Infosys Ltd

NSE:INFY

Earnings Call Analysis

Company Reports Strong Quarter Amid Challenges

The company experienced a strong Q2 with revenue growing 2.3% quarter-on-quarter and 2.5% year-on-year and an operating margin of 21.2%. Despite an environment of low digital transformation spending and slow decision-making, they won record large deals worth $7.7 billion, with 48% being new business, signaling market share gains in efficiency-focused segments. The firm's utilization improved slightly, with room for further improvement. Wage hikes were rolled out across all employees, reflecting management efforts to balance growth with margin expansion. The adoption of AI capabilities through Topaz and partnerships such as with NVIDIA have positioned the company favorably, even though these projects aren't yet a substantial part of revenue. The margin outlook remains cautious with a slight decrease in forward revenue guidance, while the overall strategy indicates a phased approach to capturing growth and improving margins.

A Quarter of Strength Amidst Adjusted Expectations

The company reported robust performance in Q2, marked by quarter-on-quarter growth of 2.3% and year-on-year growth of 2.5% in constant currency terms, with an operating margin of 21.2%. Large deal wins reached a record high of $7.7 billion, nearly half of which represented new business. This not only underscores the company's ability to capture market share but also signals a strategic shift towards delivering cost-efficiency and productivity benefits alongside transformation projects—fostering a solid foundation for future growth.

Revised Revenue Guidance Reflecting Market Prudence

Despite the stellar deal win rate, the company has tempered its revenue growth expectations, revising the guidance down to 1% to 3.5% for the full year. This cautious stance is based on slower decision-making among clients and reduced volumes in discretionary and last transformation programs. The revenue impact is most notable in sectors like telecom, Hi-Tech, payments, investment banking, and retail, which is balanced by the steady performance in manufacturing and life sciences.

Margin Improvement and Cost Efficiency Initiatives

The company is set to implement wage hikes effectively from November, which is anticipated to add pressure on costs. However, the management is confident that margin aspirations will improve, anchored by a set of initiatives termed 'Project Maximus'. These include leveraging value-based selling, lean automation with AI infusion, enhancing the employee pyramid's efficiency, and indirect cost reduction. Incremental margin uplift has been observed with a 40 basis points increase from the previous quarter to 21.2%—reflecting the fruition of such measures, and serving as a foundation for further improvements.

Strategic Partnerships and Advancements in AI

The company continues to strengthen its AI capabilities, having trained a significant portion of its workforce on large language models and new proprietary platforms like Topaz. Moreover, strategic partnerships with major players like NVIDIA advance the company's positioning in the evolving AI landscape. These initiatives reflect the company's commitment to embedding AI across old and new deals, enhancing productivity, and driving innovation for clients.

Earnings Call Transcript 2024-Q2

[Rishi Basu, executive]

Very good evening, everyone, and thank you for joining us today at our second quarter financial results press conference. My name is Rishi. And on behalf of Infosys, I'd like to welcome you today. [Operator Instructions]

With that, let me invite our Chief Executive Officer, Mr. Salil Parekh, for his opening remarks. Over to you, Salil.

[Salil Parekh, executive]

Thanks, Rishi. Good afternoon. Thank you all for joining us, and thank you for being here in person. Always good to see everyone here on the campus. We had a strong quarter in Q2. We had growth of 2.3% quarter-on-quarter and 2.5% year-on-year in constant currency. And operating margin was at 21.2%. Large deals was the highest ever for us at $7.7 billion. 48% of this was net new. We see that with our large deal wins in the past 2 quarters, we are winning market share in the area of cost and efficiency.

As the economic environment changed, we pivoted from delivering transformation projects to also delivering productivity benefits and cost savings at scale. These large and mega deal wins help us build a strong foundation for our future.

We continue to see the overall environment where digital transformation programs and discretionary spends are low, and decision-making is slow. The adoption of Topaz, our generative AI capability set is helping us deliver more value and to increase market share.

The program we've launched for margin expansion is being comprehensively driven across the company. We have 5 areas of focus in this program. And within those 5 areas, we have 20 specific tracks and these are starting to work across the company in a comprehensive way.

With that, let me open it up for questions.

