Container Store Group [TCS] Conference call transcript for 2024 q4
2024-01-11 09:00:00
Fiscal: 2024 q3
Operator: Ladies and gentlemen, good day, and welcome to the TCS Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nehal Shah from the Investor Relations team at TCS. Thank you, and over to you.
Nehal Shah: Thank you, operator. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the third quarter of fiscal year 2024 that ended December 31, 2023. This call is being webcast through our website and an archive, including the transcript, will be available on the site for the duration of this quarter. The financial statement, quarterly fact sheet and press releases are also available on our website. Our leadership team is present on this call to discuss our results. We have with us today Mr. K Krithivasan, Chief Executive Officer and Managing Director.
K. Krithivasan: Hi, everyone.
Nehal Shah: Mr. N. G. Subramaniam, Chief Operating Officer and Executive Director.
N. Subramaniam: Good evening, everyone.
Nehal Shah: Mr. Samir Seksaria, Chief Financial Officer.
Samir Seksaria: Hello, everyone.
Nehal Shah: And Mr. Milind Lakkad, Chief HR Officer.
Milind Lakkad: Hi, everyone.
Nehal Shah: Our management team will give a brief overview of the company's performance, followed by a Q&A session. As you are aware, we don't provide specific revenue or earnings guidance. And anything said on this call reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and e-mailed out to those who have subscribed on our mailing list. With that, I would like to turn the call over to Krithi.
K. Krithivasan: Thank you, Nehal. Good day, everyone, and wishing you all a very happy new year. Our Q3 performance shows a remarkable resilience against the backdrop of macro uncertainty. The demand for our company's services remain robust, resulting in strong deal wins and order book. Our deal pipeline remains solid and deal conversions have been timely. New deal ramp-ups are also going ahead as planned. Speaking about the headline numbers for the quarter. In Q3, our revenues grew 4.0% in rupee terms, 1.7% in constant currency terms and 2.9% in dollar terms. Our operating margin was at 25%, and net margin was at 19.4%. Our ability to maximize market opportunities is evident in our strong TCV of $8.1 billion and a book-to-bill ratio of 1.1. We are seeing solid deal momentum across markets, resulting in strong double-digit growth in our last 12 months TCV, which is a reflection of our deepened partnership. During the quarter, we started to deliver BSNL 4G, 5G network-related equipments -- equipment and services, a project of national importance. We are executing this project as a system integrator partnering with other OEMs. The transformational nature of this project and the solutions delivered are enhancing TCS reputation of being a critical partner to BSNL and the Atmanirbhar vision of the Government of India. I'll now invite Samir, Milind and N.G.S. to go at different aspects of our performance during the quarter. I'll step in later to provide more color on the demand trends we are seeing. Over to you, Samir.
Samir Seksaria: Thank you, Krithi. Good day and wishing all of you a great start to the new year. In the third quarter of FY '24, our revenues were INR 60,583 crores; which is a year-on-year growth of 4%. In dollar terms, the revenue was $7.28 billion, a year-on-year growth of 2.9% and in CC terms, the Y-o-Y growth was 1.7%. Let me now go over as our financial performance. Our operating margin is at 25%, a sequential expansion of 75 basis points, comprising 80 basis points headwind on account of seasonal furloughs and higher third-party expenses offset by 60 basis points improvement on account of efficiency improvements through productivity and realization and a further 70 basis points improvement from subcontractor -- reduction in subcontractor expenses. Currency gains accounted for the remaining 25 bps. Net income margin in Q3 was 19.4%. Our EPS grew 8.4% on a year-on-year basis. Effective tax rate stayed unchanged at 25.8%. Our accounts receivable increased by 2 days sequentially at 67 days sales outstanding in dollar terms. Net cash from operations was INR 112.76 billion, which is a cash conversion of 102%. Free cash flows were INR 103.52 billion and invested funds at the end of the period stood at INR 457.31 billion. The Board has recommended an interim dividend of INR 27 per share, including a special dividend of INR 18 per share. The company successfully completed its 5th buyback during the quarter. Shareholder payouts year till date were at INR 46,223 crores between the buybacks, dividends and taxes, including the recommended dividend for the quarter. Please note that in Q3, we recorded $125 million towards settlement of legal gain as an extraordinary item for the third quarter and 9 months ended December 31, 2023. All the above comparisons and commentary in this management call will exclude this extraordinary adjustment. Over to you, Milind.
Milind Lakkad: Thank you, Samir. Let me start by wishing all of you a very happy new year. Our workforce at the end of the third quarter was 603,305. LTM attrition in IT services was 13.3%, down 1.6% sequentially, in our comfort range of 11% to 14%. TCS has always been firm on its commitment to the holistic growth and development of its employees and invest in organic talent development to build newer capabilities. We have commenced special hiring from campuses and continue to recalibrate our lateral hiring, focusing more on utilizing the capacity that we've already built in the prior years. Our business imperative remains nurturing and developing human capital and enhanced focus on reskilling and upskilling of workforce. We have accelerated the rate of learning in the organization as we gear up to fulfill the opportunity on the horizon. YTD TCS has locked 39.7 million learning hours and acquired 3.7 million competencies, including over 515,000 high-demand competencies. Our workforce continues to be very diverse with 153 nationalities, in which women making 35.7% of its base. Over to you, NGS for some color on segments and products.
