Infosys Ltd (INFY) Q3 2022 Earnings Call Transcript

Infosys Ltd (INFY -2.60%)
Q3 2022 Earnings Call
Jan 12, 2022, 8:00 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 now hand the conference over to Mr. Sandeep Mahindroo.

Thank you, and over to you, sir.

Sandeep Mahindroo -- Financial Controller and Head-Investor Relations

Thanks, Margaret. Hello, everyone, and welcome to Infosys earnings call to discuss Q3 FY '22 results. I'm Sandeep from the investor relations team in Bangalore. Let me begin by wishing everyone a very Happy New Year.

Joining us today on this earnings call is CEO and MD, Mr. Salil Parekh; 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 and Nilanjan.

After that, we'll open up the call for questions. Please note that anything which we say that 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 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 turn it over to Salil.

Salil Parekh -- Chief Executive Officer and Managing Director

Thanks, Sandeep. Good evening and good morning to everyone on the call. Wish you all a Happy New Year and trust you and your dear ones are well and safe. Thank you for making the time to join us today.

I am delighted to share with you that we had an extremely strong quarter with 7% sequential growth and 21.5% year-on-year growth in constant-currency terms. Our year-on-year growth was the fastest we have had in 11 years. The growth was broad-based across industries, service lines and geographies, driven by our differentiated digital and cloud capabilities. Our strong broad-based growth in a seasonally weak quarter is a clear testament to the enormous confidence clients have in us to help them accelerate their business transformation.

This has been made possible by the relentless commitment from our employees through these challenging times. I'm extremely proud, as well as grateful for their extraordinary efforts in delivering success for our clients. Our growth has been accompanied by resilient operating margins at 23.5%. We delivered these margins while keeping in the forefront our focus on our employees with increased compensation and benefits.

Our digital business grew by 42.6% and is now 58.5% of our overall revenues. Within digital, our cloud work is growing faster and our Cobalt cloud capabilities are resonating tremendously with our clients. Some of the highlights of our results are: Revenues at $4.25 billion, where our growth 21.5% year on year and 7% sequential in constant currency; broad-based across all industry service line and geographies; all of our segments reported strong double-digit growth; large deals at $2.5 billion; on-site mix at 23.8% and utilization at 88.5%; operating margin's strong at 23.5%; free cash flow at $719 million. Attrition increased to 25.5%.

Our quarterly annualized attrition was flattish on a sequential basis. We had a net headcount increase of 12,450, attracting leading talent from the market. We've increased our annual college recruiting target to 55,000, and Nilanjan will comment more on this. We remain comfortable with our ability to support our clients in their digital transformation journey.

Financial services grew at 15.5% in constant currency with broad-based growth across geographies and steady deal wins. Various subsectors like lending, mortgage, cards, payments, are seeing increasing demand and clients are driving cloud transformation initiatives to build resilient and scalable platforms. The retail segment growth was 19.8% in constant currency. Across sub verticals, we see increased client spend on digital transformation, including digital supply chain, omni-channel commerce and large-scale cost takeout initiatives to improve business resilience.

We signed six large deals in this sector -- in this segment during the quarter. The communications segment grew at 22.2% constant currency. Segment performance continued to improve, with ramp-up of recently one deal. Client budgets are focused on digital and customer experience programs, increasing networking infrastructure, cloud adoption and security, with emphasis on 5G rollout and innovation spend.

Energy, utilities, resources and services vertical continues its steady performance with 13.6% constant-currency growth and five large deal wins. We are seeing gradual improvement across various businesses as consumer spending continues to increase and clients focus on increasing technology transformation around areas like customer experience, cybersecurity and workload migration to the cloud. Manufacturing segment growth accelerated to 48.4% in constant currency with continued ramp-up of the Daimler deal and steady momentum in new deal wins. We see across-the-broad improvement within various subsectors and geographies and expect client focus to continue in areas like smart manufacturing, IoT, digital supply chain and connected products.

Hi-tech growth improved during the quarter to 18.9% in constant currency. Clients are seeing renewed momentum in terms of spending on digital transformation programs linked to customer, partner and employee engagement. Life sciences segment performance also improved further to 29.2% growth. Adoption of digital health, telehealth and patient access programs are resulting in significant uptake of cloud, IoT, patient-facing applications, patient portals and next-generation CRM work.

We had a very strong performance on our income tax program in India. Over 5.8 crore or 58 million tax returns were filed using the new system by the deadline of December 31, 2021. On the last day, over 46 lakh or 4.6 million tax returns were filed. And during the peak hour, over 5 lakh or 500,000 tax returns were filed.

We are proud to be supporting the digital strategy for India and for the government and working on this program for future modules that will be developed. Across digital services in Q3, we have been ranked as leader in 12 digital service-related capabilities, from artificial intelligence and automation, cloud services, IoT, engineering, modernization and big data and analytics. The strong overall performance stems from four years of sustained strategic focus on areas of relevance for our clients in digital and cloud, continuing reskilling of our people and deep relationships of trust our clients have with us. With the strong momentum in the business and the robust pipeline, we are increasing our annual revenue growth guidance from 16.5% to 17.5%, moving up to 19.5% to 20% in constant currency.

Our operating margin guidance remains at 22% to 24%. With that, let me hand it over to Nilanjan for his update.

