Infosys (NYSE:INFY) held its first-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

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Summary

Infosys Limited reported Q1 FY27 revenue growth of 2.4% year-on-year and 1% quarter-on-quarter in constant currency terms, with AI services contributing 8.2% of total revenue, showing double-digit sequential growth.

The company announced the appointment of Ashish Dash as CEO-designate, succeeding Salil Parekh, who will transition out by March 2027, highlighting a focus on AI strategy and continuity in leadership.

Large deal wins totaled $3.6 billion, with 61% being net new, indicating strong demand despite a challenging macroeconomic environment.

Revenue guidance has been revised down to 1.5% to 3% growth for FY27, reflecting a soft macro environment, client-specific issues, and program terminations.

Operating margin guidance remains at 20% to 22%, supported by currency tailwinds and operational efficiency initiatives like Project Maximus.

Infosys is investing in AI talent, planning to add 6,000 frontier engineers, while maintaining a strong focus on reskilling existing employees.

The company maintained a strong balance sheet with free cash flow of $955 million and a debt-free status, but noted challenges with softer pricing and competitive pressures.

Full Transcript

OPERATOR

Ladies and gentlemen, greetings and welcome to Infosys Limited Q1 FY27 earnings conference call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindro. Thank you, and over to Mr. Mahindro.

Sandeep Mahindro, Investor Relations

Thanks everyone, and welcome to this earnings call to discuss Infosys Q1 FY27 financial results. Joining us on this call is Chairman of the Board Mr. Nandan Nilekani, 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 Nandan, followed by remarks by Salil and Jayesh on the performance. Subsequent to that we'll open up the call for questions with Salil and Jayesh.

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

Nandan Nilekani, Chairman

Thank you, Sandeep, and it's really a pleasure to talk to all of you. I joined this call to make an important announcement. As you know, Salil has done a stellar job as the CEO for almost 10 years, and under his leadership the company has grown from $10 billion to $20 billion. He's done the transition to the digital era and he's laid the foundation for a differentiated AI strategy which will serve the company in good stead for many more years. However, his term is coming to an end on March 31, 2027, and the Board has decided today to appoint a new CEO who is coming from inside Infosys, an internal candidate.

His name is Ashish Dash. Ashish Dash has been in Infosys for more than 31 years, since he joined as a software engineer from IIT Kharagpur, and he has all-round experience of Infosys. He has worked in delivery for many years. He has worked on account management. He has been involved with starting a DC in Bhubaneswar. He has been in sales and, of course, he has been a sales and segment head for many years running the SURE practice which has many verticals.

He is an outstanding person. He is very good at his job. He is very collegial; he is very collaborative. He is accepted and liked by everybody in the company. He has quintessential Infosys values. At the same time, he's focused on the market and being able to get good deals at good revenue and good margin. And because of his technical background, he understands what is happening in AI and that will help him in the future. So the Board has appointed Mr. Dash as the CEO-designate. He will work with Salil over the next few months. Next two, three months he'll focus on getting more coaching and training on being a CEO, and then for six months he will work as a mentee under Salil's leadership, who will groom him for the complex job of managing a $20 billion company at a very transformational time. So we are all very excited by the choice. It has got a very good response internally and with customers.

And you will get to see him in a few months, so you can maybe keep that in mind. Maybe now I'll ask Salil to add a few words on Dash.

Salil Parekh, Chief Executive Officer and Managing Director

Thanks, Nandan. Good morning, good evening everyone. It's an absolute pleasure for me to have Dash be the next CEO of the company. I've had the opportunity to work with him over the last several years. In my mind he's a fantastic leader and very good with the people around. He's worked very closely with clients and built a portfolio which is, I think, quite strong and exceptional on the growth dimension and the way it's managed operationally and economically—so all of the ingredients which make for a successful business.

In addition to his leadership, Dash is a very good friend and I'm delighted for this. Congratulations to him, and I look forward to working with him over the course of the next few months, as Nandan mentioned, in the way we transition—in a smooth transition there. So look forward to all of that. And as Nandan said, you will get to meet Dash in the coming quarters as well.

Nandan Nilekani, Chairman

So thank you. And I'll excuse myself, and Salil and Jayesh and the team will continue the quarterly call. Thank you very much.

Salil Parekh, Chief Executive Officer and Managing Director

Thanks, Nandan. Good evening and good morning to everyone on the call. Thank you for joining us. Let me start off with the update for the business in this quarter. Our revenue growth for Q1 was 2.4% year on year and 1% quarter on quarter in constant currency terms. We had a one-time revenue impact of a client decision. During this quarter, our AI services revenue was 8.2% of overall revenue. Our large deals were at $3.6 billion with a net new of 61%.

Operating margin was 21.1%, free cash flow at $955 million, and our earnings per share were higher by 15% in Q1. In rupee terms, we saw a strong acceleration in our AI business as I shared earlier, with AI revenues for the quarter at 8.2%. This is growing at double-digit quarter on quarter over the last several quarters. With this momentum we see long-term relevance of our services for our clients. From a delivery team, over 80,000 employees are working today on coding tools such as Copilot or Codex for our clients and for some projects inside.