N. Subramaniam: Thank you, Milind. Happy New Year and Sankranti wishes to all of you. Let me walk you through our segmental performance. As a reminder, all growth numbers are on year-on-year constant currency terms. Growth was led by Energy Resources and Utilities vertical, which grew 11.8%. Manufacturing, which grew 7%; Life Sciences and Healthcare grew 3.1%. Our Consumer Business Group grew by minus 0.3%; Banking, Financial Services, Insurance by minus 3.0%; Communications and Media by minus 4.9%; and Technology and Services by minus 5.0%. Among major markets, the United Kingdom led with 8.1% growth. Continental Europe grew by 0.5% and North America by minus 3.0%. In emerging markets, India led the growth with 23.4%. Middle East and Africa grew by 16%. Latin America grew by 13.2% and Asia Pacific by 3.9%. Let me move on to our products and platforms. Our industry-leading portfolio of products and platforms saw good traction during the quarter. ignio, our cognitive automation software suite saw 27 new deal wins and 6 go-lives. TCS BaNCS, our flagship products for financial services had 6 new wins and 3 go-lives during the quarter. ASX, Australia's premium securities exchange selected TCS to provide the next-generation clearing and settlement platform to service the Australian market. TCS BaNCS' market infrastructure will enable transformation, replacing ASX existing platform for cash equities clearing and settlement. A top Japanese bank providing custody and fund accounting services to some of the largest investment managers, insurance companies and pension funds has awarded a contract to TCS for its bank solution to offer the best-in-class asset servicing solution on the cloud. TCS BaNCS' insurance platform continues to see strong growth in Q3 with 4 go-lives during the quarter. The Quartz blockchain platform has 1 win and 1 go-live during the quarter. In Life Sciences, our TCS Advanced Drug Development platform has 1 new win and 2 go-lives this quarter. A U.S.-based global pharma company has chosen TCS as regulatory platform for transforming healthy authority submissions and responses using historic data. The solution will help in planning at a milestone-task-component level and execute features such as automated alerts and notifications, a rich and easy-to-use reporting dashboard and visualization. TCS HOBS, our suite of products for communication service providers had 1 new win and 2 go-lives during the quarter. TCS iON, our platform for digital assessment, examination administration and learning had 32 new wins. Platform administered assessments for 14.5 million candidates, 160% higher year-on-year, led by growing adoption of regional languages in the examinations. Skilling and job creation is high on the agenda of India's state and central government, driving growth in our assessment business. TCS TwinX, our digital twin solution, had 4 wins and 3 go-lives. We were engaged by a major North American package delivery company to construct their delivery network twin to analyze faster delivery operations for their North American customers. As part of this engagement, TCS TwinX enabling a twin of twins to map their existing parcel volumes and flows across their existing network of hubs, run experiments on change in parcel volumes across these routes and drive optimization of current systems and processes for efficient future planning. MasterCraft and Jile won 35 new clients in Q3. Client metrics. We continue to systematically invest in research, innovation and intellectual property, and ideating on new emerging technology trends to address our clients' evolving needs. Following a similar approach, we have worked extensively on building our capabilities in GenAI, and we are confident of helping our clients to take advantage of the benefits of GenAI. Krithi will talk more about this in his commentary. As a proof point of the success of our ongoing investments over the years, we have been able to consistently increase the number of key clients and migrate them into higher revenue bands. In Q3, we added 2 more clients year-on-year in the $100 million band, bringing the total to 61; 7 more clients in the $50 million band bringing the total to 137; 9 more clients in the $20 million band, bringing the total to 299; 24 more clients in the $10 million band, bringing the total to 480; 35 more clients in the $5 million band, bringing the total to 693; and 71 more clients in the $1 million-plus band bringing the total to 1,288. I'll now request Krithi to speak on the demand drivers during the quarter.
