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Infosys Ltd (NYSE:INFY)
Q2 2019 Earnings Conference Call
Oct. 16, 2018 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day, and welcome to the Infosys earnings conference call. [Operator instructions] Please note that this conference is being recorded. I'll now hand the conference over to Mr. Sandeep Mahindroo.

Thank you, and over to you, sir.

Sandeep Mahindroo -- Head of Investor Relations

Thanks, Aruna. Hello, everyone, and welcome to Infosys earnings call to discuss Q2 FY '19 earnings release. I'm 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. M.D. Ranganath; president [Inaudible].

We'll start the call with some remarks in the performance of the company in the quarter from Mr. Parekh followed by Mr. Pravin Rao and Mr. Ranganath, subsequent to which we'd open the call for questions.

Please note that anything which we say which refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the 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 over to Mr. Parekh.

Salil Parekh -- Chief Executive Officer and Managing Director

Thank you, Sandeep. Sorry, I was on another line. And thank you for everyone who joined the call. Good evening and good morning to everyone on the call.

Thank you for joining us. I'm delighted to share with you our results. We had a strong quarter in Q2. Our growth in Q2 was broad-based across all business segments, geographies, and service lines.

Our large deal wins were strong at over $2 billion, with over 60% net new. On a constant-currency basis, our revenue growth quarter on quarter was a robust 4.2%. Our digital revenue growth was 13.5% quarter on quarter and 33.5% year on year. Our digital business is now 31% of our overall business.

Within digital, we see strong demand, especially in cloud, IoT, cyber, and data and analytics. Operating margin for Q2 was at 23.7%. Our financial services business grew well 5.8% quarter on quarter, retail at 5.9%, manufacturing at 4.8%. Several of our sectors are growing over 10% year on year.

In fact, financial services, we saw improving demand trends in the U.S. in Q2. We see strong growth in our business process management, cloud infrastructure services and data and analytics service lines. Our large client growth is strong with our largest 10 clients growing at 5% quarter on quarter, higher than the company overall.

The demand environment looks stable across U.S., Continental Europe, U.K., and Australia. We are continuing our investments in Agile, in digital, automation, artificial intelligence and also in our people via training and compensation. Overall, we feel positive that our strategy of Agile, digital and automation and AI and core services is resonating well with our clients and building more relevance for us with them. The first steps of our three-year transformation program are being put in place and are starting to show traction.

With this strong quarter, we remain on track for a guidance for constant-currency growth of 6% to 8% for full year and operating margin guidance of 22% to 24%. With that, let me hand it over to Pravin for a few remarks.

Pravin Rao -- Chief Operating Officer and Whole-time Director

Thank you, Salil. Good morning, everyone. As Salil said, we had a good quarter, both in terms of performance as well as deal wins. We had 12 large deal wins during the quarter, with a TCV of $2.03 billion.

seven of the 12 deals were in Americas, four in Europe, and one in rest of the world. Three deals each were in financial services and manufacturing vertical, two in Hi-Tech vertical, and one is in retail, communications, and other vertical. Volume grew by 2.8%, and realization in constant-currency terms also improved by 0.9% sequentially. Utilization, excluding trainees, was 85.6%.

Attrition declined marginally to 19.9% on a stand-alone basis and 22.2% on a consolidated basis. We are taking specific measures to bring this down further. In Quarter 2 we have added 19,521 professionals on a gross basis. Now let me comment on few of the business segments.

Performance in financial services improved in line with our expectations as client-specific issues abated to a large extent. After declining for last two, three quarters, growth returned in top accounts in the Americas and spending was broad-based, helped by tax cuts and tightening interest rates. Spending by U.S. banks is expected to continue for next few quarters.

Clients continue to increase spend in digital, data, and cloud. Our proactive efforts have resulted in a large digital-led deal pipeline. While we expect momentum in the business over the next two quarters driven by new account openings and expansion of accounts opened earlier, near-term growth will also be impacted by seasonality. Insurance continues to perform strong with robust deal pipeline, especially in RPA and BPM.

Our focus is on automation, data management, analytics and BPM. In August 2018, Gartner submitted the Magic Quadrant for Life Insurance Policy Administrative Systems for North America, and Infosys was positioned as a leader. It is confirming our strong capabilities in the sector. We are seeing increasing strength in retail segment, primarily driven by our proactive pitches in digital areas and large deal constructs.

Growth was led by CPG, transportation and logistics, consumer technology, and life science subsegment, while subsegment in retail continues to see structural shifts. We've increased focus on modernization, supply chain transformation and optimization. This pipeline in the vertical remained strong. Communications segment has strong deal pipeline with its broad base across geographies.

We expect near-term growth to remain strong due to recent deal wins, though Quarter 3 will be impacted due to transition, lower working days, and furloughs. We are seeing investments around adoption and deployment of 5G leading to advances in consumer IoT. We are working with clients and the industry forums to develop 5G use cases like network slicing that will reinforce the monetization of 5G networks. Manufacturing vertical supported -- reported sustained momentum, driven mainly by Europe and improvements in Americas.

Automotive and industrial manufacturing in Europe and aerospace in Americas performed well. The deal pipeline is strong. We command a strong position in the automotive space in Europe. And acquisition of Fluido, Brilliant Basics, and WONGDOODY will further solidify our presence as we gradually integrate their expertise with our overall offerings.

