Infosys Limited (INFY) CEO Salil Parekh on Q2 2020 Results – Earnings Call Transcript

Infosys Limited (NYSE:INFY) Q2 2020 Results Conference Call October 11, 2019 8:00 AM ET

Company Participants

Sandeep Mahindroo – VP, Financial Controller and Head, IR

Salil Parekh – CEO and MD

Pravin Rao – COO

Nilanjan Roy – CFO

Mohit Joshi – President

Conference Call Participants

Edward Caso – Wells Fargo

Diviya Nagarajan – UBS

Nitin Padmanabhan – Investec

Vibhor Singhal – Phillip Capital

Joseph Foresi – Cantor

Viju George – JP Morgan

Apurva Prasad – HDFC Securities

Moshe Katri – Wedbush Securities

Abhay Moghe – Bajaj Allianz

Ravi Menon – Motilal Oswal

Sumeet Jain – Goldman Sachs

Bryan Bergin – Cowen

Dipesh Mehta – SBICAP Securities

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

Thanks, Karuna. Hello, everyone. And welcome to Infosys earnings call to discuss Q2 FY20 earnings release. I am Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is CEO and MD, Mr. Salil Parekh; COO, Mr. Pravin Rao; CFO, Mr. Nilanjan Roy, along with other members of the senior management team.

We’ll start this call with some remarks on the performance of the Company for Q2 by Salil, followed by comments from Nilanjan and Pravin, subsequent to which we will open up the call for questions.

Please note that anything which we say which refers to our outlook for the future is a forward-looking statement, which 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 it on to Salil.

Salil Parekh

Thank you, Sandeep. Good afternoon and good morning to those on the call. And thank you for joining us today. Infosys has delivered another strong quarter. I’m happy with our performance in the second quarter, which was robust across multiple dimensions: One, double-digit growth for the fourth consecutive quarter; two, continued strong growth in digital; three, expansion in operating margin; four, improvement in operational parameters, especially in utilization and onsite offshore mix; five, large deal signings; and six, reduction in attrition.

We grew 11.4% in Q2 year-on-year in constant currency or 3.3% quarter-on-quarter. Six of the seven business segments, and both U.S. and Europe grew double digits constant currency year-over-year. Pravin will provide more color on different industry verticals in just a few minutes.

Digital revenues in Q2 were $1.23 billion, constituting 38.3% of overall revenues and witnessed over 38% growth year-on-year in constant currency. Operating margin in Q2 saw healthy improvement at 21.7% compared to 20.5% in Q1. Operating margin improvement was despite compensation increases provided to employees and was driven by significant improvement in utilization, onsite mix, employee pyramid improvement, and tight overall cost management. Nilanjan will elaborate on this during his remarks.

Large deal signing in Q2 was extremely strong at $2.8 billion. While a large part of this was renewals, these renewals solidify our position significantly in our existing client base. Large TCV is up by 75% in H1 ‘20 compared to H1 ‘19.

I’m also pleased with the reduction in attrition, which declined to 19.4%, a decline of 2 percentage points compared to Q1. Within this attrition, voluntary attrition is lower at below 18%.

With the clients continuing to leverage digital to drive growth, there are three areas within digital transformation that I want to highlight with examples of our growth with clients. These are experienced data analytics and cloud; a global confectionery company we created digital asset management platform that helped them deliver a superior, personalized and intuitive experience for the end users. Through our digital studios, we developed this platform and ensured faster campaigns and product launches and could also efficiently manage multiple brands and their associated digital assets.

For a global consumer products company, we help them create a data architecture to support the sales team forecast, future orders from retail outlets, the model cluster stores and know for better performing stores to suggest assortments for other stores. Such a model minimizes subjectivity and brought data science to aid sales teams in order recommendations. The material handling company in the U.S. is implementing a cloud-based IoT telematics product to power transformation, withdrawing upon our experience and presence in the connected vehicle spaces to help them manage data and draw relevant insights for him to provide better service and after sales experience for their customers.

These examples among others and our strong performance for the quarter demonstrate our increasing relevance to our client agenda. We continue to make good progress on our localization approach as we strengthen the differentiated model to deliver digital services. During the quarter, we launched the Arizona Digital Center to accelerate the pace of innovation for U.S. companies. We also launched a digital cyber security center in Bucharest in Romania this past quarter.

I’m also delighted to share with you a recognition that each one of us at Infosys is extremely proud of. We were rated number three on the Forbes list of the World’s Best Regarded Companies for 2019.

In closing, I would like to share that we are updating our guidance. Our revenue growth guidance moves from 8.5% to 10%, to 9% to 10% for the full year on a constant currency basis. We reconfirm our operating margin guidance for 21% to 23% for the full year.

With that, let me hand it over to Pravin.

Pravin Rao

Thank you, Salil. Hello, everyone. We had another quarter of double-digit year-on-year growth in constant currency. Growth was broad-based with six business segments, Financial Services,, Communication, Energy, Utilities, Resources and Services, Manufacturing, Hi-Tech, and Life Sciences all clocking double-digit year-on-year growth in constant currency. Similarly, both North America and Europe grew double-digit year-on-year in constant currency.

