Infosys Ltd

NSE:INFY

Earnings Call Analysis

Infosys Tightens FY'24 Growth Guidance

Infosys reported a Q3 revenue decline of 1% quarter-on-quarter and year-on-year in constant currency terms. Despite this, they've seen a steady 1.8% growth in revenue over the first three quarters of the fiscal year. Their operating margin stood at 20.5% with strong deal wins at $3.2 billion, propelled by generative AI and new net deals. Looking forward, Infosys has refined their FY'24 revenue growth estimates to 1.5%-2% in constant currency, while maintaining their operating margin guidance at 20%-22%.

Revenue and Operating Margin Display Resilience Amid Market Headwinds

In a challenging economic climate, Q3 revenue experienced a slight 1% decline quarter-over-quarter and year-over-year in constant currency terms. Despite this, the company achieved a 1.8% revenue growth over the same period last year. Notwithstanding the revenue pressure, operating margins remained hearty at 20.5%.

Generative AI Initiatives Spearhead Innovation and Employee Expertise

Evidencing its commitment to innovation, the company is spearheading generative AI initiatives by integrating these capabilities into its service portfolio. With an impressive 100,000-strong workforce trained in generative AI, the company is well-equipped to deliver impactful solutions across diverse industries.

Net New Large Deals Infuse Optimism for Future Growth

Large deal signings reached $3.2 billion, with 71% being net new, indicating strong potential for organic growth and customer acquisition moving forward.

Financial Outlook Tightens While Margins Stay Steady

The company cautiously narrowed its revenue growth guidance for FY '24 to 1.5% to 2% in constant currency terms, maintaining operating margin guidance stable at 20% to 22%.

Diverse Business Responses to Geographical and Sectoral Variations

Performance varied in different markets, with challenges observed in North America while Europe displayed growth. Industry performances diverged as well, with financial services, telecommunications, and high-tech sectors facing headwinds, whereas manufacturing, energy, utilities, and life sciences showed growth.

Workforce Strategy Adaptation and Operational Efficiency

The company's flexible business model allows for rapid talent acquisition and utilization adjustments. Having recently reduced its headcount by approximately 6,000, current capacity remains within the optimal range, preserving the ability to scale quickly in response to demand shifts.

Margin Pressure Compensated by Strategic Initiatives

Despite the impact of wage hikes and a cybersecurity incident affecting margins, the company's Project Maximus has initiated cost-saving measures to offset these pressures, demonstrating resilience in its profitability strategy.

Client Budgeting Cycles and Economic Outlook Remain Consistent

Client budgeting processes have commenced, with no observable change from the previous quarter’s assessment. Although the broader economic outlook remains cautious, the company does not anticipate any negative shifts before the new fiscal year.

Guidance Reflects Precision in Revenue Expectations

The adjustment in revenue guidance reflects reduced variability as the financial year end approaches rather than a downscaled outlook, illustrating a refining of predictions rather than a diminishment in business prospects.

Generative AI Capability Gains Momentum but Revenue Impact Remains Undisclosed

While generative AI discussions are increasingly featuring in client conversations and strategic projects, the company has refrained from publicly disclosing the revenue contribution from these initiatives at this stage.

Earnings Call Transcript 2024-Q3

[Rishi Basu, executive]

A very good evening, everyone, and wishing you all a very happy new year. Thank you for joining us today at Infosys' Third Quarter Financial Results. My name is Rishi. And on behalf of Infosys, I'd like to welcome all of you today. Over the next hour through the course of this press conference, we request 1 question from each media house. And with that, I'd like to invite our Chief Executive Officer, Mr. Salil Parekh, for his opening remarks. Over to you, Salil.

[Salil Parekh, executive]

Thanks, Rishi. Good afternoon, everyone, and wish you a happy new year. Our Q3 revenue declined by 1% quarter-on-quarter and 1% year-on-year in constant currency terms. For the first 3 quarters, our revenue grew by 1.8% over the same period last year in constant currency.

