Tata Consultancy Services Ltd (TCS) Q2 FY23 Earnings Concall Transcript

Tata Consultancy Services Ltd (NSE:TCS) Q2 FY23 Earnings Concall dated Oct. 10, 2022

Corporate Participants:

Kedar Shirali — Vice President and Global Head – Investor and Analyst Relations

Rajesh Gopinathan — Chief Executive Officer and Managing Director

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Samir Seksaria — Chief Financial Officer

Milind Lakkad — Chief Human Resources Officer

Analysts:

Kumar Rakesh — BNP Paribas — Analyst

Sandip Agarwal — Edelweiss — Analyst

Sandeep Shah — Equirus Securities — Analyst

Ravi Menon — Macquarie — Analyst

Gaurav Rateria — Morgan Stanley — Analyst

Manik Taneja — JM Financial — Analyst

Apurva Prasad — HDFC Securities — Analyst

Bharat Sheth — Quest Investment Advisors — Analyst

Rahul Jain — Dolat Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the TCS Earnings Conference Call. [Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]

I now hand the conference over to Mr. Kedar Shirali, Global Head, Investor Relations at TCS. Thank you, and over to you, sir.

Kedar Shirali — Vice President and Global Head – Investor and Analyst Relations

Thank you, operator. Good evening, and welcome everyone. Thank you for joining us today to discuss TCS financial results for the second quarter of fiscal year 2023 that ended September 30, 2022. This call is being webcast through our website and an archive including the transcript will be available on the site for the duration of this quarter. The financial statements, quarterly fact sheet, and press releases are also available on our website. Our leadership team is present on this call to discuss our results. We have with us today, Mr. Rajesh Gopinathan, Chief Executive Officer and Managing Director.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Hello, everyone.

Kedar Shirali — Vice President and Global Head – Investor and Analyst Relations

Mr. N. G. Subramaniam, Chief Operating Officer.

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Good evening, everyone.

Kedar Shirali — Vice President and Global Head – Investor and Analyst Relations

Mr. Samir Seksaria, Chief Financial Officer.

Samir Seksaria — Chief Financial Officer

Hello.

Kedar Shirali — Vice President and Global Head – Investor and Analyst Relations

And Mr. Milind Lakkad, Chief HR Officer.

Milind Lakkad — Chief Human Resources Officer

Hi, everyone.

Kedar Shirali — Vice President and Global Head – Investor and Analyst Relations

Our management team will give a brief overview of the Company’s performance followed by a Q&A session. As you are aware, we do not provide specific revenue or earnings guidance. And anything said on this call, which reflects our outlook for the future or which could be construed as a forward-looking statement must be reviewed in conjunction with the risks that the Company faces. We have outlined these risks in the second slide of the quarterly fact sheet available on our website and emailed out to those who have subscribed to our mailing list.

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, Kedar. Good morning, good afternoon, and good evening to all of you. We are very pleased with our performance in Q2. Our revenues grew 18% in rupee terms and 15.4% in constant currency terms and 8.6% in dollar terms, reflecting the continued strength of demand for our services. Our operating margin for the quarter was 24%, an expansion of 0.9% sequentially and a contraction of 1.6% on a year-on-year basis. Our net profit crossed the INR10,000 crore mark this quarter, and our net margin was at 18.9%.

I’ll now invite Samir, Milind, and NGS to go over different aspects of our performance during the quarter. I’ll step in again later to provide some more color on the demand trends you’re seeing. Over to you, Samir.

Samir Seksaria — Chief Financial Officer

Thank you, Rajesh. Let me first walk through the headline number. In the second quarter of FY ’23, our revenues grew 15.4% Y-o-Y on a constant currency basis. Reported revenue in INR was INR553.09 billion, year-on-year growth of 18%. In USD terms, the sharp fall of all currencies in our basket versus the dollar in Q2 resulted in a deflated reported revenue of $6.88 billion, a Y-o-Y growth of 8.6%. While the rupee depreciated 3.4% against the dollar sequentially, it appreciated 4.4% against GBP and 3% against Euro, eroding the benefit at the operating margin level. Still, this currency benefit along with flatter workforce pyramid improved productivity of fresh hires, helped mitigate the impact of normalizing travel and facility expenses, and continued headwinds from backfilling and retention expenses. Overall, our operating margin expanded 0.9% sequentially and was at 24%.

Looking ahead, we believe the supply side issues have peaked and should start easing in the second half of the year. Net margins were at 18.9%. Effective tax rate for the quarter was 25.76%. Our accounts receivable was at 62 days sales outstanding in dollar terms, down one day compared to Q1. Net cash from operations was at INR106.75 billion, which is 102.3% of net income. Free cash flows was INR100.62 billion. Invested funds as on 30 September stood at INR592.9 billion. The Board has recommended an entering dividend of INR8 per share.

Over to you, Milind.

Milind Lakkad — Chief Human Resources Officer

Thank you, Samir. On the people front, our earlier investments in capacity building and organic talent development allowed us to achieve our strong business growth with relatively modest net headcount addition. In Q2, we added 9,840 employees on a net basis, bringing our workforce strength to 616,171 as on September 30. It continues to be very diverse workforce with 157 nationalities representing and with women making 35.7% of its base.

