most incremental improvement over the last few months? Is it on the consulting and project side? Or is it on the outsourcing and long-term contracts side?

S
Salil Satish Parekh
MD, CEO & Director

One of the things we're seeing recently is the -- what we announced in Q1 with the large deals that are over a billion dollars, it's an upward trend if you look at our last 6 or 7 quarters. We feel confident that the large multiyear deals are something that we are starting to play better and better at. We also see more and more project activity which is related to specific areas. For example, we see some of that in our digital banking space. We see some of that on our retail segments. Some of that in our manufacturing areas. So at this stage, there's no one which is more or less. We see stable traction across both of those places.

R
Rod Bourgeois

Great. And then one final quick question. So you've now been in place for a few months, and I wondered if you could give us your view on what's the biggest bright spot that you've found in the organization that you view as the real bright spot that you can build on? As you've gotten to know the employees and the positioning of the company better. And then what's the biggest challenge you see going forward that you want to work on?

S
Salil Satish Parekh
MD, CEO & Director

In terms of where we've seen -- and I've seen some strengths in meeting with over 70 clients over the past few months the thing that's really resonated the most is the depth we have in our delivery and the strength of that across both the new digital areas and our core services with the AI infused in it. So delivery really the super strength within the company, and based on that and based on those relationships of trust, I think we can build a good future for the company with these clients and new clients. In terms of challenges, we have some businesses where we need to do more work. We've seen recently, our consulting business turn a corner where we've stabilized the revenue quarter-on-quarter, we still have to work on our margins there. And we see, for example, a business in China which needs some work and focus. So we have couple of these areas within the company that need attention. And we put in place plans to work on those businesses, and hopefully, bring them to positive situation in the coming quarters.

Operator

The next question is from the line of Ankur Rudra CLSA.

A
Ankur Rudra
Research Analyst

So your 1Q performance in banking, as you said, wasn't very strong. But it does seem at odds with the forward-looking commentary in the introduction. Could you perhaps elaborate how long the pressures from in-sourcing that you've seen in a few clients are continue to -- will continue to pressure this versus the growth you see in your new deal win. So when do we see the balance turning more positive?

M
Mohit Joshi
President

Ankur, this is Mohit here. I think as Pravin mentioned, we saw the in-sourcing challenges last quarter, but we see the rebalance coming back, right? Which is why moving forward, for Q2 and beyond we think that on balance we are optimistic about the status of the portfolio, which you also see in the large deal wins. And in the addition to the $100 million client, the 2 additions to our $100 million client portfolio. Our insurance business has been strong over the past few quarters and few years. And both on the services side and on the platform side, the business continues to do well. The [indiscernible] business, as Salil alluded to, is being rated as a top performer by Gartner, and with the pivot to digital, we are seeing a lot of opportunities. Just about a week ago you'd have seen an announcement where we've been selected as the global cash management platform partner by Santander in the U.K. So hopefully, this gives you more of a color. In any business which is as large as ours, and with a significant degree of client concentrations, you always see a set of headwinds, either it's in-sourcing or its budget cuts, especially because of client concentration. And you see some tailwinds, right? Like the pivot to digital, like the full use of our capabilities on the digital pentagram. So it's always a balance, but on balance, we're optimistic about the flow and the potential for the balance of the year.

A
Ankur Rudra
Research Analyst

Just quickly on retail as well. Could you elaborate what was the performance of the retail business on a pro forma basis. I understand there's probably some contribution from WongDoody, maybe some headwinds from Skava. So adjusted for those 2 events, how's the business, and how's the perception of demand evolved?

U
U. B. Pravin Rao
COO & Whole

Ankur, this is Pravin here. In the CRL space, we had perhaps one of the best growth in recent quarters. On constant currency basis, close to 6.5% growth, largely driven on the back of large deal wins in the last couple of quarters and as well as growth in some of the existing accounts. Within that segment from a consumer technology company's perspective, we continue to see large demand. Whereas when you look at it from a CPG or a logistics perspective, they remain challenged, and there's a lot of focus on direct-to-consumer and so on. And even on the core retail side, there continues to be -- facing continuous disruption from the likes of Amazon, Facebook and so on. So we have seen a lot of increased spend to counter the disruption that they are seeing. And that has translated into the kind of growth that we are seeing in this quarter. Having said that, perhaps, it's -- we have seen some green shoots. But perhaps, it's a little bit early to say that this momentum will continue rest of the year. We remain cautiously optimistic in this space.

A
Ankur Rudra
Research Analyst

And just quick question on the margins. Clearly, you've -- Ranga, you mentioned that you are 100 basis points gain from the currency net of cross. Maybe this was somewhat unexpected. Why aren't you changing your margin guidance given where we are on the spot?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Well, I think -- thanks for the question. As you -- the beginning of the year where we said 22 to 24, we had said that we would also be making certain gradual investments in our digital area, repurposing sales and U.S. localization, et cetera. So we expect a gradual uptick in those investments in the balance quarters, and we are comfortable with 22 to 24.

