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Infosys Limited (INFY) Q1 Earnings Call Transcript

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Infosys Limited (NYSE: INFY)
Q1 2020 Earnings Call
July 12, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day and welcome to the Infosys earnings conference call. As a reminder, all lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing * then 0 on your touch-tone telephone. Please note that this conference is being recorded.

I will now turn the conference over to Mr. Sandeep Mahindroo. Thank you and over to you, sir.

Sandeep Mahindroo -- Head of Investor Relations

Thank you. Hello, everyone and welcome to Infosys earnings call to discuss Q1 FY20 earnings release. I'm Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is CEO and MD Mr. Salil Parekh, COO Mr. Pravin Rao, CFO Mr. Nilanjan Roy along with other members of the senior management team. We start the call with some remarks from the performance of the company by Salil, forward recommendations from Pravin and Nilanjan, subsequent to which we will open up the call for questions.

Please note that anything which we say which refers to our outlook is considered a forward-looking statement, which should be read in the conjunction with the risks that the company faces. A full statement of information on these risks is available in our filing with the SEC, which can be found on www.sec.gov.

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I'd now like to pass it on to Salil.

Salil Parekh -- Chief Executive Officer and Managing Director

Thank you, Sandeep. Good afternoon and good morning to everyone on the call. Thank you for joining us today. Infosys has delivered a strong quarter and I'm pleased with our overall performance as we continue to demonstrate our increasing relevance to clients. Our constant currency growth year on year for Q1 was 12.4%, which is the third consecutive quarter of double-digit growth. Our digital revenue growth was 41.9% and our digital revenue now accounts for 35.7% of our overall business.

The large deal DCV was the highest ever at $2.7 billion. Our operating margin for Q1 was at 20.5%. We saw broad-based growth across our industry segments, service lines, and geographies. In constant currency year on year, our telco segment grew 22.6% and North America geography 13.5%.

We continue to benefit from building deeper capabilities across our digital portfolio, especially in the areas of Experian's data analytics, cloud, SaaS, IoT, cybersecurity, AI, and machine learning. Our overall deal pipeline witnessed growth in Q1 and we can see that are winning market share in this competitive environment. There are many aspects of our strategy that came together to make these impressive first quarter results possible. I want to focus on how we are scaling our digital business with a few examples.

For telecom major, we're helping to build a new digital customer experience for their clients, which bring together channels such as Alexa, mobile apps, chat bots, online, and contact centers in in omnichannel mode and provide improved customer engagement. We work with a large automotive client to help them navigate their digital transformation journey, delivering for them future-ready scalable digital hybrid cloud platforms. That is supportive of their digital workspace.

We have been engaged to deliver cutting edge digital capabilities for a leading US insurance company. We are partnering with them to build a digital policy administration service leveraging our Infosys McCamish platform. We're enabling a large utility to build advanced planning and engineering systems to forecast the dynamic nature of future electricity demand, to help them plan and build their grids, and leverage green energy policies to make sure there are efficient distributed energy resources.

I'm particularly pleased that we've opened another digital experience design and innovation studio, which was last month in shortage in London, where we're able to co-create digital experiences with our clients. I'm delighted to share that our employee reskilling program, Lex, our learning platform that covers nearly 100% of our employees globally, with employees already leveraging the Lex app each week to develop their skills.

I also want to touch upon some external recognition we've received. Infosys has been recognized as a leader in the SAP S/4HANA services by NelsonHall, for global API strategy by the Forrester Wave, and in the public cloud infrastructure managed services area in the Gartner Magic Quadrant.

Now that we see our client's confidence in us increasing with increased market share gains, we are focusing as well on operational efficiency and cost discipline. We have now completed all of our investments that we outlined last year when we started our strategic direction program. All future investments will come from within our P&L and they're not specific as one of the investments that we outlined last year. Over the coming quarters, I'm looking forward to seeing the benefits of these operational improvements reflect in our business.

Given the evolution of our business outlook, we are now changing our revenue guidance. We've moved from 7.5% to 9% in constant currency to 8.5% to 10% in constant currency. We retain our margin guidance at 21% to 23% for the full year. Later on in the call, Nilanjan will share with you our new capital return policy. With that, let me hand it over to Pravin.

Pravin Rao -- Chief Operating Officer

Thank you, Salil. Hello, everyone. In quarter one, we saw acceleration in year on year constant currency growth to 12.4%. This was supported by our highest ever large deal TCV. Our core business segments, digital services, communication, [inaudible] and services, manufacturing, and high-tech top our year on year growth in constant currency.

North America, Europe, and [inaudible] also grew double-digits year on year in constant currency. [Inaudible] during the quarter improved to 83.1%. Client metrics remained strong. The number of $100 million plants increased from 2 to 27.

