Earnings Call Transcript - INFY Q3 2025

Operator, Operator

Ladies and gentlemen, good day, and welcome to Infosys Limited Q3 FY '25 Earnings Conference Call. Please note that this conference is being recorded. I now hand the conference over to Mr. Sandeep Mahindroo. Thank you, and over to you, Mr. Mahindroo.

Sandeep Mahindroo, Head of Investor Relations

Hello, everyone, and welcome to Infosys earnings call for Q3 FY '25. Let me start the call by wishing everyone a very Happy New Year. Joining us on this call is CEO and Managing Director, Mr. Salil Parekh; CFO, Mr. Jayesh Sanghrajka, and other members of the leadership team. We'll 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 that refers to our outlook for the future is a forward-looking statement, which must be read in conjunction with the risks that the company faces. A complete 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 the call over to Salil.

Salil Parekh, CEO

Thanks, Sandeep. Good morning and good evening to all of you. Wish you a Happy New Year. Thank you all for joining us on this call. Our revenue grew 1.7% quarter-on-quarter and 6.1% year-on-year in constant currency terms in Q3. All verticals and most geographies grew year-on-year. We saw double-digit growth in Europe and India and in our manufacturing business. Large deals were at $2.5 billion, operating margin at 21.3%. Free cash flow for the quarter was at an all-time high of $1.26 billion. Headcount grew by over 5,000 sequentially to now over 323,000 employees worldwide. Financial services in the U.S. continues to grow strongly in this quarter and over the past few quarters. We have seen a revival in European financial services during Q3. We are seeing an improvement in retail and consumer product industries in the U.S. with discretionary pressures easing. The automotive sector in Europe continues to remain slow. Demand trends remain stable in other industries with clients continuing to prioritize cost takeout over discretionary initiatives. Clients are turning to us as the partner of choice when it comes to enterprise AI to transform their business for growth and to manage operations more efficiently. With Infosys Topaz, our generative AI powered services and solutions, we are deepening our enterprise AI capabilities. We have built four small language models for banking, for IT operations, for cyber, and for enterprises broadly. These small language models have 2.5 billion parameters. These models are built using some of our proprietary datasets. We are developing over 100 new generative AI agents for deployment within our clients. We are working closely with the generative AI partner ecosystem to develop joint solutions for our clients, several of them on the platforms of the partners. Here are some examples of the work we're doing for our clients in the generative AI area. We developed a generative AI powered research agent that generated comprehensive solutions within seconds for requests made for the product support teams of a large technology company. We have created three audit agents to intelligently automate multiple tasks for a professional services company. Based overall on our strong performance in this quarter and our view for the rest of this financial year, we are revising our revenue growth guidance to growth of 4.5% to 5% in constant currency. Our operating margin guidance remains unchanged at 20% to 22%. With that, let me request Jayesh to share his views.