A
Ankur Rudra
Research Analyst

So are you saying that any margin tailwind that comes through, which was unexpected would also be invested? So your investments may accelerate sort of reinvesting? Or are you saying you'll see this as it goes through the year?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

No, as we -- as I said earlier as well, clearly, we'll know what exactly the investments that we are planning for in these areas. So any tailwind for the margin does not necessarily mean that they're going to invest that extra benefit into these investments. So we clearly have kind of concretized those investment plans.

Operator

The next question is from the line of Yogesh Aggarwal from HSBC.

Y
Yogesh Aggarwal
Head of India Research and India Tech Analyst

Just have a couple of questions. Firstly, on the attrition. Attrition in stand-alone business is now highest last 15, 16 quarters now. And I get the seasonality part, but it's still very high considering industry is growing just 6%, 7%. So is it something which bothers you guys? Or is it okay in your scheme of things?

U
U. B. Pravin Rao
COO & Whole

Yogesh, this is Pravin here. As you rightly said, part of the reason for high attrition is the seasonality. Having said that, it's higher than what we have seen in the past. In the last few quarters, we have done multiple things from employee engagement perspectives, given that this time we had compensation increase for 85% of the workforce on time starting April. We had 100% of variable pay in the last couple of quarters and so on. There is a lot of focus on reskilling and training and so on. And we have analyzed -- based on our analysis, we find that the main areas or problem areas in this case is people with 2 to 4 years experience. So we are now looking at maybe 2 or 3 interventions to address them now to bring this attrition level down. So we do expect the attrition to come down in the subsequent quarters.

Y
Yogesh Aggarwal
Head of India Research and India Tech Analyst

Okay, good. And then just follow up, Ranga, maybe for you. How should we look at the balance of on-site cost reduction and on-site investments? Because you have been talking about reduction in on-site costs, and I think it's 12 quarters low, which you just mentioned. But the subcon cost is all-time high probably. And then you are saying all the investments are with locals and subcontractors. So how should we look at the balance? Are they offsetting each other or one is higher than the other? Can you just help a little bit there?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Well, thanks for that question. Clearly, this quarter, if you look at the on-site employee cost as a percentage of revenue as just got a tad below 38%. As you rightly said, the subcontractor cost has increased to 6.8% of revenue. I think when you look at the on-site supply chain, we have to ensure that, especially given some of the short-term visa kind of challenges that we need to really ensure that the supply chain for some of the projects is uninterpreted, that is one aspect. But at the same time, what we have also done, as I was mentioning earlier in my spread, we're looking at the fixed-price projects on-site, and they're doing a combination of building a pyramid. The 1,000 fresh graduates that we hired, they've been deployed in these fixed-price projects and to some extent even in T&M projects. They are at a very healthy utilization level. So our ability to build a pyramid on-site is slowly increasing. So that is another factor that I think to keep in mind. Second, I think some of the productivity improvements from the on-site fixed-price projects, without dropping the revenue, all the productivity improvements could kick into us. So I think the way we are seeing this is that we do not see the on-site -- the local hiring to significantly change the cost structure or the -- as a percentage of revenue. In digital and couple of other areas, while the localization level could be higher, and they're also coming at a slightly higher point, but as I've said earlier, the gross margins for our digital revenue is also higher, which essentially means that as a percentage of revenue, still the employee cost could be in the desired level. So a combination of these levers that we're looking at.

Operator

The next question is from the line of Edward Caso from Wells Fargo.

E
Edward Stephen Caso
Managing Director and Senior Analyst

My question is around fixed price contracting in automation. How much success have you had in convincing your clients to move to more fixed-price or fixed-output based pricing so you can then deploy your automation? Where are we in that spectrum? And how much more opportunity is there?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

This is Ranga here. That's a good question. You can look at the last 8 or 9 quarters. The percentage of revenue from fixed-price projects has moved from early to mid-40s to now close to mid-50s. One of the things that has happened is even from the customer standpoint, a few, they want the certainty on their cost. For us, it also offers opportunity to enhance productivity in those fixed-price projects, especially on-site. And given the revenue is fixed, we have an opportunity to keep those productivity improvements. Now when you slice the fixed-price projects, there is on-site component, there is offshore component. And at this point in time, especially with the last 3 or 4 quarters, our focus has been how to enhance productivity in the on-site fixed-price projects, where, as you know, the per dollar -- per employee cost is significantly higher than India. So for the same reduction of all project manager, all -- and software engineer and on-site gives us a nonlinear benefit on the margin as compared to the offshore. So that is where our focus has been. And the second one is really on the pyramid aspect that I talked about. Barely a few quarters ago, the propensity of our clients to accept fresh hires on site was quite limited. I think now, especially in some of the new niche technologies where they're able to train the fresh hires from colleges, which we have hired thousands, and they're able to get deployed in these projects and the propensity to accept them has also significantly increased. So a combination of productivity as well as the pyramid building on site is one approach that we are taking.

