Infosys Ltd (INFY) Q1 2023 Earnings Call Transcript

Infosys Ltd (INFY -2.54%)
Q1 2023 Earnings Call
Jul 25, 2022, 4:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day and welcome to Infosys Limited earnings conference call. [Operator instructions] I now hand the call [Audio gap]

Sandeep Mahindroo -- Financial Controller and Head-Investor Relations

Please note that anything which we say that refers to our outlook for the future is a forward-looking statement that 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 pass the call on to Salil.

Salil Parekh -- Chief Executive Officer and Managing Director

Thanks, Sandeep. Good morning, and good evening to everyone on the call. Thank you all for taking the time to join us. We've had an excellent start to the financial year with 5.5% sequential growth and 21.4% year-on-year growth in constant currency terms.

We continue to gain market share with our Cobalt cloud capabilities and a differentiated digital value proposition, driving a significant pipeline of opportunities for us. For example, a premiere online retailer in the U.S. leveraged Infosys Cobalt to embark on a cloud-driven transformation journey to enhance the customer experience and improve the security posture. Another example is a European manufacturer who's reimagining their digital workplace and best-of-breed network security with IP infrastructure powered by Infosys Cobalt.

There are examples like this all across the spectrum in different sectors that are driving Infosys Cobalt into the market. Clients continue to place an immense amount of trust and confidence in Infosys to help accelerate their digital transformation agenda, both on efficiency and the growth dimension of the business. The strong growth we have seen in the quarter lays a robust foundation for the year. Growth continues to remain broad-based across the segments, service lines, and geographies.

Each of our business segments grew in double digits, with several of them growing at 25% or higher. In terms of geography, the U.S. geography grew at 18.4% and Europe grew at 33.2%. This indicates a healthy demand environment that is a reflection of how our industry-leading digital capabilities are relevant for our clients.

our digital revenues were 67% of the total and grew at 37.5% in the quarter in constant currency terms. Within digital cloud, work continues to grow faster with our Cobalt cloud capabilities seeing significant traction with our clients. Overall pipeline remained strong. We do see pockets of weakness, for example, in the area of mortgages in financial services.

We keep a close watch on the evolving macro environment in terms of the changes to the pipeline. Within our pipeline. We also have focus, in addition to the growth areas in digital and cloud, to the cost areas through automation and AI. Our operating margin grew at 20%.

We have completed the majority of our compensation review for this year. The management will also provide more details on the overall margin update. Some other highlights of our results are we signed 19 deals with a large devalue of $1.69 billion. This is comprised of 50% net new work.

Our on-site mix was at 24.3%. As we build capacity for the future, our utilization was at healthy levels of 84.7%. Our free cash flow was strong at $656 million. Our quarterly attrition declined.

Historically, Q1 attrition increases at 3 to 4 points sequentially on a quarterly annualized basis. However, our attrition declined by 1 point on a sequential basis, reflecting the impact of various initiatives we have in place. We had a net headcount increase of over 21,000 employees, attracting leading talent from the market. This is a reflection of our enhanced recruitment capabilities, solid brand, and deeper penetration into various talent markets.

Our Cobalt cloud capability continues to be market-leading. We have 360 technology and domain solutions. Five of our assets have over 50 clients each. We have 150 industry focused-solutions, 20 Infosys Living Labs, 50 experimentation playgrounds, and 60,000 knowledge assets.

Our One Infosys approach is serving us well to bring the best of Infosys and service to our clients' needs. Earlier this month, we announced the acquisition of BASE life science, a Denmark-based technology and consulting firm in the life science industry. This brings to Infosys domain expertise in medical, digital marketing, clinical, and regulatory areas. With a strong growth in Q1 and a current outlook on demand, opportunity and pipeline, we increased our revenue growth guidance, which were up 13% to 15%, now to 14% to 16% for the full year, EBITDA margin guidance at 21% to 23%.

With the increased cost environment, we will be at the lower end of this margin guidance. Thank you. And with that, let me hand it over to Nilanjan for his update.

Nilanjan Roy -- Chief Financial Officer

Thanks, Salil. Good morning, everyone, and thank you for joining this call in an early Monday morning. We had a strong start to fiscal '23 with a robust year-on-year growth of 21.4% in constant currency. All our business segments and major deals recorded double-digit growth with manufacturing, communications, onshore, along with Europe region recording 25% plus growth.

Sequentially, revenue growth was 5.5%, which was led by a healthy volume growth and some RPP benefits. Digital revenues now constitute 61% of total and grew by 37.5% in constant currency. Client metrics were strong with increase in client count across various buckets compared to the previous year, number of $50 million clients increased by 10 to 69, creating the next potential [Inaudible]. Number of $100 million clients increased by four to 38.

And the number of $200 million clients has grown by six in the last one year. This reflects our ability to deepen mining across our large clients. We had another quarter of strong employee additions of over 21,000 to cater to the growth opportunities ahead. The pressure addition was particularly strong, which resulted in drop in utilization to 84.7%.

On-site effort mix inched up to 24.3%. Voluntary LTM attrition increased marginally to 28.4%. Quarterly annualized attrition declined by another 1% in Q4 levels despite Q1. We'll be seeing an uptick with the seasonality.

As announced earlier, we have given competitive salary increases for various employees on April. Given the supply tightness and high-prevailing inflation, salary increases across all geo this year are higher than historical levels. The increases vary based on job levels and performance of employees with top performers getting double-digit hikes. Salary hikes for employees is being done effective 1st of July.

