Tata Consultancy Services : TCS Transcript Q4FY23

Tata Consultancy Services Limited

Q4 & FY23 Earnings Conference Call

April 12, 2023, 19:00 hrs IST (09:30 hrs US ET)

Moderator:Ladies and gentlemen, good day and welcome to the TCS Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode. Should you need assistance during the conference call, please signal an operator by pressing '*' then '0' on your touchtone phone. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press '*' then '1' on your telephone keypad. To withdraw your question, please press '*' then '2'. Please note that this conference is being recorded.

I now hand the conference over to Mr. Kedar Shirali - Global Head, Investor

Relations at TCS. Thank you and over to you, sir.

Kedar Shirali: Thank you, operator. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the fourth quarter and full year FY 2023 that ended March 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 statements, 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. Rajesh Gopinathan -- Chief Executive Officer and Managing Director, Mr. K. Krithivasan -- CEO Designate and President, Mr. N G Subramaniam -- Chief Operating Officer and Executive Director, Mr. Samir Seksaria -- Chief Financial Officer and Mr. Milind Lakkad -- Chief HR Officer.

Kedar Shirali: They will give a brief overview of the company's performance followed by a Q&A session. As you're aware, we don't provide specific revenue or earnings guidance. And anything said on this call which 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 to our mailing list.

With that, I would like to turn the call over to Rajesh.

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Rajesh Gopinathan: Thank you, Kedar. Good morning, good afternoon and good evening to all of you. In FY 2023, our full year revenue grew at 17.6% in rupee terms, 13.7% in constant currency terms and 8.6% in dollar terms. Our operating margin for the year came in at 24.1% and net margin was at 18.7%.

As you are aware, four weeks ago, we announced a leadership transition at TCS. I'll be stepping down from my role and stepping away from TCS on September 15th. The Board identified Krithi, who has led our largest segment, BFSI, over the last many years, as the CEO-Designate. Today, the Board also announced that Krithi will be taking over the role of CEO and MD on June 1st.

We are currently going through a structured transition plan and for the purpose of this call, I will speak about the year gone by, and he will cover the forward- looking topics.

I'll first invite Samir, Milind and NGS to go over the different aspects of our performance during the quarter. Krithi and I will step in later to provide more color on the demand trends we're seeing. Over to you, Samir.

Samir Seksaria: Thank you Rajesh. In the fourth quarter of financial year 2023, our revenue was `59,162 crore, which is a year-on-year growth of 16.9%. In dollar terms, revenue was $7.195 billion, a year-on-year growth of 7.4%. In constant currency, our revenue growth in Q4 was 10.7%.

For the full year, our revenue was `225,458 crore, which is a growth of 17.6% over the prior year. In dollar terms, the reported revenue was $27.927 billion, a growth of 8.6%. Constant currency revenue growth for the full year was 13.7%.

Let me go over our financial performance. Our operating margin in Q4 stayed flat sequentially at 24.5%. With supply-side challenges abating, we were able to further bring down our use of sub-contractors in Q4. The benefit of that, other efficiencies and some currency gains was canceled out by higher on-site costs.

Our full year operating margin was at 24.1%, a contraction of 1.2% over the prior year. In terms of headwinds, our annual wage increase set us back by 1.6%. The supply side challenges during the year cost us another 1.4% and travel expenses went up by 0.3%. This was mitigated by 0.5% of realization improvement, 0.5% of benefit from a flatter employee pyramid and 1.1% of currency benefit.

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	Net income margin in Q4 was 19.3% and for the full year was 18.7%. Our EPS
	grew 11.2% during the year.
	Effective tax rate for the year was 25.7%. It's worth noting that this has risen
	steadily from about 24% in FY 19 as more of our facilities come out of SEZ tax
	benefit.
	Our accounts receivable was at 65 DSO in dollar terms, down 1 day
	sequentially.
	Net cash from operations was `118.64 billion, which is 104% of net income.
	Free cash flows were at `110.95 billion and invested funds at the end of March
	stood at `498.23 billion.
	The Board has recommended a final dividend of `24 per share, bringing the
	total dividend for the year to `115 per share. For the full year, including the
	buyback tax paid out at the beginning of April, the company's shareholder
	payout was `45,602 crore.
	Over to you, Milind.
Milind Lakkad:	Thank you, Samir.
	We are honoring all the job offers and had a net addition of 821 employees in
	Q4 and 22,600 employees for the full year, resulting in a closing headcount of
	614,795.
	These numbers mask the full extent to which we had ramped-up our talent
	acquisition during the year to cope up with the unprecedented churn in the first
	half of the year. We onboarded over 44,000 freshers, and our highest ever
	number of experienced professionals during the year.
	We continue to have a very diverse workforce with 150 nationalities
	represented and with women making up 35.7% of the base. Our investment in
	organic talent development continues to deliver exceptional outcomes. In FY
	23 TCSers logged 48.3 million learning hours and acquired around 6 million
	competencies.
	Increased rigor and focus on external certifications resulted in 53,000 TCSes
	acquiring certifications on hyperscaler cloud skills during the year, bringing the