E
Edward Stephen Caso
Managing Director and Senior Analyst

My other question is going back to foreign exchange impacts here. I assume you -- and anticipate a weakening rupee in your guidance. Did it do what you thought it would do? Did it happen sooner in the year than you'd thought it would? Just trying to understand that if the rupee hadn't done what it did this quarter, would you still have made the investments that you've made?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

No. As you know, we gave our 22% to 24% operating margin guidance at the beginning of the year. That took into account that in the strategic investments we need to make. We have pretty much crystallized those investments in which areas. One is of course the sales revitalization, the localization of talent in U.S. and digital investment and refocus of talent. We have pretty much crystallized a client on how do we go about investing there. Now, yes, indeed, yes, in this particular quarter, the tailwind on account of currency, especially rupee, dollar held us by 100 basis points. At the same time, now we also had improvements in operational efficiency that I talked about. About 40 basis points came from on-site mix and utilization and a slightly higher component of digital in our share, which is also higher gross margin gave us some benefit. So to answer your question, I think our plans are pretty much concretized where we want to invest, and there'll be gradual investments, and we have a gradual plan for that. At the same time, based on the current -- the currency rates, we are pretty comfortable with 22% to 24%.

Operator

The next question is from the line of Ashish Chopra from Motilal Oswal Securities.

A
Ashish Chopra
Research Analyst

Yes. I just wanted a clarification on the guidance and had a question on the margins. Firstly, since WongDoody has been now integrated as on 22 May, would it have a significant impact on the CC revenue growth guidance?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

On the revenue guidance of 6% to 8%, no. We are comfortable with that band. And no, no material change on that.

A
Ashish Chopra
Research Analyst

Okay. But that would now include, right? Because I think last quarter, you had clarified that it was not including because the acquisition had -- wasn't complete back then. But this is -- would this now be including what was actually -- just a clarification I will see.

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Yes, yes.

A
Ashish Chopra
Research Analyst

Okay, okay. And secondly, on the margins, Ranga, so what we've really seen is, in the past 5 years, that the first quarter is usually the lowest quarter as far as the margins go and then they gradually progress. I mean -- and that's understandable given the variables, et cetera. But is there anything as far as your budgeting goals which makes you believe that it would play out differently this time around but for the vagaries of currencies, et cetera because you like you mentioned that you've calibrated the investments pretty well and you're sticking to that plan. So any reason why we should expect it to play out differently than a normal year?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Well, I think your assessment of the past is correct, saying that, look, initially, we start with the lower Q1 and it increases. I think this year, we don't want to kind of give any such trajectory. We have certain investment plans that we have in mind and which we have concretized. And I think we have taken into account all those factors while we have guided to 22% to 24%. At the same time, as I responded to earlier questions, any additional tailwind, if it comes, either currency, et cetera, I think they're not going to kind of further enhance the investments. We know what investments we need to make.

Operator

The next question is from the line of Diviya Nagarajan from UBS Group.

D
Diviya Nagarajan
Executive Director and Research Analyst

On the banking side, I think you had earlier talked about how banking would see some improvement on a year-over-year basis in fiscal '19 as of '18. Given the start that you've had in Q1, but that still hold, do you still expect banking to pick up on a year-over-year basis? And secondly, if not, then what really picks up the slack as far as your guidance is concerned?

S
Salil Satish Parekh
MD, CEO & Director

We composed the banking piece for you, right. So the first piece around Finacle. And the Finacle piece, while there isn't a gigantic core banking wheel happening, there is a lot of interest in the digital components of Finacle. There's a lot of interest in the blockchain-based components, and so we feel that, that business has a good trajectory for the remainder of the year. On the services side, there has been an uptick in our U.S. business, and we feel that, that is stable. And finally, on the Europe side, right, again, we had a weakness in one client this year because of project delays and cancellations, and I expect growth to come back in -- growth to come back to some degree in Q2. But after that, we see a strong trajectory for their business. The insurance business has been a strong performer for us, both on the services side and increasingly on the platform side with the McCamish platform that we have. So if we look at all the components of the business, right, the Finacle business with increased trajectory and increased sort of visibility on the digital components of Finacle. If you look at the services business, again, we've spoken in Q4 about insourcing for one of our large clients, but we believe that, that rebalancing is pretty much complete and that business has grown faster than the overall portfolio. But the Europe business, as Pravin and Salil mentioned, we had a muted performance in this quarter and you see some growth coming back in Q2 but a strong performance for the remainder of the year. The rest of the world business has remained strong. And so hopefully, this gives you more color to the business. As I had mentioned in my previous answer to Ankur, the fact is that this business has a very high degree of client concentration, just like with our peers, right. And so when you have this mix of client concentration and certain headwinds like certain budget cuts, or the degree of insourcing, and you have these tailwinds like the greater move towards digital and very strong strength in running significant transformation programs like our lending transformation or a trade transformation, it does make for a complex business to forecast. But having said that and because we have been very successful in this business for the past many years, we had a very strong record over the past 16 to 20 quarters, on balance, we remain optimistic about the -- about our potential in this business over the next -- over the remainder of the year.