Q1 margin stood at 20%, a drop of 150 basis points versus previous quarter. The major components of the sequential margin movement were as below: headwinds of 1.6% due to salary increases, 0.4% due to drop in utilization as we create capacity for future, 0.3% due to increases in subcon third-party other costs. These were offset by tailwinds of 0.5% due to increase in RTP from higher working days, a reversal of our client contractual provision in our FS segment, partially offset by discounts; 0.3% benefit from rupee depreciation benefits, partially offset by cross currency headwinds. Q1 EPS grew by 4.4% in rupee terms on a year-on-year basis.

Our balance sheet continues to be strong and debt-free. Consolidated cash and investments were $4.4 billion at the end of the quarter after returning more than $850 million to the shareholders through dividends, which has led to an increase in ROE to 31%. Free cash flow for the quarter was $656 million, which is a conversion of 95% of net profit. Yield-on cash balance remained stable at 5.3% in Q1.

DSO declined by four days sequentially to 63 DSO, including net unbilled was 82 days of increase of one day versus Q4. Coming to segmental performance. We signed 19 large deals in Q1 with a TCV of $1.69 billion. This comprises a 50% net new.

We had five large deals in retail and CPG, four in hi-tech, three each in financial services and energy utility resources and services, and two each in manufacturing and communications verticals. Region-wise, 15 were in Americas and two each in Europe and ROW. In financial services, clients have continued to focus on building customer experience, contact center transformation and virtual branches aimed at improving customer engagement. While the order pipeline remains strong across regions, we are seeing some slowness in mortgage industry and lending business due to increased interest rates.

We remain watchful of impact of emerging global developments on budgets of clients. In the retail segment, the pace of digital transformation, large-scale cost takeouts, and improving business resilience continues to be on the rise across various subsegments. Our focus on proactive engagement has a track in creating a robust pipeline. Clients are monitoring their emerging macro situation and the impact of that on their business.

In communications segments, clients are focused on rapid digitization and protecting their assets from cyber threats. We see enormous potential to partner with them, both on the business transformation agenda, as well as in the cost takeout trend. These pipelines in energy, utilities, resources, and services segment comprise of opportunities around cost takeout, vendor consolidation, digital transformation, cloud-led transformation, and asset monetization across industry sub-verticals. Manufacturing segment is seeing broad-based growth across geographies and industry sub-verticals.

The sector is seeing traction across energy, IoT, supply chain, cloud ERP, and accelerated cloud adoption. In Quarter 1, we have been ranked as leader in nine ratings in the areas of Oracle Cloud, SAP HANA, public cloud, Industry 4.0, employee experience, and automation services. In this supply constrained environment, we continue to invest in our growth momentum, which requires us to hire premium skill talent, while simultaneously investing in existing employees with competitive compensation increases across geos. Additionally, we expect normalization of costs like travel and other overheads.

We will continue to focus on various cost-optimization measures, including rationalization of subcons, flattening of the pyramid, increasing automation, reducing on-site mix, and increasing pricing. Whilst we retain our operating margin guidance of 21% to 23%, we expect to be at the bottom end of the range. Revenue guidance for the year has been revised to 14% to 16% from 13% to 15% earlier. With that, we can open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question is from the line of Surendra Goyal from Citigroup. Please go ahead.

Surendra Goyal -- Citi -- Analyst

Yeah, hi. Thanks for that. Good morning. Just a couple of questions from my side.

Possibly a clarification. Salil, I mean -- I believe you said that the contractual provision was largely offset by discounts. Could you please clarify a bit? Did you mean discounts to the same client, or discount in general? Curious, because on one hand, we're talking of a strong demand environment and potential price hikes, and, at the same time, we're also talking of discounts.

Nilanjan Roy -- Chief Financial Officer

Surendra, the comment was that it's not 0.5% increase in RPP. It's a combination of three to four elements: the higher working days, the client contractual provision reversal benefit, partially offset by discount. So, it's not a direct linkage of discounts and client contractual provisions. It's not for the same clients, but this is generic discount.

And these automatically keep on coming. But we are -- like I said, we come down less as we've started negotiating with our clients in terms of pricing. But that's a net impact of all these.

Surendra Goyal -- Citi -- Analyst

OK. Sure. And just another question on margins, down 360 year over year. Operating profit is, well, growth y-o-y is worse than historical trends, despite all the strong demand and growth we are talking about.

So, if you just think about the 360-basis-point decline, how much of that is really investment which you think can be recouped as we go forward from here?

Nilanjan Roy -- Chief Financial Officer

Yes. So, like we said -- we knew we were having some benefits in a way of the back end of COVID. Our utilizations were very high. We were really -- 88%, which we've never operated before.

You know, the benefits of travel, etc., now, we are seeing that more and more. That has been coming back. So, that's something which we were well aware of in last year. But as we see the demand volume ahead, I think we are very clear that in terms of our ability to support this demand, we certainly have to hire.

We have to pay competitively. So, we actually did actually two wage hikes in calendar year 2021. And now this year, we've already rolled out in March, yes. So, within 1.5 years, we've done three substantial CRs.

And actually, September last year, also, we did a skill base. So, we've been continuously investing behind that. And we know that to capture this demand, we have to pay for premium skills. We have to go behind volumes.

In some cases, subcons for us, you know, from an industry, I think, leading 6.5 position. We are closer to 11%. But again, these are some things we know over a period of time. We have a lot of optimization levers, right? And we don't want to leave a five-year demand on the table because of short-term cost pressures.

And these, we can, you know, optimize over this year and over the future as well. So, in that sense, we are quite confident, and that's why we have talked about -- we will be in the 21% to 23%, at the bottom end of the range. And, of course, if we have 20% today, we will see that improvement as the year progresses.

Surendra Goyal -- Citi -- Analyst

Sure. Thanks for that. I'll get back in the queue.

