Sandeep Mahindroo - Head of Investor Relations, Vice President and Financial Controller Nandan Nilekani - Non-Executive Chairman Salil Parekh - Chief Executive Officer and Managing Director Pravin Rao - Chief Operating Officer Ranganath Mavinakere - Executive Vice President and Chief Financial Officer Mohit Joshi - President Head, Banking, Financial Services & Insurance (BFSI), Healthcare and Life Sciences Head, Infosys Brazil and Infosys Mexico

Ankur Rudra - CLSA Edward Caso - Wells Fargo Securities LLC Sandip Agarwal - Edelweiss Securities Limited James Friedman - Susquehanna Financial Group Diviya Nagarajan - UBS Securities (Asia) Ltd. Sandeep Shah - CIMB Anantha Narayan - Credit Suisse Pankaj Kapoor - JM Financial Apurva Prasad - HDFC Securities Arvind Ramnani - KeyBanc Capital Markets Inc. Keith Bachman - BMO Capital Markets Ashwin Mehta - Nomura Securities Viju George - JPMorgan Bryan Bergin - Cowen and Company Dave Conning - Robert W. Baird & Co. Ravi Menon - Elara Securities (India) Pvt Ltd. Sandip Agarwal - Edelweiss Capital Mukul Garg - Haitong Securities India Private Limited

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 Sandeep Mahindroo. Thank you, and over to you, sir.

Thanks, Karuna. Hello, everyone, and welcome to Infosys’ earnings call to discuss Q3 FY 2018 results. Let me start by wishing everyone a very Happy New Year. I’m Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is Mr. Nandan Nilekani, Non-Executive Chairman; Mr. Salil Parekh, CEO and MD; Mr. Pravin Rao, COO; Mr. M. D. Ranganath; CFO; Presidents and the other members of the management team. We’ll start the call with some remarks from Mr. Nandan Nilekani, subsequent to which we’ll open up the call for questions on the areas covered by him. We’ll then transfer the call to the management team for some remarks on the quarter, subsequent to which we’ll open up the call again for some more 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 risks 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 Mr. Nilekani.

Thank you, Sandeep, and it’s a great pleasure to be here on this call. I want to make some brief opening remarks from the Board and then I’ll hand over to Salil. As you know, Mr. Salil Parekh joined us as CEO and MD of the company from Jan 2. And it’s barely been 10 days since he has joined and he has already taken full charge of what has to be done. So it’s great to have him on Board. And we all confident that under his leadership, this company will scale new heights. I also want to thank Pravin Rao, who did a great job stepping in on August 18, and making sure everything was running well, and he continues as the Chief Operating Officer. The appointment of Salil has been put to approval of shareholders with a postal ballot, which has gone out. I also want to deeply thank Rajesh Murthy, President, who resigned from the Board for personal reasons. He has personal challenges that require him to be based in Paris for a longer time. So given the travel he was dealing with, he wants to move on and we appreciate that. And we all want to place a deep appreciation for his commitment in Infosys for the last 26 years. I had the privilege of hiring him into Infosys in October 1991. And he has been a pillar of this company and he’s a great, warm, large-hearted individual who has always done best for the company, and we wish him all the best in his future endeavors. We also had created sometime back something called as a Committee of Directors consisting of Mr. Ravi Venkatesan and Mr. D. N. Prahlad, to assist the CEO in discharging his responsibilities. Now with the arrival of Salil, who…

Thank you. With this, I hand over the floor back to the management for the proceedings. Over to you, sir.

Good evening and good morning and wish you a Happy New Year. I’m Salil Parekh, Chief Executive Officer of Infosys. I’m joined here by my colleagues: Pravin, Chief Operating Officer; and Ranga, our Chief Financial Officer; and several members of our leadership team. It’s a privilege of me to have this opportunity to lead Infosys. I would like to thank Nandan and the Board for having put their trust in me. I’ve been in the technology industry for several years and I have always have a deep admiration and respect to what Infosys stood for. In my first few days in this role, I’ve been energized by the people I’ve met here. Whether they are individuals starting in the tech world or senior leaders, each has a real passion for their work and has pride in being part of Infosys and a deep commitment to its values. The clients I’ve reached out to have responded with messages that underscore and endorse the strong partnership that Infosys is doing with them over the years. There’s a real delight in the way they see Infosys and the work we do for them. The market, of course, has exciting opportunities and new areas of growth. Digital disruption today is impacting all our clients, as the industry is undergoing massive change. At Infosys, we have a strong foundation of our business. And as you’ll hear, our Q3 results confirm this. We have over 1,100 clients that trust us 200,000 passionate employees. We work across a broad array of sectors and service offers. We have a business that’s growing with high operating margins. We have exceptional cash generation and a strong balance sheet, and we are now progressing towards stability in governance. Building on the strategy refresh initiated by Nandan, I’ve launched a review that is structured around market opportunities, client relationships, the deeper dimension and our service offerings. Over the next three months, I’ll meet with several of our clients, partners and employees and work with our leadership team and the Board to validate our assumptions and approach around these elements. In April, I plan to conclude this exercise by outlining our strategic priorities and reconfirming our capital allocation plan. We will have an Investor Day in April to share this. With a strong set of building blocks and renewed energy to leverage growth in digital, we have an opportunity to build a stronger Infosys in the coming years, and look forward to working with the entire team here at Infosys to be part of that journey. Thank you. With that, now I will request Pravin and then Ranga to comment specifically on the Q3 results, and then come back for questions on my introductory remarks plus the Q3 results. Pravin?