We saw strong traction across the six areas of growth in our AI strategy hexagon. We see client work, for example, in building agents for processes, work on data, in AI in modernization, and of course in coding tools. For a healthcare company, we implemented AI agents to automate Medicaid eligibility verification and operations support. The solution reduced eligibility verification time from about six to eight days to approximately four minutes. We are building a team of frontier engineers to support our client work.

Our plan is to have 6,000 frontier engineers over the next few years. We built a platform, Topaz Fabric, that allows our clients to get benefits of AI while keeping the sovereignty of their data and company knowledge with themselves. Our clients are able to work with any foundation model—closed or open, on cloud or on their server. Topaz Fabric provides a harness to our clients to enable them to more fully deploy the benefits of the foundation models into their organization.

Our clients are also able to optimize their token cost by ensuring appropriate models are used for appropriate tasks. Overall, we see a good pipeline for AI services and that gives us a good view for continued AI work with our clients. Outside of that, we continue to see the macro environment remaining uncertain. With our Q1 results and a view of the rest of the financial year, we changed our revenue growth guidance to 1.5% to 3% year on year growth in constant currency terms.

Operating margin guidance remains the same at 20% to 22%. Thank you. And with that let me hand it over to Jayesh for his update.

Jayesh Sanghrajka, Chief Financial Officer

Thank you, Sarin. Good morning, good evening everyone, and thank you for joining the call. Today we entered FY27 against a backdrop of a dynamic and evolving business environment, which is reflected in lower than expected volumes. Clients continue to prioritize investments in AI modernization, cloud and productivity initiatives while remaining selective in discretionary spending. Our focus remains on disciplined execution, supporting clients' transformation agenda and delivering sustainable financial performance.

Q1 revenues were at 5,082 million, an increase of 1% sequentially and 2.4% year on year in constant currency terms. Acquisition contributed approximately 1.1% sequentially. Our AI revenue momentum is very strong, with AI revenues at 8.2% of our overall revenues, growing at a strong double-digit sequentially over the last many quarters. We are seeing strong traction across all six value pools, with higher share of revenues coming from process AI, AI strategy and engineering, and data.

For AI, Q1 revenue growth was lower than our expectation mainly due to a one-off 50 basis point impact on account of program termination by a EURS client during the quarter. This was not factored in the earlier guidance. Volumes were soft and weaker than expectations and also versus the historical Q1 trends. Additionally, client expectation on productivity along with high competitive intensity is resulting in softer increase in price versus our expectation.

Sequential revenue growth was also impacted by higher offshoring to de-risk our business model along with lower revenues from a European manufacturing client. As I mentioned in the last earnings call, despite lower than expected growth, gross margins improved by 60 basis points sequentially. Operating margin improved by 20 basis points sequentially to 21.1%. Major components of the change are as below: tailwinds of 70 basis points from rupee depreciation, 20 basis points from Project Maximus, 20 basis points net benefit due to amortization of cost on intangibles incurred in Q4, offset by impact of new acquisitions in Q1; headwinds of 50 basis points from investment in AI sales and marketing, 40 basis points from one-time revenue impact arising out of program termination. We also had one-time cost benefit of approximately 30 basis points which was offset by 20 basis points due to increase in various other expenses. Our tight focus on improving operational efficiency led to utilization excluding trainees improving by 1.9% to 84.9%. Onsite mix excluding new acquisitions dropped by 30 basis points.

However, including acquisitions it remained flat. We expect onsite mix excluding new acquisitions to reduce by 75 basis points to 1% for the year. DSO reduced by 4 days sequentially to 63. DSO including unbilled net of unearned was 76 days versus 78 in Q4. Headcount reduced by 500 employees after adding over 2,000 employees from acquisition. Attrition increased slightly to 13% versus 12.6% sequentially in line with Q1 seasonality. We plan to give salary hikes to most of our employees effective October while the rest of the employees will be covered in January 27th.

We expect effective tax rates for the year to be in the range of 29 to 30%. EPS for the quarter stood at 19.19, up approximately 15% year on year. Q1 yield on cash investment balance was at 6.8%. Our balance sheet continues to be strong and debt free. Consolidated cash and cash investments were at $3.9 billion at the end of the quarter after returning more than 1 billion to the shareholders through dividends. Free cash flows were strong at 955 million at 116.5% of net profit.

Large deal wins were strong at $3.6 billion with high net new of 61%, reflecting the relevance of our value proposition. Out of the 22 large deal wins we had three deals worth 400 million each. We have been on the positive side of vendor consolidation with 20% of the total large deal TCV being from new vendor consolidation deals. Vertical wise, we won five deals in financial services and communications, four in EURS, three in manufacturing, two in retail, one each in life science, high tech and others.

Region wise, we signed 11 deals in North America, eight in Europe and three in the rest of the world. Coming to verticals, in financial services, uncertainty and geopolitical instability is causing some clients' hesitancy as spending patterns are taking a more cautious approach. Client priorities are centered on efficiency, productivity and modernization, with discretionary spend being evaluated more carefully. We see momentum across banking, payments, capital markets and wealth management.

