Infosys Ltd (INFY) Q3 FY23 Earnings Concall Transcript

Infosys Ltd  (NSE:INFY) Q3 FY23 Earnings Concall dated Jan. 12, 2023

Corporate Participants:

Sandeep Mahindroo — Financial Controller and Head-Investor Relations

Salil Parekh — Chief Executive Officer and Managing Director

Nilanjan Roy — Chief Financial Officer

Analysts:

Nitin Padmanabhan — Investec — Analyst

Bryan Bergin — Cowen — Analyst

Apurva Prasad — HDFC Securities — Analyst

Mukul Garg — Motilal Oswal Financial Services — Analyst

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Moshe Katri — Wedbush Securities — Analyst

Pankaj Kapoor — CLSA — Analyst

Ankur Rudra — J.P. Morgan — Analyst

Vibhor Singhal — Nuvama Equities — Analyst

Sameer Dosani — ICICI Prudential Asset Management — Analyst

Rahul Jain — Dolat Capital — Analyst

Girish Pai — Nirmal Bang Equities — Analyst

Presentation:

Operator

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

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 and hello, everyone, and welcome to Infosys earnings calls to discuss Q3 FY ’23 financial results. Let me start by wishing everyone a very happy new year. Joining us today on this call is CEO and MD, Mr. Salil Parekh; CFO, Mr. Nilanjan Roy, and 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, subsequent to which, we’ll open up the call for questions.

Kindly note that anything which we say that refer to our future outlook is a forward-looking statement that must read in conjunction with the risks that the company faces. A full statement and explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov.

I’d now like to pass it on to Salil.

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Sandeep. Good evening, and good morning to everyone on the call. Thank you for joining us. We are delighted to share with you that our Q3 performance was strong with year-on year growth of 13.7% and quarter-on-quarter growth of 2.4%. This in a seasonally weak quarter for us and amid a challenging global economy. We continue to gain market-share. Growth in Q3 was broad-based with most industries and geographies growing in double-digits in constant currency. Growth in constant currency for nine months of FY ’23 was 17.8% compared to the same period of FY ’22. our large deal value was $3.3 billion, the highest in eight quarters. With 32 large deals, this is the largest number of large deals in our history. 36% of this is net new.

Our pipeline of large deals remain strong. Our digital revenues grew at 22% in the quarter at constant currency, and are now close to 63% of our overall revenue. Our core services revenue grew at 2.4%. We are seeing growth both areas of our business, digital and core services. This is a testament to our industry-leading digital capabilities, including our Cobalt cloud capability and industry-leading automation capabilities, both of which are resonating with our clients. Our large deals pipeline is seeing increased traction for automation and cost efficiency programs. Our results reflect our deep-rooted client relationships, coupled with client-centric strategy, differentiated digital and cloud capabilities, strengthen automation and the ability to pivot our business rapidly to changing client needs.

Our cloud revenues continued to have healthy growth this quarter. Our clients are focused on accelerating the digital and cloud transformation both to grow and to become more operationally efficient. They trust us to partner with them through the complexities of managing this change because of our differentiated capabilities. Our industry-leading cloud offering, Cobalt is playing a key role and helping them navigate the digital transformation. Two examples of this. Cobalt is helping accelerate business growth and resilience for a large telco, making the decision-making more data-driven. We’re supporting a leading aerospace company by automation of their customer experience area, leveraging a modernized technology infrastructure driving material cost efficiency.

Strong growth of the company by stable operating margin at 21.5%. This was driven by healthy revenue growth and cost optimization benefits. Our operating margins for the first nine months of FY ’23 are at 21% in-line with our margin guidance. Our voluntary quarterly annualized attrition continues to decline steadily, it reduced by 6 percentage points sequentially to well below 20% for this quarter. We are encouraged by the immense confidence and trust our clients have in us. The signs around us around the slowing global economy, are visible. Some areas such as mortgages and investment banking and financial services industry, telco, Hi-Tech and Retail are more impacted and that is leading to delays in decision-making and uncertainty in spending in these areas.

We are confident that the strength of our digital and cloud capabilities and our automation capabilities will continue to position us well in the market. We are keeping a close watch on the global economy. Driven by our growth of 17.8% in constant-currency for the first nine months of FY ’23 and strong large deal value for Q3, we are increasing our revenue growth guidance, which was at 15% to 16% earlier to 16% to 16.5%, despite the changing global economic conditions. We are retaining our operating margin guidance for FY ’23 at 21% to 22%. We anticipate to be at the lower end of this range.

Thank you. And with that, let me request Nilanjan to share other updates.

Nilanjan Roy — Chief Financial Officer

Thanks, Salil. Good evening, everyone, and thank you for joining this call. Let me start by wishing everyone a very happy and safe 2023. Q3 was another quarter of resilient performance. Our revenue grew by 13.7% year-on-year and 2.4% sequentially in constant currency terms, despite seasonal weakness. Most of our business segments and GOs grew in double digits year-on-year in constant currency.