We completed the first leg of compensation increases in quarter one. The rest of the employees barring leadership will receive their comp increases effective July 1st. The overall operational increase, this was largely due to seasonality since employees leave us to pursue higher studies in quarter one. We continue to focus on strengthening the employee engagement, accelerated career paths for top performers, greater learning opportunities, and performance-based differentiation.

Large deal win momentum continued in quarter one. We won 13 large deals with a TCV of $2.7 billion, including the recently closed deal with ABN AMRO. Three deals were in financial services and legal verticals, two deals within communication and [inaudible] resources and services and manufacturing vertical. One deal was in life sciences. Geography-wise, eight were from America, four were from Europe, and one from the [inaudible].

The share of new deals and overall large deal TCV was about 55%. We have reached our localization targets in the USA and have recruited more than 10,000 local employees. Let me come to the business segments.

Financial services vertical continued its growth acceleration, aided by recent status acquisitions. We have seen some challenges due to ongoing acquisition association in some US banks and also in capital market business in Europe and the US. However, there are also growth opportunities in consumer, corporate, and commercial banking, cost and payments, and wealth management [inaudible] digital transformation and technology modernization.

We remain reasonably optimistic about growth prospects due to increase in win rate and increase in our large deal pipeline. Stated deals will help incentivize our multi-gate servicing capabilities through digital platforms and enhance our presence in Europe. Growth in retail is driven by large deal wins, opening new [inaudible], and differentiation on digital deals.

There is a [inaudible] in spending toward digital, IT simplification and modernization through customer experience. The [inaudible] industry is seeing more consolidation and clients are asking for integrated BPON technology services.

Growth in communication segment remains strong due to [inaudible] of deals won in the earlier quarter. We continue to win large deals within the segment. With the 5G race picking up, the wireless telcoes are under pressure to invest and maintain leadership. In 5G, underlying technologies such as cognitive radio, small cells and smart antennas are becoming prominent. We are already working with our customers in advanced IoT use cases.

[Inaudible] and services, maintain the strong growth momentum and we expect broad-based growth to continue in this fiscal year on the back of continued momentum in top accounts and new account openings. Utilities is trending toward customer experience and digital transformation. [Inaudible] is trending toward BPO, IT, and ARP upgrades.

Manufacturing vertical is seeing some impact from global trade wars, especially in Europe with cost cutting initiatives being in place in multiple plans. Customers are looking toward digitalization of end to end processes with a strong focus on weaving mobile, IoT, and banking systems seamlessly to provide a superior customer experience. In healthcare, where we are running some important deals, [inaudible] in the sector and spending cutbacks will impact growth.

Life sciences segment also is impacted due to cost cutting initiatives by clients due to the [inaudible] process. Our digital narrative in the market continues to amplify based on the foundation of five pillars -- experience, insight, innovate, accelerate, and assure, and the five accelerators -- proximity plus [inaudible] plus automation plus learning plus and design plus. We are seeing good success in our vertical business in terms of the momentum and [inaudible].

There is continued demand in data and analytics, cloud, SaaS, user experience, security, and IoT. In the last quarter in, [inaudible] leader in digital services-related capabilities, including in modernization, IoT, experience, and security.

With that, I will hand over to Nilanjan.

Nilanjan Roy -- Chief Financial Officer

Thank you. Our revenues in quarter one were $3.13 billion, growing by 12.4% year on year in constant currency terms. This was our 12th consecutive quarter of double-digit constant currency growth. The sequential revenue growth in constant currency was 2.8%, including [inaudible] acquisition. Operating margin in Q1 was 20.5% compared to 21.5% in quarter four.

During the quarter, the rupee appreciated by 1.1% against the USD while the USD strengthened against other major global currencies, which impacted operating margins by 40 basis points. In addition, margins were impacted by 60 basis points due to compensation increase, 80 basis points due to expenses on new visas, largely for H-1B, and 30 basis points due to acquisitions.

These increases were partially neutralized by increases in utilization, which helped margins by 70 basis points, including the realization of other costs [inaudible] by 20 basis points and a minor impact of [inaudible] adoption of 10 basis points. This led to a 1% drop in operating margins compared to quarter four.

Operating cash flows in quarter one were $630 million and free cash flow was $485 million after capex of $135 million. Increasing capex is in line with our previously announced land of creating new capacities in all of these locations. DSO for the quarter increased by 2 days to 68 days, largely due to the hyper state of deals. We had similar benefits and creditors in line with the hyper business model.

