Infosys Ltd

NSE:INFY

Earnings Call Transcript 2020-Q1

[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. Thank you, and over to you, sir.

[Sandeep Mahindroo]

Thanks, Aruna. Hello, everyone, and welcome to Infosys earnings call to discuss Q1 FY '20 earnings release. I'm Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is CEO and MD, Mr. Salil Parekh; COO, Mr. Pravin Rao; CFO, 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, followed by comments from Pravin and Nilanjan, subsequent to which we'll 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 explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.I now like to pass it on to Salil.

[Salil Satish Parekh, MD, CEO & Director]

Thank you, Sandeep. Good afternoon and good morning to everyone on the call. Thank you for joining us today. Infosys has delivered a strong quarter, and I'm pleased with our overall performance as we continue to demonstrate our increasing relevance to clients.Our constant currency growth year-on-year for Q1 was 12.4%, which is the third consecutive quarter of double-digit growth. Our digital revenue growth was 41.9%, and our digital revenue now accounts for 35.7% of our overall business.Large deal, TCV, was the highest ever at $2.7 billion. Our operating margin for Q1 was at 20.5%. We saw broad-based growth across our industry segments, service lines and geographies. In constant currency year-on-year, our telco segment grew 22.6%, our North America geography 13.5%.We continue to benefit from building deeper capabilities across our digital portfolio, especially in the areas of experience, data, analytics, cloud, SaaS, IoT, cybersecurity, AI and machine learning. Our overall deal pipeline witnessed growth in Q1, and we can see that we are winning market share in this competitive environment.While there are many aspects of our strategy that came together to make these impressive first quarter results possible, I want to focus on how we're scaling our digital business with a few examples. For a telecom major, we're helping to build a new digital customer experience for their clients, which bring together channel such as Alexa, mobile apps, chatbots, online and contact centers in an omnichannel mode and provide improved customer engagement.We work with the large automotive client to help them navigate their digital transformation journey, delivering for them future-ready, scalable, digital, hybrid cloud platform that is supportive of their digital workspace. We have been engaged to deliver cutting-edge digital capabilities for a leading U.S. insurance company. We're partnering with them to build a digital policy administration services, leveraging our Infosys McCamish platform. We're enabling a large utility to build advanced planning and engineering systems to forecast dynamic nature of future electricity demand to help them plan and build their grids and leverage green energy policies to make sure there's efficient distributed energy resources. I'm particularly pleased that we've opened another digital experience design and innovation studio, which was last month in Shoreditch in London, where we're able to co-create digital experiences with our clients.I'm delighted to share that our employee reskilling program, Lex, our learning platform, now covers a near 100% of our employees globally, with employees already leveraging the Lex app each week to develop their skills.Also, I want to touch upon some external recognition we've received. Infosys has been recognized as a leader in the SAP, S/4HANA services by NelsonHall for global API strategy by the Forrester Wave and in the public cloud infrastructure managed services area in the Gartner Magic Quadrant.Now that we see our clients' confidence in us increasing with increased market share gains, we are focusing as well on operational efficiency and cost discipline. We have now completed all our investments that we outlined last year when we started our strategic direction program. All future investments will come from within our P&L and there are not specific as one-off investments that we outlined last year. Over the coming quarters, I'm looking forward to see the benefits of these operational improvements reflect in our business. Given the evolution of our business outlook, we are now changing our revenue guidance. We move from 7.5% to 9% in constant currency to 8.5% to 10% in constant currency. We retain our margin guidance at 21% to 23% for the full year. Later on in the call, Nilanjan will share with you our new capital return policy.With that, let me hand it over to Pravin.

[U. B. Pravin Rao, COO & Whole]