Energy, utilities, resources and services sector continues to grow strongly on the back of continued momentum in client accounts and ramp-up of previous wins. Stable oil prices are seen as a tailwind for players across the value chain in the energy segment. In the utilities space, enhanced information system to drive customized customer services, investment on smart grid, automation for safety and sustainability are the focus areas. Outsourcing is the key theme in the resources sector to attain cost savings.

Overall, we are seeing healthy growth in our deal pipeline. BPM is achieving industry-leading organic growth and margins with strong deal pipeline, both in traditional as well as digital and platform-based offerings. We are seeing increasing demand across the major geographies from sectors like Hi-Tech, insurance, healthcare, etc., which continues to be a good growth opportunity for us. Finally, digital adoption continues to expand across verticals and geographies, and we are seeing tremendous growth in this area.

We are seeing more and more discretionary spend being focused on digital technology. We continue to invest to further enhance capabilities and customer relationships. And the acquisition of Fluido will further enhance our footprint in digital in U.S. geographies.

Our digital strategic win capabilities across digital domains and take lead on our digital transformation engagement. The deal pipeline in digital space looks healthy with a good mix of large deals. I will pass on to Ranga to talk -- give some color on the financials.

Ranganath M D -- Chief Financial Officer

Thanks, Salil and Pravin. Hello, everyone. Welcome to the Q2 earnings call. We had a strong performance in Q2.

Several key financial metrics and operational metrics saw multi-year high during the quarter. Revenue growth, deal wins, digital share, top-line growth, cash generation and margins saw good trajectory during the quarter. Salil and Pravin have already talked about the revenue metrics, client metrics, and business outlook. Let me start with a few outcomes during the quarter.

First, on a first-half year-over-half-year basis, our revenues grew 6.9% in dollar terms and 7.1% in constant-currency terms. In rupee terms, the H1 growth was 14.7% over the last year H1. Second, our EPS in dollar terms grew sequentially in Q2 by 8.8% and year on year by 5.7%. After normalizing for Panaya charge that we took in Q1, sequential EPS growth in Q2 works out to 1.4%.

In rupee terms, EPS growth in Q2 as compared to Q2 of last year was 16%. Third, our operating margin for the quarter was steady at 23.7%, at the higher end of margin guidance of 22% to 24%. I will provide more color on this shortly. Fourth, our return on equity, ROE, was healthy at 24.7% and increased from 21.2% in Q2 of last year, an increase of 3.5% over one year.

Fifth, our relentless focus on operational efficiency parameters continued this quarter. Utilization, excluding trainees, continued to be high at 85.6%. On-site mix, which I've been talking about for last few quarters, further moderated to 28.4%, which is one of the lowest we have seen in several years. Due to continued productivity improvement, stable utilization and increase in digital share, revenue per employee increased by 3.8% year on year to $54,663.

Sixth, free cash flow was at $360 million, for the -- and for the half-year, the free cash flow was $912 million. In H1 of '19, we had higher tax payments due to APA that was concluded earlier in the year and more other income due to the share buyback, which we concluded of $2 billion in December 2017 as compared to H1 '18. Now let me come to revenues, price realization, and margins. Revenues in Q2 '19 were $2,921 million, a sequential growth of 3.2% in dollar terms and 4.2% in constant-currency terms.

In rupee terms, the revenue growth for the quarter, revenue for the quarter was INR 20,609 crores. This is a sequential growth of 7.7%. As compared to Q2 of last year, revenues grew 7.1% in dollar terms, 8.1% in constant-currency terms and 17.3% in rupee terms. Price realization in Q2 in constant-currency terms was stable on year-on-year basis and improved by almost 1% in constant-currency terms quarter-on-quarter basis.

We do believe that year on year change in price is a better indicator. Blended revenue -- blended volume growth in Q2 was 2.8% on a quarter-over-quarter basis. In first half year, H1, our blended volume growth stood at 17.8% as against the constant-currency growth of 7.1%. However, our focus on optimizing on-site employee costs, including sharper focus on productivity, on-site pyramid, localization and optimization measures led to a decrease in the on-site employee cost as a percentage of revenue to 37.4% in Q2, as compared to 37.9% previous quarter.

This is one of the lowest we have seen in several years. However, our subcontractor expenses as a percentage of revenue increased to 7.4% of revenue in Q2, as compared to 6.8% in the last quarter and 6.2% in Q2 of last year, which is an increase of 1.2% year on year. During Q2, we made further investments in expanding our localization initiatives and other areas that we had outlined at the beginning of the year. These investments will continue through the rest of the year as we had outlined in the beginning of the year.

Operating margin in Q2 was 23.7%, same as last quarter. During the quarter, rupee depreciation, net of cross-currency, provided a benefit of 80 basis points. Improvement in operating parameters, including higher pricing and lower on-site mix, which I talked about, and to some extent even lower visa costs head the margins sequentially by another 70 basis points. This aggregate benefit of 160 basis points was offset by compensation increases and higher variable pay amounting to 100 basis points and certain interventions that we did to address the attrition.

Further, increasing of subcontractor cost on-site localization and investments impacted the margins by 50 basis points. So overall, operating margins remained flat sequentially. We ended the quarter with a total headcount of 217,739 employees, which is an increase of 3.7% from last quarter. Gross headcount addition increased to 19,721.

