Information Services Group, Inc. (III) Earnings Call Transcript & Summary

Hi, everyone, and welcome to the Third Quarter 2025 ISG Index Call. My name is Stanton Jones, and with me today is Steve Hall, Partner and President, ISG EMEA; Namratha Dharshan, Chief Business Leader for ISG India; and Mark Smith, ISG Chief Software Analyst. This is our 92nd consecutive ISG Index call. So for those of you that have been joining us for many years, thank you for investing some of your time with ISG today. And for those of you that may be on your first index call, just some quick background. The ISG Index measures the overall health and growth of the technology industry, which includes both managed technology services and cloud-based software and infrastructure services. And we do this by tracking and analyzing annual contract value or ACV, as a leading indicator of where revenues are likely to be in the future. So just think of ACV as bookings. Okay. So with that, Steve, I'll turn it over to you to kick us off.

Great, Stanton. Thanks a lot, and welcome, everybody. 92nd consecutive quarter is great. So let's kind of take away sort of the 5 key takeaways from the year-to-date and sort of the quarter. So I would say, first of all, we really continue to see enterprise shifting towards cloud-first platforms. The as-a-service market, which includes infrastructure and Software as a Service was up nearly 30% year-to-date, and it was really led to infrastructure deals tied to AI. So the hyperscalers really saw amazing growth as we'll talk through later. SaaS is also performing consistently well, though, and we saw growth across IT service management, collaboration and analytics. So I think the key part is I think we're beyond the hype a little bit on AI, and it's really fundamental replatforming that we're seeing with organizations. On the managed services side, the growth was pretty sluggish. The Americas showed solid performance. It was up 15% year-to-date with really strong results in financial services, ITO and engineering. But the global services market was essentially flat. And really, most of that drag came from Europe and Asia, where delayed decision-making continue to dominate the conversation. And across both regions, we're seeing deals scope, but just not closed to date. Third, I would say deal activity is really rebounding with strength in the smaller deals and on the mega deals, so really both end of the markets. The mega deal volumes were stable this quarter. Smaller deals, and this is really the first time this year, those deals in the sort of the $5 million to $10 million ACV range are really going again. And that's really a good sign that transformation-led programs and more targeted modernization efforts are taking place and the return of some discretionary spend. One of the biggest this quarter was really the H-1B policy changes. And I think long term, we're going to see added cost and complexity to sourcing. As most of you know, the new $100,000 Visa fee introduced in September is really reshaping how firms think about labor-based delivery. It raises the cost floor for offshore, likely accelerate moves towards automation, local hiring and more diversified talent models. I'm going to talk about that more, but I think the key is clients will look to have more visa resilient delivery structures as they go forward. And finally, we can't have an Index call without really talking about AI adoption. It's really accelerating and disrupting some of the legacy BPO. We're seeing real efficiency gains now, 30% plus in software engineering and customer support specifically, but it is coming at the expense of some traditional BPO volumes. We're going to talk about this a little bit later, but we saw a big drop in BPO. Good news is we think the overall market is going to expand in this area because of new areas to grow into, but short term is certainly having an impact with AI-infused backgrounds. But let's take a look at what's going on in the broader market. So in Q3, the global combined market continued its upward trajectory with solid performance across both managed services and SaaS. This quarter again reinforced what we've seen throughout the year and our priorities have shifted. Cloud, infrastructure and AI-first strategies are really central to the spending. Year-to-date, as you can see, the combined market is up 18% as-a-service is up 29%, while managed services was just up 1.5%. The divergence again really speaks volume for the as-a-service really accounts for over 65% of the volume now. The managed services up 1.5% was all based on the growth in the Americas, which was up 15% year-to-date. The good thing is that was really driven by growth in financial services, ITO and engineering. And we're seeing a really healthy mix of large-scale renewals and smaller outcome-based awards coming back to the market, particularly in the U.S. But the bad part is that strength wasn't really global. EMEA and Asia remain soft. Deal flow weighed down by delayed decision-making and reduced discretionary investment. In Europe, we had energy costs, tariff concerns, escalating geopolitical tensions, et cetera. Ukraine, NATO, political volatility in France, we can kind of go down that list that just delays decision-making within the EMEA markets. Meanwhile, the as-a-service continued, as I said, 65% of the market. We're really seeing investments turn more to SaaS, continue to do cloud. Cloud growth is again really driven by everything that we're seeing on AI. Service management, collaboration tools and analytics are really driving that market. So before we shift into the details on IT and engineering, I do want to touch on the H-1B policies a little bit. So in late December, the U.S. administration introduced the $100,000 fee on each new H-1B visa. There was obviously a lot of dynamics going on at the beginning. That settled, but this was a significant policy shift with really immediate implications for the global delivery. The new fee effectively eliminates the cost advantage of using H-1B labor for lower wage roles in the states, especially in support roles, QA, junior development. And going forward, we expect H-1B sponsorship to be concentrated on high-value senior roles where the ROI still holds up. But there was a lot of uncertainty that was implemented with it. There's a clause on national interest exemption, which remains loosely defined, making long-term planning difficult to do. It also adds risk to the overall talent strategies for organizations. An example of this is the lottery system was modified as well to really favor high-end skills. So in the new system, these skills will be given 4 lottery tickets to senior skills, while the lower end or noncritical skills receive one. So you've got a higher probability, obviously, of being selected in the pool. Combined, we think that this is really going to skew the market towards high-end talent being awarded, Combine that with what's happening with the sort of the national interest exemption, we think those roles will primarily go to the big tech providers. The timing is also critical, though. Enterprises are already deep in automation and AI adoption. So we're likely to see a further acceleration of that trend, particularly in software development, testing and support, where we already see automation and AI being very effective. So in terms of who's impacted, who's not, I think in general, the large Indian providers have done a good job over the last several years, really mitigating some of their reliance on H-1Bs. So I think those firms are going to be okay. But what you'll see is higher offshore ratios, which will reduce that risk to H-1Bs and their global delivery frameworks will have to adjust accordingly. It means likely more growth in Mexico, Colombia, potentially Canada, other areas as you go forward. Smaller Indian firms are also really less directive because they've really pulled back on the use of H-1Bs because they just weren't getting them through the lottery. So they already are heavily reliant on lower-cost offshore talent, but it does leave them more exposed to delivery disruptions if clients push for alternative models to be on site or other things. So you'll see some hiring in that space. I think the global tech firms and diversified service providers are more likely to shift towards offshore and nearshore. They're going to blend local hiring with increased use of AI and automation. And those tech firms are also likely to receive the national exemption. I think the one thing that we're missing in this whole conversation is the prevailing wage. So in general, the prevailing wage threshold is gaining traction. That's essentially saying that you got to pay the prevailing wage in whatever city the client is as they go forward. So if that changes, even senior level visas hires could face higher cost barriers. This could further reshape the global talent, absolutely have more of an immediate impact on margins and growth there. So I think the bottom line here is the model is really evolving. We know some things. There's still a lot to figure out. It's not really going to take effect until April of '26. The lottery was for the -- or the announcement was for the October lottery. But there will be a lot of time for organizations to kind of manage and mitigate their risks as we go forward. So Stanton, why don't you take us through the ITO business?

