Prepared remarks
A very good evening, everyone, and wishing you all a very happy new year. Thank you for joining us today. My name is Rishi. And on behalf of Infosys, I'd like to welcome all of you. As always, since this is the new year, my rules don't really change, one question from each media house. We try our best. But with that, let me invite our Chief Executive Officer, Mr. Salil Parekh, for his opening remarks. Over to you, Salil.
Thanks, Rishi. It's good to see that you are very consistent, and I'm sure the media team is as well. Good afternoon, everyone, and thank you for being here. Warm wishes for the new year to all of you. We've had a strong performance in Q3. Our revenue grew 0.6% sequentially and 1.7% year-on-year in constant currency terms. Our large deals were at $4.8 billion, with 57% net new. This was across 26 deals. Our adjusted operating margin was 21.2%. We generated free cash flow of $915 million. One of the most significant large deals we won was with the National Health Service in the U.K. This $1.6 billion deal expands our work in the healthcare sector. We will help NHS leverage AI to streamline operations and improve patient care for U.K. citizens. We have deepened our Topaz AI capability with an agent services suite called Topaz Fabric. This suite helps our clients manage and implement AI agents across the enterprise.
We had strong momentum in AI adoption across our client base. Today, we work with 90% of our largest 200 clients to unlock value with AI. We are currently working on 4,600 AI projects. Our teams have generated over 28 million lines of code using AI. We've built over 500 agents. We're scaling our forward deployed engineer team. We are now witnessing 6 AI-led value pools emerging that could unlock a large incremental opportunity. We also see productivity-led benefits that compress some legacy areas. The 6 large AI-led value pools are: AI engineering services, data for AI, agents for operations, AI software development and legacy modernization, AI deployed in physical devices and AI trust and risk services. We believe we are uniquely positioned to capture market share across these value pools and emerge as the leading AI value creator for global enterprises. We will share a comprehensive view of our approach at an Investor Day later this quarter.
With a strong performance in this quarter, we have revised our revenue growth guidance for the financial year. The new revenue growth guidance for this financial year is 3% to 3.5% growth in constant currency. Our operating margin guidance for the financial year remains the same at 20% to 22%. With that, let's open it up for questions.
Questions and answers
Thank you, Salil. We will now open the floor for questions. Joining Salil is Mr. Jayesh Sanghrajka, Chief Financial Officer, Infosys. The first question is from Ritu Singh from CNBC TV18.
Rishi, this is our only opportunity to speak with management each quarter, so we need to go beyond the one question limit. Salil and Jayesh, I want to start with your headcount number. There has been an increase from 13 to 46 in just the last two quarters, which is notable considering TCS is reducing its workforce by 30,000 jobs. How should we interpret this? Is it an indication that you see demand conditions improving? Also, I’d like to discuss your revised guidance of 3% to 3.5%. How much of that change is due to large deals like NHS? How much of the Versent acquisition, which we understand is still pending, is included in that figure? Last quarter, you mentioned that segments like retail were struggling, so what improvements have led you to raise your guidance? Additionally, we’ve observed a slight dip in your margins to 20.8%, even with favorable conditions from the rupee depreciation. Can you explain why that has occurred? Lastly, while you often mention your unique position to leverage AI opportunities, HCL Tech and TCS have been sharing specific numbers. Why doesn't Infosys provide similar details?
Let me start by addressing margin; Jayesh may have additional insights. Regarding the headcount increase, it reflects our confidence in market conditions and demand. This is also related to the growth guidance. We are concluding the third quarter with only one quarter left, and we've secured several large deals over the past few quarters, coupled with strong execution this quarter. We have observed positive trends in various sectors, particularly in financial services and energy. As we have positioned ourselves as the AI partner of choice for our largest clients, we anticipate a favorable outlook as we approach the next financial year. This has contributed to our decision to raise guidance for this financial year, which concludes in March. Would you like to discuss margins further?
