Infosys Ltd Q3 FY2024 Earnings Call

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. 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.

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.

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 artificial 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.

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 for Q3 margin are as follows: there are headwinds of 130 basis points comprising of 70 basis points from salary increases effective 1st November; and 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. 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 use 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 the communication sector continue 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 a cap in short-term spend. In the Energy segment, we are seeing market share gains due to consolidation. Our investment in 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-time 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 support 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.

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Hi. Good evening, and thank you for taking my questions. My first question was around the new deal wins, which has been pretty strong at $2.3 billion, it's some of the highest we have seen in the recent quarters. However, that also implies the renewals have been weaker. In the recent quarters, we have seen renewals to be in the range of $1.5 billion to $2 billion. In this quarter, it was less than $1 billion. And that could also be the reason for the slowdown in the second half, which you are expecting. Now we can understand that the new deal wins would be lumpy and difficult to predict, but you would have a timeline on the renewals, when they would be happening and what is the probability that you could see winning them back. So how do you see the next quarter or so panning out from the renewal perspective? Any visibility on that side?

Hi. This is Salil. Thanks for that question. My perspective on the large deal wins is that we are continuing to perform well with renewals, and we've achieved impressive net new wins totaling $3.2 billion. As we've mentioned previously, the figures for large deals can fluctuate from quarter to quarter. Last quarter also saw a significantly large number. That said, we have a clear view of our upcoming renewals. We're also benefiting from consolidations in many areas, which Nilanjan mentioned, as well as our clients identifying opportunities for cost savings and efficiency. All of this combines with the renewals occurring on their regular schedules.

Got it. Thanks for that. And my second question was around GenAI. So you have talked about 100,000 new employees being trained on GenAI. But can you quantify or share some insights on the client engagement side. Anything that you can quantify in number of projects that we are working or the amount of deals that we are winning. Anything that we can start tracking on that side?

At this point, we are not providing any external insights on our revenues or projects. However, it's worth noting that virtually every client conversation we have now includes some aspect of generative AI. Through Topaz, we have identified various beneficial applications and use cases where we're collaborating with many clients at different scales, ranging from pilot projects to larger programs. We've developed expertise in several large language models and trained our teams on utilizing data sets effectively. Our primary focus remains on large enterprises and their data, as the application of large language models depends on how that data is used. We have a strong foundation in data and analytics, which supports our generative AI initiatives. We are actively ensuring that the benefits of this work extend across all our service offerings. As we engage with clients, we are beginning to see productivity gains resulting from generative AI, although we are not quantifying these elements publicly at this time. This reflects the general trends we observe in a wide array of discussions.

Thanks for that, Salil.

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Hi. Good evening. Thanks for the opportunity. Congrats on the strong deal wins. So I think, first-off, Salil, anything that you have seen versus the previous quarter in terms of client behavior that would sort of suggest green shoots on the discretionary side or do you think that will continue to be under pressure for some time? The second question is for Nilanjan. It appears that we'll exit the year with margins lower than last year. Do you still believe that margins could be better next year versus the current one, where sort of highlighted that as sort of an aspiration at the beginning of the year? So just wanted your thoughts on how one should think of that at this point in time? Thank you.

Thanks. Hi. This is Salil. In terms of the client discussions, we have not seen some sort of significant change in one or the other direction from what we were seeing last quarter. So some of the digital transformation work or some of that type of programs are where clients are not putting focus or attention. Whereas the cost and the efficiency and now even consolidation, we are seeing more and more of that, which is what we were seeing last quarter as well. So in that sense, we don't have any change that we have sensed at this stage.

So Nitin, on the margin question, I think you've seen this quarter as well, the underlying margins, excluding the one-offs are quite resilient. And we've talked about now Project Maximus. This is nearly the third quarter. And there is a lot of work that has been going on, and we are seeing the benefits of that, and you can see that in our commentary as well, and we are very confident about the overall margin outlook. Of course, we won't give a number about next year. But really, the multiple number of tracks around value-based selling, around efficient pyramid, around automation and GenAI. I think they are all working well. So I think that gives us good optimism over the medium term in terms of our margin structure.

Perfect. Thank you so much and all the best.

