Infosys Limited (NYSE:INFY) Q3 2024 Earnings Call Transcript

Infosys Limited (NYSE:INFY) Q3 2024 Earnings Call Transcript January 11, 2024

Infosys Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good day, and welcome to the Infosys Earnings Conference Call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] 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: Hello, everyone, and welcome to Infosys earnings call for Q3 FY ’24. Let me start by wishing everyone a very happy New Year. Joining us on this call is CEO and MD, Mr. Salil Parekh; CFO, Mr. Nilanjan Roy; and other members of the leadership team. We’ll start the call with some remarks on the performance of the company for Q3, subsequent to which we’ll open up the call 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 risk that the company faces. A full statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov. I’d now like to pass on the call to Salil.

Salil Parekh: Thanks, Sandeep. Good evening, and good morning to everyone on the call. Wish you a happy New Year. Our Q3 revenue declined by 1% quarter-on-quarter and 1% year-on-year in constant currency terms. For the first three quarters, our revenue grew by 1.8% over the same period last year in constant currency. We see lower traction for digital transformation programs and more activity for cost and efficiency programs and increasing interest in generative AI programs. Our operating margin was at 20.5%. We delivered this outcome while managing through one-off business disruptions. Nilanjan will provide more detail for this. Large deals were at $3.2 billion, 71% of this was net new. This included one mega deal. With this, a large deal value for the first three quarters stands at $13.2 billion, of which 55% is net new.

This is the highest ever large deal value for the first three quarters in the fiscal year for us. We see that with our large deal wins, we continue to win market share and strengthen our position through our leading capabilities and helping clients with cost efficiency, automation programs, and by leveraging generative AI, digital and cloud. We have seen impact in Financial Services, Telco and Hi-Tech segments. We see strength in Manufacturing, Energy, Utilities and Life Sciences segment. We are seeing strong traction for generative AI programs leveraging our Topaz capability. We’ve integrated our generative AI components into our service line portfolio, creating impact for our clients. We have 100,000 employees trained in generative AI areas.

We have developed a range of use cases and benefit scenarios across different industries for our clients. Some of these areas are related to client analytics, process optimization, sales, marketing, knowledge analysis, software development, self-service and personalization. Some examples of the work we’re doing in these areas. We are working with a large global bank to support them in their risk analysis program by using a large language model for them. We are working with a global food supplier to personalize food experience for their customers, and to make their operations efficient using official intelligence. We’re working with a global retail company in defining their AI-first business transformation strategy. Our clients are leveraging all these generative AI capabilities in Topaz, combined with the cloud capabilities in Cobalt to help them navigate through this current business environment and setting up for the future.

Our margin improvement program continues to gain traction. The five pillars, the large organization mobilization and steady execution are creating impact. Based on the performance in the first three quarters and our outlook for Q4, we are tightening our revenue growth guidance for financial year ’24 to 1.5% to 2% in constant currency. Our operating margin guidance for financial year ’24 remains unchanged at 20% to 22%. As you probably know, Nilanjan is leaving Infosys at the end of this financial year. I want to thank Nilanjan for the excellent work he has done and the strong position he has put Infosys in. In addition, I also want to thank him for his partnership and his friendship over the past several years. We wish him all the best in his future plans.

With that, let me hand it over to Nilanjan.

Nilanjan Roy: Thanks, Salil. Good evening, everyone, and thank you for joining the call. Coming through our Q3 results, revenues declined by 1% year-on-year in constant currency. Sequentially, revenues similarly declined by 1% in constant currency and 1.2% in dollar terms. This includes the impact of furloughs and one-offs. Volumes remained soft, coupled with seasonality and normalization of one-time revenues we had in Q2. While the overall environment remains subdued, our large deal TCV is highest ever on a YTD basis. I will talk about the large deals in more detail. Revenue for nine months increased by 1.8% in constant currency and 2.5% in USD terms. We are making steady progress on Project Maximus, the margin improvement plan across five pillars and over 20 tracks.

This strengthens our confidence that the program will give us the impetus for margin expansion over time. Operating margins for Q2 were 20.5%, a decline of 70 basis points sequentially, bringing the nine month margins to 20.8%, which is within the guidance band for the year. The major components of Q-on-Q margin work (ph) for Q3 margin are as follows: their headwinds of 130 basis points comprising of 70 basis points from salary increases effective 1st November; 60 basis points from McCamish cyber incident, which had an impact on both revenue and costs. This was partially offset by tailwinds of 60 basis points comprising of 50 basis points benefit from cost optimization, including higher utilization and lower SG&A. 10 basis points from currency movements.

