Infosys Limited American Depositary Shares

Ladies and gentlemen, good day and welcome to Infosys Limited Q2 FI26 Earnings Conference Call. As a reminder, all Parasub and 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 touched-on phone. Please note that this conference is being recorded. And now I hand the conference over to Mr. Sandeep Mahindra. Thank you. And over to Mr. Mahindra.

Hello, everyone, and welcome to Infosys Earnings Call for Q2 FY26. Joining us on this call is UNMD Mr. Salil Parekh, CFO Mr. Jayasthan Rajka, CDO Mr. Satish H.C., along with other members of the leadership team. We'll start the call with some remarks on the performance of the company, subsequent to which we'll open up the call for questions. 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'd now like to pass on the call to Salil.

Thanks, Sandeep. Good evening and good morning to all of you on the call. We had a strong performance in Q2 with increased market share gains. Our revenues for the quarter grew 2.2% sequentially and 2.9% year on year in constant currency terms. Four of our large five industry verticals and three of our four geographies grew year on year in constant currency terms. Operating margins expanded by 20 basis points sequentially. We had an excellent outcome in cash generations with free cash flow of $1.1 billion. Our large deals were at $3.1 billion with 67% net new. In addition, we announced a mega deal worth $1.6 billion after the close of the quarter, but today before results announcement. We added 8,000 employees during the quarter. Our client interactions show strong focus on deploying AI across the enterprise for growth and on cost efficiency programs. In doing this, we continue to scale our team of forward deployed engineers. Our results and pipeline of deals reflect the trust our clients have in our ability to help them bring AI to their enterprises. For example, we are partnering with an apparel company with generative AI and AIOps technologies to help them modernize their core operations, simplify their IT, and unlock greater value from their data. For a telecom client, we are infusing advanced intelligence across their operations to accelerate the pace of innovation and help them to deliver compelling digital experiences for their customers. As a result of our investments, we've emerged as the leading enterprise AI services and solutions provider. We would like to take this opportunity and give you an update on how our investments in AI have positioned us as a preferred services partner for large-scale enterprise AI transformation program today. Satish, our chief delivery officer, will share this update later in the call with all of you. We continue our strategic approach to acquisitions with a joint venture announcement of Versant in Australia. With a strong performance in Q2, we change our revenue growth guidance for the financial year The new guidance is 2% to 3% growth in constant currency terms. Our operating margin guidance for the financial year remains the same at 20% to 22%. With that, let me hand it over to Jaish. Thank you, Salil. Good morning, good evening, everyone, and thank you for joining the call today. I'm pleased to report that we had another quarter of robust all-round performance despite an uncertain environment. We continued our strong growth momentum for the second consecutive quarter, accompanied by higher margins, led by focus on client relevance and rigor on execution. We are making necessary investment in technology, people, and in sales engine to future-proof our business. Let me cover key aspects of our results. Quarterly revenues crossed $5 billion in Q2 26 and $10 billion for the half year. Revenue grew 2.2% sequentially in Q2, including 20 bps from acquisition, in constant currency terms. Growth in Q2 was on back of the 2.6% sequential growth in Q1. H1 revenues, therefore, grew at 3.3%. Volumes continue to remain soft, with bulk of the revenues growth coming from driven by realization increase. Amongst large verticals, financial services and manufacturing grew above 5% EUR in constant currency, both in Q2 and H1. Europe also grew greater than 5% EUR in constant currency terms. H1 gross margin remained resilient at 30.8%, flat year-on-year after absorbing compensation headwinds, reflecting the progress of Project Maximus. Operating margin expanded by 30 bps sequentially to 21%. H1 margins were 20.9 versus 21.1 in H1-25. We continue to invest in sales and marketing, which is reflected in 12.8% growth in S&M costs, H1 over H1. Utilization excluding trainees remained stable at 85%, which is within our comfort range. On-site mix reduced by 40 basis points for the quarter and 60 basis points for the half year. We continue to invest in talent and have hired over 12,000 freshers in the last six months. Total employee headcount was at 332,000, an increase of over 8,000 in Q2. Attrition remains low at 14.3%. DSO is down two days to 71 days, and DSO including net unbill is down by five days to 87 on a year-on-year basis. Cash flow generation remains strong. Free cash flow stood at 1.1 billion, which is 131% of the net profit and is well above 100% for the sixth consecutive quarter, bolstered by tax refunds. H1 free cash flow conversion is at 120%. Large deal TCV for Q2 was at 3.2 billion, which is 67% net new. H1 deal wins at 6.9 billion, with net new at 60%. This does not include the mega deal announcement this week with NHS. Q2 EPS in rupee terms grew by 13% year-on-year to 17.6 rupees. Operating margins for Q2 was at 21%, increase of 20 basis points sequentially. The major components of sequential margin change for the quarter were tailwinds of 60 basis points from currency movement, 30 basis points from project maximus emanating from RPP increase from value-based selling and lean-in automation, partly offset by increase in subcon and lower on-site utilization. Offset by 70 basis point of impact from higher post-sale customer support on a sequential basis and other expenses. Consolidated cash and investments were at 6.2 billion at the end of quarter. Yield on cash balance was at 6.98 and ROE stood at 29.1%. We have taken several strategic steps in the past