Infosys Limited (NYSE:INFY) Q3 2023 Earnings Call Transcript

Infosys Limited (NYSE:INFY) Q3 2023 Earnings Call Transcript January 12, 2023

Operator: Ladies and gentlemen, good day and welcome to the Infosys Limited Earnings Conference Call. 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: Thanks, Indra. Hello, everyone and welcome to Infosys earnings call to discuss Q3 FY €˜23 financial results. Let me start by wishing everyone a very happy New Year. Joining us today on this call is CEO and MD, Mr. Salil Parekh; CFO, Mr. Nilanjan Roy; and other members of the senior management team. We’ll start the call with some remarks on the performance of the company by Salil and Nilanjan subsequent to which we will open up the call for questions. Kindly note that anything which we say that refers to our future outlook is a forward-looking statement that must be read in conjunction with the risks 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 it on to Salil.

Salil Parekh: Thanks, Sandeep. Good evening and good morning to everyone on the call. Thank you for joining us. We are delighted to share with you that our Q3 performance was strong with year-on-year growth of 13.7% and quarter-on-quarter growth of 2.4%, this in a seasonally weak quarter for us and amid a changing global economy. We continue to gain market share. Growth in Q3 was broad based with most industries and geographies growing in double-digits in constant currency. Growth in constant currency for 9 months of FY €˜23 was 17.8% compared to the same period of FY €˜22. Our large deal value was $3.3 billion, the highest in eight quarters. With 32 large deals, this is the largest number of large deals in our history, 36% of this is net new.

Our pipeline of large deals remains strong. Our digital revenue grew at 22% in the quarter at constant currency and are now close to 63% of our overall revenue. Our core services revenue grew at 2.4%. We are seeing growth in both areas of our business, digital and core services. This is a testament to our industry leading digital capabilities, including our Cobalt cloud capability and our industry-leading automation capabilities, both of which are resonating with our clients. Our large deals pipeline is seeing increased traction for automation and cost efficiency programs. Our results reflect our deep rooted client relationships, coupled with client-centric strategy, differentiated digital and cloud capabilities, strength in automation and the ability to pivot our business rapidly to changing client needs.

Our cloud revenues continue to have healthy growth this quarter. Our clients are focused on accelerating the digital and cloud transformation, both to grow and to become more operationally efficient. They chose us to partner with them through the complexity of managing this change, because of our differentiated capabilities. Our industry leading cloud offering Cobalt is playing a key role in helping them navigate the digital transformation. Two examples of this, Cobalt is helping accelerate business growth and resilience for a large telco and making the decision-making more data driven. We are supporting a leading aerospace company by automation of the customer experience area leveraging a modernized technology infrastructure, driving material cost efficiency.

Strong growth is accompanied by stable operating margin at 21.5%. This was driven by healthy revenue growth and cost optimization benefits. Our operating margin for the first 9 months of FY €˜23, are at 21%, in line with our margin guidance. Our voluntary quarterly annualized attrition continues to decline steadily and reduced by 6 percentage points sequentially to well below 20% for this quarter. We are encouraged by the immense confidence and trust that clients have in us. The signs around us around the slowing global economy are visible. Some areas such as mortgages and investment banking and financial services industry, telco, high-tech, and retail are more impacted and that is leading to delays in decision-making and uncertainty in spending in these areas.

We are confident that the strength of our digital and cloud capabilities and our automation capability will continue to position us well in the market. We are keeping a close watch on the global economy. Driven by our growth of 17.8% in constant currency for the first 9 months of FY €˜23 and strong large deal value for Q3, we are increasing our revenue growth guidance, which was at 15% to 16% earlier to 16% to 16.5% despite the changing global economic conditions. We are retaining our operating margin guidance for FY €˜23 at 21% to 22%. We anticipate to be at the lower end of this range. Thank you. And with that, let me request Nilanjan to share other updates.

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Nilanjan Roy: Thanks, Salil. Good evening, everyone and thank you for joining this call. Let me start by wishing everyone a very happy and safe 2023. Q3 was another quarter of resilient performance. Our revenue grew by 13.7% year-on-year and 2.4% potentially in constant currency terms despite seasonal weakness. Most of our business segments and geos grew in double-digits year-on-year in constant currency. Specifically, manufacturing grew by 36.8%, EURS by 25.9%, and Europe grew by 25.3%. Digital revenues constitute 62.9% of total revenues and grew by 21.7% year-on-year in constant currency. Core revenue saw another quarter of growth, reflecting the accelerated client focus on cost take-out. Client metrics continue to remain strong with year-on-year increases in client counts across revenue buckets.

Number of $50 million clients increased by 15 to 79, number of $200 million clients increased by 5, while number of $300 million clients increased by 3 over the same quarter last year, reflecting our strong ability to mine top clients. During the quarter, we added 134 new clients. Utilization, excluding trainees, reduced to 81.7%, reflecting seasonality and employees joining the bench or position of the training. On-site asset mix remained stable at 24.5%. Quarterly annualized attrition continued to trend downwards and reduced further by another 6% during the quarter. This is the lowest quarterly annualized attrition in the past 7 quarters. Consequently, LTM attrition reduced to 24.3% as compared to 27.1% in Q2. We expect attrition to reduce further in the near-term.

Revenue growth was 17.8% in constant currency terms over 9 months FY €˜23. Operating margin for the same period was 21%, in line with the lower end of our full year guidance as called out earlier. Q3 operating margin remained ready at 21.5%. The major components of Q-on-Q margin movement as follows: There were tailwinds of approximately 40 basis points due to benefits from rupee depreciation and cross currency offset by lower benefits from revenue hedging, 70 basis points from lower cost €“ from cost optimization, including lower subcon. This was offset by headwinds of 30 basis points from higher SG&A and the balance 80 basis points due to seasonal weakness in operating parameters, higher third-party costs, furloughs etcetera. Q3 EPS grew by 13.4% in rupee terms on a year-on-year basis.