Specifically, manufacturing grew by 36.8%, URS by 25.9% and year it grew by 25.3%. Digital revenues constitute 62.9% of total revenues and grew by 21.7% year-on-year in constant currency. Core revenue saw another quarter of growth, reflecting the accelerated client focus on cost takeout. Client metrics continue to remain strong with year-on-year increases in client counts across revenue buckets, number of 50 million clients increased by 15% to 79%, number of 200 million clients increased by 5%, while number of 300 million clients increased by 3% over the same quarter last year, reflecting our strong ability to mine top line.

During the quarter, we added 134 new clients. Utilization, excluding premiums reduced to 81.7%, reflecting seasonality and employees joining the bench, post completion of their training, on-site asset mix remained stable at 24.5%.

Quarterly annualized attrition continued to turn downward and reduced further down 6% during the quarter. This is the lowest quarterly annualized attrition in the past seven quarters. Consequently, LTM accretion reduced to 24.3% as compared to 27.1% in Q2. We expect attrition to reduce further in the near term.

Revenue growth was 17.8% in constant currency, [Technical Issues] nine months FY ’23. Operating margin for the same period was 21%, in line with the lower end of our full year guidance I called out earlier. Q3 operating margin remained steady at 21.5%. The major component of Q-on-Q margin movement as follows. There were tailwinds of approximately 40 basis points due to benefits from rupee depreciation and cross currency, offset by lower benefits from revenue hedging, 70 basis points from lower cost — from cost optimization, including your subcons. This was offset by headwinds of 30 basis points from higher SG&A and the balance 80 basis points due to seasonal weakness in operating parameters, higher third-party costs, furloughs, et cetera.

Q3 EPS grew by 13.4% in rupee terms on a year-on-year basis. DSO increased by 3 days sequentially to 68, reflecting higher billings during the quarter. Our balance sheet continues to remain strong and debt free. ROE increased by 2.2% year-on-year to 32.6%. Free cash flow for the quarter was $576 million, a conversion of 72% of net profit. However, YTD FCF was $1.8 billion, which is implying a conversion of 81% of net profit. Yield on cash balances increased to 6.3% in Q3.

Q3 marked the 30th consecutive quarter of delivering positive forex income despite the volatile currency environment.

Consolidated cash and investments declined from $4.79 billion last quarter to $3.91 billion consequent to $1.32 billion we returned to investors towards internal dividend and buyback. We initiated the buyback on December 7 and till date have bought back 31.3 million shares worth INR4790 crores of 51.5% of the total optimization of INR9,300 crores at an average price of approximately INR15.31 per share compared to the maximum buyback price of INR18.50 per share.

Coming to segment performance. We signed 32 large deals in Q3, which is the highest ever, TCV was $3.3 billion, the highest in the last 8 quarters with 36% net new. Seven large deals were in retail, 6 each in financial services and communications, 5 each in EURS and manufacturing, 2 in Life Sciences and 1 in high tech. Region-wise, they subscript by 25 in the Americas, 5 in Europe and 2 in the rest of the world. Growth in financial services was impacted due to a higher than nominal furloughs and some specific project closures. Deal pipelines continue to be strong and oriented towards cost takeout and take off transformation. Our competitive position in the industry has demonstrated the past years remained very strong.

Retailers are seeing uncertainty on consumer spending as a result of high inflation, high interest rates and softer economy. However, the same time direct-to-consumer and digital e-commerce are opening up many new opportunities on the back of our growing presence in leading e-commerce platform and are also our very own Infosys Equinox. We had healthy deal flow in the communications segment, along with continued steady pipeline. However, cost pressures and economic concerns continue on the client side impacting discretionary budget. Energy Utility Resources Services segment reported strong growth along with healthy level of large deal wins during the quarter.

The deal pipeline is strong and on increasing trend, versus the previous quarters, giving medium-term growth visibility. Manufacturing segment continues to be robust, supported by healthy pipeline of deals in both traditional and new technology areas. We are helping clients across engineering, IoT, Supply Chain, Cloud ERP and digital transformation, including helping clients accelerate their journey to the cloud. We continue to see caution around budgets and spending for consumers in the Hi-Tech segment especially around discretionary spend areas.

For digital service capabilities in quarter three, we have been ranked as leader in 7 rating for our cloud services, digital engineering services and sales force implementation services. We have also been positioned as a major player in 7 rating for IoT and engineering, security and automation services. We believe our structural levers for medium to long term growth of industry remain intact and Infosys is well-positioned to support its customers in their transformational journey. With strong revenue performance in the first nine months of the year, the revenue guidance for FY ’23 has changed to 16% to 16.5%, operating margin guidance band remains at 21% to 22% for the year. And as mentioned previously, we expect to be at the lower-end of the range.

