TCS — earnings call

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Prepared remarks

Moderator · Conference Operator

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

Please go ahead.

Sandip Agarwal

Although, you know it is very hard to comment on how things will pan out, but, Rajesh, is there any kind of caution which you're seeing in your discussions with the client, particularly from the US geography, because individuals in UK and Europe, traditionally we have seen the economic pressure generally results into some help for outsourcing because it is more cost effective in the past, but that correlation doesn't show up immediately in the US.

So, what are you seeing, is there any kind of caution which clients are highlighting on the fears of recession or you're seeing any action into the direction when they are ordering?

Have you seen any kinds of delays or anything which makes us more vigilant?

Rajesh Gopinathan

In US we've not picked up any threats in terms of caution, I mean extra caution than what is normally expected.

So, US is not showing anything particularly concerning.

People are overall continuing to invest and normal seasonality should apply.

Otherwise, we are seeing a fairly strong environment in US.

Moderator · Conference Operator

The next question is from the line of Sandeep Shah from Equirus Securities.

Please go ahead.

Sandeep Shah

Rajesh, last time in this 1Q conference call, you said that the trend of multi-tower outsourcing deals or multi-service transformational deals are going up, and you started signing more number of such deals.

Is that trend continuing in this quarter as well?

And also, with macro being concerning, do you witness this trend being higher in Europe as a geography, versus that of US?

Moderator · Conference Operator

The next question is from the line of Ravi Menon from Macquarie.

Please go ahead.

Ravi Menon

Wanted to check about the strong additions in the 1 million and 5 million.

I know we did make organizational change, but I guess it's too soon to see the impact of that.

So, should we think of this as change in your go-to-market and trying to close a lot more of the smaller deals and is there more demand for digital transformation from the smaller firms because there might be laggards in this transformation?

Rajesh Gopinathan

No, Ravi, this is just a bit of the impact of the currency volatility that you are seeing.

Our client metric in non-US markets, APAC, LATAM, parts of Europe, etc., are more weighed towards smaller sized customers.

And when we report those revenues in US dollar terms, they are getting significantly impacted by the strength of the US currency vis-à-vis the local currencies in these markets.

So, although our business response is not going down, in the translation of revenues into US dollar terms, it is showing up that way.

At the bottom of the pyramid, the impact is a lot more, because the non-US market is more concentrated at the bottom of the pyramid.

So, it's a bit of a mathematics.

We're also internally debating what is the best way to communicate this metric.

But we also don't want to react immediately to this extreme cross currency volatility that we saw in Q2. But we'll put our heads together as to how to communicate this better in the future if required.

Ravi Menon

And how should we think about the lateral hiring, being a little lower than the revenue growth, is just a reflection of expectation that the worst of the supply side challenges are behind us, and we can now improve utilization or should we think of this as linked to slightly softer demand visibility, or maybe a combination of both?

Rajesh Gopinathan

Ravi, your question was about the headcount growth, right?

Ravi Menon

Yes, that's a little lower than the revenue growth, I mean, we have seen that –

Rajesh Gopinathan

Ravi, we have been significantly investing into headcount addition through last year.

As you know, our headcount growth was close to 20% against revenue growth of about 15%, and that we have built up a fair amount of headroom.

So, you should expect that we will be using that lever a bit more as we go into this year, and try to balance our overall headcount to our overall revenue from a longer-term perspective.

So, it's in line with our plan, and into that environment, we've significantly invested, and we are now reaping the benefits of that investment, as many of those early hires become productive into this cycle.

Moderator · Conference Operator

Next question is from the line of Gaurav Rateria from Morgan Stanley.

Please go ahead.

Gaurav Rateria

Two questions.

Firstly, is it fair to assume that the book-to-bill in Europe would have improved on a quarter-on-quarter basis, basis the commentary that you made and how the pipeline replenishment has happened in Europe after the deal wins concluded?

Rajesh Gopinathan

We typically desist from giving you incremental metrics, because that sets a precedent.

But when you take Europe and UK together, yes, the book-to-bill has improved.

But the actual growth of the pipeline is more than the growth of our qualified pipeline.

So, you are seeing some amount of elongation of the deal pipeline between total pipeline and the qualified pipeline.

Now, these numbers are volatile because it can change depending on how the environment changes, but that's where we are.

Gaurav Rateria

Secondly, in last quarter, you talked about revenue productivity getting impacted as you created capacity.