Operator

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

Moshe Katri -- Wedbush Securities -- Analyst

Good. Thanks. Spectacular numbers, especially in the revenue side of the business. Just a follow-up to the last kind of topic or question about margins, we're getting a lot of pushback on that.

From your perspective, you know, looking at the levers that you kind of highlighted, what do you think is the biggest potential lever here for you to be able to kind of catch up to the margin range that you mentioned? And then I have a follow up after that.

Nilanjan Roy -- Chief Financial Officer

Yes. So, Moshe, so I think, firstly, if you see our margin profile, how it has changed, right? So, what the cost has been the utilization and, in fact, higher 21,000 net adds during the quarter, which is well above our volumes. And that is to create the buffer so that when we put in fresher, we are able to train them, and then over a period of time, able to put them into production, right? So you can't get hire fresher and expect them to start contributing from day one. And we are very vigilant about that.

They go through our mandatory training and Mysore and then we put that. So, that's one big part of where we think we can start improving. As the hiring has brought up automatically, you see the stabilization of subcon costs, right. As a percentage of revenue, we are seeing this increase every quarter.

Now you see sort of flattening out. And over the future, as we got our recruitment track together and being able to hire fresher, we should see benefits coming out of that. The remit benefits will continue to happen for us. Whilst we have seen some adverse impact of the on-site movement, this is largely as travel overseas has picked up, but we think this is more of, you know, an aberration in terms of uptick because of the inherent story of -- we're taking costs out and having a more offshore mix in the entire cost optimization.

That should come into benefits, especially in this environment, where cost takeout is becoming a big theme across that line. So, we know we can have multiple areas. Pricing is another thing we've been talking about. We have seen less impact of pricing in terms of discounts, etc.

We are going back to clients in terms of COLA, in terms of when our renewals happen. Now, again, these are much more longer-term, you know, impact decision. But I think at least the conversations have started in right earnest across, you know, all the segments, and you can hear a similar commentary across. So, I think these are the areas we continue to, you know, focus on.

And that's something we've done over the years. You've seen that we continue to be very, you know, forceful in terms of our cost-efficiency, you know, exercises.

Moshe Katri -- Wedbush Securities -- Analyst

OK. And just as a follow-up. Just remind us, what's the sensitivity for margins versus utilization rates, i.e., 100 basis points expansion in utilization rates. What does it mean to margins in terms of sensitivity? Thank you.

Salil Parekh -- Chief Executive Officer and Managing Director

Thank you. Yeah. So, I think it depends on by which level with utilization. So, that's like complicated.

It's -- you know, you have a different utilization in on-site, different in off-shore. And then the impact of pressure in the pyramid in that utilization. So, it's complicated how the mix changes. Like, I just can't give you all the number of, you know, what 1% will lead to.

But to give you a sort of large impact for this quarter, I think, 40 basis points because of utilization in margins.

Moshe Katri -- Wedbush Securities -- Analyst

All right. Thanks for the color.

Operator

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

Kumar Rakesh -- Exane BNP Paribas -- Analyst

Hi. Good morning. Thank you for taking my question. My first question was calculation on the margin side.

So, at the end of the fourth quarter, and not just Infosys but across the industries, what the management committee had indicated compared to that, the margin performance appears to be a sharper decline. So, Salil, what do you think would be the reason behind that? Is it driven by higher-than-expected demand and higher use of subcontracting than what you were planning earlier? Or is it more supply side-driven that the pressure was higher than what we had planned through the quarter?

Salil Parekh -- Chief Executive Officer and Managing Director

Yeah, you talking about us in particular, or the industry?

Kumar Rakesh -- Exane BNP Paribas -- Analyst

Anything, whatever you could give us color on. Because the trend has been very similar for you and --

Nilanjan Roy -- Chief Financial Officer

I think we don't -- yes, so we don't operate in a vacuum and the industry doesn't operate in a vacuum. The attrition trends are pretty much very similar across industry. But the good news, like we said, is that attrition is coming down. Our quarter attrition figure is actually below our LTM figures.

And as Salil said, we're already 1% down. On a sequential basis, we were 5% down. In the previous quarter, and we were flat. So, I think this is more -- the reported LTM, of course, is more of a catch-up effect.

And in that sense, you will see start stabilization. The fresher will start coming in and getting terminated. So, that benefit in a way starts seeping into the cost structure, right? Because at the end of the day, if it's putting pressure, you have less attrition. The fresh hires which you have to get or lateral hires have come down.

They have bonuses. In fact that, that impact should come down. So, these are the things which will play, I know, in our favor. And like I said, you've seen these numbers of declines pretty much across industries.

But we have, I think, a very, very sharp cost optimization program in a way which will go and offset these headwinds.

Kumar Rakesh -- Exane BNP Paribas -- Analyst

Got it. So, it appears the supply side pressure was higher than what we were expecting. My second question was on the --

Nilanjan Roy -- Chief Financial Officer

I think there's no question about that in terms of -- you know, if you see our attrition and our net adds. The gross hiring has been very high. And, of course, and that tells in terms of fast action and all we have to offer. So, it is that overall industry issues led from the demand side.

Kumar Rakesh -- Exane BNP Paribas -- Analyst

Sure. Thanks. My second question was on BASE acquisition. So, we already have a pretty strong life sciences structure with more than $1 billion scale.

So, what exactly we are looking and targeting to get help from this acquisition?

Salil Parekh -- Chief Executive Officer and Managing Director

On BASE, there are multiple things. This is a business which is very high end in the life sciences area. When we launched our strategy a few weeks ago, just at the start of the quarter, we had shared also a new focus -- or expanded focus on Europe. And Denmark for us is a very strategic market.