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

Hey. Thanks for taking my questions and congrats on strong bookings for the quarter. First question, any color on the ongoing budget cycle for calendar ‘24? Do you think budgets will be on time? Do you think budgets will be delayed? Any color there on that one?

Thanks, Moshe. This is Salil. On the budgets, we have seen, first, as we saw our Q3 end of the year quarter, the furloughs were in play. We're seeing that coming into play in the Q1 calendar year so our Q4. The budget decisions are ongoing. And as you know, well, these will go through the early part of this month, so nothing from that. But we don't see any change in what we were seeing in terms of behavior from the last quarter where budgets would suddenly have a different direction. So at this stage, it looks like it's similar to what we were seeing, but everything is not yet closed out from our discussions on the budgets.

Understood. And then looking at the deal flow, the large deal flow that went through calendar '23. There are some concerns that they're not converting, some of these are not converting on a timely basis. Has that changed in any way in terms of conversion some of these deals? And when we could start seeing that inflection point in revenue growth because of those deals converting? Thanks a lot.

We view the revenue flow as being supported by large deals, particularly those that are new or renewing, which will contribute to future revenue. However, we are also experiencing instances where digital programs are either not progressing or are being halted. This combination influences our revenue results. At this time, we do not have a clear external perspective on what will happen in the upcoming quarter, but our overall revenue guidance for this financial year, which has just one quarter remaining, reflects our current outlook. As many of the large deals begin to materialize and as clients show increased interest in digital capabilities, we expect to see a shift in this situation.

Thanks, Salil.

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

Hi. Thank you. Salil, could you elaborate on what you've seen with client spending sentiment has been, a, on projects that have already been signed, let's say, in the last nine months or so on the cost takeout side; and b, on incremental signing of smaller projects because we can see our large projects where we don't have visibility on how your small projects are doing?

Sure. So on the client spending, where clients have signed recently in the last three, six, nine months that spending is going well, both on cost and other projects, incrementally as you were describing. On things that were more in the past that behavior on the cost has continued, and the incremental projects we have seen even in the past quarter some impact. But what has been signed recently, we see those proceeding as per what they have signed.

Understood. You've mentioned several times during the call that there are delays in revenue recognition due to project reprioritization. Is there a way to estimate this for the benefit of investors? For instance, how much of fiscal '23 or the last two years' total contract value or signings may have been affected by changes in client priorities? Alternatively, how much have signings been declining each quarter, considering the new project signings needed to maintain the same level?

We are not in a position to share that externally. Internally, we have insights on our wins, execution, and significant deals. There are also various programs, some small and some medium-sized, that fluctuate. While we manage this internal competition, we have not shared these details externally in the past, nor do we plan to do so today.

Understand. I wanted to color it as opposed to maybe a quantification.

Yeah. So same, I think at this stage, the outcome is what we have. We've not given any more on that in terms of color as well, Ankur.

Understood. Maybe moving to margins, just one question. Obviously, this quarter, if I take out the impact of the ransomware incident, it appears that margins would have been up by 60 basis points. Is that right? Number one. Number two, if you could elaborate on where we are on the various Project Maximus levers and where is the remaining support, let's say, over the next year or so?

We've discussed the margin dynamics in our initial remarks, specifically addressing the one-off items and salary considerations. Overall, with Project Maximus, there are numerous initiatives underway. Utilization is a key focus and is significantly impacting our metrics and margins. There are also several internal programs making progress, particularly with on-site and offshore operations, showing positive trends after several quarters. We're actively working on automation and GenAI, which are providing us with additional advantages beyond our traditional automation methods. Pricing has improved, and we are enhancing our value-based selling approach. This stability in underlying pricing is something we are actively promoting. I believe we have all the necessary strategies in place. There are quarters where we can optimize further, and with Project Maximus, we are exploring the potential for early margin improvement on large programs, diverging from what was initially budgeted in the bid phase. A lot is happening, and we are already seeing promising early results.

A quick follow-up, if I can. There's some concern that some of the cost takeout contracts, one in the last nine months may drive some margin headwinds. Is that something that should impact on a portfolio basis next year?