Jayesh Sanghrajka, CFO

Thank you, Salil. Good morning, good evening, everyone, and thank you for joining the call today as I wish you all a very Happy New Year. We had another strong quarter of all-around growth across verticals. This was backed by relentless execution resulting in improvement in multiple operating parameters leading to expansion in margin and cash conversion. Here are some of the key highlights. We had a strong overall growth across verticals of 6.1% year-on-year in constant currency terms. Amongst geographies, North America returned to positive growth trajectory after four quarters, growing at 4.8%. Europe grew at 12.2% year-on-year in constant currency terms, which is twice the company level. Financial services saw the third consecutive quarter of volume growth reflecting continued positivity we are seeing in this sector. Our 50 million clients increased by 7%. Large deal TCV for the quarter was at $2.5 billion, with 63% of this being net new, which is an increase of 57% in net new deal TCV. Our large deal pipeline has become stronger in Q3. Coming to margins, Q3 margins are at 21.3%, 20 bps higher sequentially after absorbing the impact of furloughs and higher third-party costs. Margins were up 80 basis points year-on-year. We saw a double-digit year-on-year increase in EPS of 11.4% to INR 16.43. Our razor-sharp focus on cash flow resulted in very strong free cash flow of $1.2 billion for the quarter and $3.2 billion for nine months. This marks an increase of 90% year-on-year and 57% on a nine-month basis. DSO was at 74 days. However, DSO including unbilled, net of unearned, was down by six days at 86. Our net unbilled revenues declined by $323 million sequentially to the lowest level in the last 12 quarters. Net headcount addition continued for the second consecutive quarter. We added 5,591 employees this quarter. Let me now talk about some of this in greater detail. We had a strong revenue growth of 1.7% sequentially and 6.1% on a year-on-year basis in constant currency terms in a seasonally weak quarter. For the nine months, revenue grew by 3.9%, both in constant currency and reported terms with double-digit growth in manufacturing. Operating margins expanded to 21.3%, which is an increase of 20 bps sequentially and 80 bps year-on-year. The major components of sequential margin walk for the quarter include tailwinds of 40 basis points from currency movements, 30 basis points from Project Maximus, 20 basis points from lower costs relating to provisions for post-sales customer support and expected credit loss provisions offset by higher third-party costs, and headwinds of 70 basis points from furloughs and lower working days, offset by higher leave utilization and others. Utilization excluding trainees was strong at 86% despite the low volume growth environment. We are very pleased with the continued success of Project Maximus, which has resulted in benefits across various tracks. One such area is realization, which has increased by 3.6% over nine months, resulting from strong performance emanating from value-based selling tracks. This has helped expand year-to-date margins by 30 basis points despite additional headwinds from FY '24 comp increase, higher variable payout, and impact due to amortization of intangibles from recent acquisition and large deal ramp-ups. Headcount at the end of the quarter stood at 323,000, growing sequentially by approximately 5,600. This is the second consecutive quarter of headcount addition. Attrition remains low at 13.7%. Coming to cash flows, our nine-month free cash flows has surpassed full-year free cash flows for the last financial year. For the quarter, our free cash flows were at $1.26 billion, up 51% over last quarter and up 90% over the same period last year. Free cash flow as a percentage of net profit for nine months was 136%. Excluding income tax refunds, our free cash flow for the quarter was at $996 million, up 27% over last quarter and up 50% over Q3 '24. Our free cash flow excluding tax refund as a percentage of net profit for the quarter is at 123%, and for the nine months is 109%, which is the highest conversion in over two decades. Yield on cash balance was 6.91% in Q3. ETR was at 29.5% for both Q3 and nine months. We closed 17 large deals with a TCV of $2.5 billion, with 63% of this being net new. Vertical-wise, we signed five deals from financial services, four in communications, three in manufacturing, two each in retail and URS, and one in high tech. Region-wise, we signed 11 large deals in America and six in Europe. This also includes a Build-Operate-Transfer (BoT) deal with a client to set up a Global Capability Center (GCC) in India. For nine months, large deal wins stood at 72 deals with a TCV of $9 billion, and 55% of this is net new. Coming to verticals, financial services in the U.S. continues to see discretionary spending, increase in capital markets, mortgages, cards, and payments, which led to another quarter of volume growth. We have also seen a revival in Europe leading to Q3 backed by some large deals. Our expansion beyond the U.S., specifically into Nordics, Middle East, and Southeast Asia, is also contributing positively to our growth. Clients have started to view IT investments more favorably post-election related uncertainty and interest rate cuts in recent months. While the focus remains on cost optimization, spending towards new growth areas like AI, cloud adoption, cybersecurity data, and analytics is observed. Manufacturing continues to see weakness in the automotive sector in Europe. However, there is continued momentum in areas such as engineering, IoT, supply chain, cloud ERP, and digital transformation. The benefits of vendor consolidation are becoming more apparent, contributing to the growth of existing accounts and the establishment of new relationships. The pipeline is healthy with a mix of large and small deals and a focus on cost takeout and portfolio rationalization. We are seeing some signs of recovery in discretionary spending in the retail and consumer packaged goods (CPG) verticals in the U.S. There is a pickup in deal activity backed by improved consumer sentiment and strong holiday season sales. Companies are looking at investing in brand and technology initiatives; the S/4HANA migration deadline is driving budget allocation to make enterprise workloads compliant. We are leveraging Infosys Topaz to showcase enhanced business value in predictive analytics, real-time insights, and strategic disengagement. The communications sector continues to face a volatile macro environment leading to growth challenges and rising operational expenses pressures. Discretionary spending continues to be soft, and current year growth is driven mainly by recent large deal wins focused on efficiency and consolidation. In the URS sector, macro headwinds and supply-demand imbalances continue to influence spending patterns. Growth in demand for electricity to cater to data centers is expected to bring in more investment in energy. Resources clients are more watchful about the changing geopolitical dynamics impacting the supply chain. Discretionary spending remains muted. Our investment in industry clouds and energy transition solutions have helped us win multiple deals. The high-tech sector continues to remain soft. Some clients are reducing the run cost and causing discretionary investment. We are seeing opportunities in cost takeout deals, including legacy product management and managed services-based business operations. Programs are driven by cloud computing and new technologies like AI and ML. Driven by our performance and outlook for the rest of the year, we are revising our FY '25 revenue guidance to 4.5% to 5% in constant currency terms. Our operating margin guidance remains at 20% to 22%. With that, maybe we can open the floor for questions.