[Rishi Basu, executive]

Thank you, Salil. We will now open the floor for questions. Joining Salil is Mr. Nilanjan Roy, Chief Financial Officer, Infosys.

The first question is from Ritu Singh from CNBC-TV18.

[Ritu Singh]

Salil, first, a couple of questions to you. On the guidance, as always, you yourself are saying this is the highest deal wins in the history that you've had at $7.7 billion, numbers have been looking good for the last couple of quarters, and yet we've seen the revenue guidance being reduced from 4% to 7% to 1% to 3.5% and now another 100 basis point reduction. What is the reason for that? And would that imply a degrowth in the second half? And as far as the environment is concerned, have you seen the bottom yet? Are there certain segments that are where you're seeing more concerns than the others? Or what is the conversation with clients like? And Nilanjan, a couple of questions to you on the head count and margins perhaps after Salil answers.

[Salil Parekh, executive]

So thanks. I think first, in terms of the guidance itself, what we are seeing, as I shared in the statement, we are seeing the discretionary programs, the last transformation programs, they have reduced significantly. And we are seeing the decision-making continues to be slow. So as we've looked at this quarter, the volumes are still under constraint. And keeping that in mind, we've given the guidance for the full year. The large and mega deal wins really are positioning us very well for the future. But as we see the ramp-ups, which will be towards the back end of the year as we had shared, and even some of those, the ramp-ups and the starts will get pushed out. So that's where we are on the guidance.

On the sectors or industries where we are seeing the impact -- where we see the impact today is what we've shared in the past. We see the impact in telecom, in Hi-Tech, in areas of financial services that we'd shared in the past, for example, payments, investment banking. We see some impacts in the retail sector as well. So those are the ones where we are seeing the impact. Of course, we have other industries, manufacturing, life sciences, which are continuing to do well.

[Ritu Singh]

But have you seen the bottom of it yet? Are you expecting a recovery in the second half? Or -- what is the sense how far pushed will it be?

[Salil Parekh, executive]

So there -- we have just looked at what we've delivered in this quarter, which is a very strong quarter. We are going in that view as we see the information quarter-by-quarter. We don't have a view on where the timing of that is.

[Ritu Singh]

Nilanjan, what's the end goal of this margin improvement program that you've been on? You stated that you'll start to see the benefits in 6 to 8 quarters at the time you announced it. What would that look like? Because currently, you're still at 20% to 22% guidance. Secondly, there's been a significant reduction in the head count, about 7,500 during the quarter. Any specific reason for that? And if you could share your hiring plans? And the wage hikes that have been deferred, when are they expected? And how would that impact your margin trajectory going ahead?

[Nilanjan Roy, executive]

Okay. I'll take the last 1 first. So the wage hikes have been announced as we speak. So from first November, this is going to be rolled out across all employees. So that's already in place. And in fact, Shaji, our new HR head has already issued necessary guidelines. So that's the easy one.

Coming back to the whole margin outlook. Of course, from a margin aspiration perspective, we know that we are carrying inefficiencies in our entire structure, for instance, in our pyramid structure, our utilization is at 81.8%. So in fact, it leads to the same question about we had a head reduction of 7,000, but our utilization only went up 70 basis points, right? So actually, we still have enough room for utilization improvement going ahead. So as we continue to grow and in the future, we can actually tighten utilization, 84% to 85% is something which we have worked in the past as well. That is actually a margin lever for us going ahead. So we have 5 tracks which we've rolled out, as you know, as under the[ Project Maximus ] name. This is being led by Jayesh personally across all the leaders. We have a track on value-based selling, including pricing. We have a track on, of course, lean automation now, in fact, injected with AI because that is something now new we are putting in. We have a track on our critical portfolio on an efficient pyramid and indirect cost. So the other 5 areas we are focusing on, of course, and our aspiration is from where we are around 21%. Over a period of time, we should see a margin improvement as these projects kicking.

[Ritu Singh]

So, over a period of time...

[Nilanjan Roy, executive]

Yes. I mean you've already seen a benefit this quarter, right? So I mean, in the margin at 21.2% versus 20.8%. From a margin walk perspective, about 50 basis points of this was a combination of the improvements on Maximus, including utilization, the pyramid, et cetera. So that's all part of this -- we're already seeing initial benefits of that.