We had 11,887 employee quits during the quarter, as compared to 11,911 quits last quarter. We continue to focus on measures to mitigate attrition. Cash generated from operating activities in Q2 as per IFRS consolidated was $438 million, which was after the $76 million of taxes paid as per the APA entered with the United States IRS earlier in 2018. Capital expenditure for the quarter was $78 million, which is approximately INR 554 crores.

Cash and cash-equivalents, including investments, stood at $4,185 million, which converts to approximately INR 30,366 crore rupees. Debtor days outstanding for the quarter stood at 66 days due to superior working capital management. Q2 continued to witness huge volatility in currency market, and we managed to navigate it fairly effectively. Yield on cash for the quarter was 7.53%, as compared to 7.2% last quarter.

Hedge position as on September 30 was $1,966 million. The company today announced an interim dividend of INR 7, approximately $0.10 per ADS, as compared to an interim dividend of INR 6.5 per share after a bonus share adjustment announced same quarter last year. This is in line with the capital allocation policy as articulated earlier in the year. We plan to make further investments as we outlined in the beginning of the year on employees' front to address attrition in the coming months toward strategical balance increases for titleholders and targeted increases for some part of our workforce.

Coming to operating margin guidance for fiscal '19. We are retaining our operating margin in the guidance range of 22% to 24%. Coming to revenue guidance in constant-currency terms, we continue to retain 68% based on March 31, 2018, rates. Lastly, I would like to thank each one of you in the investor community for the wholehearted support that I received over the last three years in my role as CFO of this iconic company.

During the last three years, the company delivered a strong and resilient financial and operational performance on multiple fronts: free cash flow, return on equity, growth in digital, execution of capital allocation policy and significant improvements in productivity parameters like per capita revenue and utilization. Between fiscal 2015 and '18, while the revenue increased by 26% in dollar terms, the free cash flow expanded by 40%, utilization touched high levels of over 85% and return on equity improved, and we executed capital allocation policy with a share buyback of $2 billion. Unwavering focus of the entire management team made these outcomes possible. I'm happy that the company's financial performance is strong and resilient as I pass the baton to my successor.

Thank you very much for your support all these years. And we will open the floor for questions.

Questions and Answers:

Operator

Thank you very much, sir. [Operator instructions] The first question is from the line of Moshe Katri from Wedbush Securities. Please go ahead.

Moshe Katri -- Wedbush Securities -- Analyst

Thanks. Appreciate letting me ask a question here and congratulations on strong execution. Just going back to the commentary on margin trends, so obviously, there are some investments that are going on. You mentioned subcontractor use, and I think there's also variable comp that went up.

What makes us comfortable that we can sustain the margin range that we guided for? That's No. 1. And then from a big picture perspective, is there any color in terms of what enterprise clients are saying regarding their comfort about IT spending -- spending initiatives, given the volatile political uncertainty out there? Thanks a lot.

Ranganath M D -- Chief Financial Officer

Hey, Moshe, Ranga here. Thanks for the question. First, we are comfortable with the margin guidance of 22% to 24%. If you look at the first half of the year, we ended at 23.7%, pretty much at the higher end of the guidance.

And as I said earlier, for this quarter sequentially, the margin was steady at 3 -- 23.7% in spite of the rupee depreciation because, as I said, some part of it went into the compensation hikes for the middle to senior levels and to some extent in higher subcontractor expenses, as I said. Coming to the subcontractor expenses, now we have to see in the broader context of the talent supply chain for the U.S., especially for the digital areas where we need certain niche skills at short notice due to the visa and other regime certain timelines, we had to go for a higher subcontractor without -- to ensure that we are not doing the business on the table. At the same time, we are also looking at seeing how to moderate this in a meaningful manner. So overall, I think, coming to the investments that you talked about, we had planned certain investments to leverage digital opportunities, localization at the beginning of the year, and we had also said that the trajectory of these investments are more toward the H2 than H1 because some of them are hiring related, some of them are investments that take -- that has a cycle time to realize.

So in the H2, we expect a higher investment trajectory. So that -- these are a combination of factors, which are -- we try really into the overall margin perspective, but we are quite comfortable with the margin guidance we have given. And first quarter has been pretty much at the top end of the guidance.

Pravin Rao -- Chief Operating Officer and Whole-time Director

Moshe, this is Pravin here. I just wanted to address your query on the expense. If you look at our performance this quarter, we actually spend broad-based across verticals and geographies. We saw 4% constant-currency growth in Europe.

North America, 3.8% and has come back in North America after three quarters. Rest of the world, we grew 6.8% on constant currency. And even when you look at it from a vertical perspective, we had good growth in financial services, retail, and CPG as well as manufacturing. We had moderate growth in assure and Hi-Tech.

We saw some softness in communication and life sciences and healthcare. But looking forward, given the demand environment, the pipeline that we have, we feel fairly comfortable with almost all the verticals and geography wise as well that trend is there. Obviously, we have to keep in mind the seasonality. Quarter 3 is typically a soft quarter number of furloughs and lower working days.

That's something we need to wait to wait and watch out for. But barring that -- barring life sciences and healthcare where we see some softness, we expect good momentum in the coming quarters across all other verticals, both in Americas as well as in Europe.

Moshe Katri -- Wedbush Securities -- Analyst

Much appreciated. Thank you.

