Ladies and gentlemen, good day, and welcome to Infosys Limited Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Sandeep Mahindroo. Thank you, and over to you, sir.

Sandeep Mahindroo - Financial Controller and Head – Investor Relations

Thanks, Inba. Hello, everyone, and welcome to Infosys' earnings call to discuss Q2 FY '23 financial results. This is Sandeep from the Investor Relations team in Bangalore.

Joining us today on this call is CEO and MD, Mr. Salil Parekh; CFO, Mr. Nilanjan Roy; and other member of the senior management team. We'll start the call with some remarks on the performance of the company by Salil and Nilanjan subsequent to which we'll open up the call for questions.

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

I'd now like to pass on the call to Salil.

Salil Parekh - Chief Executive Officer and Managing Director

Thanks, Sandeep, and good afternoon, good evening and good morning to everyone joining the call, and thank you for joining our call. Our Q2 performance was strong with year-on-year growth at 18.8% and sequential growth at 4% in constant currency. Growth in Q2 was broad-based, with all industries and geographies growing in double digits in constant currency. Growth in constant currency in the first half of financial year '23 was 20.1% compared to first half of financial year '22. This momentum is accompanied by a strong pipeline of large deals and the highest large deal value in the last seven quarters of $2.7 billion, 54% of this was net new. These elements are a clear reflection of the deeply differentiated digital and cloud capabilities we have developed that are highly relevant to our clients' strategic priorities.

Our digital revenues are at 61.8% of our overall revenue and grew 41.2% in the quarter in constant currency terms. While digital continues to see some strong growth rates, we are seeing acceleration in growth trajectory of our core services this quarter. This is due to our industry-leading automation capability and reflects an interest among clients towards cost optimization programs. We also see this in our large deal pipeline with strong focus on cost reduction programs.

While we do not generally share the specific amount of our cloud revenue, we are delighted to share that in Q2, our cloud revenue was larger than $1 billion, showing tremendous strength of our cloud services, especially our industry-leading Cobalt capabilities.

Several examples of client transformation demonstrate the value we deliver. First, a European telecommunications company is closely engaging with us to accelerate their business growth and prepare for a digital future. Second, an aviation giant is working with us to digitally advance the engineering of their product development and emerging aircraft programs.

And third, a fast-growing logistics company is working with us to secure their cloud environment and build greater resilience into their operations. These examples and several others showcase our commitment to deliver value for our clients and the trust and confidence in our expanding digital capabilities. Strong growth this quarter was accompanied by operating margin expansion of 150 basis points. The operating margin for the quarter was 21.5%. This is because of cost efficiencies, optimization in large deals and currency benefits. Nilanjan will provide more color on this.

Our H1 operating margins are 20.7%. Our attrition has now been decreasing for the past three quarters, including this Q2, on a quarterly annualized basis. While the overall demand environment continued to be healthy, as reflected in broad-based growth and robust large deal pipeline, we also see signs of cautious behavior by clients due to macro concerns. Apart from slowness in the mortgage segment of Financial Services and the retail industry segment we talked about last quarter, we see emerging concerns in high tech and telecom industry segments in the form of reduced spend, especially towards discretionary programs.

We are well positioned to help our clients with their digital agenda and their cost agenda. Growth in our digital and our cost services demonstrate that. As the macro environment evolves, both of these components of our business will help us to be appropriately positioned with our clients. We have initiated a pivot to focused cost programs within our large deals pipeline. Our operating model and offerings are agile to deliver value for clients in this evolving macro environment.

In keeping with our capital allocation policy, the Board has announced a share buyback of INR9,300 crores or $1.13 billion and incurring dividend of approximately INR6,940 crores or $850 million.

Our H1 performance of 20% growth in constant currency and robust large deal signings in Q2 give us the confidence to change our revenue growth guidance, which was at 14% to 16% earlier to 15% to 16%, even as we are seeing emerging concerns that we talked about earlier.

Our ability to grow strong rates and take market share gain is a clear validation of the relevance, depth and breadth of the service offerings and deep client relationships. We changed our operating margin guidance for financial year '23 only for this year to 21% to 22%, which was earlier 21% to 23%. We anticipate we'll be at the lower end of this range.

With that, let me request Nilanjan to share other updates.

Nilanjan Roy - Chief Financial Officer

Thanks, Salil. Good evening, everyone, and thank you for joining this call. Q2 revenues grew by 18.8% year-on-year and 4% sequentially in constant currency terms. All business segments and geos grew in double digits year-on-year in constant currency. Specifically, North America grew by 15.6%, Europe by 28.5%, manufacturing by 45%, URS [Phonetic] by 24.3%, communication by 18.4% and retail by 15.4%. Digital revenues constitute 61.8% of total revenues and grew by 31.2% year-on-year in constant currency.

Revenue growth was 20.1% in constant currency terms in H1 '23 over H1 '22. Client metrics remained strong with year-on-year increases in client count across revenue buckets. Number of $50 million clients increased by 15 to 77, while number of $100 million clients increased by four to 39. Number of $300 million clients increased to five from two in the quarter two last year, reflecting our strong ability to mine top clients by providing them multiple services.