Sure. Thanks, Steve. So as a reminder, ITO includes areas like applications development and maintenance and infrastructure, managed services, network and cybersecurity. So in the third quarter, the ITO segment was down 2% year-on-year. However, as you can see here, on a year-to-date basis, it was up 5%. And year-to-date, this segment of the market is on pace for a record number of awards. And turning to award type, 19 of the 22 mega awards that have been awarded year-to-date are ITO awards. And we think that's a signal that we continue to see strong preference for bundling technology scope in order to drive scale and cost savings, and I'll talk a little bit more about mega deals here in just a minute. So the Americas accounted for all of the ITO growth so far in 2025 through 9 months, the Americas ITO ACV is up 25% and EMEA is down 11%. And as you can see on the right-hand side of the slide here by functional area, ADM was up 3% year-to-date, and infrastructure was up 12% year-to-date, and much of that was based on strength in data center activity. Okay. Let's move on to our second service line, which is engineering services. So in the third quarter, engineering services was up nearly 60% year-over-year. And on a year-to-date basis, it's up 36%. Large multinational providers like DXC, HCLTech, Infosys, TCS and Wipro are driving much of this growth. As a collective, these large providers have won nearly half of the engineering awards in 2025 and more than 40% of the ACV. So as you may recall, we started splitting engineering out from BPO at the beginning of this year. And one of the reasons we did that is that we believe engineering is starting to scale based on a couple of factors. Number one, the average contract value of an engineering services deals is up 26% year-to-date. So the deals are getting bigger. And number two, historically, much of the activity in this segment was in the smallest deal category, but that's changing as well. Year-to-date, the number of deals in the $10 million to $40 million ACV range is up 14%. So we think this is a signal that deals in this space are starting to scale beyond smaller projects and the success of the larger players is partly responsible for this dynamic. And finally, as you can see on the right-hand side of the slide here is the distribution of engineering annual contract value. Nearly 70% of the ACV in this segment is split between software engineering services. So think about things like customer-facing products and commercial software platforms, and embedded engineering. So here, think about things like control units, firmware and processors inside of physical devices. Okay. Let's go ahead and move on to our final service line, BPO. Namratha, over to you.