Utilization, excluding trainees during the quarter improved by 180 basis points sequentially to 84.9%. Onsite effort mix reduced further to 28.2%. The second leg of compensation increase was affected in the last quarter. With this, we have covered the entire employee base except titleholders who will be covered in quarter three.

I’m also pleased with the reduction in attrition which declined to 19.4%, a decline of 2% compared to quarter one. Within this, voluntary attrition is even lower at below 18%. High-performer attrition also continues to be well below company average. The decline in attrition is due multiple initiatives spanning across more active employee engagement, performance-based differentiation, promotion, and growth opportunities for employees.

Client metrics remained strong. We added 96 new clients during the quarter. And number of $50 million clients increased by 2 to 61. We won 13 large deals with the TCV of $2.85 billion, which is the highest ever. 4 deals, each were in Financial Services and Retail, 2 deals in Communication and 1 deal each in Energy, Utility, Resources and Services, Hi-Tech and Life Sciences. Geography wise, 6 were from America, 5 were from Europe and 2 from rest of the world. While a large part of this was renewals, these large renewals solidify our position significantly in existing clients. Large deal TCV is up by over 75% in H1 ‘20 compared to H1 ‘19.

Let me come to the business segments. Financial Services vertical continued its growth momentum aided by recent Stater acquisition. We expect performance in the vertical to be affected in the next couple of quarters, driven by seasonality, sluggishness in capital markets and European banking space. The recent reduction in interest rates in major geographies can have an impact on client revenues, which may also impact their IT spending.

Our strong positioning across the digital and core services spectrum along with diversified portfolio is helping us mitigate risk and grow this business. I’m happy to share that Infosys was rated number one player in the HfS Top 10 BFS Sector Service Providers 2019. The ranking showcases our maturity across banking, capital markets, risk & compliance and across all BFS cross function.

Retail segment’s performance was muted as clients spend cautious due to increase in perceived risks stemming from trade wars and geopolitical developments. As business volatility is causing decision delays in some of our key clients in this sector, we also see this as a clear opportunity in the medium to long term to increase our client relevance. We expect to witness uptick in consumer experience, digital marketing, insights and investments in platform and remain cautiously optimistic, given recent deal wins and steady order pipeline.

Coming to manufacturing, there is presently vertical, especially in Europe. Impact of trade wars and weakening automobile segments is affecting supply chain. Clients are looking to leverage new technologies to build the next layer of efficiencies in the supply chain and manufacturing operations through digital platforms, smart manufacturing and IoT. Despite the sectoral challenge, we have healthy pipeline of deals, as well as new account openings, both in Europe and America.

Communication segment remains strong for us due to large deal wins. The traditional business models of communication players are being challenged by digital-native and the OTT players. These customers are keen to traverse their digital cost takeout journey in order to stay relevant in the market. They are seeing increasing pipeline for deals with the strong share of large deals.

The momentum in Energy, Utility, Resources and Services vertical improved further on the back of continued momentum in top accounts and new account openings. The growth is being led by Utilities in Europe and Energy with Resources seeing challenges due to M&A and diversification.

The digital portfolio continues to grow strong and is now over 38% of the total revenues, up from 31% a year ago. In our agile digital business, we see strong traction for the work we’re doing in the cloud area, in data and analytics, in IoT, and in the area of experience, user experience, client experience and employee experience.

In the last six — in the last quarter, Infosys was ranked as leader in 6 ratings in the area of modernization, IoT, experience and design, AI services, cloud services, and SAP services which recognizes our digital capabilities in the market.

At the end, I’m very happy to announce that Infosys won the prestigious United Nations Global Climate Action Award in the Climate Neutral Now category. Infosys is the only corporate from India to earn the recognition for its efforts to combat climate change.

With that, I’ll hand over to Nilanjan.

Nilanjan Roy

Thanks, Pravin. Good evening and welcome to our quarter two FY20 earnings call.

Our revenues in Q2 were $3.21 billion, growing by 11.4% year-on-year in constant currency terms. This was our fourth consecutive quarter of double-digit growth. The sequential revenue growth in constant currency was 3.3%, including 90 bps incremental contribution from Stater.

Operating margin in Q2 was 21.7% compared to 20.5% in Q1. During the quarter, the benefit of rupee depreciation was offset by cross currency impact and revenue realization. Higher utilization, lower onsite mix and other cost optimization measures helped operating margins by 110% basis points, whilst lower visa and travel costs helped another — boosted the margin by 110 basis points. These are partly offset by compensation increases which impacted margins by 70 basis points, and increases in donation and other costs of 30 basis points, leading to an overall 1.2% increase in operating margins, compared to quarter one.

DSO for the quarter decreased by 2 days to 66 days due to tight receivables management. Operating cash flow in Q2 was $522 million, which is a year-on-year growth of 19.2%. Free cash flow in Q2 was $397 million, which was year-on-year growth of 10.3%. For H1 ‘20 operating cash conversion to net profit was 103%, compared to 96% in H1 ‘19. Cash and cash equivalents declined during the quarter due to the completion of buybacks and still at a healthy level of $3.35 billion.

