Tata Consultancy Services : Transcript of the Q1 2022-23 Earnings Conference Call held at 1900 hrs IST on Jul 8 2022

Tata Consultancy Services Limited

Q1 FY 2023 Earnings Conference Call.

July 08, 2022, 19:00 hrs IST (09:30 hrs US ET)

Moderator:Ladies and gentlemen, good day and welcome to the TCS Earnings 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 '*' then '0' on your touchtone phone. Please note that this conference is being recorded. 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: Thank you, Steven. Good evening and welcome, everyone. Thank you for joining us today to discuss TCS' financial results for the first quarter of fiscal year 2023 that ended June 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; Mr. N G Subramaniam -- Chief Operating Officer and Executive Director; Mr. Samir Seksaria -- Chief Financial Officer.

Unfortunately, Mr. Milind Lakkad - our Chief HR Officer could not join us today due to a bereavement in his family.

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 mailed out to those who have subscribed to our mailing list.

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

Rajesh Gopinathan: Thank you, Kedar, and good morning, good afternoon and good evening to all of you. We are starting out in FY 23 on a strong note, growing 16.2% in rupee terms, 15.5% in constant currency terms and 10.2% in dollar terms.

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

We announced our salary increases with effect from April 1st. Reflecting that and other employee costs we incurred in Q1, our operating margin for the quarter was at 23.1%, a contraction of 1.9% sequentially and 2.4% year-on-year. Net margin was at 18%.

I will now invite Samir 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 that we're seeing. Over to you, Samir.

Samir Seksaria: Thank you, Rajesh. Let me first walk you through the headline number. In the first quarter of FY 23 our revenue grew 15.5% YoY on a constant currency basis. Reported revenue in INR was `527.58 billion, a year-on-year growth of 16.2%. In dollar terms, revenue was $6.78 billion, a year-on-year growth of 10.2%.

Let me now go over the financials. As Rajesh mentioned, we announced salary increases of 5% to 8% and much higher for top performers with effect from April 1. This had a 1.5% impact on operating margins. Continued supply side challenges entailed additional expenses, such as backfilling expenses and higher subcontractor usage. This and normalizing travel expenses negated various operational efficiencies, resulting in an operating margin of 23.1%, a sequential contraction of 1.9%.

Net income margin was at 18%. Our effective tax rate for the quarter was 25.5% and our accounts receivable was at 63 day sales outstanding in dollar terms, down one day compared to Q4. Net cash from operations was ₹108.1 billion, which is a cash conversion of 114%. Free cash flows were ₹100.68 billion. Invested funds as on 30th June stood at ₹527.6 billion, and the board has recommended an interim dividend of ₹8 per share.

Since Milind is not here today, I will take you through the HR numbers now. On the people front, our workforce strength crossed the 600,000 mark this quarter, ending this quarter with 606,331 employees. We continue to hire talent from across the world, with a net addition of 14,136. It is a very diverse workforce with 153 nationalities represented and with the women making up 35.5% of the base.

We remain committed to investing in organic talent development towards building the next generation G&T workforce. In Q1, TCSers clocked 12 million learning hours, resulting in the acquisition of 1.7 million competencies. LTM attrition in IT services was at 19.7%, and we think it will rise further in Q2, after which it should start tapering.

Now over to you, NGS, for some color on our segments and products and platforms.

N G Subramaniam: Thank you, Samir. Let me walk you through our segmental performance details for the quarter. All the growth numbers are on year-on-year constant currency basis.

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

All our verticals showed good growth in Q1. Growth was led by Retail and CPG which grew 25.1% after a similar strong growth last quarter, Communications and Media grew 19.6%, while the Manufacturing as well as Technology & Services verticals both grew 16.4%. BFSI, our largest vertical, grew 13.9% while Life Sciences and healthcare grew by 11.9%.

By geography, growth was led by North America which grew 19.1%. UK grew 12.6%, while continental Europe grew 12.1%. In emerging markets, India grew by 20.8%, Asia Pacific grew 6.2%, Latin America by 21.6% and Middle East and Africa grew by 3.2%.

Our portfolio of products and platforms continue to do well.

ignio™, our cognitive automation software suite signed up 28 new customers and five clients went live during the quarter. In addition, 15 existing clients acquired new licenses of the suite during the quarter.

TCS filed three patents around ignio during the quarter and was granted one. The market demand for ignio trained professional continue to grow. The number of ignio trained professionals stand at 14,134 while number of ignio-certified professionals is 4,294 to-date.

A global luxury hotel brand has deployed ignio AIOps to manage digital assets, including hotel content and promotional offers published globally for thousands of its properties across many brands. The solution detects anomalies in the properties across all brands, eliminates noise and averts outages in reservation and offers, thereby enhancing customer experience and averting loss of business.