Thank you, Stanton. In the third quarter, the BPO segment generated about $1.8 billion in ACV, and that was down 16% year-on-year. We've not seen a single quarter of growth in 2025 compared to 2024. And in fact, 9 of the past 11 quarters, BPO segment has now seen year-on-year declines, showing signs of long-term decline in this space. However, BPO did see a sequential gain of 8%. It was the second straight quarter where BPO has stabilized and seen quarter-on-quarter growth. Year-to-date, BPO ACV is down 22% in comparison to 2024. Let's look at the functional areas. We saw broad-based weakness. The largest segment, industry-specific BPO generated about ACV of $1.9 billion. That was down 17% year-to-date. The second largest functional area, customer experience, saw ACV of $1.2 billion, which was down 13% year-to-date. Now given the decline in ACV in the last several quarters, we also conducted revenue analysis of the top 50 BPO players. And as you can see here, more than half of the companies of the top 50 have an organic growth rate of less than 3%. While there are some providers with more than 3% growth, but that's largely due to some of the acquisitions that have happened in this space. Now given the BPO ACV decline and slow growth in revenue, let's take a look at what is really impacting this industry. The BPO market seems to be in a reset mode and several factors are actually contributing to the changes that are happening in this market. There's a marked shift towards technology-led solutions in BPO that includes data, AI and engineering services, and that is increasingly blurring the lines between BPO and ITO services. As the nature of BPO engagements are changing to more technology-driven, providers are notably focused on repositioning and enhancing their technology capabilities, either organically or through M&As. For example, as highlighted during the previous quarter, Capgemini and WNS was one such acquisition where we see high synergies between BPO and ITO services. Another example is Genpact acquiring XponentL Data to strengthen their data and AI capabilities with a deep focus on design and engineering. Obviously, this change is also pushing the BPO providers to make a significant shift in hiring patterns. BPO players are now focused on hiring for specialized skills such as AI, data science and platform engineering skills. Another trend that we have highlighted for the last few quarters is how AI is not only enabling new efficiencies with some of the prominent use cases in BPO, but we've also started to see how it is disrupting the traditional revenue streams. And finally, providers are under revenue pressure, not just because of these rapid shifts, but also because we see some enterprises are hesitant to commit to large-scale BPO transformation and instead choosing FTE-led engagements until they see the real impact of AI. Now despite all these shifts in the market at ISG, we continue to see strong pockets of BPO work, and we are currently advising some very large BPO deal activities. including several that will likely come to the market with over $1 billion of TCV. Now as we said earlier, we do see significant levels of pricing pressure, both on BPO and ITO due to both intense competition as well as AI. But to understand this deeper, I'll hand it over to Steve to walk us through some of the emerging pricing models. Steve, over to you.

Great. Thanks a lot, Namratha. And I think that last point is critical that you said. We really do see a lot of activity in our pipeline. But more importantly, on the BPO side, I think we've got to look at the integration with GBS, Shared Services, GCC and sort of this whole confluence of how organizations and enterprise think about delivering services in sort of this agentic age. But let me jump over and really talk about price performance because this sort of gets to the heart of what we see from an AI perspective. So over the last couple of years, and this is really focused on ITO and ADM, ISG always tracks the price performance, price productivity. And we do that through resource units, what we call RUs. For example, in the infrastructure space, one of the most common resource units is a server image. So historically, that resource unit would be around $20 at the start of the contract. And then after 2 years, it would decline by around 10%, so the cost would be $18. What we're seeing recently is that is double. So in the case of a server RU, it now costs $16 to support at the end of those 2 years, magnify that out across the number of virtual instances and views, you can really see how that kind of collapses. We're seeing that across really all of the IT and ADM towers, especially in areas that we haven't seen before like security, almost tripling compared to historical trends. So we think this is really a combination of two things. Number one, the market is incredibly competitive right now. So some growth, you can absolutely bet that service providers are betting on the investments in AI and others to drive that. And I think across the board, everyone is looking at the impact of agentic and saying what can they do and being very aggressive in their forward pricing. So AI is already having an impact. We're seeing that built in. And in many cases, the service providers and the clients are banking on it that they'll be able to get those productivities in 2 years given where we are with the state of the market. So one of the things that we want to highlight today is really what we're calling autonomous level pricing. So autonomy level pricing is essentially focused on where we think the market is going with pricing around AI. There's been a ton of debate over different ways to price it, how do we move to outcomes, who gets the net benefit, how do you maybe price on tokens, how do we think of service as a software, lots of different components. What we think is really happening is a new pricing component that's still based on the RU, doesn't replace the RU, but it's really starting to align with how service providers and clients think of the market and the state of the capabilities of the market. So many of the proposed pricing models just weren't really aligned with the value and skewed the economics of the services. Our autonomous level pricing really addresses this by aligning the level of automation with enterprise goals and quite frankly, regulatory frameworks, which are evolving rapidly. So as you can see here, we've got 5 levels. Level 0 is really fully manual and Level 1 is assisted. So you can think of Level 1 as a software developer using Gen AI to help develop test cases or develop code. Same way with BPO, you may get some information, help answer a question, write an e-mail, do those types of things at Level 0 and Level 1. Level 2 and 3 are agents actually executing that task. So -- but you've got a human in the loop and pricing is controlled based upon the degree of the human in the loop that you want. Now in many cases, health care, financial services, anything in the regulatory, even things such as HR, it's going to be important and mandatory to have that level -- that human in the loop. So this sort of controls. At Level 4, Autonomy Level 4, the work is really fully autonomous and only governed by policies and audits. So you can quickly see how the price could change based upon what level of autonomy. And if you're fully agents, instead of saying, well, we want agent or digital labor, we're really pricing on the improvements that we get based across that. So why do we do this? First, we think it's a fair way to look at it. Buyers see significant cost reductions if the autonomy level rises, Providers can continue to maintain margin by not overcommitting upfront, so that eliminates their risk. It allows the variability, so prices can flex based on the real execution behavior, not assumptions. If a client decides that it's too risky to go to Level 3 and they want to stay at Level 2, the prices will reflect that. It's consistent. RUs have been proven for 30 to 40 years in this industry. It's a great way to help drive it. So we're anchoring on something that's well known in the industry, client service providers, which means we can benchmark it, compare and really drive things through. It also only aligns incentive. It's safely advancing autonomy, not buyers capturing too much savings, service providers capturing too much savings, waiting for the maturity. It's actually well aligned with where the market is. It's risk averse, which means it balances the risk with it. You've got defined tiers at each tier, you've got governance roles, making the risk very explicit. And it really is proportional. You can map levels to it. You can do service level agreements, you can allocate the risk, you can really do that. And it's not arbitrary. It's not arbitrary with the pricing of agents or how we think about token counts or how we think about the use of generative or agentic on driving token counts. So we're working through this process now with multiple service providers. It is being integrated into deals now, especially some large BPO deals. And I'll say we're confident and hopeful that this approach is really going to bridge the gap between the manual processes and really tomorrow's autonomous one. So with that, I'll leave this slide up just a second. If you take a photo of this, it'll give you the QR code. We really put everything in to explain sort of the whole pricing methodology, what we're thinking through in our state of enterprise AI report, encourage you to download it, give me just a second to grab the QR code, and it will take you directly to the ISG website where you can download it, and we expect a lot of conversation on this. So Stanton, over to you, and let's go through the regions.