So, has that got sort of sorted out and you saw some improvement in revenue productivity, which also had margins and should this be seen as one of the levers for second half in terms of margin performance on revenue productivity side?

Rajesh Gopinathan

The way to think about is it is not in terms of a short-term margin lever, but as a strategic call we have taken to significantly expand our employee onboarding, especially on the entry-level employees.

We had hired close to 120,000 freshers last year and invested into that pool given the longer-term visibility that we have on demand.

We will tweak our employee model on an ongoing basis looking at the demand.

So, that is a reasonable expectation, but our overall hiring model is predicated on much longer cycles rather than on short term, quarter-on-quarter adjustments.

Moderator · Conference Operator

The next question is from the line of Manik Taneja from JM Financial.

Please go ahead.

Manik Taneja

Just wanted to pick your brains about the aspect that historically what we've seen is that we've improved our margins through periods of slow growth.

Do you envisage something similar playing out going forward as well?

And if you could also help us with the margin levers that you think will play out in the near-term given the fact that you've suggested that pricing increases is not universal and is still happening only in certain parts of the book.

Rajesh Gopinathan

If we have strong visibility of low revenue growth, and we become much more careful and optimize it, but I think at this stage, I don't think we are at that point for us to be able to make a comment on that.

So, margin optimization comes in more when there is good visibility on stable demand environments, and we use those periods to clean up on the margin side.

Right now, whether we are at an inflection point or not, we'll know only in a

Moderator · Conference Operator

The next question is from the line of Apurva Prasad from HDFC Securities.

Please go ahead.

Apurva Prasad

Rajesh, while H1 bookings has held up above the 7 billion to 9 billion midpoint, how should we be thinking bookings trajectory for H2, more around the replenishment of the funnel of the qualified deal pipeline, any progression around that?

Rajesh Gopinathan

Apurva, difficult to say.

We are running at 1.2 times book-to-bill which is a fairly healthy rate to run at.

And we can take a bit of volatility on that on a quarter-on-quarter basis.

So, to take a near-term call on what will happen next quarter or the quarter after that, difficult for us to do.

And more importantly, it does not have a significant impact on our business model, neither in our planning cycles or in our execution cycle.

So, our focus, of course, will be to maximize and capture as much as we can.

But it's not really a big factor that changes any of our planning scenarios.

Apurva Prasad

Just to follow up on that, Rajesh, so this 1.2 book-to-bill from a medium-term perspective, is that the number to build?

Rajesh Gopinathan

Apurva, I don't want to get drawn out on that.

Apurva Prasad

On the supply side, Rajesh, any comments on the learning hours which had a decline YoY for Q2?

And if you could also help us with the hyperscaler certification numbers, the number that was 71,000 last quarter?

Rajesh Gopinathan

Learning hours to some extent is impacted by the volume of freshers coming in.

As you know, we had a very large volume of freshers coming in over the last couple of quarters which has moderated over the last two quarters.

So, that will have a flow through impact on the learning hours.

As we went in through the reorganization, that also had some impact.

But at an aggregate level, our focus on reskilling and training and investing into people continues at scale and there is absolutely no change in it.

Apurva Prasad

And hyperscaler certification number?

Moderator · Conference Operator

The next question is from the line of Bharat Sheth from Quest Investment Advisors.

Please go ahead.

Bharat Sheth

Rajesh, can you give a little bit more color on products and platforms, which I understand is contributing around mid-teen kind of total revenue and since we are moving towards more on migrating to SaaS business, is the revenue recognition a bit slow and when do we expect that to catch up, and what could be the margin lever in this business?

N G Subramaniam

Overall, the products and platforms business is quite stable.

The number of opportunities that come our way across verticals and across the solutions that we have is looking good.

The business model has certainly transformed itself into a pure play SaaS-based operating environment.

Without any exceptions, every opportunity that we bid for, is for a SaaS-based offering.

So, if you really look at it, we have also transitioned, I should say beautifully, from a license-based, on-prem, AMC kind of a model to a pay-per-use SaaS model in the last two years.

All our products and platforms are now available on a cloud platform.

It's either installed in our own cloud environment, or with some of the platforms, we've also chosen to operate in a hyperscaler cloud.

In either of these cases, the key thing is that the SaaS model is prevailing.

The way that we monitor it now is with the ARR or the annual recurring revenue that is contracted.