K. Krithivasan: Thank you, NGS. As we reflect on the last quarter, enterprise adaptability and resilience continued to be high priority in the light of macro uncertainties and geopolitical volatility. This is driving our clients to prioritize business-critical projects, where return on investment realization is immediate. We are closely partnering with our clients and leveraging our contextual knowledge to proactively identify solutions to business problems in these challenging times. This is, in turn, driving good deal momentum for us. Most enterprises at the time of the pandemic invested in digital capabilities to address changing customer behaviors. In the face of macroeconomic uncertainties around fear of recession, and continued high inflation, many businesses have been cautious about further investments, creating a pent-up demand. This pent-up demand is important for long-term strategic growth for our customers, and we are optimistic that our customers will scale up these initiatives once they gain the comfort that the macro risks are receding. It's not about simply recovering previous volumes, but building strategic capabilities in a changing market landscape. We have several strategic things across industries where we know customers will scale their investments. For instance, in the consumer business, some risk transformation areas include point-of-sale channels, future stores, insights and recommendations driven by AI, supply chain, loyalty, sustainability, forecasting, hyperpersonalization, health and wellness, one model travel retailing, intelligent operations and transport control towers. Order book. Our order book in Q3 continued to be resilient with a TCV of $8.1 billion and a book-to-bill ratio of 1.1. Our trailing 12-month order book grew by a healthy 11.3% year-on-year. The TCV for our BFSI business was $2.6 billion. The order book for our consumer business group was at $1.5 billion. The TCV of deals signed in North America stood at $4.2 billion. Moving to our demand commentary, operating model transformation focused on improving efficiencies, digitalization, customer and employee experience transformation, sustainability, cloud, cyber resilience and AI/GenAI continue to be key themes, driving demand for our services. We signed several large deals in the quarter led by vendor consolidation and operating model transformation. On vendor consolidation, Virgin Media and O2, the U.K.'s largest mobile network selected TCS for integrating the 2 merged entities and deliver unified employee experience across 5 towers. Services from 10 different partner landscapes were consolidated into 1 strategic partner in TCS. VMO2 trusted and selected TCS to deliver their objective of futuristic digital workplace services to delight their end users. TCS will leverage its contextual knowledge, machine-first delivery model and future-ready talent pool to help VMO2 to enhance its regional capacity while delivering a globally best-in-class experience for their users. Moving on to operating model transformation. Our contextual knowledge has been instrumental in reimagining the client operation and the AI-powered TCS Cognix has been delivering superior business outcomes for our clients. Our integrated offering is receiving good traction from clients as it takes ownership for the entire stack of client operations, along with the underlying application, data estate and IT infrastructure layer. It allows enterprises to become more agile, lower their operational costs and achieve business efficiency across multiple business units. We were selected by a leading American aerospace manufacturer to enhance and standardize their tool chain with the objective of increasing efficiency and speed, simplifying operations, reducing costs and advancing digital transformation. The client is partnering with TCS to not only achieve system stability, but also lay the framework for the future of IT, which is key to ensuring success in its business operations. Moving on to growth and transformation. Our customers are seizing the opportunities for business growth and transformation as they present themselves. Digitalization initiatives are continuing apace as our customers double down on their focus on strengthening digital core. TCS collaborated with a global fashion retailer to build a real-time data-driven sales visualizer. TCS leveraged AI and cutting-edge technologies to build a robust observability framework solution that processes data from multiple IT systems to generate insights and identify potential problem areas. 100% transparency on sales forecast and real-time omnichannel sales performance enabled through our solution is helping the client with prevention and faster resolution of issues. Agility in fine-tuning our strategies for promotions in underperforming segments, regions, markets and products. Customer and employee experience is another area of focus with changing consumer behavior and expectations. Customer experience continues to remain a key priority for clients, and we have multiple deals and productive pursuits across industries. Another trend that we are seeing is new CHROs doubling down on employee experience to improve employee engagement and productivity to create a future-ready workforce. We helped a leading North American retail company bring to life their innovative concept of presenting exclusive offers to their customers. The concept was designed to attract customers looking for promotional deals, high-profile and limited edition exclusive offers and to smoothen the discovery experience during shopping. TCS leveraged its contextual knowledge to develop this product feature that presents an engaging and exiting interface for customers and builds an exclusive appeal. The initiative has helped attract new customers, increase the mobile app downloads, frequency of interactions and improved customer engagement. We won a first-of-its-kind deal with a tech company to sustainably enhance the employability of employees and contractors. The solution leverages our deep domain expertise and proprietary platform iON. Our integrated offering, learning in a box is a tool-based learning platform that includes best-in-class subscription-based learning content coupled with 100-plus curated practices. The platform which can be accessed anytime, anyplace and on any device, enables engagement, motivation, impact-oriented learning. We are selected by a leading American aerospace manufacturer to transform their end-to-end talent acquisition process. TCS will leverage its AI-led machine-first operating model, process transformation framework, domain expertise and agile methodology to enhance talent quality, optimize time to hire and improve overall onboarding experience. Moving on to supply chain transformation. The global supply chain is rapidly evolving, trying to keep up with a dynamically changing environment and evolving technological advancements, businesses are investing in modernizing their processes, platforms, warehouses, et cetera, to drive better efficiency, improve agility in adapting to market shifts and improve their bottom line. We partnered with a Swiss multinational food and drink processing company to digitally transform its supply chain. TCS implemented an innovative operational planning platform that maximizes automation, optimizes and standardizes process and increases visibility. This will improve our clients' ability to sense and react to the ever-changing environment and on time and in full deliveries, key to customer satisfaction. A leading U.K. supermarket chain also partnered with TCS to enhance its supply chain