Nilanjan Roy -- Chief Financial Officer

Thanks, Salil. Hello, everyone, and thank you for joining the call. Let me start by wishing everyone a very happy and safe 2022. Q3 was another successive quarter of continued acceleration in revenues at 7% constant currency Q-on-Q growth and 21.5% constant currency year-on-year growth, the highest year-on-year growth in the last 11 years.

Despite the Q3 seasonality, we registered strong broad-based growth across geos and verticals. Our largest geography, North America, grew at 21.4%, while growth in Europe accelerated to an impressive 27.2% year on year in constant-currency terms. Retail, communication, manufacturing and life sciences also saw 20% or higher year-on-year growth in constant currency. We won 25 large deals, and large deals being those with over $50 million TCV, totaling $2.5 billion of TCV, six in retail, five each in financial services, communications and energy, utilities, resources and services; two in manufacturing; and one in hi-tech and life sciences.

Region-wise, 16 were from the Americas, seven were from Europe and two from RoW. The share of new deals increased in Q3 to 24% within the large deal numbers. Client metrics improved further, with $100 million client count increasing to 37, an increase of eight year on year. We added 111 new clients in the last quarter.

Operating parameters remained robust. Utilization was 88.5%, slightly lower than the previous quarter, easing some of the supply side pressures. On-site effort mix is up marginally to 23.8%. Q3 margins remained resilient at 23.5%, a marginal drop of 10 basis points versus previous quarter.

The major components of the sequential margin movements were as below: 80-basis-points impact due to comp hikes and promotions and other employee interventions, 46-basis-points impact due to the utilization decline; these were offset by about 20-basis-points benefit due to the rupee and other cross currency movements, a 50-basis-point benefit due to cost optimization and another 40-basis-points benefit due to SG&A leverage and other one-offs included therein. Q3 EPS grew by 11.2% in dollar terms and 13.1% in rupee terms on a year-on-year basis. Although DSO increased to 71 days due to higher seasonal billings, an increase of five days versus the last quarter, it is still a reduction of two days versus Q3 of prior year. Free cash flow for the quarter was healthy at $719 million.

Free cash flow as a percentage of net profit was 93% for Q3 and 104% for the nine months to date. Yield on cash balances improved to 5.29%, compared to 5.13% in Q2. Our balance sheet remains strong and debt-free. Consolidated cash and investments at the end of the quarter stood at $4.28 billion after paying over $850 million of interim dividend during the quarter.

Return on equity increased further to 30.4%, an increase of 3% over Q3 of the prior year, driven by robust performance and consistent capital returns through share buyback and increased dividend payouts. On the employee front, voluntary long-term 12-month attrition increased to 25.5%. And as Salil commented, while LTM attrition continues to increase due to the tail effect, quarterly annualized attrition was flattish compared to Q2. We will continue to invest in all aspects of talent retention, including compensation, promotions, skill incentives, learning and career progression.

We have also simultaneously increased the pace of hiring, talent reskilling and the usage of subcons to prevent any impact on client commitments. We have added over 12,450 employees, talented employees, on a net basis in the last quarter which is the highest ever. Our global college graduate hiring program for this fiscal has been increased to over 55,000 versus the previous quarter number of 45,000. In India, over 93% of Infoscions have received at least one dose of the vaccine.

Over 90% of our employees globally are presently working in a remote environment due to the heightened precautions against the new variant. Driven by robust demand environment and our continued market share gains, we are further increasing our revenue guidance for FY '22 to 19.5% to 20% in constant-currency terms from 16.5% to 17.5% earlier. And the margin guidance remains unchanged at 22% to 24%. With that, we can open the call for questions.

Questions & Answers:

Operator

Thank you very much. [Operator instructions] The first question is from the line of Ankur Rudra from J.P. Morgan. Please go ahead.

Ankur Rudra -- J.P. Morgan -- Analyst

Thank you. Happy New Year to everybody. Excellent numbers for the quarter. Clearly, a very, very strong growth for the third quarter.

Could you maybe start with elaborating where the incremental execution came from versus the previous full year forecast? Why was the difference so sharp? 

Salil Parekh -- Chief Executive Officer and Managing Director

Hi, Ankur, this is Salil. Sorry, you broke up a little bit. You said where was the incremental?

Ankur Rudra -- J.P. Morgan -- Analyst

Where the incremental surprise came from. The full year guidance has been increased very sharply given the performance in the quarter. Where did the surprise come from? 

Salil Parekh -- Chief Executive Officer and Managing Director

Yeah, so there, I think, what we are seeing in the quarter and then all through the year is the demand environment remains extremely strong and then more and more traction on the digital and the cloud programs. This is where we saw the most impact in the quarter, in Q3, where we had this really strong growth of 7%, and therefore the overall guidance jumping up by 3%. In terms of verticals, as I was sharing earlier, it's really broad-based. Of course, we have very strong momentum in manufacturing.

That was something that we were looking forward to. There's also good momentum that we are seeing in financial services, given it's our largest vertical; and in life sciences that I described before. Retail is starting to come back nicely as well. As Nilanjan mentioned, Europe, again, was standout.

Those are some of the elements that gave us a good outcome in Q3 and then the support for expanding the margin for the full year -- sorry, the guidance for the full year.

Ankur Rudra -- J.P. Morgan -- Analyst

Thank you, Salil. Salil, the growth trajectory has continued on a year-over-year basis for the last six quarters already.