Thanks, Salil. Hello, everyone, and wish you all a very Happy New Year. I will provide an update on our quarter three performance. Our revenues grew sequentially by 1% on reported dollar basis and 0.8% on constant currency basis. Volumes grew by 1.6% quarter-on-quarter, while realization declined by 0.3% in constant currency terms due to the impact of furloughs and lower working days. Overall, realization for the first nine months of FY 2018 is flat due to constant currency compared to first nine months of FY 2017. This is due to improvement in our portfolio towards newer and faster growing services and continued our option of automation in transitional services. This also led to a 1.9% increase in revenue per employee stock, 53.7K during the quarter. Client metrics were good with 79 client additions, increasing client count and increasing number of clients across most revenue buckets. Share of new services and software improved further to 11.6% compared to 11. – 11% last quarter, which is a sequential growth of 6.8%. Our revenues from digital services also crossed 25% of our overall revenues. We plan to publish this metric in the coming quarters. During the quarter, we rolled out compensation increases for our middle and senior management in various geographies. I’m pleased to report that our decent performance in quarter three has enabled us to pay the highest level of variable payout for the last nine quarters to our employees. Attrition declined to 15.8% for standalone operations and to 18.7% for the entire group. Gross additions for the quarter was 12,622 and our employee count crossed 200,000. Operating margin for the quarter were stable, despite compensation increases and higher variable pays. Ranga will outline this in later – later in the call. We had eight large deal wins during the quarter…

Thanks, Salil and Pravin. Hello, everyone, and wish you all a very Happy New Year. In Q3, the company again demonstrated its resilience and performance on multiple fronts. Revenue, operational efficiency, profitability, cash generation significant closures on tax matters, and most importantly, successful implementation of capital allocation policy. Our relentless focus on improving operational efficiency parameters yielded results in this quarter as well. We had a broad-based improvement in multiple operational efficiency parameters, utilization percent, on-site mix percent, revenue productivity per employees, subcontractor cost as a percentage of revenue, leading to a healthy and stable operating margin. Our operating margin for the quarter improved sequentially to 24.3%. I’ll be providing more details on this shortly. During the quarter in line with the capital allocation policy announced in April 2017, the company successfully completed its equity share buyback program of INR 13,000 crores, approximately $2 billion. The company’s tender offer to buyback about 130 million equity shares from eligible holders of equity shares received a good response from shareholders. The aggregate equity shares bought back by the company amounted to 4.92% of total equity shares outstanding. The entire funding for the share buyback was done out of the cash on the balance sheet. During the quarter, the company closed significant tax matters, including Advance Pricing Agreement, APA, with the United States Internal Revenue Service. This agreement covers financial years from 2011 to 2021. I will share more details shortly in this regard. Now, let me talk about revenues. Our revenues for the quarter were US$2755 million. This is a sequential growth of 1% in dollar terms and 0.8% in constant currency terms. In rupee terms, the revenues for the quarter were INR 17,794 crores. This is a sequential growth of 1.3%. As compared to Q3 of last year, revenues grew 8%…

Karuna, can you open up the phones for questions?

Sure, sir. [Operator Instructions] So we have a question from the line of Ankur Rudra from CLSA. Please go ahead.

Hi. Thanks for taking my question. Nandan, just one question on the Board side. In your previous address, you had suggested several initiatives perhaps associated with reconstitution of the Board as well. Given that the first of your task has been completed to everyone’s satisfaction, do you – do we expect this to continue? And perhaps, before you hang your boots over again at Infosys, what are the other things you’d like to finish?

So I think, certainly, I think, we have talked about it earlier also about the fact that we will continue to work on how we strengthen the Board and so on. So that process is underway and it has to be done very properly and with due diligence and so on. So I think, as and when we take decisions in that regard, we’ll definitely get back to our shareholders as soon as we take a decision. So clearly, having a Board and bringing in new people is one of the challenges we have. I think, we also have – Salil has to take charge and take it forward, get the company back on the path of growth. We have had a strategy refresh, which he is taking forward. He’ll talk more about it, and so we have to complete that part. So I think, the number of things that we have to get done, and I’m very confident now that the company is poised for doing those things. So all that will – I’ll be there till all that happens.

Okay. Thank you, and best of luck.

Thank you. Next question is from the line of Edward Caso from Wells Fargo Securities. Please go ahead.

Sorry, I punched in too early. So I’m going to come back for the other call. Thank you.

Thank you. We have next question from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Hey, Nandan, Happy New Year first of all to the whole management team and thanks for taking my question. Just one question, and I know you have indirectly replied to that. But just wanted to know, as you mentioned, when you came that, you will be there as long as you are required. So what are those markers, which you would – which would suggest that, your job is broadly done and anytime frame, which you think is there?

Excuse me, this is the operator. So can you hear me?

Yes, I can hear you.

Okay. So can you hear me from the venue, Sandeep Mahindroo?

I’m Sandip Agarwal, I can hear you.

Sure. We request to please be connected, so there seems to be audio lost on the management line. Thank you. Ladies and gentlemen, there seems to be a disconnection from the management line. We request to please be connected. This is the operator. Can you hear me?

Please go ahead. We can hear you. Now it is clear.

Sure. Yes. So Sandip Agarwal, you’re there in the question queue. If you would like to repeat your question, please?

Yes, sure. So I had a question for Nandan. And it was like, Nandan, when you came to Infosys, again, you said that you will be there as long as required. And I know that you’ve replied indirectly. But just wanted to know what are those markers, which we can – which will – which can kind of suggest that when your job is done, or any kind of indication on the tenure you perceive will be required? Hello, operator?

So can you hear us?

I can hear you, but I…

No, one moment, please. Sandeep Mahindroo, can you hear us? Sandeep Mahindroo, are you on the main line? Can you hear us? Sandeep Mahindroo, can you hear me?