The [inaudible] continued in Q1. Our effective hedging program ensured that we had the 16th consecutive quarter of gains in non-operating income. Our hedge book was $2.5 billion at the end of the quarter. [Inaudible] improved to 8.1% from 7.91% in quarter four. Effective tax rate for the quarter was 26.4%, 26.8% for the financial year 2019.

EPS increased by 3.2% year on year. We have made further progress and we're using our cap reallocation program announced in April 2018. Out of the maximum buyback size of [inaudible], we have completed over 70% of the buybacks at 5,934 rupees so far. We're trying to finish the balance in Q2, not withstanding the recent imposition of taxes and buybacks.

Within quarter one, we also completed payout of final dividend of 10.5 euros per share for FY19. Cash and cash equivalents declined to $3,570 million due to payout of final dividends and buybacks in quarter one of $1,337 million. ROU has increased to 25.8% in quarter one compared to 22.7% in quarter four, an increase of over 3%. As we look to be a more diverse company, we have no started include a metrics of gender [inaudible]. It's now climbed to 37%.

Consistent with our previously articulated objectives of announcing the returns of our fellow investors, I'm happy to announce that the company has revised its capital allocation policy. As part of the same, effective financially in 2020, the company expects to return approximately 85% of the free cash flows [inaudible] or a five-year period to a combination of semi-annual dividends and of shared buybacks and special dividends subject to applicable laws and [inaudible].

We believe this policy will further improve shareholder return and provide more predictable cash flow for our shareholders. We have revised our FY20 earnings growth guidance from 8.5% to 10% in constant currency terms. We are maintaining the operating margin at 21% to 23% despite the rupee appreciation. We expect operating margins for the remaining year to improve on this quarter one subject to a stable environment.

This margin improvement will be driven by continuous deployment of our operational efficiencies like utilization, rationalizing deployment, automation, and other overheard efficiency measures.

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

Questions and Answers:

Operator

Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question, press * and 1 on your touch-tone telephone. If you wish to remove yourself from the question queue, you may press * and 2. Participants are requested to use handsets on asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Thank you.

The first question is from the line of Edward Caso from Wells Fargo. Please go ahead.

Edward Caso -- Wells Fargo -- Managing Director

Hi. Thank you for taking my call and congrats on the quarter. Could you provide some color on why you're having such success with the large deal wins? How much of it is price and how much of it is positioning? Maybe split the wins between legacy and digital. Thank you.

Salil Parekh -- Chief Executive Officer and Managing Director

This is Salil. To answer the question, Ed, I think part of what we see in terms of large deals is some of the investments we've made in our digital capabilities, they come together as part of a collective where clients are looking to modernize their tech landscape. Us being large incumbent players with long-standing relationships, it appears an advantage with these new capabilities combined with some of the areas that are long-standing projects and contracts for us.

In addition to that, the way we looked at segmenting which sectors we go after and in part segmenting which potential competitors we should look at differentiating versus, those are techniques that have helped us. Overall, we see an increased engagement and intensity with our clients and that is helping us.

However, as you know well, large deals are by design lumpy. We've been fortunate in Q3, Q4, and Q1 to have very strong large deal numbers. These numbers for the year, we're very confident about, but each quarter, as you know, could be up and down.

Edward Caso -- Wells Fargo -- Managing Director

My other question is you still have close to $4 billion in cash on your balance sheet. I assume that's more than you need. You raised your deployment of ongoing free cash flow, but what are your thoughts of deploying some of the unnecessary cash on your balance sheet?

Salil Parekh -- Chief Executive Officer and Managing Director

Thanks. So, as you rightly point out, we've made the change. What we have on the balance sheet, as you know, we have some part of our buyback that still has to be completed. That will be used in this current buyback. We have plans over time to make sure our balance sheet is efficient. As we look around, we will look to see if that means doing more within the laws and regulations on buybacks for that or looking at other uses if we find small appropriate acquisitions that we can look at.

Edward Caso -- Wells Fargo -- Managing Director

Thank you.

Operator

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

Moshe Katri -- Wedbush Securities -- Analyst

Thanks. Congrats on the very strong TCV numbers. Just going back to some of the metrics related to the quarter, we're getting a lot of questions about organic growth, specifically the ABN AMRO contribution. How much did that actually add to the guidance raise for the fiscal year? Final point here -- you have sustained your margin targets, but then what's embedded there in terms of FX moves in terms of being in the rupee versus some of the other currencies and obviously given the fact that we've seen a reversal there in the past few weeks. Thank you.

Nilanjan Roy -- Chief Financial Officer

So, the ABN acquisition is already built into our guidance at the beginning of the year when we announced the [inaudible] acquisitions. So, our guidance has only got to do with organic confidence of what we're seeing in the markets. On the call, I said the impact of the acquisition was 60 basis points on a sequential basis in the 2.8. So, that's embedded in that.