D
Diviya Nagarajan
Executive Director and Research Analyst

Fair enough. And on the large deals, I noticed that your TCV has gone up, particularly the color of -- around the renewal of this new component in that mix this quarter.

S
Salil Satish Parekh
MD, CEO & Director

On the large deals, TCV, is that what you're asking again?

D
Diviya Nagarajan
Executive Director and Research Analyst

Yes, yes. I just want to understand what is the -- I think in the past, you've given us a sense of whether what percentage of that is 100% new deals and what is renewals. Now help me understand that?

S
Salil Satish Parekh
MD, CEO & Director

We've got for this year, the over $1.1 billion in large deals, of which 47% has come from net new. And as earlier mentioned, 40% -- [ different ] 40% has come from our financial services sector.

Operator

And the next question is from the line of Moshe Katri from Wedbush Securities.

M
Moshe Katri

Congrats on the very strong TCV. Looking at the 40% that you've been talking about in terms of financial services, can we get some color on whether what's the mix between North America versus the other part of the business? And then are we calling a bottom to the weakness in financial services given the TCV and given the ongoing ramp or the conversion of the existing backlog and bookings into revenues?

S
Salil Satish Parekh
MD, CEO & Director

Both of the large deals that we spoke about, both of them are in North America. As far as calling a bottom is concerned, look, I -- as we've stated in the previous commentary, I think we remain optimistic about our potential in this business over the remainder of the year. It's a complex business. It has its own headwinds and tailwinds, but we've have had a very strong track record. We've seen a huge amount of uptick of our digital suite of businesses, and we are, on balance, optimistic about potential of the business for the remainder of the year.

M
Moshe Katri

Okay. And just as a follow-up, is there anything different in terms of how you close the quarter on a monthly basis, looking at April, May and June in terms of the pickup in the business? Have you seen kind of a steady pickup? Have you seen that kind of catching up towards the end of the quarter, maybe some color on that?

S
Salil Satish Parekh
MD, CEO & Director

Are you talking specifically to financial services or across the company?

M
Moshe Katri

Financial services and across the company.

S
Salil Satish Parekh
MD, CEO & Director

Overall, we don't see any monthly variation in a quarter, if that's the question if I understood it well. Overall, the volume pickup for us in Q1 was quite strong. And overall, the quarter-on-quarter growth for the company remain in constant currency is 2.3%. With the large deals wins and some of the traction we are seeing in the large accounts, both in financial services and across the company, we remain positive with respect to what we see in a demand environment. We don't see a monthly distinction in that, at least not in what we've seen so far.

Operator

The next question is from the line of Keith Bachman from Bank of Montreal.

K
Keith Frances Bachman
MD & Senior Research Analyst

I wanted to ask 2 longer-term questions on margins, and I'll ask them concurrently since they're related. The first is on your onshore or off-site -- on-site/offshore mix is with all the Connecticut and Indiana and Australia, do you anticipate that the mix of delivery will change? I think you've been at roughly 70%, 30%. Will that change over the next few years? And I understand that you've mentioned that you're going to have a pyramid scheme onshore, if you will. But wouldn't the cost of onshore labor still -- or the profitability of the onshore labor still be less than what you could get offshore? So I'm just trying to understand the margin implications. And I'll actually ask my follow-up question. So if you can just talk about the onshore/offshore mix over the next couple of years and what the margin implications would be.

