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.

Prepared remarks

Salil Parekh · Chief Executive Officer and Managing Director

Chief Executive Officer and Managing Director

Nilanjan Roy · Chief Financial Officer

Chief Financial Officer Rishi Basu (Emcee) Corporate Communications J O U R N A L I S T S Ritu Singh CNBCTV18.

Shilpa Phadnis The Times of India Jochelle Mendonca ET Prime Chandra Srikanth Moneycontrol Sai Ishwarbharath The Economic Times Haripriya Sureban The Hindu BusinessLine April 13, 2023 PP Thimmaya YourStory Rukmini Rao Fortune India Sethuraman NR Reuters News Anisha Jain ET Now Tushar Deep Singh BQ Prime Kushal Gupta Zee Business Harshada Sawant CNBC Awaaz April 13, 2023 Rishi Basu Very good evening, everyone and thank you for joining us today at our Fourth Quarter Financial Results Press Conference.

Glad to see a full house and we'd like to welcome our friends from media, our leaders from Infosys.

My name is Rishi and on behalf of Infosys, I'd like to welcome our leaders, Salil and Nilanjan to this press conference.

As always, like I say, we request one question from each media person, so that we can accommodate everyone over the next hour.

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

Over to you, Salil.

Salil Parekh · Chief Executive Officer and Managing Director

Chief Executive Officer and Managing Director

Nilanjan Roy · Chief Financial Officer

Chief Financial Officer

Sandeep Mahindroo · Financial Controller & Head Investor Relations

Financial Controller & Head Investor Relations ANALYSTS

Questions and answers

Salil Parekh · Chief Executive Officer and Managing Director

Thanks, Rishi, and good evening everyone here for joining in, and thank you for being here on the campus.

We had an excellent full year performance in Financial Year 2023, with a growth of 15.4% in constant currency.

Our digital business grew at 25.6%, now being 62.9% of our overall revenue.

And our core services grew as well at 1.9%.

We had 95 large deals with a value of $9.8 bn for the year, 40% of which were net new.

Our operating margin for the full year was at 21%, and our attrition has continued to decline in each quarter of the year, including in Q4. We are leveraging generative AI capabilities for our clients and within the company today, we have active programs and projects with clients, working with generative AI platforms to address specific areas, processes, and libraries within their business.

We have trained open- source generative AI platforms on our own internal software development libraries.

We anticipate generative AI to provide more opportunities for work with our clients and to enable us to improve our own productivity.

In Q4, we saw changes in the market environment.

During the quarter, we saw unplanned project ramp-downs in some of our clients and delays in decision-making which resulted in lower volumes.

In addition, we had some onetime revenue impact.

While we saw some signs of stabilization in March, the environment remains uncertain.

This led to our Q4 year-on-year growth of 8.8% in constant currency and quarter-over-quarter decline of 3.2%.

April 13, 2023 Our operating margin was resilient at 21% for the quarter.

We had $2.1 bn in large deals in the quarter.

Our pipeline of large deals is extremely strong.

Several of these are mega deals and several of them are opportunities for cost and efficiency programs within clients and consolidation opportunities.

Based on our sustained momentum in the financial year '23, the strong pipeline of opportunities, especially the ones in cost efficiency and consolidation, while also keeping in mind the uncertain environment, our revenue growth guidance for this financial year is 4% to 7% in constant currency.

Our operating margin guidance for the financial year is 20% to 22%.

Thank you, and over to you, Rishi, for our questions.

Rishi Basu Thank you, Salil.

We will now open the floor for questions.

Joining Salil is Mr. Nilanjan Roy, Chief Financial Officer, Infosys.

With that, our first question is from Ritu Singh from CNBCTV18.

Ritu Singh Hi Salil, Hi Nilanjan.

Your constant currency revenue decline for the quarter is far worse than what the street was expecting.

And then that sort of explains why your full year revenue growth guidance is missed, what you guided at 16% - 16.5%.

I just wanted to understand where are you seeing softness?

I remember reading your comments that your exposure to US banks isn't that large.

What are the verticals that are seeing softness?

And also on your margin guidance, which now for FY’24, you’ve brought to about 20% to 22%.

Again, last year, we thought it was an aberration because of higher wage bills, and the expectation was that it would be brought back to 21% to 23%, which is not the case.

Could you tell us a bit more about why this?

And a second question on attrition as well, which has been coming down.

If you expect that trend to continue in your hiring plans for the year, please?

Thank you.

April 13, 2023 Let me start off with the market.

Nilanjan will share a little bit about the margin and the other points we will come back to as well.

On what we saw in Q4, during the quarter, we saw some ramp-downs which were unplanned, and these were across different sectors.

We saw some in Telco.

We saw some in Hitech, some in Retail and within Financial Services, it was on mortgages that we have talked about in the past, in Asset Management and Investment Banking.

So those were the areas in which we saw things which were unplanned.

In addition to that, we saw some onetime impact in the quarter.

Now in terms of the margin, go ahead please.

Nilanjan Roy · Chief Financial Officer

Yes, I'll take that.

So, we have ended the year, as you know, at 21%, and this has been pretty stable as the year has gone by.

So, 21% was the full year margin as the exit margin as well.

And in a way, it's a midpoint between 20% and 22%.

It gives us the flexibility in this year as well.

So, we will have some headwinds which we will see with compensation, we will have some travel coming back.

But we know with things like utilization, more automation, etc., we also have a runway to increase the margins.

But this gives us the necessary flexibility into next year.

Ritu Singh With Infosys, like even with your revenue guidance last year, you started with something, and you kept increasing it every quarter.

Should we expect some sort of upside risk to these guidance figures you have given us for this year as well for FY’24?

Salil Parekh · Chief Executive Officer and Managing Director

So, the guidance we have given is based on what we see from the deals we won $9.8 bn in the year, plus what we see with a steady business and the outlook we have in the demand environment today.

So that is the way we build our guidance.

That is the way we look at it.

We don't have a view on what will change as the year progresses.

Nilanjan Roy · Chief Financial Officer

April 13, 2023 Sorry, what was the question again?

Ritu Singh It was on attrition and hiring.

Salil Parekh · Chief Executive Officer and Managing Director

Attrition and hiring.

Nilanjan Roy · Chief Financial Officer

For next year?

Ritu Singh Yes, for FY’24.

Yes, FY’24.

So, looking at the volumes, one is, we have a lot of bench with us.

In fact, over a long period of time, we have kept this bench.

They are ready to move into production projects.

But of course, they will take time as volumes come in their own pace.

And of course, we have an agile model of hiring off campus as well.

So as demand picks up, we have that flexibility as well.

So, I think our model in terms of hiring has got enough flexibility to take care of new volumes.

In any case, we have a rich bench, 80% utilization is what we have, and usually, we have operated well above that.

Rishi Basu Thank you.

The next question is from Shilpa Phadnis from The Times of India.

Shilpa Phadnis I just wanted to understand from you, if you look at the guidance for the next year, it looks really understated.

And way back in 2016 is when you had the low single-digit guidance that was re-revised downwards.

I just wanted to understand from you, where are the headwinds April 13, 2023 coming from?

Is it largely in BFSI, last quarter also, you called out some account headwinds.

Can you please take us through that?

Second, you said onetime impact.

So, is it largely related to ramp-down or any other client- related issues?

Can you please help us with that?

Salil Parekh · Chief Executive Officer and Managing Director

So, on the first, I'll address it, Nilanjan will come back on the second one.

We saw during the quarter certain clients where we saw these ramp-downs, which were not planned.

And they were across the Telco sector, Retail, Hitech and Financial Services, parts of which mainly focused on Mortgages, Asset Management, and Investment Banking.

So it was across those industries that we saw some of the constraints that came up.

Nilanjan Roy · Chief Financial Officer

On the revenues onetime, so most of the decline in revenue actually was from volume and the impact of revenue onetime is a combination of cancellations actually, exactly what you said.

So, the combination of cancellations and also some specific client issues.

So, it's a combination of that, but most of the decline actually has been from volume.

Shilpa Phadnis I had one last question.

With the two presidents leaving the organization, do you see some sort of a restructuring that you are going to announce, you're going to break up some of the verticals which are anyway monolithic and you going to break it down into smaller business units, is that plan underway?

And you ventured into the delayering exercise- top delayering, so I just wanted to understand from you that you have not called out replacements for the two presidents.

Is Infosys breaking away from the past in terms of doing away with the president structure?

Salil Parekh · Chief Executive Officer and Managing Director

So, we have announced and rolled out internally a structure, which is focused on delivery with the exit when Ravi left.

We are in position to now roll out the structure that would be for Financial Services as we move ahead.

What we see is within Infosys, we have a strong April 13, 2023 leadership team.

And so, we are fortunate that the leaders are coming from inside and then we see more and more at the next level.

There is no delayering plan within Infosys at all.

Our organization structure really is something we are building, which is agile and also quite solid to deliver our consistent trajectory that we have been driving through.

We have, as you know, growth drivers on digital and growth drivers on cost and automation.

And so those are the ones that we'll continue to drive.

And we have probably the best delivery organization in the industry.

So, we want to continue to enhance that with the team we have.