Yield on other income was 7.9%, marginally lower than the 8.1% in Q1. Effective tax rate for H1 ‘20 was 36.5% versus 27.3% in H1 ‘19. We completed the capital allocation program announced in April 2018. The planned buyback of INR 8,260 crores was completed on 26th August. Completion of buyback and higher shareholder payouts have led to the increase in ROE from 23.1% in Q2 ‘19 to 25.8% in the current quarter. Driven by our performance in H1, we have increased revenue guidance for FY20 to 9% to 10% in constant currency terms.

Q2 operating margin performance puts up H1 operating margins at 21.1%, within our guidance band. Subject to a stable currency environment, we remain confident about the operating margin band guidance for FY20 at 21% to 23%. We will continue to deploy various measures to advance operational efficiency like rationalizing the pyramid, onsite, offshore mix, automation and other overhead efficiency levers. Consistent with the new capital allocation policy of paying approximately up to 85% of the free cash flow cumulative over a five-year period to investors, the Board has declared an interim dividend of INR 8, which is a 14% growth over the interim dividend of FY19.

With that, we open up the floor for questions.

Question-and-Answer Session

Operator

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Edward Caso from Wells Fargo. Please go ahead.

Edward Caso

Thank you. Good evening. I wanted to drill down a little bit on the banking and capital market sector, which you clearly are doing very well in, considering the headwinds. I was hoping you could break it between digital strength and core strength, if you’re — what kind of shifts, is the digital growth still strong there, is there added pressure on the core side? And maybe couch those comments within the context of North America versus Europe? Thank you.

Mohit Joshi

Sure, Ed. So, look, I think — this is Mohit here. I think, clearly, on the core side, the focus is very much on consolidation. And on a traditional ADM business or testing business, that is clearly the focus area. If you look at digital, on the other hand, there is money being spent, I’d say broadly in three areas. The first is transformation of user experience, specifically for the retail and the wealth management businesses. There’s a focus on data across the enterprise. And finally, we’re starting to see the beginnings of fairly significant cloud migration journey. So, that’s the sort of the positive news. We see these trends clearly more in the U.S. now than we do in Europe, even though we are starting to see a fair degree of public cloud migration among European banks.

The other piece I’d mention is, we see a lot more strength on the corporate banking side of the house. So, specifically payments transformation, trade transformation, lending transformation, these continue to remain fairly strong areas across the board. So, whether you’re looking at large global banks or you’re looking at the regional banks. The areas of weakness clearly are in the capital market space.

The second point I’d mention is that especially in Europe the way the yield curve is working, especially with the rate cuts, if you look at a bank in Belgium for instance that we spoke with recently, they’re making about negative 80 basis points on their deposits. At the same time, they’re paying out something like between 10 to 15 basis points to their depositors. So, we feel that this interest rate regime is going to put pressure on banking revenues. And we have a downstream impact. So, hopefully that gives you a broad enough global sense.

Edward Caso

My other quick question here is, given the tax law change around repurchases, are we more likely to see special dividends going forward as opposed to repurchase? Thank you.

Salil Parekh

Yes. So, Ed, we had announced the new capital allocation issue policy in July that we had increased it to 85%. We think that gives us clear runway for investors to look at a predictable cash flow revealed through dividends and get — leaving some money aside for tuck-in acquisitions. So, I think the scope of one-off buybacks or special dividends definitely decreases.

Operator

Thank you. The next question is from the line of Diviya Nagarajan from UBS. Please go ahead.

Diviya Nagarajan

Thanks for taking my question. Congrats on the solid quarter. Salil, my question is on the guidance that we have given at the top end. We’ve had a very robust 12% kind of a first half number. The top-end kind of suggests we are kind of looking at an 8% in the second half. Could you kind of run us through the assumptions that you’ve baked in for that kind of revenue trajectory in the second half. Is this because of what you’re seeing in banking and retail so far? Any surprises that you had in any of the sectors, either on the upside or the downside in the first half of the year? That would be helpful.

Salil Parekh

On the various segments, if you look at what we did in Q2, we see a lot of strength, for example in Energy, Utilities, Services, a segment that we shared. We see a lot of strength in what we saw in Telco, Hi-Tech. So, those are positives as we’ve gone through this year, and from some of the large deal wins over the last few quarters.

Mohit shared his color on Financial Services, both from a European banking perspective and overall capital markets perspective. The way we look at the guidance, we try to fraction typically — as I know you’re well aware, our Q3 is the December quarter with the furloughs. And we typically see some seasonality into that. And that’s really what we try to bake into the forecast, the guidance. We of course increased the lower end of the guidance. And as we progress through the year and we get through next quarter and so, we’ll see where we end up. But that’s really what we baked in the commentary you heard from Mohit, the positive things we shared with you on some of the other segments, what you heard about retail when Pravin shared his remarks. So, all of those put together plus the typical seasonality of Q3 and H2, that’s what gives us a view of the guidance.

Diviya Nagarajan

Okay. And I think, the margin recovery seems to suggest that you’re well on track to kind of reap the benefits and operating leverage from those investments that you’ve made in the last few quarters. How should we think about the potential for recovery versus revenue growth? What I’m trying to understand here is that, is there an opportunity for us to kind of continue to improve on this trajectory. And if you’re looking at slight moderations either because of the base effect or some of these factors that we’ve discussed, does that allow for that kind of a trajectory to continue?