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

This is Ranga here. Look, coming to the on-site mix, if you look at last 7, 8 quarters, it has come down some -- a bit lower, 30% to 28% levels. We do not see significant change from the overall 30-70 kind of structure that we have. We don't see significant change. If the question is that because of the digital, which tends to have higher on-site as well as the higher localization, would it change? Our current assessment is that at least in the near term, we don't see a significant change in that. Point number two is the point on the localization. What we're doing is really the composition of the workforce onshore is changing. What I really mean by that is the percentage of, these independent folks or the local hires, would keep rising. So that is one part. The second part is on the pyramid is -- pyramid, when I said pyramid, it includes the fresh hires that we hired from the U.S. universities or the -- any other local universities. There we have found that for the concomitant H1 hires with a similar experience, clearly those hires are coming at an attractive -- the cost equation. So the thing is we also make them undergo 3 months of training on site. We just announced the Indiana training center. So they'll undergo a 3-month -- I think that the first batch of all these thousand people have undergone. And their utilization level is also high, and the propensity of the clients to kind of deploy them in projects is also significantly higher than what we saw maybe a year or 2 ago. So coming back to your question, most significant change in account of business mix in the on-site/offshore ratio. Second, building the pyramid on site is a gradual process that we'll continue to focus on. And third, the -- while some part of the digital initial phases will have higher, larger on-site component, what we have seen is also that as the scale increases, I think our flexibility and ability to offshore some of that has also happened. For example, salesforce.com delayed the implementation barely few quarters ago with a very high on-site component. And as they built up scale and as we also got trained a lot of folks offshore, the offshore component has been increasing. So I think it's all about scale and as well as our ability to train. So a combination of these factors I would say that in the near to medium term, we don't see significant change in the on-site/offshore mix structure.

K
Keith Frances Bachman
MD & Senior Research Analyst

Okay. Fair enough. My follow-up question is related. This year, you anticipate making incremental investments, which is why you're guiding margins down for the year, no change from your original guidance. But how do investors understand that this year is not a trend rather than an anomaly? In other words, what gives you the confidence that in subsequent years, because the business mix is changing, you won't have to make incremental investments that thereby pressure margins? Why is this year onetime? And that's it for me.

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Well, I think as we outlined in April, there are certain areas where we see opportunity to invest, to leverage on growth. So I think that's what we have made. And there we have kind of -- we have a detailed plan, and we have concretized where we want to invest, how much we have to invest. And we do not -- of course, on an ongoing basis, even in our core IT services, we make a lot of investments, whether in training people and attracting certain specific niche talents that we continue to make. I think that's the normal course of enhancing our capabilities from time to time. That happens. I think what we outlined this year was essentially revitalizing sales. We had to -- especially our focus on large deals and the certain new geographies and things like that as well as certain digital competency investments. We do not foresee -- while there will be an ongoing investment as a normal course of business, I think what we outlined this year is something that we want to do for -- over the next 12 months.

Operator

The next question is from the line of Viju George from JPMorgan.

V
Viju K. George
Research Analyst

Yes. Just had a couple of questions on wage hikes. I think you indicated that the wage hike impact is about 100 basis points. Isn't that normally -- isn't that a little lower than what a normal impact is?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Viju, Ranga here. See, I think this year also we gave 6% to 8% in India and 1% to 2% on site. And there's no difference in terms of the impact. As we know for 85% of the employees, we have rolled out effective April 1. And for the balance, 15% will be rolling out from July. So to that extent, there will be some catch-up in Q2 but not very, very significant.

V
Viju K. George
Research Analyst

Got it. So I think it's pretty much on par with prior years.

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Yes. For 85% will only be rolled out effective April 1; for 15%, effective July 1. To that extent, there will be some catch-up but not significant.

V
Viju K. George
Research Analyst

Sure. The other question I had was on the investments you mentioned, Ranga. I mean, it's 140 basis points investments you've put in there. That's almost $40 million. Now you, I think, increased sub-continent cost is also a part of that, which is $20 million Q-on-Q. That still leaves a fairly large gap of $20 million of investments to do in a single quarter. And I don't think it has taken the form of sales and marketing because the sales and marketing people costs are pretty much flat, even mildly down Q-on-Q. So where has $20 million investment gone to?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Viju, I think the trajectory of investment, as we said, is gradual. It will be -- some of these investments, as you know, are also in terms of hiring and et cetera. If you look at some of the investments that you talked about are kind of split between 3 components. One is the U.S. talent model that we had to invest, that will be reflected in the on-site employee cost. That will be part of that. Then we also had certain localization investments, which will be part of the G&A as well. Then also in certain specific digital skills, we also had to invest in sub-con to some extent, so a combination of all 3 that we are talking about.

V
Viju K. George
Research Analyst

But, Ranga, just to take this forward, if I may. Where does that get reflected? Because S&M people cost don't seem to move Q-on-Q. G&A people cost don't seem to be move Q-on-Q. Is this largest single cost of revenues as far as localization cost is concerned?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

One way I would suggest -- Viju, one way to look at it is look at the average quarterly cost of our FY '18. That will give you a trend line. Just a sequential basis, I cannot totally indicate to you because there is an effect of both currency as well as the other elements. But to answer your question, let us split in these 3 components. And if you get into an average -- the quarterly average of the last 3, that will give an indication, between G&A, sales and on-site employee cost.

