INFY — earnings call

The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.

Questions and answers

Moderator · Conference Operator

Thank you very much.

Ladies and gentleman we will now begin the question and answer session.

The first question is from the line of Ankur Rudra from JP Morgan.

Please go ahead.

Ankur Rudra The first question is, we understand the need to drop guidance this time, I know it is an exceptional year; but based on your current visibility on demand and the order book and the conversations you have had, how should we think about when you get back to normalcy – sort of the rhythm you were in before, either in terms of the revenue or profitability levels last seen in December or March or how would the shape of seasonality in revenues may turn out this year?

Salil Parekh What we are seeing today is that overall there is no real clarity on when trends are going to be back into a situation where we have a clear view to give you a guidance.

Today we definitely see in the short term some concerns where the business environment is extremely difficult.

However, when we start to see this business environment starting to stabilize and we have visibility, we will be back with what we say in terms of guidance.

We do not have a clear answer today, whether this is for X quarters or Y quarters.

Our sense is, the first order effect is visible all around in the sectors and Pravin shared specific details on them.

There will probably be some second order effect and it also depends overall on how the medical situation evolves.

So we are not commenting on the timelines here.

What we are very clear is, and these are already discussions that many of us within the leadership have had with clients. there is a strong interest in consolidation with strong partners like us.

There is a strong interest in looking at cloud movements and making changes in virtualization.

There is a strong interest in looking at – could there be some captives that may be available; and all of those areas we are exploring.

So in the medium term, given our strength in terms of delivery, our financial strength and the overall interest that clients have in consolidation, I feel positive.

But in the near term we see some weakness going ahead.

Ankur Rudra Thanks for that Salil.

In the near term, do you think there will be any changes to your capital return policy just to keep the powder dry for acquisitions or the movements you may have to make?

Nilanjan Roy Our capital allocation is quite clear – linked to our free cash flows.

Like I said, we have enough of headroom and we will have to see if any assets which come up which interests us during the period but we are open to everything at this stage.

Ankur Rudra Alright.

Thank you and best of luck.

Thank you.

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

Please go ahead.

Keith Bachman I wanted to ask about any boundaries or any signs you could give us on your margins.

So even if we stay away from revenue comments, is there are any kind of minimums or floors you think the business could sustain even in the phase of what is obviously incremental revenue pressure and/or you mentioned that there was 90-basis points of COVID impact in the current quarter, is there are any incremental COVID impact that we should be thinking about in the June quarter.

Just some broader comments on margin trends or boundaries or things to consider as we are looking at our models?

Nilanjan Roy So, the impact of COVID was about $32 million.

Two-third of that was supply led – as we were ramping up our enablement of work from home.

About a third of that was demand led – partly from clients who have now started giving us approvals to work from home and partly because of some ramp down.

So that was the equation for the last quarter and that pretty much affected the quarter margins as well, which I mentioned 90-odd basis points.

As we are looking into this quarter, initially we are trying to improve the work enablement.

The figure of work from home for the onsite is much higher than 93% and slightly lower in the offshore.

So our first priority is to continue to improve our supply side of the equation, so we don't leave any money on the table.

In terms of the Q1 near-term outlook, without getting into how much of revenues etc. are going to happen, we have already started making the margin moves.

We have talked about moving out of the hiring season, the freeze on promotions and salary hikes.

So those are the things we have already started with.

There will be pressure.

As you know that the entire industry around the world did not gear up for a sudden stop, so there were people hired etc. As we close the quarter, there will be natural attrition during the quarter as well, which will help us.

But the first, near-term impact is going to be on utilization because of the supply demand mismatch but that will iron itself out as the quarters progress and we will continue.

Other factors are our margin optimization strategically in terms of automation, in terms of the pyramid, including onsite pyramid – where we are the only ones who are capable of doing that because of our full stack DCs in the U.S., our sub-con costand how do we rotate them etc. Discretionary expenditure is completely stopped now, discretionary capex is stopped So a number of levers both from margin, preservation of cash, making sure that our liquidity cycles continue to roll; early warnings in terms of stress on any client in terms of default etc. But like I said, if quarter four is anything to go by, we had very strong collections.