The question on margins -- so, we had given a guidance at the start of the year of 21 to 23 and that was in dollars closer to $69.50 versus the rupee. We have observed 40 basis points this quarter, but we still at $68.50 remain confident that we will be able to hit that 21.3. Of course, this is predicated on the dollar remaining where it is now. Like I said, we have multiple levers and operational efficiencies. You always see that kicking in.

This quarter, utilization is up nearly 70 basis points, which had fallen. And of course, we have the automation benefits of how we can make our [inaudible] a bit more productive. We have the on site pyramid. So, the number of levers we continuously deploy, that's giving us the confidence that the rest of the margins of 21.3, we'll be able to hit that.

Moshe Katri -- Wedbush Securities -- Analyst

Thank you. Appreciate the comment.

Operator

Thank you. The next question is from the line of Ankur Rudra from CLSA. Please go ahead.

Ankur Rudra -- CLSA -- Analyst

Thank you. Congratulations. To start with, maybe you can comment a bit on what drove the increase in guidance -- was this better than expected deal wins in the quarter or any change in perception in weakness and verticals, specifically in financial services and manufacturing? Also, related, is there any reason to narrow the guidance band of revenues in the year?

Salil Parekh -- Chief Executive Officer and Managing Director

On the guidance itself, the main reason was with the strength of growth in Q1, which was 12.4% year on year and then that on the back of two other quarters, Q4 and Q3 of last year and being double-digit, what we see in our pipelines, our large deal pipeline has improved from April 1 through now. That improvement and some of the wins in the quarter, all of those things put together give us a level of comfort to raise this guidance from 7.5%-9.5% now to 8.5% to 10%.

In terms of specific segments, I think you shared when Pravin shared the view on segments, those are what we see across different segments. The mattering of the band -- our thought was given we are one quarter into the year as we increased the guidance, we felt it was perhaps more appropriate at this stage to narrow the band given what we were seeing.

Ankur Rudra -- CLSA -- Analyst

Okay. Just a question on your US or local graduate program globally, it's probably been almost three years since you said you achieved your initial targets, given that you probably have a lot of learnings about this program now, can you share what's been the experience here in terms of scalability in terms of this type of supply, the kind of pricing, utilization, attrition parameters you get and also, client acceptance, especially compared to your traditional model on site?

Ravi Kumar -- President Deputy Chief Operating Officer

Yeah, Ankur, hi. This is Ravi here. There have been quite a bit of learnings on how to hire, how to staff and program and, of course, how to retain and how do we clear the trajectory into building a sustainable model for the future? Our partnerships with colleges to set the training up really beyond STEM -- we actually went to liberal arts schools and design schools, which is very new to us all across the world. Then we have started experimenting with community colleges as well, which has been pretty new to us and pretty new to the industry. So, it's a pretty exhaustive list of learnings and how we can shop in this model and continue to sustain it long-term.

Ankur Rudra -- CLSA -- Analyst

Specifically, could you add some color, Ravi, in terms of how scalable you think this is going forward and where do the pricing and utilization and attrition sit within your traditional on site and offshore supply models?

Ravi Kumar -- President Deputy Chief Operating Officer

Yeah. So, within the scalable model, a percentage of our workforce fit into a pyramid on site. That's the learning. If we have to sustain and scale it further, we have to work to a hub so that the work actually moves from a two-tier on site offshore to an on site near-shore model. We are also setting up our own training facility, which will help us to sustain this momentum in the long run.

The key is the ability for us to retain is to create a clear path for them to continue with us in the long run. That's broadly what it is. We do like 8 to 12 weeks of training as we hire from schools. That can be optimized. We can further integrate it into the curriculums of the colleges were adding from. What we're doing with design schools -- again, a new track which we are learning on.

So, I don't want to put a number on it, but I can actually say the mix of the pyramid has to be on site offshore. We kind of think now you could have a pyramid inside it, which is only on site and you could have school graduates who are in close proximity to plants, especially when you have Agile work coming your way. That's all I can kind of tell you at a high level.

Ankur Rudra -- CLSA -- Analyst

Thank you. Appreciate the color. Best of luck.

Operator

Thank you. Our next question is from the line of Sandeep Shah from CGS-CIMB. Please go ahead.

Sandeep Shah -- CGS-CIMB -- Analyst

Thanks for the opportunity and congrats on a good set of numbers. If I look at the last three quarters, pricing increase on a blended basis, it has been positive and despite no change in the on site, actually on site has gone down. Do you believe it's mix-led or Salil, do you believe that this is an improving contribution of digital? This could be a new tailwind, which to some extent, [inaudible] has also not mentioned in one of his positive levers.

