Infosys Limited (NYSE:INFY) Q4 2024 Earnings Call Transcript April 18, 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 Infosys Limited Earnings Conference Call. [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 Q4 and FY ’24. Joining us on this call is CEO and MD, Mr. Salil Parekh; CFO, Mr. Jayesh Sanghrajka and other members of the leadership team. We’ll start the call with some remarks on the performance of the company, subsequent to which we’ll open up the call for questions. Kindly note that anything 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 complete 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. For the financial year ’24, our revenue growth was at 1.4% in constant currency terms, our operating margin for the full year was 20.7%. For large deals, we had an excellent year and the fourth quarter. For the full year, we were at $17.7 billion in large deals, comprising of 90 deals. For Q4, we had $4.5 billion in large deals. This is the highest ever large deal value in the financial year for us. This is a reflection of the trust our clients have in us. We see good traction in cost efficiency and consolidation deals. For Q4, our year-on-year revenue growth was flat in constant currency and declined by 2.2% quarter on quarter. Our operating margin for Q4 was 20.1%.
We had a one-time impact in Q4 that Jayesh will comment on. We’re seeing excellent traction with our clients for generative AI work. We’re working on projects across software engineering, process optimization, customer support, advisory services and sales and marketing areas. We’re working with all market-leading open access and closed large language models. As an example, in software development, we’ve generated over 3 million lines of code using one of generative AI large language models. In several situations, we’ve trained the large language models with client specific data within our projects. We’ve embedded generative AI in our services and developed playbooks for each of our offerings. We’re committed to ethical and responsible use of artificial intelligence.
We became the first IT services company globally to achieve the ISO 42001:2023 certification, testifying to a commitment to excellence in AI management. All of our work in AI is part of our Topaz offering. Our cloud work is growing well. We continue to work closely with the major public cloud providers and on private cloud programs for clients. Cloud with data is the foundation for AI and generative AI and Cobalt encompasses all of our cloud capabilities. Data is the other foundation for AI and generative AI. We see data structuring, access, assimilation critical to make large language models and foundation models to work effectively, and we see good traction in our offering to get enterprises, data ready for AI. We are delighted to announce a strategic acquisition of a company in the engineering services space this quarter.
Some examples of the work we are doing for a large U.S. company, we’ve engineered an enterprise grade generative AI platform that has been rolled out to over 60,000 users. We’re working with a large bank and helping them roll out an internal enterprise-wide, company-specific generative AI instance of a knowledge assistant. We continue our focus on our margin program. We saw good impact of this during the financial year. Our employee attrition was low at 12.6%, down from 20.9% in the previous year. As we look at the start of the financial year ’25, we see the discretionary spending and digital transformation work at the same level. We see focus on cost efficiency and consolidation continuing. Our large deal wins in the prior financial year will help us in financial year ’25 for our revenue.
We also see normal seasonality as we plan this financial year in terms of guidance. With that, our revenue growth guidance for financial year ’25 is 1% to 3% growth in constant currency. Our operating margin guidance for the financial year ’25 is 20% to 22%. With that, let me hand it over to Jayesh.
Jayesh Sanghrajka: Thank you, Salil. Hello, everyone and thank you for joining the call. At the outset, I must say this is an incredible privilege and honor to be the CFO of this iconic organization and would like to thank Salil, Nandan and the entire board for their confidence in me. As I step into my new role, my areas of focus will be further strengthen collaboration with business to increase our market share, work with Salil and rest of leadership towards tighter execution and continue to steer Maximus program, expand operating margins and improve cash flow in the medium term. Coming to our Q4 results. Revenues were flat year-on-year in constant currency terms, sequentially, revenues declined by 2.2% in constant currency and 2.1% in dollar terms.
During the quarter, we had a renegotiation and rescoping of contract with one of our financial services clients, which led to slightly over 1% impact on Q4 revenues. While the part of the work got rescoped, over 85% of the contract is still with us. FY ’24 constant currency revenue growth was 1.4%, normalized for the impact of revenues from the FS client, the revenues for FY ’24 were within our guidance range of 1.5% to 2%. Operating margins for Q4 were at 20.1%, a decline of 40 bps sequentially, bringing the FY ’24 margins at 20.7%, well within the guidance band of 20% to 22% for the financial year ’24. The major components of Q-o-Q margin works for the quarter are as follows: headwinds of 180 bps comprising of 100 bps from the one-time impact of contract renegotiation and rescoping; 80 bps from additional impact on salary increases, higher brand building and visa expenses, partially offset by tailwinds of 140 bps, comprising of 60 bps from lower post sales customer support, lower provision for client receivables, et cetera, 40 bps from Project Maximus and 40 bps relating to Q3 impact from cyber incidents.