Karuna, I can hear you, just hold on.

Okay, sure. Participants, we request you to please be connected, while we have the management reconnected. Thank you.

Sandeep Mahindroo, can you confirm, you are on the main line? Sandip Agarwal, you can go ahead with your question, please.

Yes, thanks. So I’ll once again repeat the third time. So, Nandan, when you came to Infosys, you said that you will be there as long as required. So just wanted to know what are those markers by, which we can kind of make out how much of your work is done and how long you may take, or any indication of how you perceive, what will be your tenure with Inforys? [Technical Difficulty]

Participants, we request you to please be connected, while we have the management reconnected to the call. Thank you. Ladies and gentlemen, this is the chorus call conference operator. Kindly stay connected, we’re trying to reconnect the management. Please stay connected. Thank you. Ladies and gentlemen, thank you for being on hold. We have the management reconnected. Over to you, sir.

With this I would like to apologize for this inconvenience. Sandip, over to you.

Yes. Hi, I’m going to attempt this the fourth time. So, Nandan, when you came to Infosys, you mentioned that you will with Infosys as long as required. So just wanted to know what are those markers, which will suggest that till how long you will be required, or how do you perceive till when you will be there?

No, I mean, that’s a difficult question, Sandip. But I have said the one phase of what had to be done is done. We have brought stability. The Board is completely united on the focus of the company. Salil has joined us as CEO. I think, we have a – the company is focusing on business and growth. We have done our strategy refresh and Salil is taking that forward with his reviews. He is holding an Investor Day in April. He is going to meet customers. The Board will – we have said that, we’re looking at how to bring in more people on the Board. So that process is underway, and we’ll announce that whenever that happens. So I think, all these things are there and – there’s up. So whatever time it takes, I’ll be there boss.

Okay. Thanks a lot to everyone, and once again Happy New Year and apologize for asking a virus-loaded questions.

No, no, no, you can ask us many times as you wanted our things and our things into work. So you can ask us. Sorry, we made you ask you – made you ask four times.

No, no, issues. Thank you, sir.

Yes, we have the next question from the line of James Friedman from Susquehanna Group. Please go ahead.

Oh, thank you for taking my question. Nandan, I was just hoping to ask, so you – great execution on the capital allocation steward by the Board. The company still by many metrics, relative to peers, looks overcapitalized. I was just wondering what are you going to do with the money? And if you could just describe your priorities, that will be helpful, if you’re ready for that, if not I understand?

Yes, I think, we’ll probably have a better sense once Salil does his whole 360 degree evaluation. But as you know, we have said that, we will – what we’re going to do is prepare a capital allocation policy and update up to 70%, which – of distribution and so on. But when you look at the whole thing and Salil will also look at the M&A and all that, and he’ll get back to you by April.

Okay. Thank you.

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

Hi, I wish you all a Happy New Year and thanks for taking my questions. This is again, from a Board perspective, what are the steps that have been taken to ensure that we don’t have any further disruptions between – in terms of management on decisions being made around…

Excuse me, this is the operator. Diviya Nagarajan, can you speak a little closer to the phone, please. We can’t hear you.

Yes, is this better?

Better ma’am. Thank you.

Yes. So my question is what are the steps that have been taken on – will be taken to ensure that there’s no further recurrences of the issues that you’ve had in the last year, especially around in certain areas like M&A decisions? Employee compensation, we’ve already talked about, but any further reconstitute – when you reconstitute the Board, what are we going to ensure that everything functions smoothly going forward?

I think, the best proof of – that there’ll be disruption – there has been no deception, no We have seen what has happened in the last few months. Everything is stabilized. Everything is quiet. We are going on with our business. The company has performed impeccably in two consecutive quarters. We have a new CEO. As I said earlier, the Board will be expanded at the right time with the right people, and we inform you when that happens. The strategy refresh has happened. I mean, I’m not really clear what your question is.

My question is, if – do you feel the need to set up maybe a committee on the Board or something else in the company that ensures that some of the issues that cropped up last year that led to the differences between the management and the founders all wouldn’t occur again?

Well, I think, that’s all past. You’re talking about legacy matter. I think now everything is aligned. Everybody is on the same page. Really, the focus is on the future and our business. And that’s – our job is to get on with it, which is what we’re doing.

Fair enough. Thank you. I’ll come back for business questions later. Wish you all the best.

Thank you.

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

Yes, Happy New Year to the management. Nandan, just one question. I think, the senior management attrition is a bit normal to a service industry, especially the IT industry. But of late, in the last five to seven years, I think, that disruption has cost Infosys a lot. So do you believe or do you have a confidence to say that the second line management set up is now very strong, and one can successfully transition whenever such challenges comes?

Well, absolutely. I think, Infosys has a very strong leadership, very deep bench. We have great people at the helm. We have great people who are also in the next level. So I’m very, very confident. I’m very confident that things will go well going forward. And I think, Salil will spend a lot of time on leadership development. So I’m very confident about the future.

Okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, we will now begin with a question-and-answer session. [Operator Instructions] Thank you. First question is from the line of Anantha Narayan from Credit Suisse. Please go ahead.

Thank you, and I wish all of you a Happy New Year and a warm welcome to Sandeep as well. I had two questions. My first question was addressed to Salil. We do appreciate the fact that you’ve just spent a few days at Infosys. But based on your discussions during the recruitment process and based on what you often see from your Capgemini days. Do you foresee any area of significant investments need to be made?