Operator

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

Yogesh Aggarwal -- HSBC -- Analyst

Yeah. Hi. I have couple of questions, if I may. But before that, Ranga, all the best for your future endeavors.

My best wishes. But firstly, Pravin, I wanted to ask on U.S. banks. You mentioned that the next few quarters, you will see ramp-up of existing deals plus the new ones, but there will be seasonality hit as well.

So -- but the net of everything, you still think seasonally -- versus the previous year's seasonality, it will still be better because of the new deals and visits?

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

This is Mohit, Yogesh. Now I think, look, the seasonality trend is the same as the previous year. You will see some furloughs, some end-of-year budget pressures. But equally, we've seen very strong momentum in this quarter, and we retained our main places, right.

We're in a strong position in this sector. I think the performance numbers for this quarter speak for themselves. And we will see headwinds in any quarter and tailwinds, but overall, it should be the same as the previous year, and we remain medium to long term very positive about the sector and our own strength in the sector.

Yogesh Aggarwal -- HSBC -- Analyst

Right, OK. And just generally, I wanted to ask on digital pricing. Most of the large clients will be governed by a big MSA, whereas digital pricing has to be higher as you guys have mentioned in the past. So most of these deals are not coming in MSA and you price them separately? And if not, how do you price it higher than an average deal pricing?

Ravi Kumar -- President Deputy Chief Operating Officer

Yes. So this is Ravi here. The digital services, which you've seen are Strategy and the Pentagon, it falls in those five pillars. A lot of the spend in the market in terms of maturity is in cloud infra, strategic cloud applications, modernization, API microservices, which is the accelerated power of -- accelerated pillar of the Pentagon.

So that's where a lot of spend is. It's kind of attached to the legacy world, but it kind of trend -- you are migrating from the legacy world to the new world as you migrate workloads into cloud and as you take legacy cloud applications into on-premise applications and distribute into the cloud. So we kind of attached ourselves with the current master services agreements, but we also have an opportunity to carve them out as new services and ask for a premium. But as this services progress in terms of more momentum into areas of experience, insights, innovate and assure, the other four pillars, I will actually see if we could carve them out separately and run it.

But at this point of time, we're kind of continuing with existing rate cards and then using wherever we have an opportunity to change the master services agreements.

Yogesh Aggarwal -- HSBC -- Analyst

OK. Got it. Thank you so much.

Operator

Thank you. The next question is from the line of Sandeep Shah from CGS-CIMB. Please go ahead.

Sandeep Shah -- CGS-CIMB -- Analyst

Yeah. Hi, thanks for the opportunity and congrats on a good execution. Just looking at the order book, Salil, can you give some color that the improvement is because of more internal factors led by the internal restructuring to pursue the large deals? Or is it more to do with the improvement in market conditions and the demand conditions? And second, do you believe looking at the pipeline, now comfortably crossing $1 billion is a new normal going forward for you? And this quarter, what is the average tenure of the deals?

Salil Parekh -- Chief Executive Officer and Managing Director

On the -- the way this was put together, I think, clearly, the market is in a good shape. As we shared earlier, our view is the demand environment is quite strong. Across many of our large sectors, we see good demand. Across all the geographies, we see a stable demand.

So that is part of it. Part of it is the way we are now intensely focusing on what our clients need and putting together a real execution element to what the large deals group creation was some time ago. So it's a combination of both of those things from what we see. In terms of the size of the large deals, I think these are lumpy deals as I'm sure you see.

It's difficult to have, in that sense, defined target each quarter. We look for this over a rolling four-, six-, eight-quarter basis. Having said that, our demand pipeline today is quite strong and robust. So we feel quite comfortable that the demand environment also for large deals is strong.

And it's difficult to be specific about what will be the size of that each quarter. It will be up and down. In terms of the tenure, we don't disclose it in terms of the overall tenure. But I know some of the larger deals will have a very short tenure as we look forward to having this support outlook in terms of revenue in the coming quarters.

Sandeep Shah -- CGS-CIMB -- Analyst

OK, OK. Just to follow up, for the second half, if I look into the implied guidance, at the lower end, we are indicating a decline on a compounded Q-on-Q basis for the next two quarters. This is despite a strong commentary for majority of the industry segments as well as strong order book. So -- and plus from inorganic acquisitions coming in.

So why not upgrade just the lower end of the guidance?

Salil Parekh -- Chief Executive Officer and Managing Director

Our view is the demand environment is strong. We've set our guidance at the start of the year. Our execution remains something we're happy with. And in that regard, we are comfortable where we are with respect to where we've landed in H1.

And we continue to see good traction that we will land in that sort of a range as we look at the full year. We decided not to make any changes in terms of the band.

Sandeep Shah -- CGS-CIMB -- Analyst

OK, OK. Thanks and all the best. And all the best, Ranga.

Ranganath M D -- Chief Financial Officer

Thank you very much.

Operator

Thank you. The next question is from the line of Joseph Foresi from Cantor. Please go ahead.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Hi. So my first question is do you think you expect in the future the trade-off margins for investments, do you think that's going to happen long term? And what's the cadence for the margin profile in the second half of the year?

