Tata Consultancy Services Limited (TCS) Earnings Call Transcript & Summary

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

Thank you, operator. Good evening, and welcome, everyone. Thank you for joining us today to discuss TCS's 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.

Hello, everyone.

Mr. N G Subramaniam, Chief Operating Officer.

Good evening, everyone.

Mr. Samir Seksaria, Chief Financial Officer.

Hello.

And Mr. Milind Lakkad, Chief HR Officer.

Hi, everyone.

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 e-mailed out to those who have subscribed to our mailing list. With that, I would like to turn the call over to Rajesh.

Thank you, Kedar. Good morning, good afternoon and good evening to all of you. We are very pleased with our performance in Q2. Our revenue 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 INR 10,000 crores mark this quarter and our net margin was at 18.9%. I 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 we are seeing. Over to you, Samir.

Thank you, Rajesh. Let me first walk through the headline numbers. 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 INR 553.09 [indiscernible] 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 helps 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 INR 106.75 billion, which is 102.3% of net income. Free cash flow was INR 100.62 billion. Invested funds as on 30th September stood at INR 592.9 billion. The Board has recommended an interim dividend of INR 8 per share. Over to you, Milind.

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 a relatively modest net headcount addition. In Q2, we added 9,840 employees on net business, bringing our workforce to 616,171 as on September 30. It continues to be very diverse workforce with 157 nationalities represented and with women making 35.7% of its base. On the learning front, TCS closed 11.7 million learning hours in Q2 resulting in the acquisition of 1.5 million competence. 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 onboard 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 0.5 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 settled 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 do 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 a HR value chain, including our work towards gender equity. Over to NGS for some color on our segments and production platform.

Thank you, Milind. Let me walk you through our segmental performance details for the quarter. All growth converts are on year-on-year basis on constant currency terms. All our industry verticals grew strongly in Q2. Growth was led by retail and 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 for their customers. We've also seen an uptick in the travel, transportation and hospitality sector, driven by increased investments in the [indiscernible] Communications and 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 and health care, 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 markets, North America led with 13.6% growth, U.K. grew [ 15.5% ], while Continental Europe grew 14.1%. It's [ defecting ] 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. In these 2 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 -- products and platforms. They did really well in Q2. Ignio, our cognitive automation software suite signed up 4 new customers and 3 clients went live during the quarter. TCS filed 2 patents around ignio during the quarter, was granted one. The market demand for ignio trained professionals continue to grow. The number of ignio trained professionals now stands at 16,398, by number of ignio-certified professionals is at 6,984 to date. A 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 eliminates a duplicate alerts and process the [ 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 which are suppressed and 66% of [indiscernible] to operations as legitimate others. TCS Bank our flagship product suite in the financial services domain, had 4 new wins during the quarter. One of the world's largest investment management company is based in the U.S. offering a broad selection of investments, advised retirement services and insights to individual investors, institutions and financial professions has selected TCS Bank's 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 in the TCS bank's platform this quarter. This is the largest ever policy migration in the U.K. license pensions industry and a major milestone in the customer simplification journey towards eliminating aging legacy systems. Our Quartz Blockchain platform had 2 new wins and one go live in Q2. Quartz has been selected by a large electricity provider in North America. They 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 contract 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 5 pharma major and our supply management platform, part of the CCT suite to deliver real-time insights into patient medication [ address. ] TCS [ products ] our AI-based digital twin solution continued to gain ground in various industries, helping clients carry out complex [indiscernible] analysis and take informed business decisions. In Q2, we had 2 wins and 3 go-lives for the TwinX platform. TCS Optumera, our AI-powered retail merchandising suite went live in 2 of our clients. TCS iON had 8 wins in this quarter. We're seeing increasing demand and similarity among educators for the ability to [ answer ] question papers and 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 Test as their entry-level recruitment platform and over 3,150 candidates 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. dollar translated revenues. 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 underreported due to currency deflation. Despite the headwind we had good additions in every revenue bucket in Q2 compared to the year ago. We added 5 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.