Hi, Anantha, thank you for that. As I said, the time spent over the next two or three months is going to be around the four pillars, which will build upon the strategy refresh that Nandan has launched. Coming out of that, we will in a set of strategic priorities that we want to drive, we will hold an Investor Day in in April to talk about it. At this stage, I’ve not developed any clear view in the few days I’ve been here in terms of the question you asked for investment thesis.

Okay, that’s probably fair. And for my second question, has Rajesh’s portfolio been reassigned?

At this stage, the portfolio, I will work directly with those areas. Over coming days and weeks, we will find the way to more efficiently distribute it.

Thank you and good luck, Salil.

Thank you.

Thank you. Next question is from the line of Pankaj Kapoor from JM Financial. Please go ahead.

Yes, hi. Congratulations on a decent quarter and welcome, Salil. My first question is on the implied guidance for the next quarter that seems to be quite broad for the fourth quarter. So I’m just curious why we have given broadly, is it something to do with the environment, or any client specific situation, which makes you a little uncertain on the near-term?

Hi, this is Ranga here. If you look at the first nine months, revenue growth has completed the first nine months of previous year. We are growing at 5.6% in constant currency and our guidance is 5.5% to 6.5%. I think, we are focusing on Q4 execution. And to just answer your prior question, I know there are no specific client consensus that we are foreseeing at this juncture.

Okay. And Ranga, if you can give some color and what kind of tax rate we should presume for the next couple of years, given the APA, as well as some of the tax benefits that you mentioned can come to us post the changes in the U.S. taxation?

So let me first address the APA part. As you know, as we announced earlier this week, APA provides the better predictability, because the methodology of both allocating the revenues and computing the pre-tax income is laid out. So, as we said in the earlier press release, we expect the overall effective tax rates to be lower about 100 basis points on account of APA for the period covered under APA, which is 2011 to 2021. Now coming to the broader U.S. tax reforms, there are multiple elements in the tax reforms. While we have been with a preliminary assessment at this stage, but overall we feel that the – this contribute to the United States.

Got it. Thank you and all the best.

Thank you. Our next question is from the line of Edward Caso from Wells Fargo Securities. Please go ahead.

Hi, thank you. Your utilization has been running record levels here. How high it has to be raised the bar? I mean, how much more is there to go? And Salil, welcome.

Hi, this is Ranga here. As you know, utilization you can look at last couple of quarters where we have been focusing. It has gone up significantly, as you rightly pointed out, we are at 84.9. Same quarter last year was 81.9, so full increase of 3 percentage. But from here on these – the runway balance, I agree is quite limited. And that’s the reason why we’re also in addition to utilization and focusing on other elements, which they had talked about. For example, earlier quarters, we had talked about on-site mix moderation. And if you look at over the last three, four quarters, the on-site mix has come down from 30% to 29%. So I think and similarly on the on-site employee costs as a percentage of revenue for the first nine months has come down to 38.3% from 39%. So we’re looking at multiple levers. But to specifically answer your question, yes, on the utilization front, certainly the run rate is limited.

Great. And I had a question about taxes to people in the United States. I believe you’re sort of working still with the fresher model in the U.S. to a large part. How is that going? Are you able to access people, given the very tight labor market for IT professionals in the U.S.? Thank you.

This is Pravin here. As you are aware, we have committed to recruiting 10,000 people over the next two years. And in the last two quarters, since we have not made that announcement, we have made that good progress. We have been going to Tier 1 and Tier 2 colleges, as well as community colleges. And we have had a fair amount of success in recruitment. So we don’t see that as a challenge. We are also setting up innovation and technology hubs, where we have already inaugurated the first one in Indianapolis. We’ll announce one shortly in Raleigh, North Carolina, so we’ll probably over the next few quarters, we will identify two or three more locations to do that. So our U.S. talent plan is really underway and kicking well, progressing extremely well. And at this stage, we are not seeing any significant roadblocks.

Okay. Thank you.

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

Hi, good evening. Thanks for taking my question and welcome, Salil. So I had a question on the client metric. So if I look at the top 10 and top 25, you seem to decline in this quarter. Should anything be really read into this?

Hi, this is Ranga here. I think, that seasonally, the sequential quarter basis, there will be some changes. But I would encourage to look at the nine-month over nine-month metrics for the year-on-year metrics. For example, if you look at the top 25 accounts, look at 4.8% at quarter-on-quarter compared to the last year, that is Q3 of this year versus Q3 of last year. So I think – and also Q3 typically has furloughed. Some of our top clients have second furlough impacts during the quarter, which can in the short-term can distort these numbers. But overall, I think, better indicator in our opinion is to look at the YOY change. So YOY, top 25 has grown at 4.8%.

Sure, that’s helpful. But if you can talk about if we’re gaining share within top accounts?

Yes, this is Pravin here. I think, in many of our accounts, they are definitely gaining shares. There’s lot of effort in terms of mining accounts better. And if you look at the last few quarters, we have had a significant wins in large deal as well and good percentage of them are rebates and renewals and so on. So there have been a lot of focused efforts in the last few quarters and most of the accounts, we are in the top two from a market share perspective.

Sure. Thanks, and all the best.

Thank you. Next question is from the line of Arvind Ramnani from Citibank. Please go ahead.

Hi, this is Arvind Ramnani from Keybanc. Salil, welcome to Infosys. We’re pleased that Infosys was able to recruit you. You have a terrific background and reputation. And I know, it’s probably premature to comment on your priority that Infosys and you will give us an update in April. I’m sure, you certainly have a view of the industry given your background. So my question really is, what is your view of the IT services industry? And specifically, what are they key opportunities and risks and how do you think the industry should address these risks?