With that, we can open the call for questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions]. The first question is from the line of Moshe Katri from Wedbush Securities. Please go ahead. It looks like Mr. Katri’s line has dropped. And meanwhile, we’ll move to our next question, that’s from the line of Nitin Padmanabhan from Investec. Please go ahead.

Nitin Padmanabhan — Investec — Analyst

Yes, hi, good evening. And thank you for the opportunity. My question was around the increase in cost of software packages, that’s up by almost $69 million sequentially. How should we think of this cost? Do you think it will — this incremental $69 million will be sticky number out there? Or do you think it’s sort of represent the headwinds on a going — it sort of comes off going forward? And is this sort of a pass-through in nature? That’s the second sort of clarification on the thinking. Thank you.

Nilanjan Roy — Chief Financial Officer

Let’s say, before, I think these — the $69 million is a combination of software other deals which we do which have — that services et cetera, it could be infrastructure. So these are part of our integrated services offering. Right. So these come with both manpower component and sometimes, they also come with an attachment of these services. So that’s the way we do it. That’s an integral part of our service offering and I think looking at, we’ll have to see where we end up the quarter four. But I think this is part of our overall — our figure will be actually giving us traction in the market in the new parts service lines.

Nitin Padmanabhan — Investec — Analyst

Sure. So it is a pass-through in nature, in a way. Is that correct? And basically at least earlier in the past you had suggested that the new level would sort of sustain. So in the new operating model, this is sort of a sticky thing that continues. That said, longer-term?

Nilanjan Roy — Chief Financial Officer

I mean stated offering, like I said, this is integrated with our services offerings. So they are not just standalone deals we do, they are coming with the service element as well, right. So that’s the way we have to look at these deals.

Nitin Padmanabhan — Investec — Analyst

Sure, fair enough. Thank you so much and all the best.

Operator

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

Bryan Bergin — Cowen — Analyst

Hi, good evening. Thank you. I wanted to just clarify some comments around demand. I’m curious if you would say there’s a material change in the way that clients are behaving now versus three months ago when you reported 2Q. Because the areas you’re citing weakness, I think were the same ones the pockets of weakness that you talk about. And I’m just trying to understand if you think there has been a real change to spending and contracting there are more broadly the same.

Salil Parekh — Chief Executive Officer and Managing Director

Hi, thanks for the question. This is Salil. What we are seeing today in addition to what we said last quarter, for example in Financial Services beyond mortgages, we see even banking side of our clients as well, showing an impact of the economic environment. And then in Telco, Hi-Tech, and in retail, in some clients. So we don’t see a material change. There are — within financial Services one more area that we see some of the impact coming in. Having said that, we have, for example, clients in energy or utilities or manufacturing. Those indices, still looking quite strong in terms of the outlook.

Bryan Bergin — Cowen — Analyst

Okay, okay, that’s helpful. And then on the large deals, the renewals were a big component of that TCV and you’ve also cited benefits from consolidation in the commentary. Are you taking any different approach as it relates to proactive renewals to try to drive more vendor consolidation opportunities?

Salil Parekh — Chief Executive Officer and Managing Director

So on large deals, as you pointed out, we’ve had a very strong result, $3.3 billion and 32 deals. We see the focus which we had on transformation continue but outside of the industries that we discussed before, where there is some impact. We see huge cost automation cost efficiency plays across all industry segments. And there we have, we believe, very strong capability, which is helping us. And within all of those discussions, we see areas where there is vendor consolidation. The approach we’ve put in place is similar to what we’ve had in the past. However, we see given our market share gain over the last several quarters, many clients are looking at us, then they start to narrow their list in the vendor consolidation.

Bryan Bergin — Cowen — Analyst

Okay. Thank you very much.

Operator

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

Apurva Prasad — HDFC Securities — Analyst

Good evening. Thank you for taking my question. Salil, I’m not asking for any guidance for ’24 or ahead, but would appreciate your comments. And generally the visibility that you have for the year ahead. So, how different would it be versus typically this time they are — so perhaps, any comments on pipeline or pipeline to TCV conversion?

Salil Parekh — Chief Executive Officer and Managing Director

Thanks for the question. I think as you rightly said, we are not in a position to provide guidance for the year, which starts in April. Pipeline, we have a very strong large deals pipeline. So we are feeling good that the pipeline is at a level which is in good shape. We see good traction of large deals and we’ve seen more and more relevance connect with our clients on the cost efficiency and automation piece. And in the areas in the industries where there is economic support, a good traction of Cobalt and the digital transformation piece. So the pipeline is looking quite good today based on what we see in the deal flow.