Thank you, Salil. Hello, everyone. In quarter 1, we saw acceleration in year-on-year constant currency growth to 12.4%. This was supported by our highest-ever large deal TCV. Five of our business segments, Financial Services, Communication, Energy Utilities and Services, Manufacturing and Hi-Tech, clocked double-digit year-on-year growth in constant currency. North America, Europe and rest of the world also grew double digits year-on-year in constant currency.Utilization, excluding trainees, during the quarter, improved to 83.1%. Client metrics remained strong. Number of $100 million clients increased by 2 to 27. We completed the first leg of compensation increases in quarter 1. Rest of the employees, barring leadership, will receive their comp increases effective July 1.While overall attrition increased, this was largely due to seasonality since employees leave us to pursue higher studies in quarter 1. We continue to focus on strengthening the employee engagement, accelerated career path for top performers, greater learning opportunities and performance-based differentiation.Large deal win momentum continued in quarter 1. We won 13 large deals with a TCV of $2.7 billion, including the recently closed Stater deal with ABN AMRO. 3 deals each were in Financial Services and Retail verticals; 2 deals each in Communication, energy utility resources and services and manufacturing vertical, while 1 deal was in Life Sciences. Geography-wise, 8 were from Americas, 4 were from Europe and 1 from rest of the world. The share of new deals in overall large deal TCV was about 55%. We have reached our localization target in the USA and have recruited more than 10,000 local employees.Let me come to the business segments. Financial Services vertical continued its growth acceleration aided by recent Stater acquisition. We are seeing some challenges due to ongoing merger and acquisition situation in some U.S. banks and also in capital market business in Europe and U.S. However, there are also growth opportunities in consumer, corporate and commercial banking, cards and payments and wealth management, driven by digital transformation and technology modernization.We remain reasonably optimistic about growth prospects in FS due to increase in win rates and increase in our large deal pipeline. Stater deal will help in strengthening our mortgage servicing capabilities through digital platforms and enhance our presence in Europe.Growth in Retail is driven by large deal wins, opening new logos and differentiation on digital deals. There is acceleration in spending towards digital, IT simplification and modernization to improve customer experience. CPG industry is seeing more consolidation and clients are asking for integrated BPO and technology services.Growth in Communication segment remained strong due to ramp-ups of deal wons in earlier quarter. We continue to win large deals within this segment. With the 5G race picking up, the wireless telcos are under pressure to invest and maintain leadership. In 5G, underlying technologies, such as cognitive radio, small cells and smart antennas are becoming prominent. We are already working with our customers in advanced IoT used cases.Energy utility resources and services maintained the strong growth momentum, and we expect broad-based growth to continue in this fiscal on the back of continued momentum in top accounts and new account openings. Utilities is spending towards customer experience and digital transformation. Resources is spending towards BPO, IT and ERP upgrades. Manufacturing vertical is seeing some impact from global trade war, especially in Europe with cost-cutting initiative being in place in multiple plans. Customers are looking towards digitalization of end-to-end processes, with a strong focus on leading mobile, IoT and back-end systems seamlessly to provide a superior customer experience.In Healthcare, while we have won some important deals, M&A in the sector and spending setbacks will impact growth. Life Sciences segment also is impacted due to cost-cutting initiatives by clients due to revenue pressure. Our digital narrative in the market continues to amplify based on the foundation of 5 pillars: experience, insight, innovate, accelerate and assure; and the 5 accelerators: proximity plus, agile plus, automation plus, learning plus and design plus. We are seeing good success in our digital business in terms of revenue momentum and order book. There is continued demand in data and analytics, cloud, SaaS, user experience, security and IoT. In the last quarter, Infosys was rated as leader in 6 of 3 digital services-related capabilities, including in modernization, IoT, experience and security.With that, I will hand over to Nilanjan.

[Nilanjan Roy, Chief Financial Officer]

Thanks [Audio Gap] FY '20 earnings call. Our revenues in quarter 1 were $3.13 billion, growing by 12.4% year-on-year in constant currency terms. This was our third consecutive quarter of double-digit constant currency growth. The sequential revenue growth in constant currency was 2.8%, including 60 bps from Stater acquisition.Operating margin in quarter 1 was 20.5% compared to 21.5% in quarter 4. During the quarter, the rupee appreciated by 1.1% against the USD, while USD strengthened against other major global currencies, which impacted operating margins by 40 basis points. In addition, margins were impacted by 60 basis points due to compensation increase; 80 basis points due to expenses on new visas, largely for H1B; and 20 basis points due to Stater acquisition. These increases were partly neutralized by increases in utilization, which helped margins by 70 basis points, increase in realization and other cost efficiencies by 20 basis points and the minor impact of IFRS 16 adoption of 10 basis points. This led to a 1% drop in operating margins compared to quarter 4.Operating cash flows in quarter 1 was $630 million and free cash flow was $485 million, off the CapEx of $145 million. The increase in CapEx is in line with our previously announced plans of creating new capacities in SEZs and overseas locations.DSO for the quarter increased by 2 days to 68 days largely due to the hyper Stater deals. We had similar benefits in creditors in line with the hyper business model.Rupee appreciation continued in quarter 1. However, our effective hedging program ensured that we had the 16th consecutive quarter of gains in nonoperating income. Our hedge book was $2.5 billion at the end of the quarter. Yield on other income improved to 1 -- 8.1% from 7.91% in quarter 4.Effective tax rate for the quarter was 26.4% versus 26.8% for the financial year 2019. EPS increased by 3.2% year-on-year. We have made further progress on executing our capital allocation program announced in April 2018. Out of the maximum buyback size of INR 8,260 crores, we have completed over 70% of the buyback at INR 5,934 crores so far. We plan to finish the balance in quarter 2, notwithstanding the recent imposition of taxes on buybacks.During quarter 1, we also completed payout of final dividend of INR 10.50 per share for FY '19. Cash and cash equivalents declined to $3,570 million due to payout of final dividends and buybacks in quarter 1 of $1,337 million. ROE has increased to 25.8% in quarter 1 compared to 22.7% in quarter 4, an increase of over 3%. As we look to be a more diversed company, we have now started including metrics of our gender ratio, which now stands at 37%.Consistent with our previously articulated objectives of enhancing returns for our investors, I'm happy to announce that the company has revised its capital allocation policy. As part of the same, effective financial year 2020, the company expects to return approximately 85% of the free cash flows cumulatively over a 5-year period through a combination of semi-annual dividends and our share buybacks and our special dividends subject to applicable laws and requisite approvals, if any. We believe this progressive policy will further improve shareholder return and provide more predictable cash flows for our shareholders.We have revised our FY '20 revenue growth guidance to 8.5% to 10% in constant currency terms. We are maintaining the operating margin band at 21% to 23% despite the rupee appreciation. We expect operating margins for the remaining year to improve versus quarter 1 subject to a stable currency environment. This margin improvement will be driven by continuous deployment of our operational efficiencies like utilization, rationalizing the payments, on-site to offshore mix, automation and other overhead efficiency measures.With that, we can open up the floor for questions.