[Rishi Basu, executive]

The next question is from Moneycontrol, Chandra.

[Chandra Ranganathan]

I still don't get this dichotomy between -- you've had a strong quarter. It's way above what people were estimating. I think people were expected a flat quarter, you've come in at 2.5%. Your large deal TCV is $7.7 billion and yet you've narrowed your guidance range at the upper end. And this is a pattern that we are seeing with other companies as well, wherein their TCVs are very healthy, but it's not getting converted to revenues. So where is the leakage or is it an overhang of certain projects that are transitioning from the COVID era? If you can give us some perspective on that. Nilanjan, you gave an update on the wage hikes. If you can also give us an update on fresher onboarding and -- I mean when are you planning to onboard them? And, b, are you hitting the campuses at all for hiring because your headcount is also down as Ritu pointed out.

[Salil Parekh, executive]

So thanks for that question. I think what we are seeing in the environment today is different things. One, on the digital programs and on the discretionary work, there's a continuous attention by clients to reduce or to stop them. So that's where we see the impact on one side of the revenue. On the other side, there's a tremendous interest in cost, efficiency, automation, where we happen to have a huge advantage in the market where we believe we are gaining market share by winning so many of these large and mega deals. Many of these deals have time as they start to ramp up, the way that they are structured, the way the transitions happen. We see those ramp ups, those scaling up of the large and mega deals more out into the future, back end of the year and as some of the new deals are coming on beyond that. So those are the 2 dynamics that we see. And then we combine that, we were fortunate and we executed a very strong quarter, as you rightly point out. And we will continue to execute, where we are also aware and we want to make sure that we communicate that or what the environment looks like. And things in that environment change in a dynamic basis, so we want to make sure that, that gives the range of what our guidance communicates.

[Nilanjan Roy, executive]

So on the freshers, I think when last year, we hired about 50,000-odd freshers. And in a way, we hired ahead of -- sort of a demand predicted which we had. Now with that slowing down over this year, our utilization, as you saw, actually had fallen into the 70s, and therefore, now slowly quarter-on-quarter, you are seeing an improvement. So we still have a significant fresher bench with us. We actually of course training them on new skills like Gen AI, SAP, et cetera. But we still have way on utilization to go. So at the moment, we are not going to the campuses as yet. And we will monitor this every quarter looking at our future projections and then accordingly decide when do we go back.

[Chandra Ranganathan]

In terms of onboarding the ones you've already given offers?

[Nilanjan Roy, executive]

So we are committed to whoever we given offers. So whoever we have given offers, we will onboard them. And these are as soon as projects come up, timing, et cetera, and they will be onboarded appropriately.

[Unknown Attendee]

Yesterday, TCS said that they're calling all their employees back to office 5 days a week. What are your return to work plans like? Because we've heard that employees have been asked to come, say, 2 days a week or something of the sort. What are your plans on that front? And what the variable pay will be like for this quarter?

[Salil Parekh, executive]

So on the variable, we don't disclose that, as you know, in this sort of forum. On the return to work or return to office, we've been consistent with the same approach for the last several quarters, almost 2 years. We are very clear that we want to remain flexible with our employees.

Having said that, every quarter, every week, we are seeing more and more employees back into the campus. And we believe this will continue on. There are some instances, for example, with specific client work or specific type of engagement where we feel it's better that everyone is working together in the office. And for that, the employees are back anyway. But in general, our view is we want to support this flexible approach. It's something that we believe is appropriate given how we set up the work-from-home infrastructure. And so we will continue with it at this stage. But there will be specific areas, whether it's projects or type of work where then -- for clients when the need is there, the employees will be on campus.

[Unknown Attendee]

What's the percentage of people who're now back to office?

[Salil Parekh, executive]

So now every week is going up. Right now, we have for the individuals who are in the locations of our delivery centers, over 70% of them are on-campus at some stage in the week.

[Rishi Basu, executive]

The next question is from the Economic Times, [indiscernible].