Apurva Prasad — HDFC Securities — Analyst

Got it. And Salil, you called out IB mortgage and parts of Telecom Hi-Tech and Retail. But is there any vertical trend for deals between transformation, the ones that are transformation in major and deals that are more on the cost optimization across verticals? And the second part two, that is, do you see any moderation in new client acquisition channel with more vendor consolidation deals happening? This was something which had very strong traction more recently.

Salil Parekh — Chief Executive Officer and Managing Director

On first part, we see some of the growth transformation plays impacted in those industries that we talked about, for example mortgage, Investment Banking, retail, Hi-Tech et cetera. The cost efficiency plays everywhere. So we see that even in programs, where let’s say in the energy sector, or manufacturing. And in many cases we see essentially clients looking to use the cost efficiency to fund the transformation, because in many cases, they still need to drive digital and cloud transformation to keep their market growth or the Client Connect, Customer Connect going. So that’s how we see that play right now.

Apurva Prasad — HDFC Securities — Analyst

And Salil, on the other part on the new client acquisition with more vendor consolidation dates.

Salil Parekh — Chief Executive Officer and Managing Director

Yes, there on new — sorry on new clients, we’ve seen — while we don’t disclose the number, we’ve seen a very good new client acquisition in Q3. And vendor consolidation discussions, where we — so there were contradiction in those two at least both are carrying on within our sales expansion and new client acquisition continues to be important as well. Vendor consolidation, what we’re seeing is on several discussions, clients are looking, especially if they have 6 or 7 vendors, they want to narrow down to one or two or three and we are appearing to be beneficiaries in quite a few of those discussions.

Apurva Prasad — HDFC Securities — Analyst

Got it. Thank you and all the best.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. Our next question is from the line of Mukul Garg from Motilal Oswal Financial Services. Please go ahead.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Thank you. I hope voice is clear. So to start with on the TCV…

Operator

Mr. Garg, I’m sorry to interrupt. Your audio is a bit muffled. If you are on hand speaker phone, please switch it to handset or something for your phone.

Mukul Garg — Motilal Oswal Financial Services — Analyst

I hope this is better.

Operator

Yes sir, thank you.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Sure. So, Salil, I had two questions. First on the strong TCV wins this quarter. Can you at least like no qualify, how much of those trends was on account of share gains, which you guys have made versus the resilient, which is there on the technology spend. Because if you look at the broader market commentary and you have also highlighted retailers, one of the weaker areas, whereas you’ve got 7 large deals in retail. So if you can just help us break-out these two to get a sense of the deal win momentum.

Salil Parekh — Chief Executive Officer and Managing Director

So I’ll start with that. This is Salil. I think the large deal momentum for us is really a function of what we have seen that we’ve put in place. We still is within this mix of $3.3 billion have digital transformation deals. And we have cost efficiency automation deals. What we mean by some of the industry call out, for example, retail or telco is there are some clients, it’s not everyone in that industry, but there are some clients which are getting impacted by the economic environment. We’ve been quite focused, we have a broader portfolio. So, for example, you saw that in retail, we had those large deals. There, it’s a mix between transformation and cost efficiency, automation. And so many times when clients feel an impact of the economic environment, there might be a greater need for the cost efficiency play as well. So we are ensuring that both of those engines continue to work well with our clients.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Right. And the question was on the margin side. You’ve guided for margins ’21 to ’22 bandwidth minimizes towards the lower-end. Can you just help us with the what are the pools, which you are seeing on profitability given that the supply scenario is easing rapidly. Is there some portion of the pressure which is on account of the higher share of cost efficiency deals which you guys are winning with initial ramp up cost. Because if you look at Q4, obviously, Q3 also had the pass-through business which got impacted. I’m assuming as Nilanjan mentioned there was some seasonality into that.

Nilanjan Roy — Chief Financial Officer

Yes. So, I think, like we mentioned the reason for Q3 margin we’ve already gave the breakdown. So as we look ahead, see the levers which we have, one is, of course, utilization, right. And you’ve seen a that 81.7, this is probably I think at least in the last three to four years since I’ve been here in the lowest, that’s one lever, which we’ll have. And as we start putting new freshers onto the production floor, you will get a pyramid automatically a pyramid benefit, right. So that will be double revenue impact for us.

You will also have subcons today, we’ve dramatically reduced our subcons literally in three quarters, we were 11% plus we are 8.7%. Historically, we’ve been at 7%. If you look at our pricing has been quite stable and historically this was one lever we promised back down repeatedly we to get discounts on renewals, et cetera. And as of now, we haven’t seen that at all. We continue to push with clients on — there all we can get price increases. So we are seeing automation in terms of our own workforce, continuing to operate that and that’s a steady lever, which we have. So, we are continuing with these levers in our armory if I had to speak as we look at and we will continue to deploy them.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Right. So is it fair to assume that we should see in our case better profitability in the next quarter given that we have a number of levers with us.