Great. Thanks, Steve. So let's start out with the Americas. So Americas managed services segment was up 22% year-over-year, and that's the best year-over-year growth rate since 2023. Mega deal activity, as I mentioned earlier, was really strong in the Americas this quarter as well. We'll talk about even more here in just a minute. Year-to-date, ACV in the Americas was up 15%, and that's on the back of the most ever contracts awarded year-to-date in this region. So the good news here is that even though the macro continues to be very uncertain, tech services spending has not only stabilized in the U.S., but we actually see pockets where it's starting to expand. Moving to EMEA. The story is quite different. As Steve mentioned, energy costs, tariff concerns and geopolitical tensions are leading to lots of business uncertainty, which is having a downstream impact on tech services spending. Managed Services ACV in EMEA was down 25% year-over-year. 7 of the past 12 quarters have seen negative year-over-year declines in EMEA. So it's been a very uneven market over the past 3 years. Regionally, in EMEA in the third quarter, the Nordics was actually up triple digits and Southern Europe was up nearly 30%. That said, the larger regions were all down. So for example, DACH was down 60%, France was down 30% and the U.K. was down 7%. And that has a really big impact because just as a reminder, the U.K. is the largest market in EMEA. So that continued quarterly weakness in EMEA is leading to the overall region being down 8%, as you can see here. In closing out with Asia Pacific, year-to-date, managed services has generated $2.5 billion of ACV, and that's down 26% versus 2024. Most of the larger markets in this region have trended negative this year. NZ is down 31% year-to-date and Japan is down 26%. That said, the region's second largest market, which is India, was up 5% year-to-date. And I'd say on the ground in this region, we've actually seen a slower pickup of AI-enabled services and the associated operating cost reductions that they can provide. But we are starting to see a pickup here as clients look to reassess their incumbent relationships and take advantage of these new opportunities. Okay. Before we jump into our industry update, let's take a little deeper dive into what's happening in the Americas. So as Steve mentioned earlier, we're seeing large deal activity remains strong, but what's different today is that we're seeing a return of smaller discretionary deals. However, what's important to note here is that this change is almost exclusively happening in the Americas. As you can see here, the number of deals with an ACV between $5 million and $9 million is up 15% compared to this point last year in the Americas. On the quarter, the number of these small deals is up almost 50%. So that we think that's a potential signal that we're starting to see a loosening of discretionary spending in the Americas. But this loosening is not happening in Europe. As you can see here, the number of small deals year-to-date in EMEA is down 26%. And on the quarter, they're down almost 40%. So this is also one of the data points we use to indicate that discretionary spending remains tight in this region. And on the right-hand side of the chart, you can see what's happening with ACV in mega deals, which are awards with an ACV of $100 million or more. Mega deal ACV in the Americas is up nearly 60% year-to-date. While in EMEA, it's almost the exact opposite story. Megadeal ACV is down 40% compared to this point last year. So these are two of the data points that we're using to measure the health and the growth of these two regions and an indicator why we believe we're starting to see a return to growth in the Americas, while EMEA remains sluggish. Okay. Let's take a look at our industries. And as we did last quarter, we're just going to focus on a few industries here. However, as usual, the full industry results are available in the appendix and on the ISG website. So let's start with BFSI. Over the past few quarters, we've talked a lot about the weakness in this sector and how that's impacted the overall industry. The great news here is that it is recovering. And as you can see here, it's up 8% year-to-date. That said, recovery is not even. BFSI sector remains weak in EMEA, it's down 12%. But in the Americas, it's up over 30%. And on the ground with clients, we continue to see a lot of work around mainframe to cloud modernization and middle office transformation through a combination of process and technology transformation. Okay. Let's move to energy, which had its best quarter ever with $1.4 billion of ACV. And unlike BFSI, energy is strong in both the Americas and in EMEA. Year-to-date, the sector is up 23% and on the ground with clients, we're continuing to see very strong demand around SAP modernization and transformation. And finally, in retail and CPG, we continue to see a lot of weakness here, as you can see on the far right-hand side of the chart. On the quarter, CPG had its lowest ACV result since 2022, while retail was down nearly 40%. And year-to-date, the combined retail and CPG sector was down 18% with much of that weakness coming from EMEA. As we mentioned last quarter, this sector remains obviously under a ton of pressure given the trade uncertainty we've seen over the past 9 months. That said, we do want to note that this is actually one of the areas where inside of ISG, as Namratha mentioned, we actually are seeing a significant amount of BPO-related work, specifically focused on cost optimization through transforming and modernizing GBS functions to take advantage of much of the scale and technology that Steve mentioned earlier. Okay. So let's go ahead and shift gears and move to our as-a-service update. Mark, over to you.