Ranganath M D -- Chief Financial Officer

Hi, Joe, Ranga here. I think, as we were saying earlier, the first half of the year, our margin has been at 23.7%, pretty much at the top end of the guidance. And though we had certain rupee benefits, we also had certain additional investments in compensation and also in some of the localization pieces. I think coming back to -- and of course, our trajectory for investments in the second half is likely to be higher than in the first half as had outlined in the beginning of the year.

But overall, I think we are comfortable with the margin band that we have given. And at the same time, we're also looking at some of the subcontractor expenses moderation and some of the other items that we need to look at. Overall, I think we are comfortable, and it is not due to any lumpy costs or lumpy investments. It's pretty much on the lines that we had planned.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

OK. But I guess -- and I just have one other question after this. But how do you feel about that margin profile over the long term? I mean, you've got digital growing at a nice pace for you. It seems like investments are necessary.

You're looking at M&A. Do you think that -- if you walk forward past this year, will that 22% to 24% band be something that you're comfortable with? Or do you feel like you'll be trading off investments for margins over the long term?

Ranganath M D -- Chief Financial Officer

I think that the way we are looking at our margin plays on two twin access. The first accessing of the digital itself. As they are being consistently maintained, our digital price points are better, and more importantly, our digital gross margins are certainly higher than the core IT by a couple of percentage points. And so as the digital share increases, that is one play that we have on the margin.

The second part is, on the core IT services, the focus is really on the productivity improvements through automation, productivity as well as the cost -- on-site cost optimization by a way of the on-site pyramid with the localization and the fresh hiring that we have started. These are some of the pieces that we continue to seek for. It is a twin play between the margin expansion in the digital part, which we have seen as well as the -- not the margin expansion but the higher margin profile in the digital that we have seen as well as the productivity-led margin improvements in the core IT. So I think in the medium term, we are comfortable in the current range of 22% to 24%.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

OK. And then my last question, can you frame for us your exposure to the European banks and maybe your expectations for their performance in the second half of the year? How that fits into your overall financial services commentary? Thanks.

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

Yes, Joe, this is Mohit here. I think, look, for this quarter, we had steady performance across the lines, whether it is in Europe or in the Asia Pacific region or the U.S. We saw strong performance. Obviously, our performance in the U.S.

was the strongest. Having said that, we do have large exposure to European banks, and we feel very comfortable about our growth prospects there. Obviously, there is some concern around volatility around what will happen to Brexit. But as of now, we have a very strong competitive position among our banking clients in Europe, and we feel very comfortable with the growth trajectory that we see there, which is in line with what we see across the world.

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Thank you.

Operator

Thank you. The next question is from the line of Ashish Chopra from Motilal Oswal Securities. Please go ahead.

Ashish Chopra -- Motilal Oswal Securities -- Analyst

Hi. Thanks for the opportunity. I just had one question around the margins, Ranga, if you will help me. So the couple of areas, which are offsetting the impact from currency, you sound it off multiple times being some of the interventions due to the high attrition, comp hikes, etc., and also the strategic investments for the year.

So just wanted to get some more color on the nature of continuity for these. Would you think that maybe the interventions-related cost would roll off by the end of the year or may continue into the future, into FY '20 as well in order to contain attrition? And even on the investments front, while the trajectory would be maybe skewed toward the second half, do you expect it to maybe cool off and you will be fairly invested going into the next fiscal?

Ranganath M D -- Chief Financial Officer

Ashish, this is Ranga here. I think, as we said earlier, especially this quarter, the 100 basis points on account of the compensation and the specific interventions I talked about, on the compensation part, as I said in Q1, the 85% of the employees had got comping figures in Q1. And for the balance 15%, we had certain increases commencing July. That's one point.

And the second one, these interventions that we had to make whereby of higher promotions in certain cases as well as certain comp increases as well. So we do not -- while we continue to focus on how the attrition trajectory moves, we do not expect on an ongoing basis over multiple quarters, we do not expect that. Second, on the investment trajectory, we clearly had outlined in the beginning of the year, specifically if you recollect, we had brought down the margin guidance band by 1% in the beginning of the year, that trajectory is something that we are investing in. And first half was -- we started to make those investments whether it's in localization or the sales as well as the digital investment.

And as I just said earlier, the trajectory will be sharper in the second half as compared to first half. And at this point in time, beyond fiscal '19, the investment piece at this juncture, we do not sit here on what we had anticipated at the beginning of the year.

Ashish Chopra -- Motilal Oswal Securities -- Analyst

Got it. That's helpful, Ranga. That's [Inaudible] and wish you all the very best.

Operator

Thank you. The next question is from the line of Surendra Goyal from Citigroup. Please go ahead

Surendra Goyal -- Citi -- Analyst

Yeah. Hi. I just had a couple of questions here. Firstly, Ranga, I am looking at gross margins YOY, 90 bps down despite 10% INR move realized rates.

And this despite cross currencies would definitely have been a tailwind. And I think, as you said earlier and as well as on TV, the digital has better gross margins, and all the growth YOY seems to be coming from there. So can you please help us reconcile because the quantum still seems to be quite big and yet margins are down 90 bps YOY?

Ranganath M D -- Chief Financial Officer

Well, I think -- let me see the YOY reconciliation on the margin. So two factors. As you rightly pointed out, the currency expansion between YOY, etc. Now if you looked at the cross-currency on YOY, I'm talking about the quarter over quarter, rupee impact was a positive of 2.2%, and cross-currency had another 0.1% positive, so total was 2.3% overall positive.

