Wipro Limited (NYSE:WIT) Q2 2024 Earnings Call Transcript

Wipro Limited (NYSE:WIT) Q2 2024 Earnings Call Transcript October 18, 2023

Wipro Limited misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.07.

Operator: Ladies and gentlemen, good day, and welcome to Wipro Limited Q2 FY24 Earnings Call. As a reminder, all participant lines will be in the 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. Deepak Bohra, Senior Vice President, Corporate Treasurer and Investor Relations. Thank you, and over to you, sir.

Deepak Bohra: Thank you, Yashashri. A warm welcome to our Q2 FY24 earnings call. We’ll begin the call with the business highlights and overview by Thierry Delaporte, our Chief Executive Officer and Managing Director and a financial overview by our CFO, Aparna Iyer, followed by Amit Choudhary, Chief Operating Officer. Afterwards, the operator will open the bridge for Q&A with our management team. Before Thierry starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of Private Securities Litigation Reform Act 1995. These statements are based on management’s current expectations and are associated with uncertainties and risks, which may cause the actual results to differ materially from those expected.

The uncertainties and risk factors are explained in our detailed filings with the SEC. Wipro does not undertake any obligation to update the forward-looking statements to reflect events and circumstances after the date of filing. The conference call will be archived and a transcript will be available on our website. Over to you, Thierry.

Thierry Delaporte: Thank you, Deepak. And good — actually good morning or good afternoon. Good evening, everyone. Thank you for joining our second quarter earnings call. I’ll begin with an overview of this quarter’s results and detail of our sector performance, talk about the demand environment and some direction for the coming quarter. Our CFO, Aparna and our COO, Amit, will join in with their comments as well. So Q2 was yet another quarter of strong deal bookings for us. Total contract value terms, we closed large deals to the tune of $1.3 billion. This is the highest in the last nine quarters and this represents a 79% year-on-year growth and a 6% growth on a quarter-on-quarter basis. During the quarter, we booked 14 deals in the greater than $30 million TCB range versus 10 in the previous quarter.

Total bookings from a TCB standpoint stand at $3.8 billion, which is also a growth of 6% year-on-year. We have added this quarter, again, one new account in the greater than $100 million client category in Q2. We now have 22 accounts in that bucket. If you remember, back in FY21, we had 11 $100 million accounts. So we’ve doubled the number of accounts in the $100 million categories. We’ve won also two close to $0.5 billion deals, in two of our large accounts as has been the case for several quarters now. Cash flow has remained strong at 145% of net income in Q2. EBIT or earnings before tax and interest of our IT services segment has increased 6% year-on-year. All of that gives us confidence that we’re winning in the market against a backdrop of economic weakness.

The business environment, as you all know, has been uncertain. Inflation has stayed high as have interest rates. Clients are continuing to take a much more rigorous look at their investments. They are hyper-focused on efficiency on optimization of existing investments and faster return on new ones. Lower discretionary spending is a reality today. Conversion of order book has become slower. Transformation programs that are nearing their project term are being replaced by new ones, but at a slower pace. All of this has impacted our top line growth as well. In Q2, revenues declined 2% quarter-on-quarter in constant currency terms. But even though there’s some softness in top line growth, we are continuing to hold margin steady. Operating margin for the first half of FY24 was 16.1%.

This is 110% basis points higher than our operating margin in the first half of FY23. Now let’s look at the performance of our four strategic market units. One, in our Americas 1 market unit, revenue grew 1% quarter-on-quarter in constant currency terms in Q2. This revenue growth was led by a strong performance in our healthcare business as well as in the technology products and platform business. Order bookings in terms of TCV grew 36% year-on-year. Our Americas 2 market units which has higher exposure to consulting clients and to the BFSI sector, so a higher than usual impact of the macroeconomic slowdown. Revenues in Americas 2 declined 2.3% quarter-on-quarter in Q3. Europe which has been our growth engine for the last two quarters — for our last two years, growing by 39% in FY22 and 12% in FY23 has also seen slowing demand and reprioritization of client spend, waiting on the overall business, revenues in this market declined 5% quarter-on-quarter.