TCS BaNCS™, our flagship product suite in the financial services domain had three new wins and four go lives during the quarter.

I'm very pleased to share that in the recently published IBS Intelligence Sales League Table 2022, TCS was ranked number one in investment and fund management and in fraud management; and number two worldwide in the areas of insurtech, Islamic banking, wholesale banking, treasury and capital markets.

Our Banking Service Bureau in Israel, which powers the country's first digital only bank has won a second client.

One of UK's leading insurance organizations has expanded its partnership with TCS Diligenta to launch innovative new products to deliver improved customer experience and drive competitive differentiation using the TCS Insurance Platform, powered by TCS BaNCS™.

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

Our Quartz Blockchain platform had two go lives in Q1.

The Quartz Smart Solution for Bond Issuance is now live at one of the leading central securities depositories in India. It facilitates real-time exchange of information among multiple stakeholders, like issuers, trustees, credit rating agencies, depositories and stock exchanges on a private permissioned blockchain platform. The solution helps eliminate potential double counting of underlying assets and ensures greater transparency and governance in the bond issuance lifecycle.

In Life Sciences, our award-winning advanced drug development suite had one new win, our first client for this suite in Japan. Our HOBS™ suite of solutions for communication service provider had one new win and four go lives in Q1.

We also launched a new release of HOBS™ Business Assurance, which enables clients to deploy faster and more easily integrate with real-time data sources, visualize revenue leakages and take corrective actions in near real-time.

TCS TwinX™, our AI-based digital twin solution had one win during this quarter and one client went live.

TCS Optumera™, our AI-powered retail merchandising suite had one significant win and three go lives.

TCS iON continues to expand its presence in the vocational education domain, entering into partnerships with three academic institutions - CRISP, Apollo Medskills and MIT World Peace for learning programs.

TCS National Qualifier Test, which is gaining traction as the preferred entry level hiring platform for corporate India has made significant progress over the last one year with over 900 corporate partners at the end of Q1.

Let me now cover our client metrics.

Movement of clients up the revenue bands is a clear demonstration of our customer- centric strategy at work. By providing a great experience and building transformational solutions that deliver high impact outcomes, we gain goodwill and trust which translates into a steady broadening and deepening of our relationships with our clients.

In Q1, we had robust client additions in every revenue bucket compared to the year ago period. We added nine more clients in the $100 million+ band, bringing the total to

59. We added 19 more clients in the $50 million+ band bringing the total to 124. We added 31 more clients to the $20 million+ band, bringing the total to 272. We added 41

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

more clients in the $10 million+ band bringing the total to 446. We added 64 more clients in the $5 million+ band, bringing the total to 650. We added 78 more clients in the $1 million+ band, bringing the total to 1,196.

Over to you, Rajesh, to give your insights on demand drivers during the quarter.

Rajesh Gopinathan: Thank you, NGS. All the demand drivers we have been speaking about for the last two years continue to be very much in play. In Q1, we saw plenty of deals in each of these categories, be it cloud adoption, operating model transformation, vendor consolidations, or G&T engagements.

Cloud adoption continues to be a powerful growth driver. We have plenty of deals this quarter once again and more in the pipeline. Our strong partnerships with the hyper scalers, deep expertise on their platforms, and our industry-specific solutions and domain knowledge have helped us gain share in this space.

As you might have seen already, we won four Global Partner of the Year Awards and two Regional Partner Awards from Microsoft this quarter. Prior to that, we won two Partner of the Year Awards from Google Cloud. The full list is published in our earnings press release available on our website.

Let me now spend a little bit of time on the operations transformation opportunity, which is a big contributor to our revenue growth, order book and pipeline. We see three distinct trends here.

• There are more and more clients looking to leverage next-generation technologies to create leaner, agile, resilient and efficient operation with an intent to plow back the savings into the business transformation initiatives. We have been big beneficiaries of this trend.
  A game changer has been TCS Cognix™, our AI-driven human machine collaboration suite, which we launched in 2020. It features a large number of pre-built configurable and reusable digital solutions, covering a wide range of industries and business function. Today, the suite consists of 530 value builders, covering an extensive set of business and technology use cases. Over 267 customers have leveraged Cognix™ across business and operations to drive business outcomes. In Q1, we had six new wins featuring Cognix™.
• The second trend is the growing incidence of multi services integrated deals. By bringing multiple elements of the operation stack, such as business processes, applications, databases, operating systems and underlying infrastructure, all within the scope of a single service provider, clients are not

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

only able to drive greater accountability, but also take up transformation programs that are more holistic in nature. This trend plays to our strengths in terms of our structure, as well as our ability to bring together different capabilities from across TCS to create a seamless service delivery team. We have six new multi service integrated deals in Q1 versus two to three deals per quarter in FY'22.