Salil Parekh

On the margin, I think you saw what Nilanjan shared there is a real focus and attention on cost and operational parameters. And Pravin shared with you some of the specific parameters that were improving in the quarter. We also shared I think last quarter, all the investments are complete and behind us. So, there is no one-off investments that we launched about a year or so — or year and a half ago. Those are complete. There is no new investments. There are investments in the ongoing business with no new one-off investments.

Having said that, we have a very high quality franchise, and we feel comfortable that as we get the operational efficiency back, we will see those levers kick in. Therefore, we remain confident. Again, as Nilanjan shared, our H1 margin is now within the band, 21 to 23, and we remain confident as the year progresses to be within the band 21 to 22.

Diviya Nagarajan

Fair enough. My last book keeping, as part of the tax rate regime change is there any — what is the thinking on the tax holiday exemptions and what should we be modeling in going forward for that?

Nilanjan Roy

Yes. So, I think we’ve just looked at it, currently for the India standalone, Infosys standalone, the India effective tax rate is less than 25, which was about 23 to 24. So,, I think at the moment, we are staying with the regime. We will start evaluate as we look ahead for the next few years when we make the transition. But for now, we are continuing with the existing tax holiday regime.

Operator

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

Nitin Padmanabhan

I just wanted your thoughts on BFSI and retail put together. Because if we look at the second quarter in terms of growth, excluding Stater, it appears that it’s relatively weaker than the earlier Q2s that we have seen in the past. So, from that perspective, do you think that both BFSI and retail have been relatively weaker versus what you would have thought earlier?

Pravin Rao

This is Pravin here. I’ll talk about retail and then Mohit will comment on the BFSI. On retail, as we believe that — I mean, this is one sector, which is probably much more, very closely linked to the consumer sentiment. Given all the macro challenges that we are seeing or macro talk that is going on, as well as reduction in consumption, trade wars and so on, I think, there is a sense of — we see a sense of nervousness in the retailers, and we are seeing the spend come down. And this segment in general we assume to be volatile. Last year for us retail was fantastic area. We had double-digit growth. Our first quarter was soft and second quarter continued to be soft. It’s difficult to predict when the sector will revive, because it’s clearly dependent on macro as well as the sentiment. So, this is something we have to wait and watch.

At the same time, we also see a lot of opportunities in the sense that retailers are trying to compete aggressively against the likes of Facebook and all the new age companies. So, they continue to invest while trying to take out cost in other parts of the business. So, we continue to stay engaged with them in our value proposition and strength on the digital. We remain confident that we will be able to capture the spend that’s there in the sector. In terms of the growth, it’s expected to be volatile till there is some clarity on the macro.

Mohit Joshi

Yes. Hi. This is Mohit. So, look, I think, while speaking to Ed’s question, I think, I’ve given you a perspective on the subsector and the geographic distribution that we see. The reality is that there is a lot of volatility. There’s a lot of volatility. And I would add that this is also a sector that is heavily concentrated. So, even if you have a couple of clients for instance that are looking at these issues more closely or that are looking at reducing the spend on the core, it amplifies the impact on us. We’ve already identified the areas of weakness in terms of European banking or in terms of the very low spend in the capital market space. So, hopefully, that gives you a perspective.

Nitin Padmanabhan

Sure. Thank you, Mohit and Pravin. Just one more. Are we — what would be the proportion of net new business on the total TCV?

Pravin Rao

The rebid is close to 90%; for the net new, it would be about 10% this quarter.

Operator

The next question is from the line of Vibhor Singhal from Phillip Capital. Please go ahead.

Vibhor Singhal

Good evening, sir. Thanks for taking my question. And congrats on a solid quarter. So, just one question from my side. In terms of hiring, we’ve seen very strong hiring in this quarter, adding around close to 7,000 software professionals. So just wanted to basically understand your perspective on how it’s going to impact — I mean, I’m sure we’re looking at significant growth going ahead because of — given the kind of hiring that we’ve done. So basically, how is it — how do you believe the growth is going to pan out? And also, what could be the margin impact? I mean, given that we would have probably hired these guys spread over the quarter, could we expect some sort of let’s say pressure on the margins going quarters, or do you think that’s all baked in into the guidance as well?

Salil Parekh

I think, I mean, as we’ve said, Nilanjan has reiterated that the margin will remain in between 21% to 23% band. So, there is no change to the guidance, and we are comfortable with that. In terms of hiring. This quarter, we hired about 14,000 people, roughly about 6,000 freshers in India and about 700, 800 people in U.S., from colleges. And laterals, we hired close to 7,000 again, about 5,000 plus from India and about 1,500 to 2,000 in other parts of the world. It’s consistent with what we have done in the past. So, I don’t see any material change to that. Our hiring will be dependent on the growth, and we have already factored that in the guidance.

Vibhor Singhal

Sure, sir. And sir, any — just lastly, any — I mean, the attrition has definitely cooled off from the last quarter but we know that first quarter is generally seasonally quite weak in terms of attrition. So, given that we’ve already taken so much measures to — thought the attrition level that it is. But, as it still remains about 21%, any further levers or steps that we intend to take to probably going town to sub-20 levels, or maybe something which we are more comfortable with?