That's something we've consistently discussed. We have a portfolio of contracts spanning multiple years. While new contracts may initially come in at lower margins, we also have contracts that are now operating at a steady state. Some of these concerns were raised a few years ago in one of our segments, and we've observed improvement in that area, bringing it closer to the company's average margin. We've fine-tuned and mastered this process over the years, and it's always factored into our projections and forecasts.

Appreciate the color. Thank you and best of luck.

Thank you.

Next question is from the line of Bryan Bergin from TD Cowen. Please go ahead.

Hi. Good evening. Thank you. First question I have is demand by geography. Can you talk about pipeline and client spending plans across the U.S. versus Europe, maybe also based on what you have in backlog. I'm curious if you think the recent trend of North America weakness being offset by solid Europe performance is likely to continue, or whether that may change as you go through fiscal '25?

Thanks. This is Salil. On the geography, as you point out, we had good growth in Europe in Q3, weaker in North America outcome. In terms of pipeline, we don't share the pipeline split by geography. We do see a large deals that Nilanjan shared by geography, in good momentum, at least on the large deals on both U.S. and European side, but we don't sort of specifically call out pipeline or outlook by geography within our business.

Okay. Any reason that the current growth trajectory should change near term? Or should it remain somewhat consistent?

If you look at our guidance for the full year, which includes the remaining quarter, it's for the entire business. We don't provide a specific view that we share externally regarding the U.S. or Europe.

Okay. Follow-up on the third-party items. So another uptick here, just I think, over 8% of revenue now. Can you talk about what you expect third-party items to continue to rise as mix revenue or may this start to come down as you go forward and deal composition potential change? I'm just trying to think about sustainable level here as this has moved up meaningfully over the last couple of years.

Yeah. So as we've talked about this before, as we are involved in larger transformation deal, the longer-term transformation deals across the entire IT stack, infra, cyber, application development, data. I think many of these are bundled deals, which have software, hardware elements in it. And in a way, that's also giving us the benefit of taking these larger deals off the table. And at the same time, we are able to manage our margins as well. So we are able to navigate both the impact of this. So we have no number in mind to say that this is where we target or this optimal level. As long as we are able to get incremental market share and get margins in line, which is what the program of Maximus is also about, I think we are comfortable with that.

Okay. And just last one for you, just on the resourcing plans. Can you just give us a sense how you're thinking about resourcing plans near term? I know it was down again sequentially about 2%. I'm just curious if you've kind of reached a stabilization point?

Yeah. So we still have a lot of headroom, and we've talked about it in the last two quarters that our utilizations are still quite low. We've operated at much higher utilization, 84, 85 and enough cost in the COVID years, maybe 87, 88. So that's one, and we are still below 84 as we speak. We also have on-tap demand fulfillment from our fresher model so we can absorb freshers in very fast because we don't have to now just go for colleges and wait for the annual cycle. Now we have a source of supply from off campus as well. And with attrition slowing down, there is a lot of talent even from a natural basis available across the country as well. So I don't think that's a big concern for us.

Good luck to you, Nilanjan. Thank you.

Thank you.

Thank you. Next question is from the line of Keith Bachman from BMO. Please go ahead.

Hi. Thank you. I wanted to ask a couple of questions, if I could. First, on pricing, you mentioned specific segment of pricing. But I wanted to ask about, a, pricing on renewals. Are you seeing pricing pressure that's different from past cycles at the time of renewals? And then also, you have good deal signings for large deals. I wanted to talk, if you could address pricing for those large deals and how that might be impacting your margins? And then I have a follow-up, please.

Yeah, I think we've experienced much better pricing stability over the last few years. We are very mindful of our value-based selling strategy, ensuring we maximize our revenue in our deals. There's a lot of effort being put into this area. Overall, from a competitive standpoint, pricing has remained stable, which reflects the cost pressures that companies are facing and their awareness of margins. Therefore, there isn't much concern currently. We do have specific clients and segments that may be facing challenges and might seek rebates, but on the whole, this isn't a significant concern for us right now.

Okay. Then my follow-up relates to duration. This was asked a little bit differently earlier in the call, but as you're getting good signings of large deals, is the duration of those large deals extending so that investors should be thinking about the book-to-bill being a bit longer?