Operator

Sorry to interrupt you, Mr. Rudra. Your voice again, it was breaking. 

Ankur Rudra -- J.P. Morgan -- Analyst

Apologies. Let me try again, if you can hear -- growth trajectory...

Operator

I'm afraid -- sir, your voice is not clear. I would just request you to please check your phone line and rejoin the queue. In the meanwhile, we'll move to the next question, which is from the line of Moshe Katri from Wedbush. Please go ahead.

Moshe Katri -- Wedbush Securities -- Analyst

Hey, thanks. Happy New Year, and congrats on very strong results. One, I know this is -- we just reported Q3. But are you ready to talk a bit about the entire calendar year down the road '22? What do we -- what's changed in terms of visibility? Maybe, I guess, the biggest question is gonna be if this is sustainable down the road.

And what can you kind of talk about in terms of color to give us that comfort? And then, on top of that, maybe you can talk a bit about some of the cushion in margins and what sort of levers that you have in the model, especially as some of the bench continues to benefit from the off-campus recruiting that's been pretty robust. Thanks a lot.

Salil Parekh -- Chief Executive Officer and Managing Director

Thanks, Moshe. This is Salil. I'll start off with the first part, and then Nilanjan will comment on the margin levers. Of course, as you referenced, we have guidance through March 31, March 31 of this year.

The color for this calendar year, broadly, we see the demand environment remaining strong. The client budgets are looking good. Our overall pipeline is the largest we've had in a very long time. The number of large deals that we were able to close that Nilanjan shared, 25 large deals, each over $50 million for a total of $2.5 billion, and 44% of these are net new.

So all of those things are giving us good confidence for what we see going ahead. Of course, we will have our guidance for the -- for our financial year in April. Nilanjan, over to you, please. 

Nilanjan Roy -- Chief Financial Officer

Yes. Thanks, Salil. Moshe, so on the margins, like I mentioned earlier, they were quite resilient for the quarter. I think, a couple of things I just wanna call out.

Of course, our many cost levers, whether it's the on-site/offshore mix, it's the pyramid, whether it's automation. Of course, these are something which we are continuously deploying. Going ahead, of course, subcon cost for us has really ramped up, and that's an area we will continue to look ahead. The other thing is, of course, pricing.

And it's important to talk about that as the higher costs are now feeding into our new deals, etc. I think that should hopefully have a benefit. And of course, as digital talents are getting priced in, we are able to show value to our clients in terms of the business transformation. Now again, this is something we have started recently.

It will take time to kick in. And we've talked about it in the last quarter as well. But really, that is the focus which we can start getting into both our cost side and also making sure that we are not leaving any free cents and dollars on the table as part of our pricing negotiations. 

Moshe Katri -- Wedbush Securities -- Analyst

Thanks, guys. Good luck.

Operator

Thank you. The next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh -- BNP Paribas -- Analyst

Hi. Good evening, everyone, and thank you for taking our question. Congratulations on great set of numbers. My first question, Salil, was around going into this calendar year.

So one of the largest peers of ours have indicated a very strong growth to continue through this year. So looking at our portfolio of capabilities and offerings, do you see that we are well aligned to meet or beat their growth numbers? Or do you see that we need some intervention to build up our own capability to continue this strong growth going ahead?

Salil Parekh -- Chief Executive Officer and Managing Director

Thanks for that question. I think, in terms of our capability set, we have a strong portfolio across digital and cloud. Our Cobalt set of capabilities is resonating extremely well with our client. We see the growth in digital is really a reflection of the focus we've had on making these choices over the past four years and positioning the portfolio for where the clients is immersed and looking for work.

We also see the cloud capability faster growing than our digital capability. So yes, we are well-positioned to benefit from this. In addition to that, we have a strong set of capabilities in automation, in modernization. We've even seen our core services, which is now stable this quarter in terms of growth, it's not shrinking.

So our view is that our set of capabilities and portfolio are reflecting what our client expectation, demand are. And we have the ability to meet all of those from the capability perspective. We also have the capacity with the expanded recruiting at the college level and our ongoing recruiting ability to attract talent, which is helping us to deliver on our projects on a regular basis. So we feel quite good about how we're positioned as we go ahead into the next year as well. 

Kumar Rakesh -- BNP Paribas -- Analyst

Thanks for that, Salil. My next question was around the margin guidance plan which we have, 22% to 24%. And currently, we are trending to the upper end of that. So how should we see that? What is it an indication of? Is it that you want to keep a flexibility with yourselves in anticipation of any large deal or any cost headwind potentially coming from that? Or is there an indication that you're looking at some major cost trends which are going to come in coming quarters, and hence, you are maintaining this margin guidance planned?

Nilanjan Roy -- Chief Financial Officer

Yeah, so I think, the margin guidance for us is really a comfort range within which we operate. So we really don't fine-tune that as the year progresses. So this is a band which we are happy to be in. It was 21% to 23% just before COVID, now we are 22% to 24%.

So that's more like a rail for us rather than anything else. And I think, looking ahead, we continue to focus. We know our cost headwinds potentially in terms of employees, etc., could be travel into the next year. But like I said, we have a very robust cost optimization, and of course, new levers which we continue to deploy.

So we remain quite confident on this.

