Infosys Limited American Depositary Shares 2027 Q2 Earnings Call

Hello, everyone, and welcome to this earnings call to discuss Infosys Q2 FY 2027 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 will start the call with some remarks by Salil and Jayesh on the performance of the company. Subsequent to which, we will 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 risks that the company faces. A complete statement 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 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 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 two mega deals. One of these mega deals was for over $2 billion with a large international company for a period of seven years, and it is 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 a 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 approvals, 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 build 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 lifecycle, 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 interests. 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%-2% year-on-year in constant currency terms. Our operating margin guidance remains the same at 20%-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 were revenue growth was below our expectations, while AI-first revenue now account for 10.5% of our revenues. Operating margin was at 21%. Free cash flow was at $928 million, representing 113% of net profits. 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 at $5.145 billion, an increase of 1.2% sequentially and 1.5% year-on-year in constant currency terms. Acquisition contributed approximately 0.4% to sequential growth. Growth was below our expectations.

Volume was 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 Topaz 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 last five years. Of this, 62% was net new. This includes an entirely net new $2 billion-plus in seven-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 2028. We also renewed a billion-dollar mega deal with an existing financial services client. Vertical wise, we won seven deals in financial services, five in manufacturing, two each in communications, EURS, life sciences, and one in high tech. Region wide, we signed nine deals, each in North America and Europe, and one in rest of the world.

This takes H1's total large deal wins to $8.8 billion, which is an year-on-year growth of 28% with 62% net new. This will lay a solid foundation for future growth. Q2 operating margins were at 21%, decline of 0.1% sequentially. Major components of the changes are as follows. Headwinds of 70 basis points from sequential change in post-sales customer support. 20 basis points additional impact from acquisitions due to one month additional consolidation. Offset by tailwinds of 40 basis points from rupee appreciation, 20 from Project Maximus, and 20 basis points from higher calendar and working days. Additionally, normalization of 40 basis point impact from EURS program terminated in Q1 was offset by lower realization due to high competitive intensity. For H1, operating margins stood at 21% at the midpoint of our guided range. Onsite mix reduced further to 22.6%, reflecting our sustained efforts to help clients achieve cost reduction.

For H1, onsite mix was down by 0.7%. Utilization, including trainings, improved by 0.5% sequentially to 85.4%, demonstrating continued operational focus. Utilization excluding trainees decreased to 81.9% due to fresher intake. Net headcount increased by about 4,400 employees. We hired about 13,000 freshers in H1, in line with our target of approximately 20,000 for FY 2027. 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 rates for the year to be in the range of 29%-30%. Q2 yield on cash investment balance was at approximately 6.9%. DSO for the quarter was 64, down by seven 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 strong at $928 million, at 113% of net profit. We ended the quarter with cash and cash equivalent at $4.7 billion and a debt-free balance sheet. EPS for the 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 in financial services of more than $3.5 billion in Q2 and saw growth momentum across global and regional banks, cards and payments, capital markets, and Europe. Mortgage sectors is expected to see slowdown due to increased rate hike expectations. Clients are prioritizing modernization and AI initiatives focused on cost efficiency and enhanced customer experience.

They are also increasingly moving from AI experimentation to enterprise-wide adoption, with Infosys being the preferred AI partner across vast majority of our top clients. While geopolitical and interest rate uncertainty continues to drive cautious spending, strong deal wins and a healthy pipeline positions us well for sustained growth. Manufacturing continues to face near-term pressures, including lower revenue from a large client. Middle East conflict, inflation, and tariffs are constraining discretionary spend and extending decision cycles. Competitive intensity remains high, particularly around AI-led productivity commitments. We are helping clients navigate uncertainty by driving initiatives across supply chain visibility, more efficient factories, and better processes. Clients are relooking at their 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 discretionary 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 last one 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 most 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 models. Communication segment is witnessing a challenging demand environment with clients maintaining tight control over discretionary spends and prioritizing cost efficiency.