Wipro - Earnings Call - Q3 19/20

Transcript

Operator (participant)

Ladies and gentlemen, good day and welcome to the Wipro Limited Q3 FY 2020 Quarterly Investor Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Aparna Iyer, Vice President and Corporate Treasurer. Thank you, and over to you.

Aparna Iyer (VP and Corporate Treasurer)

Thank you, Stanford. A very warm welcome to our Q3 FY 2020 earnings call. We will begin the call with business highlights and overview by Abid, our Chief Executive Officer and Managing Director, followed by financial overview from our CFO, Jatin Dalal. Afterwards, the operator will open the bridge for Q&A with our management team. Before Abid starts, let me draw your attention to the fact that during this call, we may make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are associated with uncertainties and risks, which may cause the actual results to differ materially from those expected. The uncertainties and risk factors are explained in our detailed filings with SEC. Wipro does not undertake any obligation to update the forward-looking statements to reflect events and circumstances after the date of filing.

The conference call will be archived, and a transcript will be made available on our website. Over to you, Abid.

Abid Neemuchwala (CEO and Managing Director)

Thank you, Aparna. Good evening and good morning, ladies and gentlemen. First of all, wish you all a very happy New Year. I'm joined over here by my leadership team, and it's a pleasure for us to speak to you all and share the results of the third quarter. Let me quickly provide an update on Q3 performance, our view of the demand environment, and progress on our strategy. We had a strong quarter, both on revenues and margin. Our revenues grew by 1.8% in constant currency terms at the midpoint of our guidance. On a YTD basis, we grew at 4.3% in constant currency terms. In financial services, we saw a slowdown in our growth rate due to continued softness driven by the macroeconomic environment. We, however, remain confident in winning the new deals that we are participating in and leveraging our strong capabilities in digital.

We are pleased with our performance in consumer, which grew 12.1% year-on-year constant currency this quarter, and the sustained rhythm that we have been in this vertical on deal widths. E&U and communications continued to grow moderately. We continue to see recovery in manufacturing and are encouraged by the order book and pipeline. Hence, we saw a seasonal uptake in HPS as Q3 has open enrollment period, while the technology business was impacted both by furloughs and a slowdown in spend in the semiconductor verticals. The overall demand environment has neither improved nor deteriorated from what I shared last quarter, but we see the same level of uncertainty due to the various geopolitical risks at play. We delivered a healthy operating margin of 18.4% in Q3 versus 18.1% last quarter, aided by the depreciation of the rupee and some favorable movement of the cross currency.

Now, let me provide you a quick update on our strategy. Business transformation. In the past quarter, our customers across nearly every industry have chosen us to embed digital transformation within their business. It is no longer just about enabling new customer experience, it's about fundamentally changing a business, and I'm pleased to share our wins, which show how our customers are turning to us as a trusted business transformation partner. In digital, our revenue grew 22.8% year-on-year and now contributes over 40% of our revenues. For example, we have won a service design engagement to define the future vision and establish the strategic foundation for digital transformation at a bank in the U.K. in the mid-market segment called Cynergy Bank. On modernization, we continue to help enterprises through their business-first strategy with an industrialized approach in enabling our customers to drive business acceleration, customer experience, and collective insights.

Our investments in Cloud Studio are continuing to pay off. We have accelerated the cloud journey for our customers by migrating more than 39,000 workloads and 2,900 applications. A U.S.-based semiconductor company has chosen Wipro to move its current engineering application infrastructure to the cloud. We will leverage our Cloud Studio offering to help the client become more agile, ensure faster time to market, and lower the total cost of ownership for the client. Our strategy on connected intelligence, which covers data, analytics, artificial intelligence, and engineering, is delivering good results. The EngineeringNXT set of offerings that I had talked about, we continue to invest in it and put the building blocks in place. We concluded the ITI acquisition this quarter. The acquisition will help us build momentum in Industry 4.0 and IoT offerings and will enable us to have a new set of clients to create differentiated value.