[Operator]

[Operator Instructions] The first question is from the line of Edward Caso from Wells Fargo.

[Edward Stephen Caso, Managing Director and Senior Analyst]

Congrats on the quarter. Could you provide some color on why you're having such success with the large deal wins? And how much of it is price and how much of it is positioning? And maybe split the 2 -- split the wins between legacy and digital?

[Salil Satish Parekh, MD, CEO & Director]

This is Salil to answer the question, Ed. I think part of what we see in terms of large deals is some of the investments we've made in our digital capabilities, they come together as part of a collective, where clients are looking to modernize their tech landscape. And us being large incumbent players with long-standing relationships puts us in a place of advantage with these new capabilities, combined with some of the areas that are long-standing projects and contracts for us. In addition to that, the way we looked at segmenting which sectors we go after and in part segmenting which potential competitors that we should look at differentiating versus, those are techniques that have helped us. And overall, we see an increased engagement and intensity with our clients, that is helping us. However, as you know well, large deals are by design lumpy. We've been fortunate in Q3, Q4 and Q1 to have very strong large deals numbers. These numbers for the year, we're very confident about that each quarter, as you know, could be up and down.

[Edward Stephen Caso, Managing Director and Senior Analyst]

My other question is you still have close to $4 billion in cash on your balance sheet. I assume that's more than you need. You raised your sort of deployment of ongoing free cash flow, but what are the thoughts of potentially deploying some of the unnecessary cash on your balance sheet?

[Salil Satish Parekh, MD, CEO & Director]

Thanks. So the ongoing is -- as you rightly point out, we've made the change. On the -- what we have on the balance sheet, as you know, we have some part of our buyback that is still to be completed. So that will be used in this current buyback. We have plans over time to make sure that our balance sheet is efficient. As we look around, we will look to see if that means doing more within the laws and regulations buybacks for that or looking at other uses if we find small, appropriate acquisitions that we can look at.

[Operator]

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

[Moshe Katri]

Congrats on very strong TCV numbers. Just going back to some of the metrics related to the quarter. We're getting a lot of questions about organic growth, specifically the ABN AMRO contribution and then how much did that actually add to the guidance range for the fiscal year. And then final point here. You have sustained your margin targets, but then what's embedded there in terms of FX moves in terms of the Indian rupee versus some of the other currencies and obviously, given the fact that we've seen a reversal there in the past few weeks?

[Nilanjan Roy, Chief Financial Officer]

For the ABN Stater acquisition, this was already built into our guidance at the beginning of the year when we announced that it takes into account our future acquisitions. So our guidance is only got to do with more organic confidence of what we have seen in the market. The impact of -- as in my call, I said the impact of the acquisition was 60 basis points on a sequential basis versus -- in the 2.8%, that's embedded in that.The question on -- what was the question? On the margin. Yes, so we had given a guidance at the start of the year of 21% to 23% and that was when dollar was closer to 69.50 versus the rupee. We have absorbed 40 basis points at this quarter, but we still at 68.50. We remain confident that we will be able to hit our 21% to 23%. Of course, this is predicated on the dollar remaining where it is now. Like I said, we have multiple levers on operational efficiencies. We've always seen that kicking in this quarter. Our utilization is up nearly 70 basis point, which had fallen. And of course, we have the automation benefits of how we can make up fixed-price projects more productive. We have the whole on-site pyramid. So the number of levers we continuously deploy and that giving us the confidence that the rest of the year margins of 21%, 23%, we'll be able to hit that.

[Operator]

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

[Ankur Rudra, Research Analyst]

Congratulations, and appreciate the increase in payout ratios. To start with, maybe if you could comment a bit on what drove the increase in guidance? Was this the better-than-expected deal wins in the quarter? Or any change in perception of weaknesses in verticals you're going into the year specifically in Financial Services or Manufacturing? Also relatedly, is there any reason to narrow the band -- the margin -- sorry, the guidance band on revenues so early in the year?