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	total number of such certifications to over 110,000 and making TCS one of the
	top-2 partners of the largest cloud providers.
	Our cohort of contextual masters continues to expand and is currently over
	62,000 strong. We are investing in grooming them into future transformation
	leaders by collaborating with Ivy League B-Schools to create tailored
	leadership development programs for them.
	We are also helping our mid-level employees gain market relevant skills, so
	that they can grow faster in TCS. The curated programs we have designed for
	them have seen massive participation of over 90% of that cohort, with over
	60% receiving certifications.
	As more and more employees started returning to work in the course of the
	year, we have been ramping-upphygital training to enhance learning
	outcomes. Over 80,000 employees have benefited from such in-person
	training in Q4.
	Xcelerate, our industry recognized talent transformation platform has seen
	nearly 400,000 TCSes record their career aspirations, of which 100,000 are
	progressing towards their aspired role.
	Similarly, our award-winning Elevate program, which links learning to career
	growth, has over 407,000 employees participating in it.
	Our LTM attrition in IT services was at 20.1%, down 1.2% sequentially, but still
	very high because it reflects the unprecedented levels of churn in prior
	quarters. Our quarterly annualized attrition on the other hand, fell by over 4%
	sequentially and by close to 10% from the peak level in Q2.
	Over to you, NGS, for some color on segments and production platforms. Over
	to you.
N G Subramaniam:	Thank you, Milind.
	Let me walk you through our segmental performance details for the quarter. All
	growth numbers are on year-on-year constant currency basis.
	From an industry vertical perspective, growth in FY 23 was led by Retail and
	CPG (+19.7%) and Communications and Media (+14%). All other verticals
	grew in a narrow band around the company average. Technology and Services

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grew by 13.7%, Life Sciences and Healthcare grew by 13.3%, Manufacturing grew by 13%, and BFSI by 11.8%.

In Q4, customer sentiment across BFSI, Retail and Technology services verticals, particularly in Europe and US, was one of caution. We saw clients deferring newer initiatives which were not critical, and in some cases, completely halt discretionary projects. Anxiety around the stability of the banking sector in March also added to the uncertainty. Consequently, growth decelerated across all verticals.

Q4 growth was led by Retail and CPG, which grew by 13%, and Life Sciences and Healthcare which grew by 12.3%. Other verticals grew in single digits. Technology and Services grew by 9.2%, BFSI by 9.1%, Manufacturing by 9.1%, and Communication & Media by 5.3%.

In terms of geography, full-year growth was led by North America (+15.3%), UK (+15%) and Continental Europe (+11%).

In emerging markets, Latin America grew by 17.3%, India by 14.6%, Middle East and Africa by 7.8% and Asia-Pacific grew by 7.6%.

The increased caution in Q4 resulted in a deceleration in many markets, but not in the United Kingdom. Q4 growth was also led by United Kingdom, where growth accelerated to 17%.

North America grew by 9.6%, while Continental Europe grew by 8.4%. In emerging markets, Latin America grew by 15.1%, India by 13.4%, Middle East, Africa by 11.3% and Asia-Pacific by 7.5%.

Our industry-leading portfolio of products and platforms had a very good quarter.

ignio™, our cognitive automation software, signed up 5 new customers and 12 clients went live in Q4.

Economic uncertainty is further driving customers to accelerate efficiency through automation. This is resulting in increased investment in AIOps and AI/ML technologies. ignio continues to be well-positioned as an end-to-end platform with point solutions for monitoring, AI/ML analytics, cloud hybrid infrastructure coverage, and so on.

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TCS BaNCS™, our flagship product suite for financial services, had 2 new wins and 6 go lives during the quarter.