Nilanjan Roy — Chief Financial Officer

So we’ve given a guidance for the year, you’ve seen in the first nine months and that should give a good indication of — good Q4.

Mukul Garg — Motilal Oswal Financial Services — Analyst

Fair enough. Thanks for taking my question. I’ll get back into the queue.

Operator

Thank you. 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

Yes, good evening, gentlemen. Thanks for the opportunity and congrats on a good quarter. Salil, during some of the previous macro uncertainties like Brexit within a few weeks of the vote, we had seen some of our large clients canceling and ramping down projects. At this time, even on the tough comps, the pace of growth moderation is much lower than what many people have been anticipating. And many forward-looking indicators like deal wins, pipeline and CIO survey still continue to be very strong, even 11, 12 months into this macro concerns. So, I haven’t seen the previous three to four macro downturn. How do you nuance the current cycle, especially on the variable of the resilience of IT services spends.

Salil Parekh — Chief Executive Officer and Managing Director

So, thanks for the question. It’s always difficult to sort of compare across cycles. From the perspective of Infosys, my sense is what you mentioned earlier, which is we are still seeing the pace of change when there is change within an industry or client to be not rapid. And we are also seeing that the opportunities for cost optimization and efficiency are expanding within the work that we are doing.

So in many ways, we are in a good position to be able to work on both sides. And so — while it’s difficult to predict what the situation in the economy will evolve, we feel quite balanced. Our sales team is quite agile, we’ve pivoted quite quickly and developed various sort of points of view on different efficiency scenarios in different industry that we feel comfortable that the pipeline will — at least looking good at this stage, and we will continue to work on that.

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Sure. Thanks, Salil. So is it a right understanding to say that we are now in a much better position to navigate this macro weakness probably through more than enough compensation from the cost efficiency deal and vendor consolidation deal. Is that the correct interpretation?

Salil Parekh — Chief Executive Officer and Managing Director

The way we see it is we have both components of at least the two large components of our clients are looking for — we have good industry-leading capability. So it’s really a function of how specific industry, if industry or a client will evolve, the we have positioned ourselves to make sure that we can support our clients in that area.

Sudheer Guntupalli — Kotak Mahindra Asset Management — Analyst

Sure. Thanks, Salil. All the best for the future.

Operator

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

Moshe Katri — Wedbush Securities — Analyst

Hey, thank you. And happy new year, and congrats on strong execution in a pretty tough environment. I have a three-part question. First, March guidance upgrades is pretty unusual from a seasonality perspective and given the macro concerns. So it seems like you have better visibility now. Can you share any views on the budget cycle itself, your kind of concern over slippages, maybe a month or two, budget delays. Are you seeing any of that? Or you think the budgets will be awarded or finalized as on time this time?

Salil Parekh — Chief Executive Officer and Managing Director

Thanks, Moshe. This is Salil. On the budget, so far, we’ve seen in some clients and especially in the industries we’ve called out some areas where there has been slowness in deciding or some sort of changes, especially on some discretionary work. So we mentioned hi-tech, for example, mortgages, a bank — investment banking. So all of those ones that we mentioned before. But we don’t see a broad base change. Equally, we do see good, let’s say, the area with the budgets moving ahead as in the past, with energy, utilities, manufacturing. So we’ve got like one answer that it’s a little bit by industry or sub industry somewhat different.

Moshe Katri — Wedbush Securities — Analyst

Understood. And then you — in the press conference, you mentioned that about third of your new or third of TCV came in from new logos. Can you remind us, is this within the range of what you’ve seen in the past in terms of mix of new logos versus renewals?

Salil Parekh — Chief Executive Officer and Managing Director

Sorry, are you referring the last deal, $3.3 billion that was 36% net new. That’s in the range where we do some quarter, it’s lower, some quarters higher, but not — these numbers are not unusual.

Moshe Katri — Wedbush Securities — Analyst

Okay. And then the final question is for Nilanjan. When we met in Bangalore back in December, you pointed to pivot in the nature of the new deal flow towards, as we said, cost optimizations and your consolidation. Obviously, this is what you’re seeing. Are these deals typically less dependent on clients’ budgets given the fact that you’re kind of taking over a specific function with the objective of kind of reducing delivery costs? And is there any difference in profitability levels here in terms of these projects versus some of these projects that you’ve been doing in the past few years? Thank you.

Salil Parekh — Chief Executive Officer and Managing Director

So in that, I think the way you describe it, these are not fully correlated with the budget of a client. In many instances these are areas where given the evolving economic situation, clients are looking to reduce that tech spend across the enterprise, in many cases, use some of that savings to fund transformation programs. It sometimes was coupled with vendor consolidation. So let’s — there are clients you may have five or six vendors and when we benefit from the consolidation, we see tremendous efficiency that can be created. Our automation tools become quite useful. We typically add automation on our ongoing programs, which give an annual benefit. But when we see something of scale where we have not been involved earlier, we have an ability to provide a much greater benefit. In aggregate, the profitability of these deals is within the range of the rest of our company and especially has been more and more over time, leverage the automation tools and our capabilities, we see these becoming stable high profit deals.