On the learning front, TCS clocked 11.7 million learning hours in Q2, resulting in the acquisition of 1.5 million competencies. Our FY ’23 fresher onboarding is proceeding as per plan. In keeping with our culture of being committed to our employees, we have honored all offers we have made and have onboarded 35,000 freshers in H1 and with 20,000 brought on board in Q2 alone. The TCS Employer Brand continues to shine strongly, helping us attract the best talent across the world.

We launched the TCS National Qualifier Test for FY ’24 on August 15, and received an overwhelming response with half a million registrants, an all-time high. Industry-wide churn continued to be high in Q2. Our LTM attrition in IT services inched up further into 21.5%. That said, the technology job market which had overheated in the last few quarters has begun to cool off, and compensation expectations of new hires are also becoming more realistic.

With supply catching up across the industry, the pressure to poach experienced talent is easing, so we should start seeing the churn settle in the coming months. Based on the monthly trends, we believe the quarterly annualized attrition figure has peaked in Q2 and should start moderating in the second half. Lastly, we continue to the benchmark with the best employers globally for our workplace practices and policies. In Q2, we won more than 50 awards globally across various aspects of HR value chain, including our work towards gender equity.

Over to you, NGS, for some color on our segments and production platform.

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Thank you, Milind. Let me walk you through our segmental performance details for the quarter. All growth numbers are on year-on-year basis and constant currency terms. All our industry verticals grew strongly in Q2. Growth was led by Retail & CPG, which grew 22.9% after a similar strong double-digit growth last quarter. Growth is being driven by ongoing spending by retailers towards making their supply chains more agile and resilient while improving the shopping experience of their customers.

We’ve also seen an uptick in the travel, transportation, and hospitality sector, driven by increased investments and resilient [Technical Issues]. Communications & Media grew 18.7%, driven by investments around 5G and delivering personalized offerings to consumers. Technology & Services vertical grew 15.9% while Manufacturing as well as Life Sciences & Healthcare both grew 14.5%. BFSI, our largest vertical grew 13.1%, covered by strong spending on cloud, data analytics, and customer experience. By geography, growth was led by North America, which grew 19.1%, U.K. grew 12.6% while Continental Europe grew 12.1%.

Let me now walk you through the growth figures by geography. Our major market, North America led with 17.6% growth, U.K. grew 14.5% [Phonetic], while Continental Europe grew 14.1%. Depicting that, Latin America led with 19% growth in Q2. During the quarter, we celebrated the completion of 20 years of TCS presence in the region. These two decades, our business across the region has grown significantly catering to the local market as well as serving as a nearshore center for North American clients.

Moving on to our products and postal — products and platforms. They did really well in Q2. Ignio, our cognitive automation software suite signed up four new customers and three clients went live during the quarter. TCS filed two patents around ignio during the quarter and was granted one. The market demand for ignio trained professionals continue to grow. The number of ignio trained professionals now stands at 16,398, while number of ignio certified professionals is at 6,984 to-date.

The large American technology company specializing in consumer electronics, software online services, and mobile phone manufacturing extended ignio AIOps event management capabilities to their supply chain. This eliminated duplicate alerts and processed genuine alerts giving SMEs more time to focus on real issues, thereby reducing overall resolution time. The tool has handled a 25,000 plus alerts since implementation, 33% of these are suppressed and 66% [Phonetic] are triaged to operation as legitimate alerts.

TCS BaNCS, our flagship product suite in the financial services domain had four new wins during the quarter. One of the world’s largest investment management companies based in the U.S. offering a broad selection of investment advice, retirement services, and insights to individual investors, institutions, and financial professionals have selected TCS BaNCS Wealth Management for their retail business. One of U.K.’s leading insurance organizations went live with TCS Insurance platform migrating 2.3 million policies into TCS BaNCS platform this quarter. This is the largest ever policy migration in the U.K. Life and Pensions industry and a major milestone in the customer simplification journey towards eliminating aging legacy systems.

Our Quartz Blockchain platform had two new wins and one go live in Q2. Quartz has been selected by a large electricity provider in North America to establish a private permission to blockchain to track and manage energy consumption and renewable energy certificates allocation among multiple smaller entities. The initial pilot will demonstrate the ability of blockchain to bring different entities together on a shared ledger and track the actual energy consumption vis-a-vis the contracted quantity, automate the issuance of renewable energy certificates using smart contracts and enable real-time tracking of the certificates issued.

In Life Sciences, our award-winning Advanced Drug Development suite had one new win. We onboarded a top five pharma major on our supply management platform, part of the CCT suite to deliver real-time insights into patient medication adherence. TCS TwinX, our AI-based digital twin solution continue to gain ground in various industries helping clients carry out complex what-if analysis and take informed business decisions. In Q2, we had two wins and three go lives for the TwinX platforms. TCS Optumera, our AI-powered retail merchandising suite went live in two of our clients.

TCS iON had eight wins in this quarter, we’re seeing increasing demand and familiarity among educators for the ability to ask their question papers in auto or manually mark responses. In Q2, we served 150 assessment customers and administered 300 exams to around 6.6 million candidates. Over 1,170 corporates now leverage the TCS National Qualifier Text as their entry-level recruitment platform and over 3,150 candidates have gotten placed till date.