Kumar Rakesh -- BNP Paribas -- Analyst

OK. So more of a reflection of flexibility that you want to keep with yourself. Got it. Thanks a lot for those answers.

I'll fall -- be back.

Operator

Thank you. The next question is from the line of Keith Bachman from BMO Capital Markets. Please go ahead.

Keith Bachman -- BMO Capital Markets -- Analyst

Yes. Thank you. I want to pick up on that line of questioning. If you could just talk about the puts and takes as you see margins over the course of the next three, four, five quarters, really calendar year '22.

And I wanted to see if you could address what you think the impact would be for a few things. So for instance, one of the headwinds this quarter was utilization. How should we be thinking about utilization trends during calendar year '22? Number two, could you speak to -- I think you said attrition was flat sequentially. How do you think about attrition trends over the course of calendar year '22? Do you think that they can move lower? Or is the market such that demand is so strong that attrition will probably remain elevated? And then, number three would be, you just brought up travel or any other issues that we should be thinking about that may impact calendar year '22 margins.

And any other issues you want to bring up? And that's it for me. Thank you.

Nilanjan Roy -- Chief Financial Officer

Yes. So I think, like we don't give out the margin guidance for the next year. Now having said that, we're looking at the headwinds which we actually face pretty much every year. You have your compensation hikes, you have clients coming back for discounts on renewals.

And some of that, you offset with the cost optimization programs which we run. And I mentioned that a bit earlier in terms of whether it's the pyramid, whether it's subcon, whether it's automation. New levers which we are looking at is pricing. So that's something which we are continuously working on and remain quite confident.

Of course, travel is one thing which is quite unknown at this moment in terms of when does it come back? Even if it comes back, does it come back to pre-COVID levels or it will stay at a slightly lower level? So we'll have to watch out for that really. In terms of attrition, I think, it's a larger industry issue. It's not peculiar to us. And fundamentally, I think, it's largely stemming from that the volume increase for this industry fundamentally has to come from freshers, right? Otherwise, it's a zero-sum game in terms of somebody else's attrition is my backfill and my attrition is somebody else's backfill.

So as long as the fresher intake starts increasing because, first, they have to come into training, then they go into production after three or four months, and that will take time for this industry to start absorbing. And I think that's something which will help with the attrition in the medium term. And like I said, we have seen attrition flattening sequentially on a quarterly, annualized basis. And looking ahead, we are seeing some positive signs, but it's too early to say whether it will dramatically come down.

But like I said, as attrition -- as freshers feed into the system, we should see the overall environment in terms of attrition in the market really working. 

Keith Bachman -- BMO Capital Markets -- Analyst

OK, OK. But any comments specifically on, is utilization, you think, a help or hurt or neutral? Just broadly. And as part of that, I noticed your offshore percent of labor increased year over year. Is that also a trend that you think continues given the dynamics in front of you? And I will cede the floor thereafter. 

Nilanjan Roy -- Chief Financial Officer

Sure. So in terms of utilization, of course, this is higher than what we would normally like to be. We would rather operate at sort of an 85%, 86%. But having said that, even if we bring this down in the future, in terms of cost, it's largely offshoring, which -- because all the effort is -- 75% of our effort is sitting there.

So utilization doesn't directly link to the margin because of the way the offshore costs operate. So that's one factor. I think -- what was the second question on? On-site/offshore. I think, in the long run, I think -- long run, if you see, I think COVID, while it's had this huge impact on demand, I think the entire ability for the supply side to be delivered in a remote environment, really for me, is a shine-out because, really, that has opened up the eyes of many of our clients, that really, every sort of work doesn't have to be done nearshore.

It can be done -- or I mean, on-site. It can be done in nearshore locations, it can be done offshore. And I think, the beauty of that is, secularly, we believe this will help the industry in a much more larger offshoring at an overall level. And of course, part of that benefit will be more -- shifting more over to offshore locations.

So I think, this is a good sign. I think, there can be short-term impacts like we've seen this quarter, 10, 20 basis points here and there. But the secular trend, we think, we'll continue to see that the large labor markets available in India will open up a lot more offshoring opportunities. 

Keith Bachman -- BMO Capital Markets -- Analyst

Terrific. Many thanks. Congratulations.

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, and congratulations on a very impressive quarter from the team. My question is on pricing. Salil, we have seen now several quarters of strong demand, and it looks like we are looking at another year, looking at the run rate that we're exiting the calendar with, a pretty strong demand as well, and in just the supply in the last few comments that you made. How do you see pricing really trend in the next 12 to 18 months? Is there an opportunity for this to go up on a like-to-like basis? 

Salil Parekh -- Chief Executive Officer and Managing Director

Hi, Diviya, thanks for that question. This is Salil. I think, on pricing, first, we've seen some level of stability in what we saw in the specific deal that we closed in Q3 versus Q2. On the longer term, the revenue share in the past, we've put in place a very focused effort on communicating the value that we are helping create with our clients through the digital programs.

We are also seeing, as we've shared, wage increases. We've done three of them in the last 12 months. And broadly, we are seeing large enterprises, for the first time in a very long time, seeing inflation in their daily environment and so are more open to having these discussions. With these factors in line, we've seen -- we will see some more value that we can bring in through communicating and demonstrating our digital impact they will be creating through those programs.

And that, while it will not be immediate, but over the next several quarters, in my view, will help us to build out more resilience in the margin profile. 