Thank you, and thank you for the question. I think, with respect to the sector and the industry, the good news is that significant areas of growth opportunity today in the market. As you know well, these areas are broadly classified under the name Digital. It will cover a lot of different things for different people. So the areas of data and analytics, IoT and industrial Internet, the whole area of cloud from SaaS to hybrid cloud management to the migrations, digital customer experience, security, AI, machine learning. So these are massive areas of opportunities for growth in the sector. In terms of areas where there’s challenges, I think, the overall sector is shifting to a much more business-driven tech agenda to the business. The buyer is – not just the CIO, but there’s also the business user. And so many of the ways and means of interacting with clients used to evolve if you look at that. So that’s my perspective on the sector. It’s an exciting sector, but there’s a transformation in the sector, and the players in the sector need to have agility to be playing in the new areas.

Okay. Thank you.

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

Hi. I’d like to ask a similar question to the past one. But I’d specifically like to focus on gross margins. If you look across the IT services industry with very few exceptions, including Infosys, gross margins continue to erode and go lower. And I’d like to understand your perspective on, what’s the opportunity for the Indian-based providers to at a minimum stop the gross margin erosion? And how you think the mix plays out as you’re trying to increase the amount of business from digital, which I think near-term erodes margins? How do you balance that new market opportunities for the Indian-based providers? So the real question is, can you talk a little bit about gross margin issues in the industry, and how the Indian-based providers combat the erosion to the gross margin line?

Hi, this is Ranga here. Yes, you’re right. I think, the gross margin declines have been quite visible. If you look at our cost structure, as you know, 80% of our operating expenses even the cost of revenue expenses is the employee cost. Now if you look at slice that employee cost, 40%, in our case, close to 40% of our revenue is from on-site employee cost, add to that another 16%, 16.5% offshore, so total 56.6%. So the key thing is, how do we ensure that for the on-site cost that we incur, what are the corresponding billing rates concomitant to the cost equity income, which essentially means going back to the pyramid. Now a way to look at it is, hey, here is the tradition mighty service. Here is the pyramid. Can I optimize the pyramid, make sure, now for example, right now we’re hiring the freshers in the United States as part of the pyramid in the on-site, a need we still have on pyramid structure with freshers intake at the bottom of the pyramid only in India. So there are some opportunities coming and even the propensity of the clients to affect fresh graduates on-site is slowly picking up. So that’s one way to look at the addressing the on-site employee costs. The second way, which is also more sustainable is really, as you pointed out, how could we price our new services, including digital at higher price points? As you’d noted, even this quarter, sequentially, our new services grew close to 7% sequentially, seven times the regular company growth, and it’s almost now 9.9% of our revenue. Now, if this robust growth is coupled with higher price points for these would also be beneficial to our gross margin. So in summary, I think, we need to look at the revenue mix. How much of that revenue mix is coming from – the incremental revenue mix comes from the new services, which are more profitable. And at the same time, how do we address the pyramid, as well as the cost structure issues. In the core IT services, we need to do both hand in hand. So that’s really the way to look at the gross margin.

Okay. Thank you very much. I look forward to your April Analyst event.

Thank you. Next question is from the line of Ashwin Mehta from Nomura Securities. Please go ahead.

Hi, thanks for the opportunity, and welcome, Salil. I had one question on BFSI. One of your peers indicated that there’s near-term uncertainty on BFSI, driven by clients finalizing their digital architecture. And secondly, deciding a location between in-house and outsourced. So you seem to be sounding much more positive near-term in terms of BFSI. So what exactly is driving this optimism? Is this deal flow? Is it portfolio differences? So some color would be helpful?

Hi, this is Mohit. So if you look at it, the insurance growth has been very strong. I guess, your question is more on banking piece. And what I’ll say is, while there are individual clients, right, the individual clients may have ramp ups or ramp downs. But overall – the overall spend position is stable. And while we expect that, there’ll be some sort of movement, right, from more of a regulatory spend, more of growth-oriented spend. But we’re quite comfortable with the position that Pravin had shown. But for our calendar year 2018 perspective, we see spend has been stable for the sector. In certain sectors or in certain sub-sectors like in regional banks, for instance, we’ve seen the fact that clients are having to do a lot of catch-up. So they’re investing significantly more in terms of their digital or their mobile strategy. In some other sub-sectors like asset management, for instance, where about a year-and-half ago, we’ve seen fairly significant cuts. We’ve seen those sectors come back competitively from a spend perspective. So the overall picture is – not is – not as hazy or as negative as it was a year ago. And if you’ve seen from our performance in Q3 itself, compared to our peer group, we have done well. So obviously, it is mixed, right, it is mixed across sub-sectors and geographies.

Okay.

This is Pravin here. I just wanted to add. I just wanted to reiterate that while in quarter three, our performance was muted, particularly in banking space. But that’s primarily due to higher than expected furloughs and slowness in ramp up of some of the large deals that we have in the past. Our competitive positioning in this space is very strong and reflected in the kind of growth we had in last few quarters. And as Mohit said, we remain positive on the segment and we expect to see calendar year 2018 spend come back and much better than what we have seen this year.

Okay. And just one more, in terms of wage hikes, you had push backs in the cycle this year. Going into the next year, what is the wage hike cycle that you’re looking at?

So we’re yet to start thinking about next year. Right now, our focus is on executing on quarter four. But sometime during this quarter, we’ll start looking at next year on the overall, I think, revenues across and wage hikes and et cetera. So we’ll probably be in a better position to comment on it at the beginning of April.

Okay. Thanks a lot and all the best.

Thank you. Next question is from the line of Viju George from JPMorgan. Please go ahead.