efficiency, improve logistics workers accuracy and availability, improve collaboration with suppliers and transparency while reducing operating costs. The solution resulted in significant reduction of waste and markdown, implement in lead time and increased stock record accuracy and annualized reduction of stock through automated ordering. I will be now moving on to sustainability. We are seeing that sustainability is a core priority for organizations aiming to secure a resilient and responsible future and enhanced brand reputation. I'll now share a few examples of how we play -- we have played a pivotal role in assisting our clients in their sustainability journey. Clients are engaging us to develop innovative technology-led solutions with IoT, AI and advanced analytics to reduce energy and resource consumption to measure and track greenhouse gas emission across their end-to-end supply chain, reduce their carbon footprint, reduce waste, promote recycling, and report on their sustainability initiatives. Based on our deep contextual knowledge, the team proactively proposed a solution to reduce wastage in inventory of high-cost drugs for a leading Canadian food and pharmacy retailer. The automated inventory management has been a big contributor to our client sustainability efforts in reducing the environmental impact of medical waste, improve operational efficiency and reduced over 90% of the financial loss on account of wasted inventory. We have also partnered with Metcash, one of Australia's largest wholesale distribution and marketing company to support their sustainability reporting. By leveraging a global team of experts specialized in sustainability, sustainability tools and GRA standards, TCS provided a deep understanding of materiality assessment, disclosures and index benchmarking across industry peers. A leading U.K. retailer, also partnered with us as a strategic partner in their digital product passport initiative. TCS will leverage its deep fashion domain expertise with investments in sustainability research, contextual knowledge and advisory capabilities to design and implement unique identifiers linked to products. This will help the retailer maintain its lead in sustainable fashion, adhere to emerging country-specific legislation across the EU and enable sustainable choices. Now moving on to generative AI, which is a disruptive technology that has potential to enhance efficiency and drive significant value is generating tremendous interest among our clients. We are taking an early lead in GenAI capabilities. We are focused on strengthening our expertise and evolving our capabilities further. Let me give you a few examples of what we are doing. We have launched GenAI offering around industry value chain, SDLC reimagination, responsible AI framework and invested in several centers of excellence, innovation labs to develop accelerated frameworks and assets. We launched a new cyber insights platform, which focuses on AI-powered threat detection. It is enhanced with machine learning models to help continuously monitor anomalies, predict potential issues well in advance and help clients to be proactive in addressing increasing threats. Our products and platform are also being enhanced with differentiating capabilities, leveraging GenAI. We have built a copilot for TCS Optumera, our AI-powered retail strategic intelligence platform for dynamic competitive pricing, new product trends, design and testing, visual merchandising, visual merchandising recommendation and product attribute enrichment. In Life Sciences, the TCS Advanced Drug Discovery is being enhanced with literature insights, patient insights, safety case processing and medical writing. TCS TwinX digital twin-powered experimentation and zero-touch marketing operations for CMO. We continue to further deepen our expertise in GenAI. This quarter, we launched a platform for skilled practitioners among TCS employees for exploration and experimentation on various GenAI platforms. We are seeing strong interest levels and engagement from customers on generative AI. Currently, we are working with several clients on improving customer contact centers. For example, assistance with intent analysis and recommendations and employee assistance, for example, crew support, sale support, factory operations, HR policy support and operation manual, generating insights on legal contracts and construction design, et cetera. Product marketing, content generation are other key areas being explored. Further exploration in the form of POC's is underway in several areas across the value chain. A leading European bank is employing generative AI to bolster e-communications surveillance and compliance regulatory framework. The solution will enable real-time risk and anomaly detection and evaluate patterns and emotional tone of internal communication for potential issues. A leading U.S. airline has partnered with us in expanding their loyalty program by reaching out to passionate marathoner, a niche breed of endurance and features known to travel frequently and across the globe. The innovative concept leveraged generative AI to enable meaningful engagement with loyalty members for the event and offers them dynamically curated deals for future years. A global insurance company has selected TCS to develop a generative AI application to assist analysts in the front office for its global wealth and asset management division. The solution leverages the suite of LLMs to provide comprehensive and easy-to-understand information from unstructured data sources related to world events, company updates, and portfolio composition. Services include summarizing earnings reports, earnings report review, industry and market ratings, commentary, et cetera. We have engaged with clients for setting up generative AI centers of excellence or AI offices and providing advisory services to scale, proven use cases in controlled fashion. Coming to Cloud Technologies. The investment that companies have made or are making in transitioning to cloud have become more meaningful with time. The increasing demand for smart interconnected devices, real-time insights and innovation, will continue to drive the demand for scalable computing resources, making cloud transformation a strategic imperative. The focus now is also on fine-tuning strategies and optimizing consumption. Here are a few examples of how TCS continues to partner with clients in the cloud transformation journey. Halfords, a U.K.-based retailer was looking for ways to simplify the customer journey while making its products and services affordable. Taking a mobile-first cloud-first approach, the retailer collaborated with us to consolidate and migrate its critical applications to public cloud. Our client is all set for growth with this cloud transformation to deliver a customer-first experience that promises significant cost savings, among other benefits. We implemented the core operation system covering crew management and operations control for Virgin Atlantic, a leading British Airline. The program involved implementation of AMS AERO product and integration of several mission-critical systems. Being the nerve center of airline operations, the implementation had to be 100% accurate to avoid any delay or cancellation of flights. The program will ensure better crew and on-time performance of Virgin Atlantic flights. We are continuing to see significant demand in areas like cloud migration and transformation, apart from exuberance around generative AI, all of which represent areas of great opportunity for the long term. We can now open the lines for questions.