Our operating margin was at 20.5%. Large deals were at $3.2 billion, 71% of these were net new. This included 1 mega deal. We are seeing strong traction for generative AI programs, leveraging our Topaz capability. We have integrated our generative AI components into our service line portfolio, creating impact for our clients. We have 100,000 employees trained in generative AI areas. We have developed a range of use cases and benefit scenarios across different industries for our clients. Our margin improvement program continues to gain traction.

Based on the performance in the first 3 quarters and outlook for Q4, we're tightening our revenue growth guidance for FY '24 to 1.5% to 2% growth in constant currency. Our operating margin guidance for FY '24 remains unchanged at 20% to 22%.

As you probably know, Nilanjan is leaving Infosys at the end of this financial year. I want to thank Nilanjan for the excellent work he has done and for the strong position he's put Infosys in. In addition, I also want to thank Nilanjan for his partnership and his friendship over the past several years. We wish him all the best in the future.

With that, let's open 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]

As always, we want to understand why yet again now for the third time during the year, you revised this guidance. What is the visibility you have now for the remaining part of the year? Why the tightening? I mean, sure, it's going to be higher than 1%, perhaps lower than 2.5% on the upper end.

Secondly, what are you seeing when it comes to client budgets now? Are clients in the U.S. open to spending more? What are the areas of weaknesses and strength, whether it's geographies or sectors? And again, the same question. The headcount can just to come down even in this quarter, it has, even though your attrition rate is lower 12.9%. Your hiring plans for the year, if you could outline. And apart from the number, if you could clarify on the deal wins and that mega $1.5 billion deal, the MOU that you had signed with a global client in the AI transformation space, that you seem to have lost out on. What was the reason for that? Are you continuing to see deal cancellations? And while you wish your colleague all the very best and you always say that Infosys has produced talent for other companies, you're proud of that. What is the impact on business? Because this is not a one-off event. We've seen multiple exits over the course of the last 18 months or so.

[Salil Parekh, executive]

Okay. So let me start off the several questions in there. The first, I think, was on margin. So what we've done is really as we get closer to the end of the financial year, we've tightened the margin -- sorry, the revenue growth guidance, the margin guidance remains the same. So in effect, really, the higher end has come a little bit lower and the lower end has gone up a little bit. So we see the outlook, in essence, quite similar, but the guidance is tightened. That's how we're seeing it.

Based on what we've seen in the first 3 quarters, where our growth has been 1.8% in constant currency terms over the previous years' 3 quarters. And that's really all we've done with the guidance. On the budgets, I think that was one of the questions on what we're seeing with the budgets. At this stage, we have not seen any different behavior from clients. Typically, as you know well, Q3 is a quarter with large furloughs and other end-of-year holidays. And that we've seen continue. We've not seen either an increase or either a decrease or the same sort of a view. Digital programs are fewer. Cost and efficiency, automation is much more. And generative AI has a lot of interest and traction even if it's small revenue numbers today.

Then there was a question, I think, about the MOU. We have no additional comment. We shared the comment in the statement we've made, I think, a few -- some time ago in the quarter. In terms of leadership, we are indeed fortunate to have a good team and a very strong set of leaders within the company. And over the last several quarters, and even in the past, the people who have taken on many of the new positions are people who have been in the company have developed their skills there.

And we're delighted Nilanjan spent 5 years in that role. He will obviously share his view. And we had a fantastic outcome in those 5 years. And really, Nilanjan has contributed immensely to that. And all the best wishes as he looks ahead.

[Ritu Singh]

On the head question as well. And for Nilanjan, your project Maximus. Just before you go, I'd like to know from you. Where do you see the end goal of that project? How do you evaluate your term here? And what's next for you after March?

[Nilanjan Roy, executive]

Yes. So it's been a tremendous 5 years here. I think what the company has transformed over the years have been truly remarkable, right, in terms of the client intimacy, what we see, a hunger for large deals, the focus on people, the entire focus on the shareholder, the capital allocation. Outside the numbers, which you all ask about, has been this whole transformation happening inside and under Salil and the Board's leadership has truly been wonderful. 5 years is a long time, 20 quarters answering the question. So I think it's time to move, and I'll do something later on and as the press release says. But more importantly for me, I may leave Infosys, but Infosys can't leave me, just has a part of me inside.