Yes. So first of all, very happy new year to all of you. Before I come to margin, I just wanted to also touch upon the head count part. If you recollect last year, we had called out that we are going to hire 20,000 freshers this year, right? And we have onboarded roughly around 18,000 freshers, and we are well on our way to finish our 20,000 number for this year, which, in a way, reflects in a head count also because many of them are under training. And if you look at our utilization, including trainees, has come down. So that is our investment into building capacity for future in a way, right? So that's on the headcount. If you look at margins, we have expanded our margin this quarter by 20 basis points versus the last quarter. We are now on a 9-month basis at 21% margin, which is midpoint of the guidance that we have given. The puts and takes of 20 basis point expansion this quarter is 40 basis points came from currency; 50 basis points came from the Project Maximus, mainly on account of value-based selling and the Lean in Automation that we have done on multiple projects, offset by the furloughs and working day that we had.
We also accrued a higher variable pay compared to last quarter, which was offset by some of the one-offs that we got. So that's the broad margin work in a way. But if you look at a 9-month period margin, which is 21%, we have invested in our sales and marketing, which has gone up by 50 basis points on a year-on-year basis. So that has been absorbed in the margin. The lower utilization of almost a 1% has been absorbed in our margin. So this margin is after absorbing all of that where on one side, we are building capacity for future, on the other side, we are investing in sales and marketing, and we still had a stable margin front.
Do you have an outlook for next year now that you're completing this 20,000 for the year? You've had a lower attrition as well this quarter.
We will have an outlook once we give our guidance for next year in April.
And also the wage hikes, what's planned for the year and what kind of impact that could have on the margins from here on?
So we just finished one cycle of our wage, which was in 2 parts in January and April. We haven't yet decided on the next part yet. We will decide on that as we progress.
Yes. On AI, I think one of the points I shared, and we have a lot of that sort of information was with our largest 200 clients, with over 90% of them, we are doing AI work. What we are doing in AI is unique AI services with clients. And also, we've reshaped all of our existing services, leveraging AI in, for example, we are using agents in several of our service lines to help enhance either growth or productivity. So that's what we are sharing in terms of what our impact is.
The next question is from Mansee Dave from ET Now.
Salil and Jayesh, this is Mansee Dave from ET Now. My question relates to demand visibility, tech spending, and AI adoption. Considering the constant currency growth scenarios and the commentary regarding fewer billing days and deal timing, how are clients approaching tech spending for calendar year 2026, particularly in terms of discretionary versus transformational programs? Additionally, the pace of enterprise AI adoption and the outlook for tech spending are crucial factors we are monitoring. What does the situation look like, and how do you see the pricing models evolving?
I'll begin with some thoughts on pricing, and Jayesh may have additional insights. Regarding demand, we have a positive outlook driven by strong large deals, and our large deals pipeline is robust. In the two sectors I mentioned—financial services and energy resources, specifically utility services—we observe promising developments in our AI initiatives and a favorable deal landscape. This leads us to have a strong outlook not just for this financial year but for the next as well. In financial services, we are seeing discretionary spending and strong market traction. That said, we still desire to see other industries and segments begin to reflect similar trends, but currently, these two sectors are showing notable strength.
And on the pricing, I think as the newer and newer technology evolve, every time there's a change like that, you see a new pricing model evolving as well. We are seeing multiple new pricing model evolving. Some of them are being led by us, whether it is outcome-based pricing or whether it is pricing, which is specific to agents, et cetera. So a little early in my mind in terms of calling out specifically what are the pricing models going to evolve on this, but everybody is testing new pricing models at this point in time.
The next question is from Shristi Achar from The Economic Times.
Happy new year to everyone. I have a couple of questions regarding the significant drop in operating margins that we're observing. Is the impact stemming solely from the labor code charges the company has incurred? Additionally, I've noticed a sequential decline in revenue contributions from your top five and top ten clients. Can you explain why this is occurring and what the outlook for the next couple of quarters looks like in this regard? Lastly, I wanted to inquire about the current situation regarding the H-1B role, as there have been recent claims concerning employee displacements. What is happening in that area?
You want to start on the labor code?
Yes. When examining the margins, the reported margins were affected due to the labor code. However, the adjusted margins have actually increased. Excluding the impact of labor codes, adjusted margins have grown by 20 basis points sequentially. For the full year, adjusted margins have remained at 21%, which is consistent with our margins from last year. This has occurred despite the investments we made in sales and marketing, which negatively affected margins by 50 basis points, and the impact of lower utilization as we build capacity for the future. After accounting for both of these factors, we have successfully maintained our margins. Do you have a second question?