Employee counts increased by approximately 10,000 to 345,000. Utilization, excluding trainees, was 83.6%. On-site effort mix remained flattish at 24.4%. Quarterly annualized voluntary attrition came down further by another 2.5% during the quarter. This is also reflecting - starting to reflect in reduction in our LTM attrition numbers, which reduced to 27.1% compared to 28.4% in Q1. We expect attrition to reduce further in the coming quarters.

Q2 operating margin stood at 21.5%, an increase of 150 basis points Q-on-Q. The major components of the Q-on-Q margin movements were as follows. The margin tailwind comprising of 70 basis points comprising of rupee depreciation, partially offset by cross currency; 90 basis points from cost optimization, including large deal optimization; RPP increase, etc., partially offset by lower utilization, 40 basis points from reduction in subcon spend, these were offset by headwinds of approximately 40 basis points from compensation-related increases and impact. Q2 EPS grew by 11.5% in rupee terms on a year-on-year basis.

Our balance sheet continues to remain strong and debt-free. Consolidated cash and investments were $4.8 billion at the end of the quarter. Free cash flow for the quarter was $589 million, with line [Phonetic] conversion of 79% of net profit. Free cash flow generation is typically low in Q2 due to higher tax payouts in both India and the U.S. ROE increased by 1% year-on-year to 30.8%. Yield on cash balances increased to 5.8% in Q2. DSO increased by 2 days sequentially to 65, reflecting higher billing done during the quarter.

Coming to segmental performance. We signed 27 large deals in Q2 with a TCV of $2.74 billion, with 54% net new. Five large deals were in financial services, four each in retail, communication, energy utility, resources and services and high-tech segments, three in manufacturing, two in life sciences and one in other vertical. Region-wise, 18 were in the Americas, six in Europe, one in India and two in the rest of the world.

Growth in Financial Services segment continues to be strong, backed by large deal wins, account expansion and new account openings. We continue to see an acceleration in cloud adoption in the FS sector and are working with many of our clients in cloud migration, cloud management and other cloud-related platform deals.

In retail, we are seeing focus on digital consumer engagement, supply chain transformation initiatives, IT cost operations, legacy modernization and new in-store capabilities. There are, however, some pockets of slowdown in different cycles, especially for fashion apparel retail and general merchandisers. We have a healthy mix of outsourcing and digital deals.

In Communications segment, we have seen healthy order pipeline and deal conversion, but we expect cost pressures on client side with impact on budgets, especially for traditional services due to macroeconomic concerns.

Energy, Utility, Resources & Services segment reported robust and steady growth [Indecipherable]. The cost takeout initiative continues to take momentum in the vertical.

Manufacturing segment growth continues to remain strong and broad-based along with steady flow of new deals. We see continued tech spend by customers driven by the need to increase security posture, migration to cloud, increasing productivity by transforming to smart factory, transitioning to smart products and other broader digital transformation initiatives.

In smaller verticals like hi-tech as well, we are seeing some increasing cautiousness amongst clients around discretionary spend and, consequently, there have been some delays in deal closure. For digital services capabilities in Q2, we have been ranked as leader in 19 ratings in the areas of public cloud, SaaS, design experience, automation and data and analytics.

We remain committed to maximizing our total shareholder returns and in line with the capital allocation policy of returning 85% of free cash over the period. The board has recommended the following, an interim dividend of INR16.50 per share for FY '23 versus INR15 per share for FY '22. This is a 10% increase in dividends per share. Buyback of equity shares of up to INR9,300 crores through open market route post approval of shareholders at a maximum buyback price of INR18.50. We believe our progressive caption allocation policy continues to provide predictability to our shareholders.

Although there is a gradual abatement of talent cost pressures, we continue to exert pressures on the cost structure and hence will need to be countered by our various cost optimization measures, including rationalization of subcon, flattening of the pyramid, increasing automation, reducing on-site mix and engaging with clients to increase pricing.

While H1 growth was strong, we expect H2 growth to be impacted due to seasonality comprising of furloughs and lower working days. The revenue guidance for the year is changed to 15% to 16%. As we mentioned in the last quarter earnings call, FY '23 operating margin would be at the bottom end of the guidance band. We are now narrowing the guidance range to 21% to 22% for FY '23, and we expect to be at the lower end of the range.

With that, we can open the call for questions.

Question & Answers

Operator

[Operator Instructions] We will take our first question from the line of Ankur Rudra from J.P.Morgan. Please go ahead.

Ankur Rudra - J.P.Morgan - Analyst

Hi, thank you and good evening. The first question is, Salil, you mentioned the macroeconomic conditions, in that context, could you elaborate how realistic or conservative your guidance is for the second half? And also what has been the nature of the client conversations in the last month or so and have you seen any sort of impact on the pipeline refill rate in this period?

Salil Parekh - Chief Executive Officer and Managing Director

Thanks, Ankur. This is Salil. On the guidance, I think what we saw was very strong large deals in Q2. We had great growth in Q1 and Q2. We continue to see overall pipeline for large deals is quite strong. In fact, it's larger than it was in the last couple of quarters. We also see the macro points that I shared earlier specifically mortgages in Financial Services, some aspects of retail, hi-tech or telecom. So keeping all that in mind, we came with a view on the guidance, which is from the 14% to 16% moving it to 15% to 16%, which is the higher end of that band.