AI adoption has been incremental and additive, with clients increasingly engaging us to support their AI journeys across strategy, platforms, engineering and operations. This is reflected in our strong deal wins this quarter with approximately 1 billion in large deal TCV, or largely in net new TCV. GCCs continue to expand and we are partnering with our clients both in setup and growth of GCCs. Growth in manufacturing continues to be impacted due to lower revenue from a large client.

Clients remain cautious on discretionary spend and decision making is elongated, especially in European auto. The impact of tariffs, geopolitical uncertainty and energy costs is keeping budgets tightly controlled, while AI adoption is creating new opportunity areas. It is also raising productivity expectations from clients. We are getting better pricing on AI skills and consulting. We remain focused on supporting clients through digital, AI modernization and consolidation initiatives while balancing growth opportunities with disciplined deal selection and sustainable pricing.

EURS segment was impacted by one-off client termination, adjusted for which the growth was strong. Macroeconomic uncertainty continues to influence client spending patterns and decision making timelines. Clients are driving business priorities including cost optimization, operational resilience, productivity improvements and regulatory compliance. Generative AI is emerging as a strong growth catalyst, driving process reimagination and productivity initiatives.

Our partnerships with hyperscalers and AI native companies is allowing us to experiment and ideate faster. In retail and CPG, consumer spend remains muted and budgets are tightly controlled due to geopolitics, inflation and tariffs. Spend is shifting towards AI modernization and productivity-led programs funded through operational efficiency and cost optimization. Clients are asking for AI-led productivity commitments leading to new pricing structures.

We are leveraging our native knowledge of the client's business processes and technology landscapes and augmenting it with AI. Large deal pipeline is healthy but decision cycles are longer. In communications, operating environment remains challenging as clients continue to exercise discipline on discretionary spending and closely scrutinize investment decisions. AI is reshaping spending patterns. Enterprises are increasingly prioritizing initiatives that deliver near-term gains.

Telecom is undergoing significant transformation with consolidation and M&A with increased investments, especially for OEMs. We remain focused on aligning our offerings to these evolving client priorities and helping enterprises realize measurable business outcomes. Considering lower than expected Q1 revenues and revised view of the rest of the year, we are revising our revenue guidance to 1.5 to 3%. This includes approximately 1.7% contribution from recently closed acquisitions of Optimum Healthcare and Stratus; slightly over 1% impact from large European manufacturing clients due to reduced client spend along with our conscious decision to not pursue certain deals that were not aligned to our return expectations; approximately 0.75 to 1% impact from shift towards offshore. Overall business environment continues to remain volatile. Lower end of the guidance assumes further deterioration in macro. Top end of the guidance assumes an improvement in macro though lower than what we had assumed in April guidance.

FS & EURS are expected to grow higher than the company average. The underlying fundamentals of our business remain strong. We continue to see healthy client engagements leading to a robust pipeline. We are taking decisive actions to capitalize on the opportunities ahead, especially on six identified AI value pools. Spending is shifting towards areas with clear business cases such as AI-led modernization, cost transformation, cybersecurity, cloud optimization and vendor consolidation.

As we look at the rest of the year, we remain confident in our strategy, discipline in our investments and focus on delivering stronger performance. Margin guidance is maintained at 20 to 22%. This assumes headwind from wage hikes, productivity pass-throughs, AI investments and 50 basis point impact from acquisitions of Optimum Healthcare and Stratus. These headwinds will be partly offset by initiatives under Project Maximus and currency benefits.

With that we can open up for the questions.

OPERATOR

Thank you. Thank you very much. We'll now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchstone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. A kind request to all the participants: kindly use handsets while asking the question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles.

First question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Kumar Rakesh, Analyst at BNP Paribas

Hi, good evening and thank you for taking my question. My first question was a bit of clarification around the guidance, especially the like-to-like guidance what we had given last quarter versus this quarter. I'm looking at the new guidance that is at the midpoint suggesting 2.25% sort of a growth which I understand you indicated includes acquisition of about 1.7%. So that would imply an organic growth of about half a percent or slightly higher than that versus 2.5% which was in the last quarter.

So is that about 2 percentage point of cut at the midpoint in the guidance or am I reading that wrong?

Jayesh Sanghrajka, Chief Financial Officer

Hi Kumar. So the last quarter would be midpoint would be around 2.2% in the guidance because, as you say, as you remember we had said 20 basis points was the Stratus which was already baked in in the guidance which was 1.5 to 3.5.

Kumar Rakesh, Analyst at BNP Paribas

Okay, got that. So in that case like-to-like this time it would be about 0.8 sort of a number excluding the incremental acquisition that we have baked in. Yep, got that. And looking into the second quarter, given some of the impact that we have seen in this quarter with lower than expected volume and one-time client related decision as well, how much of that you are expecting that to flow into second quarter as well and how you are looking at the demand environment and the growth momentum.