Balance includes impacts of furloughs, offset by higher lead utilization and one-off benefits, including lower provision for poor sales client support and lower ECL model losses, etc. Headcount at the end of the quarter stood at 322,000 employees, a decline of 1.9% from the previous quarter, which has reflected in improvement in utilization to 82.7% excluding training. On-site mix also improved by 20 basis points sequentially to 24.4%. As mentioned earlier, we continue to improve our operating efficiencies. LTM attrition for Q3 reduced further by 1.7% to 12.9%. Free cash flow for the quarter was robust at $665 million, and the conversion to net profit for Q3 was strong at 90.6%. Our unbilled revenues dropped for the third consecutive quarter and consequently, this has partly led to an increase in DSO by five days sequentially to 72 days.

Consolidated cash and equivalents stood at $3.9 billion at the end of the quarter after a dividend payout of $895 million. EPS declined by 6.1% in INR on a year-on-year basis and grew by 3% in INR for the nine months period ended. Yield on cash balances was 6.9% in Q3. ROE improved to 31.8%. Large deal momentum continued and deal TCV of Q3 was $3.2 billion, with 71% net new. Consequently, our large deal TCV is over $13 billion, which is the highest ever for any comparative period. This clearly reinforces our position and strengthens the relevance and strength of our service offerings. We signed 23 large deals in Q3, including one mega deal. We signed eight deals in manufacturing, six in FS, four in EURF, two each in retail and communication and one in others.

Region-wise, we signed 10 large deals in America, nine in Europe and three in ROW and one in India. Coming to industry verticals. Inflation, uncertain macro and delay in decision-making continues to impact the financial services sector with increasing cost pressures, clients remain cautious on spending and are reprioritizing their programs to deliver maximum business value. Topaz is central to our generative AI discussions, which is gaining momentum and use cases around improving customer experience. We also started implementing used cases in some of our clients, focusing on improving client experience, detecting fraud, etc. Overall, while the near-term outlook remains volatile, we will benefit from the recent deal wins and the new account openings.

Clients in communication sector continues to face growth challenges, which is putting pressure on OpEx spend. Uncertainty about medium-term spend remains with clients, prioritizing cost optimization and vendor consolidation. Clients are looking at conserving cash, which is visible in delayed decision-making and project deferrals. Our focus on large and mega deals resulted in healthy pipeline and deal wins. Energy, utilities, resources and services clients remain cautiously optimistic about the demand environment with cap in short-term spend. In Energy segment, we are seeing market share gains due to consolidation. Our investment on industry cloud solutions and the energy transition, combined with extreme focus on human experience have helped us differentiate, win multiple deals and build a strong pipeline.

Manufacturing segment continues to deliver strong performance on the back of new deal wins and ramp-up of earlier large deals signed. Growth was broad-based across Europe and the U.S. as well as across industrial, automotive and aerospace industries. While the budget remains largely stable, clients continue to find ways to channel run savings into newer areas like digital, cloud, data and IoT. Pipeline remains healthy with emerging opportunities on various fronts in the ER&D space resulting from increased spending. In the Retail segment, cost takeouts and consolidation remain the primary focus for the clients. While discretionary spends remain under pressure, there are pockets of opportunities, leverage generative AI, in predictive analysis, real-term insights and decision support areas.

Deal pipeline is strong, though decision cycles remain long. A resilient performance in a seasonally weak quarter and the continued momentum in deal wins, coupled with a very large efficient execution engine gives us confidence for growth in the medium term. Driven by our YTD growth of 1.8% in CC terms and Q4 outlook, we have revised our revenue growth guidance for FY ’24 from 1% to 2.5% previously to 1.5% to 2% in constant currency terms. We retain our margin guidance band for the year at 20% to 22%. Finally, I would personally like to thank all the stakeholders of Infosys, especially the fabulous finance team here for the sport over the past five years. As a step down, I look forward to working closely with the entire leadership team over the next few months to ensure a smooth transition.

Finally, I wish Jayesh the very best as he assumes the role of CFO from 1st of April ’24. With that, we can open up the call for questions.

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Q&A Session

Operator: Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh: Hi. Good evening, and thank you for taking my questions. My first question was like…

Operator: Sir, can I request you to speak up a bit?

Kumar Rakesh: Sure. Is this better?

Operator: Yes. Go ahead, please.