[Unknown Attendee]

Salil, I just want to know, you've seen flattish growth overall in the revenues. And we've seen North America, which is one of the strongest regions also growing flat. Europe has seen significant growth. Could you give us a sense on where it has grown in the regions? And if you could also give us a sense on overall why were the hikes not given in the previous year. If you could just give -- get a reason on what really went wrong? What are the reasons that you have given the employees? And in terms of new clientele growth as well, if you could just give us a sense why has it been flat? And given that it's a strong quarter. What are the reasons that we've seen new clientele growth and even additional or existing renewals have not been as great as it should have been, given that the next 2 quarters will also be kind of bleak. What is your sense or outlook on the same?

[Salil Parekh, executive]

So let me start, I think with the Europe, U.S. point first. We saw good growth in the quarter overall. So 2.3% quarter-on-quarter, 2.5% year-on-year. U.S. was positive, but small, and Europe was at about 5% in constant currency year-on-year. We've seen consistently, as you pointed out, over the last few quarters, the Europe growth has been stronger than what we've seen in the U.S. Some of that is a function of what we are seeing in the industries. So we've seen good growth in manufacturing, for example, and we've seen that reflected some of the countries within Europe, we've seen stronger growth. We don't break it out by country, but we've seen some of the countries doing quite well. We've also seen, for example, life sciences have a good growth across the company, while we've seen some constraints in retail, the overall growth year-on-year for retail is still quite strong, and that's more distributed with the different geographies.

In terms of the salary changes, we follow our normal pattern of making the salary changes, and this is what we've done. We don't consider that there was any constraint in the past. There have been years where we've done 2 salary increases in 18 months. So it's nothing where we think that what we did in the past was different from that sense.

[Unknown Attendee]

What are the reasons for [indiscernible].

[Salil Parekh, executive]

There was nothing different. So there was no question of a reason in that sense.

[Unknown Attendee]

And just to get a sense of...

[Rishi Basu, executive]

[indiscernible] use the mic, please.

[Unknown Attendee]

[indiscernible] breakup. Could you give us a sense on which has been the highest growth in terms of European region?

[Salil Parekh, executive]

So there we don't share the breakup [indiscernible] to the country.

[Unknown Attendee]

Not even the highest one, if at all? Not even the highest look -- region?

[Salil Parekh, executive]

We don't share.

[Unknown Attendee]

Just [ 2 ] quick follow-ups, Salil. I just wanted to know what are the client conversations like? What are they actually seeing? They're probably drawing up the new budgets from January. So any changes there? And Nilanjan, I just wanted to know, has there been a change in the hike cycle now because now it's been -- will be awarded in November. So are you -- is that cycle itself going to change?

[Salil Parekh, executive]

On the client conversations, I think there's a lot of discussions that clients are having much more on cost, on efficiency, and they're becoming more cautious, certainly not launching new digital transformation programs. When they want to do that, some of that is getting funded by the cost and efficiency programs. And then the discretionary projects, they're being much more cautious. If there's absolutely needed, they're looking at them. So that's the sort of a tone that we are seeing. When we have a strong proposition as we do on automation, on efficiency, we get a lot of connects with the client today, and that's where we're seeing some of these large or mega deals coming in.

[Nilanjan Roy, executive]

So on the -- I think we had a question on the hikes. I think we'll take it every quarter, we have a look at the overall environment, what is competition doing? So there's nothing decided in terms of when the next hike is getting.

[Rishi Basu, executive]

The next question is from the Hindu BusinessLine, Haripriya.

[Haripriya Sureban]

One, how are the pricing conversations changing given the macro environment? Have you had to budge on to be competitive? Another, want some color on the kind of AI deals that you're signing. Do you think the revenue translation here will be faster and better than the other sort of deals? And -- yes.

[Nilanjan Roy, executive]

So on the pricing, it's easy. I think it's largely been stable. Some quarters, we see some pressure, some quarters. There are some clients who come back with discounts, some clients we are able to push a price rise, et cetera. But by and large, it's been quite steady. I don't think anything specific on a longer-term basis.

[Salil Parekh, executive]

And on the projects, I think you said for AI projects?

[Haripriya Sureban]

Yes.