Having said that, we are seeing strong traction on the other bookings side, which in total contract value terms increased 10% in Q2 year-on-year. Given our strong bookings in this market, we are confident of a swift rebound. Finally, in our APMEA business, revenues for the quarter declined 0.5% quarter-over-quarter. Our goal in this region is absolutely to capture the rapidly digitizing market. For that, we are leveraging our global scale and domain expertise to actually continue to move our portfolio towards higher value transformation projects. This focus on improving the quality of revenue is now reflecting in our margin performance, which has improved 330 basis points over the last five quarters. Being able to sustain margin despite softer revenue is largely due to our ongoing transformation efforts.

This includes several programs around delivery excellence and operational efficiencies. Across the board, we are pivoting our business towards high-quality, high-potential businesses and reducing our loss-making accounts. We’re also working on faster bench deployment. In the last quarter, talent utilization increased to 84.5%, an improvement of 80 basis points quarter-over-quarter. Third, our segmentation strategy, together with the One Wipro approach is helping us sell bigger deals with existing clients and win in a consolidating market. And I’m proud that we are seeing these benefits within three months of moving to the new four global business line operating model. Amit will share more details shortly. Both on the delivery assurance and efficiency side, these actions are having an immediate positive impact while also setting us up for long-term margin resilience, because profitable and sustainable growth is our top priority.

In Europe, we closed three large consolidation deal in Q2 at a 100% bid-to-win rate. For example, the global bank has selected Wipro as its partner to deliver multiyear digital transformation initiatives across business units. We probably work with the bank to build solutions to enhance its global products and services through responsible use of AI and also hyperautomation. This will deliver better customer experience, analytics and drive significant operational efficiency. Another important point to drive your attention on. Our partnership strategy continues to stay strong. Looking through our partners as a percentage of total bookings have continued to increase quarter-after-quarter from 25% in FY22, 44% in FY23, and it was at 53% in Q2. [Increasingly], clients are not just looking to migrate to the cloud but also run and grow their businesses more efficiently on the cloud.

Our FullStride cloud services, which with its full stack cloud offering is setting us apart from competition and letting us tap into opportunities across the cloud journey. For example, multinational healthcare and insurance firms want us to co-create a consumer digital experience. As a strategic technology partner who will build AI and automation solutions to drive speed to market, better client experience and reduce their costs. Our high-performance software engineering program will bring them at least 20% more efficiency. Now, if you look at the bigger picture in this, you will see that our ongoing transformation is driving a substantial improvement in our market position. And that’s, in turn, reflected in the types of deals we are winning.

Clients now look to us to help them solution and orchestrate their transformation. They trust us with their complex challenges. That’s reflecting in the latest customer satisfaction survey as well with our NPS expanding by 840 basis points, which is quite substantial. I’ll take a few minutes now to share an update on Wipro’s AI 360 strategy. Since our announcement last quarter, we have trained as many as 180,000 employees in basic Gen AI principles. We have rolled out personal-based learning pathways to create a pool of specialized talent with deeper technical expertise. We are working with our alliance partners to further enhance AI learning pathways through our AIM Cloud Academies. Recently also, we launched a new Gen AI Center of Excellence with IIT Delhi.

We’re rapidly integrating Gen AI into our processes, our solutions and our offerings, thousands of our employees have or are starting to use Gen AI. Let me give you examples. In the HR functions, our teams are seeing significant productivity gains by using Gen AI for candidate background verification. And in marketing, we are using Gen AI for content generation and translation, tasks that used to take hours earlier now takes a minutes. In sales, we’re deploying Gen AI for research to improve sales collaboration and to generate RFI responses. Now Engineering business. Gen AI is helping with software development and lifecycle automation. One of the areas with the biggest productivity gain is in quality engineering and quality assurance testing.