Moshe Katri — Wedbush Securities — Analyst

It’s very helpful. Thank you.

Operator

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

Pankaj Kapoor — CLSA — Analyst

Yes. Hi. Thanks for the opportunity. So, my first question is on the smaller deals, which are less than, say, 50 million TCV. If you can give some qualitative color on how your win and pipeline in that basket has been moving? Is it higher, lower versus, say, what it was six months back?

Salil Parekh — Chief Executive Officer and Managing Director

So, on that — thanks for the question. We don’t typically disclose much about those deals. Overall, we have a good healthy pipeline where we publicly disclose more about the larger deals.

Pankaj Kapoor — CLSA — Analyst

Understood. And Salil my second question is on these cost takeout deals. Can you give some sense on how the pricing in such deals behaving? Are you seeing the pressure there more than normal, either because clients are pushing for more discounts or because of competitive intensity?

Salil Parekh — Chief Executive Officer and Managing Director

So, there the pricing in Q3, we’ve seen quite stable within the mix, we’ve not seen a change. Typically, it’s really a function of what type of focus that clients have, which industry they are in, as we have not seen at least in Q3 in the deals that we have closed in the discussion. We have a big change on that it looks stable at this stage.

Pankaj Kapoor — CLSA — Analyst

Understood. Thank you and wish you all the best for ’24.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you.

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

Hey. Thank you and congrats on the strong numbers there. Just a couple of questions to understand some little bit better. I think one of the comments that you made earlier — I’m going to try Pankaj’s question a different way now. You mentioned on previous calls over the last year, the mix of deals was changing in favor of smaller deals and that is showing up and so despite headline deeply declining. Do you think that’s still the case or has that closed?

Nilanjan Roy — Chief Financial Officer

Ankur, Nilanjan here. We can’t — we couldn’t hear anything. Ankur, we’ll have to go on a handset or something. We couldn’t hear, your voice was very muffled.

Ankur Rudra — J.P. Morgan — Analyst

Okay. Is it better?

Nilanjan Roy — Chief Financial Officer

Yes.

Ankur Rudra — J.P. Morgan — Analyst

Okay. Thank you. So, I was saying that I am going to try Pankaj’s question in a different way. You had mentioned in previous calls that the mix of deals was changing in favor of smaller deals. And that’s why the headline, TCV was declining, but growth was still quite healthy. This time of course, both have done well. Do you think the mix of deals is still the same as it was in the last year before this quarter?

Salil Parekh — Chief Executive Officer and Managing Director

Hi, Ankur. Thanks. This is Salil. I am not clear on the mix of deals on the previous discussion. But just looking backwards, we see the mix of deals remaining in good shape across the bar. There are some quarters in which there are this proportionate number of larger sized deals. But in general, we don’t have a pattern in that, at least that’s evident in Q3.

Ankur Rudra — J.P. Morgan — Analyst

Okay. All right. The next question I wanted to check, Salil, again, was on the U.S. business. The headline growth seems to sort of slipped down to close to low-double digits, whereas the creative growth has been led by very strong performance in Europe and manufacturing. Do you worry about the U.S. business, it’s sort of slower than Europe, which is not the case in the rest of the industry in many of your peers?

Salil Parekh — Chief Executive Officer and Managing Director

So, there, Ankur, we have had very strong growth in the U.S. at over 10% in Q3 in constant currency. Europe, of course, has been a standout in the growth that we’ve had. We’ve seen the traction, the pipeline, the work remains pretty strong, as we have described earlier, across the two dimensions transformation and cost across the geographies. If you look at the economic situation, we do see developing side a little more impacted, but we see good traction on the pipeline in both side. We had a very successful Europe program over the last 18 months, 24 months, and that’s also helping us with the growth in this quarter.

Ankur Rudra — J.P. Morgan — Analyst

Understood.

Nilanjan Roy — Chief Financial Officer

Ankur, just to add. I mean out of our 32 large deals this quarter, 25 were actually in the Americas. So, I think this will show that we have a very strong pipeline there.

Ankur Rudra — J.P. Morgan — Analyst

Understood. Maybe a last question over here was on pricing and contract profitability in the projects you are winning right now, especially the large number of big deals this time you signed. How is that trending? Is that improving, staying the same or maybe becoming a bit lower than before?

Nilanjan Roy — Chief Financial Officer

These are for the new deals signing?

Ankur Rudra — J.P. Morgan — Analyst

Yes. The new deal signings this quarter, how is that trending versus before?

