Wipro Ltd Q3 FY2025 Earnings Call

Ladies and gentlemen, good day, and welcome to Wipro Limited Q3 FY '25 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. Please note that this conference is being recorded. I now hand the conference over to Mr. Dipak Bohra, Senior Vice President, Corporate Treasurer and Investor Relations. Thank you and over to you, sir.

Thank you. Warm welcome to our quarter three financial year '25 earnings call. We will begin the call with business highlights and overview by Srinivas Pallia, our Chief Executive Officer and Managing Director; followed by updates on financial overview by our CFO, Aparna Iyer. We also have our CHRO, Saurabh Govil, on this call. Afterwards, the operator will open the bridge for Q&A with our management team. Before Srini starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of Private Securities Litigation Reform Act 1995. These statements are based on management's current expectations and are associated with uncertainties and risks, which may cause the actual results to differ materially from those expected. The uncertainties and risk factors are explained in our detailed filings with SEC. Wipro does not undertake any obligation to update the forward-looking statements to reflect events and circumstances after the date of filing. The conference call will be archived and a transcript will be available on our website. With that, I would like to hand over the call to Srini.

Thank you, Dipak. Hello, everyone. Thank you for joining us today. Our best wishes for the New Year. 2024 was marked by macroeconomic challenges. 2025 looks more hopeful and resilient. Our clients are cautiously optimistic and discretionary spending is slowly coming back. While cost optimization remains key, we expect significant growth in AI spending. We are committed to driving innovation for our clients by leveraging the transformative power of AI. Let me now turn to the financial highlights of the quarter. All the growth numbers I share will be in constant currency. Our IT Services revenue for quarter 3 was $2.63 billion, reflecting a sequential growth of 0.1% and a decline of 0.7% on a year-on-year basis. This takes us slightly above the upper end of our guidance. We ended the quarter with a TCV of $3.5 billion in bookings. Our operating margins came in at 17.5%, an expansion of 0.7% quarter-on-quarter and 1.5% year-on-year. This is a 12-quarter high, and I want to take this opportunity to thank our delivery teams for driving execution rigor. Our Capco business continued to see improved demand. Order book grew by 9% year-on-year and revenue grew 11% year-on-year. In our strategic market unit performance, we saw steady growth in demand across the Americas, while Europe and APMEA remained soft for us. Americas 1 grew 3.9% sequentially and 3.7% on a year-on-year basis. Growth was primarily led by health and technology and communication sectors. Americas 2 declined 0.6% sequentially and grew 1.2% on a year-on-year basis led by BFSI sector. Europe decreased 2.7% sequentially and 4.6% on a year-on-year basis. APMEA declined 2.1% sequentially and 8% on a year-on-year basis. Moving on, 3 of our 5 industry sectors recorded year-on-year growth, reflecting the progress across key areas. Health maintained its momentum, growing 6.7% sequentially and 4.5% year-on-year. While BFSI declined by 1.9% quarter-on-quarter, the sector grew 3.4% year-on-year. Consumer declined by 0.9% quarter-on-quarter and grew 0.4% year-on-year. Energy, manufacturing and resources grew 0.4% quarter-on-quarter and declined 8.7% year-on-year. Technology and Communications decreased 0.6% quarter-on-quarter and 5.3% year-on-year. I would now like to share some updates on our strategic priorities that we had called out. In quarter 3, we closed 17 large deals with a total value of $1 billion across markets and sectors. I would like to give you 2 examples in this context. We won a vendor consolidation deal with a leading American retail and distribution company. As a strategic partner, we will transform their merchandising, sales and supply chain functions. In fact, our AI-led approach across engineering, digital, infrastructure and application services was crucial in helping us win this deal. My second example is a leading airline in the Middle East that has partnered with us for end-to-end technology modernization. As part of a long-term contract, we will design and implement a customized, cloud-based solution to improve operational agility and resource utilization. Again, using AI-powered industry solutions, we will enhance employee productivity and customer experience for them. We continue to focus on our large accounts, in our core markets and priority sectors. In quarter three, we achieved a sequential growth of 7.3% in our top account. Top 5 and top 10 accounts grew 3.7% and 1.8%, respectively. We remain committed to investing and scaling our large accounts, demonstrating client centricity by driving greater value, increasing wallet share and expanding into new lines of business. I would like to give an example of this. A global technology company selected us to create and scale a cutting-edge silicon platform for its mixed reality products. We will work with the client to develop a silicon chip to deliver high performance at low power consumption. We will integrate advanced features like AI, sensor fusion and stunning graphics to enhance end-user experience. This is one of Wipro's largest core silicon engineering wins. We have made good progress in our consulting-led AI-powered industry and cross-industry solutions. This quarter, we had several successes across our industry solutions, including Payer-in-a-box, wealth AI and software-defined vehicle. Additionally, we also secured multiple cross-industry wins with our next-gen managed services and cyber shield offering. At Wipro, we continue to invest in AI education. 50,000 of our employees now hold advanced AI certification. Beyond skilling, we are also investing in AI tools and platforms across the software development cycle and our own internal processes. At Wipro, we are early adopters of AI, which will be delivering impactful results for our clients. This technology goes beyond traditional productivity assistance. While many of these applications are still experimental, we see use cases emerging in areas like customer service and supply chain management. Building talented teams is a key strategic priority for us. We remain focused on building a globally diverse team with a high-performance culture. While we are promoting strong internal talent, we're also bringing in top external talent. We are investing significantly in leadership development. In FY '25, the Wipro Leadership Institute is set to train over 600 leaders through a combination of in-house leadership sessions and programs curated with leading global institutes. Finally, I want to recognize the dedication of our employees during the holiday season in delivering business-critical programs successfully for our clients. Now a note on guidance, before I wrap up. For the next quarter, we are guiding for a sequential growth of minus 1% to plus 1% in constant currency terms. With that, let me turn it over to Aparna for a detailed overview of our financials. Thank you. Aparna, over to you.