TCS MasterCraft had 23 new wins this quarter, including 10 new clients and 13 renewals. In terms of client metrics, these metrics are an important validation of our customer-centric business model. The customary practice has been to report these figures based on U.S. dollars translated revenues. In quarters the sharp currency volatility of the kind we saw in Q2, the print numbers of clients in non-U.S. dollar markets may get under-reported due to currency deflation.

Despite that headwind, we had good additions in every revenue bucket in Q2 compared to the year ago. We added five more clients in the $100 million plus band, bringing the total to 59. We added 10 more clients in the $50 million band, bringing the total to 124. We added 36 more clients in the $20 million plus band, bringing the total to 283. We added 38 more clients in the $10 million plus band, bringing the total to 455. 41 more clients were added in the $5 million band, bringing the total to 650, and 72 more clients in the $1 million plus band, bringing the total to 1,210. Overall a very satisfying quarter from an operations perspective.

Let me now request Rajesh to speak on the demand drivers during the quarter.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, NGS. Before I get into the demand drivers, let me spend a minute talking about the demand environment and mood among clients. Despite growing newsflow around a possible economic slowdown across the world to client concerns over how that might affect their businesses, we haven’t seen any change in their spending on us so far. As you could see from the growth figures, demand for our services continues to be strong in Q2 across all verticals and all markets even in Continental Europe and U.K., where the pessimism levels are at the highest.

Project ramp-ups proceeded as scheduled and we have not seen any delays or cancellations. Deal closures also remained strong in Q2. That is not to say that the deteriorating macro has no impact at all. Clients have become more cautious when committing to longer-term investments, some of the larger transmission programs are being prioritized, and projects that of — for projects that offer quicker wins versus those with longer-term payback. Many of our clients are also working on plans for various economic scenarios for next year.

We have also seen some sporadic instances of delayed decision-making on new deals. Those apart, clients have been telling us that even if their business outlook changes over the next few months for the world, technology will be one of the last areas to be impacted. The big driver of demand in this quarter was the continued investment by our clients on cloud transformation. The scale, breadth and depth of our cloud expertise, deep domain knowledge, strong partnership credentials with the hyperscalers and our portfolio of intellectual property on the cloud makes us one of the largest beneficiaries of this opportunity.

We are now seeing clients — client focus shift execution of the cloud transformation agendas announced earlier, and this plays to our strengths. We have seen instances where clients are unable to leverage the flex capacity of their cloud until they shift a larger portion of the workloads and they’re seeking our help in accelerating that move. Further, many organizations which rush to move their workloads to the cloud without sufficient planning and controls in place are now discovering that they are not only losing out on the economic benefits of the hyperscaler clouds but are actually incurring higher costs and they did with their own data centers.

Such clients are very open to our proactive proposals with our FinOps advisory offerings to help optimize their spends on the cloud. And our cloud orchestration services powered by TCS Cloud Exponence, our multi-tenant cloud delivery platform help them seamlessly and optimally manage multiple environments spanning public, private and hybrid clouds. We won several cloud transformation deals in Q2. For example, we were selected by a leading American biopharmaceutical company as a transformation partner to modernize their technology estate. We will build for them a next-gen operating model leveraging cloud, agile, DevSecOps, and cloud-native technologies that will help them enhance enterprise resilience, accelerate the pace of innovation, and improve the customer experience.

In addition to the migration of workloads with the cloud, several clients engaged us in Q2 to architect advanced analytics leveraging cloud-native capabilities to help them launch new products, understand the customers better and deliver a richer customer experience. For example, for a large U.K. bank, we proposed a transformation solution entailing the design of an enterprise data fabric architecture that enables advanced analytics at scale, leveraging our deep contextual knowledge, portfolio of tools and accelerators, and hyperscaler cloud expertise. This will help the bank drive more personalized products and services, understanding the customers’ financial needs at various life stages and deepening relationships with customers, thereby, propelling growth for the bank.

Similarly, a leading American hotel and motel operator engaged us to develop an advanced analytic solution to help transform customer and agent experience by designing a cloud analytics platform that consolidates and harmonizes data from across their enterprise. The economic uncertainty is also resulting in greater interest from clients in our Machine First approach to transform their IT and business operation — operating models. You might recall from my earlier commentary on this topic that this approach basically entails embedding AI and machine learning deep within an enterprise to create leaner, more agile, and resilient operations, which can flex up or down depending on their business environment. And those efficiency gains can fund some of their front-office transformation initiatives.

We have several such wins this quarter, of which I’ll mention only two. We were engaged with Xerox for their enterprise-wide business transformation journey to enhance their competitiveness and power their growth. TCS cognitive business operations and Xerox Center of Excellence embarked on multiple transformation initiatives across the various business functions including finance and accounting. The digital transformation program powered by TCS Cognix was automated — has automated the processing, improving speed, accuracy, and throughput. Its AI-powered dashboard and various analytical models equip the finance function with intelligent and real-time insights for decision-making. This has resulted in a positive impact on their cash flow, significantly improve operational efficiency and employee and vendor satisfaction.

A European industrial tools manufacturer chose us to transform their service desk operations. We will leverage cognitive technologies and implement a leading employee experience platform for auto-healing of user issues and improved user experience. Coming to the third driver of demand, it is what we broadly classify as growth and transformation. What stands out in these engagements is the value of our deep contextual knowledge of our clients’ business and technology landscapes and our highly collaborative inside-out approach to transformation. This results in impactful transformation solutions that don’t face traditional organizational resistance to change and gets us much appreciation from the management teams.