Diviya Nagarajan -- UBS -- Analyst

Got it. You earlier enumerated your skills and capabilities. But if you were to kind of think of any future investments that you were going to make, in which direction would you kind of direct that in terms of your skills and capabilities? 

Salil Parekh -- Chief Executive Officer and Managing Director

So today, the biggest drive within our clients is really cloud. Our Cobalt capabilities are very strong, and we are constantly announcing it. Whether we look at the public cloud partnerships, we have also a very strong ecosystem of private cloud partnerships. And we have a good ecosystem with the SaaS players, extremely strong cloud-native, cloud-first development.

Those will be really the first area where we are already leading, but we will continue to grow. Then you have the areas which focus on cybersecurity, which focus on data and analytics, which focus on IoT. Those are the areas which we are seeing this incredible traction with our clients. Then with a very strong, innovative, modernization and automation, leveraging artificial intelligence and machine learning, we'll continue to build that out.

Our approach is gonna be to drive all of these through our current margin profile. So that's what we will drive through as opposed to any new plays for [Inaudible].

Diviya Nagarajan -- UBS -- Analyst

Fair enough. And one last bookkeeping question. Your Other segment had a big swing this quarter. Is there anything particular that we should be looking at here? Any one-off? Or is it something -- and if not, what drove that expense?

Nilanjan Roy -- Chief Financial Officer

Yeah, so I'll take that. So that's coming from India. We had some seasonality with some of our clients toward wuarter end. And that you'll see also in the geography sector of India.

Diviya Nagarajan -- UBS -- Analyst

Got it. Thank you, and wish you all the best for the coming season.

Operator

Thank you. The next question is from the line of Ashwin Mehta from AMBIT Capital. Please go ahead.

Ashwin Mehta -- Ambit Private Limited -- Analyst

Thanks for the opportunity, and congrats on a good set of numbers.

Operator

Sorry to interrupt you, Mr. Mehta. I would request you to come closer to the phone. 

Ashwin Mehta -- Ambit Private Limited -- Analyst

Sorry. Can you hear me better?

Operator

Yes, this is better. Please go ahead.

Ashwin Mehta -- Ambit Private Limited -- Analyst

Yeah, I had one question on the third-party bought-out items for service delivery. That item seems to have gone up by almost $71 million this quarter, almost 1.8% of revenues. So just wanted to check, what does this pertain to? And is it possibly related to the data center takeovers that we would have been done in some of our large deals? 

Nilanjan Roy -- Chief Financial Officer

Salil, can I take that? 

Salil Parekh -- Chief Executive Officer and Managing Director

Yes, please go ahead.

Nilanjan Roy -- Chief Financial Officer

Yeah. So I think, as we're looking in many digital end-to-end transformations, whether it's IT as a service, full stack transformation, these involve infrastructure, SaaS, data. So it's a full stack transformation. And in many cases, these involve infrastructure and software as well.

So these are bundled deals which are end-to-end transformations, and we think they're very, very important as well going ahead when we look at these digital transformations. So I think, as part of our overall deal profile, we continue to see these deals giving us increased visibility into the organization IT infrastructure and allowing us future deals ahead once we are pretty much front and center in the IT landscape. So that's what these are. 

Ashwin Mehta -- Ambit Private Limited -- Analyst

OK, OK. Fair enough. And just one last question. In terms of our margin outlook over the near term, do you think, with the attrition starting to -- on a quarterly, annualized basis normalizing, the interventions that are required possibly go down in the near term so that we can possibly make a higher exit at the end of this year so that we can maintain margins in the next year as well?

Nilanjan Roy -- Chief Financial Officer

Yes. So like I said, we haven't seen a decline as yet. These are flattening and just probably will start inching off. So we will continue to do what it takes to invest behind our employees because we know this is more than the comfort range which would be happy in.

So I think, it's premature to say when this will really come off. But as of now, we are focused in doing all these interventions. This quarter, as said, like we mentioned, 80 basis points of our margin was behind these employee interventions.

Ashwin Mehta -- Ambit Private Limited -- Analyst

OK. Thanks a lot. Congrats again, and all the best.

Operator

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

Sandip Agarwal -- Edelweiss Capital -- Analyst

Yeah, hi. Good evening to the management team. Happy New Year, and thanks for taking my question. Firsrt of all, congratulations on a very good set of number.

So Salil, I have a very simple question. You see now, our core, which is 41%, 42% of the business, is stabilizing on a year-over-year basis. It is probably start -- a little growth is there. But digital continues to be at 40%-plus growth.

So if this trend continues next year, maybe our core will become 32%, 33% of the overall pie. So what is your sense from a long-term perspective? Where do you see this core stabilizing? Or do you think it will be very unfair to see them separately, and in next two, three years, you think everything will converge together? So any idea, anything which you can share on that front would be very helpful. 

Salil Parekh -- Chief Executive Officer and Managing Director

Yeah, so thanks for that question. This is Salil. First, as you pointed out, the digital growth is very strong at over 40% at 42%. And that shows the resilience, the demand profile and our portfolio which is overlapping.

The key for the core, instead of looking at the percentage of the business, the key for us is really that core is now stable with a very small growth. So we didn't see the decline that we had for some quarters. And this makes it extremely strong for us. We have probably the best capability in automation and modernization across the industry.