Gen AI is helping with scenario creation, cogeneration, synthetic data creation as well as execution at scale. Initial pilots of these Gen AI apps have been so successful that we are now rolling them out to all our employees. On the client front, Gen AI is now a part of every client conversation, there is tremendous interest in exploring new use cases as well as understanding the benefits and implications of this technology. Today, we are seeing a doubling of Gen AI active projects than we did just one quarter ago. For now, we’re seeing rapid adoption in healthcare, consumer and financial services, but also in high tech and utilities. One example I can share with you here is the following. We are working with a US based health insurer to deploy a Gen AI-based chatbot for their agents.

We are developing a solution that is fine-tuned to be more contextual so that agents can provide more personalized assistance to every member. This solution is driving 30% to 40% reduction in operation costs, significant improvements in agent productivity and improving Net Promoter Scores. Another example, we’re working with a European multinational telecom company to unlock value from data. Working with different vendor tools and software kits, we are generating high-quality synthetic data, which allows the client to not only increase cross border collaboration but also mitigate buyers and eliminate distribution limitations that exist in real data. As the technology evolve and Gen AI output becomes more accurate, we expect demand for our Gen AI services and expertise to increase greatly over the next six to 12 months.

Frankly, we’re very excited by the opportunity Gen AI presents. And we are investing in new use cases, solutioning for clients as well as upskilling our employees because we really want to take a leadership position in this space. A word on our guidance now. For the next quarter, we are guiding for a sequential growth of minus 3.5% to minus 1.5% in constant currency terms. We expect margins to stay range bound as we’ve seen over the last few quarters. As the market starts to turn around on the back of our transformation and efficiency plays, we expect to start seeing improvements in the coming quarters. Despite the global slowdown across businesses, Wipro will continue to invest in its people through training opportunities, leadership development, global exposure to new clients and technologies and by obviously also rewarding them with merit based salary increases, because intellectual capital, our people are our biggest strengths.

We’re continuing to strengthen our foundation, streamline our operations and moving towards a more modern dynamic culture, we have the right strategy and vision to keep us competitive and resilient. With that, I’ll turn it over to Aparna for her comments. Thank you.

Aparna Iyer: Thank you, Thierry. Good evening to everyone who is joining us on the call today. In my update, I will quickly cover some key financial highlights for the quarter. To start with on the revenues, our IT Services revenue for Q2 declined 2% quarter-on-quarter in constant currency terms, which is at the lower end of the guided range for the quarter. We reported yet another quarter of healthy deal bookings. In total contract value terms, we closed large deals to the tune of $1.3 billion, which is a 79% year-on-year growth. We also booked 14 deals, which are greater than $30 million in TCV. Total bookings from a TCV standpoint stands at $3.8 billion, which grew 6% year-on-year. Turning to margins. Our ongoing focus on operational improvement has ensured that the margin remains steady even in a softening revenue environment.

Our operating margin for the second quarter was 16.1%, an expansion of 100 basis points year-on-year. Shifting to our cash flow performance. Our operating cash flow for Q2 is at INR38.6 billion, which was 145% of our net income. Our free cash flow as a percentage of net income was at 149%. Cash flow has been strong for the first half at 137% of net income. At the end of Q2, we had $4.1 billion of gross cash and $2.2 billion of net cash on the balance sheet. Our net income attributable to the shareholders for the quarter was at INR26.5 billion. Our EPS grew 4.1% year-on-year. Our effective tax rate remained flat for Q2 at 24%. On the ForEx front, our realized rate for IT Services in Q2 was 82.5%. Our DSO for the quarter is at 79 days, which is an improvement of 3 days year-on-year.

To conclude, our guidance for the next quarter from IT services business segment is expected to be in the range of $2.617 billion to $2.672 billion. This translates to a sequential guidance of negative 3.5% to negative 1.5% in constant currency terms. Thank you, and over to you, Amit.

Amit Choudhary: Thank you, Aparna. Hello, everyone. I will share some updates on our business transformation and how that’s reflecting in our steady margin performance. Our new four global business line model has allowed us to deliver a One Wipro service excellence approach to our clients. It is reflected in our latest customer satisfaction survey with our NPS expanding by 840 basis points. This directly reflects our performance with clients, delivery, program governance and our capabilities, and this is further strengthening our delivery-led sales. On the delivery excellence side, we have been very focused on consistency, efficiency and productivity for our clients. Automation and Gen AI is a cornerstone here with the corresponding productivity kicking in, both on the delivery and functional sites.