Operator, Operator

Thank you very much. The first question is from the line of Ankur Rudra from JPMorgan. Please go ahead.

Ankur Rudra, Analyst

Thank you and nice print. Can you comment a bit about if there were any one-time items in your revenues or margins this time? I do notice that your third-party costs moved up quite a bit, perhaps ahead of revenue growth and also volume growth was quite soft. So if you can talk a bit about how you think about volume growth into fiscal '26. I know you mentioned you think that will be better than last year. And if there's any impact of AI impacting the volume of work? Thanks.

Jayesh Sanghrajka, CFO

Thanks, Ankur. You're correct that our third-party costs were elevated this quarter. There is always some seasonality in Q3, but this quarter's costs were still higher than usual, which has affected both our costs and revenue. Regarding volumes for FY '26, it's a bit early to say. As you know, we gain visibility on client budgets in February and March, which aligns with our annual cycle. We'll provide a clearer picture in April when we announce our full-year guidance. There were no other one-time items affecting either revenue or costs this quarter.

Ankur Rudra, Analyst

Appreciate the color. Just if you can talk a bit about the guide, now the guide increase is positive, but if you look at the implied number for Q4, it implies a negative number. Is this primarily due to seasonality or also partly from the third-party sales led business which might shrink, which you've baked into the guide this time?

Jayesh Sanghrajka, CFO

So Ankur, there are two parts as you rightly said. One is, of course, the third-party seasonality, which is baked in, in Q4 guidance because Q3 was significantly higher. And Q4 also has lower working days in the calendar days. So that's a headwind that we face in Q4. So both of that is baked in, in the guidance.

Ankur Rudra, Analyst

Appreciate it. Just last question, you mentioned a lot about your small language model and agentic AI. Can you talk a bit about how on a structural basis this might impact the volumes of your work, the need for productivity pass back and if this will be net additive or dilutive to the amount of work Infosys can do for its clients?

Salil Parekh, CEO

Hi, Ankur, this is Salil. On the agents, we are seeing good traction with clients where we've already deployed the couple of examples I mentioned where there are several live or production examples, not just proof and concept. What we are seeing is the agents are helping clients to achieve benefits through time reduction, cost reduction, and greater impact on their customer base and growth. They are being implemented in a broad-based way within the client. So the way we are seeing it today, the areas which can be addressed by agents include the building of about 100 new agents, which expands the opportunity that we have to do this sort of work. So at this stage, it looks to us like this will give us over time more growth. On small language models, the usage of that small language model is to create some activity - software development, customer service, and preparation of knowledge objects within the client to make a positive impact in that. And those all have elements of for them to get additional market share and for them to be more efficient. So the more they are deployed, again for us, we see the possibility of driving growth through that as they get deployed. So one of the examples on a small language model we are working with a client is where they want to build their own small language model based on one of the four that we built, the enterprise one, which then translates into their industry, enhancing their business value.

Ankur Rudra, Analyst

Thank you. And would you classify this nature of work, Salil, under cost-oriented, efficiency-oriented work, or is this more discretionary-oriented work?

Salil Parekh, CEO

So today, AI is something where many clients are doing different programs. So it’s not like the traditional tech, which has that sort of view when industries were getting back, the discretionary was increasing and otherwise it was more cost. So today, we see the spend is broad-based. The end outcome sometimes could be the cost for their own growth, but it's not easily classified into one of those buckets today at least. As it becomes more mainstream, we'll be able to see how they use it. Today, there is a broader usage of AI within companies.

Ankur Rudra, Analyst

Okay. Appreciate it. Thank you and best of luck.