The whole Scandinavian market is a very strategic market for us. So, that's the second area that it benefits us. And we also see clients are using the capabilities of BASE as a starting point. And then that leads to large technology transformation, digital transformation.

That helps us overall in terms of scaling up that segment. That's a segment which we feel is a strong segment for the future and where we are underweight in percentage terms. So, we want to enhance that with our deep existing capability.

Kumar Rakesh -- Exane BNP Paribas -- Analyst

Got it. Thanks a lot for that, Salil.

Operator

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

Keith Bachman -- BMO Capital Markets -- Analyst

Hi. Thank you very much. My first question is I wanted to get your views on how you think wage inflation will impact the balance of the year. and what are the -- you know, what are the tensions on that to your margin models.

So, you mentioned that attrition has, in fact, moved lower. Do you think, a, attrition continues to move lower? And how do you think wage inflation will unfold over the next, call it, three, four quarters and be a force in the gross margin equation. And then I have a follow-up.

Nilanjan Roy -- Chief Financial Officer

Yeah. So, I think like we started last year, we were very clear that we have to be competitive in the market. So, we did the first hike in January of '21, then we did the next taking July of '21. Then we did follow-up on the talent in September of '21.

And in a way, we have not waited one year. We've actually gone ahead and done the majority of our wage hikes from 1st of March -- 1st of April this year. There's a little carry-on effect in terms of the more -- we see the higher middle to senior first, which will happen in July, but not in the same margin impact of Quarter 1, which was very broad-based. But other than that, I think we think these are quite competitive.

And, of course, if you see in the mix, we also get a lot of laterals, and there's a hidden cost of hiring laterals because they come at sector. So, in a way, the compensation overall -- weighted-average compensation, in any case, is going up across. But I think overall -- I think this is a very competitive hike in terms of -- in India, it's more like high single digits. And in overseas geos, also, because of high wage inflation across, we have given very competitive hikes, something which we've not done in this kind of wage environment -- inflation environment before.

So, these are very much higher than what we do in the past. But we think this is something which will stand us in good stead in terms of attrition. And like I said, we've seen like sort of three quarters of the efficient benefits, you know, over a period of time going in.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. OK. We cover a number of software companies. And software companies have started to say they're seeing pockets of weakness with demand elongation on sales cycles.

It doesn't sound like -- I know you made one very specific industry comment, but it doesn't sound like you're seeing the same, any kind of iteration on the demand side, particularly on the negative side. But if you could just clarify. Are you seeing an elongation on the new business front and -- yes or no? And if the macro does weaken, will that, in fact, help your wage situation? And that's it for me. Thank you.

Salil Parekh -- Chief Executive Officer and Managing Director

So, thanks for that. This is Salil. Couple of points that you raise. I think what we see on the demand, the pipeline that we have today for our large deals is larger than what we had three or six months ago.

Having said that, we, of course, recognize what is going on in the global environment. And we mentioned a couple of areas. Nilanjan within retail. He also mentioned our share within financial services, mortgages.

So, we see pockets where we see some impact. On the overall discussions, we see a little bit where it's doing in the decision-making. However, the pipeline remains strong for us today. We've also got two types of the ones which are on digital transformation or cloud, which are growth-orientated for clients driving to what they want to do with their customers or in their supply chain, how they want to make an impact.

And the second is on costs. We have a very strong play on cost and efficiency through our automation work, through artificial intelligence work, where we can really impact the cost base in the landscape of our clients. So, those areas which we are already very active with within this environment. And given our positioning, we feel good that those will start to come into play as and when the environment changes, but today, which is obviously in the demand situation.

Now, your other question was, will that have a change on the gauge, or if the macro evolves? We don't have a clear view of where that will go because it's a function of, you know, how the macro evolves and what happens. Of course, we are seeing attrition starting to come off a little bit. That we clearly have a positive impact for us with respect to competition. So, the timeline is not clear.

It depends on how the macro evolves.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. Great. Many thanks.

Operator

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

Nitin Padmanabhan -- Investec -- Analyst

Hi. Good morning. Thanks for the opportunity. I have two questions.

So, one is from a margin perspective, whatever we saw as one-offs in the previous quarter, which included Visa and these contract provisions. Both of them have been sort of offset in this quarter. Is that a fair understanding? That's the first. The second is in terms of salary increases, is it only for the associate level this quarter? And if so, then the question is that we have 145,000 associates, general team, and below, and some 130,000 people in the mid-level.

And general understanding is mid-level, obviously, the -- as a percentage of the employee comp cost, it should be higher. So, the thought reservoir shouldn't be your margin. It wouldn't be higher next quarter. If you could just help with that thought process, that would be very helpful.

Those are the two questions. Thank you.

Nilanjan Roy -- Chief Financial Officer

As I said, in the margin walk, we had a benefit of 50 bps from -- in RPP, which is a combination of work with clients' contracts and provision reversals, partially offset by discounts. So, we've seen a benefit there. There's no, in a way, what you said that has been eroded. We have got the benefit of client contraction provisions clearly.

The other one on Visa travel, I think, they were largely, you know, offset against each other. And what is the other question? On the outlook on wages. Like I said, we've done it for most of our employees, right? It is up to mid-level. And more at the senior level is what we want to roll out in July.

And that impact will be far less than 1.6%, which we've done, which is a much more broad-based across.

Nitin Padmanabhan -- Investec -- Analyst

Sure. So, both associates and mid-level happened this quarter itself. It's not only associates? Not --

Nilanjan Roy -- Chief Financial Officer

No, no, no. Associate and mid-level, correct.

Nitin Padmanabhan -- Investec -- Analyst

OK. OK. That's very helpful. Thank you so much.

Operator

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

Bryan Bergin -- Cowen and Company -- Analyst

Hi. Thanks for taking my question. I wanted to just dig in on the commentary around pockets of weakness. So, I heard you mention mortgages.