Jayesh Sanghrajka, Chief Financial Officer

So Kumar, as you know, typically whatever happens in Q1 will have a cascading effect in Q2, and especially if the volumes have been softer through Q1, automatically it will have some impact on Q2 and therefore the rest of the year. That largely explains the guidance change. As I said earlier, the multiple reasons for the change in guidance are, first of all, the one-off that we had in one of the EURS clients, the volumes that were softer with the cascading effect, the ask for productivity from clients, and increased competitiveness in pricing that reflected in a lower-than-expected pricing this quarter, which will again have an effect on the rest of the year. And as I had called out at the beginning of the year, we expect our onsite mix to be lower by roughly around 0.75 to 1%, which will have impact on a year-over-year comparison. If you're doing, we had called out European manufacturing clients impact between 0.75 to 1% last time, which is now clearly above 1% as we have progressed on certain other deals as well. So that is an additional headwind as well. So all of that is baked into the revised guidance.

Kumar Rakesh, Analyst at BNP Paribas

Thanks a lot, Jayesh, for that. Just one clarification around the one-time client decision which you spoke about. If you could give some context to that, that would be great. That's all from my side. Thank you.

Jayesh Sanghrajka, Chief Financial Officer

Thanks, Kumar. So this is with respect to a client which has terminated a project in the EURS vertical.

Kumar Rakesh, Analyst at BNP Paribas

Got it. Thank you.

OPERATOR

Thank you. Next question is from the line of Jonathan Lee from Guggenheim. Please go ahead.

Jonathan Lee, Analyst at Guggenheim

Great. Thanks for taking my questions. You mentioned that softer volumes and pricing contributed to Q1 alongside the program termination and that the upper end of the prior guide assumed macro stabilization. That's not materialized. Can you walk us through how the quarter progressed relative to internal expectations? Whether April, May, and June trended differently, when the program termination was communicated to you, and whether decision-making velocity and discretionary spend deteriorated or stabilized through the quarter?

And what have you seen in the first few weeks of July that may inform your shape of Q2?

Jayesh Sanghrajka, Chief Financial Officer

So Jonathan, sorry, I wasn't very clear with the question, but from whatever I understood, the question is whether we saw the change through the quarter and the increase in volatility. The softness that we saw in terms of volumes was through the quarter. The one-off impact that we saw was mainly on account of a client termination, which happened towards the end of the quarter, and the additional deal that we talked about, European client, that was also towards the end of the quarter.

So I think all of those factors reflected in the revised guidance, if that is what you're looking at.

Jonathan Lee, Analyst at Guggenheim

Thanks for that color. And given your commentary on pricing, particularly around the competition has been building for several quarters and Maximus explicitly includes value-based selling, why were pricing headwinds not more fully contemplated in the April outlook? What has changed over the last three months? Is the pressure concentrated in specific verticals or deal types, or renewals versus new, and what gives you visibility that pricing may actually stabilize from here?

Jayesh Sanghrajka, Chief Financial Officer

Jonathan, we are not saying that we are not seeing a price increase. What I am saying here is we haven't seen as much price increase that we envisaged at the beginning of the year on the back of the AI productivity ask of the clients, plus the intensifying competitiveness in the market. But we are still seeing a net increase in the pricing.

Jonathan Lee, Analyst at Guggenheim

I appreciate that clarification.

OPERATOR

Thank you very much. Next question is from Gaurav Ratadia from Morgan Stanley. Please go ahead.

Gaurav Ratadia, Analyst at Morgan Stanley

Hi. Thank you for taking my question. My first question is on the multiple client-specific issues. One is a European automotive that we highlighted last quarter, then this quarter on the EURS vertical. How should we think about all these? Like, are they completely disconnected issues and just happen to take place at the same time coincidentally, or are there certain common links which basically could be, you know, early renewals, competitive pricing, etc., going on because of the technology change?

So just trying to understand how much of it is led by underlying changes in technology happening and driving clients to take these decisions and creating competitiveness in the market, or are they completely disconnected events?

Jayesh Sanghrajka, Chief Financial Officer

So Gaurav, there are two parts of the question. One is the European manufacturing client that you talked about. We knew certain parts of the deals that we had at the beginning of the year, which was in April, and there were additional deals that happened in Q1 of this year. Both of these were the deals where we decided not to pursue the deals beyond a certain point because it was not economical, it did not make economic sense for us or commercial sense for us.

And that's the reason. That has nothing to do with the client behavior or in terms of AI, etc. The other deal is a contract where the client has terminated the contract for various reasons. Again, nothing to do with AI. Here it's a termination of the contract and therefore a reduction in revenue.

Gaurav Ratadia, Analyst at Morgan Stanley

Got it. My second question is on your margin outlook. I know that you maintained your outlook on the band, but now that you have announced the wage hike for second half for the company as a whole, so there will be incremental headwinds around that. So just want to understand what would be, you know, some levers that will help you to offset these pressures in the second half and would it be, would it be fair to say that our aspiration will be to just hold on the margin level compared to the last year and this year.

Thank you.

Jayesh Sanghrajka, Chief Financial Officer

So Gaurav, at this point in time we have given a guidance of 20% to 22%. Let me say that at the outset we are very confident of that guidance. Of course, as I had called out at the beginning of the year, we will have a headwind coming out from the acquisition that we have done in terms of amortization of intangibles and retention payout to the founders or the management team, etc., of the acquired entities. But we also have tailwinds coming from currency, coming from Project Maximus.