Headcount at the end of Q4 was over 3,17,000, which led to further increase in utilization excluding trainees to 83.5%. LTM attrition for Q4 reduced further by 0.3% to 12.6%. Unbilled revenues dropped for the fourth consecutive quarter to $1.7 billion. This is a reduction of $291 million in FY ’24, which is reflecting in increased cash flows. Free cash flows for the year was $2.9 billion, which is a 14% increase over FY ’23. Free cash flows for Q4 was extremely strong at $848 million, which is the highest in last 11 quarters. This is a result of our focus on improving working capital cycle. DSO for the quarter was 71 days compared to 70 days in Q3. Consolidated cash and cash equivalents stood at $4.7 billion at the end of the quarter. Yield on cash was at 7.1% in Q4 and return on equity improved to 32.1%.
ETR for the quarter was 22.2% after accounting for favorable orders, we expect the FY ’25 normalized ETR to be within 29% to 30% range. We had another strong quarter in terms of large deal wins, $4.5 billion of TCV from 30 deals including two mega deals. 44% of this was net new. We signed eight large deals in communication, six each in BFSI and retail, four each in manufacturing and life sciences, two in URS. Region wise, 16 were from North America, 10 from Europe and four from rest of the world. We ended FY ’24 with our highest ever large deal of TCV $17.7 billion, comprising of 52% net new and eight mega deals. This is a clear validation of relevance of our service offering, deep client relationships and leadership strength. The board has declared a dividend of INR20 for FY ’24 along with special dividend of INR8 per share.
With this, the total payout for FY 2024 will be 85% of FCF in line with the capital allocation policy. The Board has approved the capital allocation policy for the next five years, effective FY ’25, the company expects to continue the policy of returning approximately 85% of free cash flows cumulatively over five-year period through a combination of semi-annual dividend and our share buyback special dividend subject to applicable laws and the credit approvals. Under this policy, the company expects to progressively increase its regular dividend per share. Project Maximus, our comprehensive margin expansion program continued to run well across five pillars. This is reflected in more stability in margins for FY ’24 over ’23 compared to the previous years despite the headwinds from lower growth in FY ’24.
Some of the tracks where we have made progress are value-based selling, automation and AI and sub-tracks within the efficient pyramid like lower subcons, higher utilization and higher ratio. We continue to focus on optimizing various tracks to increase operating margin in the medium-term. Coming to the industry verticals, we continue to see macroeconomic effects of high inflation as well as highest interest rates in BFSI. This is leading to cautious spend by clients who are focusing on investing in services like data, digital, AI and cloud. Financial services firms are actively looking to move workloads to cloud, pipeline and deal wins are strong and we are working with our clients on cost optimization and growth initiatives. Manufacturing witnessed a double-digit and broad-based growth in FY ’24.
There is increased traction in areas like engineering, IoT, supply chain, smart manufacturing and digital transformation. In addition, our differentiated approach to AI is helping us gain mind and market share. Topaz is resonating well with the clients. We have a healthy pipeline of large and mega deals. In retail, clients are leveraging GenAI to frame use cases for delivering business value. Large engagements are continuing S/4HANA and along with infra, apps, process and enterprise modernization. Cost takeout remains primary focus. Clients in communication sector continue to be cautious with growth and challenges. New CapEx allocation remains under check, while the budget remains tight. We see opportunities in cost takeout, AI and database initiatives.
Growth in coming quarters will be led by ramp-ups of previously won deals. URS clients are taking cautious approach with focus on cost optimization in AI-driven efficiency. We are witnessing more deals around vendor consolidation and infra managed services. Deal pipeline of large and mega deals is strong due to our sustained efforts and proactive pitches of our cost takeouts and digital transformation, etc., across the subsectors. Macro concerns in Hi-Tech continue leading to delays in deal closures, decision making and planned repurposing spend. Discretionary programs are kept on hold. In FY ’25, therefore, we expect growth to accelerate from FY ’24 levels in financial services and telecom verticals due to large deal wins. Manufacturing sector, while still showing a healthy growth, we’ll see lower growth than FY ’24.
Hi-Tech is expected to remain soft. Driven by our current assessment of business environment, including continued software, discretionary spend and ramp-ups of mega deals won earlier, we expect FY ’25 growth to be 1% to 3% in constant currency terms. Our operating margin guidance for the year is 20% to 22%. Guidance for FY ’25 does not factor in today’s acquisition of in-tech. With that, let me open the call for the questions.
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