Let me illustrate this with three examples. We have been working closely for over a decade with a leading bank in North America that services the start-up and innovation industry. Our deep contextual knowledge of the business gained over these years has made TCS a trusted advisor to their growth journey towards becoming a large financial institution. To support the business expansion and effectively prepare them for a transition from a category four to a category two bank, which was as required by regulators, given their significantly cost growth, TCS helped them conduct a detailed risk and regulatory assessment and prepare a roadmap to meet the regulatory requirements related to liquidity market and credit risk.

This entail pre-imagination of the overall business framework for the treasury and capital markets swap dealer business for the bank. TCS led the discussions with the bank to defend the target state business architecture, solution architecture, and implementation roadmap. We brought in actionable points of view, best practices, recommendation, and presented a tactical, as well as a strategic approach to the solution implementation. As a business outcome, the real-time liquidity monitoring and management is expected to reduce the nostro buffer for the bank by a greater than 40% and ensure compliance to enhanced regulatory requirement.

The target reference architecture is expected to bring down the time to market by 10% to 15%. Similarly, we are working with a large pharma and MedTech company to reimagine discovery and development of therapies by blending science, data science, and emerging technologies, and have developed an advanced AI and model-based adaptive risk monitoring solution with a predictive engine to credit risk mitigation insight for chemical risk management. The solution was co-created with the client is now part of the TCS ADD platform. We are also a strategic partner supporting the digital surgical platform for their MedTech segment. The platform is in an early stage of evolution and has foundational capabilities of edge connectivity, analytics, and AI suite with an objective to provide capabilities to launch specific use cases for connected digital surgeries.

TCS has led the transformation of space range and display capabilities for Marks & Spencer, enabling it to improve customer choice while optimizing the range of products based on local consumer demand. This was achieved through automated data-driven range decisions and producing over 12,000 live-store specific planograms. By enhancing the accuracy of floor plans and equipment into the planogram fixtures, our solution ensure that the optimized displayed plan could be faithfully implemented in the stores. This transformation helped M&S meet local demand, improve availability, and reduce waste and improve profitability, and align future business goals and the food retail strategies.

Our deep domain knowledge is placing us at the heart of industry level transformation across multiple industry verticals. One such industry that is going through a tremendous amount of technology-led transformation is the utility sector at an industry level as well as at a level of individual enterprises. Almost every quarter I’ve shared examples of transmission work we’re doing in this year. In Q2 last year, I’d spoken about five-minute settlement solution that we have built for the Australian Energy Market Operator. That is helping to spur innovation in that market and lower cost for consumers. This time I want to highlight a transformation in the U.K. gas market. The U.K. energy regulator introduced the program for faster and more reliable supplier switching option for energy consumers with a new centralized switching service to facilitate competition and deliver better outcome for consumers.

TCS Xoserve [Phonetic], the central data service provider for the U.K. gas market to design and deliver a complex solution that transforms core business processes like switching and contract creation, settlement, device update and maintenance, meter reading, billing, delivery and others leveraging a leading hyperscaler ERP solution. TCS’ deep domain expertise and technology expertise was critical in delivering the solution capable of processing 150,000 switches in under 30 minutes. The solution allowed the transition migration of 24 million U.K. gas meter data to enable CSS switching activity. The solution went live in Q2. With the new solution, the 14 days that it took to switch a supplier has now been reduced to one day.

Similarly last quarter, I had spoken about a Fortune 500 electric and gas utility that partnered with us to launch a new business model to generate new revenue streams based on home energy services. Let me share one more example along similar lines. ENGIE France, the leading utility retailer is transforming its business model by expanding from a commodity-based business of gas and electricity to a new service-oriented model of smart home solutions offering to drive energy efficiency for its consumers and ensuring sustainability.

TCS partnered with ENGIE right from the conceptualization, design, and proofs of concept. Leveraging our deep domain knowledge and expertise in core ERP, we developed a solution for subscription in CRM with incentive on property [Phonetic] management and integrated billing for service and energy commodity charges in a consolidated invoice. This offering has been launched in the market and has received a very positive response improving customer satisfaction and growing market share for ENGIE.

I’d mentioned in earlier calls that many of our G&T engagements are business model innovations. Let me share three such examples for business transformation solutions that went live in Q2. An American multinational conglomerate engaged us to build a comprehensive asset performance management solution that they market to their industrial and warehouse customers. The cloud-based IoT platform we built for them in just real-time data from various assets and enables the new value-added services around improved asset visibility, monitoring capabilities and predictive insights leading to improved asset performance, optimized operation, and increased plant availability and higher throughput for their end customers, and new revenue streams for our client.

Ingram Micro, one of the largest technology distributors in the U.S. engaged us as their partner to power the pivot into e-commerce and achieve the mission to transform from a traditional distributor to a platform company that does distribution. We built them a new digital experience ecosystem platform connecting their customers, vendors, and associates. It reimagines the customer journey, making it frictionless and highly personalized with conversational experiences and an AI-powered recommendation engine that enables intelligent bundled offers. Similarly for Tapestry, Inc., a leading New York-based house of iconic accessories and lifestyle brands consisting of Coach, Kate Spade, and Stuart Weitzman, they partnered with TCS to drive their omnichannel modernization, implementing order management for its brands to help increase net incremental growth and improve customer satisfaction. This partnership created a flawless omnichannel order fulfillment and input customers’ journey experience. So overall, these examples, give you a flavor for the kind of services and the kind of opportunities that we are able to address across our customer-end market landscape.