We do not disclose the duration of our deal wins. We have deals with both longer-term periods and some announcements, but we don't provide specific details about whether these are increasing. Therefore, we refrain from commenting on that.

Okay. Then maybe I could sneak in one more. If you just look out over the next couple of quarters, if you could just help us, I'm not asking for guidance, but just the puts and takes on margins that we should be thinking about. You've already said that utilization perhaps is a source of at least I heard it is potential margin upside as utilization goes up. I would think that wage pressures would be less going forward, but not sure how mix fits into that. But anything you just want to highlight beyond the March quarter, but just the puts and takes that we should at least be considering as we're creating our margin profile over the next, call it, four or five quarters?

Yeah. So I think one of the earlier questions was on this, and probably I talked about Project Maximus as well. I mean there are other benefits, which we don't factor in into any of our models, really for instance, operating leverage, right? You can see the impact of SG&A benefits on operating margins when we are growing during '21, '22, '23. So that's something which automatically flows into the P&L with growth. And in a way it gets reversed, the operating leverage reversed against you when revenues are down. So that's something from a pure margin perspective, which flexes. Secondly, I think similarly on the currency, we don’t build in anything into our programs. And that also comes in the future as well, but it’s not part of Maximus. Of course, there are things out there, how – what the expectations of dollar movements are. So these are some things more extraneous as well which can impact, but we are more confident about what we are able to control within the 20 tracks of Maximus, and we’ve talked about that.

Okay. All right. Thank you.

Thank you. The next question is from the line of Jamie Friedman from Susquehanna International Group. Please go ahead.

Hi. Good evening. Nilanjan, in your prepared remarks, you expressed confidence in growth in the medium term. I was just hoping you could unpack that a little. When you say medium term, is that just a comment about the fourth quarter or is that longer in duration?

Yeah. Medium term is medium term. It's definitely more than the fourth quarter.

Thank you. I have tried to understand how Salil sees strength in the TCV and a record over the last nine months while Nilanjan described the situation as subdued in your remarks. It seems like you’re suggesting there are mixed signals. How can we be experiencing both at the same time?

Hi. This is Salil. Maybe the way that we are thinking about this, we can share with you. The large deals really give us good confidence of revenue over the next several periods in terms of the wins, both for net new and renewals. And the comment, which was more around subdued, we look at it from a perspective of where we see less activity on digital programs and less activity on some of those type of projects where that takes away a little bit from the revenue. So that's the sort of balance in our mind. One of them giving us that revenue outlook and the other where clients are under constraints on their own spend, reducing some of that. And that's how we see the balance on that. Hopefully, that clarifies the comments.

Thank you, Salil. I’ll jump back in the queue.

Thank you. Next question is from the line of Sumeet Jain from CLSA. Please go ahead.

Yeah. Hi. Thanks for the opportunity. Firstly, I wanted to ask around the one-time loss what you had around McCamish, are you expecting it to reverse back in Q4 and included in your guidance or will it reverse some time in FY '25?

No, this is one-time. There is no reversal.

Got it. And secondly, I wanted to check around your platform business. I mean we have seen for the last two years, there has absolutely been no growth in that particular business. But although we keep seeing deal wins around your Finacle platform with various regional banks in the Middle East geography and other regionals in North America as well. So can you share any plans to grow that part of the piece where we are seeing the other SaaS companies globally have actually seen a lot of traction post the GenAI offerings and their solutions?

Yeah. So I think we continue to do well. I think Finacle business continues to motor ahead, a very nice deal wins across and overall platforms is a more generic usage. And I mean, we track it across various things, but Finacle actually overall has been doing very well.

So any reasons for the platform business to be flat over the last two years.

So I think we can get back to you on that.

Okay. That’s all I had. Thank you.

Okay. I think Sandeep just prompting me that we also use it for internal productivity as well.

Got it. Thank you.

The next question is from the line of Yogesh Aggarwal from HSBC. Please go ahead.

Hi, I have a quick question. The number of employees is down 7% year-on-year, but the total wage bill is up about 1% or 2%, which indicates that the wage bill per employee has increased by around 9% to 10% year-on-year. I would have expected a slower growth in the last few quarters to have influenced this. Can you explain why the wage bill per employee has risen so significantly? Thank you.

