Ladies and gentlemen, good day and welcome to the Infosys Limited Q2 FY25 earnings conference call. As a reminder, all participant lines will be in 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 Mahindroo. Thank you, and over to Mr. Mahindroo.

Hello everyone and thanks for joining Infosys’ earnings call for Q2 FY25. Joining us on this call is CEO and MD, Mr. Salil Parekh, CFO Mr. Jayesh Sanghrajka, and other members of the leadership team. We will start the call with some remarks on the performance of the company, subsequent to which the call will be opened up for questions. Please note that anything we say with reference to our outlook for the future 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 turn the call to Salil.

Thanks Sandeep. Good evening and good morning to everyone on the call. We’ve had strong performance in Q2 with robust and broad-based growth, stable operating margins, strong cash generation, strong large deals, and increased employee headcount. Our revenue grew 3.1% quarter-on-quarter and 3.3% year-on-year in constant currency terms. Financial services grew at 2%, manufacturing double digits, energy, utilities and services at 5.8% all quarter-on-quarter. We saw growth in all geographies on a quarter-on-quarter basis. Our large deals were $2.4 billion. Our overall pipeline remains strong. We saw a double-digit quarter-on-quarter increase in our pipeline of deals below $50 million. Our operating margin for Q2 was 21.1%, free cash flow for the quarter $839 million, employee attrition was stable at 12.9%. We will launch our employee compensation increase in two phases effective January 1, 2025 and April 1, 2025. Our financial services segment in the U.S. continues to see discretionary spend increase in capital markets, mortgages, cards and payments. We have seen slowness in the automotive sector in Europe. Apart from these verticals, demand trends remain stable with clients continuing to prioritize or stake out on discretionary initiatives. Our Q2 performance reflects our sustained strength and differentiation in the industry. We are deepening our work in generative AI. We are working with clients to deploy enterprise generative AI platforms, which become the launch pad for clients’ usage of different use cases in generative AI. We are building a small language model leveraging industry and Infosys’ data sets. This will be used to build generative AI applications across different industries. We have launched multi-agent capabilities to support clients in deploying agent solutions using generative AI. Our generative AI approach is helping clients drive growth and productivity impact across their organizations. We are partnering with clients to build a strong data foundation which is critical for any of these generative AI programs. One example, we’re working with a logistics major using Topaz to power their operational efficiency improvements. Concurrently, we are supporting their digital transformation journey to help them deliver exceptional services for their customers. With our strong performance in Q2 and our current outlook, we have revised our revenue growth guidance for the financial year. The new guidance is 3.75% to 4.5% growth in constant currency. Our operating margin guidance for the financial year remains the same at 20% to 22%. With that, let me hand it over to Jayesh.