Client contribution.
Yes. Client contribution. I think sequentially, client contribution is not a way to see in my mind because there is a seasonality involved, right? Every Q3, you typically have furloughs, et cetera, which would have impact certain specific clients and larger the clients, larger will be the impact of furloughs if there is one in that account. Typically, you will see that year-on-year, and we don't really see a significant change in the year-on-year client metrics.
On your last question, I just want to read out, no Infosys employee has been apprehended by any U.S. authority. A few months ago, one of our employees was denied entry into the U.S. and was sent back to India.
The next question is from Chandra Srikanth from Moneycontrol.
Just a follow-on to that employee who wasn't allowed and sent back, are you contesting that in any form? Secondly, one of the big trends this quarter we've seen is a big acquisition from Coforge, where they acquired Encora for $2.35 billion; TCS has acquired Coastal Cloud for $700 million. So can we expect more action on the M&A front? Are there assets that attractive, if you can take us through your M&A strategy?
Regarding mergers and acquisitions, we have been making progress over the past few quarters by acquiring companies in cyber, consulting, and energy services. We plan to maintain this approach moving forward. Our pipeline of potential acquisitions is strong, and we are actively engaged in discussions. Our balance sheet provides us with robust support for these efforts, which aligns with our previous strategies. We have identified specific areas to focus on as well as new geographic markets, and we are also exploring opportunities to deepen our services in certain areas. This plan will remain ongoing.
On the ICE, any other details that you can share?
That's what I had to share.
Okay. Jayesh, sorry, just one thing on the labor code. So according to your fact sheet, Infosys has incurred INR 1,289 crores on account of labor codes. So has the full impact been absorbed? Or will it sort of be staggered? How will that work?
So whatever needs to be accounted for until the end of this quarter has been recorded, which includes the effects of the labor code on various factors such as gratuity and other wage components. This has been reflected in our books. The labor code will have a continuing impact of approximately 15 basis points on an annual basis, which is a standard effect as we move forward.
The next question is from Haripriya Suresh from Reuters News.
A few questions. One on the H-1B front. Will you be looking at making new applications? Or is it primarily just hiring in the U.S. and the employees that you have already? In retail, is that specific softness because of how America is right now? And when do you sort of see that recovery? And third is, Salil, your term for a CEO ends in March 2027, at least a 5-year term. What is succession plan? Has that started? And what is that looking like?
On the first point regarding H-1B and recruiting, our strategy is clear. As we have mentioned previously, the majority of our employees in the U.S. do not require any visa. We are continuing our deployments and delivery by utilizing a combination of resources from both the U.S. and India, and there are no changes to this approach.
The application is not clear.
At this stage, we are continuing with that process because there's an existing set. We will examine it as it comes up in the future. On retail, what we are seeing is there are some places where we see positives, there are some places where we see different client situations, which are under some cost containment for that subvertical within that. So we are waiting and we are pushing to make sure that the retail pipeline, which is growing, becomes converted into what we drive into the retail growth. On my own situation, no comment.
Like overall as a company.
Yes. No comment from my side.
The next question is from Avik Das from The Business Standard.
Quick questions. One, a little bit more on the BFSI commentary because what we understand that financial services, BFSI, overall has been improving in the North American geography. So which sectors or which subsegments within that sector is actually growing, if you can just throw some more light? And North America seems to have degrown in a constant currency basis. Any reason? Was it a client specific? Or was it any sector specific? Maybe retail that pulled it down, if you can just throw some more light? And Jayesh, there seems to be that idea that new large deals will be smaller or maybe far and few to come by as more AI-led deals sort of take the center stage. Keeping that into consideration, how do you think the margins are going to play out across the industry and for you and specific in the long run, if you can just throw.