We have won a contract from the North American subsidiary of a global automobile company to deliver the next-gen in-vehicle infotainment software as part of our EngineeringNXT proposition. The fourth area is around trust. Focusing on enhancing our cybersecurity offerings, we have created a dedicated OT and IoT security practice to address the changing threat landscape due to connected systems. We recently launched our 15th Cyber Defense Center in Melbourne. As an example, Wipro has won a strategic contract from a leading U.S.-based financial services institution to design and implement a more effective risk and compliance management process for them, leveraging artificial intelligence. The rapid adoption of HOLMES continues, delivering significant service improvement in IT-run services, testing, as well as our digital operations business. Our effort savings in fixed-price projects improved from 16.5% in Q2 to 17.8% in Q3.

One of the large U.K.-based global providers of financial market data and infrastructure has selected Wipro for a data migration contract, leveraging the contract intelligence capabilities of Wipro HOLMES. We continue to drive localization, and now our U.S. workforce is over 70% local, enhancing campus hiring, deepening employee engagement, and making significant investments in training and skill development in all our markets. This is also reflected in the attrition rates, which have improved to 15.7% for the trailing 12 months. In conclusion, we remain focused on deepening our customer relationships and converting our funnel, winning large deals that are due to close in this quarter. I will now request Jatin to give the highlights of our financials.

Jatin Dalal (CFO)

Very good evening, very good morning to the participants. As you know, we delivered at the midpoint of our guidance range. We also delivered sequentially 30 basis points higher operating margin. Overall, we delivered 3.2% EPS growth year-on-year. Cash conversion remained very robust. Our operating cash flow was 124% of net income, and free cash flow was 101% of our net income. Our forex realizations remained very robust. Our realization rate for Q3 was 72.09 compared to 71.56 for Q2. We have a very healthy cash position on our balance sheet. Our total cash on the balance sheet is $4.9 billion gross and $3.6 billion net. Our ETR is stable at 20%. We had a slightly lower ETR in Q2 because of the changes in the tax law, as all of you are aware.

Our guidance for Q4 is 0%-2% sequentially in the constant currency that are mentioned in our press release. We'll be very happy to take your questions from here.

Operator (participant)

Thank you very much, sir. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may please press star, then one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star, then two. Participants are requested to use handsets while asking a question. Anyone who wishes to ask questions, please press star, then one. Participants who would like to ask questions, please press star, then one. The first question is from the line of Sandip Agarwal from Edelweiss. Please go ahead.

Sandip Agarwal (Executive Director and Lead Analyst)

Yeah, happy New Year to the management team, and also thanks for taking my question. I have just a couple of questions. Abid, as you mentioned, that now over 70% of the work for us in the U.S. is local, which means that we have done an extremely good job in terms of avoiding any business-related risks from a long-term perspective. And ideally, it should have given us a lot of advantage on the revenue growth side, number one. Number two, the amount of work which we have done in the last four or five quarters in terms of deal wins and on the digital side, which is now like 40% of the revenue, our growth momentum should have now matched the industry level or at least closer to our competition. But we are still not seeing that in translating into numbers. So two things which I wanted to understand.

One, are we very close to the point where we will start seeing that transitioning into numbers? And number two, how bad is our non-digital side, which is taking away all the good work or good growth of the digital side? Thanks.

Abid Neemuchwala (CEO and Managing Director)

So Sandip, as you rightly mentioned, our ability to fulfill our order book that has been won and execute engagements in the market, especially in the U.S. with 70% local workforce, is clearly a differentiator. And especially in digital, where a lot of work happens in Agile Scrum teams on-site, it has been an advantage for us. Clearly, in some of the segments, especially in the banking segment, this quarter we saw a slight slowdown in digital simply because of furlough, and this being the last quarter for a lot of banks. Some of the Agile projects, which typically also have SOWs for a shorter term given out, sometimes to save costs, you may not get those SOWs renewed in the last month or so, which may impact digital revenues.

But in general, I feel quite good about both our digital business as well as the banking segment coming back in the next year. And that's why I feel good about our pipeline, both especially with digital deals becoming larger and coming across various verticals for us. I think the overall business, which you mentioned as non-digital, the 60%, is also part of the modernization and other strategies that we talk about, where we are enabling that part of the business also so that overall that doesn't become a drag to our overall growth rate. And we've been able to rotate our business from the old to the new relatively well. Of course, there are still parts of the business which degrow, and there's a productivity that happens over there, but we feel quite good about it on an overall basis.

Sandip Agarwal (Executive Director and Lead Analyst)

Okay. Thanks. That's all on my side.