Shilpa Phadnis So, the current responsibilities will be split between other leaders in the organization?

Sorry?

Shilpa Phadnis The current responsibilities of BFSI?

The leaders within the company will step up and also in delivery it is done.

The next one will be done in the next few weeks.

Rishi Basu Thank you.

The next question is from Jochelle Mendonca from ET Prime.

Jochelle Mendonca Hello, I want clarification on something you have said in the press release.

You' have said that you have expanded your internal program on efficiency and cost to build a higher path to margins.

I am asking this specifically because I am looking at headcount, and headcount fell in this quarter, but it fell more on the software professionals while sales and support staff actually went up marginally.

So, could you give me some clarity on what this efficiency program is and April 13, 2023 how it is feeding into how you look at the sales staff and what augments or detractions you might make on that front?

That I think is a very critical program.

We were running it.

In fact, Nilanjan was driving that with a very strong team.

We have expanded the attention to that program during the last quarter.

We have several methods in which we can do better in that program, whether that relates to automation, it relates to pyramid, it relates to onsite mix, relates to subcontractors, relates to travel.

And also relating to pricing and how we can drive that within our system, given the inflation that all of us have seen.

What we are communicating with that is that program gets a very focused attention.

And we have within our internal way of looking at it, a path to bring us to the aspired margin that we want, because we want to be at that margin as we go ahead.

Having said that, we have low utilization that Nilanjan mentioned.

We are going to make sure that we look after our people with that commitment.

We are going to make sure that we continue with the training, and that is an area we will continue our focus on.

We are not going to take some short-term actions against that and that will be a way to build it because over time, that is a team that will start to work on projects as well.

Rishi Basu Thank you.

The next question is from Chandra Srikanth from Moneycontrol.

Chandra Srikanth Going by the guidance that you mentioned, can you give us a sense of the incremental revenues that you will be adding for FY’24?

Because based on the back of the envelope calculation, I think it will come up to some $300 mn to $500 mn compared to the $3 bn that you added in the previous fiscal.

So, can you give us a sense of how much incremental revenues you expect to add in FY’24?

And Salil, what are you hearing from clients?

I mean, yesterday, the TCS management mentioned that discretionary projects are getting deferred.

There are no cancellations or budget April 13, 2023 cuts, but clients are spending wisely.

If you can give us a sense of what the conversations are like, what kind of deal discussions are happening, and how impacted are you by the regional banking crisis in the US?

I think JPMorgan recently said that you and TCS have the highest exposure to regional banks in the US.

So, if you can give us a sense of that because financial services have declined quarter-on-quarter and year-on-year?

The first part is on the regional banks, Nilanjan will come back with that.

But on the first part -- two parts what you asked.

One, on the incremental revenue, so as you know, we don't give a specific dollar number for that.

But our guidance very clearly allows you to interpret it as 4% to 7% constant currency growth on the base, which now is closed on March 31.

So, both reported and constant currency, we have those numbers.

But that is our guidance, which will therefore give you the incremental revenue.

On what our clients are telling us.

Now several industries where we have talked about, Telecom, Retail, Hitech, and parts of Financial Services, there are some clients which are seeing in their own business, whatever constraints they're seeing with the economic environment.

As a consequence, we have noticed that some decisions were made during the quarter to stop some parts of the programs, not everything, but some parts of the program.

And that's what we observed in the quarter.

Plus, what Nilanjan and I also shared, there was some one-time impact in the quarter.

Now, what we see going ahead, we saw some stabilization in March, but the demand environment is still uncertain.

In the last quarter, we saw that certain banking situations were in the US and European geographies, impacting decision-making across the board.

With that in mind, we are working very closely with our clients and supporting them, making sure that we remain committed to our clients as they go through their way of dealing with the situation that's changing.

And we believe that as we did in the past, the clients connect with us will help us massively in the future as well.

Having said that, we have an extremely large pipeline, the largest pipeline we have seen in a long while, while there is still a slowing in the cycle of closing the deals, the deals are very April 13, 2023 strong, and some of them are mega deals.

So, we feel good that there is a pipeline focused on cost and efficiency, and consolidation.

Chandra Srikanth I think the Street was expecting 21% to 23% and I think you've given 20% to 22%.

So again, what are the pressure points there?

Is it rising onsite cost?

Nilanjan Roy · Chief Financial Officer

So, like I said, we have ended the year at 21% and in fact, the quarter closed at 21% and the full year is 21%.

So, we have seen a very steady 21% and frankly, that is the midpoint between 20% to 22% and it gives us the flexibility to look at certain headwinds if they arise.

There will be some increases like I just mentioned earlier, it will be in terms of travel and compensation.

And of course, we have the whole benefit of utilization, the pyramid, etc., to work.

So, I think that's a fair range.

And of course, our aspiration continues to be to improve our margin profile.

Rishi Basu Thank you.

Next question is from Sai from The Economic Times.

Sai Ishwarbharath Hi, gentlemen.

So, looking at the guidance, I just wanted to ask, even last year, you had given guidance and you had kept updating it, right?

So, would you call this some sort of a misstep like kind of seeing the demand forecast as overestimating demand?

And also, I wanted to know you were saying that a lot of project cancellations and the one-time impact were there.

So, has that impact subsided, or should we also expect similar pressure in the pipeline that's coming?

Also, for Nilanjan, I wanted to know the campus hiring target for FY’24.

Thanks.

Salil Parekh · Chief Executive Officer and Managing Director

Many of the things that Nilanjan and I shared earlier today were things that happened in the quarter.

For example, some of the clients decided to slow down or stop some of the projects.

So, these were things we had not seen at the start or at the end of last quarter, and that's what we felt.

We have also seen some of that stabilizing in March, but the demand environment is April 13, 2023 uncertain.

So, we are making sure that we keep that in mind as we look ahead and remain agile as we look ahead.

Nilanjan Roy · Chief Financial Officer

So, on the freshers, like I said, we have a very rich bench now.

We have hired more than 50,000, and we have said, we will hire 50,000.

We actually had, I think, hired 51,000-odd last year.

And a lot of them on the bench are getting skilled, are getting trained.

So, we have quite a leeway for the next few quarters in terms of the availability of freshers.

And of course, with our agile model of doing both college and off-campus recruitment, we can always turn that up.

So, we have no specific number for FY’24 at this stage.

We have enough, actually, today sitting on the bench.

Rishi Basu Thank you.

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

Haripriya Sureban Hi guys.

Salil, you mentioned about slowdown.

I just wanted to understand, is it more sentimental, or is it structural?

Why are these deals getting delayed?

And on the ChatGPT part that you mentioned, are there any specific use cases that you guys are working on?

And we keep hearing that ChatGPT could make a job redundant or something like that.

So would roles change, and would the nature of jobs change?

And are you internally training employees for these technologies?

Salil Parekh · Chief Executive Officer and Managing Director

The first part was?

Haripriya Sureban Is it sentimental, around what you are seeing and the client behavior that you are seeing, is it sentimental because everybody is scared or is it structural?

April 13, 2023 So there, what we are seeing is some clients have made a decision to slow down or ramp-down projects.

We see that across the different industries that I mentioned, Telecom, Hitech, Retail, and parts of Financial Services.

So, I don't know whether it's sentimental or structural, but we have seen that as the way the clients have interacted with us.

As we were sharing, we saw some stabilization in March, but the environment is uncertain, so we will see how it plays out.

On Generative AI, we are working with multiple platforms.

We are working with open-source platforms, and we are working with proprietary platforms.

We have active client projects today.

The projects that we are working on are focused on large models within the client organization for different areas.

And how Generative AI can take advantage of those large models and create something more efficient for the client.

And then, we are working on our own software development tool, on an open-source Generative AI platform.

We are actually working with two of them.

And we are building, we are training it on our software development libraries.

We have already done that with several of our internal software library elements.

And we feel quite good that these things are going to help us with client work, so more work and also with productivity.

So, it's really incredible how we think our organization has moved quickly into driving Generative AI within our business.

And it’s now part of all the new training as well because once you have it for your own software library, you can really deploy it very effectively.

Rishi Basu Thank you.

The next question is from PP Thimmaya from YourStory.

PP Thimmaya Hi.

Just have two questions.

One is the kind of negative growth you saw in this Q4. I understand the SVB crisis, the banking crisis, the Credit Suisse, and UBS crisis, but was it expected?

I mean such kind of deep cuts for Infosys as such from a revenue perspective?

And secondly, the kind of revenue outlook you have given for the current financial year.

Is this a long-term trend you are going to see that the overall growth rate is going to be under single digit -- maybe high single-digit or below 10% kind of thing?

April 13, 2023

So, first, every quarter, we look at where our large deals, overall wins plus the current work is.

And we build in a bottom-up way, what our estimate is and what our forecast is for the period ahead for the financial year.

And that's the guidance update or change that we gain, and we have given that consistently over the last several years.

We saw a different kind of volume when we were at the end of last quarter.

And then things changed during the quarter, which is what we shared with the projects ramping down.

Now looking ahead, first, if you look at, let's just say, the last couple of years, we had 19.7% growth the year before, and 15.4% this past year.

So, we know that it depends on where the economic environment is and how we see that.

