Infosys Limited (INFY) Earnings Call Transcript & Summary

Ladies and gentlemen, greetings, and welcome to Infosys Limited Q2 FY '27 Earnings Conference Call. [Operator Instructions] Note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindroo. Thank you, and over to Mr. Mahindroo.

Hello, everyone, and welcome to this earnings call to discuss Infosys Q2 FY '27 results. Joining us on this call is CEO and MD, Mr. Salil Parekh; CFO Mr. Jayesh Sanghrajka, along with other members of the leadership team. We'll start the call with some remarks by Salil and Jayesh on the performance of the company, subsequent to which we'll open up the call for questions. Please note that anything we say that refers to our future outlook is a forward-looking statement that must be read in conjunction with the risk that the company faces. A complete statement explanation of these risks are 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.

Thanks, Sandeep. Good evening, and good morning to everyone on the call. Thank you for joining us. Our revenue growth for Q2 was at 1.5% year-on-year and 1.2% sequentially in constant currency terms. Our AI revenue was standout at % of our total revenue, growing 29% sequentially. Last quarter, it was at 8.2%. Our large deals were another standout at $5.2 billion for the quarter. This includes 2 mega deals. One of these mega deals was for over $2 billion with a large international company for a period of 7 years, and it's net new. This deal is expected to contribute over 1% of revenue growth in the coming financial year. The second mega deal was for $1 billion for a renewal. The large deal pipeline is healthy and includes some other mega deals. Operating margin was stable at 21%. Free cash flow was strong at $928 million for the quarter. As enterprises adopt AI at scale, another quarter of strong growth in AI revenues is a recognition of our differentiated market positioning and client confidence. We are advising large global enterprises on their AI and continue to invest in deep domain and technology capabilities to bring new ideas and an integrated ecosystem to help businesses unlock AI value at scale. A premier food services company was processing over 10,000 invoices a day across siloed systems, which made approval, disputes and payment tracking difficult. A new solution had to leave existing legacy systems running undisturbed. We used AI to turn business requirements directly into working software and built a single invoicing platform alongside the old systems. The result was 40% faster time to market, 80% less rework and 30% more defects caught before go live. In another example, by embedding AI agents into the software modernization life cycle, we helped an education technology company modernize its aging platform with significantly lower risk and effort, achieving 40% effort reduction and a production-ready solution. As an ecosystem integrator, we continue to work closely with frontier model companies, including both open weight and closed models. Our deep investments in Topaz Fabric help our clients seamlessly navigate between models to ensure token optimization and value realization. Infosys continues to gain market share, especially where economics of the program is aligned to the stakeholder interest. We remain the preferred AI strategy and deployment partner for our top clients. As AI remains central to enterprise transformation in the years ahead, Infosys is well positioned to help navigate this shift. Based on our Q2 performance and revised outlook for the rest of the year, our revenue growth guidance is 1% to 2% year-on-year in constant currency terms. Our operating margin guidance remains the same at 20% to 22%. Thank you. And with that, let me hand it over to Jayesh for his comments.

