Infosys Limited (INFY) Q3 2021 Earnings Call Transcript

Infosys Limited  (NYSE: INFY) Q3 2021 earnings call dated Jan. 13, 2021

Corporate Participants:

Sandeep Mahindroo — Investor Relations

Salil Parekh — Chief Executive Officer and Managing Director

Pravin Rao — Chief Operating Officer and Whole-time Director

Nilanjan Roy — Chief Financial Officer

Analysts:

Ankur Rudra — JPMorgan — Analyst

James Friedman — Susquehanna — Analyst

Kawaljeet Saluja — Kotak — Analyst

Yogesh Aggarwal — HSBC — Analyst

Keith Bachman — BMO Capital Markets — Analyst

Diviya Nagarajan — UBS — Analyst

Moshe Katri — Wedbush Securities — Analyst

Pankaj Kapoor — CLSA — Analyst

Sudheer Guntupalli — ICICI Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Infosys Earnings Conference Call. [Operator Instructions]

I now hand the conference over to Mr. Sandeep Mahindroo. Thank you, and over to you, sir.

Sandeep Mahindroo — Investor Relations

Hello, everyone, and wish you all a very Happy New Year. Welcome to this earnings call of Infosys to discuss Q3 FY ’21 earnings release. This is Sandeep from the Investor Relations team in Bangalore. Joining us today on this call is CEO and MD, Mr. Salil Parekh; COO, Mr. Pravin Rao; CFO, Mr. Nilanjan Roy, along with other members of the senior management team.

We’ll start the call with some remarks on the performance of the Company by Salil, Pravin and Nilanjan before we open up the call for questions. Please note that anything that we say which refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risk that the Company faces. A full statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

I’d now like to pass it on to Salil.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Sandeep. Good evening and good morning to all of you. I trust each of you has had a great start to this new year and continue to be safe and healthy. I am delighted to share that we have had an exceptionally strong quarter across multiple dimensions. This was made possible by the enormous trust of our clients and the extreme focus we have built for digital and the enormous client relevance that has created and helped support, digital and cloud transformation journeys for our clients.

Let me share with you some of the highlights. We achieved the highest large deal wins in our history with a deal value of $7.1 billion. This includes the larger deal we signed in our history and what we believe is the largest in the IT services industry in India. This will continue to expand our strong presence in the Continental European markets. Our overall deal value for the nine months of this financial year is over $12 billion and the net new large deal value for the nine months of this financial year is over $8 billion, positioning us very strongly for the quarters ahead.

Revenues in constant currency grew at 6.6% year-on-year and 5.3% sequentially on the back of a very strong momentum we saw in H1 and large wins secured earlier, further establishing our market share gains. Digital revenue grew at 31.3% year-on-year in constant currency and we had now crossed an important milestone, in that digital is now over 50% of our revenues.

We delivered operating margin of 25.4%, which is an expansion of 350 basis points year-on-year and flat sequentially. Our operating cash flow was robust at $829 million for the quarter. Our balance sheet remains solid with cash and investments at $4.5 billion, which is stable sequentially after the payout of interim dividend.

Recognizing continuing the performance of the Company at contribution from our employees during these times, we are paying out variable pay for the quarter at 100%. As announced earlier, the initial in salary increases for our employees, which will be effective January 1, 2021. And we are expanding our promotion cycle across all levels in this quarter.

In Q3, we reached a significant milestone in our environmental, social and governance journey by becoming carbon-neutral. This is 30 years ahead of the 2050 global target kept by multinational agencies. We further reiterated our commitment to the causes of ESG by announcing our ESG 2030 vision and ambitions.

Looking ahead, we continue to see momentum in our business, strong market share gain and increased speed, digital transformation at our clients. Keeping that in mind, we increased our revenue growth guidance for the full year from 2% to 3% to the new guidance at 4.5% to 5% growth in constant currency. We increased our operating margin guidance for the full year from 23% to 24% previously to 24% to 24.5% for the full year.

That concludes my update. Thank you for your time. And, now, let me request Pravin to give you an update on our operations. Over to you, Pravin.

Pravin Rao — Chief Operating Officer and Whole-time Director

Thank you, Salil. Hello, everyone. Wish you a very happy, healthy and safe New Year. While there is increasing optimism due to the commencement of COVID-19 vaccination, we have also seen a renewed sense of infection in various parts of the world and frequently majority of our delivery centers are operating in BCP mode with 97% of our employees globally continuing to work from home.

Growth acceleration continued with sequential revenue growth of 5.3% in constant currency, accelerating further from the momentum seen in the first half of the year. Year-on-year growth rate increased to 6.6% in constant currency for quarter 3. Three business segments, financial services, Hi-Tech and life sciences reported double-digit growth.

We have seen several operating parameters improving during the quarter. Utilization was at 86.3%, which is all-time high level. Onshore effort mix was lowest ever at 25.2%. RPP declined slightly on a sequential basis due to seasonal factors like lower working days, furlough, etc., but increased on a year-on-year basis. Subcon cost is up by 40 basis points on a sequential basis as growth picked up meaningfully.

Let me talk about the large deal wins, which are key highlights of our quarter 3 performance. Large deal TCV crossed quarter two levels and marked the new all-time high at $7.13 billion. Share of new deals in quarter 3 was 73%. The net new deals to be signed in quarter 3 is more than 1.5 times of what we signed in the entire fiscal ’20.