Thank you, Srini. Good evening, everybody, and wish you all a terrific new year. Let me cover the financial highlights for the quarter in a few key points. One, as a result of the strong in-quarter execution, we delivered about the top end of our revenue guidance range, growing 0.1% quarter-on-quarter in constant currency terms. Two. Our operating margins are at a 12-quarter high or 17.5%. This marks an expansion of 0.7% quarter-on-quarter and 1.5% year-on-year. Let me also add that this was achieved after absorbing 2 months of incremental wage revision. With this, the wage revision impact that we did as of September '24 is fully behind us. As we move into Q4, we are confident of staying in a narrow band. Three. Our EPS and net income grew 24% year-on-year and 5% sequentially. This was led on the back of the margin expansion and therefore, the EBIT growth, better treasury returns and a stable ETR of 24%. Four. I'm pleased to share with you that the Board of Directors has approved increasing the payout percentage to 70% or above of the net income, cumulatively on a block of 3-year period, this is effective FY '26. Along with this, the Board has also declared an interim dividend of INR6 per share. You'll note that this is substantially higher in terms of the quantum of dividend payout compared to what we did in the previous year. Finally, in terms of guidance, I want to reiterate the guidance stated by Srini. Our guidance for Q4 is minus 1% to plus 1%, and therefore, in dollar terms it will be $2.602 billion to $2.655 billion. This is in constant currency terms. With that, we can open it up for Q&A.

We'll take our first question from Vibhor Singhal from Nuvama Equities.

Congratulations on a strong performance, particularly regarding margins. Srini, I have a question about the deal wins. Deal wins have certainly increased year-over-year, nearing $1 billion in large deals, and total contract value has consistently remained above $3.5 billion. How do you think this trend will assist us in achieving a higher year-over-year growth rate? Execution in the past few quarters has been very solid. However, at what point do you believe we can reach a mid-single-digit year-over-year growth rate or even exceed that? Do you see a sufficient pipeline to help us attain that in the upcoming quarters, and how soon do you think we can get there?