Keith Bachman Okay my follow up question is, I wanted to ask something that TCS mentioned last week.

The comment was that the financial crisis was, at least from a growth perspective, of relevant benchmark.

In other words, the first quarter of the financial crisis revenues dropped plus or minus 10% and I just wanted to know is that an industry perspective that you would endorse?

What I mean by that is just a sequential drop for industry related revenues as investors think about the June quarter is the financial crisis when that first struck, is that a relevant benchmark or do you think this is different from the financial crisis?

Salil Parekh Our sense is this situation is somewhat different from what transpired in the financial crisis a few years ago.

This is across all sectors and all geographies equally.

There is an incredible financial stimulus that at least the US has put together and there is a strong indication that the several European countries will join in.

So those are some distinctions that we see between the actual crisis from an economic perspective.

With respect to how that impacts Q1, it is therefore not a straightforward comparison.

What is clear is there will obviously be some impact in Q1 and then we will have to see how this plays out because there are counterbalancing forces.

If the fiscal stimulus force becomes more dominant versus anything on the medical side, there is one set of outcomes.

If the medical side has a second wave, there is another set of outcomes.

And that is part of the reason why we do not have a sense of what is the quarterly progression here.

We are focused on ensuring a very aggressive cost plan as Nilanjan shared.

As Pravin shared, we have real operational capabilities to do it delivery wise; and we have extreme strength and we think we will emerge with all the consolidation in the medium term.

Keith Bachman Okay, thanks very much.

That is it from me.

Thank you.

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

Please go ahead.

Diviya Nagarajan Just a follow-up to the previous couple of questions.

If you were to look at the 2008-2010 timeframe and I do get your point that it is not really apples to apples here, typically in downturns, we do see a fair amount of pricing pressure.

Could you give us your sense on how this could be the same or different to last time, because they are clearly in a strong technology cycle.

What I am trying to understand is that could that offset some of the typical pricing pressures that we see in spending environments that are stressed?

Salil Parekh Let me start with that and Nilanjan might have other points to add to it as well.

On pricing, there is obviously depending on the industry of our clients, their segments, there will be different levels of cost stress among them.

Equally as you mentioned and Pravin shared earlier, we have some real strengths that we see, for example, in Telco, in Hi-tech we see some strength in Life Sciences, in Consumer staples, Groceries.

So there are pockets of strength and we see some positive activity there as well.

Some of the service offerings where we see a real shift from a client buying perspective, we see strength there as well and we believe we have got a good set of investments there, whether it is in cloud or virtualization or workflow transformation and we think those will be a positive.

So it is a bit of a mix in terms of the overall view therefore on pricing.

Diviya Nagarajan It is impressive that you and the entire industry has kind of got into this work from home situation in a very short period of time.

How do you see this model evolving for you in the medium to long-term and how does that kind of tie into some of the longer-term cost savings that you could get from a model like this?

Salil Parekh I will start off and Pravin will provide more color.

What we are extremely proud of is this rapid transition that we have made.

We believe with 93%, that is a really strong number and as Nilanjan was sharing earlier, that is moving north every day.

There is a tremendous amount of infrastructure, security, bandwidth capability that we had already put in place and that will be further enhanced to make all of this happen.

In terms of how we see the future evolving, let me pass it on to Pravin, he can share more color on what we see in the coming weeks and months.

Pravin Rao As Salil mentioned, in a very short span of time, we were able to get about 93% of our people globally work from home in a remote fashion.

From that perspective, we have demonstrated resilience and agility in doing it and the feedback from the clients has been extremely positive.

From a technology perspective, now it's proven that we can do this.

Obviously, we have to make sure that we invest in infrastructure, we invest in security, controls, productivity tools, collaboration tools and other things.

One of the positive thing is, if you are able to demonstrate good security and good productivity, I'm sure many clients will be much more open to doing this.

That means that in the future, some of the things around ODC and constraints around that could potentially disappear at least.