As you see this quarter, also we've got 20 basis points of tailwinds from Project Maximus, 70 basis points of currency. So all of those are tailwinds as we look forward. As I said earlier as well in the call, we will have 0.75% to 1% reduction in onsite mix. So that is the tailwind. So all of those are tailwinds. Puts and takes of all of that put together, we are still very confident of maintaining our margin guidance.

Gaurav Ratadia, Analyst at Morgan Stanley

Thank you. All the best.

Jayesh Sanghrajka, Chief Financial Officer

Thank you.

OPERATOR

Thank you very much. Next question is from the line of Abhishek from Motilal Oswal. Please go ahead.

Abhishek, Analyst at Motilal Oswal

Yeah, hi, am I audible?

OPERATOR

Yeah, Abhishek.

Abhishek, Analyst at Motilal Oswal

Yeah, yeah, hi. Hi. So I think my question is on deal wins. It does look like we've had a, you know, pretty decent quarter on deals. TCV net new seems to be decently strong as well as compared to historical levels. But clearly that's not kind of translating into, you know, guidance. So how's the TCV vs. ACV dynamic playing out? Are we seeing extended TCV, sort of, you know, extended tenures right now which is leading to lower ACV, or are we seeing, sort of, you know, delayed ramp-ups, but clients are still committing to spends?

That will be very helpful to understand with regards to the conversion of the deals that we are winning.

Jayesh Sanghrajka, Chief Financial Officer

So Abhishek, if you look at the deals, typically the terms of the large deals have not gone up. They still remain on average between three to five years. Of course, when you look at some of the mega deals, the terms could be longer. But in the current year's deals, we have most of the deals which are not mega deals. The deals that we signed, while most of them were less than $500 million, we did have some deals between $400 to $500 million, three of them.

What we also need to remember is whenever the deal comes up for renewal, we always used to have the additional productivity ask from the client, which is how traditionally this industry has been. On the back of AI, there is additional deflation on the AI-led deflation, as we call it. So that's a headwind that's there. That's only on the large deal portion. That's also there on the non-large deal portion. So that is what is getting offset by the net new business that we are seeing.

Abhishek, Analyst at Motilal Oswal

Understood. And could you quantify the deflation, if you can? I know it's sort of dynamic, but just a quantification of what the deflation entails will be helpful. And lastly, how do we define AI-led revenues? Is this AI implementation or AI-infused? Just a broad sort of sense of that will also be very helpful. Thanks. My side.

Salil Parekh, Chief Executive Officer and Managing Director

So hi, this is Salil on the AI land, and I'll come to the other one after that. I think what we are seeing on the AI revenues is these are revenues which are coming from the strategic framework we described at the investor day, which are the six areas that we see new growth, the new addressable market of 300 billion, for example process AI, for example making AI engineering strategy work, for example data which is needed, the data layer for AI. And each of those six areas we see a good growth.

This revenue is 8%, 8.2%, growing double digit Q-on-Q over the last several quarters. And that's the primary AI revenue. Internally we also look at AI revenue which you reference, like infused or augmented, or where AI is part of an existing workstream that becomes more AI. But this specific one that we shared externally is what we see from the AI strategy that we put together on the quantification. We don't quantify that compression part externally, but we acknowledge of course there is the compression and internally we track it to see how that works.

Now in many cases when there is the compression, we typically, given the work we are doing with clients, have the opportunity to do more work in other areas. So the contract terms, scope, etc., get redefined and in many cases we see adjacent to that other pieces of work not related to that which come through. So it's not easy to simply say like-for-like in many cases. But definitely we see a compression. Just to add to what you were saying, the AI-first revenue is everything that is around the hexagon, and AI-augmented revenue is what we presented on the AI Day also. That is not part of this. While we track it internally, that is not part of this. So AI-first is everything that we do in terms of hexagon and the sub-services that we called out at hexagon. We have a very robust process inside the company of identifying these at the child sub-project level and tracking it and monitoring it.

It is growing at a very strong double-digit growth.

Abhishek, Analyst at Motilal Oswal

Thank you. And that's all from my side. All the best.

OPERATOR

Thank you very much. Next question is from the line of Ankurodra from JP Morgan. Please go ahead.

Ankur, Analyst at JP Morgan

Thank you. Just curious to start with on the demand environment worsening, especially from AI productivity pass-through demand that you've been getting. Can you talk about how secular this is across your industries and geographies and how often do you see—

OPERATOR

Ankur, sorry to interrupt you. We are losing your audio in between. Can I request you to please come in a better reception area?

Ankur, Analyst at JP Morgan

Is this clear now? It's still better now.

OPERATOR

Yes, go ahead.

Ankur, Analyst at JP Morgan

Okay, sure. Thank you. So my question was on the worsening demand environment from an AI productivity pass-through perspective. How secular is this across industries and geographies? And how often do clients ask for productivity increases in the middle of a contract as opposed to on renewal?

Salil Parekh, Chief Executive Officer and Managing Director

Hi, this is Salil. I think what we are seeing is there is a demand for AI productivity which is across most industries. Now if you look at where AI is most getting used, we probably see telcos, we see financial services, we see even on retail utilities, that's where the usage is pretty high. Especially with the foundation models, the modernization, the coding tools. On the productivity side, it's a broad, broad sort of coverage that we see. And it typically, at least in the recent past, has come up as there's progress made by the AI foundation model companies or there's a perception that that sort of a benefit can be achieved.