We think our business has two growth drivers.

When there is a huge change going on within our client organizations and they are putting in large investments there.

There is digital transformation, and we have deep capability in that.

That comprises the cloud.

We have a very strong capability on Cobalt.

And then, when there are different areas where the client wants to focus on efficiency, costs, and even consolidation.

We have a very strong capability in automation, our own AI that we have used for that in the past.

So, we feel comfortable on both of those dimensions depending on how the economic environment is.

Rishi Basu Thank you.

The next question is from Rukmini Rao from Fortune India.

Rukmini Rao Salil, this is just an addition to what Shilpa asked on delayering of your leadership, your answer essentially meant that you are not going to have the president structure anymore.

Would that be a fair inference, or do you plan to make changes again?

So, what we are doing is for the delivery organization, we have already put in place the new team and the structure.

We have rolled that out.

We have a lot of people because we have, I April 13, 2023 think, a very good leadership team within the company.

So, a lot of people are really energized and excited with the new roles that they're already playing.

On FS, we will be rolling that out in the next few weeks.

Rukmini Rao Okay.

Nilanjan, also, if you can give us some understanding around the reduction in the free cash flows?

Nilanjan Roy · Chief Financial Officer

No. So I think we had a very good quarter in terms of cash flow at $713 mn. Rukmini Rao On a year-on-year basis?

We had an 85% conversion of free cash.

And I think as a percent of net profit, that's a very good conversion because also you have investment into working capital.

Last year was very unique.

We went above 100%, and the capex was low.

We had other working capital benefits.

There were some delays because of COVID in terms of our payments, which we had got benefits from governments on payments of taxes which came back this year.

So otherwise, 85% is a very good ratio of conversion.

Rukmini Rao Salil, also given that, the US macros look so weak and the commentary coming from various quarters also has been the same.

So, would that mean that for Indian IT services companies, would there be opportunities to pick up, like, say, captives of non-core assets of, let's say, big bankers, and are there M&A opportunities that will come out of this slowdown?

Salil Parekh · Chief Executive Officer and Managing Director

We are seeing very good opportunities in the M&A environment.

And this is a good environment.

We have a very strong balance sheet, a very good way to deploy it.

If we find a April 13, 2023 company or an entity that fits in strategically, but also culturally and we have a way of integrating it, we will look at that.

Rukmini Rao So, you are on the lookout?

Yes, we are -- but we are on the lookout at all times.

But yes, this environment is a good environment for finding it.

Rishi Basu Thanks, Rukmini.

The next question is from Sethuraman NR from Reuters News.

Sethuraman NR Good evening, gentlemen.

So, the question is, this weak, I mean, the soft outlook, is it going to drill down to your plans for hiring next year, as well as the increments and the variable pay?

That is one.

And do you see a recovery period over the next few quarters?

Like, I mean, one or two quarters from where, you feel that the situation in North America will stabilize, or at least, if you have a hint?

Also, is the softness overall coming from North America, or you are seeing pockets of softness from other regions as well, like Europe?

And you also mentioned about the Generative AI.

So, I just want to know whether this is in association with Open AI, where you have some stake, or how it's going to play?

I'll take the second one, which is on the softness.

Nilanjan will come back on the first one.

And I'll also talk about Generative AI.

So, firstly, our view today is from where we sit today, which is sort of in the middle of April, as we look out to our financial year.

We will see how the economic environment, how the global environment evolves.

It's not something that we have a clear view of what it will look like for the full year.

We have a good approach to building what we consider our guidance, based on what work we have already got committed from April 13, 2023 clients, what we have seen from the past that's continuing and then what we typically see in Q3, Q4, and in most years.

So that's how we have built our guidance, and that's the approach.

I think on the geography, we do see, more impact in US and less in Europe.

And that's in our numbers.

You see the growth in the full year or even in quarter is stronger in Europe than in US, even though there is growth in both for the full year.

On Generative AI, with clients, we have many projects going on.

We are working on the Generative AI platform that the client has some interest in, where they have a preference.

If they don't have a preference, we have a certain set of recommendations that we have.

We work with both open-source platforms for clients, but also with platforms that they want, which could be open sourced or proprietary platforms.

For our own work, we are working on open-source platforms today.

And we have the ability to work on any Generative AI platform, because we have our software development libraries, and we can train them on that model.

Nilanjan Roy · Chief Financial Officer

On the first question, of course, as we build out the financial model for the year, we factor in lateral hiring.

We factor in attrition, the questions around the freshers in the pipeline.

And therefore, and of course, we have a margin guidance accordingly built in.

So, this factors in many of these things, including things like compensation, travel.

So, the model actually puts together all these various factors and has that flexibility to change each lever as per where the year will progress.

Rishi Basu Thank you.

The next few questions are on text from friends from media who have sent it to us.

I just want to make a quick announcement that we are going to consider those questions in the interest of time which haven't yet been addressed.

Most of our questions have been addressed.

The first question on text is from Anisha Jain from ET Now.

And Anisha's question, Salil, is to you.

Regarding the one-time revenue impact, you said in your opening comments, is there a slowdown caused by a client-specific issue or a specific sector, or is it broad-based?

April 13, 2023

Yes, like we mentioned, I think the majority of the revenue slowdown is from volume.

And part of the one-timer, which is on revenue, is a combination of one-time client issues as well as client cancellation, in a way which is a subset of the ramp-downs.

Rishi Basu Thank you.

The next question is from BQ Prime.

Tushar has sent us two questions, one for Salil and one for Nilanjan.

For Salil, what is the rationale behind the revision in guidance, given the weakness in the BFSI space?

For Nilanjan, how do we see deal-making and margin panning out over the next two quarters?

Is growth likely to return in a hurry?

Salil Parekh · Chief Executive Officer and Managing Director

So, on the first one, in that sense, there is no revision in the guidance because it is the start of our financial year.

So that is our guidance for the year.

There is no revision in our guidance.

Nilanjan Roy · Chief Financial Officer

Yes, I mean, I think, we see the guidance in the context of the macro environment, which we are sitting in now, right?

And that, of course, can change.

But the other thing is we have a very strong pipeline.

In fact, our large-deal pipeline is the strongest ever we have had.

And in a way, that gives us the confidence, at least as the year progresses, that we will have some conversion of this.

And the second half of the year, we will definitely see a definite improvement, which is why the four to seven band, we have widened that band exactly for that reason.

Rishi Basu Thank you.

The next question is from Kushal Gupta from Zee Business to Nilanjan.

What are the tools available at your end to safeguard the margins ahead, given the current scenario remains like this for some more quarters?

April 13, 2023 Yes.

So, I think four or five of them, which straightaway we know, I think our automation capabilities are tremendous.

I think it is the biggest source of our margin improvement.

And of course, with new tools coming in, I think we can see more-and-more productivity increases.

The one which is sitting out there really is utilization.

I think at 80%, we know we have a large headroom to improve that.

Onsite offshore mix, which post-COVID, slightly went a skew because, of course, there was some travel which went back.

That now strategically can be looked at and as we can offshore more work.

Definitely on the pyramid side as well.

So, as freshers' go into the pyramid, you will get a benefit really on the production workforce.

So today, the bench has a double whammy on cost because you have idle people and, of course, you have a rich pyramid in terms of a very top- heavy pyramid.

And as freshers' go in, you will be having that benefit as well.

So, there are multiple levers, which we have.

Pricing is one of them.

Salil mentioned that as well.

We continue to work with our clients where we can put COLA clauses into our deals, where we can sell with new innovative commercial constructs.

Of course, the environment is tough.

The good news is we have not seen, for instance, a return back to a heavy discounting environment.

We are making sure that we are continuing to push back on our clients on discounts, etc., and that really has stayed even during this time.

Rishi Basu Thank you.

The next question is from CNBC Awaaz for Salil.

Has the sentiment worsened among clients?

Is there fear of further uncertainty or just caution?

Does the uncertainty and delay in decision-making make it likely to play on the pricing of deals in the coming quarters?

Salil Parekh · Chief Executive Officer and Managing Director

So there, the way we saw -- during the quarter we saw some of our clients looking at ramp- downs in their projects, and then there were some one-time impact on revenue.

These were spread across different industries.

There were some in Telecom, some in Hitech, Retail and parts of Financial Services.

We see some stabilization in March, but the demand environment is uncertain.

So, we will watch it and with agility and adapt to it.

Rishi Basu April 13, 2023 Thank you, Salil.

With that, we come to the end of this press conference.

We have perhaps 10 more minutes in case anybody would like to ask another question.

Jochelle.

Please go ahead - - Thimmaya, please use the microphone because we have to record it?

Thimmaya PP We would like to know about the sharp drop in client addition in the fourth quarter of FY’23, any particular reason for that?

Nilanjan Roy · Chief Financial Officer

No, I think it's probably to be seasonal.

I don't have the exact number offhand.

Thimmaya PP Because your own fact sheet shows that you added about 115 clients in fourth quarter.

And December quarter, it was 134, and if you look at a year back…

There is nothing specific really at all.

I mean, 115 clients on a large base of about 1,900 clients.

So that happens, the ups and downs that happens.