[Salil Parekh, executive]

For AI projects, I mean, those -- we are doing a tremendous amount of work on generative AI. We're working with open source and proprietary large language models. We are working in a way where we look at narrow datasets that promotes what is going on within a client. We've developed an extremely well thought through methodology of what clients can look at when they go into an AI transformation. And with all of this is in Topaz. And with that, we are seeing good resonance with our clients on Topaz. We are training large numbers of our employees on that. The revenue translation today, these are small projects. So we are not in that stage where this is becoming a big part of the revenue but we feel very good with the type of capability we've built, and we still have to see good traction whether you look at analyst ratings or how our clients are looking at what we're developing, we feel positive about that.

[Haripriya Sureban]

In terms of the sectors that you have flagged caution for, which one do you think going forward, would bounce back earlier? Where do you see more recovery happening first?

[Salil Parekh, executive]

In terms of which sectors will come back?

[Haripriya Sureban]

Yes, bounce back.

[Salil Parekh, executive]

So we don't have a view on that at this stage. We know that the ones I had shared before within financial services, some of the elements, for example, payments or investment banking or in the Hi-Tech area or the telco area and parts of retail. We see weakness there right now.

[Rishi Basu, executive]

Thank you. The next question is from The New Indian Express, Uma.

[Uma Kannan]

Good evening, gentlemen. Given the present macroeconomic uncertainties and war situation, like do you -- how are you looking at the Middle East market right now? And do you have any clients in Israel?

[Salil Parekh, executive]

So we have a business which is in Israel in that part of the region. And there, we have -- with what's going on there, we are saddened by it. All of our employees are safe within that business.

[Uma Kannan]

Okay. How many employees are there -- if you could...

[Salil Parekh, executive]

We don't share that.

[Uma Kannan]

Okay. Okay. Talking about Gen AI, like how many employees have been trained so far? I think recently, you were seeing that 50,000 will be trained. So how many have been trained?

[Salil Parekh, executive]

We're over that number in terms of the generative AI training, but it is every week or every quarter, that number is expanding. We built, for example, 34 new courses, which our employees are getting trained on. So in generative AI, every few weeks, there's a new large language model or a new type of data set which emerges. We are working with many of the main players in terms of them being partners with us to build on that capability. And we've got our own data sets that we've built with these large language models with the open source of proprietary platforms so that we can start to give benefit of that to our clients.

[Rishi Basu, executive]

Thanks, Uma. The next question is from the Financial Express, Sameer.

[Sameer Ranjan Bakshi]

Hello, sir. So I know that you're not disclosing the number of employees in Israel. But can you put a color like whether a significant number of employees are locals there or Indians? And the other one is, yes, there has been -- we saw some marginal improvement in the margins. But what is your desired level of operating margins, let's say, like in 1 or 2 years?

[Salil Parekh, executive]

Margin, [ Nilanjan ] will come back in a second. The employees that we have in Israel are from Israel itself -- primarily.

[Nilanjan Roy, executive]

So the margin, I think we've asked our -- aspiration continues to be to grow our margins from where we are, we are at 21%. We've already seen some benefits of the program we've launched between this quarter and next quarter. And of course, we have a number of these tracks, and we think they will start kicking in and deliver on us every quarter as we speak.

[Sameer Ranjan Bakshi]

Sir, you said most of the employees are locals there. So the Israeli government is calling them for duty. So do you see any significant disruption if the employees go back to the military duty there?

[Salil Parekh, executive]

So right now, we have within the way we are working a plan to help and support if that's something that happens over the next -- course of the next days and weeks.

[Rishi Basu, executive]

Thanks, Sameer. The next question is from Business Standard; [ Ayushman ].

[Unknown Attendee]

So despite weak macros and lower discretionary spending, right, I mean the deal pipeline has been the highest. So what is really driving these deals? I want to understand. And what percentage of these deals would be AI led? Recently, you had a partnership with NVIDIA, right, to launch center of excellence. What is the status on that? And the training of 50,000 employees, have they all been trained? Yes.

[Salil Parekh, executive]

On the reason why we are winning these large or mega deals, I think that was the first part of the question. What we are seeing is our clients are recognizing the distinctive approach we have with respect to cost efficiency. And in cases where that saving can be used to fund transformation programs. We believe we have quite a specific approach in that. And that's the reason we think we're winning the market share by winning such a large number of these sorts of deals. That's the main reason for that. AI is part of almost every one of these deals in small ways or larger ways, and generative AI specifically starting to become a part of it. But broadly, AI is already very much part of it. There are parts of AI, which can also be used for automation and for productivity improvement, and we've been working on that for some time. And that becomes within these deals with our Topaz capability.