It may take some time, but somehow those things could disappear.

So it will result in probably having much more virtual ODCs rather than any physical ODCs.

The ability to work remotely also means that, it doesn't matter whether you are in India, whether you are in different part of the world.

It is possible to leverage people, capability wherever it exists and it is also probably possible to start looking at gig workers and things like that in a way.

The ideas I am talking about is nothing new but this crisis has really enabled some of the acceleration or increase in adoption of some of the thoughts.

From that perspective, obviously there are opportunities for cost take-outs.

You don't have to invest as much in real estate, travel costs may come down but you have to invest a lot more in technology, in security and other things.

So net-net, it is a positive thing that has happened, but eventually whether that new normal means 20% office, 80% go home or whatever, I think only time will tell.

Again it can vary from risk perceptions of different industries, but it will probably be much different than what we see today.

Diviya Nagarajan Just as a follow-up, could you quantify the cost savings that you will get at least in the immediate next quarter from savings and travel facilities, subcontracting and other savings you might get because of the reduced activity and contrast that with what you might lose in terms of the utilization and pricing?

Nilanjan Roy Diviya it is a bit premature.

I think many of these will be cost avoidance as well.

There will be some cost optimization, which is about automation, pyramid, etc. So it will be difficult to give a number where we will end up on utilization, as that will also depend on how the demand works out.

We are continuing to make sure that we are taking decisions early, making no-regret decisions and monitoring the overall demand situation and then taking appropriate action.

Thank you.

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

Please go ahead.

Edward Caso I was curious if you could differentiate your clients discretionary spending, how much of it is work that you would have been doing say a month or so ago and then how much of has shifted over to business continuity to help move their workforce remote, etc. So has there been a change in that and is that coming to an end?

Salil Parekh I am not sure I fully followed the question.

The question was what was the discretionary a month ago and how is it today?

We do not normally split up our discretionary project work from our overall revenue.

However, of course, some of the discretionary work is where we will see some slowing in the near-term if that is what you are asking about.

Edward Caso I was trying to understand that the makeup of discretionary spend has shifted to more of survival work by your clients and therefore as they settle into this new normal whether they will have sort of a drop-off after that.

So will you get sort of a continuum of discretionary spending in the short run and then have it fall-off after that?

Salil Parekh Okay, for us we have not quantified how that might play out.

We certainly see there is some amount of work of that type.

I would not say survival; it is much more focused on what could be benefits that can be achieved as they want to do more virtualizations or move more to the Cloud.

I do not know if it is discretionary but it certainly seems - in this new environment - would be much more strategic for those clients.

I do not have a sense whether that is going to stay or fall-off.

At this stage, we do see there is more of a discussion on recession playbook and different sets of discussions that I shared earlier that we have in the frontlines and some of that gives us confidence again in the medium term.

Edward Caso My other question is around H1B and L1 visas.

It appears the Trump administration is taking advantage of the current environment and further tightening the ability to get visas and move people around.

So are you seeing that both from an impact on your operations but also maybe positive in the sense that as people other H1B's and other firms lose their jobs in the U.S., can you pick those people up to help you meet onshore demand?

Pravin Rao We have not seen any changes post COVID.

So, whatever changes we have seen in H1, L1, the new lottery system, all those things happened much earlier.

I do not see any changes in this regime.

Even today as we speak, even for some of our own employees, given that all travel is cut off, some people have been out of status and we are talking to the U.S. administration to make sure that they get some relief and so on.

But in the long run, if a lot of people are let go then there will probably be lot more availability of talent.

Whether we will be able to take advantage of it really depends on the nature of demand.

So it will be a function of demand.

But from our own perspective, in the last couple of years, our approach has been to de-risk ourselves from H1, L1 and so we have invested a lot in our U.S. talent strategy.

In the last couple of years, we have recruited more than 10,000 U.S. nationals, we have created six hubs.

These are in different parts of U.S. - they are not only delivery hubs but they also serve as innovation hubs.

So we have invested a lot and today lot of our people working in U.S. are local nationals.