We also loose some clients, and we add, in fact, net more than a loss.

So, I don't think anything specific in that.

Rukmini Rao Nilanjan, also, in terms of the utilization, whether it's including the trainees or excluding, given that you are going into a difficult year, is there any sort of a number that you are working with in terms of improving your utilization?

Of course, as we look, as the year progresses, we will have different targets for, as the quarters progress.

Because you can't put all the freshers into on day one into programs.

So, it depends on the kind of work that you will have.

You will have T&M work, FP work.

So, it's literally horses for courses.

Which programs come in, how many freshers can you put in, in large deals, by default you can put in more freshers.

So, it's quite complicated.

April 13, 2023 Rukmini Rao But given that your revenue guidance is not great, that would mean to say that you'll not have as many work, or…?

No, that is of course a headwind.

So, one of the ways you get around that is on existing deals.

So, if a current project is three years old, you move people out from an existing deal, which is three years, well into tenure, move up the people into higher roles, put freshers in, and move those experienced people into other deals.

So different ways you can play this game as well.

But yes, of course, I mean, if you don't have those large volumes, there is a bit of a headwind in terms of how much we can deploy.

Rishi Basu Rukmini, thanks.

Jochelle had a question.

Shilpa, one sec. Jochelle had a question, and after Shilpa's, we'll close the conference.

Jochelle Mendonca So, it's a broader question.

Over the past few months, we have seen companies say that they have record high deals, strong deal wins, and with Accenture announced 19,000 job cuts, or in the case of TCS, say, the market is still uncertain, and have issues with not as strong growth as maybe the market had expected.

Could you give some color on why there may be this disconnect between strong demand and high deals, and good deal wins and large deals, that's not somehow flowing into the revenue line?

Salil Parekh · Chief Executive Officer and Managing Director

Jochelle, it'll be difficult for me to comment on those two companies.

Jochelle Mendonca No, I mean a broader industry thing, because I think, you have had good deal wins this quarter.

It's not terrible deal wins for Infosys.

April 13, 2023

For us, I think, for Infosys, we have had very strong year in terms of wins, $9.8 bn, and that is what we see the growth guidance that we have given, 4% to 7%.

Then we saw in the quarter some of the ramp-down.

So, there is always some additions, and then this what we had not seen at the end of last quarter, those ramp-down.

So, then we balance those two things as we give the guidance.

Jochelle Mendonca Slowdown is so bad that it's offsetting the remarkable deal wins we saw in the quarter?

There, the way we look at it is, we had very good large deal wins.

And then we had some clients where we had ramp-downs.

Rishi Basu Shilpa, you had a question?

Shilpa Phadnis Yes.

The revenue productivity has dropped sharply.

And that too, it’s on a consolidated basis with all the subsidiaries added.

It’s $53,400 vis-à-vis, $57,000, nearly $58,000 last year.

So, if you can help us understand that – revenue productivity per employee?

Nilanjan Roy · Chief Financial Officer

So, this is just your total revenue by headcount.

And in a way, our utilization, if it's down from 88% to 80%, straightaway, mathematically, you have a 10% reduction.

So, that's just the impact of utilization.

So, we are just carrying many more freshers than we did last year.

That is as simple as that.

Shilpa Phadnis April 13, 2023 And in terms of the renewals, are clients taking longer than usual to renew?

And hence, the revenue recognition hasn't happened.

Is that one of the reasons why you see more slower closures?

Salil Parekh · Chief Executive Officer and Managing Director

There, what we are seeing is in a large deal pipeline, we have seen an expansion in the time to close a deal.

So, it's not specific to a renewal or to something new.

It's more that in the large deal pipeline, we have seen that.

And then once it's closed, then it flows in, once it's closed, there is no other constraint on how the project starts and so on.

Rishi Basu Thank you.

With that, we come to the end of this press conference.

We thank our friends from media for being part of this press conference.

And thank you, Salil.

Thank you, Nilanjan.

And thank you to all our leaders from Infosys who were with us today.

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 please join us for some tea outside. “Infosys Limited

Yogesh Aggarwal · Research Analyst

HSBC

Bryan Bergin · Research Analyst

TD Cowen

Ankur Rudra · Research Analyst

JPMorgan

Kawaljeet Saluja · Research Analyst

Kotak

Pankaj Kapoor · Research Analyst

CLSA

Abhishek Bhandari · Research Analyst

Nomura

Ashwin Mehta · Research Analyst

AMBIT Capital Private Limited

Gaurav Rateria · Research Analyst

Morgan Stanley Sudheer Guntupalli Kotak Mahindra Asset Management Surendra Goyal Citigroup Keith Bachman BMO Capital Abhishek Kumar JM Financial

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the Infosys Limited Earnings Conference Call.

As a reminder, all participant lines will be in the listen-only mode.

Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone.

After today's presentation, there will be an opportunity to ask questions.

To ask a question, you may press star then one on your telephone keypad.

To withdraw your question, please press star then two.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Sandeep Mahindroo.

Thank you and over to you, sir.

Sandeep Mahindroo · Financial Controller & Head Investor Relations

Thanks Inba.

Hello, everyone, and welcome to Infosys financial results for Q4 and FY ‘23.

Joining us here on this call is CEO and MD, Mr. Salil Parekh, CFO, Mr. Nilanjan Roy, and other members of the senior management team.

We will start the call with some remarks on the performance of the company for the recently concluded quarter end year by Salil and Nilanjan, subsequent to which the call will be opened up for questions.

Please note that anything we say that refers to our outlook for the future is a forward- looking statement that must be read in conjunction with the risks that the company faces.

A full statement explanation of these risks is available in our filing with the SEC, which can be found on www.sec.gov.

I would now like to pass it on to Salil.

Salil Parekh · Chief Executive Officer and Managing Director

Thanks, Sandeep.

Good evening and good morning to everyone on the call and thank you for joining us.

For the full financial year 2023, we had a good performance with growth of 15.4% in constant currency.

Our digital business grew 25.6%, now being 62.9% of our overall revenue and our core services grew as well at 1.9%.

We saw broad based growth across our business segments, with most in double digits.

We had 26% growth in Europe and 12% in the US.

We had 95 large deals with a value of $9.8 bn for the year, with 40% net new.

Our operating margin for the full year was at 21%.

We generated free cash flow of $2.5 bn in the year.

Our attrition has continued to decline in each of the quarters through the year.

We are leveraging generative AI capabilities for our clients and within the company.

We have active projects with clients working with generative AI platforms to address specific areas within their business.

We have trained opensource generative AI platforms on our internal software development library.

We anticipate generative AI to provide more opportunities for work with our clients and to enable us to improve our productivity.

In Q4, we saw changes in the market environment.

During the quarter, we saw unplanned project ramp downs in some of our clients and delays in decision making, which resulted in lower volumes.

In addition, we had some one-time revenue impacts.

While we saw some signs of stabilization in March, the environment remained uncertain.

This led to a Q4 year-on-year growth of 8.8% in constant currency and quarter-on-quarter decline of 3.2%.

Our operating margin was at 21% for the quarter and we had $2.1 bn in large deals in the quarter.

We generated $713 mn of free cash flow in the quarter.

Our pipeline of large deals is extremely strong.

Several of these are mega deals and several of these opportunities are for cost and efficiency programs and for consolidation projects.

Some industries such as financial services (in Mortgages, Asset Management, Investment Banking), Telecom, Hi-Tech and Retail are more impacted, leading to uncertainty in spend and delays in decision making.

The US geography is more impacted than Europe.

Keeping in mind the current environment, we have further expanded our internal efficiency and cost program to work on our pyramid, onsite ratio, automation, travel, subcontractor cost, office consolidation and on pricing.

We anticipate this program will build a path to higher margins in the medium term.

We are committed to investing in our people in this period.

We are committed to working with our clients as we deal with changes in the economic environment.

Based on our sustained momentum in financial year ‘23, a strong pipeline of opportunities, especially focused on cost, efficiency and consolidation, while also keeping in mind the uncertain environment, our revenue growth guidance for this financial year is 4% to 7% in constant currency.

Operating margin guidance for this financial year is 20% to 22%.

Thank you.

With that, let me hand it over to Nilanjan.

Nilanjan Roy · Chief Financial Officer

Thanks, Salil.

Good evening, everyone.

And thank you for joining this call.

FY ‘23 was a year of two halves, mirroring broader macroeconomic conditions.

Growth was extremely strong in H1 with 20%, year-on-year constant currency which reduced to 11.2% in H2 due to the slowdown in verticals like telecom, high-tech, retail, and parts of financial services.

Q4 came in slower than expected due to some specific client ramp-downs in discretionary spend and delayed client decision-making on new deals.

In addition, we had some one-off revenue impacts, including project cancellations, etc. Despite the above, we closed FY ‘23 with a strong 15.4% growth in constant currency, leading to continued market share gains.

Operating margins for Q4 and FY ‘23 were at 21% in line with our guidance.

Free cash conversion to net profit for FY ‘23 was near 85%.

FY ’23 EPS grew by 1.3% in dollar and 9.7% in rupee terms.

Client metrics were strong with the number of $50 mn clients increasing to 75, $100 mn client counts increasing to 40, and $200 mn client counts increasing to 15.