Operator: [Operator Instructions] We have a first question from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management.
Sudheer Guntupalli: Yes. Congratulations on good execution. First question is to Samir, in general, companies start cost actions with a bit of lag from the point of demand deterioration, and there will be a further lag for those actions to translate into margin expansion. Also, attrition and supply tightness in the market cooled off significantly from where it was 12 to 15 months ago. So if we see these 2 facts in conjunction, Samir, is it fair to say that the margin improvement cycle has just started and it has more legs to go despite headwinds from some of the large deal ramp-ups?
Samir Seksaria: Sudheer, if we look at last quarter's questions to us were on similar lines with large deals ramping up, will margins be impacted? We called out, we'll look at it on a portfolio basis. And what we have delivered is something which we are very happy about. We delivered a 70 basis points improvement on a back of 110 basis points improvement that we had in the previous quarter.
Sudheer Guntupalli: And my second question is to Krithi, on the recovery leg. Historically, the sector had not seen more than 3 to 4 consecutive bad quarters as long as the tightening of client spend was led by just weak macro and the underlying technology cycle remaining supportive, maybe because of the base effect or quasi cyclical nature of the industry. So going by this heuristic, Krithi, do you think it's fair to expect a good recovery going ahead, even as, second-guessing, some of these variables like interest rates, et cetera, is difficult? Or is there a reason for you to believe that the current spending tightness might also be a function of excess investments in technology that happened during COVID and hence, the tightness may continue for some more time, something like what we had seen in the aftermath of the dot-com period?
K. Krithivasan: Sudheer, we have not observed that particular heuristic maybe it's something that makes us also feel optimistic. But the way we look at it, while there was a lot of investment that happened during the pandemic, during the time of uncertainty, our customers are reevaluating the investments they made. And wherever it's required, they are passing those investments, where they think it's yielding results, they're continuing with it. Having said that, we also believe that even though they might have made a lot of investment, there are many organizations still are laden with lot of technology debt. And once there is a certainty, they will start spending to reduce this technology debt. So we are hoping that once that certainty comes in, spending will also return. But I won't be able to predict based on, okay, it's never been more than 3 quarters or 4 quarters. That would be not the heuristic that we have observed or something that we want to go by.
Operator: We have our next question from the line of Vibhor Singhal from Nuvama Equities.
Vibhor Singhal: Congrats on a great margin performance. I've got two questions. The first question for Samir. I think we got a very solid margin performance in this quarter. And as you rightly said after another solid performance that was in the last quarter. Is it safe to say that our aspirational band of 26% to 28% margin that we've long talked about is maybe no longer aspirational and there are ways that in near to medium term future, there are possibilities that we can probably work towards that? Is there a possibility that we are looking -- I mean, are the levers that you see that are still underutilized that can help us reach that band? And I'll ask my second question later.
Samir Seksaria: Sure, Vibhor. We remain committed to our guiding beacon, which is the 26% to 28%. And in doing so, we are focused on a disciplined execution and look forward to drive operational excellence and the levers which we have been banking upon so far, whether it's in terms of productivity, utilization, realization, et cetera, or given the demand environment which we have seen banking on the subcontractor cost optimization do remain. So we have been able to leverage them and do provide further opportunities for optimization. And in the long term, pricing also remains a lever, which we can do. All of it in an environment where growth is sustained, will only help accelerate our momentum.
Vibhor Singhal: Got it. Got it. My next question is to Krithi. I think the deal flow in this quarter was a bit on the softer side. We, of course, know this is a seasonally soft quarter. But on a Y-on-Y basis also, I think the growth was -- in the deal flow was a bit modest. So any specific thing to call out? Or was it just that it was a soft quarter with higher furloughs, and the overall demand environment in your opinion or the client interest, have we seen a change in that in the last 3 months since we met in the last quarter results?
K. Krithivasan: Vibhor like, first of all, the TCV, we don't look at it as soft, it's in line because the TCV sometimes in the last quarter, if you take, which had 2 large deals, 2 mega deals and so it had the lumpiness. So we can -- we will not be able to measure TCV the same we do measure revenue. So there will be some ups and downs. But overall, we look at the pipeline and we look at the deals that we close and geographical spread and the size of the deals and the type of deals, and we are quite comfortable with the deals that we are getting in. So we don't want to read. We aren't seeing a softness on that front at all.
Vibhor Singhal: Got it. And no change in the overall demand environment that we are seeing, right? And in terms of either for the positive or for the negative side, it's pretty much the same as we have been seeing.
K. Krithivasan: Yes. That's the way I would also read it Vibhor.
Operator: We have our next question from the line of Sandeep Shah from Equirus Securities.
Sandeep Shah: Krithi, I think you might have answered the question indirectly, but any of your discussions with any of your clients in any of the verticals or markets give you any indication of any emerging green shoots in terms of the demand because of the Fed meeting where now believes that the U.S. economy could be a soft landing as a base scenario versus a recessionary outlook, which people were predicting earlier?