V
Viju K. George
Research Analyst

Sure. And one last question was on gross margins. Your gross margins have declined 60 basis points Y-on-Y. Logically speaking, you've had -- if I look at on a Y-on-Y basis, you've had several tailwinds in your favor. You've had utilization that's moved up 170 basis points. You've had exchange rates that depreciated over 4%. Digital, you said, has gained traction. And typically, margins in digital are better. On site, you've been bringing down the components of on-site, yet your gross margins have declined despite all these headwinds -- tailwinds, sorry. So what does this mean? Does it mean that legacy business margins are coming down more sharply and is something there to be concerned about?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Viju, that's a good question. I think one point is you may sort of recollect the Q1 of last year. We did not have comp review. It was rolled out effective July. So then this quarter, we have rolled out April 1 as well. As well as the last year's, the July 1 is also playing in, right. That was not in the previous Q1. So this is the combination of the fact.

V
Viju K. George
Research Analyst

Sure, Ranga. And last question on attrition. I mean, you did talk about interventions there. Is attrition at the middle to senior level a matter of concern now because at least you've lost 2 business heads very recently. Are you seeing attrition at levels 1 or 2 levels below them as well? And is that concerning? And why is this happening?

U
U. B. Pravin Rao
COO & Whole

This is Pravin here. As I had explained earlier, the attrition that happened primarily with people in -- with 2- to 4-year experience. We are not seeing any different trends at senior level. The attrition is much lower and under control. We did have a couple of exits in the recent past. And as -- we have always maintained -- it's sad to see people leave, who have been with us for a fair amount of time and contributed, but when people do get opportunities and they want to pursue different things, we have to just understand them. We have a strong leadership bench, and in one sense, this gives opportunity for people at the next level to step up. And we have already identified replacement for the 2 people who left, and there is no impact.

V
Viju K. George
Research Analyst

And has the high-performing attrition -- or attrition of the high performers, has that also moved up? Because in the past you -- that was a metric you are more concerned with rather than the overall attrition. Has that also moved up to cause concern?

U
U. B. Pravin Rao
COO & Whole

Yes. This quarter, we have seen increase in high-performance attrition actually in the past. You're absolutely right, compared to high-performer attrition was on the lower side. This quarter has been an exception. So as I said earlier, we have already identified 2 interventions to address it, and we are confident that we should be able to bring it back under control.

Operator

The next question is from the line of David Grossman from Stifel.

D
David Michael Grossman
Managing Director

I've been wondering, if I could go back to the comments or the revenue productivity per employee, it looks like the productivity is still down yet utilization is up. Does that tell us anything about pricing? And if so, can you just kind of help us walk us through that?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Ranga here. If you look at the per-capita revenue that is the total revenue divided by total employees, that has gone up during the quarter. Actually, year-on-year, it has gone up 5.7%. [indiscernible] rate has gone up. Probably, as we are referring to the price realization number, well, I think I would not draw too much of a thing on the sequential basis. I think year-on-year is a much more indicative number. Then, pretty much, it is flat.

D
David Michael Grossman
Managing Director

So you're saying like-for-like pricing on a year-over-year basis has been relatively flat?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Yes. The price realization, that is the revenue per billed employee. I mean, in broad terms, the price realization, that has been flat, which is some kind of a surrogate indicator of pricing. However, if you look at the revenue per employee, which essentially takes into account that productivity improvement. It includes both billed as well unbilled on the total revenue. That has been going up, which is a reflection of 2 things: One, the rate of growth of revenue being higher than the rate of growth of headcount in certain services, essentially infrastructure management, testing and maintenance services, which are more amenable for automation, that's where it has happened. And it is also, of course, to some extent, influenced by the utilization as well as the percentage of digital revenue growth, and as digital is coming at a higher gross margin currently, that will also have a play on that.

D
David Michael Grossman
Managing Director

And then just a question on FX. Can you help us better understand just the dynamic when you see these models, currency environments. I mean, one of your competitors said ignore currency because it will impact wage hikes and other spending. Is that how you view it? And how do these fluctuations in the currency eventually accrue back to the client over time?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Sorry, was the question about how the fluctuation of currency impacts the margin?

D
David Michael Grossman
Managing Director

Well, it's a broader question just about how currency flows through over time, right? So one of your competitors says you really shouldn't look at the impact, short term, on margins from currency fluctuations because it will affect spending levels, whether it be wage hikes or other spending. And so that's one question. Is that really how you view it as well? And then secondly, I have to assume that, eventually, currency fluctuations accrue back to your clients, and I'm just wondering if you could give us -- walk us through that dynamic.