The comp review that we looked at in Q1 as which is kind of flowing through to Q2 had 2.3% negative, so it is entirely negated. Additionally, we had 10-basis-point additional impact because of the higher variable pay, 95% in Q2 as compared to earlier year. Then certain operational -- so essentially, that negated the entire rupee and cross currency impact, net-net. So beyond that, we had certain positive impact on the margins on account of higher utilizations to 40 basis points, on-site mix 30 basis points, which entirely was negated by the subcon, higher subcon expenses that we had.

So net-net, I think, if you knock off the rupee and cross-currency by higher comp review and variable pay, that essentially negated back, so an improvement in operational parameters was taken by additional subcon and certain other expenses. So net-net, the net decline was 0.5%. So that's the broad reconciliation.

Surendra Goyal -- Citi -- Analyst

Sure. And is it possible to quantify the investments that you have been talking about because while you keep on saying that margins are in line with the guidance, but when the guidance was prorated, the currency levels are very different? So I just wanted to understand if there is a way to quantify the investments?

Ranganath M D -- Chief Financial Officer

Well, I think, especially, the sales investments, you can pretty much see in our financials, in the employee cost piece that is clearly visible. And some of these investments are also in localization that we talked about. There some of our capex, which will result into some additional depreciation as well as some of the opex that we did. And also, I would like to say that some of the digital areas where we had certain hiring that we did will also reflect in the employee cost.

At this point in time, even in the beginning of the year, we have not really quantified this amount. But what we can say is that the overall 1% reduction that we talked in the beginning of the year fairly reflects 1% in the guidance, fairly reflects the quantum. Roughly, I think, the second half would be much more -- the trajectory in the second half would be sharper for those investments.

Surendra Goyal -- Citi -- Analyst

So Ranga, let me ask this question a little differently. Have investments that you had planned for, have they gone up? Because the currency move is quite sharp, and despite that, you are maintaining the margin band. So I'm just trying to understand if the investments that you plan have actually gone up compared to where they were when you had guided for the full year?

Ranganath M D -- Chief Financial Officer

No, that's not the case. I would say that the total quantum that we've anticipated has not moved up, but that trajectory and the pattern of those investments probably are more in the second half. That's the way we'll see it. The trajectory is much more intense in the second half.

Surendra Goyal -- Citi -- Analyst

Sure. And just one last question for Pravin. Pravin, you said in your opening remarks that Q3 -- and again, I'm talking about communications here, that Q3 will be impacted by transition as one of the factors. And looking at the press reports, it does seem like the large deal has a lot of rebagging, etc.

And our understanding was that revenue should start coming in as soon as the transition kind of goes through face it that the transition will take long enough that the revenues will start kicking in only in Q4? Is that a correct understanding?

Pravin Rao -- Chief Operating Officer and Whole-time Director

Yes, we have had 12 large deal wins when we look at the $2 billion makeup. In some of the wins, you do have some element of rebagging. In many other cases, you may not have -- not have rebagging. It's a combination of things.

So our experience is whenever we win large deals, it takes a period of time before revenues started to remain post-transition and so on. So we would expect while we've had $2 billion-plus [Inaudible], some of it will start reflecting in our numbers only subsequently. That is what I meant when I said will be a transition impact at site. Apart from that, you have your regular seasonality in Quarter 3 of lower working days and furloughs.

Surendra Goyal -- Citi -- Analyst

Sure. My question was specific to communications, but that answers my question. Thank you.

Operator

Thank you. The next question is from the line of by Viju George from J.P.Morgan. Please go ahead.

Viju George -- J.P.Morgan -- Analyst

Yes. Thank you for taking -- giving me an opportunity. I just wanted to dig a little bit deep into the cost. I think there are a host of factors that you've cited.

What are the elements of the cost? I mean, you've talked about subcontracting and of sales, there've also been higher compensation, promotions, variable pay, etc., etc. What are the elements, of course, that you feel may be non-repeating as we go forward?

Ranganath M D -- Chief Financial Officer

Hi, Viju, this is Ranga here. See, I think the investments costs pretty much we had outlined, and we are pretty much seeing the same trajectory, nothing outside the trajectory. We had kind of said that in the second half the trajectory'd be intense. And the compensation, that 100 basis points that I talked about.

The part of it was compensation, the 15% of the employees, which has really planned for the Q2 as well. And so these two were there. And the subcontractor expenses, going back, is something which is clearly the demand and supply chain matching related. That is something which we are looking at to see how best to optimize that.

So these are the two critical elements for Q2.

Viju George -- J.P.Morgan -- Analyst

Yes. Are there any elements that you think -- Ranga, so also taking this forward, are there any elements that you think will not repeat, in the sense, some of the payouts in order to rein in attrition? Is that something that you expect has largely been done and therefore will not sustain? Because understand what are the elements, besides the investment, that anyway you said will be skewed in H2, among the other variables would probably not repeat to the same extent. For instance, is it logical to assume that because Q3 will be a slower quarter, variable pay may not be that high? Like [Inaudible] the subcontracting may not be that high. So maybe those costs should moderate logically speaking.