Coming through the order book. We again had a strong set of deal wins in Q2, amounting to TCV of $8.1 billion. By vertical BFSI had a TCV of $2.3 billion, while retail order book stood at $1.6 billion. The TCV of deals signed in North America stood at $4.3 billion. Interestingly, while the pessimism and macro is possibly highest in U.K. and Europe, our order book is there is stronger in Q2 than Q1. While the strength of our order book as well as the price set for Q3 somewhat comforting. Given the volatility, we remain very vigilant and are staying very close to our clients.

With that, we can open the line for questions.

Questions and Answers:

 

Operator

Thank you very much. We will now begin with the question-and-answer session. [Operator Instructions] The first question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh — BNP Paribas — Analyst

Hi. Good evening, team, and thank you for taking my question. My first question was specifically around European geography and U.K. So in this quarter on a CC, Y-o-Y basis also we saw pretty robust growth of 14% to 15%, which is a higher growth compared to how we reported last quarter. One of our larger peers, who recently reported also is for pretty strong growth in Europe and we talked about double-digit growth in the November quarter as well. Given the fear around macro economy being pretty several in that geography. What is driving this much stronger growth in Europe despite those figures? Is there some structural growth drivers, which we are now seeing in the European geography, or the impact could potentially come with a lag?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Rakesh I feel always content and it has been borne out through the pandemic. Technology is at the core of solutions both on the growth side, as well as on the consolidation and the optimization side. So technology here remains very core through business, agendas for our clients across the full spectrum, across all markets also. And there — we are benefiting from participating in that cycle. The macro, as I also mentioned in the — in our press event, it’s very difficult for us to zoom out and comment on the macro level, we can only tell you what is going on, on the specificity of the clients that we have. We are in no better position than you, you are in fact at a much better position than us to be able to take a call on the macro, but this is what we see and we are running with it.

Individual customer conversations, opportunities exist, but caution also exists and that — call that out last time also that executive conversations are — people are talking about caution, and we need to remain vigilant to see whether that will translate into budgeting planning cycle for next year, and what that implies overall demand. But we’ll have to play it by the year as it comes.

Kumar Rakesh — BNP Paribas — Analyst

Great. That’s helpful. My second question was around heading into December quarter which is usually seasonally weak. Are we getting any sense, how the seasonality this time around would be, could there be higher than usual seasonality, or could be the usual seasonality? And any sense contracting with clients, how they’re looking at the next year budget, any sense on that would be very helpful.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

So leaving aside, the fact that Europe is in a fairly volatile situation, and this winter is going to be critical in Europe. Leaving that aside, our conversations with clients indicate regular seasonality, and we have had extensive client interactions, we hosted our North American clients in our annual TCS Summit, and we also had a series of client events across Europe. So overall, I don’t think there is any change to the seasonality patterns that we are picking up. However, everything is dependent on, as I said, I mean, this does not address the possibility of some severe shifts in Europe during the winter.

Kumar Rakesh — BNP Paribas — Analyst

And client interaction on next year’s budget planning?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Too early to take a call. We don’t know. I mean, we get to share of it only in the second or third month of the year, as it starts actually translating into projects. But at this stage, we don’t have visibility. As I said, in the last time also, there is a cautionary stance that customers are talking a bit, we are talking about scenario planning and the scenarios are more weighed on the downside than on the upside.

Kumar Rakesh — BNP Paribas — Analyst

Got it. Thanks a lot for that answer. And wish you all the best.

Operator

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

Sandip Agarwal — Edelweiss — Analyst

Yeah. Hi, thanks for the opportunity, and congrats on good execution and good numbers. I have just one question. Although it is very hard to comment on how things will pan out but Rajesh, is there any kind of caution which you’re seeing in your discussions with the client, particularly from the U.S. geography, because any issues in U.K. and Europe, traditionally, we have seen that, the cost, the economic pressures general results into some helpful outsourcing because it is more cost expected in the past, but that correlation doesn’t show up immediately in the U.S.?

So what are you seeing — is there any kind of caution which clients are highlighting on the fears of recession or you’re seeing any action into that direction, when they’re ordering or there — have you seen any kind of delays or anything, which makes us more vigilant? Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

U.S., Sandip, is not — we have not picked up any threats. In terms of caution — extra caution then what could be normally expected. So U.S. is not showing anything, particularly concerning, people are overall continuing to invest, and normal seasonality should apply but otherwise, we are seeing a fairly strong environment in U.S.

Sandip Agarwal — Edelweiss — Analyst

Okay. Thanks. That’s all from my side.