For a leading savings and investment company in the UK, we successfully completed the migration of annuity books sold by the customer to a specialist insurer onto TCS BaNCS, and also completed the first phase of migration from a heritage landscape to a public cloud.

Our Quartz blockchain platform has partnered with Bitcoin Suisse to build a next-generation crypto financial technology platform, supporting the latter's journey of becoming the leading global crypto financial services provider.

In Life Sciences, we launched a new solution in TCS ADD™, our Advanced Drug Development platform. TCS ADD Medical Writing is a one-stop AI- assisted solution for fast, intelligent authoring and review of regulatory and scientific documents for drugs and devices.

TCS OmniStore™, our AI-powered universal commerce suite, had 1 go-live this quarter.

TCS HOBS™, our suite of products for communications service providers, had 1 new win and 4 go lives.

TCS TwinX™, our digital twin solution, had 3 wins and 1 go live.

TCS iON had 23 new wins and 3 renewals in Q4. During this period, it served over 54 assessment customers and administered assessments to 18 million candidates. Over 1,900 corporates leverage the TCS National Qualifier Test now as their entry-level recruitment platform.

Lastly, MasterCraft™ and Jile™ won 26 new clients in Q4.

Let me now go over our client metrics. As you are aware, our customer-centric business model rests on our ability to continually expand and deepen our client relationships. These metrics provide a measure of our progress in the journey and a validation of the strategy.

In Q4, we added 2 more clients year on year in the $100 million+ band, bringing the total to 60; 30 more clients in the $50 million+ band, bringing the total to 133; 23 more clients in the $20 million+ band, bringing the total to 291; 22 more clients in the $10 million+ band, bringing the total to 461; 27 more clients in the

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$5 million+ band, totaling 665 and 59 more clients in the $1 million+ band bringing the total to 1,241.

Over to Rajesh to speak on demand drivers during the quarter.

Rajesh Gopinathan: Thank you, NGS.

In his segmental commentary, NGS spoke of the cautious stance that many of our clients have taken, particularly in North America and Europe. This has resulted in a dichotomy. On the one hand, we saw clients hitting the pause button on ongoing discretionary projects and deferring new non-critical projects, affecting our revenue growth in Q4 across most industry verticals in North America and Europe.

At the same time, we saw clients launch more new initiatives oriented towards cost optimization or strategically important projects, resulting in a very strong deal flow and pipeline replenishment during the quarter.

In terms of demand trends, we saw a spike in operating model transformation deals. In FY 23, we signed 29 large operating model transformation deals, business as well as IT operations, compared to 18 in the prior year. We also continue to see vendor consolidation and multi-service deals.

TCS Cognix™, our suite of over 600 pre-built automation components, is gaining traction because it significantly accelerates the operations transformation and helps clients realize their ROI much earlier, all the more relevant in the current environment. In FY23, Cognix helped win over $1.6 billion of TCV.

Let me share two examples of operations transformation executed using Cognix.

A US-based multinational oil field services company engaged TCS to build a future-ready finance organization. We deployed TCS Cognix to leverage intelligent automation and solve the problem of intercompany mismatch of financial entries, arising from disparate and siloed operations across 450-plus business entities and 80 countries. The program helped substantially bring down instances of unreconciled entries, improve key metrics stability and speeded up key processes.

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Similarly, a UK-based Telco chose TCS as its strategic partner to revamp its IT infrastructure backbone for resilient, always-on communication service. TCS leveraged its deep contextual knowledge, TCS Cognix, and MFDM to deliver the transformation. This resulted in a robust operating model that delivered higher levels of certainty with uninterrupted and enhanced services for its customers. The superior quality of service contributed to industry-leading customer satisfaction, improved NPS and lower churn.

In Q4, we won an all-time high number of large operations transformation deals. Here are a couple of examples.

TCS was selected by IHG Hotels and Resorts, one of the world's leading hotel companies to drive enterprise process automation across several IHG businesses and business verticals, including finance, travel agent commission, revenue compliance and audit, revenue services, sales and HR. The program aims to digitize and automate business processes to drive efficiencies and cost optimization across the enterprise.

Similarly, Delta Airlines has partnered with TCS on solutions around cognitive business operations and cloud management to better enable enterprise resiliency and reliability.

The other demand driver is cloud transformation, which remains a very strong focus area for our clients and a key growth driver for us. During the year, clients engaged us to take up their more complex, bigger workloads and accelerate the modernization and migration to the cloud. This trend continued in Q4 and we won several new deals around this field. Let me share a few examples of recent cloud transformation engagements.