K. Krithivasan: So Sandeep, you know that already some of our verticals are doing quite well. For instance, manufacturing, we've been seeing growth, reporting growth. Energy resources and utilities been reporting good growth. And even life sciences and pharma, like despite last quarter being weak, has again returned to growth. And we've also been seeing our consumer business has been quite promising, and we started seeing some green shoots in consumer business, but we'll be able to say for sure next quarter, but it looks quite promising.
Sandeep Shah: Okay. Okay. Helpful. And any initial color in terms of CY '24 budgets?
K. Krithivasan: No, like -- see, two things, Sandeep. One is we have not heard any specific color. And two, also given the overall uncertainty, we find our clients also very agile, like even though they may have some thought in terms of what they want to spend, but we find that they keep also reacting to the market sentiment. So there's a whole budget or what projects started -- start or get passed, it will be very dynamic. So we don't want to read too much into that aspect.
Sandeep Shah: Okay. Okay. And any update in terms of how the BSNL deals ramp-up continue to remain over 4 to 6 quarters?
K. Krithivasan: I'm requesting NGS to take that question for you, Sandeep.
N. Subramaniam: Yes. I'm sorry, what is the question?
K. Krithivasan: BSNL deal...
N. Subramaniam: Overall, I think the deal is...
Sandeep Shah: BSNL deal ramp-up may take 6 quarters. Any update on the same?
N. Subramaniam: We have started to deliver the equipments and services for BSNL. And as I explained in the previous quarters, we are approaching it from zones and circles in which we have to roll it out. We have taken up the North zone as the first thing, and we have started to deliver equipment and services by rolling out the new radios that are slated to be delivered to BSNL in a few circles. The data center in which the whole evolved packet core need to be installed and operationalized, that's also been progressing well. So overall, I would say that this is the first quarter where we have delivered close to about, I would say, 2,000 sites worth of equipment, and they are in the different stages of installation and commissioning. At the same time, the data centers installations are all progressing as per plan. And it will get done over the next, let's say, 4 to 6 quarters as we envisage.
Sandeep Shah: Okay. And last question, I just wanted to understand on margin levers. I think CFO has called out various margin levers but is it fair to assume in each of these levers, there would be further headwind -- further headroom to improve further because subcontracting cost is even lower than where we actually were there during the pre-COVID times?
Samir Seksaria: True, Sandeep. As I said, depending on how the demand environment continues, it could be one of the levers. That would be the other levers which we called out. Overall, as we have said, our long-term cost structures are aligned for us for our aspirational band of 26% to 28%.
Operator: We have our next question from the line of Kumar Rakesh from BNP Paribas.
Kumar Rakesh: First question was for Krithi. In your prepared remarks, you talked about the pent-up demand. So where are you seeing the signs of that? And what do you think would be the trigger for that to materialize?
K. Krithivasan: No, like I did also give out certain examples and that I think it was like, for instance, you just take the consumer business is a channel modernization or store modernization. So we talked about a number of areas where we find that investment has not kept up pace with the requirement, business demand. So that's what is giving us that confidence, Kumar.
Kumar Rakesh: And the catalyst for that to materialize that clients eventually -- the catalyst for that to materialize that clients eventually...
K. Krithivasan: Catalyst would be, I would say that when they have a confidence about the stability of the overall macros, Kumar. Once they are confident that the investments will -- the environment is good, the investments will come in.
Kumar Rakesh: Got it. My second question was you have talked about market share gain and also benefiting from vendor consolidation. So apart from your scale advantage, what is helping you to be the beneficiary of these trends?
K. Krithivasan: Scale advantage is only one thing, Kumar, okay? The most important advantage is the domain capability contextual knowledge we bring in into each of these. Like vendor consolidation, to be successful, you should bring in the value for the customer. And that has to be in terms of the contextual knowledge, the industry knowledge in terms of delivery certainty. So all these things matter, okay? And also the process that you want to deploy. And when you do this, there should be a value for the customer. So what is your ability to bring in automation? So your transformational capability, your road map of transformation. So you should be able to do everything. Just because we have a scale advantage, we don't win. We win because we have all the other advantages in giving a long-term sustained value for our customers.
Operator: [Operator Instructions] We have our next question from the line of Manik Taneja from Axis Capital.
Manik Taneja: Congratulations once again for the strong performance on margins. Just wanted to prod you further with regards to the subcontracting expenses, which have now -- which are now below pre-COVID levels. Is there something structural that we are doing to our delivery organization because of which these expenses have now reduced to a much lower level? Would appreciate some commentary on that front.
Samir Seksaria: No. So Manik, one is subcontractors, we have been using to meet the short-term demand-supply mismatch. And it peaked because, one, there were border restrictions. And second, there was the entire freight challenges, et cetera which are happening in a higher-demand environment. And we have explained that in terms of why those scenarios arose. Now as the supply side challenges eased off, attrition cooled off, we are able -- and we invested into capacity. That is how we are able to manage it. And when we don't require those intermediate ones is when we are optimizing and yes, it is below the pandemic levels as well. But -- and that has been thought through strategically, and you could see that reducing sequentially quarter-over-quarter for past few quarters.
Operator: We have our next question from the line of Gaurav Rateria from Morgan Stanley.