Yes, thank you for the opportunity. I think, all my questions have been answered. A very warm welcome to Salil. Okay, that’s it. Thank you.

Thank you.

Thank you.

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

Hi, thank you. Salil, congratulations. I wanted to ask on a large BFS deals. I give you a better 2018 calendar outlook. Can you comment on the type of deals that those were, including the kind of activities that you’re doing there, whether they’re net new work, whether they’re more traditional or digital engagements?

Look, I think, from a BFSI perspective, right, like I said, there is a pivot that is happening now, more from regulatory-oriented spend, from more a digital-oriented spend this year, right? So that is one key thing. The second thing is, if you look at the fact that we have platforms as well. So whether you look at McCamish or you look at Silicon, we have a significant demand for platform-oriented businesses, so that’s the second piece. And the third piece is, the overall sector sentiment, right? There are individual banks that are still looking at cost cuts. But the overall sector sentiment is positive. And that is based – that reflects the commentary that we made today.

Okay. And Salil, understanding, you just started, can you comment your personal views on M&A as an avenue for growth in the current digital services environment?

Again, the view I’ve taken is take the next two or three months to begin to relook at us strategic refresh along the four dimensions the markets, clients, people and service offerings. Today, the environment and given that we have a very strong balance sheet, we will look clearly as a – M&A as a very strategic opportunity, but no decisions have been made. We’re starting to evaluate that carefully to be further sort of prioritize around the April Investor Day.

Okay. Thank you.

Thank you. Next question is from the line of James Friedman from Susquehanna Group. Please go ahead.

Hi, thanks for getting back in here. Ranga, I just want to mention that was a great response that you had with regard to employee costs to the earlier question. I had a more straightforward question, Ranga. I didn’t hear you say it, but is there some change in your tax rate assumption going forward, based on the dynamics in the U.S. tax market?

Hi, this is Ranga here. I think, what I was commenting earlier for the similar question earlier was, on account of signing of our Advance Price Agreement, we expect our overall effective tax rate to be lower by about 100 basis points for the period covered under APA, which is 2011 to 2021. Coming to the second part of your question on the U.S. tax reform, there are multiple elements in the U.S. tax reforms. One is, of course, the reduction in the tax rates by several others. We have made preliminary assessment of the impact. And based on the preliminary assessment, the impact is neutral for us.

Got it, just writing that down. And then Pravin, I want to ask you one as well. With your prepared remarks, you commented on the improved dynamic in European outsourcing, not a new narrative, but clearly there’s results here for it. Where are we in that journey, Pravin? How do you see that as we move forward for the next line of sight in European outsourcing? Thank you.

So I think when you’re looking at what’s happening in the market that is tremendous focus by clients across industries in terms of transforming their businesses and investing in newer areas. So this is actually pressurizing them to look at ways and means to cut cost and review the cost on the other side of the business, and it is actually translating into Nordics. And as compared to North America and Europe, they have been probably not as aggressive as North America. And so that’s exactly today translating into a much more aggressive push for vendor consolidation in Nordics and so on. On the other side of the business, so they will say, they can throw back on changing the business. So that is the phenomenon we’re seeing, and we have been fairly successful in passing to this opportunity and converting a fair amount of this piece that have come our way.

Thank you very much. All the best.

Thank you. Next question is from the line of Diviya Nagarajan from UBS. Please go ahead. Diviya Nagarajan, your line is on muted, you may go ahead with your question, please.

Just a clarification on the demand outlook. Can you hear me now?

Yes, we can hear you, ma’am. Thank you.

Yes. So on the demand outlook, could you just help me understand between the BFS segment and the retail segment, where do you have greater confidence in outlook of your recovery? Is my understanding correct that you are more confident about BFS, or retail, or could you just correct me, if I’m wrong, please.

I think, we are fairly confident about BFS being, again, better than what we have seen this year and coming back. We had a good quarter on the retail. And CPG side, we had a good quarter after several quarters. And primarily driven by lot of opportunities in European retailers and CPG companies and also from North America. But when you look at what’s happening in the space, given all the structural changes, there’s lot of investments going on. And our belief is that we are able to bring our capability to bear. We should be able to capture some of the investments that are out there. Unlike BFSI, it’s – in my mind, it’s probably a little bit early to comment whether this spend will continue for retail, but we’re hopeful at this stage.

Got it. Thank you, and all the best.

Thank you. We take the next question from the line of Dave Conning from Baird. Please go ahead.

Yes. hey, guys, thank for taking the call. And I guess, first of all, just just to make sure we’re clear on this. In Q4, other income should come down maybe a third sequentially or so because of the cash you just used. And then what’s the share count be in Q4, just so we get that, right?

Yes, the share count came down by 4.92%, that was exactly the buyback. And if you look at our factsheet we have provided give weighted average shares post buyback. And coming to the first question, yes, to some extent, the other income is impacted by the interest income that we earn from the balances. So that is something that I know we paid $2 billion and also the interim dividend during the quarter. So to that extent, yes, the other income comprising interest income can have – can see some change.

Okay. Okay, thank you. And then – and I guess, secondly, one more thing on the tax rate. If we add back the $225 million to Q3, your tax rate this quarter would have been 30%, which is the highest in many years. Is that the normal tax rate now that like to kind of start basing everything off of like, was there something that’s changed a little bit to make it higher now on an ongoing basis than it’s been?

No, actually on an ongoing basis, as I said, our overall effective tax rates last couple of quarters has been 28%, 29% range. This particular quarter apart from this, as you know, we had – we have disclosed in the financial statement our subsidiary BPO paying dividend to us. So there is a dividend distribution tax, those that can be offset against our dividend distribution tax. But technically for accounting purposes, we had to take show it has the tax expense.