• An adjunct to these two trends is that clients are looking to reduce complexity by bringing down the number of service providers they work with to a few select partners who possess the right innovation capabilities and can scale. We won several large deals in Q1 which were vendor consolidation exercises.

Let me switch gears and talk about the airline industry which is no stranger to consolidation. There is an industry level transformation taking place there, designed to make airlines much more competitive and customer-centric, and TCS is playing a big role in helping industry players transform.

The airline industry is heavily dependent on ticketing platforms whose legacy proprietary models restrict airlines' ability to offer new products and services in a direct- to-consumer or B2C model. This is preventing them from establishing competitive differentiation and is resulting in an opportunity loss.

To address this problem, the International Air Transportation Association or IATA, has come up with a new open standard called New Distribution Capabilities, or NDC, which airlines can use to dynamically create personalized offers for customers. This enables

1. customer-specificbundling of preferences, such as number of check-in bags, seat choices, in-flight amenities, refreshments, or even in-flight shopping, priced uniquely for sale through their own channels or through third-party aggregators and travel agents. TCS is currently engaged with three airlines in implementing NDC, and in discussion with a couple more.

For a leading UK-based carrier, which is an early adopter of this initiative, TCS did the end-to-end business process redesign and solution development for NDC adoption. Since deployment, the airlines NDC channel daily bookings have grown 500%, contributing to more than 20% of the overall indirect bookings and helping the airline become a digital retailer and personalize the customers experience and drive new revenues.

Moving on to the next theme of how TCS is helping clients adopt innovative technology- enabled business models that drive new revenue streams, let me share two examples:

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

• TCS has partnered with a senior care of a leading US-based provider of long- term care insurance in launching a new line of business and assisted living marketplace. The platform will allow seekers of long-term care to find the closest assisted living care providers and also offer subscription-based consultation.
  Using design thinking approach, TCS helped define the product roadmap and carved a playbook for product positioning and targeting customer base in competitive market. The new marketplace will be formally launched this month and is targeting million customers over the next three years. In addition to driving new subscription-based revenues, the platform will allow the parent company to embed its insurance product in every transaction in the marketplace.
• Similarly, a large Fortune 500 electric gas utility has launched a new business model to generate a new revenue stream based on home energy services, that is providing warranty repair, refurbishment and replacement services of home appliances, such as air conditioners, washing machines and refrigerators. It partnered with TCS to build the platform needed to enable the service delivery that is central to this new business.
  We built a new cloud-based field service automation solution based on a third- party platform to provide advanced capabilities in intelligent scheduling, dispatching and mobile workforce management to transform field operations. The new solution has helped significantly improve the predictability of services, enhancing customer experience. It is also highly scalable. The utility now plans to expand to more states in the next six months, and achieve half a billion dollars in revenue over the next 24-months.

In earlier calls, I have given many examples of enterprises partnering with us to achieve their sustainability goals. There are a couple of stories where sustainability is directly linked to revenue growth.

• TCS is the strategic partner for a global alliance, that is focused on decarbonizing the food value chain by helping to transform farming practices globally, promote regenerative farming and generate reliable farm carbon credits and certified climate smart crops.
  We have helped them conceptualize the business model and build the enabling digital platform for farmer enablement and adoption. It provides a simple and quick way to onboard farmers and other stakeholders, validate carbon smart

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

practices through analytics, enables a carbon credit declaration by farmers and provides personalized recommendations of the practices. The platform drives revenue for the alliance through carbon credit trading, improves farmer incomes and reduces scope pre-emissions and helps the private sector decarbonize.

• Similarly, in Massachusetts, we partnered with a leading utility to build a platform that would help them roll out the Solar Massachusetts Renewable Target or SMART incentive system to accelerate solar power adoption in the state. Consumers who install solar panels and storage on the property and to the utilities grid, qualify to receive a monthly incentive payment directly from the state government.
  The TCS-built solution includes onboarding of new generators, a customer application that helps keep track of the units generated, a pricing engine and a billing system. Using this, the utility was able to achieve regulatory targets on renewable capacity onboarding on the grid. It was able to enroll more than 10,000 residential customers in the last 12 months and is now expanding the program to other states.

M&A remains the preferred growth strategy for many enterprises and over the last few years, we have built up a significant business catering to our clients need to integrate new entities that they have acquired or diverse businesses that are no longer strategic. This quarter too, we have few wins in that space.

• A global leader in health, nutrition and biosciences is building its nutrition portfolio through acquisitions. In 2020, after executing its largest and most complex acquisition in two decades, it engaged TCS to help integrate the new entity.
  Our team helped envision changes to the enterprise model to allow for a seamless integration. The first phase of integration was completed in Q1 and helped bring onboard the new entity, provide common ways of working and deliver synergies.