[Rishi Basu, executive]

Thanks, Ritu. The next question is from The Economic Times, Beena.

[Beena Parmar]

Firstly, in terms of your deal pipeline, could you give us a sense how does the next 2 quarters look like? Because your deal pipeline -- the order book has reduced that we've seen. And in the previous quarter, it was $7.7 billion, but this has -- the TCV has sort of reduced. Could you give us a reason for that?

And on the senior level management churn that we've seen. Just adding to what Ritu said, what is the reason that you've not really absorbed newer or recruited newer or made newer appointments? And what is the reason that you're seeing a lot of these churn that's happening? Do you see this as a one-off event? And what are the reasons?

And another thing is on the reports that are doing around about Infosys sending in a communication to a rival about antipoaching and unethical practices. Could you give us a view on that?

[Salil Parekh, executive]

Okay. Thanks. Let me try and go through the questions. I think first, on the wins. In fact, this quarter has been, I think, very strong at $3.2 billion. If you live the 9 months is the highest-ever value of deal wins that we've had. Actually, it's more than what we had in the year before where we had a very large deal in that instance. So we feel extremely good. 70% of this is net new, 71%. That again is extremely strong because it helps to position us for more into the future.

The deal win from last quarter was also exceptional. But those are big numbers. I mean $3 billion is really well above our average deal win in any quarter, if you look back, let's say, 8, 10, 12 quarters and so on. So we feel extremely strong with that, what we see going ahead. And these have deals which are related to cost efficiency, automation, consolidation, new work on SAP, cloud. So a lot of different areas, which is good.

It's across the portfolio. I think you had a question on our senior leadership team. Again, my sense is we have an exceptionally strong team at different levels within the company -- we've continued over the last several years and even well into the past, always promote a lot of people internally with larger responsibilities. We will do that this year and in the years ahead.

And the type of work that we do, people have exposure to some incredible opportunities, both with clients, with delivery, with projects. And the type of projects we are working on are quite leading. So we feel good about that. In terms of some of the media reports you alluded to, we have no real comment on that.

[Rishi Basu, executive]

Thank you, Beena. The next question is from Ayushman Baruah from Business Standard.

[Ayushman Baruah]

So I think the trend seems to continue that despite the large and mega deals, revenue growth has not been on par with the deals. So when can we expect the revenue growth and the large deals to be in sync, that is one. And secondly, any specific pockets of weakness you would like to highlight both in terms of verticals or geographies?

[Salil Parekh, executive]

So there, I'll start off and Nilanjan may add some things. I think large deals more represent what is the level of connect we have with our clients for large transformation programs or consolidations or cost and efficiency programs. The revenue reflects both what deans contribute? And then what programs clients are doing or not doing. For example, digital programs have been reduced in what we've seen over the last few quarters with clients. That really combination gives us the outcome for the revenue, and we'll see how the global economic environment evolves, and that will tell us when that comes in -- sorry, what was the second one?

[Ayushman Baruah]

It was about any pockets of...

[Salil Parekh, executive]

Yes, the segments. So there we are seeing financial services, high tech, telco, where we still see impact in the market. We see growth in manufacturing, energy, utilities, life sciences. So we do see both of those things. In geographies, similarly, we see impact in our North American business, but growth in the European business. So it's not sort of one thing for all.

[Rishi Basu, executive]

The next question is from Moneycontrol, Reshab Shaw.

[Reshab Shaw]

Reshab here. So on your headcount, year-on-year, we have seen a lot of headcount. So does that indicate a weaker-than-expected revenue trajectory from here onwards? Your number of clients has been down month-on-month and year-on-year. So would you like to say something on that? And on furloughs, how much has that impacted revenues this quarter and discretionary spending, when do you see it coming back?

[Nilanjan Roy, executive]

Yes. So I'll take a couple of them. So I think furlough as a seasonal industry impact, and it's reflected in the minus 1% constant currency decline. So it's part of that as well.

In terms of headcount, we had already told you all last quarter that we have a lot of utilization headroom still in a way that was led to the 6,000-odd headcount reduction. We are still at [ 83.7 ] and our comfort range is between [ 84, 85 ]. So we still have some capacity, and we can always crank this up by taking more trainees on short notice as well.