You mentioned, I guess, the subcomponent of retail. Can you just give us a sense, maybe quantify what mix of your business is actually seeing some slowing decision-making? You know, is it 5%? Is it 10%? Is it less? Anything could just to help frame or quantify areas that are seeing pockets of weakness.

Salil Parekh -- Chief Executive Officer and Managing Director

So, thanks for your question. This is Salil. We don't quantify typically what part of our financial services, mortgages, or the other areas which are impacted. We're now seeing pockets.

This is not across our whole business. And the way I would sort of look at it is, with all of that, given our pipeline, we've increased our revenue guidance. So, the majority of our business is still seeing good demand. It's really pockets without quantifying.

That's how I would give a context to it.

Bryan Bergin -- Cowen and Company -- Analyst

OK. And then just a follow-up on margin. You gave sequential changes. Can you give us what the year-on-year changes in operating margin in the different categories?

Nilanjan Roy -- Chief Financial Officer

So, largely, we know it was the comps-related hike I said earlier, about 350 basis points. That was in the biggest ones. And this was offset by some rupee benefits, which was also a benefit, but there was cost currency as well, which offset probably half of that. And then we got some benefits of cost optimization because of net on lower utilization.

So, these are the broad things, but the biggest one was comp which was about 370 bps.

Bryan Bergin -- Cowen and Company -- Analyst

All right. Thank you.

Operator

Our next question is from the line of Sudheer Guntupalli from Kotak Mahindra Asset Management. Please go ahead.

Sudheer Guntupalli -- Kotak Mahindra Asset Management -- Analyst

Yeah. Good morning, gentlemen. Thanks for giving me this opportunity. I have just one question on margins.

Ideally, the strong growth at the headline level should have translated into some operating leverage, but that doesn't seem to be happening. And, Nilanjan, we seem to be of the view we'll chase growth for now and focus on margin optimization at a later date. What is the risk to that hypothesis? Because this growth margin paradox seemed to be a mere reflection of what is happening in U.S. and U.K.

now, a very tight job market, very high nominal growth, but very little benefit trickling down to the bottom-line level. So, sooner or later, this nominal growth rates may cool off and on-site job markets and some supply costs may auto-recalibrate. But back in India, job market may not be as much of a free market as it is in U.K. and U.S.

There may be some sticky elements, both at headcount and wage level translating into negative operating leverage as demand moderates. So, what is the risk that margins will remain structurally lower than even the pre-COVID levels going ahead? Because demand tends to be more cyclical while some of the supply costs tend to be more sticky.

Nilanjan Roy -- Chief Financial Officer

So, a couple of things. One is that many of these cost increases can be passed on the client on day one, right? So if I have to give a wage hike on all my existing base, right, they will come up for renewals, right? That's the time when you have a base discussion. When we are doing new deals, automatically, we will build it and the industry, in a way, will build it into their wage profile. So, we think will automatically be flow back.

There's no free lunch for anybody, right? So, that's one thing which will happen over a period of time. But that's more of a generic point I'm making. But in terms of subcon, right, we've operated at 6%, 6.5% of subcon. Today, we're sitting at, what, 11.1%, right? There's no reason for us to be at these levels because we know what wage market, the overall demand environment, our recruiting picks up.

We can replace these account with our own headcount, put more pressure into projects. And this is something we've been doing very well in the past as well. So, I think these levers are well-known for us. We know how utilization works.

We know how pyramid was. So, we are quite confident in the go-forward model of taking out cost from our structure.

Sudheer Guntupalli -- Kotak Mahindra Asset Management -- Analyst

Just one more question, if I may. So, when we say the pipeline is larger now, just curious if the pipeline is getting bigger and bigger because some of the decision-making is getting slower. Is there any correlation related between the two?

Salil Parekh -- Chief Executive Officer and Managing Director

Sudheer, this is Salil. The pipeline, what we are seeing is there is appetite and we go by different industries for digital transformation programs for large cloud programs, for programs, which start to relate to cost and efficiency. That's what is in the pipeline. It's not a function of the time line, which the delay that you referenced, which is causing an increase.

It is where we see traction with more and more client discussions as of today that we see. Now, we will see how that evolves, but that's the outlook we have today.

Sudheer Guntupalli -- Kotak Mahindra Asset Management -- Analyst

Thanks, Salil. Thanks, Nilanjan. That's it for me.

Operator

Thank you. Our next question is from the line of Ankur Rudra from J.P. Morgan. Please go ahead.

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

Thank you for taking my question. First question is what the level of conservatism or realism infused into both the revenue and the margin guide this time? Part of that is on the revenue guide, given the potential macro headwinds ahead of us and the ask rate from the second half of this year. And similarly, on margins, we still have another round of wage hikes, which could impact margins by maybe as much as 100 basis points, if I look at the wage hike impact so far and a similar ratio between the first and the second rounds in the previous years, and also keeping up travel and facility costs. Thank you.

Salil Parekh -- Chief Executive Officer and Managing Director

Hi, Ankur. Thanks for the question. This is Salil. Let me start off and then Nilanjan will have a few points to add.

On the guidance for growth, as we've shared in the past, the approach we take is we see how things are as we look at the financial year today. What we saw is in Q1, we had extremely strong revenue growth, 5.5%. We also had underlying volume growth that Nilanjan referenced, which was very strong. When we see the outlook where we have clarity looking ahead for some period of time, and then a set of estimates that we have for the rest of the financial year, and also looking at how typically H2 works versus H1 and then putting in some views on where the end of the year could be, based on that, we felt comfortable to increase the revenue growth guidance.