A leading global software company has partnered with TCS to enable its SaaS business model and GTM strategy. TCS is helping modernize products across four lines of business and make them hyperscaler-ready. Leveraging its thought leadership, contextual knowledge, IPs like TCS Cloud Exponence and TCS Cloud Assurance, and our ecosystem of hyperscaler partners, TCS helped migrate 32 SaaS solutions to the cloud. This migration is helping the clients make their product suite cloud vendor agnostic, and thereby more attractive to their end customers.

A large US commercial property and casualty insurance company selected TCS for its multi-year application modernization and cloud migration journey to gain competitive advantage and business resiliency. TCS successfully

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modernized those critical applications and seamlessly migrated them to the cloud. This has rendered the client's application stack future ready and ready to support new business models for product rollouts. The modernization has also improved business resiliency with 99% improvement in application availability and enhanced security.

Flight Center Travel Group's, 30+ travel companies across the world faced varying pace of travel recovery, creating a need for flexibility and ability to scale fast. TCS' thought leadership and advisory helped Flight Center harness the power of cloud with a unified global approach. Leveraging its contextual knowledge, TCS transformed critical business functions on the new multi-cloud platform and implemented TCS Cloud Exponence to provide orchestration and 24/7 management. Flight Center's new technology backbone has enhanced its resilience, improved its time to market and gives it the ability to drive business transformation and capitalize on new opportunities.

Moving on to growth and transformation, clients continue to invest in new initiatives designed to support their business growth strategy, either through innovative business models, new services or by targeting new market segments using technology.

A large food retailer in the UK partnered with TCS to implement a technology initiative critical to its asset-light growth strategy of expanding through franchise stores. TCS leveraged its domain expertise and contextual knowledge of the client's application and IT landscape to design a new platform that brings franchise stores on par with owned stores through advanced automated multi-level forecasts and replenishment capabilities to streamline inventory across their supply chain. It provides greater visibility of sales and stock movement, agility in introducing new products and even flexibility to convert owned stores to franchise stores. The new platform enables rapid onboarding of new existing franchise stores and enabling the client to accelerate the expansion of its franchise network and drive growth.

In Q4, we won a new deal from Bridgestone Americas, the leading US-based tire manufacturer and an existing client. They have engaged us to transform and expand their subscription-based mobility offerings globally. TCS will help define a global template for the subscription business, catering to the different lines of business and enable new business models across different markets, driving the company's global expansion.

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	I'll now invite Krithi to talk about demand trends in BFSI sector and our order
	book. Over to you, Krithi.
K. Krithivasan:	Thank you, Rajesh.
	The banking and financial services industry is the largest spender on
	technology and that reflects in its outsized share of revenues within TCS'
	business mix. While we saw some softness in BFSI in North America due to
	discretionary spending being put on hold, all of the demand trends that Rajesh
	spoke about are very visible in BFSI as well. Clients continued to push ahead
	with cloud migration, operations transformation and other strategic G&T
	initiatives. As the largest provider of IT services in the banking and financial
	services domain, with deep domain expertise across the end-to-end financial
	services value chain, TCS is deeply entrenched in the sector's G&T initiatives.
	Let me begin with a couple of examples of product innovation.
	A global information services company partnered with TCS to launch a new
	commercial fraud solution for banks and other financial services firms and drive
	new revenues for the client. TCS leveraged its deep domain knowledge in this
	area to design a comprehensive commercial fraud solution that blends
	consumer and business datasets to provide ML-powered predictive insights on
	the legitimacy of businesses, their ability to repay and the likelihood of credit
	abuse.
	The solution offers a much more comprehensive set of capabilities compared
	to competing products, resulting in a good offtake of the solution. Within the
	first few months since its launch, the new solution has been adopted by the top
	10 banks in the US, and customers have reported a 62% improvement in fraud
	detection.
	A US-headquartered global bank partnered with TCS to transform its new card
	launch process to gain market share and drive growth. Leveraging our
	expertise in human-centered design thinking, we designed the solution with an
	interactive UI and automated workflows that make it easier for the bank's credit
	card business to create and launch new products in the market.
	This has enabled the bank to launch new products 70% faster. Moreover, the
	reimagined product design workbench is resulting in better, more competitive
	products and has driven a 10% increase in new-to-bank customers.

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