Gaurav Rateria: So first question is with respect to, is there any difference in the TCV growth trends versus ACV growth trends because of the deal tenures changing compared to what you saw last year? Or it's largely been similar, no material change there?
Operator: I'm sorry, sir, you're not audible.
K. Krithivasan: Gaurav, what is the question, like TCV trends...
Samir Seksaria: TCV's lower because the tenures are shorter.
K. Krithivasan: We don't see any trend, that kind of change, Gaurav, okay. The TCV trend in terms of tenure continues to be consistent with what we saw before as well.
Gaurav Rateria: Got it. The second question is on the levers for margins that helped during the quarter, you did talk about realization and productivity. So the general perception is that in a tough environment, it's very difficult to use a lever of realization, but you have been able to do that. Is there anything going on with respect to client negotiations that has been helping you to benefit on margins? And is there a -- like this is over or this is going to continue in coming quarters as well?
Samir Seksaria: So Gaurav, I will distinguish realization from pricing. Pricing environment is stable. Realization is an outcome. You can say it as revenue per FTE and you could look at it, that has been improving. And it's a combination of factors, utilization versus productivity, use of tool sets, et cetera, helping in. And we have been banking on these levers for a few quarters. Structurally, on a longer-term basis, the cost structures would be based on these levers and pyramid, et cetera, and we'll continue to drive efficiency across these metrics.
Gaurav Rateria: Got it. And last question, like I know that we should look at the TCV numbers more on a 12-month basis rather than on 1 quarter basis because of the variations that can happen. But if you look at trailing 12-month growth, whatever that number is, should that be a fair reflection of growth going forward in terms of revenue or there can be more nuances that you have to keep in mind?
K. Krithivasan: Gaurav, by and large, the TCV, like is a lead indicator of more medium- to long-term growth performance and gives you the confidence on whether what the market is thinking, how our growth would be, okay, so from that perspective, the last 3 quarters, it's been a very strong $10 billion almost every quarter. And even this quarter, we had $8 billion, and there have been some lumpiness in some quarters before some through mega deals and all. So we don't see it as a great big variation from what we had in the previous quarter. And as we said before, this gives us confidence on the medium- to long-term growth potential.
Operator: We have our next question from the line of Apurva Prasad from HDFC Securities.
Apurva Prasad: My first question is on the BFSI vertical. Would it be fair to say that BFSI grew on a sequential basis if I adjust for the large program completion in North America, which you had referred to earlier and the furlough impact in specific Europe BFSI account.
N. Subramaniam: I think it's -- I would agree with your view, adjusting to the large BFSI program that we completed in North America and furlough impact we had across markets. I think BFSI actually did well. The deal closures in BFSI vertical is also quite broad-based across markets. I would agree. I would agree that BFSI is actually a positive thing from my perspective and it will only further from here.
Apurva Prasad: Got it. And Samir, my question to you is on margins. What further headwinds do you see as BSNL ramps up next quarter or any other headwinds that you may want to call out for next quarter?
Samir Seksaria: See, overall, we are focused on managing our margins at a portfolio level, and that's what we called out. There were a lot of apprehensions last quarter as well in terms of how large deal wins will impact margins. We look forward towards managing it at an overall portfolio basis. And you know the normal headwinds which we have in a year, Q1 would have expected increments related increases, et cetera. The business has a certainty of growth also works either ways, growth definitely is the margin lever.
Operator: We have our next question from the line of Ravi Menon from Macquarie.
Ravi Menon: Congratulations on your margin performance. Samir, a popular belief is that large deals come with an increase in unbilled revenue. Can you talk us through why unbilled revenue is down Q-o-Q despite the BSNL deal ramping up this quarter?
Samir Seksaria: Okay. So no, it's not always that large deals come with unbilled revenue. Yes, some of them would have it. But in this quarter, unbilled revenue is down because we had a focused effort concentrating on that metric. And I think overall, the business has delivered quite well on -- ensuring unbilled revenues go down. And we see a slight impact of that in terms of the DSOs going up by 2 days because the unbilled revenues caught into invoicing, and that's a good thing to have because we have better visibility on collections.
Ravi Menon: And if I heard NGS correcting in the press conference, you said that BFSI will return to growth next quarter. Is this due to a change in how discretionary spending decisions are being made or due to any specific deal ramp-ups?
N. Subramaniam: I think, as I said, overall, BFSI, if I look at all our clients in BFSI, many of them actually grew or stayed flat, right? There has been a marginal growth in each one of them, and the actual degrowth eventually happened because of 2 large programs that we completed and furloughs. Adjusted for that, we believe that it will be actually a positive momentum for us in BFSI vertical in the next quarter, coupled with some of the deals that we have won, I think that should also ramp up in the coming quarter in the Q4 and Q1 all that what makes us feel that BFSI has actually returned to growth, at least in our portfolio or plans that we have.
Ravi Menon: And one last follow-up for me. Talked about -- you talked about your specific advantages on context of knowledge and how the overall value that you provide to the customer and the solution, could you tell us how many solution architects, overall software architects you have within your employee base, maybe a rough proportion?