Nilanjan Roy — Chief Financial Officer

I don’t think anything unusual. Yes, absolutely new deals, and in fact many clients want the productivity efficiencies upfront. So, we always see that the — initial part of these new deals will be lower than portfolio margins. But like we have shown in the past, at the same time, our existing deals, tenure deals are reaching higher profitability, and that offset some of this pressure which is coming from the newly signed deals and margins will typically be lower. So, nothing unusual on the trends.

Ankur Rudra — J.P. Morgan — Analyst

Okay. Appreciate it. Thank you for the color and best of luck.

Operator

Thank you. Our next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Vibhor Singhal — Nuvama Equities — Analyst

Hello. Yes. Hi. Thanks for taking my question and congrats on a solid quarter. So, Salil my question — I have just two questions. One, I wanted to basically get an idea on, I mean you have seen attrition coming down in this quarter quite sharply. And as you mentioned in your opening remarks as well. So I mean how do you see the trend of this attrition going forward of course downward? And how do you believe the benefit of this could actually percolate to our margins? Again, I am not asking for objective guidance of a number. But in terms of the direction, do you think it is going to aid our margins, or do you think most of the impact of this is already built into the numbers that we have currently?

And my second question was majorly on the geography of Europe. So, just wanted to pick your win on how the conversations with the clients are happening in that part of geography, specifically if you could maybe break up between Continental Europe, Eastern Europe and maybe UK. And which pockets of those geographies do you think are looking more softer, or is there more of delayed decision-making in that part of the geography?

Nilanjan Roy — Chief Financial Officer

Okay, I’ll take the first one on the lower attrition. Absolutely, we are seeing this coming down. And like we’ve said, even in the future in the next quarter, at least until, what we are seeing latest an issue, because we are seeing this coming down. Absolutely, this should have a positive impact on margins. I mean during the year, whether it was stretching on laterals, whether it was the compensation hikes we did, that really impacted our year-on-year margins. So, I was looking ahead and attrition as an impact both of the macroeconomic and also the internal policies we are doing in terms of promoting within, et cetera, should benefit us looking ahead.

Salil Parekh — Chief Executive Officer and Managing Director

On Europe, I think the way we see some color for 25% of our business is Europe, and we have a few countries — in the countries we operate in, we see some slowing — some economic impact in Germany. There is some in the UK, less so in the Nordic countries at this stage. But overall, the coloring is a little bit more by the industries that we mentioned earlier in the call, which are across sort of on a global perspective. But relatively, Europe seems a little bit more impacted today than certainly the U.S.

Vibhor Singhal — Nuvama Equities — Analyst

Got it. If I can just maybe drill down just a little bit more. Any specific color that you can provide on European retail and European manufacturing segments?

Salil Parekh — Chief Executive Officer and Managing Director

So, there — we don’t necessarily provide that much sort of a granularity, but sort of same comments on a global level on manufacturing that we mentioned earlier. And for energy, which is looking stronger and more sort of let’s say, attention to the economy on retail in this case.

Vibhor Singhal — Nuvama Equities — Analyst

Got it. And the softness in retail, do you believe it is as of now confined to the retail stores and what maybe percolate and you could, in your discussion with clients, do you see percolating down to the CPG companies and probably other ones as well. But as of now, it’s limited to the more of the retail stores that we are talking about?

Salil Parekh — Chief Executive Officer and Managing Director

So, within retail, we’ve not called out any specific sub-segment at least in our commentary. We are not gone down to that gallery in our public statements.

Vibhor Singhal — Nuvama Equities — Analyst

Got it. Great. Thanks for taking my questions and wish you all the best.

Salil Parekh — Chief Executive Officer and Managing Director

Thank you.

Operator

Thank you. Our next question is from the line of Sameer Dosani from ICICI Prudential Asset Management. Please go ahead.

Sameer Dosani — ICICI Prudential Asset Management — Analyst

Thanks for the opportunity. Salil, so Just one question around Europe again. So, if I look at your commentary around regions in North America versus Europe, Europe looks more cautious overall. But if I look at performance for the last few quarters, I think Europe has been performing better than North America as a whole. So, do you think this impact of the cautiousness is yet to just like in the numbers and you would see more this growth trajectory will be a little more affected going forward? Your thoughts around that. Thanks.

Salil Parekh — Chief Executive Officer and Managing Director

I think in Europe, there is two different things. We had a very strong Europe program, both on transformation and cost over the last 18 months, 24 months. So, some of that comes through in the benefits we see even in this quarter. The commentary or the view is more to share what we are seeing just in the economic activity. And again, we see the coloring more by industry, which is a little bit global as opposed to just specifically across the board in the geography.