The conversations with clients, we've seen for this quarter, our digital business has grown over 30% and our cost services has also grown. We've seen our pipeline a good focus on cost programs and on the growth programs and there are clients in different sectors at different intensity looking at both of those. So the conversation depends more on the context of the client is in. We feel that given these two engines that we have, we are somewhat well prepared for the evolving macroenvironment.

Ankur Rudra - J.P.Morgan - Analyst

Thank you. And Nilanjan it's really great to see the margins back in the band and the extent of margin recovery in the quarter. Could you elaborate, if there were any special interventions that were taken that drove this change in the quarter, perhaps just back to wage increases or something else and if there is any one-offs within this? Thanks.

Nilanjan Roy - Chief Financial Officer

Yes, Ankur. As we explained, I think our cost optimization engine continues to tug along well. I think looking on the pyramid, working on subcon, I think this was something which are very apparent, you would have also seen in numbers Q-on-Q. So I think it's been overall the continuous focus across and we've seen that benefit helping us. But for the year, as you know, we are still at 20.7% and we have guidance of 21% to 22% and we said we'll be at the bottom end of that range. So we still have ways to go on the cost, this is going to continue to be the conversations on pricing etc. with clients that continues to be ahead. Like I just mentioned in the earlier press conference that our discounts definitely have come down. This continues to - we continue to push our sales force team how to go and approach clients on this. So like I said this is a long haul and pricing, but at least the discussions have started around this.

Ankur Rudra - J.P.Morgan - Analyst

Just one clarification, in your margin breakup that you'd highlighted before, the impact of compensation increases seemed a bit light, is there any change in the compensation change trajectory over the next two or three quarters, or if you don't mind maybe elaborating that part a bit more?

Nilanjan Roy - Chief Financial Officer

No, there was nothing, because this is largely for the - Q1 had the biggest impact. This was more for the mid senior level of folks. So, I don't think there's anything unusual in that.

Ankur Rudra - J.P.Morgan - Analyst

Okay, appreciate it. Thank you and best of luck.

Operator

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

Moshe Katri - Wedbush Securities - Analyst

Hey, thanks for taking my question and a good quarter. So Salil when you point to clients being cautious beyond longer sales cycle and delayed deal closures, are we also seeing project deferrals or project cancellations or are we not there yet, and obviously this would be us playing the 2008 kind of slowdown playbook. So I just wanted to get some more color on that?

Salil Parekh - Chief Executive Officer and Managing Director

Hi, Moshe. This is Salil. I couldn't hear properly, but this is - what I understood was, are there any project cancellations or other such things in the quarter. If that's the question, we didn't see any project cancellations in the quarter, we saw some slowness in discretionary spend within the macro segments that I mentioned. For example, in Hi-Tech, we saw that. We saw some in telco. We had mentioned last quarter in mortgages within Financial Services and the retail parts of retail industry. That's how we saw it for this quarter.

Moshe Katri - Wedbush Securities - Analyst

How would you categorize the discretionary spend, is it predominantly cost take-outs?

Salil Parekh - Chief Executive Officer and Managing Director

For that the discretionary spend, a more spend, which support transformation programs is the way we see it. For the cost programs, those are different, more let's say targeted of fixed spend.

Moshe Katri - Wedbush Securities - Analyst

Okay. Okay. Do you have any views about the budget cycle for next year? Do you think we'll see any sort of slippage i.e., rather than budgets being all set and ready sometime by January, maybe we'll see some sort of a slippage there because of the macro?

Salil Parekh - Chief Executive Officer and Managing Director

So today, what we are seeing is within our large deals pipeline, there is a large number of programs, which are cost related and we see our own core services growing. What it shows us is, there is an interest from clients on both, some elements of digital and now also on elements of cost. The budget cycle - this is the quarter in which we will start to get a sense for the calendar year budget. So it's not something that we have within our grasp from the previous quarter. Within the next few months, we'll start to see that.

Moshe Katri - Wedbush Securities - Analyst

Okay, just final point, just a slight detail. Can we get the number in terms of subcontractor costs for the quarter as a percentage of revenues?

Salil Parekh - Chief Executive Officer and Managing Director

Just a second.

Nilanjan Roy - Chief Financial Officer

10.1 all right, from 10.5. [Speech Overlap] 40% margin is nice. Yes.

Moshe Katri - Wedbush Securities - Analyst

Thank you very much.

Salil Parekh - Chief Executive Officer and Managing Director

Yes, did you get that, Moshe?

Moshe Katri - Wedbush Securities - Analyst

Yes, I did. Thank you very much.

Operator

Thank you. Our next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.

Ashwin Mehta - Ambit Capital - Analyst

Hi. Thanks for the opportunity. I had a question on what is happening in the manufacturing vertical in terms of margins, because we had a $46 million incremental revenue addition, but our segmental profitability bumped up by almost 40 bps [Phonetic] a year. So that seems to have helped our margins by almost 100 bps plus, so we wanted to get a color on what exactly is happening there? And then clarification on our revenues, you mentioned it's now above $1 billion, so is it on a quarterly basis or on an annual basis?