K. Krithivasan: We don't give it.
Samir Seksaria: We don't give that kind of breakout -- breakdown, Ravi.
Operator: We have our next question from the line of Moshe Katri from Wedbush Securities.
Moshe Katri: Congrats on very strong execution in a pretty tough environment. I have two on my side. First, we continue to see a disparity in performance in Europe versus North America. Can you kind of provide some color on that? And do you think that disparity kind of will maybe disappear down the road given your pipeline?
K. Krithivasan: So like if you look at our pipeline in Europe has also been good, same for this quarter, and we have seen our TCV in Europe also has improved. If you look at the parity in terms -- but I also, in fact, our Europe over on a sequential basis, actually did better this quarter compared to North America. So on -- it's reasonable to expect that Europe will also return to growth in the medium to long term. And we are like we've mentioned before, we are hoping there is a growth that returns in North America as well. I don't know whether there will be parity but there will always be some differences, but we hope in the medium to long term both the markets will return to growth.
Moshe Katri: Understood. And then the follow-up I just wanted to clarify, given some of your commentary and looking at your pipeline, are we seeing more optimism for discretionary spending during the next few quarters more on the digital side? And obviously, what we've seen on the PCB side, the main drivers were more on the cost takeout kind of area. But any color on the discretionary side outlook for the next few quarters?
K. Krithivasan: Moshe, like at this time, whatever the proportion between discretionary and nondiscretionary that existed in last quarter or last couple of quarters, we see that has not filtered or changed significantly, it's continuing to be the same.
Operator: We'll take our last question from the line of Dipesh from Emkay Global.
Dipesh Mehta: Two questions. First, on BFSI. If I look last almost 3 years, BFSI deal intake remained around $10.5 billion on last 12 months basis. So more or less flattish, if I look, let's say, 3-year basis, in a way it gets reflected in revenue growth performance also in BFSI. So can you help us understand from a medium- to long-term perspective how one should look at BFSI growth trajectory? Second question is about non-CIO spending exposure. If you can help us understand how we are placed to participate in non-CIO spending, CMO, CDO-related spending.
N. Subramaniam: I think overall, BFSI, I would say that it's a large portfolio that we have across banking, capital markets and insurance and products and platforms. Because of this, the nature of this whole thing, let's say, banking does well, sometimes capital markets kind of even without and then Insurance has been doing well for us in the last, I would say, quarters. And the products and platforms will also have a significantly a good run for us. So I believe that in banking, capital markets, insurance and the platforms if all of them fire, then you will see a very distinctively huge growth. But the nature is such that, that looks one or the other actually goes for a flat negative growth. And we are managing it as a portfolio and we are happy that given that there is always a cost and optimization focus in BFSI, while they continue to explore new technologies, and then in terms of the number of hours of technology services that we provide to banking financial services. We track it to the extent that look we are gaining market share in BFSI, while overall revenue and the portfolio is kind of sees some moderate growth. That's the way I'll put it.
Operator: Mr. Dipesh?
Dipesh Mehta: Yes. Can you answer the second one?
N. Subramaniam: Non-CIO revenue across the verticals, I think you see some growth. And separately, if you look at the revenue on the CMO side or COO side, they are improving. And as they adopt cloud and generative AI in the technologies, I think what is really kicking off is the digital marketing right now. And the whole TCS interactive portfolio that we are seeing good growth and good opportunities that are coming there. We stay focused on, let's say, cost optimization and vendor consolidation is one side and the growth and transformation projects on the other side. The majority of the growth and transformation projects with our transformation deals that we have are really led by business.
Dipesh Mehta: Is it possible to quantify some numbers here? What would be the share of revenue?
N. Subramaniam: We have not started to give that out, and let's hope that this year, August well for it to give us more color on all of this. .
Operator: Ladies and gentlemen, that was the last question for today. I now hand the conference over to the management for closing comments. Over to you, sir.
K. Krithivasan: Thank you, operator. In Q3, our revenue grew 4.0% in rupee terms and 1.7% in constant currency terms. Improved productivity and other operational efficiencies, along with further optimization of subcontractor expenses, helped expand our operating margin, offsetting margin headwinds from furloughs and higher third-party expenses. We are able to improve operating margin to 35.0%. Our net margin is 19.4%. Deal momentum continued to be very strong in Q3 with our order book at $8.1 billion. Our LTM attrition in IT services fell further to 13.3%. Our Board has recommended a dividend of INR 27 per share, including special dividend of INR 18 per share. We continue to invest in building our GenAI offerings, deepening our employees' skills on generative AI and are building differentiated capabilities, integrating generative AI in our portfolio of products and platforms. We continue to deliver strong and resilient growth, winning market share with industry-leading margins. Our resilience is a result of our ongoing investment and exceptional leadership team under extremely talented and dedicated workforce. I want to thank each of them for what has truly been an outstanding performance in a challenging environment that we should all be proud of. With that, we wrap up our call for today. Thank you all for joining us. Enjoy the rest of your day and stay safe. Thank you.
Operator: Thank you, members of the management. On behalf of TCS, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.
