Infosys Limited (NYSE:INFY) Q1 2024 Earnings Call Transcript July 20, 2023
Infosys Limited misses on earnings expectations. Reported EPS is $0.17 EPS, expectations were $0.18.
Operator: Ladies and gentlemen, good day, and welcome to the Infosys Earnings Conference 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. Sandeep Mahindroo. Thank you, and over to you sir.
Sandeep Mahindroo: Hello, everyone, and welcome to Infosys earnings call for Q1 FY ‘24. Joining us here on this call is CEO and MD, Mr. Salil Parekh; CFO, Mr. Nilanjan Roy and other members of the senior management team. We will start the call with some remarks on the performance of the company for the quarter by Salil and Nilanjan, subsequent to which the call will be opened up for questions. Kindly note that anything which we say that refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks that the company faces. A full statement explanation of these risks is available in our filings with the SEC, which can be found on www.sec. gov. I would 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 had a strong quarter in Q1. Our Q1 growth was solid at 4.2% year-on year and 1% quarter-on-quarter in constant currency. We have 21% growth in manufacturing, 14% in life sciences. Our Europe region grew by 10%. Our operating margin for the quarter was strong at 20.8%. We generated robust free cash flow of $699 million in Q1. Our large deals value for Q1 was $2.3 billion, 56% of this was net new. We had one mega deal win in Q1. Our value of deals for financial services was 50% of the overall large deal value in Q1. We announced a mega deal of $2 billion value after the close of Q1, and before our results report today.
With a strong large deal and mega deal wins, we are building well for the future. Our pipeline of large deals is strong and we continue to have mega deals in our pipeline. We are delighted that Topaz, our AI and generative AI platform is resonating well with our clients. We are working on 80 generative AI projects for our clients at this time. The work we are doing encompasses large language models for software development, text, document, voice and video. Internally, we have developed generative AI tools using an open source model for software development. We are working with open source and proprietary generative AI platforms and models. We have trained 40,000 employees on generative AI. We see opportunities for new work and for productivity improvements through this technology.
All of these elements are available within our Topaz set of capabilities. We see this area of generative AI and Topaz being really transformative for our clients. As we look ahead with our large and mega deal successes and our strengthen in cost efficiency, automation and consolidation we feel confident. In the short term, we see some clients stopping or slowing down work on transformation programs and discretionary work. This is especially so in financial services, in mortgages, asset management, investment banking and payments, and in the telecom industry. We also see some impact in the high tech industry and in parts of retail. Even as we’ve won two mega deals recently and have a strong pipeline of large and mega deals, we’ve received revenue from some of these and other large deals towards the later part of our financial year.
Keeping that in mind, we are changing our revenue growth guidance for this financial year to growth of 1% to 3.5% in constant currency. As a consequence of our mega deal wins overall traction and cost efficiency, automation and differentiated digital cloud and generative AI capabilities, we are well positioned for the medium-term and especially towards the end of our financial year and the period after that. We have launched a broader and comprehensive margin expansion program. The program will work across five areas; pyramid efficiency, automation and generative AI, improvements in critical portfolios, reducing our indirect costs and communicating and deriving value across the portfolio. As senior leadership is mobilized on this, we are working on this program with our clients, our employees and partners, and we’re taking steps for the short, medium and long term, while keeping the overall strategic direction of the company in mind.
We have an ambition to improve our operating margin in the future periods. Our operating margin guidance for the financial year remains unchanged at 20% to 22%. With that, let me hand it over to Nilanjan.
Copyright: rawpixel / 123RF Stock Photo
Nilanjan Roy: Thanks, Salil. Good evening, everyone, and thank you for joining the call. We entered FY ‘24 on the backdrop of uncertain macroeconomic environment, with clients reassessing their IT spend and continued to focus on cost and efficiency programs. Q1 revenue growth was 4.2% on a Y-on-Y basis in constant currency. Sequentially revenue grew by 1% in constant currency and 1.4% in dollar terms. Operating margin for Q1 was 20.8%, 20 basis points lower sequentially. This was primarily due to a 70 basis points of benefit from cost optimization, including utilization, automation, which was offset by a balance 90 basis point impact from employee related costs, including higher variable pay, promotions et cetera. Client metrics remained strong with a number of $50 million clients, increasing to 79, and $200 million clients at 15, reflecting our strong ability to mine top clients by providing them multiple pay — multiple relevant services.