Salil Parekh

See, the attrition for Tech Services is about 19.4% with both voluntary and involuntary. If you look at voluntary alone, it’s about 18%. And when we compare with quarter two of last year, it is lower than that. So, definitely, we are seeing some marked improvement. But at the same time, some of the interventions that we have done to address this in the last one or two quarters, have helped us. It is something we have to continue to do on an ongoing basis. This is an area where we’ll continue to watch out and focus on. But, at this stage, we are very encouraged with the progress that we have seen and we’re hopeful that it will continue to turn in the right direction in the coming quarters.

Vibhor Singhal

Sure, sir. Thanks for taking my questions. Wish you all the best.

Operator

Thank you. The next question is from the line of Joseph Foresi from Cantor. Please go ahead.

Joseph Foresi

Hi. So, my first question is just around the revenue growth acceleration. You’ve seen an uptick the last couple of quarters. Do you believe that you’re taking maybe market share from some of your competitors, or is it the fact that digital is growing as strong as it is right now? I’m just trying to get a sense of what seems to be causing the uptick in the numbers. And should we be thinking of this as a high single digits, low double digits, more low double digits business?

Pravin Rao

I think, on the growth — part of what we are seeing in the growth is, we have a set of offerings which are really close to what the clients want to spend in their digital transformation journey, and will relate to specifically areas we’ve highlighted in the past, whether it’s data analytics or cloud or experience or IoT or cyber and so on. And that’s where we’ve seen growth, which is possibly higher than where the overall market for those sort of service is growing.

We also see a strong push on automation, which is helping where we have good strong core businesses with clients. And they see a benefit from this coming into — for us to come into their enterprise and display the value of the automation. Having said that, we know that all of those things also require an intense focus as we put in into the large deal program and ongoing activity to execute against that. We genuinely believe today that we have a very strong position within the minds of our clients’ deck and now sometimes the marketing executive spend, which is helping us to drive our growth.

In terms of what this means as an ongoing business, we are not sharing any view at this stage beyond the end of this fiscal year. But, as we come to the end of the year, obviously, we’ll start to talk a little bit more explicitly on the next fiscal year.

Joseph Foresi

Okay. And just a couple of quick follow-ups. Are these new engagements or are you taking market share from others, when you talk about the digital practice? And how much is pricing a factor across both the digital business and your traditional business?

Pravin Rao

So, in terms of digital work, typically, these are new projects or new mid-term, long-term contracts. They are definitely things that we are winning in a very competitive environment. In terms of the pricing, I think, we shared maybe in the last quarter’s discussion, our margin for our digital business is higher than the margin for the company overall. So, we feel confident as we shift more and more of our portfolio to digital that that should be a benefit to margin.

Joseph Foresi

Okay. And then, just lastly, the business that — or the pieces of the business that aren’t digital, are you seeing pricing pressure on the traditional maintenance stuff and maybe you can give us an update on the non-digital business and how that’s performing?

Salil Parekh

So, there, we believe we have an extremely strong set of capabilities across all of our service offerings. That still comprises 62% of our business. It’s a very strong business, a long foundation there. However, the automation play allows us to ensure that the clients are getting an ongoing productivity benefit. We do see some pressure, which comes into play in pricing or discounts on an ongoing basis. And especially, when we start to see medium-term and long-term renewal contracts that come up for discussion.

Operator

The next question is from the line of Viju George from JP Morgan.

Viju George

I had a question on your unbilled sales. The last four quarters through FY19, it was like tracking at between 21, 22 days. It shot up to 27, 28 days in the first half of this year. I just want to try to understand what really caused such a massive jump for the Company of your size in H1.

Nilanjan Roy

Yes. So, actually, the way we look at revenue, these are based on activity and effort, whereas billing milestones are agreed with clients in advance, based on delivery dates. And that’s the way billing actually happens. So, there are certain times mismatches between the revenue and the billing milestones. These are largely client-specific. So, they have their pluses and minuses. And therefore, that’s one of the reasons; we also had because of the Stater and HIPUS acquisitions. There was also an increase because their business model had also an increase on the unbilled. So, these are two large reasons for this increase.

But, if you see our collections overall, I think that’s the number to look at. Our collections continue to be very, very strong. Our DSO for the quarter actually was down by two days. So, I think that’s the key metric to show the health of the business.

Viju George

Yes. But, Nilanjan, I just think, when you look at this in terms of incremental sales, it has jumped to almost 24%, 25% in H1, whereas in the four quarters through FY19, it was like kind of 10%, 11%. So, as a percent of incremental sales annualized, it’s doubled. So, is that possible — I mean, how is it practically possible for the large company — for the company as large as Infosys? Has there been a change in policy, or are you sort of trying to recognize with clients far more often revenue recognition milestones in a way different from what you used to do earlier?

Nilanjan Roy

No, nothing like that. So, in fact, we monitor very, very closely inside all the unbilled of the previous quarter as mostly billed in the next quarter. And there are new set of milestones, which comes. So, it’s not as if it’s a legacy which is increasing. We look at the aging of this very, very carefully. And like I said, this is a combination of — in a few clients where you have a difference in the billing milestones versus the revenue recognition, and like I said, HIPUS and Stater.

Viju George

Sure. And one more question on your TCV. I think, Pravin indicated that maybe 10% of the TCV is net new, which means that 90% is renewals. How does this sort of — this sort of compare with maybe averages of the recent past?