Whether it's conservative or realistic, that is the approach we take to make sure that we then share what we think the revenue is going to look like for the year. On the margin, I'll start off and then Nilanjan will talk a little bit about the wage component and what we've done. Overall, on the margin, we've made sure that we work to get all of the levers in place. So, the approach to driving cost efficiency is in place.

Several levers that Nilanjan mentioned, one of the bigger ones we've got the bulk, the vast majority of our compensation increase already done in Q1. So, yes, there's a small component. But it's not really a huge component that will come up. And then we see steadily other areas which will help us.

There are areas where we can focus on how the subcontracting works. There are areas where we can focus on discussions with clients, the wage increases and COLA. There are areas where we're doing work, which is driving significant impact from clients. So, we think there are a set of those levers that can help us through the margin discussion that will be focused on this financial year.

Our approach very much is to make sure that we remain a high-margin business. And that's the underlying theme that we are working with. Given where we are, given the inflation around the world, we saw it was clear to make sure that we communicated that in the way we see the market. Anything else if you want to add?

Nilanjan Roy -- Chief Financial Officer

No, no. That's good.

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

OK. Just a quick follow-up, if I may, on margins. Nilanjan, are there any one-offs in the margin this time? Asked another way, what would be the pro forma margins if the provision reversal was not to happen? And related to that, can you say that 20% in Q1 should be the bottom of margins going forward so that we can get -- you can get back to 21% for the year realistically?

Nilanjan Roy -- Chief Financial Officer

Yes. So, I think we've mentioned the margin walk at the beginning of the call. So, we had 20 and we are, you know, guiding at the bottom end of '21. So, mathematically, it says that this improves going forward.

So, absolutely. In '23, we will see the improvement quarter-on-quarter.

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

OK. Thank you.

Operator

Our next question is from the line of Ravi Menon from Macquarie. Please go ahead.

Ravi Menon -- Macquarie Group -- Analyst

Thank you. Gentlemen, congratulations on a good set of numbers. Just wanted your thoughts on how broad-based in North America, you not seeing, I think, such progress sustained for a long time. And though you call out some headwinds in BFSI, even that still added quite a bit of revenue.

So, if you could give us some color about how sustained the parameters there. And secondly, you know, the pyramid, we've obviously seen a large impact of freshers last year. So, I had hoped that some of that would have come into production and, you know, have helped us offset the margin headwinds through this quarter. But it looks like, given the current utilization as well, it doesn't look like much of that has happened.

So, if you could give some color on that.

Salil Parekh -- Chief Executive Officer and Managing Director

Hi, Ravi. This is Salil. I didn't catch the first part of the question. I think it was about demand, but maybe you can just say the first part.

Ravi Menon -- Macquarie Group -- Analyst

Yeah. It was around the demand, how broad -- you know, we've seen broad-based revenue addition across verticals in North America, and, you know, if you're seeing the pipeline also along similar lines? Or are there any specific verticals where you see some softness starting to come in?

Salil Parekh -- Chief Executive Officer and Managing Director

Yeah. So, the softness, we are -- as we referenced, we see some pockets of softness within our overall business. That's why we want to be very clear that, that is something visible. A couple of examples you shared, financial services and retail.

But there are areas where we see that weakness. However, once we say that, we also have a view and we see it in our pipeline. The overall pipeline is stronger. So, there are areas where we see some good traction as well.

And it's a mix of the growth and the cost opportunities within our pipeline. And I think the second one was about the pyramid, I think.

Ravi Menon -- Macquarie Group -- Analyst

Yes.

Nilanjan Roy -- Chief Financial Officer

Yes. We've hired a lot of freshers last year, and many of them also have gone into, you know, training pipeline because, as we had -- the previous year, there was something really in the pipeline in terms of hiring. So, in fact, if you see our utilization, there's a 2% gap between the excluding trainees and including trainee numbers on a year-on-year basis as well. We continue to deploy them into projects.

And like I said, you can't overnight. In all projects, put freshers in, and that's why it's important to build the pipeline in advance, make them go through the trainings or enter them into production bench and then move them into projects as well. So, that benefit will come in, and we are seeing that slowly coming in. But it's important to invest ahead, right? If you just have just in time, it'd be probably, you know, sub-optimizing in terms of how fast you can deploy.

So, that's why we have made these investments because we know it will take time for these freshers to go in, but it's important to make that investment ahead.

Ravi Menon -- Macquarie Group -- Analyst

Thanks, gentlemen. One follow-up of this last quarter's contractual revenue. So, did you recognize all of that this quarter? Or is there still something pending?

Nilanjan Roy -- Chief Financial Officer

Yeah, it was all recognized this quarter.

Ravi Menon -- Macquarie Group -- Analyst

Thank you. Best of luck.

Operator

Our next question is from the line of Pankaj Kapoor from CLSA. Please go ahead.

Pankaj Kapoor -- CLSA -- Analyst

Salil, can you give some color on the overall order book since the reported TCV [Inaudible]? That covers only $50 million plus deal and may not really be representative. So, any quantitative or qualitative comment on the scale and how the overall order book has grown? That will be helpful.

Salil Parekh -- Chief Executive Officer and Managing Director

Thanks. Thanks for the question, Pankaj. As you know, we share the large deals win number. We don't publish the overall deal win.

Having said that, the main sort of context I would put is the increase in the growth guidance that we provided. That factors in, in that sense, all of the inputs that you may be looking for, which then comes from essentially a very strong Q1 execution, the 5.5%, 21% growth. And then a view that we have on what we see in the coming quarters, and then an overall view of how we look at H1, H2 in our mix within the company. That is sort of broadly how we looked at it.