And with this, while everyone else's core is still shrinking, ours will be stable or possibly even have a small uptick, and that means we'll be the most competitive in this area. So I'm really looking at this as a very positive step. We of course have to maintain this, and we have to keep building out our automation capabilities. So if we succeed in that, I think that has a very good outlook for us in the quarters ahead.

Sandip Agarwal -- Edelweiss Capital -- Analyst

Yes. Thanks. That's very helpful, and best of luck for the current quarter. Thank you.

Operator

Thank you. the next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan -- Investec India -- Analyst

Yeah. Hi, good evening, and thanks for the opportunity. I had two questions. The first is on the employee side of things.

I think, over the past, if you look at the employee cost under cost of revenue, it's consistently been, as a percentage of revenue, is actually below what it used to be pre-COVID. And a lot of the growth has actually been added on the subcon side of things. And even if you look at the numbers, it looks like most of the additions are all freshers. So keeping this dynamic in mind, just wanted to understand, as we go forward and maybe attrition sort of normalizes, how do you see this subcon sort of evolving from an operational perspective? Do you think you'll have to hire these subcontractors directly on to your roles? And would that involve slightly higher costs? How should one think of this dynamic overall? Was the first question.

The second question was around the digital proportion of the business has meaningfully gone up. And if you look into the next year, I'm sure it will be even higher. From that perspective, does that mean that our ability to sort of garner price increases will be far higher going into next year than what we see today? Thank you.

Nilanjan Roy -- Chief Financial Officer

So I'll take the first question on subcon. Really, and as Salil said, the demand environment is so strong that we don't want to leave anything on the table. And therefore, whether it's through subcon, whether it's through lateral or freshers, we will first intend to fulfill that demand. And of course, over a period of time, we will optimize that entire structure.

So whether it is a program to rehire some of this subcons, some of them we will, of course, elapse and we will get new lateral hires, somebody will promote from within. So that dynamic will play itself out over the next year. But at the moment, it's critical that we don't leave any demand on the table. And of course, this will remain an optimization lever for us.

We were one of the lowest in the industry at about 6.9% pre-COVID, and we are, I think, above 11% now. But this is a lever we will have over the medium term to optimize. Salil?

Salil Parekh -- Chief Executive Officer and Managing Director

On the pricing, the -- as the digital work will increase, what we have been putting in place, which is demonstrating to our clients the value creation through digital, will give us a larger opportunity for that because the revenue will be larger. So I think, your assumption is absolutely valid. We will have an additional ability to do that as long as we execute on that well.

Nitin Padmanabhan -- Investec India -- Analyst

Perfect. Thanks for that. Just a clarification on the first answer. So on the first one, considering fresher additions are so strong this year and subcon is so strong, does it mean that next year, our ability to add as many freshers will be a little more inhibited in the sense that we'll need to focus a little more on laterals next year? Is that a way to think about it? 

Nilanjan Roy -- Chief Financial Officer

No, I don't think so. I think, we will continue to have a very robust fresher program. It's always been there. We have an internal -- strong internal rotation program.

So people will -- based on the skills they've taken through our reskilling program, we will move them to new projects, promotions. So in that sense, we think it will be a combination of both laterals and freshers as well. I don't think we see any change in that. 

Nitin Padmanabhan -- Investec India -- Analyst

Fair enough. Thank you so much, and all the very best.

Operator

Thank you. The next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Sandeep Shah -- Equirus Securities Private -- Analyst

Yeah, thanks for the opportunity, and congratulations on a solid execution, both on revenue and margins. The first question is CY '21 or FY '22 had a benefit of mega deal wins, especially from Vanguard, as well as Daimler, as well as some amount of pent-up demand for you, as well as the industry. So the question is, entering into next year, do you believe that these elements, one has to take care in terms of tapering off any growth in the next year? Or do you believe the digital adoption journey, cloud adoption journey, which has a low penetration, which does not make us upset in looking in the next year in terms of the growth momentum as a whole?

Salil Parekh -- Chief Executive Officer and Managing Director

So thanks for the question. First, the guidance increase, as I'm sure you've seen, is for the year ending March of this year. We are not yet commenting in terms of quantitative guidance for next year. What is clear, nonetheless, is the demand environment remains strong and our portfolio of services and capabilities, especially on cloud and digital, are resonating well with clients, and we see a good pipeline for that.

Our large deals in this quarter were also very strong. We continue to see a good large deal pipeline. We have seen a steady expansion of our clients over $50 million, $100 million, $200 million and so on. And so, we see that expansion within clients is working very well as well.

And also, our new client wins, new accounts, are working well. So overall, we have the various elements of continuing this demand environment strongly. But we don't have a specific guidance yet for April 1, '22 -- year starting in April 1, '22.

Sandeep Shah -- Equirus Securities Private -- Analyst

No. No. Fair enough. And just last two bookkeeping question.

The way I look at it, the Daimler deal has two legs to ramp up, one being the deal and employee-related ramp-up and second being the pass-through data center-related ramp-up. Is it fair to say that most of these two legs ramp-up is largely behind? Or may continue in Q4, as well as 1Q of next financial year? And second, in terms of FY '22 wage hike, is it largely over? Or something is due in the fourth quarter as well? 