Headcount at the end of the quarter stood at 336,000 employees, which is a decline of 2% from the previous quarter. A substantial portion of attrition has been backfilled by training and reskilling existing pool of talent and deployment of freshers. Consequently, our utilization, excluding trainees improved to 81.1%, which has further headroom for growth. We will calibrate the hiring for FY ‘24 based on available pool of employees, growth expectation and attrition trends. Free cash flow for the quarter was robust at $699 million and the conversion to net profit for Q1 remained strong at 96.6%, led by strong collections. DSO increased by one day sequentially to 63. Consolidated cash and equivalents stood at $4.5 billion at the end of the quarter.
This is before the payout of final dividend that happened in the first week of July. EPS grew by 6.6% in dollar terms and 12.4% in rupee terms. Yield on cash balance was 6.71% in Q1. ROE increased to 32.8% in Q1, a 1.8% increase year-on year, which is a reflection of our strong cash generation and capital allocation policy. Large deal momentum continued and we signed 16 large deals in Q1. TCV was $2.3 billion with 56% net new. Three deals each were in FS, EURS and communication, four in retail, two in manufacturing, one in life sciences vertical. Region wise this was split by 11 in America, four in Europe and one in ROW. Coming to vertical segment performance, financial services vertical witnessed continued softness in areas like mortgage, asset management, investment banking, cards and payments.
Large and super regional banking clients in the U.S. have been resilient during this quarter. Large banking clients are focusing on vendor consolidation, cost takeout and self-funding transformation program. Many financial institutions are looking at outsourcing their non-core business that includes taking over existing employees across technology and operations. While delayed decision-making is impacting the vertical, our recent deal wins and the strong pipeline will help create momentum and opportunity for future growth. In retail, cost efficiency and consolidation continue to remain top priority for our clients. There is intense focus on leveraging AI to accelerate digital transformation for enhanced customer and employee experience, predictive analytics and real time insights.
While decision cycles are long, large deal pipelines remain healthy in infra (ph), apps and process modernization, cloud and workload migration. Communication sector is witnessing continued impact from budget cuts, delayed decision making for newer spends and slow ramp up. Growth challenges for the client such as due to increasing OpEx pressure. Cost optimization and vendor consolidation are top priorities for clients who are open to innovative solutions and are asking for AI to amplify productivity. OEM clients are showing greater interest in revenue generating services, decreased time to market, increased product quality and improved customer experience. Large [Technical Difficulty] vertical remains very healthy. Outlook for the energy utilities, resources and services vertical continues to be positive though there is slowdown in decision making.
Energy clients are coming to us for large scale transformation programs such as business capabilities for energy transition and journey to net zero. Utilities clients are focused on in-flight transformation programs or those required for regulatory compliance. Service clients are focused on consolidation and M&A, cloud cost optimization and legacy transformation. Our investment in industry cloud and solutions in the energy transition area had helped us differentiate in these sectors, in multiple deals and build a very strong pipeline. Manufacturing clients are focusing on controlling the spend and awarding deals which are focused on differentiation. Despite the volatile environment, deal pipeline is strong. Areas like engineering, IoT, supply chain, cloud, ERP and digital are seeing increased traction.
There’s a need to increase paper migration to cloud, increasing productivity by transforming to smart factories and transitioning to smart products. We are seeing opportunities across auto, aerospace and industrials. We have revised our revenue growth guidance for FY ’24 to 1% to 3.5% in constant currency terms. This was due to lower-than-expected volumes, which will ramp down in discretionary spend, coupled with lower mega deal volumes arising from delayed timing and longer ramp-up times due to regulatory approvals and transitions. Margin guidance remains at 20% to 22% for FY ’24. We continue to aspire for higher margins over the medium term with the razor sharp focus on cost optimization and efficiency improvements. As Salil mentioned, we have launched a new margin maximization program across the five pillars comprising over 20 tracks.
With that, we can open up the call for questions.
See also 11 Best Insurance Brokerage Stocks To Buy Now and 10 Best Scientific Instruments Stocks To Buy.
To continue reading the Q&A session, please click here.