On the large deals, we shared this in the past. Typically, this is a number which is a little bit more volatile because we only report deals which are larger than 50 million in our large deals. And so, that's really the way we look at it.

Pankaj Kapoor -- CLSA -- Analyst

Fair enough. My second question is on the profitability in the manufacturing vertical, where the margins have been coming down. And in fact, the last three quarters, probably, they have halved, despite a very strong revenue growth. I understand this could be because of a very large deal, which is still ramping up there.

Can you give us a sense how the profitability curve in this vertical put shape over the next two, three quarters? What I'm trying to understand is that has it bottomed out now? Or you think that this would potentially go down further?

Nilanjan Roy -- Chief Financial Officer

Yeah, So, I think without specifically commenting, I think, you know, on any particular deal. I think, firstly, there is -- we've seen the revenue growth, which has been quite spectacular in this segment. This has been led by large deals. And as we talked about a large deal approach from day one, a lot of clients would like to see savings, but we are very clear that over a period of time, that we have a lot of cost optimization because on day one you can start -- not on the cost structure, right, whereas clients pay half of the savings.

But we know over a period of time the levers which we continue to deploy on all these, you know, large deals. And if I go back to the last three years, you know, and four years, in fact, when the large deal sort of strategy started, we've actually seen an increase in margins over that. So, there's no historical correlation in terms of saying that large deals are dilutive. Because we continue working on taking out cost to the system.

And we have factored into our entire, you know, bid progress. We look at, you know, how we're going to optimize on-site offshore. Many of these projects require dramatic automation. We can inject that through all our services, which we are providing.

We know how the pyramid works. So, these are things which we know, you know, over the lifetime of these large deals, and that's something, you know, we can deploy. So, that's something, you know, without getting into specifically manufacturing, what we do well.

Pankaj Kapoor -- CLSA -- Analyst

OK. Thank you, and wish you all the best.

Operator

Thank you. Our next question is from the line of Gaurav Rateria from Morgan Stanley. Please go ahead.

Gaurav Rateria -- Morgan Stanley -- Analyst

Hi. Good morning. Thank you for taking my question. So, firstly, is there any difference in the client decision-making behavior in U.S.

versus European signs. And the reason is that I'm asking is U.S. is seeing a fair bit of broad-based growth across segments. But when we look at Europe, there is a weakness, specifically in retail and communication vertical, whereas the other two verticals energy side, hi-tech has grown very, very well.

So, just trying to understand, are there any client-specific pockets, especially in Europe, where you kind of see decision-making behavior has changed compared to the U.S. market?

Salil Parekh -- Chief Executive Officer and Managing Director

Thanks for that question. Today, we are not seeing that, which is more geography-based, as you are describing. We see some which is more globally industry-based. And our client base, as you know well, is mainly U.S., Europe, and Australia.

So, not so much color, which is more geography-related.

Gaurav Rateria -- Morgan Stanley -- Analyst

OK. Second question on margins, your margin outlook at the lower end, you explained very well the supply side and cost-related factors, which has led to this. But is there also an element of expectation of pricing increase that has been tapered down, which has led you to now take the margin outlook to the lower end? And is it fair to say that with all the cost levers that you have in place, the exit margin should be better than the lower end of the guidance? Thank you.

Nilanjan Roy -- Chief Financial Officer

Yeah. So, I think, when we do our sort of margin, you know, forecast, there's a combination of factors we look at. And that equation keeps on changing. And it's so dynamic, you know, what happened in the previous quarter, what do we see as outlook, what's happened on subcon, wage inflation.

So, that mix continues to change and evolve. Sometimes, we have to push harder on some pages in terms of accelerating some programs, but -- and going back to the whole, you know, what we have today at '20 and we are saying when we're at the bottom end of '21, I think that should give you a good sense of the margin trajectory for the rest of the year.

Gaurav Rateria -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. Our next question is from the line of Ritesh Rathod from Nippon India. Please go ahead.

Ritesh Rathod -- Nippon India -- Analyst

Yeah, hi. Just on this margin, within a quarter, you have to lower your guidance on the margin side. So, this is despite rupee depreciation benefit, despite attrition coming down in the last two quarters. So, what has surprised internally in your expectations that you have to bring it down to the lower end?

Nilanjan Roy -- Chief Financial Officer

Yeah. So, I think like I just mentioned, this is a very dynamic and moving, you know, [Inaudible] forecast completely what is the impact of attrition, how much wage hike will come in for new hires. So, it's very dynamic how does pricing play out. So, in that sense, this is a, you know, very fluid situation.

But the '21 to '23, we said we are within that but, of course, at the bottom end of it. And we remain committed from where we are today at '20 to do all our various cost optimization, factoring the cost impacts of what we see. In terms of wage inflation, there could be potential benefits of the rupee, etc. So, it's a combination of all this into their forecast.

Ritesh Rathod -- Nippon India -- Analyst

And what would have been a bigger surprise element? Would it be the wage? Or would it be the pricing benefit not coming through? Any one highlight compared to what you expected in the start of the year?

Nilanjan Roy -- Chief Financial Officer

It's a combination of various things. And I won't say surprised. I think, like I said, it's a fluid situation. And we can remain agile.

That's more important rather than anything else.

Ritesh Rathod -- Nippon India -- Analyst

And coming to pockets of weakness, which is pointed out retail, mortgage, can you give some color? Are clients taking -- or the decision-making -- are the new deals not getting converted? Or are the existing deals which have been won, they are not getting ramped up? What's the exact sense on the weakness over there?

Salil Parekh -- Chief Executive Officer and Managing Director

So, there, within the areas of the pockets that we described, where we see a slowing. For example, if you look at the mortgage situation, the volume there in the market, meaning the client volume at the macro level, has gone down in the Europe and U.S. market. So, our work there is proportionally reduced.