Operator (participant)

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

Parag Gupta (Executive Director)

Hi, good evening, and I wish you all a very happy New Year. Just two questions from my side. So I just wanted to understand, getting into 2020, how do you feel about the demand environment relative to what it was when you got into 2019? Are you seeing any sort of client pressures where deal conversions are taking time or projects are being broken up into smaller projects and just getting deferred? So I just wanted to understand that. And the second question is, you seem to be a little bit more confident on banking for the next 12 months. So I just wanted to understand what subsegments within banking are making you feel more positive, and is there any risk that these projects also get pushed out given the kind of pressures your customers may be seeing in their own business?

So I just wanted to get some sense qualitatively on both of these. Thank you.

Abid Neemuchwala (CEO and Managing Director)

Yeah. On the second part of your question on banking and financial services, I'll have Angan Guha, who heads that business, give you some color, and answering the first part of your question, compared to last year, we don't see a significant change in the demand environment, either positive or negative. Level of macro uncertainties do continue. But from a Wipro perspective, we had a very robust order booking in Q3, and we are entering the calendar year with a bigger pipeline than we entered last year. Deal closures, we are not seeing any extended time compared to last year. So the time that deal closures are taking is pretty much the same. Actually, the deals, we have a larger component of large deals, so the deals are definitely getting larger. Especially in digital, the deal sizes are bigger than last year. Angan?

Angan Guha (SVP and Global Head of Banking, Financial Services, and Insurance)

Yeah. And Parag, this is Angan Guha. So as you know, Parag, over the last three years, BFSI has delivered industry-leading growth. Now, this quarter, we had a challenge because of furloughs, because of certain clients in the capital market space in sourcing, and that is why we saw a little bit of headwind. But I'm confident because our funnel is probably bigger than ever, and if we can close some large deals, like Abid mentioned, next year will be much better. And the confidence comes in from the funnel size. I think our deal size has gone up, and the funnel size is significantly higher than what it was in the same period last year.

Parag Gupta (Executive Director)

Got it. And maybe if I can just ask one more. I do remember you talking about digital work also being discretionary in nature, which potentially runs the risk of either getting pushed out or made smaller if there is an issue in the market or in the demand environment. So I just wanted to understand, is that still the case? Are you still seeing some sort of those conversations happening, or do you think digital is a lot more strategic right now and hence is likely to come through even though there may be other challenges faced by your customers?

Abid Neemuchwala (CEO and Managing Director)

We have Rajan, who's the President of Wipro Digital. I'll let him throw some color at it.

Rajan Kohli (President and Global Head of Wipro Digital)

Hi, this is Rajan. Actually, both the statements you made are sort of true. It is discretionary to the extent that it is up to the client to really spend it, but it is essential because this is the long-term future of the enterprises. To that extent, change is becoming the new enemy. So we feel that they have no option but to spend it. But as Abid said in the opening, certain segments have sort of this quarter tightened the belt, but we believe that's a very short-term phenomenon because they will come back and spend the money on digital because that's the only way out for them to optimize their overall estate. Thank you.

Parag Gupta (Executive Director)

Okay. Great. Thanks a lot.

Operator (participant)

Thank you. The next question is from the line of Sudheer Guntupalli from Motilal Oswal. Please go ahead.

Sudheer Guntupalli (Vice President and Research Analyst)

Good evening, gentlemen. Thanks for giving me this opportunity. Within the consumer BU, if I may ask, what are the subsegments driving growth? Because the strong reported growth seems to be at odds with the commentary of some of our competitors, especially in the subsegment of, let's say, retail. So within the consumer BU, what are the areas where you are seeing strong growth, and what is your take on the specific segment of retail?

Abid Neemuchwala (CEO and Managing Director)

Sudheer, I'll let Srini Pallia, who's the President for our consumer business, throw some color. But essentially, our growth in consumer is led by digital. And also, we work with a lot of our customers in the e-commerce space, which is the part of consumer which is growing. And we have a fair mix and share of that business where we are seeing growth, primarily through a lot of discretionary spending on project work. Srini can elaborate a little bit more by vertical.