Nilanjan Roy - Chief Financial Officer

Yes, so the manufacturing margins, I think the same question I think many of you had in the previous quarter and we took heed of that advice, so we have worked on making sure our manufacturing margins across deals - large deals and just to show that, yes, we have plans on how deals of all over period of time and that should give a comfort, which it has over the last four, five years of how we source large deals and large deal margin improvements. And of course the other cost optimization lever across both - across the entire manufacturing, which helped the other sector as well.

Then the second question, I didn't really get.

Ashwin Mehta - Ambit Capital - Analyst

I only get a sense in terms of the cloud revenues that you mentioned of $1 billion plus, is that on a quarterly basis?

Nilanjan Roy - Chief Financial Officer

It's one quarter, it's for this quarter $1 billion plus.

Ashwin Mehta - Ambit Capital - Analyst

Okay. Thanks, and all the best.

Operator

Thank you. Our next question is from the line of Jamie Friedman from Susquehanna. Please go ahead.

Jamie Friedman - Susquehanna - Analyst

Hi. Again let me echo the congratulations on the robust results. I'm sorry to come back to the macro, Salil, but in the instance that there were recession is that contemplated in the guidance?

Salil Parekh - Chief Executive Officer and Managing Director

So what - thanks for your question. The way we've looked at it today is, the guidance is for our financial year, which is two more quarters. We've kept in mind what we've done in Q1 and Q2 and with very strong large deals, a number that we had in Q2 with 54% net new. We also kept in mind the seasonality, which I know all of you know for example in this, our Q3, there will be some impact with furloughs and typically Infosys has more seasonality in Q3 and - our Q3 and Q4. And then we built in what we see today of the macroenvironment, specifically those industry segments that I talked about where we see some of the slowing. Keeping all that in mind, we've built this guidance for the revenue growth given where we are, that's what we factored in to the guidance update.

Jamie Friedman - Susquehanna - Analyst

Okay. And then in terms of the potential transition from transformational work to cost containment, you're obviously very well positioned for both, is there a gross profit or margin difference for the same quantum of work like dollar transformation versus dollar cost contain - how do we think about the margin implications from that transition?

Salil Parekh - Chief Executive Officer and Managing Director

So there first - as you pointed out, we see growth today in both of these engines, which is a huge positive for Infosys. It's something where we are very differentiated from many of our peers. The margin profile is not so much differentiated on the type of work. There are different scenarios in the margin profile, for example, depending on the scale of the impact, the industry, the geography. In general, we will see that at aggregate level, so aggregate cost program, aggregate transformation programs, we'll have a similar margin outlook. So we don't consider today that pivot itself has any positive or negative impact on margin. However, as Nilanjan was pointing out, we have a very strong internal cost program, which he and the team have put in place and that will continue to give us benefit in either of the scenarios.

Jamie Friedman - Susquehanna - Analyst

Thank you so much. I'll jump back in the queue.

Operator

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

Zack Ajzenman - Cowen - Analyst

Hi, this is Zack Ajzenman on for Bryan. First question -

Operator

Sorry to interrupt. Sir may we request you to please switch to a handset mode and speak. We are not able to hear you that well. Thank you.

Zack Ajzenman - Cowen - Analyst

Hi, thanks. First question that we have is on the revenue per full time employee. It looks like it's trended lower for multiple quarters now. Can you give us a sense of the dynamics here, what the expectation is going forward?

Nilanjan Roy - Chief Financial Officer

Yes, so I think this is directly effecting our utilization as well. So like I mentioned, in fact, pricing has been actually stable to positive this quarter, but revenue per employee is across the entire headcount of the company and we have put so many freshers in - both in our training programs in Mysore and on the bench. So this will get mathematical number around revenue per employee is not indicating anything about pricing really.

Okay. And I have just been handed a note, there is also a cross-currency impact as well as you can imagine because only 65% odd of our revenues are in dollars, 35% are in currency outside dollar than those have cost depreciated, so this is pure metric, we will also automatically come down.

Zack Ajzenman - Cowen - Analyst

Understood. Makes sense. And our follow-up is more of a broader one on the macro, so more industries are seeing caution now, we've heard hi-tech and telecom this quarter in addition to what we heard in the prior quarter. Are there any other specific areas that are expecting to get worse going forward based on line of sight here?

Salil Parekh - Chief Executive Officer and Managing Director

Zack, this is Salil. I think what we are seeing today is in the areas that you just mentioned and that reflects in some of the discretionary spend, which is slowing. We also see that the large deals pipeline is at a very strong level, so we see somehow some balance in the cost programs also becoming a part of the large deals pipeline. But in terms of the macro, we see those areas as of today, but we are watchful and sort of making sure we have early signs if any other areas sort of point in the future.

Zack Ajzenman - Cowen - Analyst

Thank you.

Operator

Thank you. Our next question is from the line of Keith Bachman from BMO. Please go ahead.