So our model is very flexed in terms of ability to recruit fast, train them fast and put them on production. So in that sense, I think we're in a good space in terms of ability to capture any future growth.

[Rishi Basu, executive]

The next question is from the Mint newspaper, Jas Bardia.

[Jas Bardia]

Just a couple of questions. At the start of the year, you were expected to grow at 7%. And now this is the third such revision. How much of this revision do you attribute to company-specific factors? And how much of it do you attribute to macro economic issues?

The second question, did the cybersecurity incident at McCamish lead to the termination of the $1.5 billion MOU. Could you give more details on this? And also, could you cite some measures that Infosys is taking to address this?

[Salil Parekh, executive]

So let me start off with the guidance point first. I think on the guidance, this quarter, really, we see this more as a tightening of the guidance. So in that sense, it's not so much a change. It's more that as we get closer to the end of the financial year, the visibility gives us to a similar outcome.

So if you look at last quarter and this quarter, it looks, in that sense, similar except the distance to the end of the year is reduced by half. On the deal specifically, the MOU, we have no additional comment, and we've made a specific disclosure at the earlier time.

On the McCamish question that you asked, I just want to maybe share with you a comment from what we had stated in our financial results. As we've shared earlier, one of our subsidiaries, Infosys McCamish, experienced a cybersecurity incident that resulted in the disruption of some of its services. The systems have been largely restored and are now up and running.

[Rishi Basu, executive]

The next question is from NDTV Profit, Tushar Singh.

[Tushar Deep Singh]

A couple of questions. First, on the dealmaking. We see that the large deal wins are still happening, but they're still not meaningfully converting revenue. So when do you think that is going to come back? And are the large deals ramping up as per expectations so far?

Also, your margins have declined quarter-on-quarter, I think because of the wage hikes that went out. But you have maintained your operational profitability guidance for the full year. So what are the margin levers left in play that's giving you the confidence to maintain those margins? A final question on your -- I think the acquisition that you have done of InSemi Tech, can you just talk to us about it?

[Salil Parekh, executive]

On the first one, I think the way we see large deals really helping us to build a foundation into the future. And the wind sizes, the overall wind value is very strong at $3.2 billion at 71%, very good to have the net new. That gives us, let's say, one piece of the revenue into the future. And equally, there are digital programs or other programs which are not something that clients are looking at in this environment, and that takes away a little bit from the revenue. So that combined gives us the revenue outcome as we see it and as we even as the outlook as we see it. So that's how we will put that together. On the margin...

[Nilanjan Roy, executive]

Yes. See -- on the margin, as you have seen in our disclosure, one is we, of course, given our wage hike from first of November. That's about 70 basis points of the drop. In fact, we've dropped 70. We've had another impact of $30 million between revenue and cost because of the McCamish incident as well. So that's actually a 1.3% headwind. We've compensated that at about 50 basis points of the Project Maximus, which now is in full flow. This is across -- we've talked about 5 tracks and many verticals. And it's about that basis points, which is from currency. And then, of course, there's a balancing ground furloughs, et cetera, et cetera.

So we actually are seeing a very strong underlying margin movement coming because of Maximus. And of course, the wage hikes, et cetera, were panned and known for and are leading to this margin gap for this quarter.

[Tushar Deep Singh]

The acquisition of InSemi Tech...

[Nilanjan Roy, executive]

Yes. So as you know, we have a very large and growing engineering business. We don't probably talk about it as much. We had a business which is working with leading engineering companies around the world. And as you know, semicon is a space which is expected from today a $500 billion market to grow about $1 trillion. And this is a very exciting business in terms of semiconductor chip design, working with leading fab, non-fab players across the world.

And I think it will give us, firstly, a good entry into a new space and also a new set of clients, which we don't have. So we are very excited about this.

[Rishi Basu, executive]

Thank you. The next question is from Haripriya Suresh from Reuters News.

[Haripriya Suresh]

First, I wanted to understand now that client budgets have firmed up, at least for the calendar year, do you see what does the deal momentum look like? Are there any signs of improvement at all? Are we -- do we expect things to look like they have so far?