Srini Pallia (President of Consumer Business Unit)

Sure. Thanks, Abid. Hi, Sudheer. This is Srini Pallia here. So there are two parts to this industry that we see. So specifically on the retailers, obviously, you would have seen the news that they had a good holiday season in the U.S. thanks to the consumer confidence. And if you look at overall retail, last quarter grew 3.4% during the holiday season. And of course, like Abid mentioned, e-commerce grew almost 19%, while e-commerce still contributes only 15% of the overall retail. And however, brick and mortar actually declined 1.8%. So net net, what we are seeing is retailers investing in technology to kind of create a core differentiation in this other context, which is e-commerce picking up quite a bit. And whoever is investing in technology are doing well. We also see a traction in modernization and digital transformation that, again, Abid and Raj talked about.

Overall, retail market, from my point of view, will continue to be choppy and volatile. I've engaged with our customers and specifically focused on executing today's strategic priorities. Now, the other part of retail is changing behavior of consumers, right, and if you look at, there are a lot of dynamics around that, and specifically on the consumer business, in addition to digital transformation, brand companies are looking at going direct to D2C, which is direct to consumer, and they're also investing significantly on their supply chain modernization, so both retail companies and CPG companies, to my point, in my mind, will continue to invest significantly on technology, and if you look at the growth of some of the CPG companies that we have seen, they are actually growing in emerging markets, and they continue to invest in that, which is their next way of growth.

And our presence outside of the U.S. is also helping us to go after that part of the business. So net net, the industry will continue to be volatile and choppy. We'll stay focused on where the customers are investing, especially on the technology transformation. I think that's the right way to go in my point of view, Sudheer.

Sudheer Guntupalli (Vice President and Research Analyst)

Sure. That's very helpful. And the other question is, there seems to be a sharp improvement in the vertical margins in communications, almost 450 basis points or so. And this came despite revenue remaining more or less the same. So any color on the same will be helpful.

Jatin Dalal (CFO)

Yeah, so I wouldn't see too much into the quarterly variation. We had a one-time collection which reversed a provision for doubtful debt, and that has improved the quarterly operating margin. I would look at a four-quarter trend for a normalized sustainable margin.

Sudheer Guntupalli (Vice President and Research Analyst)

Okay. So this quarter, if I adjust for that provision, what would be the normalized margins, adjusted margins?

Jatin Dalal (CFO)

That would be difficult to break out, but if you see the trend, you should be able to see that additional adjusted in that.

Sudheer Guntupalli (Vice President and Research Analyst)

Sure, sir. Thanks so much, and all the best for the future.

Operator (participant)

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

Sandeep Shah (Director and Lead Equity Analyst)

Yeah. Thanks for the opportunity, and congrats on good execution. Just a bit, wanted to understand if you can throw some light in terms of, is it fair to say most of the portfolio-specific issue in the global markets outside of India is largely behind? Because last quarter, we called out manufacturing. Now, you are foreseeing some amount of green shoots and tailwinds also coming out of manufacturing. So is it fair to say outside India, most of the client-specific or portfolio-specific issues are behind for Wipro?

Abid Neemuchwala (CEO and Managing Director)

Yeah. Sandeep, I would say, including India SRE, most of the portfolio issues that we had, that we were working on the turnaround, are behind us. Of course, the state-run enterprises, which is a segment outside, still has restructuring work to do, and there also, we are making a lot of progress. Having said that, obviously, in our health business, again, based on some of our portfolio mix of higher exposure to ACA, it does continue to be an area of uncertainty, and that will drive volatility.

But otherwise, overall, if you look at the portfolio, I do feel good that things that we had set out to both re-engineer our portfolio and address Wipro-specific issues, as well as a lot of the investment and capability that we have been doing, where we get the mindshare and traction with customers with a very robust set of tailwinds, gives me confidence that those issues are behind us.

Sandeep Shah (Director and Lead Equity Analyst)

Okay, and just to follow up a bit, around three, four quarters back, we said that the growth outperformance in the banking financial services is largely driven through higher penetration of digital offerings in the banking as a vertical. So if you need to put that number in terms of penetration, are we able to replicate that success which we have done in terms of digital penetration in banking in other segments, or still that's a work in progress?

Abid Neemuchwala (CEO and Managing Director)

I think learning from what we did in the banking and financial services segment, you see the evidence of replicating that in the consumer segment. Also, it's a function of both the horizontal capabilities that go with digital, as well as the vertical capabilities that each one of the business units are building to be able to contextualize digital to their own vertical. And the second part of that is also the uptake and spend that these companies in particular industry verticals have in terms of investment on digital. So I feel good. For example, we are seeing good deal traction in the healthcare piece outside of HPS in our health business, where healthcare companies are investing in patient experience, which essentially is part of digital, and we are winning a fair share of our business.