Salil Parekh -- Chief Executive Officer and Managing Director

Sorry, go ahead. You had something else? I think from our perspective, we see that as a very critical parameter. It's something that we think is a function of both of the factors that you mentioned, the mix and the capability. It's something that we are working on actively. We think it's something in the immediate term, not immediately every quarter, but in the medium term, we think that can be something that can help us sustain and maybe even expand our margin outlook.

Sandeep Shah -- CGS-CIMB -- Analyst

Just a follow-up in terms of audit book. Is it possible to break down the contribution from the structured deal? As well as in the audit book, do you believe the recent increase in the global data or any impending Brexit is leading to any kind of a scenario where you believe the audit book traction may slow down in the coming quarters or you believe the [inaudible] is not getting impacted because of this? And some comments on the pipeline, if you can give some color on quantitative outlook in percentage terms if it has improved?

Salil Parekh -- Chief Executive Officer and Managing Director

Stated externally, the decoupling of the audit book that Nilanjan shared with you in terms of the quarter, the revenue, and the year on year revenue, that we've talked about. In terms of Brexit, we assume today that our business in the UK has remained reasonably in good shape. We don't see any particular change in our business mix today. We think once all of this Brexit discussion settles down, if anything, we will start to see some acceleration. We don't see any change or it's not something we've decoupled to make it something of a concern within the pipeline.

The overall pipeline -- we shared the stat externally. I started to give some color earlier that from April 1 through now, we've seen a good growth in the large deals pipeline that we have. That's part of the reason why we see some potentially increased traction in the coming quarters.

Operator

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

Jared Levine -- Cowen and Company -- Analyst

Hey, this is Jared Levine on for Brian. I know you discussed prior the sequential drivers to the decline in margins, but can you talk about the year on year bucketing of the decline in operating margin, please?

Salil Parekh -- Chief Executive Officer and Managing Director

I think the big one which we continue to mention, which we said in our last call, first is in the increase in compilated costs over the year, which is about 210 basis points and the combination investments we have made, both in our salesforce, which we ramped up. The other one is the impact of the higher [inaudible] costs, which is the last year progressing at the 150 BPs. The offset of that has been the rupee benefit, about 40 basis points.

We've got the benefit of RPP, the rate prior to that, which is about 50 basis points. And of course, our special quarter one impact, which is 80 basis points and a higher visa cost because we did not have that many visas last year. so, that's about 80 basis points. So, that gives us the overall, around 20 BPs. I think if you see the quarter on quarter, I think that's a situation which is to understand where we came from, how we ended last year, and what is our go forward plan in terms of improving our margin to hit our guidance of 21.3.

Jared Levine -- Cowen and Company -- Analyst

Got it. Thank you. Then just one more quick follow-up -- in terms of the digital deals you're weighing, are there any kinds of digital projects in particular like IoT or cloud deployment that are particular taking great care of the projects currently?

Salil Parekh -- Chief Executive Officer and Managing Director

Sorry, I didn't follow that. What was the question about the digital?

Jared Levine -- Cowen and Company -- Analyst

Yeah. We're seeing digital. Are there certain particular projects that are accounting for a great share of the wins, like IoT or cloud deployment? What's making up the mix of digital wins currently?

Salil Parekh -- Chief Executive Officer and Managing Director

So, to share with you, we have five broad areas within digital that we've outlined over the last year or so. A few of those areas we believe are going to start to be very large businesses and we'll see a lot of traction in those areas. One of them is the area of cloud. This is both cloud services, which are through our strategic partnerships with AWS, Azure, and Google Cloud, all with some of the SaaS leaders such as Salesforce or ServiceNow. Another very strong area for us is the area of data and analytics.

Having said that, we also have strength in the other areas, for example, in the digital design and experience, in the area of cybersecurity and in the area of IoT. Each of these are seeing good traction. There's no one that stands out, but the first two I mentioned, I think we start to see good scale benefits from that as well.

Jared Levine -- Cowen and Company -- Analyst

Perfect. Thank you.

Operator

Thank you. The next question is from the line of Ravi Menon from Elara Securities. Please go ahead.

Ravi Menon -- Elara Securities -- Analyst

Thank you. If you just back out of what we think would be a five-year contributed from state, it looks like your TCV is about $1.6 billion or so. Then if you assume there are no other free matching deals in there, something that should help going forward, would that be concurrent with your view?

Salil Parekh -- Chief Executive Officer and Managing Director

So, we had the couple of large deals in the stats we've shared outside. We do see a lot of what we are selling in the large deals -- Pravin shared a stat earlier -- are net new. In that sense, we feel good about how the margin profile of those deals have evolved.