As Salil said, in quarter 3, we signed what is probably the largest deal signed in Indian IT services industry. Apart from this, we signed another deal of $500 million. Overall, we won 22 large deals in quarter 3, 18 financial services, four deals each in manufacturing and energy utilities, resources and services sector, three deals in communication, and one deal each in retail, Hi-Tech and other segments.

Region wise, 13 were from Americas, seven were from Europe and two were from rest of the world. With this, our large deal wins from nine months is over $12 billion, an increase of 63% over the comparable period in the last year. Net new large deal wins for nine months have increased by 244% year-on-year. While quarter 3 deal signings were very strong, a large value of this deal signings will start contributing to revenues in the second quarter of the next fiscal due to transition involved.

Net employee addition during the quarter was more than 9,100 and share of women employees increased to 38.3%. Voluntary attrition for IT services reached up to 10%, although lower than our comfort band of 14% to 15%. We will be implementing salary increase across all level setups till January 1, 2021. Budget planning for calendar 2021 is progressing normally and we expect clients to continue to focus on their digital transformation agenda.

Moving to business segments. Growth momentum accelerated in financial services with ramp up of past deal wins, focus on accelerating the digital transformation agenda for many of our large clients and opening of new accounts across various sub-verticals like mortgages, regional banks, wealth and retirement services. We see multiple opportunities in cloud, data services and creating new digital bank capabilities as things improve post-COVID.

Finacle continues to grow steadily and that’s firmly established itself as one of the best banking platforms in the industry for digital transformation. Retail segment continued to improve with increased volumes in quarter 3 despite seasonal softness and year-on-year growth turning positive. The deal pipeline remains healthy and we are seeing opportunities around vendor consolidation and capital monetization.

Performance in communication segment also improved sequentially, although media, entertainment, advertising and OEM segments remained under pressure. They have won three deals in the segment in the last quarter and continue to have strong pipeline of deals. Parts of energy, utility, resources and services vertical continue to face a difficult environment due to stress in segments like oil and gas, education, publishing, travel and hospitality, etc., while utilities remain relatively steady. Based on the recent deal wins and deal pipeline, we expect to see stable performance in the coming quarters.

Manufacturing had a stand out quarter both in terms of deal signings and revenue momentum, which improved meaningfully, despite continued deceptions across sub-segments. As deals ramp up over the coming quarters, we will see superior revenue momentum for this segment. We expect to spend to grow in the newer areas of the digital, data, cloud and security and reduction in run the business areas.

Infosys BPM has grown at double-digit with strong pipeline of both traditional and digital deals. Our digital portfolio also saw strong growth of 31.3% year-on-year in constant currency and crossed 50% share of overall revenues.

In the last quarter, we have launched Infosys Modernization Suite, Infosys Live Enterprise Application Management Platform, both part of Infosys Cobalt and Infosys Applied AI.

Three acquisitions completed in the last quarter, GuideVision, one of the largest ServiceNow Elite Partners in Europe; Blue Acorn, Adobe Platinum Partner in the US; and Kaleidoscope Innovation will further enrich our capabilities and offerings in the digital space. We also have been rated as leader in 17 services-related capabilities across the digital pentagon areas by industry analysts.

The global pandemic has gone from threat to opportunity as clients have gained confidence in their own resilience and now we embraced the opportunity to accelerate and often radical reimagination of their own businesses. Infosys with the strengthening capabilities and expanding array of offering is becoming the preferred choice for customers in that journey.

With that, I will hand over to Nilanjan.

Nilanjan Roy — Chief Financial Officer

Thanks, Pravin. Good evening and good morning, everyone. I would like to wish you all and your families the season’s greetings and a safe and healthy 2021. Q3 was another successful quarter marked by continued acceleration in revenue with the highest Q3 sequential revenue growth in the last eight years. Our unwavering execution over the past three years against our navigating your next strategy with client relevance at the core supported by digital, operational excellence, cost and cash management is clearly the driver of this allrounded performance and reflecting in our total shareholder return appreciation during the period.

Revenue for the quarter stood at $3.52 billion, a growth of 5.3% sequentially in constant currency. This translates to 6.6% growth year-on-year and 3.5% growth for nine months in constant currency. Operating margin stood at 25.4% were up by 3.5% year-on-year and stable sequentially. Sequential margin movement in Q3 comprised of 100 basis points improvement due to better operating parameters like utilization and onsite mix and other cost levers, 20 basis points due to cross-currency movements, partly offset by rupee appreciation. These benefits were negated by a 50 basis point impact of transition and reimagine costs of recently won deals, 20 basis point increase in costs relating to employee promotions and compensation correction and the balance 50 bps impact due to a combination of higher subcon one-off and others.

Operating margin for nine months stood at 24.5%, which is 3.1% higher compared to the 21.4% margin for nine months of the last fiscal. As mentioned last quarter, we will see higher cost in Q4 as we implement the salary hikes for our employees, effective January. Q3 EPS grew by 12.5% in dollar terms and by 16.5% in INR on a year-on-year basis. Nine months EPS grew by 10.6% in dollar terms and 16.9% in INR on a year-on-year basis.