That is the metric we are monitoring and with which we are measuring our own performance, as opposed to the earlier way of what is the license fee, what is the AMC, what is the services element to it and so on and so on.

So, it is maturing.

And our products and platforms business itself has matured with the whole environment of onboarding the clients on a single instance SaaS.

Some of the things that we are seeing developed is the data privacy element, the data localization element.

For example, in Europe, the data residency increasingly is becoming a necessity to be located in Europe.

These are the things that are getting sharpened as I speak.

But overall, it's a good growing business and the ARR metric is going to become increasingly relevant.

At some stage, we hope we'll be able to start reporting separately on ARR basis as we mature our model.

Bharat Sheth

And what are the margin levers you have in this business?

Moderator · Conference Operator

The next question is from the line of Rahul Jain from Dolat Capital.

Please go ahead.

Rahul Jain

Just on the subcon side and on the global hiring side, subcon cost has been going up, of course, for the supply side factors.

But given the expectation of a relatively better supply environment in the global market, is that going to change the subcon cost as well as direct hiring outside India?

Samir Seksaria

I'll answer first on the subcontractor cost.

So, as you would have seen, subcontractor cost has started trending downwards.

Most of the subcontractor cost increase was on account of two factors.

With borders opening up and visa availability in most countries improving, we would expect subcontractor costs to start trending down.

Also, as the headwinds from attrition eases, we would expect the use of subcontractors also to trend downwards.

Rahul Jain

Will we be incrementally using it as a metric given the macro remains uncertain?

Moderator · Conference Operator

Mr. Jain, please use the handset mode the audio is not coming clear from your line.

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

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

Rajesh Gopinathan

Thank you, operator.

We had a very good second quarter growing 18% in INR terms and 15.4% in constant currency.

Our growth was strong across all our industry verticals and all our markets.

Importantly, we had a good order book once again.

While clients continue to worry about the uncertain economic environment and are planning for different scenarios, we are not seeing any material change in client spending behavior.

There are some sporadic instances of delayed decision making.

But those happen at normal times too, so it's hard to pin this down specifically to the economic environment.

Our operating margin expanded sequentially to 24% and our net margin expanded to 18.9%.

On the people front, the capacity we built up over the last few quarters and our investment in organic talent development is helping us meet this demand.

Our attrition inched up to 21.5% in IT services on LTM basis.

However, we believe the situation is easing, and that our quarterly annualized attrition has peaked this quarter, and will start tapering off going forward.

With that, we wrap up our call.

Thank you all for joining us on this call today.

Enjoy the rest of your evening or day and stay safe.

Moderator · Conference Operator

Thank you members of the management.

On behalf of TCS, that concludes this conference call.

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

Questions and answers

Moderator · Conference Operator

We will now begin with the question-and-answer session.

First question is from the line of Kumar Rakesh from BNP Paribas.

Please go ahead.

Kumar Rakesh

My first question was specifically around European geography and UK.

In this quarter on a CC YoY basis also, we saw a pretty robust growth of 14% to 15%, which is a higher growth compared to how we reported last quarter.

One of our larger peers who recently reported also saw pretty strong growth in Europe and talked about double-digit growth in their November quarter as well.

Given the fear around macro economy being pretty severe in that geography, what is driving this much stronger growth in Europe despite those fears?

Is there some structural growth drivers which we are now seeing in the European geography or the impact could potentially come with a lag?

Rajesh Gopinathan

Rakesh, we have always maintained, and it has been borne out through the pandemic, that technology is at the core of solutions both on the growth side as well as on the consolidation and optimization side.

So, technologies remains very core to business agendas for our clients across the full spectrum, across all markets.

And we are benefiting from participating in that cycle.

It’s very difficult for us to zoom out and comment on the macro situation.

We can only tell you what is going on with the specific clients that we have.

We are in no better position than you... you are, in fact, in a much better position than us to be able to take a call on the macro.

This is what we see and we are running with it.

In individual customer conversations, opportunities exist, but caution also exists.

I called that out last time also that in executive conversations, people are talking about caution.

We need to remain vigilant to see whether that will translate into the budgeting and planning cycle for next year, and what that implies for overall demand.

We'll have to play it by the ear as it comes.

Kumar Rakesh

My second question was around heading into December quarter, which is usually seasonally weak, are we getting any sense how the seasonality this time around?

Could there be higher than usual seasonality or could it be the usual seasonality?

In interacting with clients, how are they looking at their next year budget?

Any sense on that could be very helpful.