Ravi Menon -- Elara Securities -- Analyst

Right. I think Nilanjan said in his comments earlier that you're looking at the margins improving gradually over this year. That's why I asked this. Secondly, are you worried at all about attrition being a little high this quarter, year on year is up slightly. So, given utilization is also inching up, where do you think you'll be comfortable with utilization given the current layers of attrition?

Salil Parekh -- Chief Executive Officer and Managing Director

So, attrition, that is an area of extreme attention for us. We want to make sure that we take all the actions that we need to take to make sure this is within a level that is comfortable for our business going forward. Having said that, in Q1, as Pravin has shared, we've taken very strong measures and some of the attrition that it's in here is what we call involuntary attrition and some of the attrition in this stat is also for individuals who leave to go for graduate school or higher education. That is somewhat seasonal.

If you look at our attrition stat, it takes all of our businesses into account. It's not just the IT services attrition. So, if you look at the attrition we are focused on, we have a lot of measures we've put in place to start to address that, in addition to making sure there are all the hygiene factors, we're also focused on really driving the opportunity set for employees to a broader base. That includes the value connection that employees will have with us. We think over the next -- in the medium term or the next three quarters, that should start to see some impact.

Ravi Menon -- Elara Securities -- Analyst

Last question from me -- you've spoken about how [inaudible] will actually help you in Europe, given the uncertainties with Brexit, is this something you see on the mortgage market as still being attractive? I know you've seen some interest.

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

Yeah. Hi, this is Mohit Joshi. I think I should point out that Stater is primarily focused on the Dutch market and the Northern European market, so, not so much on the European market. To that extent, I don't see Brexit as having an impact on Stater itself. I think a second thing is we see a huge opportunity globally, not just in the Europe, in the entire mortgage servicing market, but also the mortgage resignation market.

If you look at Europe, for instance, in Germany, 98% of all mortgages are currently being serviced by the banks themselves. We think this number over time will lead to what we see in the US. The majority of the servicing is done by third parties. Stater is the strongest and largest mortgage servicer in Europe. With Stater, we're also building a very significant front office that has origination capability and middle office that's underwriting capability. So, we think it will be a powerful proposition for us within Europe and the capabilities that we have, even if it's not in the platform, the capabilities are applicable globally. That's my perspective on the opportunities that we have.

Ravi Menon -- Elara Securities -- Analyst

Thank you. Best of luck.

Operator

Thank you. The next question is from the line of Parag Gupta from Morgan Stanley. Please go ahead.

Parag Gupta -- Morgan Stanley -- Analyst

Hi, good evening. Congratulations on a strong quarter. I had two questions. Firstly, Salil, if you can just talk about delocalization efforts in the US. You've done a commendable job in achieving your targets. I just wanted to understand -- now that you've got to a reasonable level that you have actually set out for, do you think that that is good enough incrementally to start taking away some of the efforts involved from a subcontracting perspective or do you think that a skillset is very different and the subcontractors would still be required to meet the demand that you want over the last few quarters?

Salil Parekh -- Chief Executive Officer and Managing Director

So, the localization work has indeed been a positive and we are delighted with the progress it's made. However, it's the first step of a very long journey and we have plans in the medium term on how we think our business model will evolve. In terms of subcons, yeah. I think it's not so much and/or it's much more than both will exist. The skillsets that we see in the market today for which we're winning, we have a tremendous capacity of those skillsets.

There's always some demand which comes in where the fulfillment needs to be done on a relatively quick basis. We have some operational levers that we're putting in place, including localization as one of them that will help us to adjust the subcon usage, for example, looking at aging of subcontractors that can give us benefits again in the medium term into a margin.

Parag Gupta -- Morgan Stanley -- Analyst

Got it. My other question was my understanding for your margin guidance of 21% to 23% was premised on the usual wage hike cycle that you've already set out on, but given that the attrition rates are running high, is there a risk to your margin guidance if you have to go out for out of turn wage hikes, promotions, or other incentives?

Salil Parekh -- Chief Executive Officer and Managing Director

We are fully committed to our margin guidance. There are a lot of business situations plus and minus, but we will deliver our margin guidance.

Parag Gupta -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Thank you. The next question is from line of Joseph Foresi from Cantor Fitzgerald. Please go ahead.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. My first question is just around some of the market share shifts. I know you talked about this a little bit at the beginning of the call, but maybe you can talk about any changes in your approach. What piece of your customers' businesses are leaving some of your competitors and going to you and what you've strengthened to strengthen your position in the end market?