Thank you Salil. Good morning, good evening everyone, and thank you for joining the call. We had a strong Q2 with broad-based growth and stable margins amidst an uncertain macro environment. Let me talk about some of the key highlights. Revenue grew sequentially at 3.1% in constant currency terms, ahead of our expectations. All geographies and verticals, barring retail, grew sequentially. Europe had strong growth and is now approximately 30% of our revenue. Inorganic contribution was 0.8% Q-over-Q, which contributed to growth in Europe manufacturing. We had another quarter of volume growth. Financial services in the U.S. continues to see discretionary spend uptick in capital markets, mortgages, and cards and payments. Both manufacturing and the energy, utilities and services verticals reported double-digit year-on-year growth. Overall deal pipeline remains strong. The pipeline for deals less than $50 million increased double digits sequentially. Operating margin during the quarter was stable at 21.1%, driven by better operating metrics despite higher variable pay and acquisition impact. Utilization continued to improve to 85.9%, up 60 basis points sequentially. We saw headcount additions after six quarters and added approximately 2,500 employees sequentially. We had a second consecutive quarter of over 100% of free cash flow conversion to net profit. Free cash flow for H1 stood at $1.9 billion, 41% higher than H1 last year. Let me delve into the details now. Revenue for Q2 was $4.9 billion, up 3.1% sequentially and 3.3% on a year-on-year basis in constant currency terms. This included benefits from acquisitions of 8.8%. Operating margin was stable at 21.1%. The major components of sequential margin walk include payments up 80 basis points of benefit from Project Maximus, 10 basis points from the currency movement, offset by a 30 basis point impact from acquisitions, mainly on account of amortization of intangible assets, and 60 basis points from higher variable pay and other costs. Project Maximus remains a key focus area and success, which is visible in improved operating metrics like utilization and realization, subcontracting costs, etc. for the quarter. Our growth was 2.9% in constant currency terms. Operating margins were at 21.1%, 10 basis points up on a year-on-year basis. Headcount at the end of the year stood at 317,000, returning to positive sequential growth after six quarters of declines, with net additions of approximately 2,500 employees. Utilization including payments increased by 60 basis points to 85.9%. Attrition for Q2 was up by 20 basis points at 12.9%. We are on track to onboard 15,000 to 20,000 people in FY25. Free cash flow conversion was approximately 108% for Q1. H1 ‘25 free cash flow is 41% higher than H1 ’24. DSO for the quarter was 73 days versus 72 sequentially. Consolidated cash and cash equivalents stood at $4.6 billion after paying out $1.4 billion towards dividends. The board announced an interim dividend of Rs 21 per share, an increase of 16.7% as compared to last year. Yield on cash balance was flat at 7% in Q2. ADR was at 29.6% for Q2 and 29.5% for H1. We continue to expect ADR for FY25 to be in the range of 29% to 30%. EPS grew by 4.7% in INR and 3.4% in dollar terms on a year-on-year basis. We closed 21 large deals with TCV of $2.4 billion. 41% of this was net new. In terms of deals, we signed seven deals in financial services, three each in communications, manufacturing and other, two in data, and one each in EURS and high tech and life sciences. Region-wise, we signed large deals in America, five in Europe, three in India, and one in the Rest of the World. Total large deal wins stood at 55 deals with TCV of $6.5 billion, and 51% of that is net new. We saw discretionary spend uptick in capital markets, mortgages, and cards and payments. Deal wins during the quarter were strong, which coupled with an expanding pipeline of small deals gives us visibility for future growth. We are doing a variety of generative AI projects and are seeing them getting embedded in large programs. The retail sector continues to be impacted by economic and political uncertainties. Cost optimization and vendor consolidation are key priorities for clients. Consumer spend in the upcoming holiday season will be a key indicator for future spending decisions. We are progressing well on our journey to leverage AI to deliver business value with safeguards around privacy, ethics, controls, etc. across areas such as enhanced customer and employee experiences, digital marketing, etc. The communications sector outlook is challenging, with clients primarily focused on cost reductions and making their investments profitable. Discretionary spend for OEMs is expected to remain under pressure. Cost optimization and vendor consolidation are among top priorities, with clients open to innovative solutions and asking for AI to amplify productivity. Political conflicts and higher interest rates continue to influence spending patterns, causing clients to focus on cost optimization initiatives. We saw strong growth in verticals, especially in the manufacturing sector, with significant traction in cloud programs as many companies adopt a cloud and AI strategy. Our competencies in the energy transition space, human experience, and industry clout have helped us build a strong pipeline. Growth in manufacturing was strong, partially contributed by recent acquisitions. The automotive sector has seen recent challenges while discretionary spend remains under pressure. We have witnessed increased benefits of vendor consolidation. Opportunities around supply chain optimization, cloud ERP, smart factory, and connected devices across various sub-verticals are emerging. We are in discussions with multiple clients for setting up AI initiatives to drive AI adoption at scale. Most high-tech clients remain cautious due to geopolitical tensions. Discretionary spending and new project starts are slow due to a cash conversion focus. We are advancing multiple AI programs from ERP to implementation, focusing on customer support and sales effectiveness. Driven by our H1 performance and outlook for the rest of the year, we are revising our FY25 revenue guidance to 3.75% to 4.5% in constant currency terms. Our operating margin guidance remains at 20% to 22%. With that, we will open the call for questions.

Thank you very much. We will now begin the question and answer session. The first question is from Guarav Rateria from Morgan Stanley. Please go ahead.

Hey, hi. Thanks for taking my question. First question is, you know, the reasons for changing guidance for revenue grew, is it largely because Q2 came in better than your expectations or is it because the outlook for 2H has improved versus your prior expectations because of a better pipeline of the smaller deals?

Hi Guarav, this is Jayesh here. I think there are multiple factors that led to the increase in our guidance - of course the H1 performance or the Q2 performance, as you said, and more importantly the broad-based Q2 performance was one factor. We saw continued momentum in volumes as well as momentum in financial services. Our increase in the smaller deals, which are less than $50 million deals, as we said earlier, has had strong double-digit growth. I think all of these factors contributed to the increase in the guidance.

Got it. A second question on the generative AI adoption. Have you seen the generative AI actually triggering a large transformation project and leading to multi-million dollar deals or much higher deals? Just trying to understand that - is this going to lead to a wave of larger IT spending and increased overall addressable market for us?