Nilanjan Roy

I don’t have the exact number. But, in general, I mean, there is a metric which is volatile. In some quarters, we have lot of net new; in other quarters, we have good percentage coming from renewals. The way we look at it is — it’s important for us to win renewals, because it helps in retaining our business and solidifying our presence. At the same time, winning net new deals has been capturing market share. We focus on both, but general — and it varies from quarter-to-quarter. And for the half year — for this half year, I think the net new was about 35%.

Viju George

Net new was 35%. Okay. Would it be fair to…

Nilanjan Roy

We did 2.7 in quarter one, 2.8 in quarter two and about 35% was net new.

Viju George

Got it. Would it be fair to say, at least for this quarter, the percentage of net new is generally a lot lower than it might have been in the recent past?

Nilanjan Roy

Yes. I mean, you’re right. I mean, if you look at the last few quarters, probably the 10% net new is probably on the lower side.

Operator

Thank you. The next question is from the line of Apurva Prasad from HDFC Securities. Please go ahead.

Apurva Prasad

Thanks for taking my question. So, I want to know what’s really constraining us to increase the top end of our guidance despite the strong momentum across verticals. Are there any client-specific issues that you are looking at? I’m looking at the top 2 to 10. It seems like a decline for this quarter. So anything which is incrementally different?

Salil Parekh

As we shared, we’ve increased our guidance on the lower end from 8.5% to 9%. We think the overall discussion with the segments, which as you heard from Mohit, in terms of Financial Services, you heard what Pravin shared on Retail, and that is something that we have to be watchful about. Then, we have strength, which we shared earlier on Energy, Utilities, on Telco Hi-Tech, and those are positive. And then we shared typically the second half in sector — our second half, so Q3 and Q4 is typically softer than the first half, and especially Q3 with the discussions around furloughs and so on. So, given all of those factors in mind, we took advantage to increase the lower end of the guidance, keeping in mind that this is really where we see the rest of the year going. And as the quarter progresses, we will see — as Q3 progresses, we will see where we end up, and come back to you at the end of the quarter on the next steps.

Apurva Prasad

Thanks for that Salil. And Nilanjan, on the margins, how do we see that — I mean, the second half trending within the band? Any headwinds, tailwinds that you’re looking at, or perhaps you can call out the titleholder impact which will be coming in third quarter?

Nilanjan Roy

Yes. So, I think, like we said, we are at — H1, we are at 21.1%. We are within the band. And I think this is a good place to go from here, and that’s what we are looking at. From the titleholder, not a material impact. Most of — as you know, people — this is less than probably a percentage of the overall headcount. So it’s a relatively small impact. Otherwise, I think, we have a very robust, like I said, the cost takeout program, like I said on multiple utilization pyramid. And I think, we’re quite confident that this is a machinery which had to literally churn out every quarter. So, there is — there will continue to be headwinds in terms of discounts or wage hikes. But, I think, we seem to have gone to rhythm of making sure that we are able to take out these costs in time. So that’s where we are.

Operator

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

Moshe Katri

Hey. Thanks. Congrats on very strong execution. Going back to BFSI, is there any way to figure out what — if you’re looking at the organic growth numbers, I know you haven’t disclosed these. But organically, was the sector up sequentially year-over-year? At least sort of color here will be helpful. And then, if you do want to disclose that how much did the acquisition add to growth during the quarter? Thanks.

Nilanjan Roy

Look, I think, we haven’t really disclosed the two numbers separately, because you also have to keep in mind that Stater was a client of ours, prior to the acquisition. So, there were certain revenues that accrued to the entity, to Infosys prior to the joint venture as well. So, we’re not breaking out the numbers separately.

Moshe Katri

Okay. And then, kind of looking at this on a forward basis. Has anything changed since the end of the quarter in terms of sales cycles, pipeline conversion rates, any sort of spending or project in terms of project funding? Maybe you can talk a bit about those trends since the end of the quarter. Thanks.

Salil Parekh

When you say end of the quarter, you mean the last couple of weeks. Right?

Moshe Katri

That is correct.

Salil Parekh

Okay. No, no, no. We don’t see any change in the last couple of weeks from what we’re discussing, which is our quarter end view. Of course, it’s only two weeks. So, we don’t expect to see any change in that timeframe.

Moshe Katri

All right. And then, the last question. Obviously, the renewal number in terms of bookings was pretty high this quarter. On a forward basis, during the next two quarters looking at your pipeline, I’m assuming that’s going to be a trough in terms of mix. And during the next two quarters, we should see a larger mix of renewals in terms of bookings. Is that correct?

Pravin Rao

No, I don’t think we have seen any seasonality in the renewal. So, it varies from quarter-to-quarter depending on the context. So, I don’t think there is any seasonality to renewal or net new.

Operator

Thank you. The next question is from the line of Abhay Moghe from Bajaj Allianz. Please go ahead.

Abhay Moghe

Congrats on sustaining good execution. I just had two questions. First is on the revenue growth. If I see over the last four to five quarters, your revenue growth year-over-year had been increasing, whether you see dollar terms or CC terms. This quarter, it is lower than the last quarter. And the way you have given the guidance, it is likely to be couple of percentage points, even lower, by the time we reach Q4. Now, my question over here is, this trend that you are seeing, is it like you have the revenue visibility and do you see the trend going down in year-over-year growth, or it is more like a cautiousness or a conservativeness because of macro concerns and you want to have — give a conservative guidance? So, what is it like, lower revenue visibility and some conservatism, or you have the visibility and you’re saying that no, it will be trending down? That’s question number one.