Keith Bachman - BMO - Analyst

Hi, thank you for taking the question. I wanted to ask you about the sensitivity of your margins to revenue growth, and more specifically, what I wanted to see if you could address as we look out over the horizon of the calendar year '23, if revenue growth were to slow to something like 10% just to pick a number, how sensitive is that growth rate margins and specifically what I'm asking, could you let attrition and/or lower subcons, could you reduce the subcontractors and/or just let attrition take your headcount lower such that you could maintain your 21% kind of operating margins or just any characterizations on how we should be thinking about the sensitivity of operating margins to the growth rate, which I think you can tell by the question a lot of investors' concern growth will continue to slow as we look a little bit longer-term than your fiscal year? Thank you.

Salil Parekh - Chief Executive Officer and Managing Director

Yes, I think you answered most of the question yourself, but reality is that we can't pivot our operating margin quite fast and fundamentally the IT services business, the operating leverage element is quite small compared to other fixed cost business. So you can - in terms of more of the point like you've mentioned, right, firstly our intake of lateral, your intake of freshers, gradual attrition, the subcon, all these four, literally by quarter you can pivot on these and to get your cost structure in line.

So I don't think it's a big drag and unlike high fixed cost industry. So in that sense, I think in the past also we've seen it, a perfect example, I would say, is looking at the COVID period when six month pretty much everybody in the industry when they were seeing negative growth attributed at least on the margin front. But we didn't see degrowth during that time. But nonetheless, even the floor growth at that time, we were able to pivot our entire cost model.

Keith Bachman - BMO - Analyst

Okay. Yes. And to be clear, I wasn't asking you to guide margins. I was just asking for the sensitivity that we think about, but I think you're answering that you can manage your cost structure regardless of the revenue growth rate to sustain margins even if growth were to slow. Okay.

Okay. And any comments more specifically on how we should be thinking about attrition, as you exit the year. You said you would move it lower, but should we be thinking kind of a point in a quarter? Or how should we be thinking about attrition as we look out to the end of your fiscal year? And that's it for me. Thank you.

Nilanjan Roy - Chief Financial Officer

Yes. So I think like Salil has mentioned, three consecutive quarters of decline, 2.5% decline in this quarter itself, and indicators into - going into Q3 because we have a lot of geography like a 90-day notice period, and that gives us a reasonable view of what's coming ahead. And we continue to see that - figure of attrition going down.

Keith Bachman - BMO - Analyst

Okay. Many thanks.

Operator

Thank you. Our next question is from the line of Aniket Pande from ICICI Securities. Please go ahead.

Aniket Pande - ICICI Securities - Analyst

Hi. Thanks for the opportunity. I just have two questions. Salil, I wanted to understand the trend of your TCV number. I wanted to understand how the mix between cost optimization and transformation deal trained - changed since last three quarters? And has the deal tenure increased now as compared to before?

Salil Parekh - Chief Executive Officer and Managing Director

So thanks for the question. This is Salil. First, on the large deal pipeline itself, are you asking on the TCV we declared at large deals?

Aniket Pande - ICICI Securities - Analyst

The trend between the TCV actually.

Salil Parekh - Chief Executive Officer and Managing Director

So the large deal -

Aniket Pande - ICICI Securities - Analyst

And how the mentality [Phonetic] changed between cost optimization and transformation.

Salil Parekh - Chief Executive Officer and Managing Director

Yes. So there, on the large deal itself, we have looked at it within our numbers. So that's not information that we have shared outside. What I can share with you is what we see in our pipeline today is a good focus on cost programs. And we are also seeing, because of the growth of core that I shared earlier, that we have both sides growing, of course digital growing over 30%, but we also see now the cost programs, which core reflects in part also growing.

Aniket Pande - ICICI Securities - Analyst

Thank you. Last question. And then if I turn to pricing, right? So just wondering what the tone and tenure of pricing conversation have been and how they have progressed since last two quarters. And right now, how are you building in? Thank you.

Nilanjan Roy - Chief Financial Officer

Yes. So like we said, it's horses for courses. It is client-specific, it is whether there's a new deal, is it a renewal? Is it SP deal? Is it a T&M? Is it COLA clause? It is really, really complex. But one message clearly I've said is that we have actually firstly seen discount, which used to be quite a large in order of pricing in terms of renewals, etc. That definitely has come down. There's a lot more focus on the client and the clients also appreciate that because we have seen the same impact on their attrition, etc.

So these are some of the things. We've seen COLA clauses. We are seeing a more - a larger implementation of that being able to push some of the COLA increases. In some cases, it is - you have to show more value for customers in terms of digital rate starts, what are you able to offer to clients in terms of transformation dollars. So like I said, it's varied across clients. But like I said, it's going to be a long haul. We've never said it's going to be easy, and that continues.

Aniket Pande - ICICI Securities - Analyst

Thank you.

Operator

Thank you. Our next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh - BNP Paribas - Analyst

Hi. Good evening team and thanks for taking my question. My first question, Salil, was for you to help us understand on the deal wins side. So we have seen quite a sharp acceleration in the deal wins, especially in the new deal side which has almost doubled both quarter-on-quarter and Y-o-Y basis. At the same time, we are talking about some caution coming in at some of the verticals and some of the clients taking more cautious turns. So in that context, what is driving the sharp increase in our new deal then? Is it that these discussions or caution is still at the CXO level and we are yet to see the impact of that in the deal wins? Or these concerns are getting compensated by a higher focus on the cost side?