[Salil Satish Parekh, MD, CEO & Director]

On the guidance itself, the main reason was with the strength of growth in Q1, which was 12.4% year-on-year and then that on the back of 2 other quarters, Q4 and Q3 of last year, being double-digit and what we see in our pipeline, so our large deal pipeline has improved from April 1 through now. That improvement and, of course, some of the wins in the quarter, all of those things put together give us a level of comfort to raise this guidance from 7.5%, 9.5%, now to 8.5% to 10%.In terms of specific segments, I think you heard when Pravin shared the view on segments, those are how we see -- what we see across different segments. And the narrowing of the band, our thought was given we have 1 quarter into the year as we changed -- or increased the guidance, we felt it was perhaps more appropriate at this stage to narrow the band given what we were seeing here.

[Ankur Rudra, Research Analyst]

Okay. Just a question on your U.S. or local graduate program globally. It's probably been almost 3 years now and you said you've achieved your initial targets. Given that you probably have a lot of learnings about this program now, could you share what's been the experience here in terms of scalability of this type of supply, the kind of pricing, utilization, attrition, kind of parameters you get and also client acceptance specifically compared to your traditional model on-site?

[Ravi Kumar Singisetti, President & Deputy COO]

Yes, Ankur, this is Ravi here. Yes, there have been quite a bit of learnings on how to hire, how to staff on programs and, of course, how to retain and how do we create a trajectory into building a sustainable model for the future. Partnerships with colleges to set the training up. Going beyond STEM, we actually went to liberal arts schools and design schools, which is very new to us all across the world. And then we have started experimenting with community colleges as well, which is, again, pretty new to us and pretty new to the industry. So it's a pretty exhaustive list of learnings and how we can sharpen this model and continue to sustain it on a long term.

[Ankur Rudra, Research Analyst]

And specifically, could you add some color, Ravi, in terms of how do you -- how scalable do you think this is going forward? And what -- where does the pricing and utilization and attrition sit versus your traditional on-site and offshore supply models?

[Ravi Kumar Singisetti, President & Deputy COO]

Yes. So the -- it is a scalable model. A percentage of our workflows can fit into a pyramid on-site, that's the learning. If we have to sustain and scale it further, we have to move works to our hubs so that the work actually moves from a 2 Tier on-site offshore to a on-site nearshore offshore model. As you're aware, we are also setting up our own training facility, which will help us to sustain this momentum on a long run. The key is to -- the ability for us to retain and actually create a career path for them to continue with us on a long run. So that's broadly where it is. We do like 8 to 12 weeks of training as we hire from schools. That can be optimized. We could further backward integrate it to the curriculums of the colleges we are hiring from. What we're doing with design schools is again a new track, which we are learning on. So effectively, I don't want to put a number on it, but what I can actually say that the myth that the pyramid has to be on-site offshore, and we kind of think now you could have a pyramid inside it, which is only on-site and you could have school graduates who are closer -- in cross proximity to clients, especially when you have agile work coming your way. So that's what I can kind of tell you at a high level.

[Operator]

And the next question is from the line of Sandeep Shah from CGS-CIMB.

[Sandeep Shah, Vice President]

Congrats on a good set of numbers. Just if I look at last 3 quarters Y-o-Y pricing increase on a blended basis, it has been positive and despite no change in the on-site. Actually, on-site has gone down. So is it -- you believe is it a mix led? Or Salil, you believe that this is with improving contribution of digital, this could be a new tailwind, which to some extent, Nilanjan has also not mentioned in one of his positive levers?

[Salil Satish Parekh, MD, CEO & Director]

Sorry, go ahead, you had something else. I think from our perspective, we see that as a very critical parameter. It's something that we think is a function of both of the factors that you mentioned, the mix and the capability, and it's something that we are working on actively. We think it's something in the medium term, not immediately every quarter, but in the medium term, we think that can be something that can help us sustain and potentially even expand our margin outlook.

[Sandeep Shah, Vice President]

So this is helpful. Just a follow-up in terms of order book, is it possible to break down the contribution from the Stater deal? As well as, Salil, in the order book, do you believe the recent increase in the global tariff or any impending Brexit is leading to any kind of scenario where you believe the order book traction may not -- may slowdown in the coming quarters? Or you believe, no, the decision-making is not getting impacted because of this? And some comments on the pipeline if you can, give some color on quantitative how Q-on-Q and Y-o-Y in percentage term it has improved?