Thanks so much, Stanton. During the third quarter, the SaaS segment generated $4.8 billion in ACV and was up 18% year-over-year. The 18% year-over-year growth accelerated 730 basis points from last quarter's year-over-year growth rate, and this represented the fourth straight quarter of double-digit gains. And as you can see here in the first 3 quarters and year-to-date, SaaS is up 16% to $14.4 billion. This segment has quietly outperformed expectations with AI viewed as a strategic enhancement that augments rather than replaces enterprise software. The complexity of enterprise systems spanning security, compliance and integrations makes full AI disruption unlikely and generative AI is instead boosting productivity through agentic capabilities. While some envision LLMs generating custom software on demand, most users won't abandon established tools simply to avoid subscription cost. Each of the regional markets contributed to the growth with EMEA leading the gains with nearly 22% upside. Asia was also up significantly at 20% year-to-date. The Americas advanced 13%, but has still slightly lagged the highs established in 2022, but represents 60% of the market. Now let's talk about the SaaS trends. Overall, the top 10 SaaS providers posted a 17% year-to-date growth, which has slightly outperformed the broader SaaS market index. The largest SaaS leaders remain confident in strong adoption and usage of their enhanced and new AI offerings, with revenue expected to follow as these offerings scale within their broader businesses. First, AI, including data analytics and platforms had a 24% ACV year-to-date growth with continuous evolution of data software with infused Gen AI and agentic AI support. This category is a $1 billion-plus ACV segment that has also exhibited strong performance year-to-date in 2025. After a flattish performance in 2024, this year, the segment is up 24% year-to-date growth as companies such as Databricks, MongoDB and Snowflake have outperformed the broader SaaS market. Second, the front office applications segment and CRM had only a 1% year-to-date growth with enterprises again making small investments to existing and new soft writers in this category. Commerce software underperformed being down 3% year-to-date on an ACV basis. And in the quarter, ServiceNow announced its market entry to CRM, expanding its focus on customer service and building on top of its CPQ acquisition of Logik.ai. Third, the middle office applications segment saw a 23% ACV year-to-date growth with collaboration, content and project management categories, but back-office ERP only had a 6% ACV year-to-date growth, cooling in 2025 compared to prior years as software purchases are not the challenge with migrations, including SAP's continued push to customers for stepping into S/4HANA. I will note that HCM is down 18% ACV year-to-date decline, but did grow 19% quarter-to-quarter, showing some early signals for ACV growth recovery. Fourth, IT platforms like ITSM had a 55% ACV year-to-date growth led by ServiceNow with newly announced entrant Salesforce, who is expansion in this very established category and a trend as mega soft writers expand into pure categories. Last, we've also observed very high growth in the collaboration segment, and it saw a 50% ACV growth year-to-date driven by conversational AI and Gen AI tools. Our ISG buyers guide on collaborative and conversational AI found providers like Zoom as exemplary and a leader. As AI increases, advances, SaaS and many avenues, software vendors face pressure to adopt consumption-based pricing, though the transition is proving difficult and many advancing to value and outcome-based methods. This evolution mirrors past shifts in pricing models and highlights software potential vulnerability to structural change driven by AI efficiency gains. And as referenced by Steve earlier, the changes in pricing models will continue into 2026. Now let's talk about Infrastructure as a Service. On the quarter, we finally saw a broad-based growth return, while hyperscalers kept posting triple-digit AI revenue gains as we look -- and as we look towards 2026, we're watching whether supply constraints start to ease. The ramping CapEx for AI and cloud, more servers, more data centers and in this early phase, scale as a differentiator. The largest players with the most enterprise cloud consolidation and sovereign cloud wins where control of GPUs, power and LAN will set the price, pace and the M&A agenda. So let's talk about the top trends in this segment. First, continued growth in Infrastructure as a Service across cloud and cyber with 33% ACV year-to-date growth and regional with Americas at 42% and EMEA at 50% are finding continued demand for a broad range of compute needs, including AI. Second, the big 3 hyperscalers, AWS, Microsoft, Azure and Google Cloud are seeing strong demand with ACV up 42% year-to-date. Growth is still accelerating and Azure is outpacing AWS despite AWS' larger base. If recent quarterly growth rates persist, Azure could catch and surpass AWS in quarterly revenue around 2027. So we're watching for the inflection point where their shares converge. The reference to Big 3 is expanding to Big 4 to include Oracle, where its RPO is $455 billion, which is up 359% year-over-year versus 41% in 4Q FY '25 driven by 4 multibillion-dollar deals with 3 customers and more pending that could push past $500 billion. Third, enterprise demand for digital sovereignty is pushing EU-specific and global hyperscalers to invest, those sovereign cloud controls are still maturing and most enterprise spend is early. SAP's recent steps expanding with Delos Cloud on Microsoft Azure for the public sector and partnering with Schwarz Digital for broader EU needs shows how providers are balancing risk and opportunity. ISG's buyers guide on rates Google, Microsoft and Oracle as leaders with an exemplary rating. Fourth, U.S. data centers are an AI compute arms race. Hyperscalers are pouring record CapEx and inking big partnership deals to build multi-gigawatt campuses that can meet future AI demand in the U.S. and worldwide. Last, but critical and beyond, cloud is cybersecurity and is still growing at a strong double-digit clip with Palo Alto Networks, CrowdStrike and SentinelOne expanding. Palo Alto Networks' $25 billion CyberArk deal that was announced underscores the fast-moving consolidation as fragmented cyber categories converge, echoing themes from our ISG Cybersecurity buyers guide. Now let's talk about vertical industries. Our new software reported results for as-a-service across vertical industries examines the health of these essential intersection with enterprises. All the industry segments grew by more than 20% ACV year-to-date growth. While BFSI represents 19% of ACV, I will highlight the top 3 fastest-growing industries. So let's examine health care industry that represents 10% of the overall revenue. It was up 29% year-to-date and a breakout of infrastructure service up 34%. Significant new expansion of health care clouds and applications like that of Microsoft with new Dragon Copilot, Oracle's AI-driven Oracle Health EHR and Salesforce's Einstein Copilot health actions are examples. For retail and CPG that represents 15% of ACV, it was up 32% year-to-date with a breakout of SaaS of up 18%. The combination of these two industries is finding new growth and innovation from the likes of Snowflake's Retail and CPG Cloud, Microsoft Cloud for retail and Oracle's Retail Merchandising Cloud are just examples of these investments. For business services that represents 16% of ACV, it was up 36% year-to-date, with breakout and infrastructure service up 40% year-to-date. The overall business services industries have been early adopters to a wide range of AI and application-related SaaS and efforts by ServiceNow and its agentic and GenAI now Assist and Workday with its advancing AI platform are focused on the service industries. And as noted, each of these highlighted industries overall have continued quarterly growth across multiple years. The investments into the verticalization of SaaS and even tailored infrastructure are using latest cloud computing-based applications now infused with AI has been advancing substantively. Software writers like NICE, Oracle and Salesforce have been investing through R&D with new industry offerings to capture the mind for more specific needs of enterprises. Okay. Let's now move on to our leaderboard. Namratha, over to you.