Operator, Operator

Thank you. Next question is from the line of Yogesh Agarwal from HSBC Securities. Please go ahead.

Yogesh Agarwal, Analyst

Hi. Just have one question on the third-party items, the pass-through revenues. Jayesh, you talked about seasonality, which is for the fourth quarter. But in general, if you step back, will this line item continue to grow with the top line, or is there a limit like one can expect around 9%, 10%? Will it settle down, or is this a new reality that for every new deal, new work, the pass-through revenue will grow in line with the overall revenues?

Jayesh Sanghrajka, CFO

So Yogesh, at this point in time, we don't expect this to change significantly, but it's also a factor of the large deals or the mega deals that come in at times, right? So it's dependent on some of the large deals that come in where you take over the tech, process, people, and technology from the client. As a result, you do incur those costs on your P&L because you are providing an end-to-end solution to the clients. So it's going to be a factor of that, but based on current visibility, we are not seeing any significant increase from here in the next few quarters.

Yogesh Agarwal, Analyst

Got it. Thanks. Thank you.

Operator, Operator

Thank you. Next question is from the line of Bryan Bergin from TD Cowen. Please go ahead.

Bryan Bergin, Analyst

Hi, thank you for taking the question. I wanted to start on pricing. So I think you mentioned a 3.6% nine-month realization tailwind, very solid. I'm just curious how you think that progresses from here as you pursue this value-based pricing strategy and what is a reasonable level of potential pricing impact you'd expect going forward? And then just more broadly, can you comment on the competitive pricing situations in the market?

Salil Parekh, CEO

So Bryan, as we had talked earlier, this is one of the pillars under our margin improvement program. There were multiple tracks beneath that, and those tracks are yielding results. It's difficult to predict from here whether this growth year-on-year will be sustained or not, but our endeavor is to keep improving and getting the best from where we are. So it's difficult to give guidance. Having said that, coming to your second question, the pricing environment per se across, at least what we are seeing in the industry, is stable at this point.

Bryan Bergin, Analyst

Okay. And then on utilization remains modestly above your normalized range around 86% ex-trainees. Can you comment, is this a new normal? Will this move lower as hiring continues? Where do you see that progressing?

Salil Parekh, CEO

Yes. So we have generally said, 83%, 85% of utilization is the range that we are more comfortable with. 86% is a little bit above our comfort level, but we don't expect it to change significantly either way here. So yes, 83%, 85% is where we would like to be.

Bryan Bergin, Analyst

Okay. Thank you.

Operator, Operator

Thank you. Next question is from the line of Rishi Jhunjhunwala from India Infoline. Please go ahead.

Rishi Jhunjhunwala, Analyst

Yes. Thanks for the opportunity. I'm sorry, I had dropped for a minute. So in case I'm repeating the question, just wanted to understand the growth in top five clients, right? So it has declined pretty sharply in this quarter, down more than 6% quarter-on-quarter in dollar terms. And even on a year-on-year basis, there hasn't been much growth. So trying to understand what exactly is happening there.

Jayesh Sanghrajka, CFO

So Rishi, the sequential change in the top five clients is primarily due to furloughs, largely because you do see furloughs impacting many of the large clients. And of course, these are also reported numbers. So there could be a bit of currency impact as well, depending on which geography the top five clients are also from. The year-on-year results will be client-specific; there would be some deals which would have ramped up and ramped down as we are seeing. So there could be multiple reasons. I don't think there is anything sectoral here in a way to decipher from here in my mind.

Rishi Jhunjhunwala, Analyst

Okay. And just secondly, clearly last year we had a pretty big year in terms of overall deal wins, almost $17.6 billion. This year currently we are annualizing at around $12 million. Just wanted to understand in terms of the proportion of revenues that come through pass-through, has that changed in the amount of deals we have won in totality this year versus last year?

Jayesh Sanghrajka, CFO

No, not really, Rishi. If you look at last year, we had some of the mega deals in the deal signing, which we had called out for as well. I think we had around six mega deals last year, which has helped the $17 billion. But as you know, those deals are volatile. Some quarters you do have mega deals, some not. There's always a spike in the mega deals. The large deals we've been signing, outside of the mega deals, are in the range of $2.5 billion to $3 billion. If you look at this quarter, our $2.5 billion has 63% net new, which means that the net new sequentially has grown by 50% quarter-on-quarter. That having any significant impact this year on third-party, we don't expect any impact from the deals that we signed this year on the third-party.