[Salil Satish Parekh, MD, CEO & Director]

On the Stater, we've not stated externally the decoupling of the order book and that Nilanjan shared with you in terms of the quarter, the revenue and the year-on-year revenue impact that we've talked about.In terms of Brexit, we've seen today that our business in the U.K. has remained reasonably in good shape. We don't see any particular change in our business mix today. We think once all of this Brexit discussions settle down, if anything, we will start to see some acceleration, but we don't see any change or at least it's not something we've decoupled to make it something of a concern within our pipeline. The overall pipeline, we've not shared the stat externally. I stated to give some color earlier, but from April 1 through now, we've seen a good growth in the large deals pipeline that we have and that's part of the reason why we see some potentially increased traction in the coming quarters.

[Operator]

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

[Jared Marshall Levine, Research Associate]

This is actually Jared Levine on for Bryan. Can you talk about -- I know you discussed prior the sequential drivers to the decline in margins, but can you talk about the year-on-year bucketing of the decline in operating margin, please?

[Nilanjan Roy, Chief Financial Officer]

I think the big one just we continue to mention, which we said in our last call, the first is the increase in the comp-related costs over the year, which is about 210-odd basis points and there's a combination of investments we have made both in our sales force and that's something which we ramped up. The other one is the impact of the higher sub-con cost, which you've seen over the last year progressing, that's about 50 bps. The offset of that has been the rupee benefit, about 40 basis points. We've got another benefit of the RPP, the rate question prior to that which was about 50 basis points. And of course, the special quarter 1 impact, which is 80 basis point on the higher visa cost because we did not have that many visas last year, so that's about 80 basis points. So that gives us the overall 320 bps. I think if you see the quarter-on-quarter, I think that's more a situation which is to understand where we came from, how we ended last year and what is our go-forward plan in terms of improving our margins to hit our guidance of 21%, 23%.

[Jared Marshall Levine, Research Associate]

Got it. And then just one more quick follow-up. In terms of the digital deals you're winning, are there any kind of digital projects, in particular like IoT or cloud deployment, particularly when taking a great share of kind of the projects currently?

[Salil Satish Parekh, MD, CEO & Director]

Sorry, I didn't follow that. What was the question about the digital?

[Jared Marshall Levine, Research Associate]

Yes. Within digital, are there certain particular projects that are accounting for great share of the wins like IoT or cloud deployment? What's kind of making up the mix of digital wins currently?

[Salil Satish Parekh, MD, CEO & Director]

So to share with you, we have 5 broad areas within digital that we've outlined over the last year or so. Two of those areas, we believe, are going to start to become very large businesses, and we see a lot of traction in those areas. One of them is the area of cloud. This is both cloud services, which are through our strategic partnerships with AWS, Azure and Google Cloud or with some of the SaaS leaders, such as Salesforce or ServiceNow and another very strong area for us is the area of data and analytics. Having said that, we also have strength in the other areas, for example, in the digital design and experience, in the area of cybersecurity and in the area of IoT, each of these are seeing good traction. So there's no one that stands out, but the first 2 I mentioned, I think, we start to see good scale benefits from that as well.

[Operator]

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

[Ravi Menon, VP of IT Services & Internet and Analyst]

So if you just back out what we think would be a 5-year kind of contribution from Stater, it looks like your TCV is about $1.6 billion or so. Then if we assume that there are no other kind of rebadging deals in there, surely that should help margins going forward. Would that be concurrent with your view?

[Salil Satish Parekh, MD, CEO & Director]

So we -- when we coupled the large deals in the stats we've shared outside, we do see that a lot of work we are selling in the large deals, that Pravin shared a stat earlier, are net new. And in that sense, we feel good about how the margin profile of those deals is evolving there.

[Ravi Menon, VP of IT Services & Internet and Analyst]

Right. I think Nilanjan said in his comments earlier that you're looking at the margins kind of improving gradually over this year, so that's why I asked this. Secondly, are you worried at all about the attrition being a little high this quarter for year-on-year to up slightly? So given your utilization is also inching up, what -- where do you think you will be comfortable with utilization given the current levels for attrition?

[Salil Satish Parekh, MD, CEO & Director]

So attrition is something -- there is an area of extreme attention for us. We want to make sure that we take all the actions that we need to take to make sure this is within a level that is comfortable for our business going forward. Having said that, in Q1, as Pravin had shared, we've taken a very strong measures and some of the attrition that's in here is, what we call, involuntary attrition and some of the attrition in the stat is also for individuals who leave to go for graduate school or higher education and that is somewhat seasonal.If you look at -- and our attrition stat takes all of our businesses into account, it's not just the IT services attrition. And -- so if you look at the attrition we are focused on, we have a lot of measures we've put in place to start to adjust that. In addition to making sure that there is all the hygiene factors, we are also focused on really driving the opportunity set for our employees to a broader base and that improves the value connection that employees will have with us. And we think over the next -- in the medium term over the next few quarters, that should start to see some impact.

[Ravi Menon, VP of IT Services & Internet and Analyst]

So, 1 last question, if I may. You've spoken about how Stater will actually help you kind of the approach in Europe. Given the uncertainties with Brexit, this is something that -- do you see the mortgage market as still being attractive? I know you're seeing some interest and potentially some leads come through already.