Return on equity increased further to 27.4%, an improvement of 130 basis points over the last year. DSO measured on an LTM revenue basis remained stable year-on-year, while increasing four days quarter-on-quarter. Connection remained strong and helped in generating operating cash flow of $829 million. Coupled with lower capex of $57 million, FCF for quarter 3 increased to a record $772 million, a growth of 15.1% year-on-year and a growth of 40% on YTD basis. Free cash flow conversion remained strong at 109% of net profit and 113% for the nine months.

We continue to maintain a strong debt-free and liquid balance sheet. Cash and investments at the end of quarter 3 was $4.5 billion in line with the previous quarter, despite paying $687 million of half yearly dividend during this period. Yield on cash balances continue to decline due to moderating interest regime in India. The yield was approximately 6% in quarter 3. Quarter 3 also marked the 22nd consecutive quarter of positive forex income, despite significant currency volatility across the globe.

Driven by strong deal wins and revenue performance in the first nine months, we are again increasing revenue guidance for FY ’21 to 4.5% to 5% in constant currency terms than 2% to 3% guided earlier. We expect operating margin for the full year to be in the range of 24% to 24.5% compared to the previous guidance of 23% to 24%.

Amidst the numbers, it would be remiss of me not to mention the landmark achievement in quarter 3 of attaining carbon-neutrality as a Company 30 years ahead of the Paris Accord. This was the journey we embarked in 2010 and we are extremely proud of the commitment soon and achieving this goal. In the last quarter, Salil mentioned, we also announced our first ESG vision of 2030, a holistic approach of integrating our business model with the extended stakeholders, impacting environment and climate communities and societies, employees and shareholders. We believe our robust and measurable targets were the pillars of environment, social and governance will help us setting new standards in this area.

With that, we can open the call for questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Ankur Rudra from JPMorgan. Please go ahead.

Ankur Rudra — JPMorgan — Analyst

Thank you. Exceptional quarter yet again. Just starting with the question on budgets, perhaps, Salil, a large part of your exceptional strong deal win momentum appears to be capitalized, perhaps, with cost takeouts and consolidation you had alluded to at the beginning of this year. And I was wondering if this implies that enterprise tech budgets got actually shrink or stay flat as opposed to going up in C ’21? And also whatever is freed up by these cost take-outs, how do you see yourself participating in those sort of freed up tech budgets? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Ankur. The way we are seeing it today is, there is definitely some element of cost takeout. If we look at the way this spread — we have seen this past quarter and for this financial year, the three quarters, we see those are both cost takeout but also what you all described in the second part as large enterprises looking to invest that amount into their own digital infrastructure landscape for their growth with their end customers.

So the overall budget are always difficult to estimate as you know and we have a number of other agencies we all depend on for those sorts of estimates. Those are all positive estimates at this stage for calendar year ’21. But the key is, one to have the capabilities for digital and cloud and the transformation that these enterprise are driving, so those investment moneys can be spend with us and to have the automation capability and the efficiency capability for the cost takeout which we have. And so it’s a dual approach and we’ve seen — we are playing quite on both sides of that.

Ankur Rudra — JPMorgan — Analyst

Thank you for that. Just a follow-up on revenue conversion. Clearly very strong momentum here. I was wondering if you’ve seen an acceleration of the conversion from signing to recognition in the last few quarters, perhaps virtual on-boarding and would you expect those trends to go on for the large deals you won right now?

Salil Parekh — Chief Executive Officer and Managing Director

There we’ve not seen anything different in the way we are converting. There are some deals which convert faster, some have a slower sort of transition. Pravin shared in his comments that some of the transition from what we see in Q3 will start to show up a bit later in Q2 of next year. So that pattern has not changed. Some deals do have a faster conversion and some are more slow, nothing changed because of a virtual on-boarding and so on.

Ankur Rudra — JPMorgan — Analyst

Okay. Thanks for the color. Just lastly on margins. Should we expect a significant impact, perhaps, in F22 as these large deals come through like you’ve seen in the current quarter? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

On margins, I request Nilanjan to step in. Go ahead, please.

Nilanjan Roy — Chief Financial Officer

Yeah. So, Ankur, as you know, I mean we run with the portfolio, we have large deals, we have small deals, we have the new deals coming into the pipeline. Also, we are maturing large deals. So we run with the portfolio and if you actually see our history over the last three years, even as we’ve accelerated the large deal pipeline and the revenues, our margins also have gone up. And there is a couple of reasons. One is, of course, the strategic cost levers we continuously deploy each year and we talked about that in our Analyst Day around the onsite/offshore mix, the pyramid automation and this is something we relentlessly focus on.

When we pick up large deals, we also start seeing the lifecycle of the deals and of course initially these have higher costs in terms, because they would not have enough automation or process improvement, they may not be enough on terms of onsite/offshore mix. And, therefore, when we look at the portfolio entirely. We also realize there are deals which will be maturing and hitting near portfolio margin. The new deals will enter the portfolio at lower margins initially. And that’s the way we manage our overall portfolio. Yes, every quarter you could have plus or minus and in fact this time we’ve had this mission in the marginal one-off on a rebadge deal. But I think the flow of the green, I think we are quite comfortable with our overall performance as we are. And as we look into next year, of course, we will have the quarter 4 impact of the wage hikes across. Some of the cost may come back in next year in terms of travel and all, but that may be a bit further away. But like I said, again, the cost optimization which we have and as we approach this, we are quite confident.

Ankur Rudra — JPMorgan — Analyst

Thank you, and best of luck for the year.

Operator

Thank you. The next question is from the line of James Friedman from Susquehanna. Please go ahead.