LTM voluntary attrition declined to 20.9%.

Quarterly annualized attrition reduced by over 4% sequentially and is the lowest in the last nine quarters.

This is also well below pre-pandemic levels.

Coming to Q4 performance, revenues grew by 8.8% year-on-year and declined by 3.2% sequentially in constant currency terms due to the reasons mentioned earlier.

Utilization declined to 80% on the back of softness in demand.

We expect the utilization to improve gradually in the coming quarters as freshers starts getting deployed.

We will calibrate the hiring for FY’24 based on available pool of employees, growth expectations and attrition trends.

Q4 margins were at 21%, which is a decline of 50 basis points sequentially.

Major components of sequential margin movements are - tailwinds of 50 basis points on cost optimization, including reduction in sub- con. - 60 basis points benefit from reduction in PSCS, which is post sale customer support.

Offset by a headwind of about - 70 basis points from a drop in utilization and - the balance 90 basis points with a combination of revenue one-timers as mentioned above, partly offset by other savings.

Q4 EPS grew by 0.2% in dollar terms and 9% in rupee terms on a year-on-year basis.

Our balance sheets remained strong and debt-free.

Consolidated cash and equivalents stood at $3.8 bn at the end of the quarter.

Free cash flow for the quarter was robust at $713 mn with a conversion of 95% to net profit.

Yield on cash balance was 6.66% in Q4. The board has recommended a final dividend of ₹17.50 per share, which will result in a total dividend of ₹34 per share for FY ‘23 versus ₹31 per share for FY ‘22, an increase of 9.7% per share for the year.

Including the final dividend and recently concluded buyback, we have returned 86% of FCF to shareholders over the last four years under our current capital allocation policy.

In Q4, we completed the open market share buyback of ₹9,300 crores, buying back 1.44% of shares at an average buyback price of ₹1539 versus a maximum buyback price of ₹1850.

ROE increased to 31.2% in FY ‘23 from 29.1% in FY ’22 as a result of higher payout to investors.

Coming to segment performance, Large deal momentum continued, and we signed 17 large deals in Q4. TCV was $2.1 bn with 21% net new.

Five large deals were in manufacturing, four in FS, three in CRL, two each in Life Sciences and Hi-Tech, and one in EURS.

Region-wise, this was split by ten in America and seven in Europe.

In FY ‘24, we signed 95 large deals with TCV of $9.8 bn with 40% net new.

Coming to vertical segment performance, Financial services vertical was impacted by budgeting delays at the start of the year led by macroeconomic uncertainty coupled with softness in mortgages, asset management and investment banking.

However, our strong pipeline and large deal-wins in areas like infra, production support, cybersecurity and business operations is helping in better visibility for FY ‘24.

We have a very diverse portfolio of clients in the US and hence, exposure to multiple regional banks is less than 2% of our overall revenues.

We do not anticipate any material impact on our operations as a result of recent news and regional banking segment.

In Retail, there is heightened focus on accelerating digital transformation to enable top line growth with rigor in ensuring budgets get spent on right programs to maximize ROI.

While there is some pressure on discretionary tech spending, companies are prioritizing investments in key areas such as e-commerce platforms, supply chain management systems and customer engagement tools.

Manufacturing segment continues to see ramp-up of large deal wins and benefits of vendor consolidation.

There is increased focus on digital spend, including opportunities on ER&D, 5G and industrial IoT.

Increased energy prices and interest rates coupled with continuous supply chain disruptions is impacting spend on the run side of the business, especially in Europe.

Communications segment is witnessing increased opex pressures, cost cutting ramp- downs and delayed decision-making.

Demand for ideas and solutions are moving from cost takeout to revenue growth side with heavy focus on customer success.

Cloud and mobility remain top driver for 5G adoption.

Overall pipeline remains strong, which gives us the confidence of growth opportunities in the coming quarters.

The positive momentum in energy utilities resources and services for FY '23 was supported by large deal wins.

Our renewed strategy to re-pivot our offerings and developing integrated Energy as a Service solution and the focus on the journey to net- zero initiative has positioned us well ahead of competition.

While we are seeing delays in kicking off discretionary spend projects, the cost takeout and vendor consolidation initiatives continue to pick momentum.

We expect our revenues to grow by 4% to 7% in constant currency terms in FY '24.

Our pipeline of large deals remains extremely strong with increased focus on cost takeout programs.

Operating margin guidance stands at 20% to 22%.

The margin guidance factors in growth assumptions for FY '24, impact of utilization, employee cost increases, further normalization of costs like travel, facilities, etc. We continue to focus on various cost optimization and efficiency improvement measures.

As we look beyond FY '24, we believe we have various levers to generate more efficiencies like improving utilization, reducing subcons, improving pyramid apart from growth acceleration and potential pricing increases, which will enable us to aspire for higher margins over time.

With that, we can open up the call for questions.

Moderator · Conference Operator

Thank you very much.

Ladies and gentlemen, we will now begin the question-and- answer session.

Our first question is from the line of Yogesh Aggarwal from HSBC.

Please go ahead.

Yogesh Aggarwal · Research Analyst

Yes, hi, good evening, couple of questions.

Firstly, while the quarter was weak, the guidance at the upper end still looks very solid when we just mathematically look at the sequential build up from here.

So, is that 7% based on some macro pickup or is it what you see today 7% is possible?

And related to that, Salil, in general, the demand and the growth picked up post-COVID.

So are we back to pre-COVID growth rate of 5%, 6%, 7% or FY '24 is one-off?

And we can see a pickup from FY '25.

And then I have a follow-up, please.

Salil Parekh · Chief Executive Officer and Managing Director

Hi, Yogesh, this is Salil.

I didn't catch the second one.

I'll go with the first question, then you can just repeat the second one.

On the guidance, what we have built it with today is, what we see with the deals we have sold and the ongoing work that we have and then put the range between 4% and 7%.

There are different scenarios in which different things happen.

We have widened the band to three points given the uncertainty in the environment.

We also have a very strong large deal pipeline with some mega deals in the pipeline.

Of course, these are always binary.

But given the strength of the pipeline, we believe that there is, ways that we can achieve the high end of the band of guidance.

Yogesh Aggarwal · Research Analyst

Got it.

So, I was asking, the second question was 4% to 7% is almost going back to pre- COVID growth rate.

So, is it like the new normal again or we can expect some pick up again from FY '25?

That is one.

And also, Salil, I wanted to ask you on the recent management exits.

Just recently, you had two Presidents and COO.

Now all three are not there for whatever reasons.

So, has it impacted the business by any chance?

And what is the new structure?

Are you going to replace them or is it in, the new structure doesn't need Presidents and COO.

Salil Parekh · Chief Executive Officer and Managing Director

So, on the first one, as of course, we don't provide a view or a guidance beyond this financial year.

Underlying the way we see the business, we see two growth drivers.

And we are well positioned on both in terms of capabilities and track record.

One is on digital transformation, comprising of cloud and other elements and one is on cost efficiency, automation and an additional element, which is on consolidation that comes in through that.

We see both of those drivers working.

We have seen a reduction in the digital transformation work today.

We see more in the cost and efficiency and consolidation play today.

But going through and depending on where the client is, what the environment is, we feel comfortable for both of those drivers to work over time.

In terms of the structure, we have put in place a structure for the delivery organization, which is already rolled out.

And in the next few weeks, we'll roll out the new structure for our FS team.

So, we feel good with the leadership pool that we have within the company, who are moving up to take a broader role and a larger role, and that they will step up and deliver what we are driving to.

Yogesh Aggarwal · Research Analyst

Very helpful.

Thank you so much Salil.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Bryan Bergin from TD Cowen.

Bryan Bergin · Research Analyst

Hi.

Good evening.

Thank you.

I wanted to ask on the growth outlook first.

At the midpoint of your 4% to 7% range, can you give us a sense on how much of the backlog is already in hand versus having to go out and convert upon the pipeline to achieve that growth target?

And does the amount that you have to sign in that pipeline to hit the target differ relative to prior years at this time?

Salil Parekh · Chief Executive Officer and Managing Director

Hi, this is Salil.

Thanks for that.

We don't have a specific number there that we share externally.

What I can share is, we see through this past financial year, we have had a good, large deals booking, $9.8 bn with 40% net new and we see a set of very strong active relationships, some of them are expanding through the year through other work.

And then we saw in Q4 during the quarter, some ramp downs.

So, keeping those factors in mind, we have built the guidance of 4% to 7%.

And we see that we have the ability to deliver on that guidance.

Bryan Bergin · Research Analyst

Okay.

And my follow-up is kind of on margins here.

So, you've cited internal efficiency programs that you are going to progress upon, I think, pyramid, office consolidation and other items.

Is there a stated target of cost reduction that you are expecting to achieve?

So, a run rate of operating margin expansion?

Just trying to get a sense of how you think about the structural margins of the business, assuming the efficiency initiatives you’ve cited?

Salil Parekh · Chief Executive Officer and Managing Director

So, there, we put together an internal plan with targets and, a road map for each of the subcategories that we outlined and a few others.

