Yahoo Finance 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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