Salil Parekh - Chief Executive Officer and Managing Director

Thanks, Rakesh. This is Salil. We - the deal wins, I think, represents the strength that we have on both sides of the capabilities, on digital and on core automation. And so what we are seeing today is, we have the ability to be appropriate for clients depending on what macro they are facing. And as the overall macro evolves, we have both sides, let's say, ready for that. And there, my sense is, we have a sort of differentiation from our peers with this approach. We've also put a little bit more emphasis within our pipeline on proactively looking at automation cost deals with our clients. So that is what's driving it.

Having said that, it's also to be kept in mind that large deals are deals, which are over $50 million for us. And we've always maintained that these are not - there is no sort of quarter-on-quarter trend on this. It's more to look at for quarter period and gives you a sense. So that's also something to keep in mind.

Kumar Rakesh - BNP Paribas - Analyst

Got it. Thanks for that. Second question was for Nilanjan. So you have talked about margin band and margin coming closer to 21%. And we have already done 21.5% in this quarter so that effectively implies we are not expecting sequential margin improvement meaningful from here on. And that is in the context when we are talking about that the supply side concerns have started easing and our subcontracting cost is also coming down. So where do these two points meet when the supply side issues are resolving, but we do not expect margin to expand from hereon this year?

Nilanjan Roy - Chief Financial Officer

Yes. So I think, firstly, we are at 20.7%, right, for H1. And like we said, the guidance is to 21% to 22%. We also go in into Q3, Q4 in a seasonally weak quarter as well because of furloughs and working days. And those are straight away a drop-down to margins. Yes, we are seeing some of the benefits, which we are getting from a lower attrition figure. And all these basically play into the guidance which we have given for the year.

Kumar Rakesh - BNP Paribas - Analyst

Got it. Thank you. That answers my question.

Operator

Thank you. Next question is from the line of Dipesh Mehta from Emkay Global. Please go ahead.

Dipesh Mehta - Emkay Global - Analyst

Thanks for the opportunity. Two questions. First, about moderation in revenue growth trajectory, which you are implying from the revised guidance. So can you help us understand you alluded some of the segments which are likely to be softer. But even after concerning, there seems to be some sizable moderation, which is happening in the next two quarters. So if you can provide some sense whether any specific industries where you are seeing more weakness of client specific situation?

Second thing is about the deal intake. Now you indicated about cost efficiency program and cost takeout programs showing uptick kind of thing. Do you think it would lead to higher deal TCV closures in next few quarters? And any mega deal which you can - let's say, how the mega deal pipeline is picking up? And if you can provide some progress or clients are deferring to take those kind of business? Thanks.

Salil Parekh - Chief Executive Officer and Managing Director

This is Salil. I didn't follow all of it. The first one, I think, is talking about the future, Q3, Q4 growth in the segments. If that's the question, we don't give more color for future growth, especially by quarter or by segment. But overall, I go back to what we shared earlier that the macro environment has some areas which we are looking at with more caution. Overall demand large deal pipeline is strong. And both sides of our engine - both engines are doing well, digital and core and automation. Then I didn't follow the next point.

Dipesh Mehta - Emkay Global - Analyst

The second question was about the cost efficiency program or the cost takeout. Generally, they are large in TCV because of tenure and overall volume efficiency, which clients are generally expecting. Considering the mix is now tilting towards those programs compared to discretionary digital program, do you think deal TCV will be showing uptick, which we have seen even in Q2, which is the seven quarter [Phonetic] high kind of deal TCV?

Salil Parekh - Chief Executive Officer and Managing Director

So on the cost optimization, if I follow what you're saying, we see good discussions of that with our clients. In some of the industries, we see more of that, in others, at a moderate level. So that's where we are seeing a good traction, which is also showing up in the growth of core services. Deal TCV, again, to us quarter-by-quarter, it can go up and down because these are deals over $50 million, and these deals take some time to build up. As Nilanjan shared, there were 27 deals in Q2. But if I look more on an annual cycle, there is a good way of looking at large deals across. So on a quarter-on-quarter basis, we don't have like a simple way where we forecast it. It can go up and down.

Dipesh Mehta - Emkay Global - Analyst

Let me rephrase the question. Do you think that size of the deal between digital and cost takeout, by nature cost takeout will be larger in size or you don't think any such thing?

Salil Parekh - Chief Executive Officer and Managing Director

The size of the deal. Sorry, I did not follow that. No, I don't think so because sometimes there's a very large digital transformation program at the client. And sometimes, there could be a large modernization plus cost efficiency program. Sometimes there could be only cost efficiency program. So there is not like one is larger and one is smaller like that.

Dipesh Mehta - Emkay Global - Analyst

Understand. Thank you.