Thank you, Vibhor. I appreciate your question. Our large deal pipeline is strong, and we are experiencing good momentum across various regions. When we look at it from an industry perspective, our best traction in large deals is in the BFSI and EMR segments. BFSI is performing well in the Americas, Europe, and India, while in the EMR space, manufacturing shows stronger performance in Europe compared to the U.S. Our Energy and Utilities sector is also strong, particularly in the Americas, including the U.S. and Canada, followed by ANZ and Europe. In the healthcare, consumer, and technology sectors, we are seeing increasing traction in medium to large deals ranging from $50 million to $100 million. In quarter 3, our large deal Total Contract Value was $1 billion, reflecting a 6% year-on-year increase in value and an uptick of 3 deals. However, I wouldn't read too much into this. Large deals can be unpredictable, and there's a seasonal aspect to them. As you may recall, we experienced a record quarter in Q2 '25, and now we have a strong closure. Therefore, we do not see this as a cause for concern.

Got it. In terms of discretionary spend outside of Capco also, are we seeing tailwinds in terms of clients willing to put the spend back on the anvil or do you believe there is still some time to be able to reach that stage?

So if you look at it from a discretionary lens perspective alone, we did talk about Capco, where both the bookings and revenue saw good year-on-year growth in quarter 3. Having said that, the discretionary spend in the Americas, definitely, we see positive signs in the BFSI segment, which is good news for us. We also see some level of uptick in certain sectors, but it's not secular at this point in time. Also, this is a month where many of our customers are in the process of budgeting, and we are working with them to understand where the spend is going to be. But if I were to actually extend your question to the overall demand environment, we see Americas very strong and the demand continues to pick up. While if you look at our bookings into $1 million to $5 million and $5 million to $10 million range, it has been very strong. However, in Europe, while the economies are challenged, as we all know what's happening in Germany, the U.K. or France, this has put some pressure on some of our clients and some of the companies out there to trim their costs and become more efficient. We see this as an opportunity going forward. Just to conclude, the overall pipeline is healthy and has remained at the same level over the last year.

Got it. Just 1 question for Aparna. So Aparna, I think margins in this quarter were rock solid. We were able to expand margins despite a 2 month wage hike. Could you basically reflect on some of the levers we managed to use this? Because our gross margins have also expanded in this quarter on a quarter-on-quarter basis despite the wage hike. And a related question, what would now be our, let's say, target band of margins given that we're already in the 17.5% range? In the near to medium term, where do we expect these margins to be, let's say, in the next 3 to 4 quarters?

So Vibhor, yes, the margin expansion has come. If you look at what were the factors in Q3, we started the quarter with 2 incremental months of salary wage hike to absorb. We also had a seasonally weak quarter in terms of furlough. A lot of the improvements have been in action consistently over the last 3 to 4 quarters. Some of that played out. The improvement that we made to offset the increase and also expand the margins came from the back of improved execution rigor, both in our core and in the consulting business. Looking at rising Capco and the core business, all of that has done very well. Now we had a set of levers, which are traditional in terms of the utilization, offshoring and the fixed price productivity that played out. We also did a very conscious reduction in terms of our overheads, including G&A. Despite the wage hike and everything, you'll see those numbers coming down. These conscious reductions that we drove have also yielded in margin improvement. In terms of a revised operational band, nothing that we would like to share at the moment. We've got to 17.5% that we had shared and it's a 12-quarter high. We are very conscious that we should sustain it. And therefore, for Q4, we are saying that we are confident of holding it in a narrow band, and we'll take it from there.

So 17.5% plus/minus could be the aspiration band now?

Yes, at least for now.

We'll take our next question from the line of Abhishek Kumar from JM Financial.

Congratulations on a very good performance. My first question is on growth and related to that is on guidance. Last 2 quarters, we have now been coming closer to the top end of our guidance, which was not happening in quarters prior to that. I just wanted to understand what has changed? Are the mid-quarter negative surprises kind of abating and that is helping us hit the top end or has the demand environment been improving? So that is on the performance. And related to that, on guidance, next quarter, despite the fact that furloughs will be absent, we are still looking at flattish growth similar to 3Q. So some of the puts and takes for our 4Q guidance.