Kumar Rakesh: Thank you. So my first question was around the new deal wins, which has been pretty strong at $2.3 billion, it’s some of the highest we have seen in the recent quarters. However, that also implies the renewals have been weaker. In the recent quarters, we have seen renewals to be in the range of $1.5 billion to $2 billion. In this quarter, it was less than $1 billion. And that could also be the reason for the slow down in the second half, which you are expecting. Now we can understand that the new deal wins would be lumpy and difficult to predict, but you would have a time line on the renewals, when they would be happening and what is the probability that you could see winning them back. So how do you see the next quarter or so panning out from the renewal perspective? Any visibility on that side?

Salil Parekh: Hi. This is Salil. Thanks for that question. I think — my reading of the new — of the large deals win is more along the lines that we are continuing to do well with renewals, and then we’ve got really excellent net new wins in the $3.2 billion. As we have discussed at other times, the large deals, by themselves — the numbers vary quarter-on-quarter. As you know, last quarter was also extremely large number. Having said that, we have on the renewals a clear sight of what’s coming up. We’re also benefiting in many of these areas from consolidations, which Nilanjan referenced. And also where we are seeing — our clients are seeing opportunities for cost and efficiency. So all of that gets combined with the renewals coming along at regular cycles.

Kumar Rakesh: Got it. Thanks for that. And my second question was around GenAI. So you have talked about 100,000 new employees being trained on GenAI. But can you quantify or share some insights on the client engagement side. Anything that you can quantify in number of projects that we are working or the amount of deals that we are winning. Anything that we can start tracking on that side?

Salil Parekh: So there, we are not, at this stage, sharing externally any views on revenues or projects and so on. What is — to give you color what is happening today is, almost every discussion with clients involves some element of generative AI. And what we have now developed through Topaz is a set of areas where there’s benefit cases, use cases, scenarios where there’s impact, where we’re working across a large number of clients on those in different scales, where there are some which are more pilots some which are programs. And that’s the three examples that I shared. We’ve also developed strength across a number of large language models where we’ve trained our teams. And then on how to leverage data sets — our focus is very much on large enterprises who are our clients and the data sets within those enterprises, depending on the usage of where that large language model is to be applying.

And we have a very strong business in data and analytics, which becomes the foundation for this generative AI work. And then we are working to make sure that the benefits are felt across all of our service offerings. So we can start to see in new discussions with clients, productivity benefits, which are downstream coming from this generative AI. So at this stage, while we are not externally quantifying all of the elements I referenced, that’s the sort of color we are seeing across a large number of discussions.

Kumar Rakesh: Thanks for that Salil.

Operator: Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan: Hi. Good evening. Thanks for the opportunity. Congrats on the strong deal wins. So I think, first-off, Salil, anything that you have seen versus the previous quarter in terms of client behavior that would sort of suggests green shoots on the discretionary side or do you think that will continue to be under pressure for some time? The second question is for Nilanjan. It appears that we’ll exit the year with margins lower than last year. Do you still believe that margins could be better next year versus the current one, where sort of highlighted that as sort of an aspiration at the beginning of the year. So just wanted your thoughts on how one should think of that at this point in time? Thank you.

Salil Parekh: Thanks. Hi. This is Salil. In terms of the client discussions, we have not seen some sort of significant change in one or the other direction from what we were seeing last quarter. So some of the digital transformation work or some of that type of programs are where clients are not putting focus or attention. Whereas the cost and the efficiency and now even consolidation, we are seeing more and more of that, which is what we were seeing last quarter as well. So in that sense, we don’t have any change that we have sensed at this stage.

Nilanjan Roy: So Nitin, on the margin question, I think you’ve seen this quarter as well, the underlying margins, excluding the one-offs are quite resilient. And we’ve talked about now Project Maximus, this is nearly the third quarter. And there is a lot of work has been going on, and we are seeing the benefits of that, and you can see that in our commentary as well, and we are very confident about the overall margin outlook. Of course, we won’t give a number about next year. But really, the multiple number of tracks around value-based selling, around efficient pyramid, around automation and GenAI. I think they all working well. So I think that gives us good optimism over the medium term in terms of our margin structure.

Nitin Padmanabhan: Perfect. Thank you so much and all the best.

Operator: Thank you. The next question is from the line of Moshe Katri from Wedbush Securities. Please go ahead.

Moshe Katri: Hey. Thanks for taking my questions and congrats on strong bookings for the quarter. First question, any color on the ongoing budget cycle for calendar ‘24? Do you think budgets will be on time? Do you think budgets will be delayed? Any color there on that one?