Operator

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

Nitin Padmanabhan - Investec - Analyst

Yes, hi, good evening. Thanks for the opportunity. I wanted to ask on the client performance this quarter. So I think most of the revenues have come from the non-top 25. And top 25 has been relatively soft. So I just wanted your thoughts on, is that what you're seeing on a - do you see that softness sort of continuing? And do you think the remaining can sort of hold up? So that's the first question.

The second one is, do you think the - I think over the past two years, there were a lot of smaller-sized deals that sort of was a reasonable mix overall and that sort of led to faster velocity and deal conversion - deal to revenue conversion. Do you think in the new sort of setup wherein it's more cost optimization, the deal to revenue conversion should slow down or there's no such thought process there. Thank you.

Salil Parekh - Chief Executive Officer and Managing Director

I'll start with the second one. In general, at a higher level, there is no big correlation between the conversion of a deal to revenue. Sometimes, there is an immediate large impact because there is early transformation. Sometimes there is rapid transition. And other times, it's more drawn out in the size of the - specifically large deals, which are more than $50 million. There is no real like conversion like that which is you can correlate it to something.

And the first point was on I think the top client.

Nilanjan Roy - Chief Financial Officer

Top clients. I think the question was about the 25 clients. They decline from 36.3 to probably 35.3. No, I don't think there's anything reading that impact. In fact, I'm also seeing it for the first time. But one thing to be kept in mind, there's a lot of cross currency applicable during this time, right? So there could be clients in certain geographies, right, like Europe, etc., could be in the mix. But nothing we have seen unusually in the top 25 going down or anything like that.

Nitin Padmanabhan - Investec - Analyst

Sure. Fair enough. Just one last quick one from my end. How big is capital market for us within the Financial Services piece? And - because I thought that should normally be a cause for concern, but I haven't heard that in any of the call so far. So just wanted your thoughts on the same.

Salil Parekh - Chief Executive Officer and Managing Director

So there, we typically don't break up the segment beyond what we had given in Financial Services. We have a very good business in capital markets across the board, but - whole Financial Services, has retail, insurance, asset management and capital markets, among other things.

Nitin Padmanabhan - Investec - Analyst

Sure, but is there any slowness that you're seeing within that space or - whether that wasn't a call-out at all. So just curious.

Salil Parekh - Chief Executive Officer and Managing Director

There, we are not - so the one we called out at this stage were related to the - what I shared earlier, which was on mortgages in financial services, parts of retail, hi-tech and telco.

Nitin Padmanabhan - Investec - Analyst

Sure. Thank you so much and all the very best.

Operator

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

Sandeep Shah - Equirus Securities - Analyst

Yes. Thanks for the opportunity. Just the [Speech Overlap] look at your past -

Operator

Sorry to interrupt, sir. Mr. Shah, this is the operator. May we request you to switch to handset mode, please, and speak. Thank you.

Sandeep Shah - Equirus Securities - Analyst

Yes. Am I clear now?

Operator

Better, sir. Thank you.

Sandeep Shah - Equirus Securities - Analyst

Yes, yes. Just if I look at the [Indecipherable] achieve the guidance [Indecipherable] 0% to 1.2%, which -

Operator

I'm sorry, Mr. Shah, your voice is fading again. Maybe if you can rejoin the queue.

Sandeep Shah - Equirus Securities - Analyst

Am I clear now?

Operator

This is better. This is fine, sir.

Sandeep Shah - Equirus Securities - Analyst

Yes, yes, so I can start now?

Operator

Yes, please, could you repeat the question, please?

Sandeep Shah - Equirus Securities - Analyst

Yes, yes, so the ask rate to achieve the guidance is 0% to 1.2% in the next two quarters, which looks softer despite a strong deal wins. Also, we are talking about more cost optimization deal coming along the digital deals. So is it a client-specific issue? Or is it higher than abnormal furloughs are we factoring? Or this is more a conservative way of looking at things because of the higher macro issue in the second half. And I have a follow-up, which I will ask later.

Salil Parekh - Chief Executive Officer and Managing Director

So there, first, what we are seeing, typically, as you know, the Q3 has furloughs. We have not estimated anything higher or lower. We've essentially had a sort of a similar estimate to previous years. We typically have both Q3 and Q4 - have more seasonality for us in the past year. So that's what we've estimated. And then for the macro, what I shared earlier is the sort of color that we've put as we were developing the guidance. And then we factored in the large deal. So there is no, let's say, additional view to say whether it's conservative or not conservative. It's those factors we've taken into account and develop the guidance.

Sandeep Shah - Equirus Securities - Analyst

And the follow-up is the question to Nilanjan. So if I look at, we are implying EBIT margin guidance of 21.3% in the second half versus 21.5% in the second quarter. This is a Q-on-Q decline versus, Nilanjan, your first quarter comment was in 2Q, 3Q, 4Q, we may see a Q1 to increase the margin. And the way we are in terms of the utilization as well as likelihood of lower subcontracting costs, likelihood of lower pass-through costs, is it fair to say, again, on margin, we are conservative? Or there are some additional cost headwinds which we should be aware about?