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Well, I think, as you know, the currency is an important element, especially U.S. dollar in India. And last year, for example, it was adverse in the sense that rupee had appreciated. So it does have impact on the margin primarily because the offshore costs are kind of translated back differently. However, when we plan, we clearly look at -- and we are not linking our investment plans or the other cost elements that we need to do primarily on the expectation of a currency movement because it is primarily driven by the business needs. And of course, like this quarter, the tailwind on the currency helped us to some extent, but that's not always expectation that look -- every quarter we expect certain currency. And based on that, we budget. I think, primarily, that's why the band that we give for margins is kind of why it is 22% to 24%. And first quarter, it was 23.7%. And we all have planned such an investment as we had outlined at the beginning of the year, and they're gradual investments. And at the same time, while our -- as I was mentioning earlier, there are operational efficiency and cost levers that we have, both productivity based as well as the other factors, like on-site pyramid and so on. We'll continue to leverage them as we make these investment. Concomitantly, we'll also be optimizing these levers. So we're comfortable with the current band.

D
David Michael Grossman
Managing Director

I see. And just one last question on the subcontractors. As you mentioned, it did tick up as a percentage of revenue, and obviously, you've had 2 consistent quarters of relatively strong bookings. So is the increase in subcontractors just a function of better bookings and ramping capacity to meet that? Or is there something more behind just the mix of business that -- mandating that you get different skill sets that you don't currently have in-house?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

So as I said, there are 3 factors in play in subcontractor expenses: One, of course, certain digital projects, et cetera, when we undertake the initial stages, it has a higher on-site component. And sometimes the current visa environment provides us challenges to staff those projects on time. While to some extent, we are mitigating through local hiring, still, we have some play to go there. So that is one of the reasons that demand for subcontractor expenses comes. Second and a very important point is also that we're running at a very high utilization levels. That also plays into that. So one point to note is that, when we look at our total employee cost, we kind of look at both aspects: the on-site employee cost as a percentage of revenue and the last bits of contractors' expenses as a percent of revenue. The whole idea is, when we engage subcontractor, we need to also to ensure that the corresponding billing rates to reflect their prices are also there. As they are typically getting -- the incremental ones are getting into higher-price, higher-billing-rate digital projects, that percentage is fine with us.

Operator

The next question is from the line of Srinivas Rao from Deutsche Bank.

S
Srinivas Rao
Research Analyst

Srinivas here from Deutsche Bank. I have 2 questions. First, your share of digital continues to increase, but this quarter, at least on a quarterly basis, we see fixed price in a project, actually, share coming down. I mean, if you can give some color as to the digital projects are also you are getting are on a time and material basis, or are they generally skewed towards fixed price? So -- and that color would be helpful. Second, within your digital stack, any feedback on the type of projects which are getting share of cloud migration? Just more -- or as you said, share of experienced projects. Any such feedback would be helpful. And third, just taking the point which you answered in the previous question, is it possible that, as you said, the subcontractor expenses are -- also need to be appropriately billed, which means they have a positive impact on revenue and -- but they're not part of the employee stack. Is that, at least on a seasonal basis, leading to higher revenue-per-employee number which you get to see? These are my key questions.

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

Let me answer the second question. That's not the case. I think it's not because -- only because of subcontractors are getting billed at a higher rate. The per-capita revenue has gone up now, even at the broader pool, also, because of the factors, both productivity, utilization, automation and the higher digital component. Now on the other part, I request our President, Ravi Kumar, to address on the digital, please.

R
Ravi Kumar Singisetti
President & Deputy COO

Yes, so most of our digital revenue is primarily on all the 5 pillars, but the biggest chunk of it is actually coming from cloud transformation projects, which primarily come in a fair bit of fixed price. We do see 3 pointed projects coming up in cybersecurity experience tower, which we called out earlier. And then there is a big opportunity around modernization, which, again, comes in big chunk, modernization in different aspects of digital: embrace of open source, migrating workloads to the cloud. There's also a great opportunity around Agile, DevOps and legacy modernization. So that's where we are seeing the trend of where the digital revenues are involving. A lot of our existing customers are actually taking small projects and then they're scaling it up, while large deals come with an opening into digital where if you could look at existing scapes of -- existing landscapes of a client, then actually condition -- transition those landscapes into the digital world.

Operator

The next question is from the line of Sandip Agarwal from Edelweiss.

S
Sandip Kumar Agarwal
Vice President

Thanks for taking...

R
Ravi Kumar Singisetti
President & Deputy COO

Sandip, can you speak a little bit louder?

S
Sandip Kumar Agarwal
Vice President

Yes, sure. Is it okay now?

R
Ravi Kumar Singisetti
President & Deputy COO

Yes.

S
Sandip Kumar Agarwal
Vice President

Hello? Is it okay, now?

R
Ravi Kumar Singisetti
President & Deputy COO

Yes, Sandip.

S
Sandip Kumar Agarwal
Vice President

Yes. So my question is regarding the guidance, 6% to 8%. I understand it is just first quarter, but this quarter, we have come at 8%. Now the thing which I'm trying to understand that the 6% to 8%, how do you see the way -- demand momentum you're seeing, the order book growth and the relatively positive commentary versus last quarter? So is the ask going to increase, number one? And are you -- when you are guiding, you are building in that? That is the -- precisely the question.