Thank you, Salil. Good morning, good evening, everyone, and thank you for joining the call today. Let me begin with some comments about the broader environment. Client spending remains cautious, reflecting geopolitical tensions, inflationary pressures and shifting technology priorities. Selective discretionary spend also tempered the usual Q2 seasonal growth. Against this backdrop, the key outcomes for the quarter where revenue growth was below our expectations, while AI first revenue now accounts for 10.5% of our revenues. Operating margin was at 21%. Free cash flow was at $928 million, representing 113% of net profit, Large deal wins were at $5.2 billion with 62% net new. Let me now turn to performance drivers and what it means for our outlook. Q2 revenues were $5.45 million, an increase of 1.2% sequentially and 1.5% on year-on-year in constant currency terms. Acquisition contributed approximately 0.4% to sequential growth. Growth was below our expectations, volumes were softer and price increases were lower than anticipated amidst high competitive intensity. Q2 AI revenue is now 10.5% of total revenue with strong sequential growth of over 29%. Clients are expanding enterprise-wide AI adoption, and we are investing in to Topas capabilities and partnerships to support this opportunity. H1 revenue growth was at 1.9% in constant currency terms and 2.1% in reported terms. We won 19 large deals in Q2 with a TCV of $5.2 billion, which is second highest quarterly TCV in the last 5 years. Of this, 62% was net new. This includes an entirely net new $2 billion-plus 7-year mega deal with a financial services client. Transition is expected to begin in the second half of Q4. This deal is expected to contribute over 1% growth for the company in FY '28. We also renewed a $1 billion mega deal with an existing financial services plan. Vertical-wise, we won 7 leads in financial services, 5 manufacturing to each in communications, EURS, life sciences and 1 in high-tech. Region-wise, we signed 9 deals each in North America and Europe and 1 in rest of the world. This takes H1's total large deal wins to $8.8 billion, which is a year-on-year growth of 28% with 62% net news. This will lay a solid foundation for future growth. Q2 operating margins were a 21% decline of 0.1% sequentially. Major components of the changes are as below: headwinds of 70 basis points from sequential change in post-sales customer support, 20 basis points additional impact from acquisitions due to 1 month additional consolidation, offset by tailwinds of 40 basis points rotation, 20 from project maximum and 20 basis points from higher calendar and working days. Additionally, normalization of 40 basis point impact from EURS program terminated in Q1 was our realization due to high competitive intensity. For H1, operating margin stood at 21% at the midpoint of our guided range. On-site mix reduced further to 22.6%, reflecting our sustained efforts to help clients achieve cost reductions. For H1, on-site mix was down by 0.7%. Utilization, including trainings improved by 0.5%, sequentially to 85.4%, demonstrating continued operational focus, utilization, including trainings decreased to 81.9% due to fresher intake. Net head count increased by about 4,400 employees. We hired about 13,000 pressures in H1 in line with our target of approximately $20,000 for FY '27. As mentioned last quarter, we are rolling out compensation hikes to most of our employees effective October '26, with the next phase effective January '27. Attrition reduced to 12.7% versus 13% sequentially. We expect effective tax rate for the year to be in the range of 29% to 30%. Q2 yield on cash investment balance was at approximately 6.9%. DSO for the quarter was 64%, down by 7 days compared to DSO last year. DSO, including unbilled net of revenues was 77 days, down by 10 days as compared to last year. Free cash flow generation was at $928 million at 113% of net profit. We ended the quarter with cash and cash equivalents at $4.7 billion and a debt balance sheet. Each quarter stood at INR 19.32, up 8.7% on a year-on-year basis. H1 EPS stood at INR 38.51, a double-digit growth of 11.7%. The Board has announced an interim dividend of INR 26, an increase of 13% compared to last year. Coming to verticals. We had robust large deal signings and financial services of more than $3.5 billion in Q2. And saw growth momentum across global and regional banks and payments, capital markets in Europe. Mortgage sectors is expected to see a slowdown due to increased rate hike expectation. Clients are prioritizing modernization and AI initiatives focused on cost efficiency and enhanced customer experience. They are also increasingly moving from AI experiment into enterprise-wide adoption with Infosys being the preferred AI partner across a vast majority of our top clients. While geopolitical interest rate uncertainty continues like cautious spending, strong deal wins and a healthy pipeline positions us well for sustained growth. Manufacturing continues to face near-term pressures, including loans from a large client Middle East conflicts, inflation and tariffs are constraining discretionary spend and extending decision cycles. Competitive intensity remains high, particularly around AI productivity commitments. We are helping clients navigate uncertainty by driving initiatives across supply chain visibility, more efficient factories and better process. Clients are relooking at the partners across the value chain, leading to vendor consolidation opportunities. EURS segment continues to see stable demand with client spending concentrated on targeted high-impact programs rather than broad-based discretion initiatives. Cost optimization, vendor consolidation, core modernization and AI-led transformation remains key priorities. While competitive intensity remains high, we are investing in sales and domain capabilities and leveraging differentiated AI-led solutions to improve conversions. Large deal pipeline has grown significantly in the last 1 year, which provides future growth visibility. Sequential growth in retail segment was primarily impacted by lower third-party revenues. Additionally, subdued environment and macro uncertainty resulted in soft consumer demand, which has led to ramp-downs in some clients. Consumer tech and logistics are impacted on account of supply chain disruptions. However, there are opportunities around large cost takeouts as well as transformation programs towards AI. Expectations for AI-led productivity commitments are increasing competitive intensity and reshaping commercial model. Communications segment is witnessing a challenging demand environment with clients maintaining tight control over discretionary spend and prioritizing cost efficiency. AI-led driven productivity expectations and are putting pressures on pricing and delivery models. While cost takeouts and vendor consolidations remain the primary drivers, some opportunities are emerging in transformation, legacy modernization and AI-led program. We are strengthening domain capabilities and execution speeds to help clients scale AI and capture these opportunities. Hi-Tech segment was impacted by lower third-party revenues as well as reduced spend in a few large clients due to cost pressures emanating from budget cuts. Clients remain focused on cost control with hardware spending. -- constrained by micro once. We are revising our full year revenue growth guidance to 1% to 2%, reflecting softer-than-expected H1 performance and are updated assessment for the rest of the year. The lower end assumes further deterioration in macro while the upper end assumes improvement. FS and EURs are expected to grow higher than the company average. Our assumptions regarding acquisitions, the large deal European manufacturing client and the shift towards offshore delivery remains broadly unchanged. Our operating margin guidance is 20% to 20%. H2 margins will be impacted by compensation hikes, softer revenue seasonality, continued sharing of AI-driven productivity benefits and ramp-up of large deals. These headwinds will be partly offset by initiatives under Project Maximus. In summary, while growth in the first half was lower than expectations deal signing during the period and a strong large deal pipeline with few mega deals provide a solid foundation for future growth. With that, we can open up for the questions.