[Mohit Joshi, President]

This is Mohit Joshi here. Ravi, I should point out that Stater is primarily focused on the Dutch market and the Northern European market, right? Not so much on the U.K. market. So to that extent, I don't see Brexit is having an impact on Stater itself. I think the second thing is we see a huge opportunity globally, not just in Europe, in the entire mortgage servicing market, but also the mortgage origination market. If you look at Europe, for instance, in Germany, 98% of all mortgages are currently being serviced by the banks themselves. We think that this number over time will move to what we see in the U.S. The majority of the servicing is done by third-parties. Stater is the strongest and largest mortgage servicer in Europe. With Stater, we're also building a very significant front office that is origination capability; and middle office, that's underwriting capability. So we think it will be a powerful proposition for us within Europe and the capabilities that we have, even if it's not the platform, the capabilities are applicable globally. Yes, so that's my perspective on the opportunities that we have.

[Operator]

The next question is from the line of Parag Gupta from Morgan Stanley.

[Parag Gupta, Executive Director]

Congratulations on a strong quarter. I had 2 questions. Firstly, Salil, maybe if you could just talk about the localization efforts in the U.S.? You've done a commendable job in achieving your targets. Just wanted to understand now that you've go to a reasonable level that you had initially set out for, do you think that, that is good enough incrementally to start taking away some of the efforts involved from a subcontracting perspective? Or do you think that the skill sets are still very different and the subcontractors would still be required to meet the demand that you won over the last few quarters?

[Salil Satish Parekh, MD, CEO & Director]

So the localization work has indeed been positive, and we are delighted with the progress it's made. However, it's first step of a very long journey, and we have plans in the medium term on how we think our business model will evolve. In terms of sub-cons here, I think it's not so much and/or it's much more that both will exist. The skill sets that we see in the market today for which we're winning work, we have a tremendous capacity of those skill set, but there's always some demand, which comes in where the fulfillment needs to be done on a relatively quick basis. We, however, have some operational levers that we're putting in place, including localization as one of them that will help us to adjust the sub-con usage. For example, looking at aging of subcontractors that can give us benefits again in the medium term into a margin.

[Parag Gupta, Executive Director]

Okay, got it. My other question was, my understanding for your margin guidance of 21% to 23% for this year was premised on the usual wage hike cycle that you've already set out on. But given that your attrition rates are running high, is there a risk to your margin guidance if you have to go out for out-of-turn wage hikes, promotions or other incentives?

[Salil Satish Parekh, MD, CEO & Director]

We are fully committed to our margin guidance. There will be a lot of business situations plus and minus where we will deliver our margin guidance.

[Operator]

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

[Diviya Nagarajan, Executive Director and Research Analyst]

Congrats on the quarter and order wins you may get. Two questions from my end. If I strip out the Stater contribution, banking seems to have been a little soft. How do you -- you spoke about deals wins being strong, but we saw that in the last quarter as well. From a reported basis, how should we see the banking revenue organically trend in the year? That's question number one. And two, what are the preconditions do you think that really this year has been sitting down from more manageable number according to you?

[Mohit Joshi, President]

Sorry, I didn't catch the second question. This is Mohit. Let me address the first question on banking. I think that is not true that banking was soft even after excluding Stater. And obviously, we haven't broken out the Stater number for this quarter. But if you see the trend in Q1 of last year, year-on-year growth was 3%. This climbed to 8.3% in Q4. And even excluding Stater, it continued to climb in Q1. And obviously with Stater, it was significant double-digit growth. So that is not true that we had weakness in the quarter even excluding Stater. And could you repeat your second question?

[Diviya Nagarajan, Executive Director and Research Analyst]

First question, I was actually talking from a sequential basis, if that still...

[Mohit Joshi, President]

Yes, yes. No, even sequentially. Even sequentially, while we haven't broken out the number, I can confirm that we had growth even excluding Stater.

[Diviya Nagarajan, Executive Director and Research Analyst]

And on the attrition, what are the preconditions under which you think your attrition will come under control? What do we need to see in terms of organizational metrics for you to control? What does get you there to a more manageable number in your view?

[U. B. Pravin Rao, COO & Whole]

See historically -- this is Pravin here. Historically, attrition, we have been comfortable with attrition in the range of 13% to 15%. These are -- and these are during normal times when there are less disruptions. But today, we are living in an environment where there is a lot of disruption -- technology disruptions happening. There is an increase in adoption of newer technologies, there is shortage of skills. So to that extent, we are seeing a higher degree of attrition given the shortage of talent. So as Salil had said earlier and as I had also said earlier in my press conference, there are many things we are doing to bring it down. Significant part of the attrition is at lower levels. So during the current comp review, we have hopefully addressed some of it. There are a lot of efforts we are doing in terms of increasing the engagement, increasing rewards, looking at high performers, creating more opportunities. Many initiatives are underway, and we are hopeful that over a period of time, it should come down. But eventually, I mean, once things stabilizes and once the talent gap actually minimizes, then I think we'll probably go back to 13% to 15%, but in the short term, it will be slightly on the higher side.