Rishi Jhunjhunwala, Analyst

Okay. Thank you so much.

Operator, Operator

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

Jonathan Lee, Analyst

Great. Happy New Year and thanks for taking our questions. Last quarter, you called out improvement in your smaller deal pipeline, but it doesn't sound like that continued into this quarter. What do you think is driving that difference particularly given some of the improvement you called out in discretionary demand?

Jayesh Sanghrajka, CFO

Jonathan, as we said our overall deal pipeline has grown because this quarter, our large deals pipeline has also become stronger and the pipeline outside of the large deals has remained stable. So that has reflected in our overall deal pipeline growth. There is also a reflection of everything that Salil talked about in terms of the positivity in certain sectors that we are seeing, especially the financial services in the U.S. and Europe, the positivity in retail in the U.S., and the cost takeout opportunities in some of the other segments that continue.

Jonathan Lee, Analyst

Appreciate that color. On the European BFSI front, can you help us unpack some of the strength you called out there? What is it that you're seeing in your conversations there? And how durable is that strength?

Jayesh Sanghrajka, CFO

Yes. We are not observing a significant sectoral shift, but we have signed a considerable number of deals that are expected to yield positive results in the upcoming quarters. These deals include cloud initiatives and the consolidation of some vendors, which should contribute to our success in the near term.

Operator, Operator

Thank you. Next question is from the line of Surendra Goyal from Citigroup. Please go ahead.

Surendra Goyal, Analyst

Yes, hi, good evening. One of the industry players called out AI-driven productivity pass back to a large client of theirs. Have you seen any such instances in any of your large clients?

Salil Parekh, CEO

So on the AI-driven productivity point, in general, what we see is whenever there is a productivity benefit, there is always sharing with clients. So in the AI driven or the other - outside of AI driven, we are not seeing a difference in the way it's being treated. Many of these examples I've given on agents and some of the examples we've done in the past, we look at the foundation models doing software development or customer service, typically some benefits will go to the client and we will also be able to retain some benefits.

Surendra Goyal, Analyst

Okay. Maybe I'll ask the question more specifically, has the top five client performance been impacted by such productivity pass-through?

Jayesh Sanghrajka, CFO

No, Surendra, it's more of furloughs this quarter. Part of that is due to currency since some of the clients are located in different regions or outside the U.S. Looking at year-on-year data, I don't see any sector-specific behavior in those areas where client behavior is different.

Operator, Operator

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

Vibhor Singhal, Analyst

Yes, hi. Thanks for taking my question. I had a couple of questions. So the first question is on the expected growth rate for Q4, which as per the guidance comes in negative territory. Now you alluded to the point that it's only based on the seasonality. So should we assume that this is the reality for business now, that the overall business mix we have at this point in time in general Q4 is going to be sharply lower than what Q3 does, despite the fact that Q3 itself would be lower because of the furloughs and the holiday season that we see? If you can answer that and then I have a follow-up question.

Jayesh Sanghrajka, CFO

Yes. So Vibhor, if you look at Q3, it was benefited by some of the third-party revenue, right? So to that extent, there is additional seasonality versus what we generally see in Q3 and Q4 as a seasonality. Historically, if you look at our first half, it has always been stronger than the second half, and within the second half, depending on how the calendar days and working days play out, you would see one quarter better than the other quarter. This year, we have lower working calendar days, both in Q3 and Q4, and that is why Q3 and Q4 are impacted. Plus Q3 has larger furloughs, and Q4 will have some furloughs. So you will see an overall some furlough flashback, offset by working days and calendar day impact and a reversal of the benefit that we got in terms of third-party revenue.

Vibhor Singhal, Analyst

Got it. And the third-party revenue will also have the seasonality of maybe peeking out in Q3 and then maybe tempering down in the following quarters. Is that also fair to believe?

Jayesh Sanghrajka, CFO

Yes, that is how it generally is, right? In Q3, you do see many of these deals having larger volumes.

Vibhor Singhal, Analyst

Got it. Great one. Just one last question is on the retail vertical. I'm sorry if I missed out in the opening parts. I mean, what is our outlook in that vertical overall that we are seeing? I mean, we've alluded to discretionary spend picking up here. I think a couple of your competitors also have basically seen the vertical bottoming out. How is this vertical playing out for us and our outlook for this in the coming quarters?