Operator

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

Sandeep Shah — Equirus Securities — Analyst

Yeah. Hi. Just a question, Rajesh, last time in the 1Q conference call, you said that the trend of multi-power outsourcing deals or multi-thousands transformational deals are going up, and you started signing more number of such deals. Is it that trend continuing in this quarter as well? And also with macro being concerning, do you witness this trend being higher in the Europe and the geography versus that of U.S.?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I’m sorry, I don’t specifically remember exactly what I said, but let me abstract and answer this. Operating model transformation as a demand driver is a very strong trend, and we are seeing multiple opportunities across all markets on operating model transformation. Operating model transformation is being characterized by few very distinct ones, one is the shift to what we call as a vertical operating model or product-centric operating model where tech and ops is being aligned very closely to business units and to business outcomes. So that they operate in what is known as a product-centric model or the vertical model that I spoke about.

The other big one is of course the adoption of agile and lean into everything in operations and more importantly significant leverage of our Sonic [Phonetic] platform which is powered by MFDM [Phonetic] and the embedding of automation at a granular level across the enterprises operation suite, both on the tech side as well as on the operation side is also core to the operating model transformation that we’re seeing. So this kind enterprise-wide operating model transformation is going to be a big driver of demand, the couple of examples that are shared there are often one [Phonetic] of the others are examples of that and that demand trend I think is quite strong and will continue to remain strong into the foreseeable future.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. And just in terms of — is it fair to say in terms of what you said in earlier question, in the second half seasonality could be normal, especially in the U.S. but there could be some issues in the Europe and there could be significant shift if the macro issues goes more consuming versus what you anticipate now. Is it a fair assumption?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

It’s a prudent assumption. But from our side, we will remain focused on the opportunity on the ground, and we’ll deal with it one opportunity at a time, but at an overall level, it would be prudent to assume so.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. And last question, Rajesh, in this — CFO as welI. In this quarter, is there a 100% variable pay being paid or then some adjustment looking at the macro issues and could be impending slowdown, especially in the Europe?

Milind Lakkad — Chief Human Resources Officer

Yeah. Hi, this is Milind. We are going to pay 100% of variable pay for 70% of our employees. The remaining 30% will get paid based on the business rate performance.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. So Milind, this is for 2Q or this is for the rest of the FY ’23?

Milind Lakkad — Chief Human Resources Officer

No, no, this is for this quarter, Q2.

Sandeep Shah — Equirus Securities — Analyst

Okay. Okay. Thank you. Thank you and all the best.

Operator

Thank you. [Operator Instructions] The next question is from the line of Ravi Menon from Macquarie. Please go ahead.

Ravi Menon — Macquarie — Analyst

Hi. Thank you. Then my congratulations on the margin improvement and good revenue performance. I wanted to check about the strong additions in the 1 million and 5 million. I know that you did make a organizing change, but I guess that is — it’s too soon to see the impact of that. So should we think of this as change in your go-to-market and trying to close a lot more of these smaller deals, and is there more demand for digital transformation from the smaller firms because they might be laggards in this transformation?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

No, Ravi. This is just a bit of the impact of the currency volatility that you see. Our client metrics in non-U.S. markets, APAC, LATAM, parts of Europe, etc., are more weighed on the smaller-sized customers, and when we report those revenues in U.S. dollar terms, they are getting significantly impacted by the strength of the U.S. currency vis-a-vis the local currencies in these markets. So though our business with these firms is not going down. The translation of that when we report it in U.S. dollar terms is showing up. So that, at the bottom of the pyramid the impact is a lot long — lot more because the non-U.S. markets are more concentrated at the bottom of the pyramid. So it’s a bit of a mathematics, we are also internally debating, what is the best way to maybe communicate this metric, but we also don’t want to react media to this extreme cross-currency volatility that we saw, but we’ll put our heads together as to how to communicate this better in the future if required.

Ravi Menon — Macquarie — Analyst

Okay. Thanks. And how should we think about the net hiring being a little lower than the revenue growth? Is this a reflection of your expectation that the worst of the supply-side challenges are behind us, and we can now improve utilization, or should we think of this as linked to slightly softer demand visibility or maybe a combination of both?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Ravi your question was about the headcount growth, right?

Ravi Menon — Macquarie — Analyst

Yeah. That’s a little lower than the revenue growth. I mean this — we have seen that be [Speech Overlap]

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yeah. Ravi, we have been significantly investing into headcount addition through the last year. As you know, our headcount growth of close to 20% against revenue growth of about 15%, and that — we have built up a fair amount of headroom. So you should expect that we will be using that lever a bit more as we go into this year and try to balance our overall headcount to our overall revenue from a longer-term perspective.

So it’s in line with our plan, and into that environment, we have significantly invested and we are now reaping the benefits of that investment, as many of those early hires become productive into this cycle.

Ravi Menon — Macquarie — Analyst

Great. Thank you and best luck.

Operator

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

Gaurav Rateria — Morgan Stanley — Analyst

Hey, congratulations on good set of numbers. Two questions. Firstly, is it fair to assume that the book-to-bill in Europe would have improved on a quarter-on-quarter basis, basis the commentary that you made? And how the pipeline replenishment has happened in Europe after the deal wins concluded?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

So, typically this is from giving you incrementally metrics because then that sort of trend, but when you take Europe and U.K. together, it is. Yes, in book, but the actual growth of the pipeline is not more than the growth of the qualified pipeline. So you are seeing some amount of elongation of the deal pipeline between total [Phonetic] pipeline and the qualified pipeline. Now, these numbers are volatile because it can change on a — depending on how the environment changes. But that’s where we are.