So I'll start off on financial services. We see a good traction across most of the sub verticals we have within financial services. So we are seeing good traction with retail banks. We're seeing good traction with what are considered mid-market banks. We're seeing good traction on payments. We're seeing good traction in the mortgage area. So overall, pretty strong. Some are stronger, some are less strong. But overall, we see a good demand environment. There's good adoption of AI across the spectrum with our large financial services clients. We recently announced, for example, a partnership with Cognition, which is very strong, and we are working with them jointly in some of the financial services companies. On North America, nothing very specific. It's a mix of different industries and different plays. The overall situation on energy utilities, on financial services remains strong, on some of our other verticals remains something that is coming back over time, but not yet. On the third on the margin?
Yes. In terms of large deals, we signed $4.8 billion this quarter, and if you look at it from a nine-month perspective, our large deal signings have increased compared to last year. While there is a continuous push for productivity due to AI and similar factors, many deals are being structured for cost optimization from the client side. There's a lot being bundled together when you analyze it. Additionally, large deals typically have slightly lower margins than our company average, but overall, we compensate for this because new work tends to come in at better margins. This is a trend we have observed, and there hasn't been any change in this trend from that standpoint.
The next question is from Sanjana from the Hindu Business Line.
So manufacturing and Europe, they have grown significantly for Infosys this quarter. Both of these were previously seeing some softness. So can you expand on what were some factors contributing to this growth? And also, I think the tech budgets for the calendar year 2026 are expected to be rolled out soon. Based on client conversations, what are you hearing? Is there any sign of uptick in discretionary spending? And also, the guidance was raised upwards despite seasonalities and uncertainties. Any reasons for this? And the last question, regarding the collaboration with Cognition, which is an AI startup, what were the gaps in your AI portfolio that you were looking to bridge with this particular collaboration? How is this contributing to your whole AI momentum? Just that.
So starting on manufacturing in Europe, I believe Europe has been performing well for us for several quarters. Manufacturing activity has been strong across the board, and we've seen positive traction. Certain segments within our manufacturing client base are benefiting greatly from the growth in AI. For instance, we collaborate with companies that offer power solutions and those that provide manufacturing capabilities, including engine and generating capacity. There are many components of these client industries that are thriving, and our team is actively engaged in that area. We've also gained good traction in the engineering services side of manufacturing.
Guided tech projects for 2026. Discretionary spend.
Regarding discretionary spending overall, in financial services, we are witnessing positive developments. The deals we've secured, along with the traction we're gaining from AI in that sector, suggest that next financial year will yield better results than this one. Financial services are performing well this year. Similarly, in energy and utilities, we've seen a good number of deals coming together across the entire industry, which is contributing to our momentum. We're not observing any deterioration in other areas, which is a positive indicator. The macro environment appears to hint at potential interest rate cuts, particularly in the U.S. Additionally, we are expanding our efforts with some of our smaller clients, which are showing promising growth. Overall, as we look ahead to next year, these factors support our growth. Concerning AI, we expect significant growth in the six areas I mentioned earlier, not just next year, and as we implement these strategies, they should benefit us.
Cognition.
On Cognition, it's not so much a gap. The Cognition team has developed an agent that focuses on software development. We are collaborating with our clients as partners, where we are also building agent capacity and enabling these agents to operate within the client environment. The advantage is our in-depth understanding of the client technology landscape and the knowledge of industry constraints and opportunities. This, combined with the software agent from Cognition, creates a powerful combination for many clients. We anticipate this will expand significantly.
The next question is from Jas Bardia from The Mint.
Just two-pronged question. In what segments and for what clients will you all be using these AI software engineers? And how will this impact delivery? How will this impact billing? And more importantly, how will it impact future hiring? That is FY '27 onwards, considering you're using a lot of these AI software engineers to work in client projects actively.
We anticipate that the usage of AI software engineers will span across nearly every industry and client over time, depending on their specific objectives. In the cases I mentioned earlier, we’ve seen significant changes in the economic considerations from the client's standpoint. For instance, in legacy modernization, when we combine software agents with our expertise, it greatly improves the economics for clients, enabling projects that were previously stalled to move forward. This isn't merely a shift in how existing projects are executed; it's about initiating projects that weren't being undertaken at all. With this in mind, we will continue to expand our hiring. As mentioned earlier, we will share our plans for the upcoming year in April, and we are set to hire on campus. This year, we’ve brought on 18,000 new employees, and we plan to increase that to 20,000 campus hires next year as these new areas generate demand. Our workforce, along with the software agents, will enhance the overall economics for our clients.