The discussion starts, and of course at the renewal time is definitely there. Sometimes it does come in between the time frame of the contract's renewal as well.

Ankur, Analyst at JP Morgan

Okay, thanks for clarifying that. I just wanted to sort of follow up on AI revenues which have been growing at a very high pace like you've been highlighting. If we think this out a few years, at what size of your overall portfolio do AI businesses have to be so that you can overcome the AI deflation or the compression in the rest of the portfolio in that sense?

Salil Parekh, Chief Executive Officer and Managing Director

So. We don't have a view in that sense externally on what you are sort of referencing. But I think if we are able to execute on this AI transformation as we have done in the last few quarters, we get this sort of a momentum. It's not that difficult to see that in the coming few quarters it will start to become more and more larger part of our overall revenue and that will drive the growth of the overall company. If I go back to how we saw it, not that it's the same thing, but there are some lessons maybe on the digital.

We saw that there was a way that at one stage we were at 20% and then over a few years we then went to 60% of our revenue becoming digital. So if that sort of a path becomes followed, we can see a big sort of a transformation and a long-term sort of support to the view that what we are doing remains relevant in terms of services for our clients. Now here there are strong partnerships with the foundation model companies. There is extremely strong internal work on Topaz Fabric.

We are building things where clients can use multimodal scenarios within our Topaz Fabric, where they can use different models for different types of work, so the token cost is optimized. We have an ability to provide a harness so that they can build what they want to build and keep the sovereignty of the data and the knowledge of the company more within themselves. So to me, all of that points to that it's a nice growth area for the long term. And we are now looking at 8%.

It's fairly sizable and we're looking at it becoming more and more sizable in the quarters to come.

Ankur, Analyst at JP Morgan

Just one last clarification.

Jayesh Sanghrajka, Chief Financial Officer

Sorry, Ankur, just one additional data point I would want to add is if you remember in February we talked about RAI revenue, which was five and a half percent for Q3, and in two quarters it's already become 8.2%. So you can imagine the rate at which it's growing. And even if you look at a longer five, six quarter view, it's going at a strong double digit. And that kind of gives us a confidence that this is becoming our growth engine.

Ankur, Analyst at JP Morgan

Appreciate it. Maybe just one clarification, Jayesh, can you confirm that the program termination was fully absorbed in Q1, or will it have an impact in the second quarter also from a sequential basis?

Jayesh Sanghrajka, Chief Financial Officer

So, Ankur, the program has been terminated. What we know has obviously been taken in Q1 at this point in time.

Ankur, Analyst at JP Morgan

So no follow-through in Q2 in terms of that program specifically?

Jayesh Sanghrajka, Chief Financial Officer

What we know at this point in time has been considered in this.

Ankur, Analyst at JP Morgan

Okay, thank you.

OPERATOR

Thank you very much. Next question is from Brian Bergen from TD Cowen. Please go ahead.

Brian Bergen, Analyst at TD Cowen

Hi. Thank you. Good evening. And first off, Salil, congrats to you and congrats to Ashush Dash. My first question is on AI talent and competition. Curious what your view is on hyperscalers like AWS, Microsoft recently announcing new investment in their own FTE practices. Just considering their historic use of the services channel around cloud deployment, they seem to be a bit more surprising than, you know, OpenAI or Anthropic doing it. So what are your thoughts there?

And you've announced plans to add 6,000 frontier engineers, but it seems everyone is looking to add that base of talent. So can you just talk about how you plan to navigate that elevated competition for top-tier talent?

Salil Parekh, Chief Executive Officer and Managing Director

So first, thank you. I think on the, you know, with other companies launching services companies to help large enterprises with making AI work, at a high level, I see that as a positive for Infosys because it reconfirms that what we do, and now with the AI revenue growth that we are demonstrating, that we have sort of relevance for the long term for our clients. What I think works for us is we have over 300,000 employees. We have deep knowledge and context of the select clients that we work with.

And that becomes the way to really ensure that AI gets leveraged into that environment, which is typically quite complex. We are also in a position where we are partnering with some of the companies you named and I've spoken with them as they have launched their programs. And the intent and the idea is really in terms of scale, a few hundred or a couple of thousand is not going to be the same as 300,000 from Infosys. But there is a way to partner and make all of that work for the benefit of the client.

That's how at least we're looking at it for now. And there are similar type of models existed, as you probably know well, in the past when there were software companies which had their own small services businesses. In terms of talent, first, we have already people within Infosys who are operating at the level of frontier engineers, and so we have put together a program to bring all of that together to make them at the same type of a global level.

Then we have training for the people that we will recruit and build out to be like that, frontier engineers. And then of course we will look externally. But the primary method is recruitment in college, training, and taking internal people who are doing some of that type of work and making sure they are fully deployed into the frontier engineer work. So we feel that we have a decent start to it. It's not that we are going to tomorrow morning recruit 6,000 from the outside, but equally we also have, as has been always the case with Infosys, the approach of training the people from ground up, so building out that skill set, which is slightly longer.

And that's why I've sort of said it's not, you know, it's over a few years. We want to build it out and make sure that we support our clients in that.