Hi Guarav, this is Salil. Regarding generative AI, we're focusing on building our capabilities. I shared three examples of our approach using platforms, agents, and a small language model. Our emphasis is very much on productivity and growth as our clients explore these technologies. Currently, our large deals are primarily concerned with addressing cost inefficiencies rather than transformations. However, generative AI is a key element in these large deals. While it may not be the primary driver for closing these deals, it certainly plays an important role.

All right. Last question for Jayesh, what would be the tailwinds from a margin point of view in the second half which could help us offset the impact of the wage hike? Thank you.

Guarav, you know, just to put together all the headwinds and tailwinds, the headwinds will come from the compensation increase in Q4 that we talked about, but Q3 and Q4 will have regular seasonality in terms of working calendar days. Tailwinds would include everything that we are doing in Project Maximus, whether pricing or optimization, etc., so all of those would be part of that same bucket of Project Maximus.

Guarav, do you have any follow-up questions?

No, thank you.

Thank you very much. The next question is from the line of Bryan Bergin from TD Cowen. Please go ahead.

Hi, thank you. I wanted to ask, just as you think about how you’ve built the forecast forward and the discretionary view, aside from the improvement you’ve cited in U.S. BFSI, have you basically held everything else muted in your discretionary view as you go through the December and the March quarters?

Hi Bryan, this is Jayesh here. As I mentioned earlier, the recent factors contributing to our margin expansion and guidance change stem from our Q2 performance and the increase in volumes we observed across various sectors, including financial services. Our pipeline is strong, featuring both a large deal pipeline and numerous smaller deals under $50 million, which have seen double-digit growth. I believe all of these elements have been accounted for. Of course, we expect some seasonality in the second half of the year, including fewer working days, so all of this is currently factored into our guidance.

Thank you. I have a follow-up question regarding the furloughs. Can you explain how you approached the furlough activity planned for the end of the year? Is there any difference compared to what you observed last year or in historical data?

No, so we at this point in time have baked in the regular furloughs that we have seen over the past few years.

Thank you.

Thank you very much. The next question is from the line of Jonathan Lee from Guggenheim Securities. Please go ahead.

Great, thanks for taking our questions. Can you share further detail around what you’re hearing in pricing conversations, both around new deals and any potential re-scoping of deal terms, particularly given continued focus on cost optimization for clients?

Hi Jonathan, this is Jayesh here. The pricing environment has remained stable; however, we’ve been able to make a lot of progress in terms of getting benefits on the track that we are running under Project Maximus, which involves value-based selling, so many of those tracks have started kicking benefits which are visible in our numbers. You know, if you look at our volume growth using a proxy of the headcount, you will see that the delta between the revenue and the volume growth, which is contributed by the pricing significantly.

Thanks for that color. How should we think about large deal TCV momentum going forward? Are we seeing any changes to client preferences around signing of large deals, perhaps maybe towards smaller deals given some of what you called out regarding smaller deal strength?

Hi, this is Salil. The large deals, the way we are seeing it is the pipeline remains quite good for us today. There is much more focus on cost efficiency, automation and consolidation type of work. These are lumpy, so in some quarters we see a little bit more, some a little bit less, but we don’t see a change in that outlook for large deals. The point on the smaller deals that Jayesh shared was a little bit additive. We are seeing more activity there as well which is different from what we had seen before.

Thanks for the added detail.

Thank you. The next question is from the line of Vibhor Singhal from Nuvama Equities. Please go ahead.

Yes, hi. Thanks for taking my question. Salil, I just wanted to pick your brains mainly on how the BFSI vertical is looking post the interest rate cut. Are you seeing a change in approach by clients towards spending that might be picking up in coming quarters? Are you seeing that play out?

Thanks. In certain financial services, we saw last quarter good improvement in discretionary spend, and we continue to see that in Q2. The discretionary spend is good. We also saw the results of some of the large U.S. banks looked quite strong. We see still the focus is much more on discretionary and then some cost efficiency programs. We are still not seeing large transformation type of programs, but given our scale and the needs that the banks have, and some of our clients where we are seeing good traction, the overall feeling when we look at financial services, whether it’s capital markets or mortgages, cards and payments, we see good traction on the discretionary side.

My second question was on the TCV side. Would you agree that the pending U.S. elections are pushing the deals out? How would you read that, and how do you see the deal flow in the coming two quarters of the rest of the year?

We have not seen a change in the behavior from Q1 to Q2 in terms of the deal timelines and so on, on large deals. These are, at least in our experience from the past over multiple quarters, sometimes lumpy. We see some quarters where we see more, some less, because these are large deals. That’s where we’re looking, so we don’t see that in the data about it, including in the pipeline, which looks good as well.