[Diviya Nagarajan, Executive Director and Research Analyst]

Sorry, a quick follow-up to that. With attrition being where it is and your first quarter margins outside the guidance range, could you give us a sense on which half of the guidance spend you'd be more comfortable with at this point in time from a margin perspective?

[Salil Satish Parekh, MD, CEO & Director]

On the guidance -- our guidance is 21% to 23%. So at this stage, we are not further narrowing or segmenting that guidance.

[Operator]

The next question is from the line of Joseph Foresi from Cantor Fitzgerald.

[Joseph Dean Foresi, Analyst]

My first question is just around some of the market share shifts. I know you had talked about this a little bit at the beginning of the call, but maybe you could talk about any changes in your approach? What piece of your customers' businesses are leaving some of your competitors and going to you? And what you've strengthened to kind of strengthen your position in the end market?

[Salil Satish Parekh, MD, CEO & Director]

See, here, it's more with respect to the traction -- the comment I had made there with respect to the traction we're seeing for a digital business. To give you one example, with Microsoft, we've been named as the #1 partner globally for this year. It's a shift where our capabilities on all of their product set, so from Azure to Office365 to all other workplace toolkit. Our approach to driving that into enterprise space is something that's gaining traction. So it's not so much taking away from another competitor, we think we're gaining market share in a space that's growing but our growth is higher than what the overall growth for that space is. And we see similar type of traction in other elements of the 5 areas, the pentagon of our digital focus. For example, we see that with some other SaaS players. We see that in a lot of agile development work that we're doing on different toolkits. We see that even for the work we're doing for S/4HANA. So there are different places where we started seeing more and more growth through those investments or capabilities that we are building or have built over the past.

[Joseph Dean Foresi, Analyst]

Got it. Okay. And then going back to Financial Services, we have seen a couple of different players have troubles with some of the banking budgets that they are dealing with at the big banks and then we've seen a lot of news about what's going on in Europe and the banking system there. You had put up some really good numbers. So maybe you could talk about your positioning in Financial Services and comment a little bit about some of those shaky budgets that we've seen at those big banks?

[Mohit Joshi, President]

Well, I think look it's been a mixed bag. You've seen some weaknesses obviously in the capital market space, both on the buy side and the sell side, and you've seen some challenges obviously in Europe. For us though this quarter, we've continued to do quite well in Europe. But on the flip side, some other sides of the business like the consumer banking space, the commercial banking space, corporate banking, mortgages, I think these businesses are seeing good traction. I think, as Salil mentioned, look, for us it's a mix, right? We are obviously seeing significant traction in the cloud space in the entire digital transformation journey for banking. Obviously, the new centers that we're building out like the studio in Shoreditch are really helping us engage with banks from a branch transformation perspective, from a digital user experience perspective. On the data space, obviously, there is a huge focus on data monetization, data mining. Banks are starting to move to the cloud and there obviously is a significant revenue opportunity for us. So I'd say it is a mixed bag, right? You have certain areas of the sector where you have some weaknesses, actually, including the life and health insurance business. But other sides of the business, the traditional consumer businesses, the traditional corporate banking and transaction businesses are seeing a lot of investment.Finally, from our perspective, I think there are 2 other pieces that are helping us from a growth and a mindshare perspective. The first is that we have a very powerful product business in Finacle, and Finacle is obviously gaining significant traction globally. We had a great quarter in terms of TCV bookings, expansion in North America and expansion in the European markets. So that is one unique differentiator for us, given the strength of the product and the renewed interest in digital engagement, the reduced -- the renewed interest in omnichannel hubs. And the second piece I'll point out is the new Stater acquisition. And as I previously mentioned in response to another question. We're really building out subsectoral capability in a fairly significant way and specifically for the mortgages space, and mortgages really are the largest revenue line for our banking clients. The fact that we're building out significant mortgage front-to-back capability, I think, is another example of a unique differentiator.

[Joseph Dean Foresi, Analyst]

Got it. And sorry, I'm trying to sneak one more in because it builds on what you are saying. Are you taking market share in the U.S. from companies like FIS and Pfizer? How are you getting traction there? And with the lower margin profile, do you feel like you're more competitive in the pricing environment?

[Mohit Joshi, President]

So look, I think, if you look at the U.S. space, more broadly speaking absolutely. I think growth in the U.S. in Financial Services has been very strong for us. Most of the time, FIS and us, we don't really compete in the same spaces. And so I don't think that they are a significant source of market share gain for us.