Thanks, Mark. As a reminder, providers are listed in alphabetical order and positioning is based on annual contract value signed over the past 12 months. The companies new to the list are denoted with an asterisk and a reminder that the regional leaderboards can be accessed on the ISG website. Now let's start with the managed services leaderboard. In the largest group, we continue to see minimal changes in the leaderboard with the top companies maintaining their strong positions. Several of the leaders we would like to call out in the big 15 would be Accenture, who is working alongside Microsoft at Nationwide Building Society to transform their cybersecurity operations. Accenture is also working alongside another partner, and this time, AWS at NatWest on a 5-year deal to consolidate its customer data streams into a single bank-wide data platform that's enabled by AI. We'll also highlight Capgemini, who signed a multiyear agreement with Aptiv to provide IT support, infrastructure and digital operation services. Capgemini also won a contract with Danish firm, GN Group to transform its retail vertical chain, implement Salesforce global order management system designed to streamline order processing and enhance customer experience across their 100-plus markets globally. Moving to Building 15, we'd also like to call out LTIMindtree's recent 7-year $450 million ISG Advice contract with Archer Daniels Midland, a global food processing and commodities trading company. The agreement involves LTIMindtree implementing an AI-powered operating model to manage ADM's IT infrastructure, application management and cybersecurity services to enhance efficiency and support global growth. In the Breakthrough 15 group, Chinese-based provider, Neusoft joined the leaderboard on the strength of a large 4-year deal to become the designated supplier of smart cockpit domain controllers of a Chinese automaker. Neusoft counts Geely, Changan Automobile Group, FAW Group and GAC Group among its large car-making clients. You will also see ER&D provider, L&T Technology Services, who announced an agreement with Thyssenkrupp Steering to establish software development center in Pune in India. The new center highlights LTTS expertise in mobility segment dedicated to developing safety-critical software for advanced steering technologies while supporting Thyssenkrupp's global engineering expansion. And finally, in the Booming 15, we highlight several new entrants to the leaderboard. First up, Swedish customer engagement provider, Transcom Worldwide, which has won deals at PayPal, Samsung, BNP Paribas and Tele2. Tata Technologies joined the leaderboard as well. They are an ER&D leader that provides a full range of solutions from concept to production for manufacturers in automotive, aerospace and heavy machinery industries. Congratulations to all the leaders. Mark, over to you to cover the as-a-service leaders.