few years to reduce our dependence on work visa, especially in H-1Bs in the U.S., This includes reduction in onsite mix, increased focus on nearshoring, increased local hiring, university partnerships, and certain creation of local hubs. We currently have several delivery centers across the U.S. to serve clients and leverage local talent. These hubs focus on emerging technologies such as artificial intelligence, machine learning, cloud computing, big data, and user experience design. In line with our capital allocation policy, during the quarter we announced Rs. 18,000 crores buyback through tender route at Rs. 1,800 per share. Buyback is expected to be completed in Q3, subject to shareholder approvals. The board approves Rs. 23 interim dividend, which is 9.5% higher than the FY25 interim dividend. We signed 23 large deals during the quarter, six in financial services, four each in manufacturing, communication, and retail, three in EURS, and one each in high tech and others. Region-wise, we signed 14 deals in America, seven in Europe, one each in ROW and India. Coming to verticals, in financial services, clients are actively planning modernization and AI-driven initiatives with a clear focus on cost efficiency, enhanced customer experience, and strategic business transformation. We see strong momentum in mortgages, capital markets, commercial banking, and wealth management areas. While macro uncertainty and volatility is impacting spends, there is some acceleration in mortgage sector with recent reduction in interest rates. Overall pipeline and signing remains strong, which is visible in six large deals signing this quarter. Banks have spent significantly to build AI infrastructure. Many initiatives are progressing from proof of concepts to full-scale projects with notable traction in agentic AI. Manufacturing segment continues to face trade and macro uncertainties, which is creating pressure on discretionary spend, specifically in automotive sector. We continue to help our clients in digital initiatives and rationalizing their applications and infrastructure . We are at the forefront of leveraging AI and automation to increase productivity and offset pricing and deflation. In Aero, we've seen opportunities to help clients navigate headwinds by helping them resolve bottlenecks in their supply chain, use new technologies and products. Over 90% of large-deal DCV for Q2 was net new, which should help drive growth going forward. Clients in EURS have strong focus on cost reduction, operational efficiency, and cash preservation, which helps open the door for vendor consolidation. In resources with large-scale gen AI deployment are limited, agency AI adoption is growing in tech operations to reduce cost. With rapid construction of data centers, utility companies are looking for partners to meet the accelerating electricity demand. creating opportunities in areas like renewable integration, grid modernization, AI-driven optimization, etc. Year-on-year growth was impacted due to significantly higher third-party revenues in Q2-25. Retail clients continue to remain cautious on account of ongoing tariff-related uncertainties. Across DOs, there is an increased focus on AI, cloud, estate modernization, de-risking, and cost take-offs. there is a growing sense of urgency to improve the productivity of operating models to offset inflationary pressures. Deal pipeline remains strong, but decision cycles remain elongated. We continue to leverage our topaz and AI Next platform capabilities, showcasing our enhanced customer and employee experience through digital marketing and predictive analytics and real-time insights. Communications continue to face growth headwinds coupled with high COPX pressures. Discretionary spending remains subdued, with investment prioritization in AI automation and consumer experience. GCCs are becoming key buying centers, and opportunities are emerging for IT companies to support their transition. While lower interest rates offer cautious optimism, geopolitical tensions, and tariff risk add to uncertainty. In high-tech, there has been significant focus on cost reduction, leading to budget cuts and program closures. However, there are opportunities emerging in areas like semiconductor, with a strong focus on leveraging Gen AI. Our H1 performance reflects resilience of our business model and agility of our execution capabilities. As we enter H2, we expect seasonal factors to impact growth, low working days, furloughs, onset of new calendar year. Hence, we have revised our revenue guidance to 2% to 3%. This does not include any revenues from the joint venture with Telstra, which we expect to close later this year. Our margin guidance remains at 20% to 22%. With that, let me hand over to Satish to talk about our AI capabilities. Thanks, Jayesh. Good day, ladies and gentlemen. I'm pleased to share we have emerged as the industry-leading enterprise AI services and solutions provider. Eight industry analyst firms have ranked Infosys as a global leader in 20 separate AI rankings over the last 12 months. We are delivering more than 2,500 generative AI and AI projects and 200 plus agentic AI projects for our clients. Let me outline the key pillars of our strategic focus. The first one is making Infosys AI first. We embarked on our AI first journey in 2023. On the people front, we are committed to making our employees AI amplified. About 90% of our employees are AI aware, equipped to collaborate with and leverage AI tools responsibly in their daily work. The next tier is the AI builders. 