Yes. Sure. So Abhishek, if you look at it, our guidance when we guide there's no change to the philosophy of guidance. We guide based on the visibility we have closer to the midpoint, and then we guide in a range. The fact that in the last 2 quarters, we are able to come about the midpoint is because of both stronger execution in quarter and the improving demand environment. It does show that the stability that we are able to draw at the start of the quarter to when we finish is better. This is reflected in the fact that some of our consulting businesses are doing well. Capco, as highlighted, has grown 11% year-on-year. Bookings are up 9% year-on-year. So that's a good sign. But otherwise, there's no change. As we look at Q4, it is a better guidance compared to the guidance we gave for quarter 3, and that's the present visibility for us.

Sure. Okay. Maybe one question on margin, Aparna. There was a sharp decline in depreciation in this quarter. So is that now a more normalized level as far as depreciation is concerned or was there any one-off there that we should be aware of?

No, I don't think there are any one-offs. It's likely to sustain. You can model it at the same level.

We'll take our next question from the line of Abhishek Bhandari from Nomura.

I had a question on growth and the guidance, again. So Srini, if I look at your growth for this quarter, it was broadly led by health care, partly by manufacturing. But in banking, we had a negative number. Is it both because of the furlough? And if you could talk about your outlook specifically for banking and health care businesses, given that some of your peers are talking about increased caution amongst health care clients, given uncertainty around policy, and optimism in banking due to potential decreases in rates?

Let me give you some color on this. If you look at BFSI, it was impacted by furloughs in quarter 3. However, the sector has grown 3.4% year-on-year. This is clearly a combination of discretionary spend led by capital which has been timely, which is consulting work, and also non-discretionary fees in some of the large and midsized deals, which are more around the themes of vendor consolidation and cost optimization. If you look at BFSI budgets going forward, we feel there will be an uptick, and health care budgets will continue to grow, albeit maybe at a slower pace than what it was in the past. So that's my take on both health care and BFSI.

Got it. And Srini, second and last question is again on the guidance part. Given that we had a great execution this quarter, we exited at the top end. We are talking about some return of discretionary demand, furloughs would be absent, and there will be some tailwinds coming from the execution of the projects in the near past. So I'm still curious why you have a negative number from a guidance perspective when most of the things are actually positive for you?

As Aparna said, we've given the Q4 guidance based on the visibility we have. Having said that, we are seeing a gradual recovery happening. The sectors that I talked about just now, BFSI and Health care, clearly are doing well. Some of the sectors for us, both in EMR, especially energy, manufacturing, and resources, still need to recover. If you look at geographies, we see momentum building in the Americas, while Europe and APMEA remain soft for us.

Got it. And last question, Aparna to you, now that we have a return of capital to shareholders of around 70%, how should we think about the mode of return? And you have mentioned blocks of 3 years, so would it again be lumpy if you decide to use the buyback route or do you want to make it more like an annual?

In terms of returns, we continue to prefer both dividends on buybacks and/or even special dividends as appropriate. The Board will make a decision on this. We want this to be more consistent, but can't rule out a buyback. We've said that you should continue to measure this over a block of 3 years. We will assess, and if at some point in time, we want to make this annual, we will. But for now, we will continue to measure this as a block of 3 years, and we prefer both buybacks and dividends.

All the best for calendar '25.

Thanks. Thanks, Abhishek.

Next question is from the line of Rishi Jhunjhunwala from IIFL Institutional Equities.

Just 1 question around mining the non-top 10 clients better or looking for hunting opportunities. If you look at, we have done reasonably well when it comes to growth in top 10 clients. It's up 15% year-on-year, whereas excluding that, our revenues are still declining at a 5% rate. So I just wanted to understand, outside of the top 10 clients mining, given that if the overall environment were to become better, how are we preparing ourselves to ensure that when some of those opportunities come, we are able to hunt better as the decline in non-top 10 seems to be a lot higher than what we generally see in industry peers?