So how should we think about the like – so if I mean, obviously, there’s a lot of moving parts between tax reform, the APA benefit and stuff. I mean, does that all aggregate to a pretty normal ongoing tax rate around 28%?

Well, I think coming to the APA, as we have disclosed earlier, because of the APA, we expect our overall effective tax rates to come down by 100 basis points for the period covered under that APA, which is 2011 to 2021. Now, we have also made preliminary assessment of the U.S. tax reform and the measures proposed under the – rather approved under the U.S. tax reform. Our preliminary assessment indicates that, the overall impact is neutral for us. So there are two parts: the tax reform impact is neutral, the APA is about 100 basis point reduction in the overall effective tax rates for the period covered under APA.

Okay, great. Thank you.

Thank you. Next question is from the line of Ravi Menon from Elara Securities. Please go ahead.

Hi. Thank you for the opportunity and welcome aboard, Salil. While it’s too early to ask how you – from you regarding Infosys strategy. But since you’ve been a long-term industry participant and in a very key role. In your view, how Indian IT firms been slightly slow to adapt to the technology shift underway? And do you think that there is a change required in the model itself as new technology requires a different kind of skill set profile, deep technical expertise in multiple elements of the stack, good domain expertise as well? And would you view these as not being compatible at the traditional pyramid model for Indian IT services?

Thank you. I didn’t catch the second part of the question. But let me start with the first. I think, it’s difficult to characterize all companies whether they’re from India from other geographies in a particular grouping with where they stand on the transformation journey. There are different nuances of different companies. And generally in the market, I think, there’s a lot of work that’s going on in different components of the digital spectrum. As you know well, there’s a whole component around the marketing and interactive side. There’s a component around the industrial Internet, and there’s a component around cloud and its different iterations. And different companies across the sector, not just from India or others, have strength that has developed in specific areas. That’s the way, at least, I’ve seen how the industries evolve. So I don’t have a view of one grouping being in a position, which benefits or does not benefit. And the second part of your question, I didn’t catch, if you could repeat that, please?

Yes, second part was several change required in the model itself as new technology requires a different kind of skill set profile with deep technical expertise in multiple elements of the stack, good domain expertise as well. And do you think that this is not really compatible with a traditional pyramid model for Indian IT?

Well, first, I think, the pyramid model applies to almost every business I’ve seen within the IT sector, whether it’s from India or from anywhere. In General, I think, it’s skill sets that are needed in some of the newer areas require that there needs to be some level of re-skilling or indeed to recruiting from college that type of skilling that needs to come in. So those implications, I think, are independent of where the company is from. It depends on the portfolio that the company has in terms of its current service offer. So again, the pyramid, I think, approach at least applies to most companies that I’m familiar within the sector.

Great, thank you. And Pravin, just a quick question. In the press conference, you mentioned that Infosys is positioning Nia with some new thinking. Could you please elaborate on that statement?

Can you repeat the question, please?

In the press conference, you mentioned that Infosys is repositioning Nia with some new thinking. Could you elaborate on that?

Yes, we have had – as you are aware, we had good success in Nia over the last few quarters. But at the beginning of last quarter when we did the strategy refresh exercise, we looked at all aspects of our business, including Nia on what is working and what is not working. And one of the opportunities we found in Nia was, right now we have opportunities more at horizontal solutions. We felt that, looking at what was happening and the differentiated position of Nia different to our build up time, our ability to monetize would be much better if you’re able to build vertical solutions on top of Nia. So that is a strategic shift that we have done and it’s been probably a quarter since we have done that and that’s focusing on executing on that.

Great. Thank you, and best of luck.

Thank you. Next question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Yes. So I have a question, which probably Pravin or maybe Salil can as well add. So first of all, warm welcome to Salil, and best of luck for your new role, and thanks for giving me the opportunity to ask a question. So my question is little bottom of what I’m trying to understand here is that, with Europe firing better than earlier and digital doing well, BFSI looking optimistic, retail looking good, and energy with oil prices going up and again, communication probably is not worsening further. Will it be safe to say that CY 2018 looks much more promising than CY 2017, and probably the worst of the growth is behind. I’m not asking for any guidance, but just trying to understand?

It’s perhaps too early to comment on that. As I said earlier, right now our target is to make sure we execute on quarter four. For us, I think, the last few year, quarter four has been initially soft quarter. And this time, we want to make sure that we execute a decent trade and which will help us going forward. At the same time in this quarter, we’ll have the benefit of – certainly, we’re getting to details about the strategy refresh exercise, as well as resulted time, and we also step back and take a look at the pipeline and the future. So April is perhaps the better time for us to respond to this question.

Okay, thanks. That’s very helpful.

Thank you. Next question is from the line of Mukul Garg from Haitong Securities. Please go ahead.

Thanks for giving me the opportunity, and a very warm welcome to Salil. Ranga, the first question is on the on-site mix, which you have highlighted as one of the drivers, which should be further improved. Should we look at this on a near-term basis, or do you think there is space for improvement even on the medium-term, especially on the back of the upcoming hiring, which you have committed in U.S. over the next two years?