In the E&U business, in the energy space, there's a lot of investment happening in digital and cloud, and we are winning a fair share of our business. So I can go vertical by vertical, but essentially, to answer your question, yes, we've been able to take our expertise, our horizontal capability, banking-led, because banks were the first to invest, but we are able to translate those capabilities in each one of the verticals. And each vertical, I would say, is at a different level of readiness as well as industry uptake to be able to take digital.

Sandeep Shah (Director and Lead Equity Analyst)

Okay. And just the last two questions. If I look at the commentary on the funnel, it looks really positive, especially on the banking financial service. So can you throw some light in terms of the sales cycle here and where are we standing in terms of the number of competitors? Is it more proactive, reactive? And the last question to Jatin, this is the fourth quarter where the EBIT margin on IT service has been close to 18% despite the headwinds on the margins. So do you believe that this is a sustainable level to look for, and there could be a further improvement if the growth pickups?

Abid Neemuchwala (CEO and Managing Director)

So Sandeep, the funnel looks good. It has a combination of both what I would call as deals of large size as well as average-sized deals. We've not seen any change in the time it takes to close a deal, but typically, a large deal takes almost six to eight months to close. Small deals, obviously, close faster, so that pace continues. And we see a good share. We are getting our fair share of deals in terms of both in our funnel as well as getting into the last two or three, where we then really have a chance to win the deal. Jatin?

Okay. Okay. And the question on margin?

Jatin Dalal (CFO)

Yeah. So Sandeep, Jatin here. So as you know, we have delivered for this fiscal 18.4% in Q1, 18.1% in Q2, and 18.4% in Q3. So that we have demonstrated the discipline of execution, even as we have continued to invest incrementally in our big bets through the course of the year. As we always maintain, our priority is to get a superior growth trajectory for the organization because we believe that is the source of margin expansion or margin sustenance in medium term. And therefore, we'll remain always committed to initiatives and investments that we need to do to get the growth trajectory up. So far, we have been quite successful at finding those dollars by squeezing the costs that we believe we can squeeze out, and that would be our endeavor going forward. We are not guiding on margins.

As I said, we will remain committed on getting the growth trajectory further improved from where we are.

Sandeep Shah (Director and Lead Equity Analyst)

Okay. Thank you and all the best.

Operator (participant)

Thank you. The next question is from the line of Madhu Babu from Centrum Broking. Please go ahead.

Madhu Babu (Analyst)

Yeah. Hi, sir. So last one year, we have been going slow on acquisitions. So currently, around 25,000 total is the net cash on balance sheet, and we generate almost 10,000 total free cash flow per year. So would we start looking to increase the payout ratio more of interim dividends because anyway, the buyback for the next buyback would be only post-September of this year? So with such a high cash component on the balance sheet, would you look for more interim dividends from here on?

Jatin Dalal (CFO)

So as you know, we have had two cash events in the year, and I think that's optimal. We have declared an interim dividend in this quarter. The board will continue to evaluate as we move forward on what should be the way of returning cash to the shareholders. For the last two years, if you see, we have gone significantly ahead of our commentary of paying 45%-50% of net income over a block of years. And therefore, our philosophy has been around what we don't need for our growth, we will certainly look at returning, but in the guided range that we have spoken about. So we will continue to look at opportunity, and the board will make decisions as it deems fit based on our requirement of funds.

Madhu Babu (Analyst)

One more on the top two clients in the banking. I think the top accounts have been weak, and one of that is a banking account. And even within the top five, there are two banking accounts. So what are the outlook on those two accounts for next year?

Jatin Dalal (CFO)

We cannot talk specifically about which two because the other two could be different now in this quarter compared to the two that we had in previous quarter. But overall, I wouldn't worry about the commentary specific to customer. Abid and Angan had spoken about our overall outlook on BFSI space, and I would see that as an important step forward from our side because individual clients can always go up or down, but what I'm sure you're looking at is the portfolio outcome from the BFSI.

Madhu Babu (Analyst)

And last one on the engineering side, sir. I think we brought in a new team. And also, could you elaborate more on next year, what is the target growth? Because that segment, actually, some of the pure-play vendors are growing at a much faster pace.