Thanks, Namratha. In the Big 15, we continue to also see minimal changes in the leaderboard with the top software companies maintaining their strong positions as hyperscaler providers dominating the growth and including Oracle, as I mentioned earlier. In the Building 15, we saw a couple of new SaaS providers join the leaderboard, as example with AppLovin and Autodesk. AppLovin develops software and solutions for mobile app monetization and marketing. In the Breakthrough 15 group, this quarter, our leaderboard is popular with data center provider 21Vianet, who has moved up to the Booming 15 and including OVH. You also see well-known softwriters such as Databricks, Palantir and Zscaler. Databricks also signed a Series K term sheet at over $100 billion valuation, surpassed at a $4 billion run rate with a $1 billion-plus AI run rate. Finally, in the Booming 15, CyberArk joined the leaderboard, and they are a cybersecurity company that provides an identity security platform to secure and manage the credentials and access privileges of all identities. The announced $25 billion acquisition by Palo Alto Networks to close in 2026 will bring new potential and a tipping point for future M&A activities. Congratulations to all leaders. And now over to you, Steve.

Thanks a lot, Mark. I think as everybody in the business can appreciate, this has been one crazy quarter as we've gone through. So managed services, up 1.5% globally. All of that growth really on the Americas, as we discussed, which was up 15%, really led by the recovery of BFSI, which was up 30%. So good news there. I think on the SaaS side, Mark, you did a great job really covering that. We're seeing ongoing strong demand, both for hyperscalers and SaaS. The market is up 33% year-to-date, and we really just see strong demand going forward. So if we think about what that means for the forecast, we're going to hold our forecast for managed services at 1.3% for the full year. The Americas is going to have to continue to carry the weight of that, but we expect Q4 to remain challenged, especially in EMEA. So we just don't see room to raise our full year forecast on that. We are going to raise our forecast though for as-a-service another 400 basis points. So we're going to go from 21% to 25%. We're just seeing so much growth -- we're seeing so much growth as we go through that. So you will see the increase there. Again, that will go from 21% to 25%. With that, I want to thank everybody. And Sumeet, would you like to start with questions?

Sure, Steve. Thanks a lot for the insightful presentation. So my first question is around the demand outlook. I mean, obviously, you have maintained your managed services outlook at 1.3%. But wanted to understand the tariff hit sectors like retail, autos, when are you expecting the discretionary demand to revive back in those sectors? And secondly, your increase in as-a-services outlook to 25%, will that help to revive demand for system integrators around SaaS implementation?

Yes. Let me take the last one first and actually have Mark answer that because I think the SaaS market is driving up, and I do think we see greater opportunities for SIs, and that's clearly in the case with SAP. But Mark, any comments on that?

Yes. No, it's -- the demand curve, I think, as we've seen in the SaaS segment has definitely been driven by a lot of the, let's call it, the Gen AI and AI platforms. And we're just starting to see a better pickup in the core applications segment. As I noted, ERP is up 6%. And I think as many organizations are trying to rationalize their infrastructure to be AI ready, that's going to require more services work, and we're already beginning to see those indicators.

Yes. And Sumeet, you mentioned CPG and retail. I mean, it's -- as we showed in the data, it's down significantly. Retail had its worst quarter in, I think, 3 years. That said, as I mentioned, on a deal activity basis for ISG, that's super busy right now and especially around cost optimization focused for back, middle and even starting to get into some front office area like marketing, marketing automation, fulfillment, those kinds of areas. So there are definitely mixed signals there, but I also think the consumer is just under a tremendous amount of pressure. In my opinion, no macro economists, but in the U.S. specifically, I can speak to that, the U.S. consumer is under a lot of pressure. I think the automotive sector is under a lot of pressure, and I think it's going to get worse. And so you could argue that bodes well for the services sector as more companies need to focus on cost optimization. That's what we're seeing. But in some cases, we're just not seeing it reflected in the bookings.

Got it. That's very helpful.