[Operator]

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

[Ashish Chopra, Research Analyst]

Congratulations on a good quarter. Firstly, maybe Nilanjan, you could take this. On the wage hikes impacts on -- in this quarter, the impact was, I think, close to 60 bps is what you said. And in the media comments, you also mentioned that there was deferral of wage hikes for certain, I think, bottom of the pyramid employees as well into the next quarter. But typically, we've seen second quarter's wage hike impacting lower, but is it expected to be on similar lines or different this time around?

[Nilanjan Roy, Chief Financial Officer]

So like Pravin had also said, I think we always have a staggered impact of wage hikes. Some portion of the wage hikes was deferred, but like I said that's built into what we are seeing as predictions for the rest of the year. So I don't think there's anything unusual or aberration in that.

[Ashish Chopra, Research Analyst]

Okay. And secondly, Pravin, as far as the net new share is concerned, I would be assuming that Stater would be entirely in the net new and the percentages would be different if we were to exclude the Stater?

[U. B. Pravin Rao, COO & Whole]

Yes, Stater would be entirely net new.

[Ashish Chopra, Research Analyst]

Okay. And just lastly from my side, I think towards the end of the quarter, you had announced a partnership with Pan-American Life Insurance Group, sort of, I think, on the policy administration side. So just if you could throw some light on the nature of that deal. And you've seen your peer announced a lot of deals with -- on the insurance platform of much larger sizes in nature. So just wanted to know if this would actually compare into similar space or would be completely different?

[Mohit Joshi, President]

So look, I think we are seeing a huge interest and this is true for our peer group as well. As you look at the life insurance and annuity business, there is a significant amount of interest in using third-party processors in making sure that the close book at least is being done by a more efficient producer. In reality, what has historically been more of a processing business, now there is a lot of interest in also a better user experience, more of a front-end transformation piece. And we feel that this is an area which we'll see significant growth. We're fairly optimistic about the McCamish platform that we have. We've also modernized it very significantly and there are significant deals that we're seeing in the pipeline, which will allow us to really -- which will really allow us to build on the growth that has been seen in the marketplace.

[Operator]

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

[Sandip Kumar Agarwal, Vice President]

Congratulations to the management team for excellent quarter. A couple of questions, Salil and Pravin, from my side. First on the digital side. We are growing at 40%, 42% and our proportion is continuously rising. And I understand then that the business has changed and it is not fair to keep apart the growth rates and understand, but just wanted a little bit of clarification on this side. The way we are growing and the way our order book clearly is tilted towards the newer technologies, are we going to see a phase where the leakage from the non-digital piece will come to a halt and that will lead to a much higher growth than what we are seeing structurally going forward, although size obviously is a concern? And I'm not asking for a specific guidance but I'm just trying to understand whether the growing proportion of digital will lead to a structurally better growth going forward?And second question. When you meet your client, what is your sense how much they have penetrated in terms of spending on the digital? Is it a very, very early stage or it is a little bit in the middle phase? Or how do you foresee that?And another question which I had was on the attrition side. We have generally seen that when you have 2, 3, 4 quarters -- good quarters, then the attrition rate should come off. And I have seen that in last 4, 5 quarters, tremendous amount of effort has been made both on hike side and the promotion side and also to some extent I think the stock option side and still we are not seeing any kind of control on the attrition number. In fact, they are worsening. And -- so my concern is that, is there a substantial portion of involuntary piece in this? Or you think the voluntary piece still is high. And I'm not asking specifically for this quarter because if this continues, then our dependence on external resource will not come down and sub-con cost may remain elevated, which may not allow us to beat top end of our margin anytime soon.

[Salil Satish Parekh, MD, CEO & Director]

Okay. So there are several points that you shared. Starting with the structural piece, we have a view on the digital addressable market and the growth rate. We'll update it in the coming quarters when we have another session for our Analysts Day. If you recall, we've shared -- it's about $160 billion market growing at 15%. So that's the piece that we are investing in and we see some traction.On what you talk about and what we define is cost services, we've not declared the growth rates, but I think the market view is available if you look at what's with third-party agencies who have a lot of data like Gartner and others and it's fair to say that, that market has more challenged growth environment today. In that context, it's how we've developed our strategic approach and that's what we are executing too. We have a view on where this might go medium term, but we've not actually shared any of that externally. We think the way that we are driving this, for example, the 12.4% growth in Q1, that's a good indication of what are the sorts of things possible when many things come together in a fortuitous way for us in a quarter.In terms of the attrition, there is -- we've talked about operational efficiency and we have now more and more intense focus on involuntary attrition as well. There has been some element of what is termed as seasonal because of higher education. And when you start to strip that out, we see the attrition numbers, while not improving they are stable, and so we still have work to do to make sure they start to trend down.

[Operator]

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

[Sandeep Mahindroo]

We would like to thank, everyone, for joining us today on this call. We look forward to talking to you, again. Have a good weekend ahead.

[Operator]

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