And we have a view to drive that through the next period here in the coming quarters.

We have not shared that target externally, but our view is to make sure that we put in place, execute on that programs in place and deliver to that in the medium term.

Bryan Bergin · Research Analyst

Thank you.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Ankur Rudra from JPMorgan.

Please go ahead.

Ankur Rudra · Research Analyst

Hello, Thank you.

The first question is on, I just wanted to get a bit more color, if you can, on the reasons for the very sharpness on revenues and margins versus the guidance.

Why did it surprise you?

And how much of the demand environment has existed through the quarter or versus what probably came in the last 30 days?

That is the first one.

Salil Parekh · Chief Executive Officer and Managing Director

So, what we saw there was during the quarter, as the quarter progressed, we saw some clients ramped downs on programs.

And this was across different sectors- Telecom, Retail, Hi-Tech and parts of Financial Services- mortgages, investment banking, asset management.

And that was something which were unplanned as we went through.

And then additionally, we had some one-time impact, which we saw in the quarter as well.

Ankur Rudra · Research Analyst

Would you be able to elaborate on the one-time impact, Salil?

Nilanjan Roy · Chief Financial Officer

Yes, so I think firstly, the majority of the decline is volume-led.

The balance of the revenue is one-timers which is a combination of specific client issues including the impact of cancellations as well, which is just a top line impact, more and more over and above the volume impact.

So that is the state of play, really for the quarter.

Ankur Rudra · Research Analyst

Okay thank you.

On the guidance, I just wanted to get a sense, looking at what happened in the quarter and the uncertainty in the environment, are you turning more conservative for the guidance setting process for FY24 both on the revenues and the margins versus what you may have done before?

And also along with that, if you can share what is the visibility that you have at the moment for the full year versus what you may have had at the beginning of last year?

Salil Parekh · Chief Executive Officer and Managing Director

So there on the guidance, we took into account what we see typically as we close the year in March on what we have had in new large deals and overall new deals.

And the ongoing work that we have across our client base.

And that basically becomes the foundation of our guidance.

Typically, again, as you know well, we don't have a detailed view of Q3 and Q4. So, we have more typically estimates from other years that we use.

And that is the same approach we have used this year from what we see as we look out.

And the same on margin we finished the year at 21%.Utilization in Q4 is low compared to what we want to target.

We have a very strong efficiency and cost program but within that program we are very clear that from an employee perspective we will continue with our commitment with employees.

And so, the utilization will go up through the quarters but in the medium term, we will get that impact back into the margin and that is how we build the ‘20 to ‘22 margin guidance.

Ankur Rudra · Research Analyst

Understood.

Just a last question on the leadership, I think this was attempted before, clearly there has been departures as you know/ acknowledge.

And some of them have gone to competition, probably will drive hungrier peers going forward.

Do you think you are losing muscle and increasing the roles and responsibilities at a more concentrated leadership team?

At least I've seen this from the outside, at a time when the industry is facing a tougher period this year?

Salil Parekh · Chief Executive Officer and Managing Director

Sorry Ankur, I didn't follow you.

You said, will we have concentrated leadership or?

Ankur Rudra · Research Analyst

Yes, the concentrated leadership and basically more roles and responsibilities.

As an example, on your door or Nilanjan's door versus having three other very senior leaders helping you with a wider leadership team.

Salil Parekh · Chief Executive Officer and Managing Director

Okay.

What we have seen and what we know is within the company, there is a very strong set of leaders across different roles.

On delivery, many of them have now stepped up.

And clearly any role as you start to step up to delivery and leadership within a large company like Infosys becomes more concentrated.

And that has been announced and rolled out and the same will happen with FS where we are rolling that out in the coming weeks.

FS segment of course, is a large segment for us.

So those will be concentrated in that sense.

So we will have a leadership structure with a very strong responsibility for several of the senior leaders.

Ankur Rudra · Research Analyst

Understood.

Thank you and best of luck.

Moderator · Conference Operator

Thank you, our next question is from the line of Kawaljeet Saluja from Kotak.

Please go ahead.

Kawaljeet Saluja · Research Analyst

Yes, hi.

I have a couple of questions.

The first question is on the guidance once again.

Is it back ended or guidance that you've seen with growth through the course of the year?

And related question to the guidance is that given the deterioration in the macro environment along with the huge miss in the 4Q, along with weak signings do you think you have been watchful in your guidance for FY ‘24?

You know, has the process been tightened.

Any thoughts on that would be welcome?

Salil Parekh · Chief Executive Officer and Managing Director

Hi, Kawal.

This is Salil, on the revenue growth guidance, the thinking is really spread over the four quarters.

I'm not sure I would say it is front or back but it is based on what we see in the large deals today.

And also, in the pipeline that we have, where we do have some mega deals in the pipeline.

So, that gives some weightage to the guidance given where those deals will come in the, later on in the year itself.

The second one, sorry, Kawal was, are we more conservative?

Is that the point?

Kawaljeet Saluja · Research Analyst

No, has the process of guidance have been tightened, or rather the forecasting process has it been tightened given the magnitude of miss in your revenues in the quarter, which obviously would have shocked you as well.

You know, have you basically built-in better cushion, greater cushion in your guidance for FY ‘24?

Or is the process and the underlying assumptions the way it used to be historically?

Salil Parekh · Chief Executive Officer and Managing Director

So we have tried to put in place what is changing or changing and uncertain economic environment which where we saw some of these impacts.

So, those factors have been taken in as we build this guidance.

Kawaljeet Saluja · Research Analyst

Okay and the second question that I had is on profitability.

You know every company would you know I mean want to operate at a certain base level of profitability.

Now in Infosys’s case, this profitability has been drifting down and the profitability guidance is down to 20% to 22%, which is a new low.

How should one think about the underlying operating assumptions behind these deal wins you know, and the process of bidding for large deals?

And how does that tail in now with the underlying base of profitability aspirations and rather assumption that you have?

So how should one think about structural profitability, if you may?

Nilanjan Roy · Chief Financial Officer

Hi, Kawal.

Yes, so I think if you step back a bit into the last year and a half, I mean, basically the whole chasing of this demand side, three compensation hikes in 15 months, stretch salaries- all that in a way has made our structure bit inefficient.

And in a way, part of that today is the reverse that you are sitting with 80% utilization whereas you want to be at much higher levels and the pyramid is not as efficient because you had to get talent from anywhere when the market was hot.

So, we have seen a lot of these sort of things during this period where we can identify these pockets sub-con rising to 11.5%.

So, we were clear that we had to go behind getting the volumes in and we knew we had time to correct the margin structure.

And therefore, that is fundamentally what we still believe in.

Our guidance is just today at a midpoint at the end of the year at 21%.

And we have enough flexibility guidance in this between 20% to 22% and in-a-way 21% is just a midpoint of that.

To take care of firstly of course there may be some headwinds coming because of compensation, there could be something on travel.

But at the same time you have levers of improving our utilization at 80%, really which is probably on the lowest I have seen.

We have other opportunities of improving the pyramid, because the higher bench comes with a double whammy of course.

One is you have the ideal cost of the bench and at the same time you have a very rich pyramid.

So the moment you start moving freshers into the pyramids, you get a double benefit of cost that, the idle cost goes away from the bench and your quality of the pyramid improves on the production side.

So you are sitting on in fact two inefficiencies now.

These are the levers we start using, pricing etc, still going on, maybe conversations, how we built in COLA (cost of living adjustments).

So, our aspiration continues to be that we continue to look at improving margins from where we are.

The guidance is just a reflection of the flexibility in this uncertain year and we have ended at 21% as you saw consistently during the last year as well.

Kawaljeet Saluja · Research Analyst

Sorry to interrupt you Nilanjan there, see uncertainty might be there on revenue but on cost, there are only tailwinds and there are a number of tailwinds that you listed out and I presume that the labor market is also cooled off, so why bring down the lower end of the band actually?

Nilanjan Roy · Chief Financial Officer

Yes, so I think also some is that many some of these levers will take time to put in because it is a different situation of how much room you have to deploy levers when you are growing at 10% versus when you are going at 4% to 7%.

So, for instance you have fresher, how fast can you deploy them, when you are growing at 4% is at a different pace versus what you were deploying at 7% versus what you were deploying at 10%.

So, all that will still weigh into the structure.

It is not that you can immediately say, I'm going to overnight change my utilization from 80% to 85% or shift the onsite offshore because in a way a slower volume regime has that overhang on how fast can we deploy.

But like I said, when we started, that we are sitting on these inefficiencies which are very visible to us.

And we know we can deploy many of these levers which we have to continue to aspire for higher margin profiles.

Kawaljeet Saluja · Research Analyst

Okay, got that.

Thank you so much.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Pankaj Kapoor from CLSA.

Please go ahead.

Pankaj Kapoor · Research Analyst

Thanks for the opportunity.

Nilanjan just continuing on Kawaljeet's question around margins, two things.

One, what kind of a time frame are you looking at for this year's wage hike?

Are you sticking to first quarter?

And what kind of a quantum are you expecting?

What kind of a margin impact will you foresee of that?

Will it be similar to last year, or do you think this could be lower this year?