We commonly think of G&T as front-endcustomer-facing work. But we have plenty of examples of operations transformation that reimagine processes at the backend using digital technologies like AI, resulting in much faster turnaround times, much higher throughput, and therefore, more revenue.

Let me give you a couple of examples of these:

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

• For a leading global HR services firm, TCS partnered to transform their core recruitment process leveraging next-generation technologies. Their existing processes entailed recruiters spending 60% to 70% of their effort on profile sourcing and screening, of which 50% was devoted to candidate outreach. Over half the outreach efforts was wasted due to lack of response or declines.
  TCS redesigned the end-to-end recruitment process, taking a Machine First™ approach. We built bots to automate the background check initiations across clients and deployed a third-partyAI-powered candidate outreach platform to significantly bring down recruiter effort and completely streamline the candidate screening process.
  This resulted in a 300% increase in number of shortlist candidates, a 15-20% reduction in turnaround time, and most importantly, a 42% increase in hiring throughput, which is directly linked to revenue growth for the company.
• Similarly, a large US insurer has engaged TCS to transform its personal lines of business. The vision is to simplify business processes, modernize the technology stack, enable faster launch of new products and product enhancements for greater competitiveness, enhanced customer experience and profitable growth.
  TCS helped reimagine and implement significant improvements in pricing, risk assessment, acquisition and servicing of customers using a third-party platform. On completion, the new solution will enable ensure issuance of a new policy in eight minutes versus the current 24-hours. It will significantly improve the quality, granularity and timeliness of data and analytics to support better targeting and personalization. The solutions or features are expected to help improve business agility, enhance customer experience and drive growth.

Coming to the Q1 order book, as you know, we had an all-time high order book TCV last quarter. On the back of that, we again had a strong set of deal wins in Q1 amounting to a TCV of $8.2 billion. The deal mix is very heterogeneous, with the largest two deals being just over $400 million in size.

By vertical, BFSI had a TCV of $2.6 billion, while retail order book stood at $1.2 billion. The TCV of deals signed in North America stood at $4.5 billion.

Looking at the strong order book and our pipeline, this is good visibility for the next few months. We have not seen any budget cuts or deferments so far. In conversations with clients, we see continuing investments in technology. Some clients, particularly in Europe have expressed concerns about the macroeconomic fallout of the ongoing

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Tata Consultancy Services Q1 & FY23 Earnings Conference Call

July 08, 2022, 19:00 pm IST (09:30 hrs US ET)

conflict there. But the predominant sense is that technology spending will be resilient. That said, given the macro level uncertainties, we remain very watchful.

With that, we'll open the line for questions. Over to you, Kedar.

Moderator:We will now begin the question-and-answer session. The first question is from the line of Ankur Rudra from JP Morgan. Please go ahead.

Ankur Rudra: A few questions from me today. First, Rajesh, could you maybe elaborate on the tone of conversations you had with clients on perhaps new growth and transformation contracts. How has that evolved this quarter? And in addition to that, how do you think the pipeline formation has been? And finally, how should we interpret the fact that deal signing to the growth on a year-over-year basis seems to be sort of flattening out and the book-to-bill ratio seem to be lower than the last couple of years?

Rajesh Gopinathan: Hi Ankur. As you can imagine, we have been staying very close to our customers given the overall news flow that we see all around us. We have been at all levels personally reaching out, meeting with as many customers as we can. The general sense that we're getting is that at the operating level, the demand continues to be very strong and unabated. There is high visibility of project funding; there is appetite for continuing investments and in fact, for acceleration. So, the demand environment on an immediate basis continues to be very strong.

Some conversations at senior executive levels - CEO, COO, level, etc., are more about what they see overall about the whole macro environment that you spoke about. But that elevated conversation does not seem to be reflecting in the actual budgets and the spend. We have not seen any project cancellations, pull backs, nothing of that sort. And this is across both transformation projects as well as on the optimization projects.

Overall, we are, as you can imagine, staying very vigilant, maximizing contact with customers and taking it on a case-to-case basis, and reacting to what we have on hand and maintaining that stance.

Ankur Rudra: Second part, Rajesh, should investors read anything into the fact that the book-to-bill ratios have dropped a bit this year versus the last years at this time?

Rajesh Gopinathan: TCV is a forward-looking number. It is what it is. I gave you the commentary on what we're seeing on the field. The actual closures, that number is there. When we look at our pipeline and overall trend, I don't think there's anything that is alarming for us. A

1.2 times book-to-bill is still quite strong. So, nothing more than that from our perspective, but we're also being very vigilant.

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