Salil Parekh -- Chief Executive Officer and Managing Director

On the Daimler, we don't have any more specific. I can understand what you're looking for, but we have not gone into that specific now with Q3 and Q4. And the overall guidance is increase of the revenue covers all of that, including Daimler and many other clients, and especially with Q4 and the seasonality of that quarter. In terms of salary and compensation increases, we have done three of them for this year.

There is nothing specific that is planned for Q4. We will start to look at what we will do in the next financial year that will come up. But nothing specific and being planned in Q4. 

Sandeep Shah -- Equirus Securities Private -- Analyst

OK. Thanks, and all the best.

Operator

Thank you. the next question is from the line of Manik Taneja from JM Financial. Please go ahead. 

Manik Taneja -- JM Financial Services Ltd -- Analyst

Thank you for the opportunity. Just wanted to understand, we've seen a significant increase in offshore mix of revenues over the last 18 months and this quarter saw a slight aberration. What caused that? And how do you see this metric going forward? Thank you.

Salil Parekh -- Chief Executive Officer and Managing Director

This is Salil. The mix has changed over the last 18 months with a lot of the -- has been put -- working -- that was put in place, work from home, allowing the work to be delivered from a different location with tremendous ease and efficiency. What we saw in the last quarter was a little bit thing that opened up in terms of travel. We've also been extremely optimal in what we have done in the previous quarters.

And this is something that has given us more ability to drive connects with clients and grow. We see, in the medium term, a tremendous opportunity for an efficient mix because clients have also seen that, once the work is done remotely or work from home, that more opportunity exists for that work to be done from a location farther away. So in general, as a medium-term trend, we see that as a positive trend. We will have, of course, each quarter, some movements up and down.

But as a longer-term trend, we see that as a positive. 

Manik Taneja -- JM Financial Services Ltd -- Analyst

Thank you. I had one more additional question. Just wanted to get your thoughts around what we are seeing from a revenue productivity metric standpoint, or revenue per person standpoint. And while there is a significant amount of offshore shift over the last 18 months, we have seen utilization go up.

So what's causing the increase in revenue productivity despite the significant offshore shift that we've seen over the last 18 months? If you could talk about some of the factors that are driving that. Thank you.

Salil Parekh -- Chief Executive Officer and Managing Director

On the revenue productivity, there are a number of things that are going on. We see some of the mix of our work which is also changing more to digital. And there, we see much more revenue productivity coming in. As you pointed out, utilization has also gone up.

We are also seeing some of our work, for example, on the consulting side, the data and analytics side, growing really well, and that's giving us some level of a boost. There is also some impact which we've not quantified externally on leveraging some amount of automation and platforms that gives us this benefit. So there are several factors we then work despite the mix -- onshore/offshore mix changing. 

Manik Taneja -- JM Financial Services Ltd -- Analyst

Sure. Thank you, and all the best for the future.

Operator

Thank you. The next question is from the line of Ruchi Burde from BOB -- sorry, BOB Capital Markets. Ruchi Burde, your line has been unmuted. We lost the line.

So we'll move to the next question, which is from the line of Rahul Jain from Dolat Capital. Please go ahead.

Rahul Jain -- Dolat Capital Market Private Ltd -- Analyst

Yeah, hi, thanks for the opportunity, and congratulations on the strong numbers. I have a question regarding the core revenue, which has seen a stabilization in this year. I think, you've addressed this point partly, but wanted to understand what could be the prospect for this side of the revenue in the coming years, especially when we talk about so much shift to digitalization? So what should be the prospect out here? This is the question number one.

Salil Parekh -- Chief Executive Officer and Managing Director

So there, we have no individual guidance for digital or for the core in that sense which is -- even for Q4 or for the next financial year. But structurally, what is clear is we have been successful in driving automation and modernization well. We make sure that we are probably the most competitive large player in the market working with large player in the markets, working with large and [Inaudible] in the last fall. We continue to execute under an ongoing activity, automating bulk, modernizing for us.

If we can continue to execute on that, my view is we earn that again. And that will have its own benefits in the medium term. 

Rahul Jain -- Dolat Capital Market Private Ltd -- Analyst

Right, right. I appreciate the color. One more thing on the taxation part. Our tax rate steadily has been upwards of 27% on an average.

This looks a little higher given the kind of country that where most of our earnings belongs to. So any flavor you can share in terms of what should be the ideal tax rate on a sustainable basis and in near term?

Nilanjan Roy -- Chief Financial Officer

Yeah, so I think, our tax rate has always hovered around this 27%, 28% range. And I don't think you'll see much movement going against it because, in any case, as you know, the India-only rate, because it is India-only, plus countries which are there, that's a 25%, India-only. So I think, in the long run, you will be around this range itself. 

Rahul Jain -- Dolat Capital Market Private Ltd -- Analyst

So which region profitability is -- or tax rate are much higher than the 25% rate? Also for taking this number higher than the average for India itself? 

Nilanjan Roy -- Chief Financial Officer

Yeah. So we can't give that individually, but there are some jurisdictions, and also in some jurisdictions where those tax cannot be set off here as well. So it's a combination of both. 

Rahul Jain -- Dolat Capital Market Private Ltd -- Analyst

OK, OK. So if we are not able to set that out -- that result in double taxation, and to jurisdiction. That is also the reason. OK.

Got it. Thank you so much.