Ranganath M D -- Chief Financial Officer

Well, I think I don't want to kind of seeing how the subcontractor piece is, as you know, it's really the short-term measures we have to undertake, primarily to meet the certain specific on-site demand, which, otherwise, to our employee base, we're not able to fulfill. And so that is -- in the short term, it is difficult to predict that. But at the same time, now that it has touched 7.4% from 6.2% last quarter, we're also seeing certain -- if you look at the headcount addition that you saw this quarter, both on-site and offshore, has been broadly in line with our plan. So these are some of the two factors that will really play into the subcontractor.

One is to what extent we could start with our own employees. So at this point in time, we are fine with the current levels, and we will see how the next two quarters play out.

Viju George -- J.P.Morgan -- Analyst

Sure. And when you step back and look at start of the year and look at all the costs which have panned out, except for the costs that we've incurred in connection with raining in attrition and, therefore, the payouts you've incurred in this quarter as that, would you say that most of the other elements have been as per track, nothing has been unexpected?

Ranganath M D -- Chief Financial Officer

Well, I don't think so, because as I said, clearly not. Now if the question is, are there any unforeseen costs that we had to encounter? That's clearly not the case. The subcontractor piece I talked about and some of the interventions on the attrition that we talked about, even for the second half the investments have been planned out, and these are all pretty much that we see at this point in time. It is not that certain unforeseen cards that happened here and that really kind of brought down our -- the positive impact of the rupee during the quarter.

That's not the case.

Viju George -- J.P.Morgan -- Analyst

Sure. And Mohit, one question here on financial services, if I may, please. I think [Inaudible] optimism basically if you might then on possibly the interest rates will rise in the U.S. and interest rates are rising right now.

And today, you've got growth in, and it looks you've got a far better order book this time than last year. So do you think that, therefore, there are more concrete data points to suggest that this may not be a false alarm and therefore, this momentum would sustain in a more certain manner?

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

I agree. So Viju, I think, look, last time last year, at the end of Q2 we had a couple of other internal issues that you know about apart from client investments, specific issues. This time around, based on the results that we see from the banks, based on the trajectory of the yield curve, not just in the U.S., but across the world, it certainly seems to be more soft yield. We're also seeing -- see, there are two broad spend areas, right? First, is we are a company.

Our traditional dominance of consolidation of the run part of the business where plans are still looking to focus on reducing the cost income ratio, so that continues to be a traditional area of strength. The August piece is on the digital piece, right, wherein seasonally, we are seeing a demand from clients asking us to come and bid for business to build new digital platforms in trade, in payments, in lending. There does seem to be the perspective that banks are looking to expand after a long time, pretty much after the global financial crisis, banks are looking to expand into that. Having said that, we own a good deal in sort of more medium and long term.

From a quarter-to-quarter basis, we will always see headwinds and tailwinds. But in the long run, we remain optimistic about this trend of the business.

Viju George -- J.P.Morgan -- Analyst

Sure, sure. Can I push in one more question for Salil? Salil, as an industry, there's a lot of cost pressures in the system today. Your H1B visas are tough to come by. Localization costs have moved up.

I think the wage inflation in the U.S. is it's hot, so the market for software services is red hot right now. So seriously, industry pricing that we pass it on to clients, subcontracting does not help. Do you think as an industry, we are ready to sort of have a conversation with clients saying that input costs are increasing and therefore, it's time you start to sort of have on conversations on construct -- on price increases.

Is that happening at an industry level at a player-specific level? Or was it purely driven by mix still?

Salil Parekh -- Chief Executive Officer and Managing Director

First, I think if you look at our data, pricing is stable from previous quarter, which already is a good sign. In general, I think, there are elements around digital where there is an ability to demonstrate more and more value. If you can do that across the sector, then there is possibility what we're striving. In other places, there is a huge benefit if you can apply more and more automation and artificial intelligence, and that can give us some benefit of holding pricing while having some impacts on margins.

And as Ranga described earlier, there is other parameters, which I think we can look at internally as we go through the rest of this year and into the next year, which will help us to make sure that our margin profile remain stable or even sometimes my view is to get that expanding.

Viju George -- J.P.Morgan -- Analyst

Sure. Thank you. Ranga, all the best.

Ranganath M D -- Chief Financial Officer

Thank you very much, Viju.

Operator

Thank you. The next question is from the line of Ankur Rudra from CLSA. Please go ahead.

Ankur Rudra -- CLSA -- Analyst

Hi. Thanks. Could you start with comment on, add color to your substantially higher deal wins you've had this quarter? And if there is any change or departure from previous margin or asset intensity thresholds or the nature of the business I understand?

Pravin Rao -- Chief Operating Officer and Whole-time Director

Ankur, can you repeat the question?

Ankur Rudra -- CLSA -- Analyst

Yes. I just wanted to get some more color on the deal win, the order book this time, and if there was any departure on previous margin and asset intensity thresholds?

Pravin Rao -- Chief Operating Officer and Whole-time Director

Ankur, this is Pravin here. As we said, we've had 12 large deal wins: seven in Americas, four in Europe, and one rest of the world. Big percentage of deals were in financial services, manufacturing and couple of them in Hi-Tech, one we can have retail and etc. Overall, we have not seen any significant showing in the intensity or the competitiveness of this field.