The billings?
The value we create will drive the billings. Much of this will follow traditional billing methods, as Jayesh mentioned. Over time, we will see changes as the AI market evolves. Currently, there are no immediate changes, but we can expect developments in the future.
The next question is from Poulomi Chatterjee from The Financial Express.
I wanted to ask about the recent trend in Indian IT regarding a number of AI-related acquisitions. What is your approach to this? Additionally, IT companies are competing to hire specialized AI talent, particularly fresh graduates who are receiving significantly higher salaries. What does the talent pool look like, and what qualities do you seek when hiring these individuals?
So in terms of acquisitions, in the landscape, there are not so many AI services companies today that we see. What we do see are companies where we are partnering, which are really AI, whether they build agents or models or foundation tools, which exists, and those are the ones we are partnering. We will look in an acquisition approach to AI as they start to appear as larger AI services companies. And we have some that we are looking at, which is part of our overall acquisition, meaning there are other things in the acquisition as well. In terms of the compensation, I think Infosys has always been a leader in making sure that we put new constructs in regard to our employees and the new people we recruit. What we've now done with the most recent approach and launch is put together an approach for very good software engineers who'll work in AI and who will have that level of expertise to be specialized engineers within our structure and with different and higher or much higher compensation levels. So in the AI world, there will be different types of people working jointly with AI agents with different levels of training. And we want to make sure that we remain in the leading position in that recruitment environment. And with that, what we have launched for specialized engineers, that's the approach we put in place.
The next question is from Uma Kannan from Deccan Herald.
Last year, you introduced the AI-first GCC model. Could you update us on how that is evolving? Additionally, you have announced several partnerships this month. Will there be more AI-native collaborations in the future? Lastly, some companies have implemented a mandatory six-hour office policy. Do you have any plans regarding office hour requirements, or will you maintain your current hybrid flexible model?
So on the GCC, we have, as you mentioned, launched the AI-specific approach. We have a lot of client activity in that. We have some clients we're already working on that. There are several others which are in the pipeline for large AI-specific capability building in GCC. So beyond regular GCC work that we're doing, and that's going pretty well at this stage. In terms of partnerships, we will have a number of different partnerships because there are several companies, smaller companies, but with great capability on AI, on the foundation model, on coding, on agent development, on customer service. So we will continue with that because those are the areas which our clients are most interested in, and we will continue. We are already working with those companies, but we will have these sort of strategic announcements as well. And the third one?
Work from office.
Yes, no, we are not making any change to our approach. We'll remain flexible in the way we are today, in the way that our employees are interacting with the company and with our clients.
The next question is from Padmini Dhruvaraj from the New Indian Express.
I apologize if these questions have already been addressed. Firstly, looking ahead, do you believe the labor code will affect profit margins? Additionally, do you anticipate this influencing your appraisals in the future? Lastly, with the U.S. government planning to restrict the credit card interest limit to 10%, do you think this will also have an impact?
So let me start with the second one. Labor code, Jayesh mentioned, I can also mention on the appraisal. On the U.S. credit card, what you mentioned, that is something that the U.S. banking system will look at and how they have to implement it. What we do with our clients, with the large banks is help them as they have to go through different regulatory changes. And if that requires our help and support, we will continue to do that. On the margin impact, Jayesh will mention the number on the appraisals, there will be no change in our appraisal approach.
Yes. The impact of the labor code until the end of December has already been reflected in our financial statements. This is a one-time effect due to the change in regulation, which considers the duration employees have served with us. We have accounted for that impact already. Additionally, there will be an ongoing effect from the revised wage code, which will be addressed as it arises. This is expected to be approximately 15 basis points annually.
Thank you. With that, we come to the end of this press conference. We thank our friends from media. Thank you, Salil, and thank you, Jayesh. Before we conclude, please note that the archived webcast of this press conference will be available on the Infosys website and on our YouTube channel later today. Thank you very much, and please join us for hi-tea outside.