Jayesh Sanghrajka, CFO

So Vibhor, what we have said is we are seeing positivity in retail and consumer packaged goods (CPG) in the U.S. That is reflecting from the fact that the sales in the holiday season is better and the consumer sentiment is getting positive. So all of that is starting to reflect in the deal pipelines, etc., and the clients' behavior in terms of decision-making. We are seeing that positivity. In the next one or two quarters, it should start reflecting in terms of volume.

Vibhor Singhal, Analyst

And the deal pipeline as a vertical also remains strong.

Jayesh Sanghrajka, CFO

Yes, deal pipeline overall has remained strong. If you look at again in this quarter also we did sign a couple of retail deals as well.

Vibhor Singhal, Analyst

Got it. Yes. Thank you so much for taking my question and wish you all the best.

Jayesh Sanghrajka, CFO

Thank you, Vibhor.

Operator, Operator

Thank you. Next question is from the line of Ashwin Mehta from Ambit Capital. Please go ahead.

Ashwin Mehta, Analyst

Yes, hi, thanks for the opportunity. Just want to check in terms of the impact of the wage hikes, will it be full impact next quarter or will it be staggered? And what is the margin impact that you see of wage hikes?

Jayesh Sanghrajka, CFO

So Ashwin, as we said earlier, our wage rollout will happen in two phases. The first phase starting the 1st of January, and the second phase will start from the 1st of April. The India wage increases would be on an average of 6% to 8%. Of course, the higher performers would get much higher, etc. And overseas would be low single-digit. We haven't really called out a margin impact on account of that.

Ashwin Mehta, Analyst

Okay.

Jayesh Sanghrajka, CFO

Most of the employees will get a comp increase in Q4.

Ashwin Mehta, Analyst

Okay. Thanks. And just one follow-up to an earlier question. So you indicated that the top five client decline was largely furlough-led. So ideally this should recover in the next quarter itself, right?

Jayesh Sanghrajka, CFO

Yes, I mean, likely, yes Ashwin. We don't give projections by the brackets of clients, but furlough should reverse for sure.

Ashwin Mehta, Analyst

Okay. Okay. So the decline is beyond. It is much higher than. Because you had almost a 1% drag because of these top five clients. And in terms of our guidance, there is a decent enough decline built in. So essentially the decline is much more than we projected.

Jayesh Sanghrajka, CFO

So Ashwin, it's going to be as I said earlier, it's going to be furloughs, it'll be currency plus. It can also be factors like third-party. If one of those clients had third-party last quarter versus this quarter, that could be those scenes. I'm not seeing any sectoral behavior in those brackets, which is where the client is behaving differently.

Ashwin Mehta, Analyst

Okay, thanks, Jayesh. Thanks for the clarification.

Operator, Operator

Thank you.

Jayesh Sanghrajka, CFO

Thank you, Ashwin.

Operator, Operator

Next question is from the line of Jamie Friedman from Susquehanna International Group. Please go ahead.

Jamie Friedman, Analyst

Hi, good evening. Nice print. So Salil, how are you characterizing linearity, the linearity narrative now? Because I see you're taking up the headcount, which seems quite constructive. Was wondering the automation impact contemplation relative to linearity?

Salil Parekh, CEO

So on linearity, we see currently there's benefits coming, as you stated, from automation. There are also benefits that Jayesh was sharing earlier from pricing. But broadly speaking, at the scale we are operating at today, we still see benefits - with the employee headcount increase. For us, that's a good signal on a net basis because it's showing that we are expanding the work that we're doing overall. In the medium to long-term, there are different views that could develop. But right now we are positive with the employee growth, and we do see the pluses and the minuses with some of those elements you referenced internally.

Jamie Friedman, Analyst

Thank you. And a separate question with regard to the net new number, which was quite robust. Does the net new reflect either the similar vertical operating group, or service lines as the current base of business, or is there something that is like net-net new going on in the new bookings?

Salil Parekh, CEO

So we are also positive on the net new. It demonstrates an expansion of what we're doing typically, with existing or new clients. We don't detail out the specific service lines, but it's sufficient to say that we see good traction on areas like cloud. We see good traction in a small way on what we were discussing earlier on generative AI. We are seeing good traction on areas like SAP S/4HANA. We are seeing good traction as Jayesh shared earlier on broadly cost takeout. So these are not, let's say, all net-net new generative AI but it's a mix of these things without getting into the specifics on the 63%.