And on the guidance, I wanted to understand because it was 2.5% at the upper end, right? Like I wanted to understand, if you're not seeing cancellations, et cetera, why it was narrowed at the upper end? In terms of geographies, I mean, across -- this is obviously a phenomenon across companies, north America has obviously been impacted. How much is that affecting you? And is Europe sort of helping in any way?

And in terms of hiring, you said that it'd be in time. So is it fair to presume you will not be going to campuses this year and we can sort of expect headcount to trend the way it is right now?

[Salil Parekh, executive]

So maybe sort of combining a few things. On what we're seeing for the budgets as the calendar year starts, most of our comments are really on the financial year that we are looking at. The budget process has started and launched for many of our clients. It's still early in January. So it will sort of work its way through.

At this stage, we don't see any change from what we were seeing last quarter, in that we don't see things becoming worse. We don't see any sort of change in that dynamic. We will have our own view of the next financial year as we come into the March, April timeframe, when we have the April results.

The guidance again, for us, it's been more of -- we are seeing similar outlook to what we were seeing in the past quarter. But as we get closer to the end of the year, just the variability reduces, and that's how we've narrowed the guidance. And so it's not a question of reducing the upper end because in that sense, we've increased the lower end. So it's I would say it's really quite balanced between what we were seeing last quarter and this quarter.

[Haripriya Suresh]

And the campus...

[Nilanjan Roy, executive]

Yes. So like I just mentioned earlier, we continue to monitor the utilization. And our flexi hiring model, in fact, with COVID, which is both off-campus and on-campus, I think that's really been a new learning for us. So it's really on demand, we can go behind that thing if any fresh demand comes in. And at this stage, of course, we are not seeing any immediate campus requirement. But for any volume increase, we have a very strong off-campus program as well now.

[Rishi Basu, executive]

Thank you. The next question is from Haripriya Sureban from The Hindu BusinessLine.

[Haripriya Sureban]

Salil, could you give us some more color on the visibility in the market? We keep listening that the macro condition and the situation is bottoming out. Do you think so? And do you see any sort of green shoots or what is your reading like, which verticals do you expect to bounce back earlier?

And on the margin front, do you see any impact if there is no tailwind from the currency depreciation given that rupee has been flat for almost 1 year now, so...

[Salil Parekh, executive]

So on the sort of outlook in the macro, we don't have a view on where it is in terms of the cycle. What we really are focused on is how that's impacted our client decision-making. And there, we see what we were sharing earlier, financial services, telco, high tech, we see the impact. Equally, we see growth in manufacturing, energy, utilities, life sciences, there's a difference in the geographies as well, as we said earlier, between North America and Europe.

So at this stage, there's no more view that we have than that. We're obviously very positive with the deal wins we've got. A lot of those deals win in cost and efficiency. But there are also deal wins which we've seen, for example, in cloud, in SAP, and these are areas which we have tremendous strength in. And so we feel good. And then generative AI is becoming more and more important in all discussions, while it's not a big revenue component, it's still becoming more and more important in all discussions.

[Nilanjan Roy, executive]

Yes. On the currency side, we don't plan for actually any currency movement when we do our margin plans as well. So whatever comes on top of a currency benefit is actually always a bonus so -- but our underlying plans don't reflect that.

[Rishi Basu, executive]

Thank you. The next question is from The Financial Express, Sameer Bakshi.

[Sameer Ranjan Bakshi]

Please correct me if I'm wrong. You said a lot of Gen AI projects are in pipeline, right? And you have around 1 lakh Gen AI trained employees. So why is this that we are seeing smaller and active clients, their number have fallen?

[Salil Parekh, executive]

Sorry -- smaller and active clients, the number has fallen.

[Nilanjan Roy, executive]

I think if you see from a revenue perspective, which is more relevant, it's the large clients who continue to grow well. Of course, there is a longer tail towards the 1,500-plus clients. But I mean the biggest revenue chunk comes from the top 50, top 100, top 200.

[Rishi Basu, executive]

The next question is from Rukmini Rao from Fortune India.

[Rukmini Rao]

I have 2 clarification question. One, the $30 million impact of McCamish, it has been accounted for completely this quarter?