Salil Parekh -- Chief Executive Officer and Managing Director

It's more with respect to the traction. The comment I made there was with respect to the traction we've seen with our digital business. To give you one example, with Microsoft, we've been named as the number one partner globally. For this year, it's a shift where our capabilities on all of their product sets from Azure to Office 365 to all of the workplace toolkit, our approach to driving that into enterprise space is something that's gaining traction. So, it's not so much taking away from another competitor.

We're gaining market share in a space that's growing but our growth is higher than what the overall growth for that space is. We see similar type of traction in other elements of the [inaudible] of our digital focus. For example, we see that within some of the SaaS players. We see that in a lot of agile development work that we're doing on different toolkits. We see that even for the work we're doing for S/4HANA. So, there are different places where we start to see more and more growth through those investments or capabilities that we are building or have built over the past.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. Okay. Going back to financial services, we have seen a couple of different players have trouble with some of the banking budgets that they are dealing with at the big banks. Then we've seen a lot of news about what's going on in Europe and the banking system there. You put up some really good numbers. Maybe you talk about your positioning and financial services and comment a little bit about some of those shaky budgets that we've seen at those big banks.

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

I think it's been a mixed bag. You've seen some weaknesses, obviously, in the capital markets space, both on the buy side and the sell side. You've seen some challenges, obviously, in Europe. For us, this quarter, we've continued to do quite well in Europe, but on the flip side, some other side to the business like the consumer banking space, commercial banking space, corporate banking, mortgages, I think these businesses are seeing good traction.

I think as Salil mentioned, for us, it's a mis. We obviously are seeing significant traction in the cloud space, in the entire digital transformation journey for banking, obviously the new centers that we're building out like the studio in [inaudible] are really helping us engage with banks from a brand transformation perspective, from a digital user experience perspective, on the data space. Obviously, there's a huge focus on data monetization, data mining, banks are starting to move to the cloud and there obviously is a significant revenue opportunity for us.

So, I say it's a mixed bag, right? You have certain areas of the sector where you have some weaknesses, actually including the life and health insurance business. But other sides of the business, the traditional consumer businesses, the traditional corporate banking and transaction businesses are seeing a lot of investment.

Finally, from our perspective, I think there are two other pieces that are helping us from a growth and a mind share perspective. The first is that we have a very powerful product business in [inaudible] and [inaudible] is obviously gaining significant traction globally. We had a great question in terms of DCB bookings, expansion in North America and expansion in the European markets. That is one unique differentiator for us given the strength of the product and the renewed interest in digital engagement, renewed interest in omnichannel apps.

The second piece I'll point out is the new Stater acquisition. As I previously mentioned in response to another question, we are really building out sub-sector capability in a fairly significant way. Specifically, for the mortgages space -- mortgages really are the largest revenue line for our banking clients. The fact that we're building out significant mortgage front to back capability, I think, is another example of a unique differentiator.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Got it. Sorry, I'm going to try to sneak one more in because it builds on what you were saying -- are you taking market share in the US from companies like FIS and Fiserv, how are you getting traction there? And with the lower margin profile, do you feel like you're more competitive in the pricing environment? Thanks.

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

So, I think if you look at the US-based, more broadly speaking, absolutely. I think growth in the US in financial services has been very strong with us. Most of the time, FIS and us, we don't really compete in the same spaces. So, I don't think they're a significant source of market share gain for us.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Thank you.

Operator

Thank you. The next question is from the line of Ashish Chopra from Motilal Oswal Securities. Please go ahead.

Ashish Chopra -- Motilal Oswal Securities -- Analyst

Thanks for the opportunity and congratulations on a good quarter. Firstly, maybe Nilanjan, you can take this -- on the wage hikes in this quarter, the impact was, I think, close to 60, which is all you said. In the media comments, you also mentioned that there was definite loss for wage hikes for certain [inaudible] well into the next quarter. Particularly we've seen second quarter wage hike impact being lower, but it is expected to be on similar lines or different this time at all?

Nilanjan Roy -- Chief Financial Officer

So, like Salil also said, I think we always have a staggered impact of wage hikes. Some wage hikes were deferred. But like I said, that's built into what we are seeing as predictions for the rest of the year. So, I don't think there's anything unusual or aberration in that.

Ashish Chopra -- Motilal Oswal Securities -- Analyst

Okay. Secondly, [inaudible] is concerned, I would be assuming that the status will be entirely in the net new and the percentages would be what to exclude for starters.

Nilanjan Roy -- Chief Financial Officer

Yeah. That will be entirely net new.

Ashish Chopra -- Motilal Oswal Securities -- Analyst

Okay. Just lastly from my side, I think toward the end of the quarter, you announced a partnership with Pan-American Life Insurance Group on the policy administration side. So, if you could, throw some light on the nature of that deal. We've seen your peers announce a lot of these on the insurance platform of much larger sizes in nature, so I just wanted to know if this would actually compare.