Thank you, NGS. Before I get into the demand drivers, let me spend a minute talking about the demand environment and mood among the clients. Despite growing news flow around the possible economic slowdown across the world, the client concerns over how that might affect the businesses. We haven't seen any change in the 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 the highest with the 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 transformation programs are being prioritized and projects that offer quicker wins versus those with longer-term paybacks. Many of our clients are also working on plans for various economics synergies 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 the 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 client focus shift to execution of the client transformation agendas announced earlier. And this plays to our strengths. We have seen instances where clients are unable to leverage the flex capacity of the cloud until they shift a larger portion of the workloads, and they are seeking our help in accelerating that move. Further, many organizations, which [ flush ] 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 than they did with their old data centers. Such clients are very open to our proactive proposals with our FinOps advisory offerings to help optimize their spend on the cloud and our cloud orchestration services powered by TCS cloud exponents, our multi-tenant cloud delivery platform, help them seamlessly and optimally manage multiple environments, planning, 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 to 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 contractual 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 analytics solution to help transform customer and agent experience by designing a cloud analytics platform that consolidates and harmonizes data from across the 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 the business environment. And those efficiency gains can fund some of their front office transformation initiatives. We had 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 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. It's AI-powered dashboards and various analytical models equip the finance function with intelligence and real-time insights for decision-making. This has resulted in a positive impact on the cash flow, significantly improve operational efficiency and employee and vendor satisfaction. European industrial tools manufacturer chose us to transform their service desk operations. We will leverage cognitive technologies and implement the 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 landscape and our highly collaborative inside-out approach to transformation. This results an impactful transformation solutions that don't face traditional organizational resistance to change and gets us much appreciation from the management team. Let me illustrate this with 3 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 contractual knowledge of the business gained over these years has made TCS a trusted adviser to their growth journey towards becoming a large financial institution. To support the business expansion and to effectively prepare them for a transition from a category 4 to a category 2 bank, which was as required by regulators, given their significantly fast growth, TCS help them conduct a detailed risk and regulatory assessment and prepare a road map to meet the regulatory requirements related to liquidity, market and credit risk. This entire re-imagination of the overall business framework for the treasury and capital market swap dealer business for the bank. TCS led the discussions with the bank to define the target state business architecture, solution architecture and implementation road map. We brought in actionable points of view, best practices recommendations and presented a tactical as well as the strategic approach to the solution implementation. As a business outcome, the real-time liquidity monitoring and management is expected to reduce the [ Nostra ] buffer for the bank by greater than 40% and ensure compliance to enhance regulatory requirements. 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 companies 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 predict risk mitigation insights for clinical risk management. This 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 the Medtech segment. The platform is 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 has achieved through automated data-driven range decisions and producing over 12,000 live store-specific planogram. By enhancing the accuracy of floor plans and equipment into the planogram fixtures our solution ensures that the optimized display plan could be faithfully implemented in the stores. This transformation helped [ amends ] meet local demand into 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 are doing in the future. In Q2 last year, I had spoken about 5-minute settlement solution that we have built for the Australian energy market operator that is helping spur innovation in that market and lower costs for consumers. This time, I want to highlight a transformation in the U.K. -- U.K. gas market. The U.K. energy regulator introduced a 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 worked with [indiscernible] 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, 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 1 day. Similarly, last quarter, I've spoken about the 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 the consumers and ensuring sustainability. TCS partnered with ENGIE right from the conceptualization, design and proof of concept. Leveraging our deep domain knowledge and expertise in core ERP, we developed a solution for subscription in CRM with incentive and professional 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 had mentioned in an earlier call that many of our G&T engagements and business model innovations. Let me share 3 such examples of Business Transformation Solutions segment live in Q2. An American multinational conglomerate engaged us to build a comprehensive asset performance management solution that their market to their industrial and warehouse customers. The cloud-based IoT platform we build for them in just real-time data from various assets and enable the new value-added services around improved asset visibility, monitoring capabilities, and predictive insights leading to improved asset performance, optimize 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 vision to transform from a traditional distributor to a platform company that does distribution. We've 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've partnered with Teachers 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 customer 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 and market landscape. Coming to the order book, we again had a strong set of deal wins in Q2, amounting to a 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 the macro is possibly highest in U.K. and Europe, our order book is there is stronger in Q2 than in Q1 while the strength of our order book as well as the pipeline for Q3 somewhat comforting, given the volatility, we remain very vigilant and are staying very close to our customer clients. With that, we can open the line for questions.

[Operator Instructions] The first question is from the line of Kumar Rakesh from BNP Paribas.

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 a 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 saw pretty strong growth in Europe, and you talked about double-digit growth in the November quarter as well. Given the fear around macro economy being pretty severe in that geography, what is driving this much stronger growth in Europe despite those fears. Is there some structural growth drivers, which we are now seeing in the European geography or the impact could potentially come with a lag?

Rakesh, as you have always maintained 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 optimization side. So technology here remains very core through business agendas for our clients across the full spectrum across all markets also. And we are benefiting from participating in that cycle. The macro, as I also mentioned 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, they are in fact in 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 I called 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 the 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.

Great. That's pretty 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 interacting with clients, how they are looking at next year budget? Any sense on that would be very helpful.

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 a 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.

And client interaction on next year's budget planning?

Too early to take a call. We don't know. I mean we get to hear 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 about. They are talking about scenario planning and the scenarios are more weighed on the downside than on the upside.

And wish you all the best.

The next question is from the line of Sandip Agarwal from Edelweiss.

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 are seeing in your discussions with the client, particularly from the U.S. geography? Because [ any which ] was in U.K. and Europe, traditionally, we have seen that the cost -- the economic pressure generally result into some help for outsourcing because it is more cost expective in the past. But that correlation doesn't show 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 are seeing any action into the direction when they are ordering or the -- have you seen any kind of delays or anything which makes us more vigilant.

U.S., Sandip, is not -- we have not picked up any threats in terms of caution, I mean extra caution than what would be normally expected. So U.S. is not, 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.

Okay.

The next question is from the line of Sandeep Shah from Equirus Securities.

Just a question, Rajesh, last time in the 1Q conference call, you said that the trend of multi-tower outsourcing deals or [ multi-tower ] 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 [ harder ] in the Europe and the geography versus back of U.S.

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 a few very distinct ones. One is the shift to what we call as a vertical operating model or a 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. Even more importantly, significant leverage of our Sonic platform, which is powered by [ MSDM ] and the embedding of automation at a granular level across the enterprise operations suite, both on the tech side as well as on the operations side is also core to the operating model transformation that we're seeing. So this kind of enterprise-wide operating model transformation continue to be a big driver of demand. And a couple of examples that I had shared, [indiscernible] one 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.

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 a significant shift if the macro issues goes more consuming versus what you anticipate now. Is it a fair assumption?

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.

Okay. Okay. And last question, Rajesh and 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.

Yes, 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.

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

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

[Operator Instructions] The next question is from the line of Ravi Menon from Macquarie.

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 an 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?

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, et cetera, 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 you know at the bottom of the pyramid, the impact is a 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.

Okay. 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?