But the overall point, which I shared earlier, we see some slowing in decision-making. But nonetheless, the pipeline remains today in a good position, and that allows us to increase the guidance.

Ritesh Rathod -- Nippon India -- Analyst

And maybe last one on your deal wins. On LTM basis, your deal wins are down sharply, if you see large trailing four quarters versus the previous four quarters. And even if I adjust the base because of the high-value deals which you won in a couple of quarters, four quarters back, you're still down minimum by 15%. What -- how do you connect those two dots that your LTM-basis deal wins are down, but your deal pipeline is all-time high? Are the deal conversion ratios dropping than what it was historical?

Salil Parekh -- Chief Executive Officer and Managing Director

There, on the large deals, we typically -- we always shared, we've seen some volatility because these are deals which are larger -- the ones we share in this number, which are larger than $50 million in value. We do see the pipeline being larger than where it was. And what we referenced in some areas a slowing of it. But we don't see any change in the other parameters on the pipeline.

Ritesh Rathod -- Nippon India -- Analyst

OK. OK. Wish you good luck.

Operator

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

Manik Taneja -- JM Financial Services -- Analyst

Hi. Thank you for the opportunity. And sorry for harping on the margin question once again. I just wanted to understand how should we be thinking about the segmental -- or the improvement in segmental margins in the manufacturing vertical given the sharp drop that we've seen over the last three quarters.

And how does that feel in terms of the overall margin outlook. Thank you.

Nilanjan Roy -- Chief Financial Officer

Yeah. Like I -- somebody else has asked a similar question. And like without going into any specifics, we have seen that growth coming out of large deals in manufacturing. And like I said, as we look at the tenure of these large deals, in some cases, they start off with lower than portfolio margins because clients may ask for savings upfront.

But we have a very -- started plan in terms of quarter on quarter what we need to do to bring back profitability. Because from day one clients come to us because they know we can optimize their cost structure. So, that's something which is definitely what we've been doing since we started the large deal strategy, right? And we've seen margin improvement over that period. So, I think we're quite, you know, confident of the future profile of these businesses.

Manik Taneja -- JM Financial Services -- Analyst

Sure. Thank you.

Operator

Thank you. Our next question is from the line of Apurva Prasad from HDFC Securities. Please go ahead.

Apurva Prasad -- HDFC Securities -- Analyst

Yeah. Thanks for taking my question. Salil, this is on mega deals. While the industry frequency tends to be low, and it's been a while for Infosys, it'd be good to know your comments on mega deals from a pipeline perspective.

And secondly, on pricing, how is the ability to get price increase versus last quarter? Do you see any changes to that?

Salil Parekh -- Chief Executive Officer and Managing Director

On the mega deals, I think -- again, we don't share anything specific in terms of what we publish. The color from our side is, we have mega deals in our pipeline, if that gives you a context. On the pricing, we've seen pricing currently holding in our deal values for this -- for Q1. My sense is we have seen examples that Nilanjan was sharing earlier where we are working -- we have worked with clients to demonstrate to them the impact of compensation increases, and that has translated to COLA price benefits.

We've had examples where we've had increases which are related from more of the digital high-value work that we are driving for clients. We now have to make sure we take that across our whole portfolio and see the benefit coming into our business. Typically, the salary increase happens, you know, at a periodic time. And these things where we've not seen a high inflation environment like this for over 40 years in the Western markets.

That takes longer time. And that's what, as Nilanjan said, is part of what we've put in place to support our margin as we go ahead there.

Apurva Prasad -- HDFC Securities -- Analyst

Thank you for that.

Operator

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

Salil Parekh -- Chief Executive Officer and Managing Director

So, thank you, everyone. This is Salil. Thanks again for joining for this call. I just want to summarize with a few points.

First, we've had industry-leading growth in Q1, 5.5% quarterly, 21% year on year. We clearly see tremendous market share gain, driven primarily by the strength of our digital and the cloud Cobalt capability set that is resonating with our clients. We highlighted there are pockets of weakness, and we are aware of the environment around us. We see in our pipeline, both growth opportunities in digital cloud and cost opportunities in automation.

With all of that, we increased the growth guidance for the full year. We are now seeing attrition coming down on a quarterly basis. We see many of the initiatives we put in place starting to create some impact. We have levers for the margin, several that Nilanjan shared.

Large programs will transition to a steady state, COLA, because of increases in compensation costs to pricing, pyramid adjustments as we have college hires driving the production environment, subcontractor usage, and then several others on the cost side. Given all of that, we feel we are really well-positioned to work with clients on their growth and cost opportunities and have a margin profile that is something that sustains the high-margin approach of the company. So, we are looking forward to this year with strength and optimism. And once again, thank you, all, for joining us and catch up in the next quarter.

Thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Sandeep Mahindroo -- Financial Controller and Head-Investor Relations

Salil Parekh -- Chief Executive Officer and Managing Director

Nilanjan Roy -- Chief Financial Officer

Surendra Goyal -- Citi -- Analyst

Moshe Katri -- Wedbush Securities -- Analyst

Kumar Rakesh -- Exane BNP Paribas -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Nitin Padmanabhan -- Investec -- Analyst

Bryan Bergin -- Cowen and Company -- Analyst

Sudheer Guntupalli -- Kotak Mahindra Asset Management -- Analyst

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

Ravi Menon -- Macquarie Group -- Analyst

Pankaj Kapoor -- CLSA -- Analyst

Gaurav Rateria -- Morgan Stanley -- Analyst

Ritesh Rathod -- Nippon India -- Analyst

Manik Taneja -- JM Financial Services -- Analyst

Apurva Prasad -- HDFC Securities -- Analyst

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