And second is on the margins, like, overseas, you are running a good cost cutting program, and over the next four to six quarters in a constant currency terms, you know next year also wage hikes, visa cost, everything will be there. But over the four to six quarters, you think margin would look up from current levels, or you think that whatever the headwinds are, whatever cost cutting programs you have, it will like neutralize? Those are the two questions from my side.

Salil Parekh

On the revenue, as we’ve shared earlier, I think, we have a good set of growth over last four quarters. We know that typically there is some seasonality in the last quarter of the calendar year, our Q3. We also know that there’ll be some difficult comps for Q3, Q4 versus previous Q3, Q4 based on deal wins and so on 12 months to 18 months ago. Keeping all that in mind is where we’ve come with the guidance.

Our large deal wins is still robust. It is lumpy. Of course, the large deal wins, we’ve had several good quarters on that. But it’s not a predictable view in terms of where the large deal numbers go and how the renewals versus the net new pan out. We do see more and more net new in the coming quarters in the pipeline. So, we have confidence that as we get into the next fiscal year, as we are starting to build a base of deals that can help us for that. And beyond that there is no other sort of color on the revenue from our side. That’s how we built the guidance.

In terms of margin, we have a very clear view, which is for Q3 and Q4 and for the full year. We have no view today on the next four to six quarters, which is in that sense in the next fiscal year. For this year, we believe our operational efficiency approach is working well and will deliver good benefits. We believe that we have essentially a high quality franchise and the investments are behind us. So, we will see the benefits of that and we will be within our margin guidance. Already for H1, we’re within the margin guidance and we will have that for the full year as well.

Operator

Thank you. The next question is from the line of Ravi Menon from Motilal Oswal. Please go ahead.

Ravi Menon

Two questions, first on the margin levers. Your utilization is already close to the highest it’s ever been. So, do you think that we can actually push those any further, or what other margin levers are we looking during near term? Secondly, related to that, [Technical Difficulty] in the variable payout, like for the quarter. And one more question, a follow-up after this.

Salil Parekh

Yes. On the utilization front, we are comfortable, where we are, 84.8%, that’s where we landed. In the past, we have had quarters where the utilization upwards of 85% plus. So, we typically tend to operate in arrange between 83% to 85%. So, at this stage we’re comfortable, but whenever there is a need, we have shown the ability to increase the utilization, so as to not to leave behind business on the table. But at this stage, we are comfortable. And we are not really planning to increase it further, but we have the flex available in case there is a need.

Ravi Menon

And on the variable payout for the quarter?

Salil Parekh

No, I don’t think we comment on it.

Operator

Mr. Ravi Menon, are you done with your questions?

Ravi Menon

Sorry. I was waiting for the answer for that. So, you would not comment on the variable payout in the quarter. Is that right?

Nilanjan Roy

Yes. Sorry, we don’t. We normally don’t disclose the variable.

Ravi Menon

Sorry. I didn’t quite hear that. Yes, sorry. And then, just a clarification on why do you think that you should include Stater within the [indiscernible] if I read metrics right. I think, that’s what — that’s where the revenue has fallen in. So, I thought it’s primarily a BPO, there is a software platform targets [ph] they are using for the BPO, but why classify this revenue to digital?

Salil Parekh

Sure. So, if you look at the Pentagon that we’ve been working on as our key strategy for digital for the past 18 months, you will see that vertical platforms is clearly called out as one key element in digital. And this is very clearly a vertical platform. It is not a BPM offering. There is a mortgage origination and mortgage servicing platform. So, there is significant IP in the platform. And the pricing like any vertical platform is very clearly outcome linked.

Operator

Thank you. The next question is from the line of Sumeet Jain from Goldman Sachs. Please go ahead.

Sumeet Jain

Yes. Hi. Thanks for the opportunity. So, firstly, I wanted to understand, in your revenue growth guidance of 9% to 10%, are we including the recently closed Eishtec with the Irish BPM acquisition? And if yes, can you quantify that?

Nilanjan Roy

So first, that work is a business transfer approach. So, it’s very much part of our business going forward. And we’ve not disclosed the specifics on that. Nonetheless, it’s a very small part of our BPO business.

Sumeet Jain

Got it. So, it won’t have any material impact on your revenue growth trajectory in December quarter?

Nilanjan Roy

That’s right.

Sumeet Jain

And secondly, I wanted to understand on the subcontracting cost, like we have seen for the last three to four quarters, it has been in the range of 7.3% to 7.5% levels. So, going forward, do you think that — did you think subcontracting cost will be one of the margin levers, given that we have now a full strength of local hires in U.S.?

Salil Parekh

So, I think, subcontracting is an integral part of the business model. I think, as we look for talent overseas and especially talent at immediate requirements we need subcontractors. But as you see, for this quarter, we have actually been able to hold down our subcontractor costs. So, what we actually do is also rotate many of these subcontractors back onto our payroll. And therefore, we continue to get a new set of fresh subcontractors that we had to take them back. So, I think, if we get this going as a strong model, we will be able to keep the cost under control and yet able to hire talent on demand. So, that’s one of the levers we’ve operated this quarter on margins as well.