Rishi, there's no change to the philosophy. We would like to continue to hunt and mine, right? We do look at mining our top 10 clients or top 25 or top 50 as a show of strength, and that's something that we're focused on. The reduction that you're seeing in our active client portfolio, we report that number on a trailing 12 months. So if there is a weaker revenue environment, that also shows up in the number of active clients. It's also the furloughs and the cross-currency impact that's playing out a little bit this quarter. But there is certainly, in terms of the strategic priorities that Srini talked about, hunting remains a very key lever for us, and we are very focused on winning the must-have accounts.

Next question is from the line of Ravi Menon from Macquarie.

This quarter, even without any assistance, the margins have been impressive. So I am actually surprised that you're referring to this.

Sorry to interrupt, Mr. Menon, can you use your handset mode, please? Your audio is not very clear.

Yes. The margins have been pretty good. So surprised that you're talking about keeping it in a narrow range. Are there any headwinds in the coming quarter that you're thinking about? Because it looks like at least the rupee seems to be depreciating. So how should we think about margins for what the headwinds and tailwinds next quarter?

Yes, the rupee has been depreciating, and we need to monitor it closely. It has been quite volatile in recent weeks. There are several factors at play, and we also have certain hedges in place that will impact this situation. As we enter Q4, I don't foresee any significant challenges. Unlike last quarter, we won’t have to deal with a wage increase. It will be business as usual, so I don't see any notable headwinds to mention.

And Srini, health care, seasonally, this is actually normally a good quarter for health plan services. So is that what helped you, or are there any other segments within health care that you're seeing good traction there?

If you look at health care for us, it's a combination of payers, providers, pharma and medical devices companies, so the growth that we see has been across these four sub-industries.

We'll take our next question from the line of Gaurav Rateria from Morgan Stanley.

Congrats on great execution on margins. My first question is on the large deals. Have you seen any change in the average tenor of these deals and hence, the conversion of these deals into revenues?

In some sense, Gaurav, our large deal bookings are down sequentially, but our TCV bookings are not down. The quantum of small- and medium-sized deals have picked up this quarter, which also means our ACV growth was particularly good after several quarters. But it's still one quarter. We'll wait and watch to see if this is a deterministic trend that plays out. But as far as the overall texture of deals when we see in the pipeline, there are quite a few large deals as well, both in terms of cost takeout, consolidation, and efficiency. In some sense, the large deal pipeline continues to remain robust. The bookings in Q3 have definitively shown that the deal tenor has come down.

Got it. Second question is, what are the portfolio interventions you have done in some of the areas where growth has not been so great, like EMR vertical, and APMEA geography? And where are we in terms of these interventions, and are we likely to see any changes in the outcomes?

Sure, Gaurav. Let me just talk about both of them, APMEA and Europe, where we have been very soft. As far as APMEA is concerned, we have a new CEO there, and he's building a new level of leadership, and we continue to invest in this market across the broad geography that APMEA covers. We're relooking at our go-to-market approach with defined account teams as well as teams that can go after new logos. Specifically in APMEA, we have identified a set of accounts, and we are also differentiating ourselves with AI, which offers a different value proposition to this market. The pipeline is being rebuilt, and we see the pipeline growing. I think if we continue to execute, we should see momentum coming back in APMEA. In Europe, we have created new leadership at the SMU level. We are also focusing on certain sectors and doubling down on them. While Europe showed de-growth in quarter 3, the pipeline is strong. All we need to do is focus on deal conversion. With our consulting teams and local delivery capabilities, we have the ingredients in place for execution.

We have our next question from the line of Sudheer Guntupalli from Kotak Mahindra AMC.

Congrats on a good quarter. I have a couple of questions. Firstly, your top account is experiencing very good traction. Is there a specific reason for this? Over the last few quarters, we have noticed a steady increase in its revenue share.

I'll just provide one fact, and then maybe Srini can elaborate. In terms of the top 10 growth, especially the top 5 and top 10, they've been performing well. Even when considering the top 25, the growth is quite impressive. What's driving this growth? Seven out of our 10 accounts are experiencing year-on-year growth in constant currency terms, which is quite broad-based. Certainly, sectors like BFSI and health are contributing significantly by adding new clients, and the top 10 are performing particularly well.