Jamie Friedman, Analyst

Perfect. Thank you. I'll jump back in the queue.

Operator, Operator

Thank you. Next question is from the line of Sandeep Shah from Equirus Securities. Please go ahead.

Sandeep Shah, Analyst

Yes, thanks for the opportunity. Salil, just the first question. When we entered FY '25, we had a lot of support of the mega deal, large deals, which have ramped up in the first nine months of FY '25. With those largely into the ramp-up stage, and might have gone into steady state. Do you believe FY '26, we may have to worry or do you believe FY '26, as some of the industry peers are calling out, better than FY '25? So do you believe that for the industry FY '26, could be better than FY '25?

Salil Parekh, CEO

So there - I think we don't have a comment externally on the next financial year. What we are very clear on is, with this better view on financial services. So the first was U.S., now financial services Europe, the better view on retail and consumer products U.S. We are starting to see some positivity on the discretionary. With a net new of 60%, looking good with where that brings us into the next cycle. Overall, going in with an increased guidance, we feel confident going into Q4. We also see the deal pipeline for large deals looking more robust than it was, at this time last quarter. Overall, we see our execution of what we are driving. The traction that the clients are giving us is incredible. That's what we have to say because we stop in terms of specific guidance at March 31. But generally speaking, what we're seeing underlying seems positive.

Sandeep Shah, Analyst

Okay. Just other questions. Any color in terms of the deal pipeline below $50 million, which has grown 10% Q-on-Q in the 2Q, any update on the same? Second, in terms of margin, Jayesh, do you believe the likely reversal in the third-party could be enough to offset the wage hike impact in the third quarter? And also in terms of the recruitment, which we have done this quarter. Can you throw some color? Is it more pressure-driven, or is it more lateral-driven?

Jayesh Sanghrajka, CFO

Sorry, Sandeep, what was your first question?

Salil Parekh, CEO

Small deal pipeline.

Jayesh Sanghrajka, CFO

Yes, small deal pipeline. The small deal pipeline remained stable as compared to last quarter. As Salil said, our large deal pipeline has grown, so our overall pipeline therefore has become stronger. So that's point number one. Point number two, we will have headwinds in terms of compensation, and we will have tailwinds coming from, if the third-party cost is coming down. And some bit of currency depending on how the currency plays out. But at this point in time where we are, there could be some benefits from that. So that's broadly the puts and takes. We don't quantify each of them, as we get into this quarter. So I wouldn't get there.

Sandeep Shah, Analyst

And the last question on recruitment.

Jayesh Sanghrajka, CFO

I believe recruitment involves both freshers and laterals. While we haven't specified the breakdown, we plan to hire over 15,000 freshers this year, in line with our earlier comments. For next year, we anticipate hiring over 20,000.

Sandeep Shah, Analyst

Okay. Thanks and all the best.

Operator, Operator

Thank you. Next question is from the line of Sumeet Jain from CLSA India. Please go ahead.

Sumeet Jain, Analyst

Yes, hi, thanks for the opportunity. If I recall correctly, last quarter you mentioned that sub $20 million deals had a very strong pipeline. So can you just comment, did you actually see the positive impact of that in Q3, and how does that deal pipeline look like at this stage?

Jayesh Sanghrajka, CFO

So Sumeet, what we said was the sub $50 million dollar deals which had grown 20%. We haven't really called it out how much of that is converted, how much of that is not? And in any case, whatever we convert in this quarter will start showing up results in Q4 onwards. So more likely than not. The idea of last giving that data point last quarter was we saw a significant change there, which we thought it was important to share with investors. But we are not breaking that up further as to how much of that got converted or not. At this point in time, we still continue to see that as stable. The large deal pipeline has become stronger.

Sumeet Jain, Analyst

All right, got it, that's helpful. And secondly, I actually forgot my second question. Maybe I will come back in the queue.

Operator, Operator

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

Keith Bachman, Analyst

Hi, thank you very much. My question is on cost to serve your clients, and what I mean by that is how is AI changing your cost to serve today? And I'm not talking about AI deals; I'm talking about the broader portfolio. And how do you envision that changing say a year from now?