Nilanjan Roy · Chief Financial Officer

Yes, so this will be continuously evaluated.

We have built in, like I mentioned, into our guidance, the compensation.

And we will take the decision during the year as we're looking at the market context, to competitive context, so no decision has been taken as yet.

Pankaj Kapoor · Research Analyst

So the hike may not happen in the first quarter, is that what you are saying?

Nilanjan Roy · Chief Financial Officer

At this moment, no decision has been taken for the hike.

Pankaj Kapoor · Research Analyst

Understood.

And at the lower end of the guidance, are you keeping a buffer for some kind of a potential pricing pressure that might come in during the course of the year?

Is that the headwind which you see as the major one, when you are guiding for a 20% margin?

Nilanjan Roy · Chief Financial Officer

No, I don't think, specifically on pricing.

I think it is just that we are at 21% and the midpoint between 20% to 22%, just happens to be 21%.

And like I said, there may be some headwinds and maybe some tailwinds.

And of course the aspiration will continue to do better than our margins as well.

So nothing specific like that in terms of pricing contingency or something.

Pankaj Kapoor · Research Analyst

Okay.

And Salil, if I look at the net new deal wins, probably this was the lowest since we had from the start of the pandemic.

I mean, was this mainly due to clients delaying decisions on deal awards, towards the last 30 days?

And are you building any conversion of this to get to that 7% at the upper end of the guidance?

Salil Parekh · Chief Executive Officer and Managing Director

So there, one of the things we have seen in the pipeline is a slowing in decision making.

So, large deals are staying in the pipeline longer.

Having said that, the net new or even the quantum of large deals as we discussed in the past, there is always volatility.

These are only deals over $50 mn and not everything.

It is not a full booking value.

And so we have always seen that volatility in the past.

We think, it is the large deal pipeline that we have today, which happens to be a very large pipeline and some mega deals in it.

We have the ability to drive to our growth guidance as we run through the year.

Pankaj Kapoor · Research Analyst

So just to clarify at an upper end of the guidance, we are expecting some of those mega deals to convert during the course of the year?

Salil Parekh · Chief Executive Officer and Managing Director

I would not be so specific in that to say what it is based on.

We do have a large pipeline with mega deals and we anticipate that some of those will allow us to get to the higher band of the guidance.

Pankaj Kapoor · Research Analyst

Understood.

Thank you.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Abhishek Bhandari from Nomura.

Please go ahead.

Abhishek Bhandari · Research Analyst

Thank you for the opportunity.

Salil and Nilanjan, this quarter we had certain unanticipated external events that led us to miss our guidance of 16% to 16.5%.

Specially, after we have upgraded at the end of Q3. Do you think you could have considered issuing a profit warning citing results from beyond your control?

Because this time the miss seems to be fairly sudden and shocking in the fourth quarter?

Nilanjan Roy · Chief Financial Officer

No, I think when we see the full year, we said 16% and we are at 15.4%.

And we said 21% margin, and we were at 21% as well.

So, I am not sure what are you referencing to.

Abhishek Bhandari · Research Analyst

Nilanjan where I was coming from, we had raised the band at the end of Q3. We signaled we possibly had better execution under control.

Of course, things have changed there a macro situation beyond our control and there were some cancellations.

So as a good practice.

Nilanjan Roy · Chief Financial Officer

This evolved during the quarter right.

So the situation also has evolved during the quarter, it is not as if suddenly on one day, we wake up and suddenly see that the volumes are down.

This is a situation during the quarter as well.

Abhishek Bhandari · Research Analyst

Okay.

The second question is, Salil, I think in the press conference, you mentioned M&A could be an opportunity, where some of the global companies could consider selling the captives.

Do you foresee a meaningful deployment of capital for that particular purpose this year?

Are there enough number of such captive conversations in your pipeline?

Salil Parekh · Chief Executive Officer and Managing Director

So, on M&A, I think we have, with a strong balance sheet, the ability to do something small or medium or large.

Today we look at many opportunities.

We will see how those fit in.

There are various components to it, a strategic fit, valuations, which are much more reasonable today, cultural fit of those companies and the ability for us to integrate that in and so all of those we will keep in mind.

And if it meets those points for us, we will look at those opportunities.

Abhishek Bhandari · Research Analyst

Thank you, Salil.

And all the best.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Ashwin Mehta from AMBIT Capital Private Limited.

Please go ahead.

Ashwin Mehta · Research Analyst

Thanks for the opportunity.

So Salil, what is the nature of this one-off client issue?

And when this reverse out like we saw last year in the same quarter, where we took a client contract provision.

Secondly, is it a single client or multiple client issue that we are talking about?

And in which segment have you seen this client issue?

And I have a follow-up.

Nilanjan Roy · Chief Financial Officer

Yes.

So like I said earlier, this is a one-off client revenue issues and there are a number of clients.

It is a mixture of clients, and some of it is a provision against them.

Some may come back, some may not come back and some of it is also linked to cancellations.

Because the revenue impact also beyond the volume impact of cancellations.

Yes there is a mixture of clients there.

Ashwin Mehta · Research Analyst

And the 10% decline that we have seen in US Telecom, is it related to this, these client issues because that appears to be a pretty steep decline?

Nilanjan Roy · Chief Financial Officer

10% decline in?

Ashwin Mehta · Research Analyst

In the US telecom business of yours?

Nilanjan Roy · Chief Financial Officer

No, I don't think anything specific is coming out of these issues really.

Ashwin Mehta · Research Analyst

Okay.

And the last one is, if I look at your guidance it implies a 2.9% sequential growth over the next four quarters.

The last we saw this ex of the COVID surge was in FY '16, so what drives such a high growth comfort for us in an uncertain environment?

Salil Parekh · Chief Executive Officer and Managing Director

Can you repeat please?

Ashwin Mehta · Research Analyst

So the CQGR requirement for your top end of guidance is around 2.9% sequential every quarter.

This is something that excluding of FY '22, we have seen last in FY '16.

So in an uncertain demand environment, what drives such a high-growth comfort?

Salil Parekh · Chief Executive Officer and Managing Director

So, what we have seen with our guidance is we have some good large deals that we closed in the previous financial year.

And we have a pipeline, several of them mega deals which gives us the opportunity to have those come into our mix and give us a flow through the year.

Ashwin Mehta · Research Analyst

So would you say the sub $50 mn deal flow is where the traction is much stronger than what appears in the greater than $50 mn deal flow that we announce typically?

Salil Parekh · Chief Executive Officer and Managing Director

We don't have a view that we share typically on the non-large deals, but our large deals is one of the components that we use to build out the guidance.

Ashwin Mehta · Research Analyst

Sure Salil, thanks a lot and all the best.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Gaurav Rateria from Morgan Stanley.

Please go ahead.

Gaurav Rateria · Research Analyst

Hi, thanks for taking my question.

So first is conversion of the order book to revenue.

If I look at your fiscal '23, you entered the year with a net new deal win of roughly $3.8 bn, which generated incremental revenues of $1.9 bn. You are entering fiscal '24 with a net new deal wins of $3.9 bn, which is pretty similar to last year, but the guidance implies incremental revenues of $1 bn at the midpoint.

Just trying to understand that what has changed that is driving significant downtick in the incremental revenue with a very similar net new deal wins in your book.

Nilanjan Roy · Chief Financial Officer

So, I think part of it is the net new wins and the phasing of that, right?

And I think in FY '22, you would have seen them more throughout the year.

And if you are seeing in FY '23, I think the last quarter, for instance somebody has also mentioned has been a weaker quarter because there is usually a four to six-month gap between that deal win right before it comes into revenue.

So I think partly is the phasing, but the underlying is I think we have had strong deal wins on both sides and a percentage of net new.

I think part of the answer is the way the net new has phased in during the year.

Gaurav Rateria · Research Analyst

So, it is to do with the ACV growth being weaker than the TCV growth.

Is that like a fair understanding?

Nilanjan Roy · Chief Financial Officer

Could be, could not be, also a timing of it, right?

So I'm just saying that in the net new, like, for instance, in quarter 4, is about 21%.

So that will reflect in FY '24 going forward initially.

And then, of course, as new deals ramp up, that is a separate volume impact.

But the phasing of the wins within that is also to be seen, where the net new has come.

Gaurav Rateria · Research Analyst

All right.

The second question is around the comment that you made around the stabilization that you have seen in March.

So, is it fair to say that your guidance is assuming things are likely to improve sequentially from here on?

And this is the worst?

Or it is difficult to say that the worse is behind us?

Salil Parekh · Chief Executive Officer and Managing Director

At this stage we are not seeing any of those things.

What we are saying is we saw some stabilization, but the environment is uncertain.

So, we are watchful and agile.

And one of the reasons we have expanded the growth guidance band to three percentage points is to take that into account.

Gaurav Rateria · Research Analyst

Got it.

Last question from me on the margins.

So how much of the margin downtick is primarily a cost-led issue, which will rectify over a period of time?

And how much it is kind of flexibility you have given to yourself to go after the deals, which may have a fundamental different contract profitability?

Nilanjan Roy · Chief Financial Officer

Like I said we explained how we have done the margin guidance.

We ended at 21%.