Gaurav Rateria — Morgan Stanley — Analyst

Got it. Secondly, you — last quarter you talked about revenue productivity getting impacted as you created capacity. So, has that got sort of sorted out and you saw some improvement in revenue productivity, which also helped margins? And should this be seen as one of the levers for second half, in terms of margin performance on revenue productivity side? Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

This is the way to think about it is not in terms of short-term margin lever, but we have strategically taken a call to significantly expand our employee onboarding, especially on the entry-level employees. We had hired close to 120,000 freshers last year and invested into that pool, given the longer-term visibility that we see on the demand. We will complete our employee model on an ongoing basis, looking at the demand. So that is a reasonable expectation, but our overall hiring model is predicated on much longer cycle than short-term quarter-on-quarter adjustments.

Gaurav Rateria — Morgan Stanley — Analyst

All right. Thank you so much.

Operator

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

Manik Taneja — JM Financial — Analyst

Hi. Thank you for the opportunity. Just wanted to pick your brain about the aspect that historically, what we’ve seen is that we’ve improved our margins through periods of slow growth, do you envisage something similar playing out going forward as well? And if you could also help us with the margin levers that you think will play out in the near term given the fact that you’ve suggested that I think increases is not a unit company, it is still happening [Indecipherable] parts of the year. Thank you.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

If we have strong visibility of lower revenue growth and we become much more careful and optimize it. But I think at this stage, I don’t think we are at that point for us to be able to make a comment on that. So margins is more — margin optimization comes in more when there is good visibility on stable demand environment, and we use those periods to clean up on the margin side. Right now, whether we are at an inflection point or not, we’ll know only in a few quarters’ time, otherwise, we’ll continue to stay in the growth and investment mode. But short-term margin levers, I will hand it to Samir to talk about.

Samir Seksaria — Chief Financial Officer

Okay. So in the short term between the quarters, we would expect to focus on our operating metrics, utilization still continues to provide opportunity for optimization and realization has improved this quarter, and we’d expect to still leverage further on that. We’d also enhance our rigor on execution, and as the headwinds start trending down, we should expect that to also support margins.

Gaurav Rateria — Morgan Stanley — Analyst

Sure. Thank you and all the best for future.

Operator

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

Apurva Prasad — HDFC Securities — Analyst

Thanks for taking my question. Rajesh, while H1 bookings has held up above the $7 billion to $9 billion midpoint, how should we be thinking of the bookings trajectory for H2 more around the replenishment of the funnel of the qualified deal pipeline, any progression around that?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Apurva, difficult to say, we are running at 1.2 times book-to-bill, which is a fairly healthy rate to run it and we can take a bit of volatility on that on a quarter-on-quarter basis. So to take a near-term call on what will happen next quarter or the quarter after that, difficult for us to do. And more importantly, it does not have a significant impact on our business model. So neither in our planning cycles, or in our execution cycle, so our focus, of course, will be to maximize and capture as much as we can, but it’s not really a big factor that changes any of our planning scenarios.

Apurva Prasad — HDFC Securities — Analyst

Okay. Just a follow-up on that, Rajesh. So this 1.2 book-to-bill from a medium-term perspective, is that the number to build?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Apurva, I don’t want to get drawn out on that.

Apurva Prasad — HDFC Securities — Analyst

Right. And on the supply side, Rajesh, any comments on the learning hours which had a decline Y-o-Y for Q2? And if you could also help us with the hyperscaler certification numbers, the numbers that was 71,000 last quarter.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Learning hours to some extent impacted by the volume of freshers coming in. As you know, we had a very large volume of freshers coming in over the last couple of quarters, which has moderated over the last two quarters. So that will have a flow-through impact on the learning hours. There’s some amount of other impact also as we went into the reorganization that also had some impact. But at an aggregate level, our focus on reskilling and training and investing into our people continues at scale, and absolutely no change in it.

Apurva Prasad — HDFC Securities — Analyst

And the hyperscaler certification number?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I don’t know whether we give that out. If it is available in whatever form it is given, you will find it there.

Apurva Prasad — HDFC Securities — Analyst

Okay. Thank you.

Operator

Thank you. The next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.

Bharat Sheth — Quest Investment Advisors — Analyst

Hi. Thanks for the opportunity. And just on, can you give a little bit more color on product and platform which I understand is contributing around mid-teen kind of total revenue, and since we are moving towards more on SaaS — migrating to SaaS business model. So has it got, I mean despite good wins revenue recognition is a bit slow, and when do we expect that to catch up and what could be the margin lever in this business?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Hi. This is NGS here. Overall, the product and platform business is quite stable and a number of opportunities are coming our way across verticals, and across the solution segments that we have is looking good. The business model is certainly transformed itself into a pure-play SaaS-based operating environment because without any exception, every opportunity that we win for is on a SaaS-based offering. So we really look at it, we are also transitioned, I should say beautifully from a license on-prem AMC kind of a model to a paper use SaaS model for the past two years. And all of our products and platforms are now available on a cloud platform.

Mostly, it’s either installed in our own cloud environment or in some of the platforms that we’ve also chosen to operate in a hyperscaler cloud. In either of these cases, I think the key thing to note is that the SaaS model is prevailing, and the way that we monitor now is one of the ARR, essentially the recurring revenue that is contracted. That is the metric that we are monitoring and we are measuring our own performance as opposed to the earlier what is the license fee, what is the AMC, and what is that services element to it, and so on and so on, right?