Operator

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

Jamie Friedman -- Susquehanna International Group -- Analyst

Hi. Let me echo the congratulations, it's Jamie at Susquehanna. I just had one simple question, perhaps for Nilanjan. Can you remind us what the capital allocation strategy is? I remember you had put it out, I think, at the analyst day in November 2020.

But where is share repurchase in the prioritization? Thank you.

Nilanjan Roy -- Chief Financial Officer

Yeah, so what we had announced in FY '20 basically was that we had taken our capital allocation to 85%. It was at 70%. And we said that we will pay this out over a period of five years through a combination of progressive growth-oriented dividend policy, plus either share buybacks or one of the special dividends. And in the first two years, as we announced, we have actually paid back 83% through higher -- increased normal dividends and also through this share buyback which we announced last year.

So we've already paid back 83%, and we remain quite committed to our overall 85% five-year number. 

Jamie Friedman -- Susquehanna International Group -- Analyst

Got it. Thank you so much.

Operator

Thank you. The next question is from the line of Vimal Gohil from Union AMC. Please go ahead.

Vimal Gohil -- Union Mutual Fund -- Analyst

Yeah, thank you for the opportunity, and congratulations on a great quarter. My question is on your employee costs, which partially has been addressed. But how should we think about the core employee cost growth, which comes under the cost of revenue, which has been around 4% sequentially here over the last -- over Q1 of FY '21 versus a 6% revenue growth? And this has been in light of a very sharp increase in attrition and, of course, other supply challenges and etc. So if you could just highlight, I mean, what -- how has the company sort of -- are our wage hikes in line with the industry? Or have they been much, much higher than the industry? How should we think about this historically? And if you could give some kind of an outlook over there as well.

Thanks.

Nilanjan Roy -- Chief Financial Officer

Yeah. So you have to see both employee cost and subcon together. So the cost of people is a combination of both, you can't see one in isolation. That's number one.

Number two, from an overall cost perspective, we of course are very focused on attrition and being competitive in the market, as well as being an employer of choice for many of our employees going ahead. So we look at interventions on the compensation side. Like Salil said, in Q1, Q2, we did across -- in January, we did across the board. In July, we've done across the board.

In Q3 as well, we have done very segmented and targeted on talent. And we'll continue doing that into Q4, etc., and looking at high points of attrition and doing it much more tactically to see where we are seeing demand being high in the market for those skills and target those employees, really. So I think, it is very nuanced and, like I said, a horses for courses, and we will continue doing that. 

Vimal Gohil -- Union Mutual Fund -- Analyst

Right. And sir, how should we think about -- so basically, if we were to look at your guidance versus your implied -- your guidance implies a 0% to 2% sort of revenue growth in Q4. Considering the fact that there were some furloughs in Q3, your revenue growth would be -- could be higher than what you've reported in Q3. So how should -- is your guidance conservative at this point in time? How should we think about that? 

Salil Parekh -- Chief Executive Officer and Managing Director

In terms of the guidance, it's a very strong guidance, which is 19.5% to 20%. There is no further color in saying whether it's conservative, aggressive or sort of stable. We see a very good demand outlook. We see good large deals and good growth for the year.

But the guidance is, I think, a very big move up from where we were in the last quarter. 

Vimal Gohil -- Union Mutual Fund -- Analyst

Fair enough. Thank you so much, and all the very best.

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. 

Salil Parekh -- Chief Executive Officer and Managing Director

Thank you, everyone. This is Salil, just to close from our side. First, thank you all for taking the time. We feel extremely good about the quarter, 7% growth Q on Q, 21% year on year.

Very strong digital, 42%. Very good on large deals, $2.5 billion. So overall, really excellent market demand. And we are seeing market share gains, which is a very good sign for us, primarily which are coming from a well-positioned portfolio and a good execution from all of our teams.

Our revenue guidance, of course, has gone up 19.5% to 20%. Our operating margin remains at a good level at 23.5%. And we have very good, strong trust and confidence of our clients; overall, a strong outlook; and positive about what we see in the future for our digital and cloud transformation programs. So with that, thank you all.

I wish you a Happy New Year. And look forward to catching up in April.

Sandeep Mahindroo -- Financial Controller and Head-Investor Relations

Thanks, Salil, for the closing comments, and thanks, everyone, for joining us on this call. We look forward to talking to you again during the year. Thank you. 

Operator

[Operator signoff]

Duration: 86 minutes

Call participants:

Sandeep Mahindroo -- Financial Controller and Head-Investor Relations

Salil Parekh -- Chief Executive Officer and Managing Director

Nilanjan Roy -- Chief Financial Officer

Ankur Rudra -- J.P. Morgan -- Analyst

Moshe Katri -- Wedbush Securities -- Analyst

Kumar Rakesh -- BNP Paribas -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Diviya Nagarajan -- UBS -- Analyst

Ashwin Mehta -- Ambit Private Limited -- Analyst

Sandip Agarwal -- Edelweiss Capital -- Analyst

Nitin Padmanabhan -- Investec India -- Analyst

Sandeep Shah -- Equirus Securities Private -- Analyst

Manik Taneja -- JM Financial Services Ltd -- Analyst

Rahul Jain -- Dolat Capital Market Private Ltd -- Analyst

Jamie Friedman -- Susquehanna International Group -- Analyst

Vimal Gohil -- Union Mutual Fund -- Analyst

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