I believe the increase in compensation has also occurred this quarter. Earlier in the year, we experienced more lateral movements at the higher levels of the organization. However, if you look at the most recent quarter, you'll notice a reversal of that trend. I think employee costs have decreased this quarter as well, suggesting that you might see a shift in that trend.

Okay. Thanks. Nilanjan, all the best for your future endeavors.

Thank you.

Thank you. The next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Hi, thanks for taking my question. Salil, I have a question regarding the recent numbers. I know we've discussed it a bit already, but I wanted to get some feedback. This quarter has been softer in terms of seasonality and likely due to higher furloughs compared to last year. I'm curious about the overall demand environment we're observing, particularly regarding cost-cutting deals, discretionary spending, and various sectors. Has there been any change in the demand landscape since three months ago when we talked about the second quarter results? How do you foresee this evolving over the next few months as clients enter their budget cycles? Are there specific sectors you’d like to highlight?

We've observed that, with our large client base, there hasn't been a change in their spending behavior. Digital transformation programs are still being affected, with a stronger emphasis on cost efficiency. Additionally, we're noticing more consolidation, which was evident in the previous quarter. Almost every discussion we have includes interest in generative AI. Therefore, I don’t sense any significant shifts in our current situation. As we enter the new calendar year, we will quickly gauge how clients are approaching their spending. As we conclude our financial year and plan for the next one, we will have a clearer understanding of their spending patterns.

Got it. In terms of deal flow, the deal wins we had in the first half of the year were very solid. Can you share any insights on some of those deals moving into execution mode based on your conversations with clients? Are we observing any increased intent from clients to start those deals that may have been delayed, or any updates on that over the past three months?

So there, we've seen essentially in this last three-month cycle, the deal starting or ramping up being as we anticipated. So nothing has changed in this three month cycle. There are places in some of the large deals where there's need for incremental work, which is also starting to be visible, which will hopefully flow through. So there has been no delay that we've seen. In fact, we've seen more of those on track in the last three months.

Got it. Thanks for taking my questions and wish you all the best.

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

Hi. Thanks for taking my questions. The first question is with respect to the mega deal signed in 2Q. The transition period was expected to be a little longer, and some of them were supposed to come into revenues in the fourth quarter itself. So is the expectation remaining similar on that or has anything changed with respect to the transition period and flow-through of the revenue?

There, as we had shared previously, it was towards the end of the year and that's where we are. So we don't see that changing.

Got it. Second question is with respect to the underlying sort of leakage in the business on small deals discretionary spend that has been continuing now for some time. How do you characterize your 3Q versus, let's say, 1Q and 2Q, has the leakage remained largely similar or has that kind of come down compared to the base that it was kind of leaking in the first two quarters?

Let me clarify our perspective on this. In the last quarter, which covers the last three months, we have not observed any changes in direction. They seem to be stable or consistent.

And is that a similar thing built in your outlook for the fourth quarter as well when you tightened your guided band?

At this stage, that's what we've put into the Q4 outlook, yeah.

Got it. Last question is on the margins. Given that you will have some bit of more headwind in fourth quarter because there will be a full three month impact of the wages that you have provided for in this quarter, your margins probably will have some more headwinds plus your implied guidance points to sort of again weak revenue trajectory in the fourth quarter also. So no major massive operating leverage per se. It's just that you're exiting the year with margins closer to the lower end of the guide. Is that the bottom for the margins and given the Project Maximus is underway, from here on the margin should only be going in the upward direction. Is that the way to look for it? I'm not specifically looking for fiscal '25, but just trying to understand is that the bottom for the margin. Thank you.

Yeah. So in Q4, I mean it will work out of Q3 as well and there are puts and takes in Q3. And like we’ve said, Project Maximus continues to deliver very strongly. And in our overall commentary, we’ve talked about the optimism in the medium term for our margins coming out of Maximus.

Thank you.

Thank you. Next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Yeah. Thanks. Thanks for the opportunity. Most of the questions have been answered. Just wanted to understand the 60 bps impact on cybersecurity, is it possible to break down in terms of revenue and cost? And is it fair to assume the impact which could have been there because of the cost will actually no longer be there, it would be a tailwind in the fourth quarter?