That is the midpoint of 20% to 22%.

We have some headwinds.

We have some tailwinds.

And this margin allows us that flexibility as well.

Of course, we continue to aspire to improve that.

Moderator · Conference Operator

Thank you.

We'll take a next question from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management.

Please go ahead.

Sudheer Guntupalli Hi good evening, thanks for the opportunity.

A couple of clarifications.

Due to unplanned ramp-downs and cancellations, you said we have seen a sharp 3.2% fall in the revenue.

However, margins fell just 50 basis points.

And even based on the positioning of margins you gave, utilization and cancellation led impact isn't so much in proportion to 3.2% fall in revenue.

Logically, this decline of this magnitude should have entailed a much bigger margin impact, given the cost recalibration is difficult in the near term.

So just curious, is there any sizable pass-through element which would have gotten rolled off, which would have also led to the revenue decline?

Or is there any deferred cost component, which will come and hit us in the subsequent quarters?

Nilanjan Roy · Chief Financial Officer

As we went through the margin walk earlier, if you go back to our script, we have explained the four key elements.

I think they are quite clear of how the margin has moved from 21.5% to 21%.

Sudheer Guntupalli Sure.

And the second part, the reason why I'm also asking about this pass-through component is the SVB scare and the sentiment overhang sort of unfolded from 10th March, post which there were 12 to 15 working days.

And the revenue was almost 3.5% to 4% short of guidance or expectations, which means there is a $180 mn revenue swing.

It looks quite a bit for 12 to 15 working days of invoicing, so again to put it conversely, is there a deferred revenue component, which can come in the subsequent quarters since you also mentioned somewhere about the provision reversal or one off?

No, I am not clear on your question really.

Sudheer Guntupalli No. What I was asking was in general, the macro sentiment overhang unfolded in the last quarter?

No, I think if you say that whether all the shortfall of 3.5% has happened in the last, like month or something like that?

Sudheer Guntupalli Yes.

So, you are saying the 3.5% shortfall is evenly spread from the beginning of the quarter itself and not necessarily SVB etc.

Yes, of course the onetime is a different issue, but the majority of the drop in revenue is because of volume.

And like Salil said, this was pretty much after 15th and we have actually seen March stabilizing.

So it was in the initial half of the quarter.

Sudheer Guntupalli Thanks.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Surendra Goyal from Citigroup.

Please go ahead.

Surendra Goyal Hi good evening.

So my first question was on the revenue guidance.

Just wanted to confirm that the guidance is all organic in nature?

Salil Parekh · Chief Executive Officer and Managing Director

Yes, the guidance is all organic.

Surendra Goyal And second question is on margins for Nilanjan.

So, while I understand that your guidance is always annual.

But how do you really think about medium-term margins, right?

So the common question we have been getting from investors, given the direction of margins is can it be 18% a couple of years down the line.

So, I know you can't quantify it, but just wanted to understand how you guys think about medium-term margins?

Nilanjan Roy · Chief Financial Officer

We have explained it earlier in the question to Kawal as well.

If you have to step back and you see during this period of COVID, for us to go after in a very talent constrained environment, the impact on the cost structure of the company all across- per capita cost went up, with a combination of compensation stretches, pyramids got skewed, basically, fundamentally, you were going behind these large deals.

We don’t have time to really optimize on all these levers, subcon at a record 11.3%.

All these inefficiencies we saw, but like we have continuously said during that period that we knew that we had to go and grab that volume, and we would have enough time to subsequently as we start unwinding those inefficiencies and this is a cost optimization program we run throughout That is where we still think these inefficiency still exists across- utilization is a classic one, we're sitting today at 80%, as we mentioned and it is got a double whammy on cost, like I mentioned earlier.

So, these are things we will continue to target on and aspire to improve our margins, and 20% to 22% really gives us that flexibility and 21% just happens to be the midpoint where we ended the year.

Surendra Goyal Sure, I get the annual guidance.

My question was more medium-term because in good demand scenario, margins go down because of supply side issues and in bad demand scenario, possibly, they go down because of either pricing or whatever other reasons.

So maybe, I'll just take it offline.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Keith Bachman from BMO Capital.

Keith Bachman Yes.

I had two questions also.

Could you talk about what the growth rate of the backlog in the pipeline was during the March quarter and how that differed during the December quarter?

I'm just trying to understand the magnitude you called out volume was the major driver.

But how did it impact the overall backdrop?

And within that context, could you give us a sense of you called out there are several onetime events for customers.

Could you give a quantification about what that was in the quarter?

Nilanjan Roy · Chief Financial Officer

We don't quantify that.

But like I said, the majority has been because of volumes and the balance has been because of the one-timer across clients, some of them related to cancellation and other provisions.

Keith Bachman Okay but you don't want to give a characterization of what those cancellations were a quantification of it?

No, I don't think anything else we have to add on this, Keith.

Keith Bachman My second question then relates to pricing.

And the previous question, I think, was trying to get at this.

I'm not sure I understood the answer.

But if you think about the guidance that you provided- on the one side, perhaps I would think that you give COLA benefits associated with your contracts, but a lot of your customers, frankly, are experiencing the same economic weakness you are and therefore, could negotiate can tougher pricing as we look out over the next 12 months.

In other words, what price reductions because they're experiencing economic pain as well.

So maybe just talk how are you thinking about like-for-like pricing as you look out over the next 12 months in terms of the forecast that you provided

If you see pricing in generic, and I won't say how much of the pricing element has been built in.

So, this is a program we started about a year and half back.

And it is a combination of two or three things.

One is the renewal discounts, which clients come back when programs are ending.

And basically, after productivity increases at the renewal stage, which we are just loosely calling discounts.

That is something which we have really curved over the last few years, basically pushing back on the renewal because there are other ways we can get productivity as well.

So that is something which has actually stemmed quite a lot.

In fact, clients understand that we have to also provide for our own talent and in this hot talent market to compensate their teams.

So that is something which we have learned appreciate as well.

So that is one part of it.

Second, is the program, which we run on digital pricing where we're going after new digital deals and this is a combination of how we have changed our pricing model into linking it, for instance, the new early acquired subsidiaries which have higher pricing, it could be more broad-based pricing, outcome-based pricing.

There are new innovative pricing construct, so that is second.

Third is simple hygiene work of having COLA clauses into our MSAs.

And of course, how much you can execute and implement is a different question, but at least with that and deals going in, at least you have a starting point to negotiate with the client as well.

So it is all three we look at in terms of existing deals, new deals and renewals and of course, you have clients where we are able to push this through great levels, some clients ask for that to be ploughed back into the employee sets.

Some clients, it depends on markets, of course, who are going through their own sort of concerns on their environment, it may be more difficult.

And therefore, it is literally horses for courses in which we go literally client by client to see where we can get an improvement in the underlying RPP realization.

Keith Bachman And so, what is the underlying assumption associated with the guidance for FY '24?

And how is that different on what you've experienced

We don't break down our guidance into volume and price, if you want to call it that way, it is contracted into the overall guidance.

Keith Bachman Yes, more just directional.

Is it the same, better or worse, just kind of directional barometer?

Yes.

We would expect pricing to improve, right?

Now I can't give you a sense of versus last year, how much will this improve, but yes, we have pricing improvements built into our overall plan.

Keith Bachman Okay fair enough many thanks.

Moderator · Conference Operator

Thank you.

Our next question is from the line of Abhishek Kumar from JM Financial.

Please go ahead.

Abhishek Kumar Hi, good evening and thanks for taking my question.

You've seen some divergence in the client behavior that we have talked about versus what some of our larger peers have spoken about.

One, we have seen march stabilizing while what we heard yesterday was march actually deteriorated?

And second, the discretionary spend for peers have actually got deferred and not canceled, while we have seen certain cancellation in the project.

So in that context, just wanted to understand the nature of these projects which are being cancelled, are these discretionary or there are also vendor consolidation deals

Salil Parekh · Chief Executive Officer and Managing Director

What we shared was that some of the projects or programs were stopped in an unplanned way during the course of the quarter.

These are not resulting from vendor consolidation.

These are resulting from decisions that the clients have typically made on their spends given the environment that they are faced.

Abhishek Kumar Okay, sure.

Thank you and all the best.

Moderator · Conference Operator

Thank you.

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

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

Over to you, sir.

Salil Parekh · Chief Executive Officer and Managing Director

Thanks everyone for joining us.

As we shared through the call, first, for the full year we had good growth, good margin, good cash collection.

We saw during the quarter some situations which were new situations during the quarter with the changing environment.

We have a strong guidance for next year of 4% to 7% of growth.

We have a good guidance on margin.

We have put in place even more emphasis on our cost and efficiency plan, which has many components at a detailed level, and we look to see that benefit come through over a multi-year period and aspire to higher margins.

And we have an extremely strong pipeline with large deals and some mega deals, especially on cost efficiency and automation.

With that, we feel the business remains in a good position and we have the ability to work through different environments on digital transformation and on cost efficiency consolidation as the course of the year develops.

So, we look forward to executing on that and connecting with you at the end of this Q1. Thank you.

Moderator · Conference Operator

Thank you.

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

Thank you for joining us and you may now disconnect your lines.