Sameer Dosani — ICICI Prudential Asset Management — Analyst

So, the outlook, I mean do you think the outlook that you are giving will reflect in the numbers in medium term or in the next two quarters I mean because till now it has been an outperformance versus overall portfolio. Thanks.

Salil Parekh — Chief Executive Officer and Managing Director

So, there we’ve given a view on our outlook only up until March this year, so we will come up with guidance for the next financial year at the end of this quarter.

Sameer Dosani — ICICI Prudential Asset Management — Analyst

Okay, that’s from my side. Thanks.

Operator

Thank you. Our next question is from the line of Girish Pai from Nirmal Bang Equities. Please go ahead. Mr. Girish Pai, could you please un-mute and go ahead with your question. As there is no response from this connection, we will move to our next question, that’s from the line of Rahul Jain from Dolat Capital. Please go ahead.

Rahul Jain — Dolat Capital — Analyst

Yes. Hi. Thanks for the opportunity. Firstly, we commented that manufacturing is doing well for us, but actually the vertical is doing exceedingly well in the European region, where it’s up 60% YoY, but is much weaker in the U.S. where it’s up 7% YoY. So, what is that we are doing so well in Europe, is it led by few very crucial deal, or it’s more holistic and why it’s different in the U.S.?

Salil Parekh — Chief Executive Officer and Managing Director

So, thanks for the question. Within the industry, we don’t typically comment on a client, multi-client level activity. But we do have good traction, as you pointed out, within our European business in manufacture.

Rahul Jain — Dolat Capital — Analyst

Okay. And another thing was on digital revenue. For the quarter, it’s up 17% YoY or let’s say, CC would be 20% or 21%. This is like our slowest ever since we’ve been giving this time savings on digital revenue. So, is this a bit worrying, or is it more because of the furlough or any other factor?

Salil Parekh — Chief Executive Officer and Managing Director

So, there it’s partially due to some of the changes that we were discussing earlier on where in certain industries and sub-industries, we see much more attention to the economic environment. And there we see some of the digital transformation work being slower where we see much more focus across the board on the cost and automation claims.

Rahul Jain — Dolat Capital — Analyst

Got it. And lastly, if I can, is margin impact furlough was too high in the quarter. how has this shaped up in the current month? Are these clients resume to normalcy now or the pain remain extended in Q4 as well?

Nilanjan Roy — Chief Financial Officer

So, we will have to see how it goes, it’s a bit too early to say what’s going to be the Q4 outlook on that.

Rahul Jain — Dolat Capital — Analyst

Okay. That’s it from my side. Thank you so much.

Operator

Thank you. Our next question is from the line of Girish Pai from Nirmal Bang Equities. Please go ahead.

Girish Pai — Nirmal Bang Equities — Analyst

Yes. Thank you. I just wanted to understand with cost optimization deals more in the pipeline and in the TCV, has the average deal tenure gone up in the last couple of quarters?

Salil Parekh — Chief Executive Officer and Managing Director

So, thanks for the question. We don’t typically comment on the deal tenure in terms of public statements.

Girish Pai — Nirmal Bang Equities — Analyst

Okay. And you said that the third-party items have given you a lot of traction in terms of getting deals. Now, the number has gone up from about less than 2% of revenue to almost like — I think this quarter it’s — in this quarter, it comes to almost like 6.5% of revenue. Do you see this number going up in the coming quarters and years?

Salil Parekh — Chief Executive Officer and Managing Director

Like I have said, we are offering it quite holistic. In some cases, like I said, many of the cloud-based deals come with services, there could be licenses, there could be DAS services. So, more and more integrated deals and when you go to IT-as-a-service, which is really sort of very holistic, we could see this. But I mean it may vary from quarter-to-quarter, you could have some quarter with up. But there is nothing to say that in the long run where this is going, it’s bit early to say that.

Girish Pai — Nirmal Bang Equities — Analyst

Okay. And lastly, from a competitive landscape perspective in the vendor consolidation deals, who are the ones losing out? Are these the global MNCs or these are typically Tier 2 vendors?

Salil Parekh — Chief Executive Officer and Managing Director

Again, on those, we don’t specifically comment on where we are getting the benefit of the consolidation. We are seeing some benefits coming through with large clients.

Girish Pai — Nirmal Bang Equities — Analyst

Okay. Thank you very much.

Operator

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

Salil Parekh — Chief Executive Officer and Managing Director

Thank you. So, thank you everyone for joining us. This is Salil. Fantastic to have our Q3 close out, 13.7% growth, 21.5% operating margin, $3.3 billion in large deals, very happy with that outcome. We can see guidance increase on our growth for that. And we can see both sides of our business on transformation, digital work and core services, cost automation working well. And so we feel good with the current environment and how we can play and support our clients on both sides. Thank you all for joining us and look forward to catching up during the quarter. Thank you.

Operator

[Operator Closing Remarks]