But you would have liked to see maybe Q3 or Q4 to see indications of that, or will that depend on how the macro factors play out?

It will be more, first, that the deal flow is decent, but sometimes because the size of these deals is quite large, sometimes they bunch up in a quarter, and sometimes they spread out a bit, so we look at it over a half or over a full year when we observe trends, since most of them are driving revenue for the next several years.

Got it, got it. Thank you so much for that.

Thank you.

Thank you. The next question is from the line of Kumar Rakesh from BNP Paribas. Please go ahead.

Hi, good evening, and thank you for taking my question. My first question was to understand how is the traction on your generative AI work. You have launched platforms, and you already had similar platforms for cloud. How do you see Topaz panning out compared to when Cobalt initiative was launched?

Hi, this is Salil. First on Cobalt, as you know, it was launched and rolled out with very strong partnerships with the three big public cloud players and have today, but when it was launched as well. We had a strong private cloud offering which we also have expanded, and we had a set of offerings on SaaS providers, the range of them. So that was an ecosystem which for enterprises was already in motion and we were already playing on that, and Cobalt brought all of it together. In generative AI for the enterprise, it’s just starting to gain traction on how it will be adopted. There are several use cases, some of them with good traction with clients, but the method of adoption, so what we have done here in Topaz, some of the examples that I shared, is that we have created a generative AI platform that can be rolled out across a large organization, and then individuals in the organization start to build out their own generative AI applications on that. We’re building a small language model. We have a multi-agent framework where agents create full solutions to certain business processes or functions. These are different ways that generative AI is being rolled out. It’s difficult to compare the two. We see much deeper capability sets being rolled out in generative AI today than what we see anywhere else. Our clients are giving us that same view. We’re also seeing generative AI a lot in productivity, and especially in the deal flow we see today in cost take-out. There, almost every large deal or significant deal has some generative AI component related to productivity.

Any insight on customer adoption, how many customers have signed up for that, how many transactions are happening or how many accelerators you have run on that?

There, we have not publicly shared data for generative AI. What we have shared at this approach we are taking is that our projects today are not POCs or proofs of concept; they’re actual projects, while they’re small in revenue, delivering impact in that space.

Got it, thanks for that, Salil. My second question was about the small language model for industry-specific use cases you are working on. My understanding is that larger models are generally for more general use cases. How do you want to position this in the end market? Would it still be just an accelerator built on top of what other tools are there, or do you want to look at this as a separate product?

Here first, if you step back, our views on enterprise AI, generative AI, large language models will also play a part, but in addition, we are working on a small language model, so it’s not one or the other. The reason for the small language model is we believe we have some very good data sets within Infosys, and we are taking clean data sets from outside the industry. These help train the small language model. It then becomes deployable in an industry for a specific client, where they can build or we can help them build on this small language model other business applications. The idea is to establish a foundation upon which generative AI applications can be built by us or by the client.

Okay, so this will also work as an accelerator in deployment of AI applications, is that fair?

It will also be an accelerator. It will also be a foundation on which other generative AI applications can be built by the client or by us for the client.

Thank you. The next question is from the line of Rishi Jhunjhunwala from IIFL Equities. Please go ahead.

Yes, thanks for the opportunity. Just one question - your growth in this quarter, as well as last quarter, has been fairly broad-based across verticals. The commentary suggests that discretionary has seen some sort of pick-up in some verticals, but the guidance that you’ve provided for the second half effectively means that there is a considerable slow-down in the overall growth momentum. Now, given the nature of broad-based growth that you’ve delivered for two consecutive quarters at the midpoint of the guidance not having growth seems a little bit counterintuitive versus what you have commented on the demand environment. Just wanted to understand how you’re thinking about that.

Hi Rishi, this is Jayesh here. If we look at what we have consistently said in the past, it is that H1 is going to be stronger than H2. H2 will have seasonality, which is furloughs, lower working and calendar days in Q3, and lower working and calendar days in Q4, so all of that is baked into the guidance. Our guidance philosophy hasn’t changed. We run multiple models running up to the guidance which define the bottom, midpoint, and the top end of the guidance, and we say it as we see it, right? At this point in time, this is what we are seeing in terms of guidance.

Got it, and just very quickly, given where your utilization levels are right now, is it fair to assume that going forward, the hiring trend will largely reflect how you end up growing on revenues as well? It seems a lot of the moderation on utilization is probably behind us.

That’s right, Rishi. Again, we’ve always maintained that 84%, 85% is our comfort level utilization. We are already above that, so we don’t think at this point in time that there’s any significant headroom left on that. Most of the volume growth would come from the net hiring going forward.