Sumeet Jain

Got it. That’s it from my end. And all the best for the remainder of the year.

Salil Parekh

Thank you.

Operator

Thank you. Our next question is from the line of Bryan Bergin from Cowen. Please go ahead.

Bryan Bergin

I wanted to ask on the progression of your strategic relationships. If we think back two to three years ago, the prior management team had commented that it thought it was having strategic discussion and conversations around, I think it was around 50 clients at the time when there was a 1,000 plus. Where do you think you are today as far as the mix of clients, where you are really having strategic discussions and how do you expect this to progress?

Salil Parekh

I’m sorry. I didn’t follow the question. It was about strategic relationships we have with our clients?

Bryan Bergin

Yes. Would you think you are perceived as a — a change in a strategic partner in your client base? Before you kind of started on this journey, it was a small percentage of the client mix. I’m curious how you perceive that today.

Salil Parekh

We may be a bit optimistic in how we look at it, but we absolutely perceive that we are more and more part of the strategic thinking of our clients. One of the things we’ve observed in the recent past is, many of our clients are looking at us more than they are looking at some of our competitors. And especially with some of the investments we’ve made in digital, some of the focus areas on automation and the relationships that we have built in terms of the alliances that we have with our strong partners in the tech world, that’s helping us to be perceived more and more central to the agenda of our clients.

Bryan Bergin

Okay. And I wanted to ask, as far as digital contributing to large deal TCV, can you give us any metrics there, give a sense of how digital deals are changing in size and scope?

Nilanjan Roy

No, we don’t really break up the percentage of digital in the large deal. Digital is definitely a part of large deal in the sense that every large deal there is business as usual, but there is also expectation we transform and migrate to cloud and so on. So, there is definitely a digital element, but we don’t really break out a lot of the percentage of the digital in the large deal.

Bryan Bergin

Okay. That’s fair. Just last one here. Within BFSI, can you just comment on how insurance and U.S. regional bank performance is?

Mohit Joshi

Yes. I think, look, on the whole, regional banking continues to be an area of growth for us, really where there is some M&A activity going on, there is a little bit of a freeze until legal day one happens, but we feel that regional banks are fairly robust. We feel that there is a lot of technology investment that’s going into the sector, as they look to compete with the larger universal banks. And finally, I feel that for regional banks, we also have a very compelling story in terms of our services, our platforms like the Stater platform in Europe, and the fact that we have the world’s largest banking software platform in Finacle, right, which is really gaining fairly significant traction. So, the regional bank story continues to be a good one for us.

Bryan Bergin

Okay.

Mohit Joshi

And insurance, I think — I’m sorry. Did you have a question on insurance as well?

Bryan Bergin

Yes. If you could just touch on how your performance is in that sub vertical?

Mohit Joshi

Sure. So, look, I think insurance continues to be — continues to grow steadily. I don’t think we’ve seen any significant acceleration or any significant growth beyond the average in that sector. But, it remains a strong and stable sector for us. We also feel that the headroom for growth continues. And again like in banking, the McCamish platform has been gaining fairly significant traction. And we have a fairly sizeable pipeline of opportunities there.

Operator

Thank you. The next question is from the line of Dipesh Mehta from SBICAP Securities. Please go ahead.

Dipesh Mehta

Yes. Thanks for the opportunity. Couple of questions. First, about, if one look rest of world, after couple of years of healthy growth, growth rate seems to have moderated. So, if you can help us what is playing out there and how you expect rest of world to grow? Second question is about margin. Earlier INFY used to have a industry-leading margin. Now, considering the specific investment phase and one-off investment phase, which we invested to return back to industry-leading growth, if you can provide some color by when you expect industry-leading margin also to be achievable or now we are fine with where we are and focus would be more on growth than margin? Thank you.

Salil Parekh

On the rest of the world, there is India and then the rest of the world. India is a very small part of the business and our focus is on very limited projects. We are very selective on what we bid for India. So, that we will continue to see a volatility there. On rest of the world, we have had good run over the last few quarters, as we said. This quarter, we have seen slowdown or a negative growth. But, this is not a secular trend. We expect — I mean, at least at this stage, we are not seeing anything material. So, hopefully, the growth should come back in the coming quarters. What was the other question?

Nilanjan Roy

On margin.

Dipesh Mehta

Yes. Maybe I can repeat. Now we achieve industry-leading revenue growth and revenue growth trajectory seems to be at least last four quarters we returned to double-digit growth rate. But if one look at margin profile, we have still not achieved industry-leading kind of goalpost. If you can help us understand now whether we will stick with where we are or we have aspiration to again achieve industry-leading margin profile? Thank you.

Nilanjan Roy

So, on that, our view is very much that a lot of the operational measures that we’ve talked about through this call are getting in place and giving us benefit, which gave us a nice improvement in our margin in Q2. We have a clear guideline in terms of guidance for this year. Beyond this year, we will come back and have a discussion at the end of the year, when we talk about our guidance for next year.

Operator

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

Sandeep Mahindroo

We would like to thank everyone for joining us on this call and spending time with us. Look forward to talking to you again. Have a good day.

Operator

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