Abid Neemuchwala (CEO and Managing Director)

Yeah. So as I mentioned in my opening remarks, we are making significant investments. We just closed an acquisition. Also, over there, I let Harmeet Chauhan, who Heads our Engineering Business, give a little more detail color on how we feel about our Engineering Business.

Harmeet Chauhan (SVP and Global Head of Industrial and Engineering Services)

Hi. This is Harmeet here. As you know, we've been operationalizing our new strategy for the last two to three quarters, including the acquisition of ITI, which we completed in Q3. We also rolled out new EngineeringNXT offerings, which is to truly enable innovation for clients across 11 different industries for both accelerating time to market and also delivering efficiencies, so based on where we sit, based on where we are, we believe that we are heading to a phase where we have a complete stack of engineering offerings to really sharpen our value creation for our customers, and that should position us in the industry-leading growth. Even if you see in quarter three, we have delivered QoQ growth, and we believe that momentum to continue going forward.

And of course, the other data point I would like to share as far as your operationalizing strategy is customers are really engaging us across 5G, across IoT, across Industry 4.0, across connected products, across software products. So the breadth and depth we are seeing in terms of addressing, and we are winning against competition. We have seen in Q3 as well a significant traction of growth across geographies, North America, Europe, and in Japan as well. So I remain bullish, and our team remains bullish to deliver on industry-leading growth going forward.

Madhu Babu (Analyst)

Thanks.

Operator (participant)

Thank you. The next question is from the line of Abhinav Ganeshan from SBI Pension Funds. Please go ahead.

Abhinav Ganeshan (Analyst)

Good evening, sir. Thanks for taking my question. I just wanted to cover a couple of things. First one is that our digital and platforms are doing better. So is there any tailwind coming from HOLMES? And the second part is, can we give more color on the AI? How are our capabilities with our peers? Are we doing some work on cognitive AI as such? Thanks.

Abid Neemuchwala (CEO and Managing Director)

Yeah. So HOLMES, both as part of a lot of the run deals that we bid for, becomes an essential part of our solution, and it is a differentiator for us. If you remember a couple of years back, as we engineered HOLMES, we had picked up some of our large accounts and run engagements in those accounts to deploy HOLMES, to build use cases, to build interfaces so that they can be deployed at an enterprise level. Those deployments, as well as that IP, along with the overall HOLMES framework, have helped us win a large number of run deals and deliver productivity and margin within those deals. As AI technology has become available primarily also from the cloud providers, we've identified use cases where we can inherit technology from each one of the cloud providers, whether it is Azure, whether it is AWS, or GCP.

We've created use cases across platforms so that we can deploy HOLMES in a cloud environment in the work that we do for them. So I feel pretty good. Over 280 customers now have HOLMES deployed with use cases. We have about 17.8% of our work being done in FTE equivalent terms through automation, which is primarily driven by HOLMES. The second area where we see traction with HOLMES is what we call as HOLMES for business. One of the examples that I gave in my opening remarks is an example of HOLMES for business. We've identified about 12 industry use cases where the applicability of artificial intelligence and cognitive technologies delivers business transformation. We have deployed one or more instances of those use cases with our customers. A lot of those deals are also proactive. They are also part of our business transformation offerings.

Including change management, we are able to do those deployments. Although the size of those deals are small right now, but we see quite a lot of traction, and we are building more accelerators leveraging HOLMES across different industry verticals.

Abhinav Ganeshan (Analyst)

Thank you.

Operator (participant)

Thank you. Participants who would like to ask questions, please press star, then one. The next question is from the line of Harit Shah from IndiaNivesh Shares and Securities. Please go ahead.

Harit Shah (Senior Analyst)

Yeah. Thank you for the opportunity. I just want to get a sense of what is happening on your top clients. So you know the revenue in dollar terms is down at its lowest level more than two years. So is there some sort of color on what is happening or the trends that are playing out in that space? That would be helpful. Thank you.

Abid Neemuchwala (CEO and Managing Director)

Harit Shah, we've been talking about the cross-sell and client mining across our top clients for the last many quarters. As you saw, we saw double-digit growth in the last two or three years, which we've seen a little bit of slowdown in the last couple of quarters. If I give some color on the mix of the top clients for Wipro, our top clients are primarily from banking and financial services industry and technology industry vertical. Both of these, as we have discussed, financial services last year, because of the, as you guys know better than anybody else, because of the interest rate change, a lot of banks did curtail their spend. We had some challenges at a macro level in the capital market space, and that has impacted because they form part of our top 10 clients.