The partnership with NVIDIA is extremely strong. You saw the announcement. All of the work is progressing well. The training we have already across all of the generative well in advance. And on the ones we're working jointly with NVIDIA progressing as well. There, we are going to see -- as the generative AI market becomes larger, more and more enterprises coming into it, and that's where we are extremely excited. Among others, we have other partnerships also, but this partnership will be very exciting.

[Unknown Attendee]

Okay. Just a quick doubt. With regards to the campus hiring, did you say that you will not go to campuses this year?

[Nilanjan Roy, executive]

So as we see it, I don't think it's likely that this year we are going to be going, but we'll have to watch it every quarter.

[Rishi Basu, executive]

Thanks, [ Ayushman ]. The next question is from Reuters News, Varun.

[Varun Vyas Hebbalalu]

So I was wondering if you could tell me what percentage of new deals that you saw are renewals vis-a-vis new ones and long-term deals. And if you're seeing more short-term deals now. And if there's any old projects that you're seeing get canceled, if you could talk about these?

[Salil Parekh, executive]

So on the large or mega deals, we had -- 48% of those are net new. So the -- the new deals, the rest are not. On the point about older projects, we see it where there's discretionary work, that's where clients are slowing down their spend and where there were transformation programs, that's where we're seeing slowing down of the spend.

[Rishi Basu, executive]

Thanks, Varun. The next question is from the Informist, Reshab.

[Reshab Shaw]

On large deals, I wanted to understand, are the price [indiscernible] -- I mean, are they margin dilutive? On 2 quarters earlier, you used to give a breakup of digital and core breakdown. So if you could clarify on that, if you could shed more light on that?

[Salil Parekh, executive]

On the large deals, so we don't disclose margin on specific deals. But as a comprehensive, if you look at our projects, whether we have large programs, small programs, our margin fits into the same profile as we see for the overall as an aggregate.

On digital and core -- what happened at the start of this financial year. So at the end of the last financial year, we had reached a level of about 62% of our work was digital. And at that stage, a lot of the company was digital. So we chose to stop disclosing the breakup because it wasn't that relevant. It was very relevant when we were going a few years ago from 20%, 25% all the way to about 60%. So we stopped to share. It was not that relevant to data point.

[Reshab Shaw]

Understood. On BFSI, it's in -- it's down in high single digits. Can you clarify on that?

[Salil Parekh, executive]

On Financial Services, as I was sharing before, we see still constraints both on transformation programs, on discretionary work. We see constraints in payments, in investment banking, in some -- in mortgages. So those are the subcomponents of financial services where we see some of the constraints.

[Rishi Basu, executive]

Thank you. The next question is from the Deccan Herald, Shakshi Jain.

[Shakshi Jain]

Good evening. So my first question is on the AI front...

[Rishi Basu, executive]

Shakshi, could you just hold the mic a little closer, please.

[Shakshi Jain]

Okay. First question is on the AI front. Firstly, which stage of training are your employees on? Secondly, what are the kind of queries you're receiving from your clients on that front? And another question for FY '25. Industry experts do say it could very well be a washout year again. So what is your reading on that front, at least for the first half?

[Salil Parekh, executive]

On AI, so the training in terms of the stage, it's -- employees are getting chained on the new large language models, how to deploy them. We've also built a large library of assets within Topaz, which are proprietary, but on these large language models. So the employees are getting trained on that. And then they get internally certified, they make sure that they go through testing internally so that they are ready for this work on generative AI.

On FY '25, we don't have a view in terms of what that will look like. We have a guidance for this year.

[Rishi Basu, executive]

Thank you. With that, we come to the end of this Q&A session. We thank our friends from media for joining us today. Thank you, Salil. Thank you, Nilanjan. Before we conclude, please note that the archived webcast of this press conference will be available on the Infosys website and on our YouTube channel later today. Thank you once again, and please join us high tea outside.