James Friedman — Susquehanna — Analyst

Hi. Congratulations on the extraordinary results. Pravin, in your prepared remarks, and I know you have reflected this in the previous response Salil, and you’re suggesting that the large deal wins that we’re currently addressed start to bill in the Q2, I realize that can vary, but is there any — can we think about those boarding linearly or would that be on the stake in terms of our future modeling exercise?

Pravin Rao — Chief Operating Officer and Whole-time Director

Yeah. As I said, of this large deal wins in the other period of transition and revenue will start picking in –only in the second quarter of next fiscal. Again, the trajectory of revenue also will vary on the nature of the deal. In some large deals, it’s finally — initially taking over and providing services starts with the client and then maybe over a period of time modernizing. In some other cases, it could be taking over. But at the same time, in parallel, doing the transformation. So it’s — the nature of the deals actually vary. So I don’t think we can have a common yardstick to say how revenue will pan out.

James Friedman — Susquehanna — Analyst

And then, Pravin, you also mentioned, a good pipeline of deals. I think you were talking about the communications vertical, which you are — despite weak media, you see a good pipeline in that vertical overall. Could you give us some context for that? Is the opportunity in that vertical equivalent to the, say, strength that you’re seeing in manufacturing deals? When you say good pipeline about that vertical, what’s that about, some context would be helpful?

Pravin Rao — Chief Operating Officer and Whole-time Director

I think the number of opportunities in the communication segment, as I said, is fairly good, decent and it’s primarily in the telecom space, because when you look at communication, it’s not only about telecom it’s also media, entertainment, OEM. So we do find softness in media, entertainment and OEM, but we’re seeing a lot more traction from the telecom segment. We have already won three deals in this segment in this quarter and the pipeline as I said, continues to be healthy. Given the pandemic, we have seen lot of volumes improvement in telco, but it’s so far not really translated into impact on their own revenues, but we expect this to probably change there going forward. So at least on the telecom side, we remain optimistic given the deal wins as well as the pipeline.

James Friedman — Susquehanna — Analyst

Great. Thank you so much for the color. I’ll drop back in the queue.

Operator

Thank you. The next question is from the line of Kawaljeet Saluja from Kotak. Please go ahead.

Kawaljeet Saluja — Kotak — Analyst

Hey, guys. Fantastic quarter. Couple of questions. First, is that — there was a very healthy conversion of pipeline into TCVs in this quarter and actually in the last two quarters. Has this conversion left the pipeline a little bit lighter or does it continue to be as robust as it was earlier? That’s the first question.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Kawal. This is Salil. Yes, the conversion at that instance, it comes out of the pipeline as you rightly point out, but the overall health of the pipeline is extremely robust. Of course, with this level of large deals in Q3, we will have that impact in the immediate outlook. However, we see across the different industries still a significant opportunities and the pipeline overall seeing that level of health and robustness. So we’re still feeling quite good about the pipeline.

Kawaljeet Saluja — Kotak — Analyst

Thank you, Salil. The second question I had is on profitability and it’s the same question I asked in the previous quarter to Nilanjan. And, Nilanjan, your margin band there in the last — every year has changed. This year, it has been a good thing that it has increased, but what the real sustainable level of band of operating margin taking into consideration the large deals, a possibility of two rounds of wage increases and possibly cost normalization as well, how should one really think about your profitability dynamics as we move into FY ’22 or even beyond that?

Nilanjan Roy — Chief Financial Officer

Thanks, Kawal. I’m not sure you will get a separate answer each quarter. So on the previous note, I think like where we are today at 24.5% on a nine-month basis, by the same last time we were at 21.4%. We have seen about a 310 basis points improvement on a year-on-year basis for nine months. I think this is a combination, like we said, on some of the discretionary cuts, which we have done, which is largely the impact of the compensation hikes and that will come back in Q4.

Also, if you look at the — every cuts which we have done, which some of them were on travel, on the brand side, etc. Some may open up, but that’s yet to be seen how fast the post-vaccine world normalizes. But I think we’re very, very confident and you continue to see very strong metrics on our cost optimization, right.

So the onsite/offshore mix improvement in the last one year has been something which took three years in the past. And these will open up a lot of opportunity, there is client fee and are open to more offshoring with 98%, 97% of our teams working from home literally over the last year. I think the confidence of clients as well to offshore will increase and that could be a lever. We will step on our localization and local hiring in the US as the pyramid, something very unique to Infosys, creating the six digital hubs, recruiting from universities, community colleges.

Historically, the IT industry had a very steep pyramid onsite and 75% of employee cost actually is onsite, whereas only 25% of the headcount sits there and therefore if you don’t address the onsite pyramid, you really have a battle at up your hands. And I think what we’ve been doing over the years with our localization drive, putting in our hub and hiring fresher is helping us negate some of this. So without giving any numbers into next year, I think we are entering with some levers up our sleeve. Yes. There may be some impact of compensation, but we’ll see as next year comes and our guidance re-announced.

Kawaljeet Saluja — Kotak — Analyst

Thank you so much. Just a final question. It’s on the largest ever deal that you have won. I mean is it just a typical large deals like the ones you have signed with Vanguard or maybe others, or is there something unique which you want to call out maybe in the form of our higher pass through element or anything of that sort. Any color on this deal will be very, very helpful? And thank you so much. That’s my last question.