So from that perspective, we are less dependent on what happens on the H1, L1 thing, but obviously if there is a demand and there is availability of talent, we will be always open to pick them up.

Thank you.

The next question is from the line of Sudheer Guntupalli from Motilal Oswal Financial Services.

Please go ahead.

Sudheer Guntupalli Good evening, gentlemen.

Thanks for taking my questions.

You highlighted in the press briefing that you were winning deals as late as in the last two weeks of March and even in the first two weeks of April.

Probably this will be a closer proxy to the expected deal activity over the near term.

In that context, it will be helpful for us if you can give us some more characteristics of these deals which were won over the last 30 days.

Which geographies are these, which verticals, which service areas, is there also any discretionary spending in this?

Pravin Rao As I mentioned earlier, we won 12 large deals, four of them in Retail, four in Energy, Utility, Resources and Services, and one deal each in Financial Services, Communications, Manufacturing and Hi-tech.

Total TCV was $1.65 billion and 56% of it was net new.

Again from a geographic perspective, seven wins from Americas and five were from Europe.

So as you can see these deals have been across several industries and geographies as well and the fact is, as we mentioned, in the last two, three weeks of the quarter, even after COVID had started, we were able to close many of these deals.

From that perspective it was very encouraging for us that we are not seeing postponement of at least some of the deals that were in the pipeline.

So if Mohit is on the call, he can probably provide some color.

Mohit Joshi I think Pravin has covered it in fairly great detail.

The only thing I will add is that we were obviously concerned that the signatures on these deals may get delayed because of the infection but thankfully given the relationships and given that we were fairly advance into deal, we have been able to push ahead and close.

It is a mix of deals across segments and across geographies and maybe across service lines as well.

So there are cloud deals in this, there are traditional application maintenance and application development deals, infra services deals for the work space.

Moving ahead as well, we have an existing pipeline for large deals and we will continue to push ahead in this.

The dialogue with the clients are continuing and we are working to make sure that we do not lose momentum.

Sudheer Guntupalli Sure Sir, so you mean to say that even in the last two weeks whatever deal activity happened or even in the first two weeks of April, it is more of a broad-based kind of a deal activity and not characterized towards any one particular segment.

Mohit Joshi That is correct it is not one single deal, multiple deals.

Sudheer Guntupalli Secondly our exposure to time-and-material contracts has been comparatively higher at roughly around 47% of our revenue as per our last reporting.

Assuming the feasibility that clients have to ramp down the workloads in these contracts, are we seeing a higher trend or impact in the T&M portion of our portfolio than otherwise?

Pravin Rao It is early days; I do not see any distinction between T&M or fixed price.

Initially clients were worried about ensuring business continuity, safety of their own employees.

But in these situations, conserving cash is a very critical element and they will start looking at projects.

They will start looking at each project, the business case or the projects whether in the current situation it is a priority or not, the decision will be taken on that basis.

Every project will be evaluated for a business case and in the new context and that is a decision they will probably take.

T&M or a fixed price, or a managed service is more a commercial term.

Sudheer Guntupalli My last question is regarding the onsite pyramid.

As you said, we currently have around 10,000 local employees in U.S. Even before COVID-19 we were seeing some utilization/productivity challenges over there given that we have recently hired these guys, and they were going through the ramp up curve.

Now with the demand expected to take a sharp hit, what is our thought process around managing the utilization of these employees?

Some damage control measures which we could have possibly taken in the case of H1B's may not be very realistic right now.

So what are your thoughts on how this could be impacting our margins?

Pravin Rao So far our utilization onsite has been fairly good.

It is in line with what we had planned and we had also factored a slightly lower utilization with building a pyramid there and that had worked out well for us.

But in the new context, in the light of demand and other things, we will go slow on hiring in this coming year in all geographies.

We will hire only on a need basis and any incremental hiring will be only from a skill perspective.

We also have opportunities to rotate our subcon and replace them with our own people.

So there are a few levers that are still available where we can try to improve utilization.