Hi, this is Ranga here. Yes, towards the last couple of quarters, like I said, that we’re focused on on-site mix and it had moderated from the level of 30% to 39.8% and 39.4% last quarter and now 29%. However, the on-site mix is, as you rightly said, is also a derivative of the business mix. And for example, certain service lines like, for example, test chamber, infrastructure management make themselves more amenable for on-site mix moderation. Typically, they have larger companies that offshore. However, some of the new services, as well as the consulting and other services typically offset heavy. So I think, the business mix change is one factor. If you look at the broadest level, which can have an effect on the on-site mix. But most specifically, what we have also done over the last couple of quarters is to look at more granular at the service line level and also look for opportunities for the on-site mix moderation. And there the focus primarily has been on the fixed price projects, because in case of T&M, when we try to moderate the on-site mix, there’s the impact on the revenue using a quite linear. But as in case of a fixed price projects, the moderation of on-site mix through productivity and others do not – they merely impact the revenue. So I think we need to work on multiple components here. So that’s what we have done. So we don’t want to kind of give any specific target for the medium-term or something, but we’ll continue to work on it.

So maybe, if I can ask this question in a slightly different way. You are planning to hire about 10,000 employees in U.S. over the next two years. And if you look at your recent net hiring levels, they do not suggest a significant ramp up of hiring in India itself. So won’t that work against optimization of on-site mix further in the medium-term?

No, I think if you – referring to the hiring part. Hiring part necessarily is not means all is net headcount, right? It is also a churn of people. These are dependent/independent people. So to some extent that will also address the replacement of, I think, people on certain projects. So it’s not necessarily mean that the entire 10,000 is totally incremental to the existing. So I think, there are a couple of pieces there as well. So overall, our focus on on-site mix is a combination of business mix, as well as in FP projects in the current service portfolio by service plan how do we address this I think that will be the result of these two elements.

Understood. And if I may ask one question to Pravin. Pravin, you mentioned that digital is now close 25%. And you will probably give us more break-up of what the growth going forward? But can you help us understand, what you’re seeing there in terms of size now, digital has been one of the sector areas in the market for a while now? So have you seen digital actually scaling up and becoming larger business line by itself in terms of individual orders of – we recently heard one of your larger peers talk about a reasonably large digital deal win. So are you also seeing something similar?

So as we said earlier, our share of revenue from digital has crossed 25%. We will probably start reporting that in the next coming quarters on an ongoing basis. In the last couple of quarters, we have started talking about new services and plus share of revenue from that. And that is a subset of digital. And as you have seen this quarter, it has grown by #6.8%, and today it’s about 11.6% of our revenues. So that is the kind of growth and overall we have grown at 1%. The growth from new services and software has been about 6.8%. So that is the kind of impact we can see. And digital is a common theme across industry verticals, because everywhere we’re seeing plans looking at new business models, improved customer interface, digitization and so on. And the definition of the digital also in some sense is very broad. So one part of the retail definition is about cloud. And if you today look at any large deal, there is an element of cloud in that. And if you use that hypothesis then there are already, I mean, in the past also, there have always been many large deals with significant component of digital in that. So I would not like to comment. I mean, we continue to see traction. We continue to expect increased momentum in digital across verticals. But I would not like to really comment on the size, because on the basis of definition itself, we have already seen large size digital deals.

Understand. Thanks for answering my question. Best of luck from my side.

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

Yes, thanks, and welcome, Salil, and all the best. Just the question is, in terms of the 4Q guidance, so if I look at the higher-end, it is 3.1% Q-on-Q growth. While last four years if you look at, except for one year, three quarters in three years, you had a sequential decline. So what gives you confidence to retain your higher-end of the guidance at 3.1% this time. So what could be the deal wins, which can result into some amount of optimism or breaking the jinx?

I think, I should not read too much into this beyond the fact that only one fact, which I would like to mention here is, if you look at the first nine months of this year, the revenue growth as compared to the first nine months of previous year, in constant currency, we have grown at 5.6%. And our current guidance is 5.5% to 6.5%. And as you know, we had reduced the guidance last quarter. So I think, right now, as Pravin had mentioned earlier, the deal momentum that we have seen in the earlier quarters, we’re focusing on ramping up some of them. And I think, the focus is clearly to have good execution in Q4. At the same time, we’re also very, as you rightly mentioned earlier, we’re very much aware of the fact that the exit rate of Q4 is important to leave it and that will really be important for the FY 2019 point of view. So we’re all working towards the execution.

Okay. Just last question, on the large deal pipeline, some of your peers, as well as industry consultant says that the pipeline is robust and the decision-making or conversion of the pipeline is actually accelerating or increasing. Do you also witness the same? And is it broad-based across industry segment?

This is Pravin here. The pipeline is strong. I agree with that assessment. But the digital cycle continue to be strong and continue to be long. It takes anywhere from six to nine months from the beginning to close from an average. But we have not seen accelerated decision making. And by and large, it is broad-based. Obviously, we’re seeing lot more. I have seen in the past lot more large deals in the ECF space and in the FX space. We have seen half pockets in manufacturing and RCL. I don’t – we don’t say any pattern in that. I mean, it really depends on when deals come up for renewal and renewal cycles and so on.

Okay. Okay, thanks, and all the best.

Thank you. Ladies and gentlemen, this was the last question for today. I would now like to hand over the floor back to the management for any closing comments. Over to you, sir.

Thank you. And this is Salil. Thank you, everyone, for joining this call today and thank you for the warm welcome. As you have heard, we have had a strong performance in Q3. All of our metrics indicate, the underlying business is in good shape. Overall, the fundamentals of our business, growth, operating margin and cash generation are really in a healthy position. We also have a pristine balance sheet, which has been used in the past and we will continue to use in the future as we evolve the capital allocation policy. Our governance now is stable. And with that, we now look at our strategic priorities that we’ll lay out at the April Investor Day. That’s what I wanted to share with you from our call today. Overall, as a company, we have all of those elements coming together, look forward to meeting with several of you at the April Investor Day. And thank you, again, for joining in.

Thanks, everyone, for joining us on this call. We look forward to talking with you again. Have a great day.

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