Over the last quarter, on the operational efficiency front, utilization is now up to 84.5%. In fact, utilization has increased by almost 470 basis points in the last four quarters, including utilization of next-gen associates. We have taken several actions here from sustained bench reduction efforts, pyramid optimization to onshore offshore rationalization and rigor around subcontracting costs. Alongside, we are keeping a very close eye on discretionary spends with increased rigor on cost and efficiency management. Thierry has talked about skill being our biggest currency. On the talent reskilling side, we continue to scale Gen AI talent. Over 180,000 of our employees have taken the first Gen AI course, focused upskilling initiatives across skill families are in place now, including several account academies.

These are collaborative initiatives with our clients, providing a skilling road map for our teams to serve them better. I am pleased with the progress we have made so far and a lot more lies ahead. Now I’ll turn it back over to Deepak.

Deepak Bohra: Yashasvi, now we can open up the question-and-answer session.

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Q&A Session

Operator: [Operator Instructions] We have a first question from the line of Kumar Rakesh from BNP Paribas.

Kumar Rakesh: My first question was around the large deals and TCV. So over the last four quarters, you have been consistently reporting $1 billion or more of large TCV. Over the last two quarters, your revenue from existing customers have reached almost close to 100%, about 99.6-ish or so number, which was about 95%, 96%, sort of last year. Does that imply that large part of these deals which we are seeing are renewable, I understand that you don’t disclose those data, but — and this challenge of high yield when not translating into revenue, it’s not just unique to you, we have seen with other companies as well. But at least their guidance or the commentary do suggest that in the coming quarters, they are going to see a much better growth outlook.

Whereas in contrast, your outlook suggests that the growth is going to further de-accelerate from here on? And it’s absolutely in contrast to the deals and TCV, which you are reporting. So is that a reflection that almost the entire part of the large TCV which we are seeing here is actually a renewal and not meaningfully new TCV?

Thierry Delaporte: This is Thierry. This is not the case. I think you’re certainly reflecting on the fact that indeed, bookings in TCV have been very solid over the last quarters. That is true. What we are seeing is we are winning more large deals. There is a good balance between new and renewals. Renewals can include increased scope in the case of consolidation. So we have different types of those large deals. What’s clear is that while we — and I think you will recognize also what we’ve said because the market has not dramatically changed versus the previous — last quarter is that while we win large deals, that may take a little bit more time to convert into revenue there’s a lower volume of discretionary spend being clocked, if you like, with our clients.

That is the kind of now type of revenue that we are missing. So that — it is — the revenue trend you’re seeing is a reflection of those two different realities. On the one side, there’s a very decent volume of business in the market. We have a strong pipeline and we are winning a nice share of those deals. We are winning more large even before. Every quarter we improve I mean, it’s quite interesting. We’ve moved from never going into largely to — going occasionally a big one to now system — more systematically, I would say, win large deals this time to close to $1 billion deal for the same quarter is a sign of that. And yet at the same time, discretionary spend is lower. You know that like everybody in our industry, we have certain volume of our business that is for discretionary.

We might be a little more exposed than some of this because of our significant presence in consulting business, in particular. And even if we know that it will be the first one to bounce back when the demand is there. But so that’s what we are seeing. And now the last thing is, except the fact we are guiding for the quarter to come and not beyond that and that’s probably why that’s how we are guiding to you. But we also believe that should the market remain as it is we will slowly bounce back.

Kumar Rakesh: My second question was around your strategy of exiting from the smaller accounts. And we started seeing the effect of that from last year’s fourth quarter. And since then, the revenue for the IT services has come down by about $90 million. Does it appears to be that proactively pruning small accounts at a time when the demand environment could be counterproductive and actually could be one of the reason why our growth could be getting impacted?