Similarly, in the technology space, of course, Q3 always is a difficult quarter for technology because of furloughs. But apart from that, we are seeing, again, due to macro issues, challenges in the silicon segment of our Tech business unit, primarily driven by the U.S.-China trade and the slowness of the uptick of 5G with telecommunication service providers, which has an impact on the network equipment providers, both of which in banking and financial services as well as in the Tech BU. I see our midterm or short-term temporary, and next year, we feel that it will be back to growth and there will be uptick in both of these. So the relationship with our top clients is very robust. We are gaining market share even when sometimes our revenue goes down as they consolidate, as they renew. So we feel quite good about our overall top client portfolio.

Harit Shah (Senior Analyst)

Sure. That's helpful. You had mentioned last quarter that you do a lot of digital-related work for your top clients. And you had mentioned that some digital projects had ended and renewal is taking a little bit of time. So have you seen that trend continue this quarter also? And any kind of renewals taking time maybe because of budget, the new budgets being decided or any other reason?

Abid Neemuchwala (CEO and Managing Director)

Yes, so specifically, our Q3, which was the last quarter for a lot of banks, we did see customers holding their spend back sometimes to address their own internal budget challenges because, as you rightly mentioned, digital work is also a lot of discretionary spend, and they may decide to pause work and not renew their SOWs, and we did see that coming into January, we are starting to see that demand coming back, but it's too early to call right now, so we have built that uncertainty in our 0%-2% guidance that we have given.

Harit Shah (Senior Analyst)

Okay. Thank you. And my last question, the bookkeeping question, what are the outstanding forex hedges that you have at the end of the quarter?

Jatin Dalal (CFO)

Yeah, so we have $2.6 million of outstanding hedges as of December.

Harit Shah (Senior Analyst)

At what rate would that be on an average?

Jatin Dalal (CFO)

As you know, we have stopped sharing those rates, but we typically hedge at any point in time for 50% of our next four quarters net inflow, and you can gauge what rates we would have booked those at.

Harit Shah (Senior Analyst)

Sure. No problem. Thank you very much and best of luck.

Operator (participant)

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

Nitin Padmanabhan (Analyst)

Yeah. Hi. Thanks for taking my question. Abid, you clearly highlighted that there's an improved funnel that's driving confidence of growth, sort of improving going forward. And also the fact that there's a potential deceleration of headwinds from the existing client buckets, and at some point, they would actually start spending. So I just wanted your thoughts on two things. One is, in terms of the funnel, are these more cost takeout kind of spends, or are these higher on the digital side of spends? And second, something that's at loggerheads with the broader thought process, if you could clarify, is that the broader market environment appears to continue to be weak, at least if you look at banks and their own profitability and so on and so forth. So what, in your mind, is sort of changing that they'll actually come back and really spend?

What's the confidence of that really happening?

Abid Neemuchwala (CEO and Managing Director)

So there are three areas that I would kind of like to touch upon. One is banks and all other industries, but especially banks, continue to invest in digital. So that gives us optimism because as that digital spend happens, we are able to participate in that. The second is, as you rightly mentioned, there are challenges as the macro economy slows down and it impacts banks. Banks will normally lead some of these areas of slowdown and cost efficiency as well. And we have a significant play in the area of helping banks deliver a better revenue-to-cost ratio, and we participate in that. And those deals are cost takeout deals, consolidation deals. Those deals have a component of large deals, but none of them come without a transformation component.

To answer your third question, or the third part of my answer is that invariably, those deals are digital in nature. In some cases, they may be more on the business transformation and experience front. In some cases, it may be more of automation and AI-led business transformation. So digital is essentially part of all of that. I wouldn't imagine a pipeline which is not 60%-70% digital in today's IT services environment.

Nitin Padmanabhan (Analyst)

Sure. That's helpful. Just one follow-up there is, do you think, looking at the funnel, that customers really expect vendors to really invest upfront for them considering what they're going through? Is that something that's sort of out there in the landscape, or that's not really the case?