DSO increased by 3 days sequentially to 68 reflecting higher billing during the quarter. Our balance sheet continues to remain strong and debt-free. ROE increased by 2.2% year-on-year to 32.6%. Free cash flow for the quarter was $576 million, a conversion of 72% of net profit. However, YTD FCF was $1.8 billion, which is implying a conversion of 81% of net profits. Yield on cash balances increased to 6.3% in Q3. Q3 marked the 30th consecutive quarter of delivering positive ForEx income despite the volatile currency environment. Consolidated cash and investments declined from $4.79 billion last quarter to $3.91 billion, consequent to $1.32 billion we returned to investors towards interim dividend and buyback. We initiated the buyback on December 7 and till date have bought back 31.3 million shares worth INR4,790 crores or 51.5% of the total authorization of INR9,300 crores at an average price of approximately INR1,531 per share compared to the maximum buyback price of INR1,850 per share.

Coming to segment performance. We signed 32 large deals in Q3, which is the highest ever. TCV was $3.3 billion, the highest in the last eight quarters, with 36% net new. 7 large deals were in retail, 6 deals in financial services and communications, 5 each in EURS and manufacturing, 2 in life sciences and 1 in high-tech. Region wise, this was split by 25 in the Americas, 5 in Europe and 2 in the rest of the world. Growth in financial services was impacted due to a higher than normal furloughs and some specific project closures. These pipelines continue to be strong and oriented towards cost takeout and take of transformation. Our competitive position in the industry as demonstrated in the past remains very strong. Retailers are seeing uncertainty on consumer spending as a result of high inflation, high interest rates and softer economy.

However, at the same time, direct-to-consumer and digital commerce are opening up many new opportunities on the back of our growing presence in leading e-commerce platforms and also our very own Infosys Equinox. We have healthy deal flow in the communications segment, along with continued steady pipeline. However, cost pressures and economic concerns continue on the client side impacting discretionary budgets. Energy utility resources and services segment reported strong growth along with healthy level of large deal wins in the quarter. The deal pipeline is strong and an increasing trend versus the previous quarter given medium-term growth visibility. Manufacturing segment continues to be robust, supported by healthy pipeline of deals in both traditional and new technology areas.

We are helping clients across engineering, IoT, supply chain cloud ERP and digital transformation, including helping clients accelerate their journey to the cloud. We continue to see caution around budget and spending for consumers in the high-tech segment, especially around discretionary spend areas. For digital service capabilities in quarter three, we have been ranked as leader in 7 ratings for our cloud services, digital engineering services and sales force implementation services. We have also been positioned as a major player in 7 ratings for our IoT and engineering, security and automation services. We believe our structural lever for medium to long-term growth for the industry remains intact and Infosys is well positioned to support its customers in their transformation journey.

With strong revenue performance in the first 9 months of the year, the revenue guidance for FY €˜23 has changed from 16% to 16.5%. Operating margin guidance band remains at 21% to 22% for the year. And as mentioned previously, we expect to be at the lower end of the range. With that, we can open the call for questions.

Q&A Session

Operator: Thank you very much. The first question is from the line of Moshe Katri from Wedbush Securities. Please go ahead. It looks like Mr. Katri’s line is dropped. In the meanwhile, we will move to our next question, that’s from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan: Yes. Hi, good evening and thank you for the opportunity. My question was around the increase in cost of software packages that’s up by almost $69 million sequentially. How should we think of this cost? Do you think this incremental $69 million will be a sticky number out there or do you think it’s sort of representing the headwind instead of come off going forward? And is this sort of a pass-through nature that’s the second sort of clarification on the same thing? Thank you.

Salil Parekh: Yes, Nitin. So I think these €“ the $69 million is a combination of software and other deals which we do which have DAS services, etcetera. It could be infrastructure. So these are part of our integrated services offering, right. So these come with manpower component and sometimes they also come with an attachment of these services. So that’s the way we do it. It’s an integral part of our service offering. And I think looking at we have to see where we end up for the quarter four, but I think this is part of our overall offering and it’s actually giving us traction in the market in many of our service lines.

Nitin Padmanabhan: Sure. Is this sort of €“ so it is a pass-through in nature in a way, is that correct? And basically, at least earlier in the past, you had suggested that the new level would sort of sustain. So in the new operating model, this is sort of sticky thing that continues, is that correct?

Salil Parekh: An integrated offering, like I said, this is integrated with our services offering. So they are not just standalone deals we do, they come with the service element as well, right. So that’s the way you have to look at these deals.

Nitin Padmanabhan: Sure. Fair enough. Thank you so much and all the best.

Operator: Thank you. Our next question is from the line of Bryan Bergin from Cowen. Please go ahead.

Bryan Bergin: Hi, good evening. Thank you. Why don’t you just clarify some comments around demand? I am curious if you would say there is a material change in the way that clients are behaving now versus 3 months ago in your reported 2Q, because the areas you are citing weakness I think were the same ones, the pockets of weakness that you talked about. I am really just trying to understand if you think there has been a real change to spending and contracting there or more broadly the same?

Salil Parekh: Hi, thanks for the question. This is Salil. What we have seen today in addition to what we said last quarter, for example, in financial services beyond mortgages, we see the investment banking side of our clients as well showing an impact of the economic environment and they are in telco, high-tech and retail in some clients. So, we don’t see a material change, but within financial services, one more area that we see some of the impact coming in. Having said that, we have for example clients in energy or utilities or manufacturing, those industries are still looking quite strong in terms of the outlook.