Salil Parekh — Chief Executive Officer and Managing Director

So let me try that, Kawal. This is Salil. In terms of the large deals, I think your question was in a specific deal. The way I would characterize it is, it’s been — which relates to cloud and really a huge moment to both public cloud, private cloud inside this service and gaining together the ecosystem to make all of that happen. The primary driver for parts of it is what we built in Infosys Cobalt, which is all of our cloud assets and of course we are working very strongly with an ecosystem of partners are together shaping what this cloud environment will look like.

Kawaljeet Saluja — Kotak — Analyst

Thank you so much, and have a great year ahead.

Operator

Thank you. The next question is from the line of Yogesh Aggarwal from HSBC. Please go ahead.

Yogesh Aggarwal — HSBC — Analyst

Yeah. Hi. Good evening, everyone, and Happy New Year to the team as well and a good quarter. Just two questions from me. Firstly, on large deal wins, which have been so impressive. Salil, is there — from an execution perspective, are there — the executions is different than a normal deal or they are almost similar? So in that context, do you need to make any SLA or milestone related contingencies since these are lot more complicated deals?

And, secondly, from a guidance perspective, the fourth quarter guidance is much weaker compared to what you achieved in the third quarter. So was there some kind of a budget flush in third quarter or any specific weakness which is leading to slower growth in fourth quarter? I have a follow-up after that on margins, please.

Salil Parekh — Chief Executive Officer and Managing Director

Okay. On the first two points, I think the delivery risk profile across a large single portfolio, if I look at over the last nine months, the last quarter, it’s not any different from delivery risk of those type of deals in the past. Now we are doing larger deals in this last year or last few years. And so, with that, it could be increasing.

However, there is no provisioning in our books with regard to specific situations on SLAs as we start out the delivery of the deal. In that sense, this is something where we did our capabilities and we are now putting together the approach to deliver on the various large deals that we’ve talked about. The second point, sorry, what — can you just repeat that please?

Yogesh Aggarwal — HSBC — Analyst

Salil, I was trying to understand the guidance for fourth quarter, which looks much weak, yeah.

Salil Parekh — Chief Executive Officer and Managing Director

Yeah. So on the guidance, as you probably know, historically, Q3 and Q4 financial year are always softer quarters for the industry and for Infosys. So there is nothing different. In fact this particular Q3 has been extremely robust. We had a phenomenal growth in terms of the revenue, constant currency growth that we have shared, but there is nothing unusual in that to point you any weakness in Q4. However, seasonally, Q3 and Q4 are always being softer across the industry and for Infosys over the years.

Yogesh Aggarwal — HSBC — Analyst

Okay. Okay. Thanks. Just another question on margins. Nilanjan, most of your operating metrics have improved quite smartly, as you said, utilization, offshore mix, etc., but the employee cost is still up around 5%, 6% sequentially. We have seen with other companies despite the wage hike, it’s been largely flattish. So what is leading to the employee cost increase, if I may.

Nilanjan Roy — Chief Financial Officer

Yeah. So like I mentioned in the margin walk, sequentially we had this 50 basis point impact of transition and rebadging of recently one large deal. So that’s something clearly we called out and, the balance, we had talked about a combination of higher subcon one-off and others, which was explaining about 100 basis points of the cost drags versus the 100 basis point improvement in operational metrics by utilization of onsite mix.

Yogesh Aggarwal — HSBC — Analyst

Great. Thank you so much.

Operator

Thank you. The next question is from the line of Keith Bachman from Bank of Montreal. Please go ahead. Keith Bachman, your line is in the talk mode, I request you to go ahead with your question.

Keith Bachman — BMO Capital Markets — Analyst

Yes. Thank you very much. I had two questions as well. The first, your cash flow was also very impressive this quarter, was there anything that you want to call out that might have been unusual or one-time in nature and anything that you want to call out on the cash flow that we should be thinking about over the next couple of quarters, but certainly next quarter in particular?

Nilanjan Roy — Chief Financial Officer

Yeah. Thanks. So I think as we’ve been showing for the entire year quarter-after-quarter, we have had very strong collections, because — I think that was our first concern when COVID shuts — the ability of our clients and of course the reality of our clients, our Fortune 500 clients having a very, very strong balance sheets as well and across the three quarters, we have not seen any impact at all in terms of our collection ability and that remain strong.

Of course, one reason for the cash flow is improving because of the lower capex as everybody is now working from home, I think that automatically has come down. And in fact we repurpose some of our capex spend towards technology, so that people can enable — being able to work from home with laptops rather than desktops. So nothing really to call out on a cash flow basis. Yes, here and there we have received some deferrals of some indirect taxes, but nothing material really. I don’t — I mean, I think this is — on an underlying basis, we are still above 100% of net profits.

Keith Bachman — BMO Capital Markets — Analyst

Yes. Yes. Okay. Then the second question I wanted to go back to the deal signings, again impressive deal signings, particularly 73% being net new, if you took out the one large deal that you said was the largest in history, what — any growth rates that you can provide just to give some dimensions? And then, B, I’m just curious of the distribution, is there any dimension’s you could give around what was in the digital versus legacy of the signings this quarter or if you want to say over the last few quarters, but I’m just curious of this — the signings, the distribution between the legacy and the digital side? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Let me start. This is Salil and then Pravin might be able to add a bit more color on the distribution. In terms of what we did in Q3, we don’t have a view to give a specific number, what I would say is, even outside of that we were running at an extremely robust pace overall in terms of the sort of averages we have had over the last several quarters for large deal finding. So while it was a large, specific deal, that will not be only one. And as Pravin also mentioned, the 22 deals also referencing the one another deal, which was at $500 million just to give some color. Pravin, over to you for anything else.