Brian Bergen, Analyst at TD Cowen

Okay, okay, that's clear. My follow-up's on AI productivity. Can you just give us a sense of how much of your existing backlog has been repriced under the higher levels of market productivity? I'm trying to understand how long a company may face outsized compression as you renew the installed base of work where there wasn't any meaningful GenAI-driven efficiencies before.

Salil Parekh, Chief Executive Officer and Managing Director

So as you can imagine, it's something we look at internally, but it's not something we share externally.

Brian Bergen, Analyst at TD Cowen

Okay, understood. Thank you.

OPERATOR

Thank you very much. Next question is from Vibhor Singhal from Nuvama. Please go ahead.

Vibhor Singhal, Analyst at Nuvama

Yeah, hi. Thanks for taking my questions. Just two questions from my side. One question on basically the overall environment in which we are operating. Some of our peers have kind of called out, and I think it's kind of what is also the concept which is getting traction, is that more and more belief that enterprises might not just basically look to deploy the premier large language models for their enterprise needs and they might be now going more towards more like customized small language models, the SLMs, which can be basically catered to their own specific needs.

And to that extent more and more deals, and large deals specifically, are basically making their way into the market towards the players. Is that also what we are seeing in our conversations with the clients? Do we see some of those kinds of deals on the horizon and do you see that basically playing out over the next few quarters?

Salil Parekh, Chief Executive Officer and Managing Director

I think the way you describe it, what we are seeing is the large companies, large enterprises, are becoming more sensitive to what is a foundation model best equipped for, and for the various tasks and activities and processes that they have inside their company, which model should be used for which thing. Can we use, like a company might think, a less-parameter model, also less expensive model, like even an older version of some of the big company models for some tasks, and the most recent one for some very specific, let's say high-end type of task which needs it, so that optimization is going on.

And that's where we think what we have built in Topaz Fabric allows the company to do this in a very efficient way. Then it also looks at companies also looking at, okay, I will use for the simpler task a slightly older model or less expensive. Then let me also then look at the cost of token usage for that model, and even there there's a way for the same effectiveness you can get a lower token cost approach in a model. This whole approach of this multi-model is critical for the task and the cost.

At least we are seeing the large companies are being sensitive to that, and that's where what we have built and how we can work with them. Today we are working in Topaz Fabric with 15 different models. So let's say you come as a large company, Global 100, and you want to do something. You don't even have to decide. By looking at the task, we will decide between the 15 where to put it and give you the most efficient outcome. So those are things like that will help the companies to do the things in a better way, we feel.

Vibhor Singhal, Analyst at Nuvama

Got it, got it. So overall this should basically, I mean if I were to let's say take a top view of this, this would mean that there is an increasing level of customization or let's say a specific requirement that each client would require rather than more of a standardization to begin with.

Salil Parekh, Chief Executive Officer and Managing Director

It depends also a little bit. Some companies might see this is available, but some companies might say, look, I want model X, I want to build deep capability in that model X. Like company X will have three models. They can go with an older model in the company X. It's not like there's one answer, meaning people are all doing different things. But the flexibility exists today, depending on how a company wants to do it.

Vibhor Singhal, Analyst at Nuvama

Got it, got it. Just one last question on the margins front. Jayesh, if I could just bother you there. In FY26 we had the wage hike which was spread over Q4 FY25 and Q1 FY26, so we just probably had basically half of the impact of the wage hike in FY26. In FY27 we are going to give the wage hike in Q3 and Q4, so the entire impact is going to be absorbed in this year itself. Plus we have the acquisition impact which you called out in the call. So are we looking at more headwinds this year on the margins than FY26?

I know we are in that same guided range of 20 to 22%, but vis-à-vis FY26, are we looking at more headwinds than FY26?

Jayesh Sanghrajka, Chief Financial Officer

So, Vibhor, if you look at FY26, we had a full year impact of the wage hike that we gave in January as well as in April. Right? Of course, whatever we gave in January, the flow-through of that was for three quarters. But whatever we gave in April, the whole full-year impact of that came in the year versus in FY27. We have only half-year impact of whatever we'll do in October and one-quarter impact of whatever we'll do in January. So to that extent the relative impact is going to be lower in FY27 versus FY26, and of course that would be a 50 basis point impact on account of the acquisition that we have called out.

But if you look at the tailwind That I called out, there is a currency tailwind, at least as we stand today versus last year. Project Maximus is still creating value. We have seen pricing benefit a bit less than what we estimated at the beginning of the year. Utilization has gone up quarter on quarter. Significantly, our on-site mix is going to go down. So I think there are puts and takes on both sides. Thank you.

OPERATOR

Thank you very much. Next question is from the line of Keith Bachman from BMO Capital Markets. Please go ahead.

Keith Bachman, Analyst at BMO Capital Markets

Good evening. Good morning. I wanted to ask about your thoughts on headcount growth trends through FY27, and I'm not looking for specifics but just generalities. Is headcount going to grow, be flat, reduce as you look at the next 12 months? And even if you opined on the next few years, how do you see the headcount growth in relation to revenue growth?