Again, we have to evaluate all options to make sure that our costs are under control.

We have to wait on how this situation will unfold and we will have to take a view, particularly if the utilization drops dramatically.

But we have enough levers as I said, subcon replacement and a lot of things is possible to keep the utilization up.

Sudheer Guntupalli Sure, thanks gentlemen, all the best and take care.

Thank you.

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

Please go ahead.

Moshe Katri Thanks for taking my question.

Is there any way to differentiate in terms of the services that are getting impacted here?

And obviously, there is a lot of talk about discretionary that is impacted and non-discretionary that is not impacted.

Can you give us some color in terms of what is included and what you call discretionary and is that also including what we call digital in terms of the impact and the slowdown?

That is my first question, thanks.

Salil Parekh I think in terms of services, we discussed some of the points earlier, I will elaborate on those.

We definitely see some of our services which relate to areas around cloud and virtualization actually gaining traction.

We see some other services, which relate to some more project level work, which is discretionary, which will probably be slower.

Overall, we are now getting into looking at how that plays out, given the speed at which this has moved and we have started to develop a sense from all of that into what becomes the focus with Q1 going ahead.

But my sense is, we definitely see the conversations many of us are having with our clients that relates to some benefits accruing to us from consolidations, some benefits accruing to us from Cloud, some benefits accruing to us from workspace transformation.

Those are the services that will be positive.

Those areas, virtualization, cloud, workspace transformation all form part of digital.

That is one of the elements of digital where we will see some traction, anything that helps clients to move more and more of their work into the remote working approach.

There are other elements of digital, which potentially are more project related, which we think will become slower in the coming quarters.

Moshe Katri That is helpful.

Then my follow up here, there were some questions on pricing.

So to frame it the right way, are you seeing any efforts on behalf of clients to try to restructure contracts at this point?

Maybe it is too early for us to get there but is there any concern that this is where we are going to get to?

And then are you seeing any potential competitors employing any sort of disruptive pricing out there that could impact the industry competitively?

Thanks.

Salil Parekh On the competitors, at this stage we do not see any moves.

In fact, where we do see some activity is what I shared earlier around vendor consolidation which is even for some larger competitors of ours which are not potentially as efficient in their delivery model as we are, we see some advantages accruing to us there.

In terms of pricing, depending on the sectors where clients are or the sectors that will be most impacted, I am sure we will hear about some of these discussions.

We anticipate some of that to happen but usually those discussions are also coupled with different delivery models that Pravin was sharing earlier and also consequent consolidation discussions that come about.

At this stage, we don't have a quantified view on that but my sense is we will see some of those discussions start to come up.

Moshe Katri Thanks for the comment.

Thank you.

The next question is from the line of Nitin Padmanabhan from Investec.

Please go ahead.

Nitin Padmanabhan Post GFC we actually saw a lot of spends during the recovery phase come in terms of merger and integration spends of those banks and risk and compliance related spends.

So when you visualize a recovery this time around, which areas do you see spends really coming out in a big way?

Salil Parekh My sense is even through this period especially as things come back to a different new normal, the spend on Digital will continue to accelerate.

There are different components of it which are active.

We see some of that already go into this and essentially the focus around the broader cloud discussion.

I think bigger moves on digital will absolutely come back as that way.

In addition, there will be transformation initiatives which we will see more as and when we see that sort of recovery starting to come back in.

Nitin Padmanabhan So, if you saw the recovery phase last time, we saw a lot of these services that were built over the previous 10 years, go through a commoditization.

This time around, if we look at digitalizing, it is now a reasonable part of portfolios of most vendors, do you envision some sort of commoditization there in some form or do you think that because there will be far more transformation projects and so on and so forth, you'll actually see a shift to larger vendors from smaller vendors.

How would you visualize the changes this time around?

Salil Parekh The commoditization is more difficult for me to comment today.

We have to wait and see how the demand/supply looks.

In terms of movement, it is very clear already to us that there is a movement from the smaller or the less capable vendors to larger or the more capable vendors and we definitely see, with our strengths, we believe we will benefit from that.