So it is maturing, and I hope the products and platform itself is matured, but the whole environment of onboarding the clients on single-instance SaaS and some of the things that we are seeing that look, the data privacy element, data localization element means that look we have to operate. For example, in Europe, the data residency increasingly is becoming necessity to be located in Europe, these are things that are getting sharpened as I speak. But overall, it’s a good growing business, and the ARR metric is going to become increasingly relevant. At some stage, we hope that we’ll be able to start to report it separately on an ARR basis as we mature our model.

Bharat Sheth — Quest Investment Advisors — Analyst

And what are the margin lever in this business?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

Margin levers are essentially it depends on the volume of business, volume of transactions that they are going to put in, so it varies. And I think the efficiency is going to come from the fact that we’re not going to be doing too much customization, people are going to be using the products and platform more as a cost model. So we don’t have to maintain too many customer-specific customizations at any point in time, that is going to be one level of efficiency that’s going to come in. And consequently, our own support model, etc., is going to be heavily optimized and it’s going to be a lot more standardized.

Thirdly, the product release cycles are going to be a lot more standard, and then we’ll be able to define it rather than defined by customers at every instance. But things that at operating level, I see, and more and more is that as we add more optionality to the offerings in the sense that, look, I can give you the standard platform, but there are certain valuable [Phonetic] services that I can bring in. For example, client reporting, either customer can take data and then do it themselves, or for example, as a value-added service, we can provide client reporting separately, our client reporting separately or a certain amount of analytics, they can do it themselves or they can come and leverage our value-added services. So it’s a standard service, value-added service, efficiencies that come in view of a standard way of product management, product releases, and upgrades, all this will contribute to the margins.

Bharat Sheth — Quest Investment Advisors — Analyst

Thank you and all the best.

Operator

Thank you. The next question is from the line of Rahul Jain from Dolat Capital. Please go ahead.

Rahul Jain — Dolat Capital — Analyst

Yeah. Hi. [Technical Issues] for the opportunity. Just on the subcon side and on the global hiring side, if you could give us sort of subcon cost has been going up, of course, by the supply side factor, but given the expectation of relatively better supply and ones that’s is in the global market, if that going to change the subcon cost as well as global hiring outside India, as well.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

The question on global hiring, again?

Milind Lakkad — Chief Human Resources Officer

Subcon. Global. Can you repeat your question, Rahul? Global supply side.

Rahul Jain — Dolat Capital — Analyst

So yeah. So both factors, one, in general view on the subcon cost how it should trend, if the supply side eases out eventually, and is there any results on the attrition of global from a supply-side challenges.

Rajesh Gopinathan — Chief Executive Officer and Managing Director

I’ll answer first on the subcontractor cost. So as you would have seen, subcontractor costs have started spending downwards. And that is — most of it, the subcontractor cost increase was on account of two factors, the borders closed and with borders opening up and Visa availability in most countries being more and more available, we would expect subcontractor costs to start trending down. Also has the headwinds like attrition and probably the elevated backfilling cost is it something you would expect the use of subcontractors also to trend downwards.

Rahul Jain — Dolat Capital — Analyst

All right. And will we be incrementally using it as a metric do — and even given the macro remains [Phonetic]

Operator

Mr. Jain, please use the handset mode, the audio is not coming clear from your line.

Rahul Jain — Dolat Capital — Analyst

Is any better?

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Yeah. Mush better.

Operator

Yes, sir.

Rahul Jain — Dolat Capital — Analyst

Yeah. Sorry for that. So is it safe to assume that this may not go down substantially in near future, even supply-side eases out because it may be a good lever to, in case of the macro weakens, this could be an good alternative to manage the demand and supply situation better, or it should ease out irrespective of it?

N. Ganapathy Subramaniam — Chief Operating Officer and Executive Director

We’re trying to balance it, and it would be a dynamic thing, if demand as it continues to be strong, try to optimize and capture the demand first rather than optimizing the subcontractor cost. That’s the lever which we know how to use and optimize as and when need arises.

Rahul Jain — Dolat Capital — Analyst

Okay. Okay. Got it. Thank you. That’s it from my side.

Operator

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

Rajesh Gopinathan — Chief Executive Officer and Managing Director

Thank you, operator. We had a very good second quarter growing 18% in INR terms and 15.4% in constant currency. Our growth was strong across all our industry verticals and all our markets. Importantly, we had a good order book once again while clients continue to worry about the uncertain economic environment around, and are planning for different scenarios, we are not seeing any material change in client spending behavior. There are some sporadic instances of delayed decision-making, but those happen at normal times, too. So it’s hard to pin this down specifically to the economic environment.

Our operating margin expanded sequentially to 24%, and our net margin expanded to 18.9%. On the people front, the capacity we built up over the last few quarters and our investment in organic talent development is helping us meet this demand. Our attrition inched up to 21.5% in IT services on LTM basis. However, we believe the situation is easing and that our quarterly annualized attrition has peaked this quarter and will start tapering off going forward.

With that, we wrap up our call. Thank you all for joining us on this call today. Enjoy the rest of your evening or day, and stay safe.

Operator

[Operator Closing Remarks]