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

My first question was, this year, understandably, you had multiple impacts from macro economy, offshoring and client-specific issues as well. When I see going in to the next year now, especially with the large deal also which you announced, there hopefully will be no large offshoring impact the way it is having this year, you'll have additional contribution from the mega deal as well. Now assuming sectors Paribas, I'm assuming everything else being equal is a great work building model, but a terrible way of planning our business, but just tumor me for a minute. Based on the deals that you have locked in so far and the visibility that you have, on the flux of your existing deals, do you think you can see next year organic growth, which is flat this year. Do you see some recovery. The purpose of this question is not for you to give a guidance or anything next year, just to understand if the headwinds are still emerging or you think that we are largely past them?

Hi Rakesh, this is Salil. I think we feel with the 2 big sort of movements of this quarter, first on the AI, which is looking very strong at 29% growth quarter-on-quarter. And that builds on something that has been going on, strong growth over the last few quarters. And the mega deal win that we shared, which gives us support for next year, plus the pipeline that we see on the mega deals and large deals overall, we feel good that the organic will be in a good shape in next year. .

Next question. Second question was around margin. So we are consistently running a high level of subcontractors what does the business need to run this at a higher level? And what is stopping us to bring it down to the pre-COVID levels, which used to be about 6-odd percent. .

This is Jay here. If you look at what we have been directing is we -- there's an endeavor to bring our subcontractor cost down over a period of time. It has come down and then slightly it has inched up again on the back of -- it is a factor of at what utilization you are and what the volume growth comes in, what kind of skills that you need and what geography that you need, right? And sometimes, some of these programs where you need them, maybe short term, immediate kind of a demand. And that's why the subcontractor comes in. But our endeavor is to keep it in a tap, keep it within a broad band, and that's where we are right now.

So my understanding is right, if I see that it's a trade-off between higher running higher utilization with and running higher subcontracting cost. And may not necessarily be margin accretive if we bring that down also.

So yes, I mean, if you are able to bring the subcontractor down by 1%, we have stated in the past, it gives you around 15 to 20 basis points on margin. So yes, to that extent, there is an opportunity, but it will never come down to 0. So even in the best years, we have been in the range of 5%, 6%. So that's the delta that we have here. .

Next question is from the line of Bryan Bergin from TD Cowen.

I was hoping to isolate what changed most in the growth guidance revision versus last quarter. So you gave a lot of details. You talked about volume and price. -- high tech and retail as verticals that have seen pressure. But if we look at the midpoint of the growth guidance for 2027, can you unpack what may be most different by like the largest drivers? .