Pravin Rao — Chief Operating Officer and Whole-time Director

Yeah. So I think there is an element of digital in every large deal, because at the end of the day large deal is not only about taking over and delivering the services, but it’s also transforming over a period of time. So in that sense, it’s a combination of digital plus legacy. And we don’t really give you a breakup of that. And the nature of these deals also varies. I mean, there are

I mean, there are some deals around infra modernization, cloud and infrastructure-as-a-service, there are some deals around ops transformation, there are some deals where we have taken over whole IT and delivering it back as IT-as-a-service, deals which are purely ADM where we are providing next-gen ADM services. There deals there which is platform-led, where we have taken over some products, not only maintaining, but also go to market, get product.

There have been some captive forwards as well. Engineering also a strong element in the many of these large deals. Of course, BPM is also a part and parcel of most of these large deals, so nature of these deals vary, but there is always an element of digital units and we — I mean, as I said earlier, we just say, call out how much is digital and how much is non-digital.

Keith Bachman — BMO Capital Markets — Analyst

Okay. Well, congratulations on the signings. Many thanks, cheers.

Pravin Rao — Chief Operating Officer and Whole-time Director

Thank you.

Operator

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

Diviya Nagarajan — UBS — Analyst

Thanks for taking my question. Quite a few of my questions have been discussed already, but to kind of go back to this large deal that you talked about, could you just kind of explain how this — a deal like this, at this scale can — is typically structured? And anything that you would like to call out on how we should model some of these ramp ups in these deals?

Second part to that is that, for the contract like this and I think we’ve also seen some dilution that came in, because of the large deal ramp up in Q3, Nilanjan, you spoke about a portfolio approach, when you think about this portfolio, what kind of a timeline do you typically price in for these deals to mature and then for margins to start coming up the curve so to speak?

Salil Parekh — Chief Executive Officer and Managing Director

Let me start with the first part. This is Salil. We have not given any anything more specific than what Pravin shared earlier in terms of sort of broadly on the ramp ups from the Q3 bookings. What I can say is the win — this has been put together where we have a lot of the work that relates to data centers and the workplace transformation and all of that underlying with cloud transformation to private cloud. We see that whilst this is not going to steady state, it’s really the foundation of many things that we can do, which we run through on a steady basis over a number of years and that the timing of that, we’ve not given anything more specific, which can give you a sense today of when specifically the revenue will come beyond the comment that have been made on Q2. And let me now pass it to Nilanjan for the margin profile on these large deals.

Nilanjan Roy — Chief Financial Officer

So like I mentioned earlier, we have various kinds of large deals, some of them come initially with margin, which unbind the portfolio, tad below portfolio and some maybe initially ones which is required dramatic transformation because they are 100% onsite, there is no automation which has been done, client expect savings from day one. So once we go and we’re very, very clear over the deal cycle, typically, these are five, seven year deals that we model on a quarter basis, what is going to be done in the terms of an intervention of moving work onsite-offshore, putting automation inside the pyramid side of it. And I think we look at that very, very holistically and as part of the bid process, so that we are very clear that there is a trajectory in the margins as well. So that’s an ongoing process.

And like I mentioned, we’ve been winning large deals over the last two years, accelerating them quite sharply, but yet we’ve seen an improvement in margins, because the way we’ve talked about it is — these elements start kicking in and at the same time new deals come in at lower margin, whereas the existing deals start maturing and giving portfolio margin. But it doesn’t mean that every deal will be exactly be in line with what our operating margin of the Company is, there will be deals above the operating profile, margin profile of the Company and there are deals which are below that. So it’s a portfolio, which we continuously look through and focus on the cost side.

Diviya Nagarajan — UBS — Analyst

Got it. And you spoke about potential margin levers, one of it was the offshore mix. Pravin earlier alluded to how it’s one of the lowest offshore mixes that you’ve seen in a while, what is the room here that we have for further offshore mix shift — sorry, lower onsite mix so far. So what’s the potential there? And secondly on utilization, has anything structurally changed in how we look at utilization as a result of remote working and better employee allocations over various locations? And my question here is this, can these mid-80s utilization structurally move up from where they are?

Salil Parekh — Chief Executive Officer and Managing Director

Yeah. So I think on the onsite/offshore mix, yes, there has been some, firstly, temporary benefits because of curtailed travel and then therefore people have not been able to travel overseas as well. But having said that, I think the bigger strategic, I think, opportunity is that, with work from home, clients are now seeing over the last year SLAs have been delivered on par, there has been no impact on whether signing deals or delivering and therefore the confidence of clients in terms of offshoring has also started improving and in fact we’re also now solutioning ourselves so that we can give nearshore facility. So Canada is a nearshore base for the US, near Mexico and both have been dramatic growth in this time as well and Mexico being a low-cost location.

So it’s a combination of remote working in our hubs, where we can create a pyramid, that one lever, then move on to nearshore and then finally on to offshore. So I think we have three things which we can continuously press on and I think these opens up large opportunities. Of course, as travel comes back there could be some temporary lull, but particularly I think the downward decline is quite, yeah.