10% of our top technology talent pool are engaged in highly innovative projects and solution building with AI. The top tier, the AI masters, and amongst them, the forward deployed engineers, are driving the AI momentum for our clients by solving the tough industry challenges. On the process front, we are reimagining the way we work with AI. For example, AI code assistance accelerate our development lifecycle. Our developers have produced more than 25 million lines of code using generative AI. We have deployed AI agents across our internal operations. Our multi-agent invoice automation solution alone unlocked $50 million in incremental cash flow, directly improving our free cash flow conversion. We have deployed AI to accelerate our compliance processes. In some of the use cases, we have seen over 20x gains for specific activities. and an overall end-to-end process productivity in the range of 40 to 50%. Now coming to our industry-leading AI offerings, we have built capabilities in AI, applied them across our own operations, and now we deliver these innovations to clients through Infosys Topaz, a holistic suite of generative and agentic AI-powered services and solutions. We deliver value through two strategic frameworks, services.ai and client.ai. In services.ai, we build a foundation for better business services for our clients by accelerating IT capabilities and operations, both our own and our clients. Our integrated services stack, a composable set of AI services and agents, contextualized for every client and industry, integrates human and AI agents to reimagine IT services and operations with greater velocity, productivity, and quality. On Client.ai, we focus on business transformation to deliver sustained enterprise-wide impact for our clients like revenue growth, efficiency, and productivity improvement. We have 22 industry blueprints and more than 400 agents tailored to specific verticals to accelerate value from AI-led transformation. We also use power vibing to rapidly build proofs of value and iterate business solution prototypes to client problems. In terms of delivering enterprise value to surmount pilot paralysis, the challenge of extracting value from enterprise AI investments and pilots continues to be the biggest priority for global enterprises. We have expertise in delivering that through five key levers. With Infosys forward deployed engineers, we have the specialized engineering talent, which is deeply embedded within client businesses, delivering enterprise-scale value from AI. For a global logistics leader, Forward Deployed Engineers co-created a solution that uses real-time data streams and AI to accurately predict shipment life cycles across regions and operating companies. This platform delivers 400 million messages daily with sub-minute latency and operates uninterrupted 24 bar 7, resulting in $1.5 million in immediate benefits, $8 million in annual savings, and 12% reduction in customer service call volumes. With our Infosys Topaz data workbench, we have an expansive portfolio of solutions for data preparation, engineering, and governance. For a leading industrial manufacturer, we built a unified data fabric. powered by 100-plus domain-driven multimodal data products centered on equipment operations covering more than 10 petabytes of structured and unstructured data to power 30-plus AI companions across business functions, driving more than 90% boost in precision, performance, and productivity. With our Infosys SLM, we are able to deliver small language models which are key for context engineering of agentic AI solutions, which are adapted for enterprises' specific needs. We have built four small language models for banking, IT operations, cyber, and enterprises, broadly for rapid value delivery. We also offer these models as services to keep businesses securely build their own custom AI models. A good example is how our SLM is used by clients to run their banks on Infosys Finnecon to launch new contextual banking experiences and innovations. With our Infosys Responsible AI office, we have now become an industry pioneer in setting up a Responsible AI office. We are amongst the first companies to be certified on ISO 42001-2023 for management systems implementing Responsible AI projects. Our Responsible AI toolkit ensures that clients have the defense and the technical guardrails to address AI-related risks. With our Infosys Poly Delivery AI model, the high dependence on AI key providers is a key concern that we address. Our hybrid of flexible Poly AI helps them avoid vendor lock-in as they scale their AI transformation. Using this model, we helped a bank in Europe established their AI Innovation Lab to create a pipeline of AI-first business initiatives. They have now deployed 13 AI and agentic AI solutions, and there are several more in development. This has delivered substantial financial gains and earned our client the honor of being number one in their region of an AI-first bank. Now, building an AI ecosystem for our clients, we have established strategic alliances with NVIDIA, Microsoft, AWS, Intel, Meta, Google Cloud, and others to enhance their capabilities. Infosys is among the first and largest enterprises to deploy GitHub co-pilot at scale. We have over 22,000 developers on board. In collaboration with Google Cloud, we have developed more than 200 enterprise-grade AI agents. These partnerships combined with open-source solutions enable Infosys to deliver flexible vendor-agnostic AI ecosystems. Through our Infosys innovation network, we engage with AI startups across AI cybersecurity, data management, and other emerging domains to accelerate client adoption of cutting-edge solutions. Our academic collaborations with institutions like Cambridge, Columbia, Cornell, Stanford, HAI, and MIT fuel our advanced AI research and give our innovations practical enterprise application. We also contribute to shaping global AI standards, like partnering with OWASP on LLM security. We are also advising policymakers, and we are also collaborating with regulators in shaping emerging standards. To summarize, our clients value our differentiated capabilities that we have built on the success of our own AI first journey. They trust us to navigate them with a clear practical roadmap to transform their business and deliver sustained enterprise scale value. This proven capability has translated into robust growth and notable gains in market share over the past several quarters underscoring the impact of our strategic approach. This includes amplifying people, implementing advanced AI solutions, co-creating AI projects from the ground up for success, and fostering an effective ecosystem of partners. We are focused on empowering our clients to conquer the pilot paralysis and achieve enterprise scale advantage.