Salil Parekh, Chief Executive Officer and Managing Director

Hi, this is Salil. So first, what we saw in the last financial year, as you know, is we recruited 20,000 college graduates for the full year. This year we have a plan to recruit 20,000 college graduates in the first quarter. We have recruited over 4,000 already. Our plan is to continue to bring in talent, make them more and more AI well versed, and then have them work with our clients. What we are seeing with the 8% revenue of AI is, to make many of these things work, it's a combination of foundation model agents and people.

Of course, there's more efficiency, so the same amount of work can be done maybe with fewer people, but there's more work. So overall, at least right now, we are seeing that. We don't have an exact external view on the end-year headcount, but we continue to look at recruitment. We think it looks like part of the headcount will be part of our future as our revenue grows as well.

Keith Bachman, Analyst at BMO Capital Markets

Okay. Okay. It'll be interesting to see how—I understand the recruitment process. It'll be interesting to see how your net headcount trends unfold. Can I go to the dislocation you talked about? Twenty percent of your CCV was vendor consolidation deals. Could you provide some context on really the economics associated with those deals? What I mean by what was the leverage that enabled you to win those deals? In particular, you talked about price was a little more aggressive this quarter.

How were pricing trends enabling you to win those deals? Just any kind of attributes that you could throw out, such as was it more competitive or was price downs—anything along those lines? That's a term of many things.

Salil Parekh, Chief Executive Officer and Managing Director

I'll start and Jayesh will add a little bit more to it. What we saw in the reasons for winning a consolidation deal—typically what we are noticing is there's a complex tech environment, and the clients are seeing that what we have done for them over the past in terms of delivering value is very significant, more reliable. And that's typically when we are the beneficiaries of the consolidation deals. In terms of pricing for those specific deals, there's always productivity benefits because that is in the nature of the discussion in this period.

But the reason primarily for the wins is more about the depth of delivery and understanding of technology.

Jayesh Sanghrajka, Chief Financial Officer

Just to add to this, what Salil said, on an aggregate level, all of these consolidation deals came at very healthy margins, even when you compare to our overall large deals portfolio. As I said earlier, we will compete aggressively in the market, but we are not going to underwrite uneconomic productivity assumptions. And in those cases, we would prefer to not pursue those deals further when it doesn't make economic sense to us.

Keith Bachman, Analyst at BMO Capital Markets

Okay, perfect. Many thanks.

OPERATOR

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

Jamie Friedman, Analyst at Susquehanna

Hi, good evening. Salil, well done piloting the company, and Ash, we look forward to working together. I had a bigger picture question back to the Strategy Hexagon. I'd be interested in your perspective on the supply side—what sort of reskilling does that require? And on the demand side, Salil, you mentioned what you're finding is resonating most; obviously it's performing well. Is there anything, though, that needs to be adjusted? So, supply and demand question about the Strategy Hexagon.

Salil Parekh, Chief Executive Officer and Managing Director

Thank you, thank you for that. On the supply side, first, we have taken a view—and I'm sure you know—that we have not done any staff restructuring in the company. We have done essentially all reskilling, and that is significant work for the company. But I think we see a benefit of that over time. What we are seeing is, and as another reason for doing the college graduate hiring, what we see from colleges are people coming in with a lot more native understanding of the AI landscape and the tool set, and then training them on our fabric and Topaz is the next step after that, and also training them on our tools which are pre-AI, so that they have a sense of how software development works. So we think we will be able to manage a lot of that supply side with the people we bring in. But there are also specialized things where there will be some accelerations needed when a specific tool is very much in demand. And for that, of course, we have some recruitment which is more lateral as well. Even there we need a little bit of reskilling or training, but not massive. There's good understanding, but that of course is in short supply.

So we will still rely more heavily on bringing in from college, training, which by design is a longer duration process. On the demand side, we are now tracking each of the six areas pretty granularly. As Jayesh mentioned earlier, we have good traction. On the process AI side it's going pretty well. On the AI engineering it's going pretty well. Meaning in terms of scale, all of them are growing very fast, but those things are at decent scale already.

The data AI part is going pretty well. And so the whole work of building agents, doing the coding, doing the modernization, doing the data—those things are really scaling up, meaning have a decent scale today. And we think those will continue going pretty well.

Jamie Friedman, Analyst at Susquehanna

Okay, thank you, Salil. I'll drop back in the queue.

OPERATOR

Thank you very much, ladies and gentlemen. We'll take that as the last question. With this, I now hand the conference over to the management for closing comments.

Salil Parekh, Chief Executive Officer and Managing Director

Thank you. So first, thanks everyone for joining. A couple of points to summarize from my side. Overall in the quarter we had neutral revenues, strong margins, strong free cash flow, and very strong large deals. The more critical thing: AI services revenue 8%, growing across quarters, Q-on-Q double digit, and becoming more and more of scale for us, and showing us therefore that there's a long-term relevance of what we are doing for our clients. And that gives us a tremendous benefit given the client connects that we have across the different industries and across the different markets.

So thank you all for joining in, and we'll catch up at the next quarterly call.

OPERATOR

Thank you very much, members of the management and ladies and gentlemen. On behalf of Infosys Limited, that concludes this conference call. Thank you all for joining us, and you may now disconnect your lines. Thank you.

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