Diviya Nagarajan — UBS — Analyst

On the utilization?

Pravin Rao — Chief Operating Officer and Whole-time Director

On the — yeah, let me add on this. Yeah, me add on this, it’s Pravin here. I think utilization, as I said, it’s a record high. This is not where we want to be. Even in the past few quarters, I think we have had comfort in operating between 83% to 85% and that’s where we want to be. So we will look at much more aggressive hiring over the next few quarters and try to bring down the utilization to manageable level.

Diviya Nagarajan — UBS — Analyst

Thanks for taking my questions. Congrats on a good quarter, and all the best for the rest of 2021.

Pravin Rao — Chief Operating Officer and Whole-time Director

Thank you.

Operator

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

Moshe Katri — Wedbush Securities — Analyst

Hey. Thanks for taking my question, and congrats on very strong results. I have two follow-up questions. One is confirmation regarding margins. Pravin, I think during the last call, you indicated that some of the margin gains that you’ve seen in fiscal ’21 will not be sustainable until fiscal ’22. Given some of the commentary that you made today, is that still the case, because it seems that you’re talking about some margin leverage, you’re talking about some encouraging signals and accelerating the offshore trend and one of your former executives suggested in the call, that we hosted last week, that he hasn’t seen this acceleration into offshoring in about 10 years? And the second question is more about the sustainability of what we’re seeing right now in terms of the demand trends, the pipeline and etc., maybe you can give some color on both of these? Thank you.

Pravin Rao — Chief Operating Officer and Whole-time Director

Yeah. So I’ll take the first question, Moshe. So, like I said, we are at — in the first nine months at 24.5% and we have the wage hikes coming up in quarter 4. So that’s clearly will have an impact. And as we look into next year, there could be some easing off of travel, etc., which will have some cost pressures. Now, having said that, we said we also annually will work on our cost optimization levers, which is something we continuously work on. So we are not at this stage saying that there is a margin guidance out there for FY ’22, but just a color of what’s coming ahead. We will have these cost pressures, but we will also work on the cost optimization parallelly.

Moshe Katri — Wedbush Securities — Analyst

And on the second question regarding, at this point, what you’re seeing in terms of sustainability, some of the trends that you’re seeing in terms of pipeline strength and maybe also — maybe you can elaborate on what percentage of the mix in terms of the bookings came in from new logos versus renewals? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

Let me check the trend and then on the mix…

Pravin Rao — Chief Operating Officer and Whole-time Director

Okay.

Salil Parekh — Chief Executive Officer and Managing Director

Okay. Let me start on the sustainability trend and then on the mix, Pravin, you can go ahead. I think the way we see the pipeline and the movement of the deal, we still see a good demand environment across all the industry segments as we’d referenced at the start of the call. There are some there, strength that is quite exceptional, but overall all of the existing segments are moving in a positive direction.

On the mix, I think, to your point on the offshore mix, there we’ve seen good movement this year. Of course with some of the travel restrictions coming off, we will see some more movements from offshore to onsite, but our recruitment engine onsite is very strong as well. And so we wait and watch how that plays out. We don’t see that — it’s — immediately will it change, because fundamentally clients are seeing that delivery remotely from whichever location we saw feasible for a broader set of functions. So we feel quite comfortable that over a period of time that can work to your benefit in terms of the mix and therefore in terms of the margins. Pravin, over to you on the mix.

Pravin Rao — Chief Operating Officer and Whole-time Director

Yeah. On the mix, again, we normally call out only what is net new and what is rebates, and in this quarter it’s 73% net new. And if you look at for the first — for the nine months of the year where the total TCV is $12 billion, the net new is $9 billion of the — of that. So from that perspective that, I think in the last — past nine months, we have seen a significant percentage of that revenues coming from net new, which we feel should good comfort on the growth momentum in the coming few quarters.

Obviously, there is also a mix of new logos as part of this mix for instance. Last quarter we had Vanguard, which was one of the large deals we announced on the platform new logo. But we typically don’t call that out. We normally look at what is net new and that gives us a sense of deal flow and growth momentum for the forthcoming quarters.

Moshe Katri — Wedbush Securities — Analyst

Thanks for the color.

Operator

Thank you. The next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.

Pankaj Kapoor — CLSA — Analyst

Yeah. Hi. Thanks for the opportunity. So Nilanjan I have two questions to you. First is, on these very large transactions you have outside India. are the commercial terms of these deal is any different from the regular deal that we do? What I’m trying to basically understand is that, how is the cost statement?

Operator

I’m sorry to interrupt you, Mr. Kapoor, but your audio is not very clear sir. Mr. Pankaj Kapoor, your audio is not very clear.

Pankaj Kapoor — CLSA — Analyst

Yes.

Operator

May we request you to check?

Pankaj Kapoor — CLSA — Analyst

Sure. Is it better now?

Operator

Yes, it is. Thank you.

Pankaj Kapoor — CLSA — Analyst

Okay. So my question was for Nilanjan. So what I was trying to basically understand is the commercial structure of these very large transactions at a generic level. Are cost in such deals typically flow through the P&L or do we have — like we do typically in a leg-running or can some of these be capitalized also, so that is one thing which I’m trying to understand.

And my second question is on the next year’s wage revision. I mean, one of your peers of course is talking about FY ’22 be a normal year, so are you also expecting that the wage hike for next year will follow the regular pattern of being in April or sometime mid-year? These are the two questions I had. Thank you.