Nitin Padmanabhan Sure, thank you so much and all the best.

Thank you.

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

Please go ahead.

Bryan Bergin I wanted to clarify on the remote capability for the first quarter.

Do you still have supply constraints that will limit your 1Q revenue potential or is it all demand driven going forward?

Salil Parekh We still have some supply constraints which we are working through.

We internally have the target to get to essentially what we call 100% capability there.

Pravin, if you can add something please.

Pravin Rao Yes, if you look at the remaining 7%, there is a very small percentage or areas where clients have not given us permission to operate from home, it is a very small percentage.

So in the context of a lockdown or an extended lockdown, we will continue to be challenged from a supply perspective because we will not be able to get people to come to office and work.

That is one part.

Then we also have in a lockdown situation some percentage of people who have gone home who are not in our locations and they do not have any personal assets or company assets with them.

So they are also stranded.

So only during the period of lockdown we would anticipate some kind of supply issues but once the lockdown gets relaxed, we should be able to get people back to office and equip them either with assets, or wherever clients have not given permission, they should be able to come and work in offices.

Nilanjan Roy Yes, I just want to add that we are looking at 93% overall.

If you go on-site, most of it is nearly 100%.

So onsite our billing rates etc., are much higher.

So 93% does not mean that we are losing 7% of revenue due to supply.

Bryan Bergin Okay, that is helpful.

The large deal signings you have had in late March and early April, for the new deals that you closed, are those projects ramping up and starting on a normal timeframe or are any of those delayed?

Salil Parekh I will make a comment on that and then firstly and then Mohit can also add to it.

We had one of the largest projects ramping up in literally the middle of all of these activities late March, early April, a European project and we saw how through all of this remote working, we could manage to ramp that up extremely successfully and on schedule.

So, that is one of the positives that we have seen but for more color on the specific deals there, Pravin if you want to add something and then Mohit?

Pravin Rao So the challenges initially would have been only around transition and ramp up.

But in the deal which Salil mentioned, we had rebadging and we were able to get a significant number of their people on to Infosys rolls.

So we were able to do onboarding on a remote manner.

Similarly, with another client in U.S., we were just about to start the project when this COVID situation and lockdown happened.

But we were able to use tools and other things and start working on a remote transition plan.

We had a few days where we had to rework our plan on things.

So there are few examples like this, which has given us confidence and comfort that even in situations like this, using technology and collaboration tools, we should be able to do the transition.

From that perspective going forward, I don't see too much of a challenge in terms of ramp up unless clients want to slow down on some of the ramp ups given the current situation.

Mohit Joshi I think as we are trying to ramp up as we can.

In many cases we have seen even remote ramps happen, remote transition, remote KT happens.

So that is obviously a positive thing for us.

Now there will be instances where remote transition is not possible in the situation of a complete lockdown and we might need some percentage of people to be able to be at the client's location, those might slightly get delayed.

But on the whole, we are not seeing any of these programs structurally being delayed because clients are now not working from their premises.

Bryan Bergin You mentioned vendor consolidation conversations that you are having with clients, in what industries is that occurring?

Salil Parekh Many of our leaderships have had that sort of discussion.

At least I have had those discussions across multiple sectors, so it is not specific at this stage towards any sector.

There have been areas where it is related more to where clients see some small vendors potentially having challenges as they went to remote working, challenges on financial stability in the medium to long-term.

In other cases, we have seen with large clients where we want to make sure that the benefits of automation are more streamlined into their work.

So it is not specific to any industry, in the discussions I have had.

Bryan Bergin Okay thank you.

Thank you.

Ladies and gentlemen, this was the last question for today.

I now hand the conference over to the management for their closing comments.

Over to you Sir.

Sandeep Mahindroo We would like to thank everyone for joining us on this call.

We look forward to continuing our conversation over the course of the quarter.

Thanks and have a good day.

Thank you very much members of the management.

Ladies and gentlemen, on behalf of Infosys that concludes this conference call.

Thank you for joining us.

You may now disconnect your lines.