The last point on that is retail is a really small part of the overall managed services market. We know the brands really well, and we get excited about the brands, but it's kind of very -- it's got a small impact, really less than 5% of the overall global market with it. So it's really BFSI, manufacturing, energy that drives such a big part of the market and life sciences being up is also very helpful.

Got it. That's very helpful. And secondly, I wanted to check around post the H-1B visa fee hike, are you seeing any sort of delay in the decision-making out there across the clients maybe because of operational hurdles or how to flag around the H-1B visa resource. So anything picking up from ground in the last 20 days?

Yes. That Saturday was one of the busiest Saturdays of my life from the time it was announced on the Friday night, and I was in Europe and the Saturday morning and all the calls from both friends and colleagues and clients and reporters. We have not seen clients slow down to the extent that we thought that they could because I think there was a lot of clarity by Monday morning. And I think with the White House coming out and clarifying things sort of Saturday afternoon U.S. time, helped kind of calm the markets down quite a bit. And I think what we see right now is a little wait and see. We understand the direction that they want -- that the administration wants to go. So we think we can mitigate that risk. Over the weekend, as you know, because I know you were working just as hard as I was, it was a bit crazy to forecast what was going to happen and what the impact was. But we feel like especially the lottery is going on now, decisions in April. That's when the first payments will go through. We'll have a much better perspective of what's going. My only concern, quite frankly, is still on the prevailing wage, and that's the big unknown because the prevailing wage comes down if we're whatever percentage under market in certain cities and those have to be raised immediately. That will absolutely have an impact on margins. And it's unlikely that those costs will be able to be passed on to a client in many instances. So that would be my immediate concern as I look into Q4 and early Q1.

Got it. And I think maybe last question I can squeeze in, in terms of the HIRE Act. I mean it was introduced in September, the halting of international relocation of employment. So anything you are hearing, any scare among the clients as to or among the GCC activity as to how that can play out, although a lot of uncertainties are there, whether it can get cleared or it requires a congressional approval, but anything you are hearing on the ground?

Yes, Sumeet, I would say I was actually just in -- I think a lot of that HIRE Act, Sumeet, it's going to be focused in the customer experience space. I was actually just in the Philippines. I got back a couple of weeks ago as I was speaking at the IBPAP event where -- around GCCs and what we see happening in GCCs. That came up a couple of times, but it didn't seem to be from -- given the degree to which a lot of that customer experience activity emanates out of the Philippines. Not a huge concern. I have not talked to a single client that's brought it up. So to me, I would say, no, not a significant concern.

Great. Sorry Steve.

Great. Sumeet, thank you. Do you want to open up the questions more broadly?

Thanks, Sumeet. Yes, we've got time for a couple of questions. Let's just keep them brief. So Namratha, I'll come to you first. There's a question around M&A. Is IT, BPO convergence leading to more M&A?

Yes. I think when we highlighted the WNS and Capgemini mergers and acquisition last quarter, we did say that this could be a signal to the market in terms of M&A sort of picking up, though it may not be at the same size and scale. But I think we're still seeing a lot of active M&A that is happening in the IT and BPO, but that's largely also focused on some of the capability investments and enhancing all the AI and platform engineering capabilities. And some of the CX in the front office space also we saw a lot of mergers and acquisitions, though they were -- some were more focused on some of the acquisition of specialized skills. Some are also focused on strengthening their scale presence in the market given the high competition that is also kind of increasing. But I think at this stage, I would say, predominantly most of the companies in the BPO segment are focused on enhancing their data and AI capabilities. And the second segment where we are actually seeing is more around industry-specific capabilities. We've highlighted that industry-specific BPO is one of the largest segment and functional area under BPO. And we see that is quite actively picking up where providers are investing in broadening and strengthening their industry-specific capabilities.

Okay. Thanks, Namratha. Okay. We've got time for one more question, Steve. We've got a number of questions coming in about what we think 2026 is going to look like. So what do we think?

Yes. Everybody wants to know. Everybody wants to [indiscernible] I get it. Listen, we're coming out of a very difficult quarter on the managed services side at the 1.3% that we're talking about, that's on the low side of where we've been. But I do see a lot of green shoots. We'll have the full forecast by the end of Q4. I'm very optimistic about the growth of BFSI, the continued growth in Americas. I think some of that will translate into Europe as well. And I think this is clearly a case where the high tides are going to rise all boats, if you will, because I think we're going to see so much more spend in other areas, both as Mark went through with infrastructure as SaaS, what that means for SIs. So I'll say roughly, I think we'll be in the mid-3s for growth for 2026. I won't put the data on it yet, but I think we'll be in the mid-3s on where we'll be for growth, which will be good for the industry and further showing the stability and the growth that we have.

Super. Thanks, Steve. Okay. We're going to go ahead and close out the call. Sumeet, as always, a huge thanks to you and your team for hosting the call today. As a reminder, you can access a copy of the slides that you just saw, which includes the regional leaderboards on the ISG website. Don't forget to download the state of Enterprise AI adoption, the report that Steve talked about. And we thank you very much for joining us today, and we'll see you on the fourth quarter and full year 2025 call in January. Thanks.