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

So, I think we are seeing a huge interest. This is true for our peer group as well. As you look at the life insurance and annuity business, there is a significant amount of interest in using third-party processers in making sure the closed book at least is being done by a more efficient producer. In reality, what has historically been more of a processing business, now, there's a lot of interest in a better user experience, more of a front-end transformation piece. We feel that this is an area in which we'll see significant growth.

We're fairly optimistic about the McCamish platform that we have. We've also modernized it very significantly and there are significant deals that we're seeing in the pipeline, which will really allow us to build on the growth that is being seen in the marketplace.

Operator

Thank you. The next question is from the line of Sandeep [inaudible]. Please go ahead.

Sandeep -- Unknown -- Analyst

Thanks for taking my question and congratulations to the management team for an excellent third quarter. A couple of questions, Salil, from myself -- first, on the digital side, we are growing at 42% and our propulsion is continuously rising. I understand then that you know the business has changed and it is not fair to chip apart the growth rates and I understand, but I just wanted a little bit of clarification on this side.

The way we are growing and the way our audit book clearly still kept toward the newer technologies. Are we going to see a phase where the leakage from the non-digital piece will come to us hard and that will lead to a much higher growth than what we are seeing structurally going forward? Although, you know size is a concern. I'm not asking for a specific guidance, but I'm just trying to understand whether the growing proportion of digital will lead to a structural better growth going forward?

Second question -- when you meet your clients, what is your sense of how much they have benefited in terms of spending on digital? Is it a very early stage or it is a little bit in the middle phase? How do you perceive that? Another question I had was on the attrition side. We have generally seen that when you have two, three, four good quarters, then the attrition should come off.

I have seen in the last four or five quarters a tremendous amount of effort has been made both on hike side and the promotion side and also, to some extent, I think the stock option side. Still, we are not seeing any kind of control on the attrition number. In fact, they are worsening. So, is there a substantial portion of involuntary piece in this or do you think the voluntary piece still isn't high end? I'm not asking specifically for this quarter because if this continues, our dependence on external [inaudible] will not come down, which may not allow us to beat the top end of our margin anytime soon. Thank you.

Salil Parekh -- Chief Executive Officer and Managing Director

Okay. So, there were several points that you shared, starting with the structural piece. We have a view on the digital addressable market and the growth rate. We love data. In the coming quarters when we have a new app for analysts. If you recall, we've shared about a $160 billion market growing at 15%. So, that's the piece that we are investing in and we see some traction. One what you talk about and what we've defined as cost services, we've not declared the growth rate, but I think the market view is available if you look at what's with third-party agencies who have a lot of data like Gartner and others. It's fair to say that market has a more challenged growth environment today.

In that context, how we've developed a strategic approach, that's what we're executing to. We have a view on where this might go medium-term, but we haven't actually shared any of that externally. We think the way we are driving this, for example, the 12.4% growth in Q1, that's a good indication of what are the sorts of things possible when many things come together in a fortuitous way for us in the quarter.

In terms of the attrition -- we've talked about operational efficiency and we are more and more intensely focused on involuntary attrition as well. There have been some elements of what it's done seasonally and because of higher education. When you start to strip that out, we see the attrition numbers while not improving, they're stable. So, we still have work to do to make sure they start to trend down.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I now turn the conference over to the management for their closing comments.

Salil Parekh -- Chief Executive Officer and Managing Director

We would like to thank everyone for joining us today on this call. We look forward to talking to you again. Have a good weekend ahead.

Operator

Thank you very much. Ladies and gentlemen, on behalf of Infosys, that concludes this conference call. Thank you for joining us and you may now disconnect your lines.

Duration: 60 minutes

Call participants:

Sandeep Mahindroo -- Head of Investor Relations

Salil Parekh -- Chief Executive Officer and Managing Director

Pravin Rao -- Chief Operating Officer

Nilanjan Roy -- Chief Financial Officer

Ravi Kumar -- President Deputy Chief Operating Officer

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

Edward Caso -- Wells Fargo -- Managing Director

Moshe Katri -- Wedbush Securities -- Analyst

Ankur Rudra -- CLSA -- Analyst

Sandeep Shah -- CGS-CIMB -- Analyst

Jared Levine -- Cowen and Company -- Analyst

Ravi Menon -- Elara Securities -- Analyst

Parag Gupta -- Morgan Stanley -- Analyst

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Ashish Chopra -- Motilal Oswal Securities -- Analyst

Sandeep -- Unknown -- Analyst

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