Brian, so if you look at the last couple of years, we have been getting a price increase or RPP increase as we call it. If you look at what we are seeing today is a pricing pressure on the back of competitive intensity, which has increased in the last couple of quarters. And therefore, that pricing expansion that we are expecting at the beginning of the year, that has not materialized. So that's 1 impact for sure. We saw softer than revenue -- softer-than-expected revenue growth or volume growth in the quarter. So that was the second reason. . And slower discretionary spend in some of the sectors, especially the retail and high tech that we called out. So those are the 3 specific reasons that that led to lower than our expected revenue in this quarter. Again, when you look at the overall guidance for the year, I would want you to remind that there were certain factors that impacted our overall revenue when you compare that to the rest of the peers, we had a lower -- we expect a lower revenue from off shoring. There was a large deal that we walked out of or we did not pursue because it did not meet our return expectations. So those were the things that impacted our overall guidance even at the beginning of the year and as we continue to deliver this year, both of them put together were in the range of 1.8% to 2% impact for the year. So that is the overall guidance in my mind. And as we look forward, like Salil said, we have a strong deal pipeline with a couple of mega deals in it. We have already signed $5.2 billion with 62% net new. So that gives us a stronger belief in the year that we see coming up.

Okay. That's helpful. And then my follow-up is on the AI-driven productivity. So when we think about a like-for-like basis, would you say that has worsened since the start of the fiscal year, meaning clients are demanding more productivity in just the past 6 months? Or is it more so just getting more prevalent across your client portfolio as AI programs scale?

This is Salil. I think what we see is the effect or the expectation on the productivity is about similar. And we also see some parts of our portfolio have already been exposed to it and others are getting exposed to it. There is broader sort of upticks as revenue has also gone from 8% to 10%. There's just more awareness of this, especially in some industries, and so we see that coming into play, but it's not -- the intensity doesn't seem to have changed. .

Next question is from the line of Yogesh Agarwal from HSBC Securities.

Just a couple of questions. Firstly, the -- you guys did well in banking, and it's been a similar result from most companies and high tech has been weak. So how to read this for you and for the sector level because both these sectors are leading tech adopters. So -- is this the second round of deflation at high tech? And can it spread to other sectors or banking stent is more relevant and a positive for other sectors?

So what we saw there is, first, banking financial services has done well. Then we have energy utilities has done well. Then we have parts of manufacturing what we also saw in health care. So it's a broader base multiple sectors, which are looking quite strong. And then we have Hi-Tech, which essentially I would say, for the most part is focused on 1 client in the U.S. And then we have retail, which is seeing a change in the segment vis-a-vis the client footprint that we have. So we see actually there's a lot more industries or sectors, which are showing good traction, good adoption of the and also good discretionary like financial services, energy utilities. And we think that, that's more of what is likely to happen across the entire set of industries.

Got it. Got it. And just a quick one. Just, I know it is less relevant now, but for the next 2 quarters, now only 5 months are less. So any potential risk to the midpoint of the guidance or any push pools you can talk about?

Yes. So as you know, we are entering the seasonally weaker part of the year. There will be furloughs that impact the H2, there will be lower working days and all of those implications, all of those impacts. So that will definitely be there. And like always, we don't have 1 model that leads to guidance, right? There are always multiple models that leads to multiple points of the guidance. At the lower end of the guidance, we have baked in higher uncertainty at the upper end of the guidance. We have baked in an improvement in the environment. At this point in time, we can't really say where we will end up. I mean that's on how things play out. .

Next question is from the line of Surendra Goyal from Citi.

Good evening. Could you just talk a bit about the nature of work in this net new mega deal? And does it also have any margin implications during the ramp-up phase? .

So there, what we are seeing is it's a business transformation opportunity where we are really using AI to make sure that all of the tech and ops work is better serviced. The approach is really taking some real benefits from AI to apply into it. This was a situation where our teams worked directly with the client teams to shape how this is being developed in terms of the opportunity and the resulting deal itself. We don't see any real margin impact on the transition in this year at all on this one.

Okay. And does it involve asset and people take over as well?

Surendra, there are no asset takeover. There will be some people take over. Again, we don't really give too much detailed deal by deal. But yes, on an overall basis, -- there are no asset takeovers.

Next question is from the line Jonathan Lee from Guggenheim.

Great. This quarter, currency and working days contributed about 60 basis points and Maximus contributed only 20 bps. With the October and January wage hikes, acquisition amortization and continued pricing pressure hitting the back half, what would keep fiscal' '27 margins above the 21% midpoint? And what would push it below? How much runway is left on Maximus? And if those savings slow, which other levers can hold margins near that midpoint?