[Nilanjan Roy, executive]

Yes, between loss of revenue and in cost, yes.

[Rukmini Rao]

Sure. And the other one, this is in continuation to what Beena asked. So Salil, does it mean that -- I don't fathom how 2 companies can informally talk to each other. And if at all, Infosys has actually sort of written to a peer, raising certain concerns, it must be legal in nature. I mean I'm guessing so. So could you actually tell us whether you have had any sort of communication with your other peers when it comes to talent?

[Salil Parekh, executive]

On any of the -- I think you're referring to the media report.

[Rukmini Rao]

That's right, that's right.

[Salil Parekh, executive]

So we have no additional comments on that.

[Rukmini Rao]

But Salil, and going back to the deal that didn't fructify, right? I just want to understand from you whether -- was it a client concern about Infosys' ability to be able to execute this deal? Or was it a client-specific problem that you faced? The way large deals are getting structured or the check boxes at the very last minute that are getting countered, what really led to this deal not fructifying? And also some sense on the large deals. Is there any fundamental change that is happening, how vendors are being looked at by clients when it comes to closing large deals?

[Salil Parekh, executive]

So on the way large deals are working, in fact, in this quarter, in Q3, we've seen quite a few deals which are consolidation deals where we've been the beneficiary where clients are looking to consolidate to select partners or strategic partners. So that's one of the things that we are visibly seeing.

On the specific MOU, which was not completed, there is no additional comment. We made the comment as we made the statement as we had shared earlier. The deal flow really in the market is good because the way we look at it, at $3.2 billion, it's well above the average that we see for large deals in any quarter. With 70% net new, that's also very strong because that gives us a good confidence that, that is building out for the future. I think that then you get coupled with -- there are digital programs which are not happening or slowing down. And that takes away a little bit from the possible benefits of these large deals. And that's really the balance that we are working on.

[Rukmini Rao]

Salil, like you mentioned earlier saying that digital deals are not still a component of your revenue, right? But when you have another peer of yours already calling out Gen AI revenues that they win. When do you see actually Infosys being able to sort of call out this number or reach a size in revenue -- do you think you're sort of -- where are you there in the curve when it comes to being able to drag Gen AI deals and make it, let's say, substantial or be able to have statable revenues coming out of Gen AI deals?

[Salil Parekh, executive]

So generative AI, we have an extremely strong capability set, a lot of activity with our clients. For example, we are working with a large retail company on their AI-first transformation. This is a very strategic work with the client. We are working with a large global bank on the risk area to use large language models to make that risk area better for them.

So we have a large number of such deals. We are not at this stage publicly sharing what the Gen AI revenue is. But we have tremendous capability, a good leading market position. And we feel in generative AI, we are very strong in the capabilities we built.

For example, there are a lot of large language models out there. There are several different use cases, different benefit scenarios. We have many of them, for example, in customer service, in analytics, in data, in software engineering. So a host of areas which we are working with clients on.

We have also developed what we think is an appropriate approach for large enterprises, what we call the narrow transformer approach. Here, when you're looking at large companies, the interest is not just on consumer generative AI. It's much more on what is going to make an impact to them with their data set. And so which is the appropriate large language model you can use for their data set depending on what the area is.

So we -- I believe we have an incredible capability in Topaz and clients are also resonating with that capability. We are not today calling out the value, the generative AI value today, but that is a different subject. But the work we're doing, I think, is quite impactful.

[Rukmini Rao]

Salil, just to understand the Gen AI deals that you're actually getting are from existing clients. So you've been able to get newer clients, maybe of the smaller ticket sizes. Just to understand there...

[Salil Parekh, executive]

So it's A mix of both. A large number of them are existing clients. We have good relationships. They have seen our capability set. And they are -- as I said, it's resonating.

We've also done what we call generative AI road show. It's a tour where we are taking all of our capabilities in the different locations around the world. And there are some new clients as well, where we are sort of the first time doing generative AI.

[Rishi Basu, executive]

With that, we come to the end of this Q&A session. We thank our friends from media for being part of this conference. 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, and we request you to join us for some high tea outside.

[Salil Parekh, executive]

Thanks.