S
Salil Satish Parekh
MD, CEO & Director

Sandip, this is Salil. In terms of our business environment we shared over the last few questions and in our press release, what we see in terms of how our clients are reacting to, first, the Agile digital capabilities that we have; and second, the AI and automation-infused core services business that we have. Those things show us that we have good traction in the market and the overall demand environment is stable. On that guidance side, we started the year, and we built a plan, and we shared the constant currency guidance at that time. And that's something that we have done. We are now focused fully on our clients and the execution of the business. And we're not looking in that sense day-to-day on what is going on with the guidance. The demand environment discussion comes really from all the interactions with our leadership, our sales people and many of our delivery leaders have with our clients and what we see in the market, generally.

Operator

The next question is from the line of Ravi Menon from Elara Securities.

R
Ravi Menon

Could you just give me some color on the large deal win rate improvement. I mean, as we've seen that your PCV from last year has improved over last 2 quarters. So what's really led to this? Is it a broader pipeline? And if that's the case, where is it coming from or if it's better win rate? What's helping you now?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

During the year, we are doing multiple things on the large deal side, and that was reflected in the increased trajectory over the last few quarters. What is -- right from deal origination perspective itself, we're increasing our engagement with deal advisers and industry analysts, who play sometimes intensive role in promoting the large deals. Then we have put together a large deal team dedicated and to bring the best solution, tapping the best talent within Infosys. So that's the other thing that we have done. And we have also created some incentive aspects internally as well for incentivizing people to go after and convert large deals. It's a combination of things, but primarily, the increased focus and positive influences have resulted in a higher win rate in this large deal space.

R
Ravi Menon

Then I noticed that you stopped giving metrics that show those line contribution. Is this prelude to a reorganization of your data release site? And if you could also explain how you organized your services -- the people aligned to services with verticals, that would be great.

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

So there's no real -- as part of IFSR 15 (sic) [ IFRS 15 ] changes in reporting, we try to reflect the reporting in line with how we are internally organized. So there's no real reorg or anything in that sense.

R
Ravi Menon

All right, great. And the last follow-up. Could you give what is the contribution and the headwind from Skava this quarter?

M
Mavinakere Dwarakanath Ranganath
Executive VP & CFO

It's about $2 million.

Operator

The next question is from the line of Bryan Bergin from Cowen and Company.

B
Bryan C. Bergin
Director

A clarification on the North America improved outlook. Is that solely due to an improved pipeline in Financial Services, or are you seeing a broader increase in client budgets across other verticals as well?

S
Salil Satish Parekh
MD, CEO & Director

In North America, we've seen strength in what we've done in our retail sector. We see continued strength in energy, utility, resources and services business. We also see a good traction in Financial Services, which is a change from the previous quarter. The overall environment for us remains stable to good in the North -- in the U.S. geographies.

B
Bryan C. Bergin
Director

Okay. And then on the large deals, the 2 Financial Services deals that you noted, are those net new work or renewals?

S
Salil Satish Parekh
MD, CEO & Director

The 2 Financial Services? Sorry, what was the question? The 2...

B
Bryan C. Bergin
Director

I think you mentioned in total earlier how much of your large deals was net new work versus renewals. Can you do that just for the Financial Services piece?

S
Salil Satish Parekh
MD, CEO & Director

Yes. It's about the same. It's about in line. It's about 43%, roughly. 43% of the Financial Services deals were net new.

Operator

The next question is from the line of Apurva Prasad from HDFC Securities.

A
Apurva Prasad
Research Analyst

Just a very quick one. If you can just talk about the large deal wins margin profile, how different would that be versus the large deals earlier? That's it.

S
Salil Satish Parekh
MD, CEO & Director

From the large deal wins, the margin profile discussion. What we noticed in the large deal wins, especially the ones we've referenced in this Q1, there, the competitive margin profile is, at the start, always very strong. However, there's a lot of automation and AI that we build in, a lot of productivity improvement that comes as we get into these deals over a period of time. So from a start perspective, the competitive dynamic is always strong, and over a period of time, we start to see productivity, AI and automation, into these deals.

Operator

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

S
Sandeep Mahindroo

Thanks, everyone, for joining us on this call. We look forward to talking to you again. I would like Salil to say a few words before we end the call.

S
Salil Satish Parekh
MD, CEO & Director

Thank you, everyone, for joining us for the call. Just to confirm what we have said earlier, overall, we've started the fiscal year with a solid quarter. We see good momentum within our digital -- Agile digital business. We see our core services, automation and AI becoming more and more relevant with our clients. We see a strong margin performance in Q1, and we see a demand environment which starts to give us a good level of view into what our clients are spending going ahead. And this marks the start of the execution of our strategy and of our 3-year transformation program. Thank you, everyone, and talk to you on the next quarterly call of the fall.

Operator

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.