So Jonathan, if you look at what we have delivered over the last multiple years, we've been able to run a ship with a steady margins. FY '25, we had an expansion on margin in FY '26 and H1 of FY '27, we've been able to maintain our margins at 21% despite investing in business, whether it is sales and marketing, whether it is building our AI talent, our investment in technology. And all of that we have assumed and absorbed within the margin that we have declared. Having said that, if you recall at the beginning of the year, I did call out that the acquisition that we have made will have 50 basis points impact on our margins overall. So that's a headwind from a full year perspective. As we look forward in H2, we will have compensation rollout. A large part of that will be effective October and the second phase will be effective January. So we have headwinds coming from compensation. We have headwinds coming from acquisition-related amortization, et cetera, the seasonally slower part of the year. So yes, we'll be able to partially offset that through project, Maximus. But at this point in time, for the year, we are very confident of the guidance that we have given.

That's good color. And then on the verticals, look, high tech and retail both softened this quarter. Obviously, HiTechtied to a U.S. client ramp down retailer by lower discretionary spending in smaller third-party. Can you size each impact and say whether it's fully run through? Or should we expect further ramp downs in the back half? And do you see the weakness spreading to other clients in either sector or is it isolated?

So Jonathan, I mean, we don't really give a vertical specific guidance or forecast from that perspective. At this point in time, what we have guided for is 1% to 2% on an overall basis in terms of revenue growth for the year. And just to clarify the impact of all the headwinds that we see has been baked in, in the guidance. .

Next question is from the line of Ankur Rudra from JPMorgan.

Just a couple of questions on pricing. The pricing pressure you mentioned, is this broad-based across clients? Or is this very client-specific or sector-specific -- and what kind of incremental pricing assumptions are you baking in for the second half of the year?

Ankur, this is Salil. Let me start off and then Jayesh Jes will add. So on the pricing, what we are seeing is that across the client base, there is demand or request requirement, which is focused on productivity benefits from the AI that are getting passed on. And then we see also sometimes those are beyond the sort of threshold of economic return that we are looking at. So what we are seeing in the ones, while we are taking on the bulk of the deals, there are some small number where we see that is even higher. On the ones that we are taking on, we see because of that productivity push, the pricing pressure coming through across -- in different clients across the industries.

And Ankur, just to add to your second question, at the lower end of the guidance, we have assumed similar to slightly deterioration on the pricing at the upper end, we have assumed improvement.

So the midpoint is no change in pricing, you basically assume the same pricing continues? .

I mean it's very difficult to call out each factor that will relate to which point of guidance are good. As I always say, there are multiple models that lead to multiple points of guidance, right? So directionally, lower end is deterioration and upper end would be improvement. .

Understood. Just a follow-up question was on the margin profile of your AI revenues. How is that versus a rest of the portfolio now that has grown -- and secondly, if you can just comment also on the large deals you have signed and pursuing you've mentioned a couple of mega deals as well. How should we think about the margin pricing profile of those contracts?

So on the large deal sign, the margin profile is similar to what we have signed. So we have not seen that this set of large deals and especially on the mega deal is any different from what we've seen in the past. And we've also mentioned that in general, we've been quite disciplined about the contracts we signed in terms of the economic guideline or return. Similar to that point on the pipeline, the couple of the mega deals or the large deals in that pipeline, we are seeing similar margin profile. So we feel comfortable to look at how that plays out. .

And sorry, if you comment about the AI revenue. Is the margin similar?

Sorry, yes on the AI revenue, we don't share externally the margin that and the overall of the company. Having said that, we are getting good pricing on those deals. We feel confident that the value that we are showing that the clients are seeing it. And also, we are very competitive in the market in terms of building the capacity because that capacity is at a slightly different cost point also. But overall, we don't look external. We don't share externally the margin of that revenue. But as Jay shared earlier, the overall company margin, we remain quite comfortable with the guidance on that. Thank you.

Next question is from the line of James Friedman from Susquehanna International.

Thank you for the opportunity. So -- thank you for the use in AI in your prepared remarks. They are quite illustrative illustrative. My question is, could you share some perspective on whether those are informing and helping you win these large transactions? Are they part of the large transactions? Are they typically shorter duration? Any perspective on the AI dimension from this perspective would be helpful.