Nilanjan Roy — Chief Financial Officer

Yeah. So on the first question, I think all deals, like, and even Pravin mentioned, they’re all different, some of them may have rebadging element, some of them may have a comprehensive infrastructure with software, so it depends on deal to deal, I think there is no standard answer on how — or a generic way we can answer that question. And some of them may have a pass through and some of them may not. So it depends service element versus the entire transformation element. So that’s quite different across the deals. So I don’t think there’s anything specifically we can say more than that at this stage.

Salil Parekh — Chief Executive Officer and Managing Director

So on the second one, let me address that, the second is wage, wage hike. We’ve announced the salary increase effective January 1 of this year. We did not make any comments with respect to the next year situation and we will come to that once we conclude this and solve the next year and at that stage we will share with you what the approach is.

Pravin Rao — Chief Operating Officer and Whole-time Director

Salil, I just wanted to also [Indecipherable] I wanted to make a correction to my last response to Moshe, I think. I said total TCV of large deal wins for nine months of $12 billion, which is correct, and the total net new out of it is $8 billion, I think I said $9 billion. It’s not $9 billion. Its $8 billion. As I found out, I will clarify that.

Pankaj Kapoor — CLSA — Analyst

Understood. Thank you, and wish you all the best for the year.

Operator

Thank you. The next question is from the line of Sudheer Guntupalli from ICICI Securities. Please go ahead.

Sudheer Guntupalli — ICICI Securities — Analyst

Good evening, gentlemen. Congrats on a good quarter and thanks for giving me the opportunity. Salil, regarding the large deal, for a deal of this size, we assume almost all the Tier 1 vendors might have aggressively competed, some of them might be native European companies, some of them might have larger revenue base in Europe or in the infrastructure kind of service offerings. So can you help us understand what are the, let’s say, three, four variables that have given Infosys that extra edge to win this deal over the competition?

Salil Parekh — Chief Executive Officer and Managing Director

Sudheer, you’re right, this is an extremely competitive situation with several European, US and Indian companies competing on this work. One of the elements that really stood out that I could see and we could see was what we understood from the clients to meet their technical strength of our solution. And this is a solution, which is built on something we’ve shared before, the Cobalt Suite, in the cloud. The approach that we put together to this, the clients and solution, which was more flexible, capable and secure, while globally spread out operations of theirs will enable it and was really valued by them.

We also benefited, I think, from the way that we make sure that all the different elements of the business objectives in how they wanted to focus on the business and how they wanted to perform the cloud journey, we incorporated quite fully into the solution. I mean, this is really extreme win in that sense from the technical capability perspective and that’s why we are extremely delighted and because it opens up a new area for us on something in which we were previously doing well and now we can do a further better as we go ahead.

Sudheer Guntupalli — ICICI Securities — Analyst

Sure, Salil. And second question is on the gross client additions during the quarter, which seems to be significantly higher than the typical run rate in the previous quarter, I think you are at around 139 odd clients. Can you please throw some more color on what has driven this strong addition, nature of these clients, say, potential, scalability and has this has to do with the entry into new sub-segments that Pravin has spoken about in his opening remarks?

Salil Parekh — Chief Executive Officer and Managing Director

Let me request Pravin first to address it and if there is anything else, I’ll come back.

Pravin Rao — Chief Operating Officer and Whole-time Director

Salil, I missed the question. Can you repeat it?

Sudheer Guntupalli — ICICI Securities — Analyst

Sure, sir. So basically if you look at the gross client addition during the quarter, it seemed to be significantly higher than the typical run rate in the previous quarters. So my question is, if you can throw some more color on what has driven this strong addition and — but — that the nature of these clients potential, scalability and if this has to do with the entry into some new sub-segments you spoke about in your press meet and in your opening remarks as well?

Pravin Rao — Chief Operating Officer and Whole-time Director

I think we had seen strong new account openings, new logo openings across the sub-segments. I don’t think there is any particular trend. We have seen good openings of course many of those segments and this has been consistent over the past few quarters as well. So I don’t see any pattern in this or a any strategic thing. And again the opportunities also vary. In many of them, we are opening the doors with transformation opportunities, some of them are — few of them are opening with large deals. So it’s a combination of things. There is no specific pattern or anything specific to a particular sub-segment.

Salil Parekh — Chief Executive Officer and Managing Director

Yeah. Just to add to Pravin’s, I think there is also some client additions we’ve had and this is a new acquisition we made.

Sudheer Guntupalli — ICICI Securities — Analyst

Sure, sir. Thanks. That’s really helpful, and all the best for the future.

Operator

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

Sandeep Mahindroo — Investor Relations

Salil, do you want to make some closing comments, please?

Salil Parekh — Chief Executive Officer and Managing Director

Yeah. Thanks, Sandeep. First, thank you everyone for joining us for this session. As you can see, we’re extremely delighted with the performance for this quarter, standout being an exceptional large deals win, phenomenal growth at 6.6% year-on-year and a strong operating margin performance backed up by extremely robust cash collections and conversion that was noted. We feel confident to revise the guidance upwards as we shared on both revenue and margin and we have a strong outlook as we go into the next financial year, which will start for us in April. So, overall, extremely delighted with this, and thank you again everyone for joining us.

Operator

[Operator Closing Remarks]