Nilanjan Roy - Chief Financial Officer

No, I don't think it's conservative. I think we are realistic in our margin projections. We see, like I said, certain headwinds. We see some impact of furloughs, like I said. Yes, some of the attrition impact will come, but those are more longer-term impact. Some of that will be in subcons, etc. And also, of course - that the seasonality of the volumes, of course, the levers in that sense, we don't have growth as a lever really in terms of operating leverage and a question came to dramatically change the margin profile. So SG&A, for instance, [Indecipherable] you have some operating leverage. So these are multiple things, and that's all factored into the figures which we've given for H2 and full year.

Sandeep Shah - Equirus Securities - Analyst

Okay. Okay. And just last thing on the variable pay, it looks like in the first quarter we might have paid 70%. How was the variable pay payment in the second quarter? Is it a headwind or a tailwind on a Q-on-Q basis?

Salil Parekh - Chief Executive Officer and Managing Director

So on variable, clearly, we don't share that number externally. As you know, we will come back with what we do from an internal basis when we disclose it internally.

Sandeep Shah - Equirus Securities - Analyst

Okay. Thanks and all the best.

Operator

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

Manik Taneja - JM Financial - Analyst

Hi. Thank you for the opportunity. Just had one clarification question related to the margin performance or the margin improvement this quarter. When we look at our cost schedule to the peers that subcontracting, expenses are down by about 120 bps. While in your opening remarks, you stated that subcontracting expenses are down 40 bps. So just to understand, is some of the large deals cost optimization being captured in the cost of taking subcontractors?

Nilanjan Roy - Chief Financial Officer

No. So I think that is the cost of as a percentage of revenue. But the impact on margin is what is the premium you're paying to subcontractors over employee. So it's just not a mathematical impact of subcontractor costs coming down from 11% to 10%. By that token, if we say we can bring down subcontractors to zero, our margin can go up by 10%. So this is just a premium you're paying to subcontractors which is impacting our margin. That's the 40 bps.

Manik Taneja - JM Financial - Analyst

Sure. And one last question was with regards to the hiring that we've seen through the year. We've already hit the full year hiring target in terms of the fresher intake. How should - how are we thinking about the fresher intake in the second half of the year given the fact that there have been some media reports of companies in the sector delay fresher onboardings?

Nilanjan Roy - Chief Financial Officer

Yes. So we are - like I said, we will - we had 40,000 in H1. And yes, we will be above the 50,000. Of course, we'll get back later on what the number is, but we will go above 50,000.

Manik Taneja - JM Financial - Analyst

Sure. Thank you and all the best for future.

Operator

Thank you. Our next question is from the line of Ravi Menon from Macquarie. Please go ahead.

Ravi Menon - Macquarie - Analyst

Hi. Thank you and congrats on your excellent margin performance this quarter, especially considering that utilization has dropped. Could you talk a bit about how you see headroom for utilization and margin improvement, as attrition has started to decline?

Nilanjan Roy - Chief Financial Officer

Yes, sure. So I think at - I think at 83.6%, we are at much lower than what historically we've been. But part of it in a way is that the freshers, which we have brought in, we want to make sure that they are learning both of course in our training facility in Mysore plus on the bench. So we are very cognizant of not putting them into projects on day one. And therefore, we are ready to take a hit on the margins and utilization on account of this because this we know is a long-term investment for us. End of the day, we strongly believe the industry can only grow through the fresher intake year-on-year, and that's the investment we're able to make. And over a period of time, of course, we know we can, as demand picks up and we are able to train them, we can rotate them into projects. So we are quite comfortable. And of course, we want to get this figure slowing inching back towards our more comfortable 85 area.

Ravi Menon - Macquarie - Analyst

Right. Thanks. And when you talked about concerns starting to emerge in industry verticals like retail, hi-tech, telecom and the mortgage sub-verticals, have we actually started seeing project cancellations? Or are we just seeing slower decision-making for new programs?

Salil Parekh - Chief Executive Officer and Managing Director

So today, we are seeing where there are discretionary work that we see slowness in that area. We will keep a watch on anything else that starts to develop in those specific industry verticals.

Ravi Menon - Macquarie - Analyst

So Salil [Indecipherable] there have been no cancellations yet?

Salil Parekh - Chief Executive Officer and Managing Director

We don't see cancellations of program. We see slowness in the discretionary part of the program.

Ravi Menon - Macquarie - Analyst

Great. Thank you so much. Best of luck.

Operator

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

Salil Parekh - Chief Executive Officer and Managing Director

Thanks, everyone, for joining us. Just a few comments from me to close out. In summary, first, we really have both sides - both engines in our business, digital and core, growing, which is very strong for us. Digital capabilities and Cobalt are resonating. And core and automation, as we believe we have a leading - industry-leading set of capabilities. And that makes us ready for the evolving macro environment.

We had large deals of $2.7 billion, which we are delighted with. And we had a very strong margin performance of 21.5%. So margin is clearly part of our focus. And we have a strong internal cost program that will help us drive all of these things. Attrition is coming down. So we see a huge impact of the initiatives that we put in place some time ago. So overall, we feel we had a good quarter, and we are well positioned for the environment that's coming ahead in whichever scenario that evolves in that environment.

Thank you all for joining, and we'll catch up in a quarter or so.

Operator

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Q2 2023

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