On this field, we have faced global competition before winning the deal. And as we've done in the recent past, we continue to be aggressive on winning large deals and executing on our margin improvements, leveraging some of the investments that we're making on tools, technologies, automation, AI, and so on. And to some extent, if you look at last two quarters as well, if you look at from a pricing perspective, realization perspective, we had been fairly flat on year-on-year basis. So to that extent, I think our strategy of going a bit [Inaudible] trying to execute on superior execution and meeting our margin requirements has stood out so far.

Net-net, we don't see any change [Inaudible] dramatic change. We're not seeing any significant change. In this space, it will be competitive -- it can lead to a very competitive space. We're going to continue to look for cost take out so that we can repurpose this in other areas, and that trend will continue.

Ankur Rudra -- CLSA -- Analyst

Thanks. Also earlier in the call, Pravin, I think you commented that spending looks -- maybe in financial services looks strong over the next few quarters. You seem to stuck short of giving a more structural view on financial services spending. Is there something that limits your visibility right now to limit your comments just in the next two or three quarters given a very strong order book and good momentum?

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

Ankur, this is Mohit here. So look, I think what Pravin is trying to say is that the legacy had a strong quarter. We had good deal activity. We had strong volume momentum, but with the caveat that Q3 is a severely tough quarter.

There are furloughs. There are some clients who have -- and we have budget pressure. So we just want to give that qualification. We remain very confident about that the overall state of the sector, and our competitive positioning.

The qualification is the fact that if you go back previous [Inaudible] years, there is a [Inaudible] in the business.

Ankur Rudra -- CLSA -- Analyst

Sure, but beyond the seasonality, which should show up perhaps in Q3, maybe in Q4, there's nothing else structurally which makes you less comfortable about demand environment on these [Inaudible]?

Pravin Rao -- Chief Operating Officer and Whole-time Director

We remain very confident about the state of the industry in terms of spend, and we remain very comfortable about our competitive positioning.

Ankur Rudra -- CLSA -- Analyst

OK. Thanks. And one last question on the costs. I know it's been discussed a lot, but was the incremental subcontracting cost, perhaps despite the offshore shift, something that was in the kind of unexpected from what you thought would happen over the course of this year? Is there something on the supply side that worries you and probably is causing greater-than-expected cost inflation.

Ranganath M D -- Chief Financial Officer

Yes, Ankur, Ranga here. I think as I was saying the subcontract cost pretty much on-site to meet the demands, which otherwise we couldn't really staff from the internal sources. It's a play on both the gross addition as well as the attrition, and they both play a role. So this time, I think the on-site, how the requirements came because of these elements.

And that cited 7.4%, and we've had some good gross additions -- rather net additions on-site this quarter, which should play into the next quarter. So we're closely monitoring that, but we expect at the current levels, no substantial reduction.

Ankur Rudra -- CLSA -- Analyst

OK. Thanks and best of luck.

Operator

Thank you. The next question is from the line of Bryan Bergin from Cowen. Please go ahead.

Bryan Bergin -- Cowen & Company -- Analyst

Hi. Thank you. A few for you. First, can you tell us the assumed contribution from inorganic growth is in the full-year growth range?

Ranganath M D -- Chief Financial Officer

Very negligible.

Bryan Bergin -- Cowen & Company -- Analyst

OK. And then on margin, can you give us a sense of the level of benefit operating margin that you've seen from automation initiatives that you've implemented thus far? And then on the subcontractor issue. So we've thinking about as you go through the three-year transformation plan, a new structural range so to speak as far as the level of subcontractor expenses?

Ranganath M D -- Chief Financial Officer

Well, I think, we still have in the close to 7% several quarters ago, and we got moderated to only early 5%. I think at the same time, during the last 12 months or so, we've also seen certain visa regime changes in the United States. This has put certain weak times for the visas. And while we have accelerated the localization and local hiring and since we need certain -- we need to meet certain immediate project requirements, especially in digital and niche areas, so that is the reason we have hired.

And we also had certain elevated level of attrition on-site. So a combination of these two factors has led to incremental uptick in the subcontractor to 7.4%. And nevertheless, I think, as we have seen certain net addition improving during Q2, which will play into Q3, we are closely monitoring that. Having said that, in the near one or two quarters, we don't see significant change from the current levels.

Operator

Bryan Bergin, are you done with your question?

Bryan Bergin -- Cowen & Company -- Analyst

Yeah. Thank you.

Operator

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

Salil Parekh -- Chief Executive Officer and Managing Director

Thank you very much.

Operator

[Operator signoff]

Duration: 61 minutes

Call Participants:

Sandeep Mahindroo -- Head of Investor Relations

Salil Parekh -- Chief Executive Officer and Managing Director

Pravin Rao -- Chief Operating Officer and Whole-time Director

Ranganath M D -- Chief Financial Officer

Moshe Katri -- Wedbush Securities -- Analyst

Yogesh Aggarwal -- HSBC -- Analyst

Mohit Joshi -- President Head, Banking, Financial Services, and Insurance

Ravi Kumar -- President Deputy Chief Operating Officer

Sandeep Shah -- CGS-CIMB -- Analyst

Joseph Foresi -- Cantor Fitzgerald -- Analyst

Ashish Chopra -- Motilal Oswal Securities -- Analyst

Surendra Goyal -- Citi -- Analyst

Viju George -- J.P.Morgan -- Analyst

Ankur Rudra -- CLSA -- Analyst

Bryan Bergin -- Cowen & Company -- Analyst

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