Abid Neemuchwala (CEO and Managing Director)

Actually, nothing has changed much. If I look at some of the large deals we've done in the last eight, 10 years, invariably, large deals have a component of skin in the game. They have a component of upfront capital investment on transformation and the gains coming over a few years. And invariably, those deals sometimes require deal structuring depending on the customer's cash flow needs as well as the ability for us to leverage our balance sheet, if it makes sense. As you would remember, as part of our strategy, we have sharpened our ability to do a gain share deals, outcome-based pricing deals, where we take the risk of transformation upfront and commit to a certain amount of savings, which does give us, given our balance sheet, gives us the ability to structure the deal. But I would answer that question on a deal-by-deal basis. I wouldn't generalize it.

The large deals that we have done, in some of those deals, we had to do some kind of an upfront investment. In others, we did not have to. Wherever we have to do that upfront investment, it is priced in. The cost of that capital is priced into the deal financials. If you look at our unbilled revenues over the past few quarters, it has shown a steady improvement. We've maintained a lot of discipline in how we leverage our balance sheet so that our quality of revenues are not impacted in the near term.

Nitin Padmanabhan (Analyst)

Sure. That's very helpful. Just one data point, if I may, is what was the contribution from ITI this quarter?

Jatin Dalal (CFO)

Hi, Nitin. This is Jatin. 0.3% of our 1.8% sequential growth came from ITI.

Nitin Padmanabhan (Analyst)

Thank you, Jatin. Happy New Year. Thank you.

Jatin Dalal (CFO)

Thank you.

Operator (participant)

Thank you. Participants, to ask a question, please press star, then one. The next question is from the line of Shashi Bhushan from Axis Capital. Please go ahead.

Shashi Bhushan (Executive Director)

Yeah. Thanks for taking my question. Our margin performance, despite growth volatility, has been very stable. And we have invested in building localized talent pool despite any major impact on the same. So shall we assume that margin gains through automation or high-margin digital deals would be reinvested in the business for growth going forward? And we are comfortable at the current level of margin profile and not eyeing for expansion.

Jatin Dalal (CFO)

Shashi, you articulated well how we have delivered first three quarters of this fiscal where we have continually invested, especially in our articulated big bets to get a superior growth trajectory. And we have been able to find those dollars from automation, AI, and our traditional operating levers. However, we will remain very focused on growth. The priority number one for us is growth. And for that, we will continue to invest.

So we don't want to guide forward, but our effort is to go ahead and invest and also squeeze that dollars out of the other cost levers that we have.

Shashi Bhushan (Executive Director)

So very, very helpful, sir. Thanks a lot.

Operator (participant)

Thank you. The next question is from the line of Ruchi Burde from BOB Capital Markets. Please go ahead.

Ruchi Burde (Assistant VP of Research, Technology and Internet)

Thank you, [Foreign language]. My question is on your retail and consumer vertical. You identified that growth in the vertical was led largely by your association with the e-commerce name. So what I'm trying to understand here is, was this a function of more strong seasonality of the e-commerce player that one witnessed, or this is more structural growth uptick that Wipro witnessed and can sustain in the future?

Abid Neemuchwala (CEO and Managing Director)

I'll let Srini address that.

Srini Pallia (President of Consumer Business Unit)

Thanks, Abid. Now, if you look at the last few quarters of where we were with the consumer BU, I think one of the points that I made in the previous question as well is retail CPG companies are definitely going through turbulence, transition, and transformation at the same time. What's important is look at those customers who are trying to transition and look at those customers who are trying to transform themselves and be part of that journey. And if then you are part of their strategic priorities, and that actually has been helping us. In the context of industry itself, yes, it's going to be choppy and volatile. But from our point of view, trying to focus on those investment areas and executing to their priorities, I think, is what will sustain the growth and momentum in the few quarters ahead as well.

Ruchi Burde (Assistant VP of Research, Technology and Internet)

Thank you.

Srini Pallia (President of Consumer Business Unit)

Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, as there are no further questions from the participants, I would now like to hand the conference over to Ms. Aparna Iyer for closing comments.

Aparna Iyer (VP and Corporate Treasurer)

Hi. Thank you all for joining the call. In case we could not take your questions due to time constraints, please feel free to reach out to the investor relations team. Have a nice day.

Operator (participant)

Thank you very much. Ladies and gentlemen, on behalf of Wipro Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.