I think we can't separate them, but both are one-time impacts, specifically the loss of revenue and the cost impact. This is part of the overall fluctuations. So right now, as we see it, there won't be an impact in Q4.

Okay. So even the revenue will come back in the fourth quarter, right?

Yeah. So I think in the statement, you have seen that the systems are back substantially by the end of December, right, the system is up and running. So I think that part goes away.

Okay. And Nilanjan, for two months of wage hike, 60 bps to 70 bps wage impact looks slightly lower. So is it the almost 100% of the eligible employees have been covered? And is it fair to assume the wage impact would be much lower in the fourth quarter because it would be one month impact?

Going to be a one-month impact, absolutely. And every time we do a wage hike, we look at, of course, the competitive scenario, we look at the market, attrition, employees tenure, what are the pay point grids. So it's a very complex exercise. And based on this, we think what we have rolled out. And of course, you can see the attrition figures are also good.

Okay. Thanks and all the best, and all the best Nilanjan.

Thank you.

Thank you. The next question is from the line of Kawaljeet Saluja from Kotak. Please go ahead.

Hey. Hi. My question is for Nilanjan. Nilanjan, the margins for this quarter, is it based on your normal variable compensation provision or is that something which has taken a hit in this quarter?

We don't discuss the variable pay, so there won't be any news about that. We do not provide any commentary on variable pay.

Yeah. I mean I think it will make its way to the media after a month, so might as I talk about it now Nilanjan.

We never confirm at any case.

Okay. Got that. All the best in future endeavors, Nilanjan.

Thanks, Kawal.

Thank you. Next question is from the line of Manik Taneja from Axis Capital. Please go ahead.

Thank you for the opportunity. I would like to ask about the concerns the industry has raised over the past nine to twelve months regarding project leakage and the lack of extensions on certain projects. Have you noticed any changes in this area? My second question is about the expansion of captive centers, as we have seen ongoing updates on that front. Could you provide any comments?

Thanks. Regarding the first part, in the last quarter, we haven't observed any changes in the progress of projects that have followed a similar trajectory. For captive centers, we usually notice that new technology shifts, whether related to digital, cloud, or generative AI, spark increased interest among clients in establishing captives. Additionally, as technologies mature, some clients are looking to exit and optimize. We've seen this reflected in several large deals over the past few quarters, where, alongside transformation initiatives, we've also focused on optimizing existing captives. So, we don't see any changes; it’s possibly just a period of heightened activity due to new technologies. However, we are also witnessing the opposite trend with setups from five, seven, or ten years ago that are now experiencing transitions or decline.

Sure. And one last question from me, we've been seeing our head count reduced for the last several quarters. Any sense on how we should be thinking about the optimization on this front given the kind of deal wins that we've had in the last three quarters?

Yeah. So I think I've mentioned that a couple of times, utilization is something where we have headroom. So the decline in headcount really doesn't concern us too much. And both from availability of talent to ramp up, we have now have a very strong off-campus program. This is something over the last three or four years, we've perfected post-COVID. And that's really on tap without having to give out requests to colleges one year in advance. And of course, from a lateral perspective, like I mentioned, with the market being soft, there is, of course, talent available that release. So in that sense, we are very, very comfortable with any volume requirements and ability to fulfill.

Sure. Thank you and all the best for the future.

Thank you.

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

Thank you. Just first, everyone on the call, thanks very much for joining us and for your questions. I want to just summarize with a few points. First, we're very excited with the large deals at $3.2 billion, 70% net new. It really shows the foundation of what we see for the future. Very happy with the strong margin and also for an extremely strong margin improvement program that's in play. Generative AI work is really pervasive. It's across all of our client discussions, in our service lines and we believe we're building extremely deep capability within our Topaz set of capabilities. We see continued strong focus on cost takeout, consolidation, and we have extreme strength in that. We feel good that, that will continue. If that continues, we have a good play into that. And then finally, we feel good overall about the resilience of our business given the quarter and the seasonality that we had and the overall economic environment. We feel really good about the resilience of our business and the future. So thank you, everyone, again, and look forward to catching up at the next quarter call.

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