Okay, thank you so much.

Thank you. The next question is from the line of Jamie Friedman from Susquehanna International Group. Please go ahead.

Hi. Congratulations on the continued improvement. A number of the questions you’re getting are about what your assumptions are about seasonality. I know you said in your previous answers that the year is typically super-seasonal in the first half. In terms of what you're contemplating for the second half, can you share your assumptions on the cost take-out narrative versus the discretionary narrative, and maybe some call-outs on the verticals?

Hi, this is Salil. The way we’ve seen it, the two parts to it, from what you mentioned: in building the outlook, we have taken a view of what we see today, so financial services discretionary has shown positive trends. We didn’t see new discretionary in other industries. We saw continued weakness in retail and then we saw a little bit of new weakness in the automotive sector in Europe, so we considered all this while creating our guidance. Seasonality, as Jayesh shared earlier, is a factor as well, so the furloughs in our Q3, and lower working days in Q3 and an additional in Q4 are also contributing to how we built this outlook for the full financial year.

Perfect. Thanks for the context, Salil. Appreciate it. I’ll drop back in the queue.

Thank you. The next question is from the line of Nitin Padmanabhan from Investec. Please go ahead.

Yes, hi. Thank you for the opportunity. Salil, you mentioned that the deal pipeline for smaller deals, which is below $50 million, has improved in double digits. How has it been in terms of closures for this current quarter? While the pipeline has improved, how have the closures been in the current quarter? Have you seen that improve as well?

Yes, so Nitin, closures in terms of the time taken to decisions hasn’t changed. Both small and large deal closures have not really seen a significant change in the decision-making process. By nature, these deals remain lumpy, so you will see quarters where you do more and you will see quarters where you do less. What we are talking about is the Q3 pipeline, which has increased, so we will see how the conversion of that increases. But the pipeline increase and the wins that we maintain should lead to increased closure in the coming quarters.

Got it.

Coming to the second question on third party, third party remains an integral part of many of our large deals, especially the mega deals. When you take over a large project from a client, where you’re taking over people, technology, and the whole solution, you will incur third party costs that could be hardware, software licenses, etc., which will become costs to you and become part of the revenue for the client. This is both of that, as we take it from third party vendors and whatever costs that we incur.

That’s helpful. Thank you so much, and all the best.

Thank you.

Thank you. The next question is from the line of Abhishek Kumar from JM Financial. Please go ahead.

Yes, hi. Good evening. Thanks for taking my question. I wanted to double-click on the nature of the smaller deals. Are these smaller deals mostly in those sub-sectors, or are these also non-discretionary potentially smaller deals that a client is releasing against a large lump sum contract?

Yes, these are deals across various verticals and types. We are not breaking that out into how much of that is discretionary, etc.

Okay, fair enough. Thank you.

Thank you. The next question is from the line of Keith Bachman from BMO Capital. Please go ahead.

Hi, thank you very much. I wanted to ask two questions, if I could. The first is for the annual guidance, what is the embedded expectation for the inorganic contributions for the year?

Keith, this is Jayesh here. In the last quarter when we changed our guidance, we had baked in the entire impact of the acquisitions, and so just to clarify, this guidance change does not have any incremental change from the acquisition. This quarter, we got a benefit of 80 basis points from acquisitions, and that would be in a similar range for Q3 and Q4.

Okay, perfect. Then my second question is, it’s interesting what you said about discretionary spend coming back in the smaller deals, contributing to TCV growth. I just wanted to get your perspective on why you think there was a change in this category.

First, there is a discretionary view and there’s small deals. They are distinct in that they overlap but are two separate activities. On the deals smaller than $50 million, as Jayesh said, we saw good increase recently. But we don’t know if it’s durable or sustainable yet.

Okay, that is the category that I was interested in, the smaller deals. No comments on whether you think it’s durable or not, whether it stays in place?

Right.

Thank you very much.

Hi, thank you everyone. In summary, we had a strong quarter on revenue growth, margins, cash collections, large deals, so we feel good about that. That resulted in an increase in our revenue growth guidance for the full year, which gives us good confidence as we look into the future. Clearly, financial services is showing continued strength in discretionary spend, and our segments remain about the same, with a note on the automotive sector in Europe becoming a bit slower. We have deep capabilities in generative AI, with platforms, agent solutions, small language models that we believe will greatly impact our clients. We continue to focus on execution across our business, which remains key for us moving forward. So we remain optimistic as to how the year will play out. Thank you everyone for joining, and I look forward to catching up in the next quarterly discussion.

Thank you very much, members of management. 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.