Infosys Limited (NSE: NS:INFY) reported robust performance for the second quarter of FY24, with a sequential growth of 2.3% and a year-on-year increase of 2.5% in constant currency terms. The company also secured a record $7.7 billion in large deals. However, due to a subdued environment for digital transformation programs and discretionary spending, the IT services giant revised its revenue growth forecast for FY24 to 1% to 2.5% in constant currency terms.
Key takeaways from the earnings call:
- Infosys reported a strong Q2 FY24 performance with a 2.3% QoQ and 2.5% YoY growth in constant currency.
- The company secured its largest-ever deals worth $7.7 billion, with 48% being net new.
- Due to a subdued environment for digital transformation and discretionary spends, Infosys revised its revenue growth guidance for FY24 to 1% to 2.5% in constant currency terms.
- Infosys continues to gain market share in cost efficiency, automation, and AI.
- The company anticipates the usual seasonal impact and softer quarters in Q3 and Q4.
During the earnings call, Infosys' CEO, Salil Parekh, and CFO, Nilanjan Roy, discussed several factors impacting the company's performance. They noted delays in initiating large programs and longer cycles in closing deals, leading to slower growth. Despite decreasing discretionary spend and the slowdown of transformation programs, they highlighted the positive impact of Project Maximus (NYSE:MMS) on cost optimization, resulting in a 50 basis point improvement in margins. The executives expressed confidence in the program's potential to enhance margins in the future.
Parekh clarified that Infosys is working with proprietary models from partners and not developing its own large language models. They are focusing on narrow transformer approaches and applications in software development, text, voice, and video. These models are being used for clients and some internal activities within Infosys.
The earnings call also discussed the impact of discretionary spend on revenue and the weakness in certain verticals such as financial services, mortgages, asset management, high tech, telco, and retail. The guidance takes into account both volume and the impact of third-party bought-out items. Wage hikes, effective from November 1, were mentioned, but the impact on margins was not specified.
Parekh also stated that Q3 and Q4 are typically softer quarters for Infosys and that they anticipate the usual seasonal impact during that time. The company has closed four mega deals and has a good pipeline for future deals, particularly in the cost and efficiency space. The full benefit of the Project Maximus program will be seen over approximately 18 months, with ongoing tracking and potential faster benefits.
The company expects headcount to improve as they have headroom to increase utilization further. The executives also mentioned that large deals had not eroded margins in the past and that the company has the experience and strategies to improve margins over time. They also mentioned that the conversion of deals into revenue would take time due to factors such as regulatory approval, transition periods, and transformation elements.
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