Sure. The context of the deals I talked about when Gaurav asked that question. Similarly, both in Europe and APMEA, we have reinforced our teams, both on account management and delivery. That should help us mine these accounts more effectively in this market. The top 10 accounts that have grown can be role models for the rest of the account teams.

Sure, sir. And second question is in terms of headcount. If I look at the last 10 quarters, I think net additions are negative in 7 of them, including the current quarter. Now that we're talking about an improvement in demand and our guidance also sort of reflects some growth in the coming quarter. Adjusted for furloughs, we are operating at 86% to 88% kind of utilizations. When should we think that the hiring engine should start picking again?

Saurabh here. The hiring engine has actually kicked off. It's not that it's not there. We've called out that in the next fiscal, we will be going every quarter to campus and hiring about 10,000 to 12,000 people. Over and above that, we'll have lateral hiring happening. We also see attrition coming down in the coming quarters because our net new resignations have been coming down. We'll look at overall supply chain in terms of utilization, demand, and attrition and plan our hiring accordingly. But I see that we will be robust in hiring as we move forward.

Next in line is Mr. Sandeep Shah from Equirus Securities.

Congrats on a good execution. The first question, I think, Srini, you mentioned that the portfolio-specific issue in the energy manufacturing resources and consumer is not behind, so when do you expect that to get behind? Because we've also heard in earlier calls that it may be more Wipro-specific rather than industry-specific. And why I'm asking this is this contributes almost 36% to 38% of the top line, and that may provide a hurdle in terms of consistently growing quarter-after-quarter.

Thanks, Sandeep. If you look at the way we have the 4 strategic market units, clearly, the performance over the last few quarters has been positive in the Americas. Sandeep, while we did call out that APMEA and Europe have been soft for us, the sectors that we see growth and opportunities in the last 3 quarters have been banking, financial services, and health care. In terms of energy, manufacturing, and resources, it has been soft for us, but we have seen an uptick in manufacturing this quarter. We have a robust pipeline around that. I think we need to focus on execution in that segment. Overall, the pipeline is broad-based across the sectors and across the strategic market units.

Okay. And Aparna, just if I'm not wrong, what you said on capital allocation, we are more tilted on dividend versus buyback as a matter of choice, or am I wrong in understanding this?

No, we prefer both dividends and buybacks. That said, the dividend that we declared is substantially higher compared to what we have done in the previous year. The capital allocation that we committed is 70% and above of the net income over a block of 3 years, effective FY '26. So you should look at the block starting FY '26 for us to meet that number. All modes, including dividend, buyback, special dividend, everything will be explored.

Next question is from the line of Ashwin Mehta from AMBIT Capital.

Congrats on good results. Aparna, I wanted to get a sense in terms of that despite the wage hikes, our employee cost number in absolute terms does not seem to have changed materially over the last 2 quarters. What have been the offsets for that? And the second question is in terms of depreciation. We've seen almost 120-odd bps benefit on depreciation from a year-on-year perspective. So what is driving this substantial reduction in terms of depreciation?

Actually, Ashwin, on depreciation, in Q3 of the last fiscal, we had a one-off. So that's not the right number to take. Even if you look at it over the last 2, 3 quarters of depreciation, broadly there is some optimization, but that is a result of the natural face-off of intangible amortization that we do. What you're seeing in Q3 is actually the result of that, and you can model that going forward. On the employee cost, there are quite a few things. One, we've spoken about improved levels of utilization; the number you're seeing is a reduction, but that's how we define it because of furloughs. Utilization looks lower, but if you look at the core utilization, even outside of this, it is very strong. Two, FTP productivity that we've been driving is consistently improving, and the improved quality of revenue has also played into this.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to Mr. Dipak Bohra for closing comments. Over to you, sir.

Yes. Thank you for all joining the call. In case we could not take any questions due to time constraints, you can reach out to Investor Relations directly. Have a nice day.

Thank you, members of the management team. On behalf of Wipro Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.