Salil Parekh, CEO

In terms of AI and our cost to serve, what we are seeing, some of these elements we've discussed in the past, at the level of what our activity is. We see applying for example, some of the small language models and large language models within the company, and we've seen some benefits accrue from that. Now the place where this becomes the most relevant is when we have clients. Where there's a large common set of approach, a common foundation of data infrastructure. Or for example where we have our own business financial, where we've started to apply these. We are now rolling this out, where we see common elements across our own internal business, and those are benefits that will support us. And it will be one of the levers that will help us over time on our margin activity as part of our program. We don't have an external quantification, but that's something that is one of the elements of the approach we are driving through internally. And as time goes on, we need some large common element, common data set to make impacts in that area, particularly on customer service, and other areas where Generative AI can be applied within Infosys.

Keith Bachman, Analyst

Okay. Let me ask my follow-up related to that. You call out SAP as being a strong area for you, and I think it's candidly strong for a number of different vendors or suppliers. Presumably, Gen AI will help with deployments over time because there's a notion of software development as the SAP ECC customers migrate to the cloud. And so as that develops into more robust capabilities for Infosys, how does that change your pricing to the customers, say a year from now for the deployment of SAP work? Because if you're getting a benefit, presumably, the customers will want to share in that benefit. So how do you think it? Is it a source of deflation for you, or how do you think you – as that unfolds particularly from the software development side?

Salil Parekh, CEO

So I think if I understood what you are asking, this is on SAP software development when we are doing it for our clients. In that instance of today, the demand, as we were sharing earlier on S/4HANA or even on Rise, which is the cloud migration piece, is strong in the SAP area. Now that work is more implementation of migration. So it's not typically software development. Having said that, some elements of the agents that we discussed before, especially in the finance process, which is where we are seeing the biggest impact today in areas like invoicing and other finance activities, we will see some impact and benefit. However, stepping back all of that, let's say, benefit will eventually, at least from past experience, is almost always shared with the client in some way. So I don't see that approach to sharing will change, which to us means we will get some benefit and the client will get some benefit.

Keith Bachman, Analyst

Okay, I will seat the floor. Thank you.

Operator, Operator

Thank you. Next follow-up question is from the line of Sumeet Jain from CLSA India. Please go ahead.

Sumeet Jain, Analyst

Yes, hi. Thanks for the opportunity again. My second question is around the retail vertical growth sustainability. I think last entire year, we mentioned that because of high interest rates and inflationary environment in the U.S. This vertical had subdued growth. We saw a pretty strong sequential growth here. How do you see the sustainability of growth in CY '25? And post the U.S. election outcome, do you see any client sentiment changing particularly in this vertical?

Jayesh Sanghrajka, CFO

So Sumeet, the Q3 growth in retail was also helped by some of the third-party deals that we talked about earlier. But as I said, and Salil said as well, the retail in the U.S. and CPG in the U.S. are seeing a revival in terms of growth on the back of strong holiday season sales as well as the consumer sentiment changing. At this point, we are seeing revival and interest from clients in terms of spending, which should ideally reflect into growth in the next few quarters.

Sumeet Jain, Analyst

Right. And secondly, in terms of the GenAI rollout, are you seeing any specific verticals where the impact is slightly higher in terms of volume gains or increase in pricing?

Salil Parekh, CEO

So generative AI today is in discussion across almost every industry, most clients. Some of the examples that we were discussing earlier, like in a technology company. We are doing a lot of work in the telco area. And of course, in financial services, where we discussed overall segments, and the retail point we discussed. But generative AI discussions are more broad-based. Almost many clients have some internal, and then with us, some external activity going on.

Sumeet Jain, Analyst

Got it. That's helpful, Salil. And lastly, I just want to understand the 3.6% year-on-year increase in pricing you mentioned in the first nine months. What has been the primary factor behind that very strong increase in pricing?

Jayesh Sanghrajka, CFO

So Sumeet, this is Jayesh here. This is the program that we've been running on margin expansion, and there is one dedicated pillar, which is value-based selling. There are multiple tracks beneath that. I think many of those tracks have started yielding results, whether it's change requests or differential pricing, etc. And all of that has yielded results in multiple ways. Of course, even the lean automation is also reflected in pricing eventually, right? Because we're able to deliver the same output with fewer people, it will reflect in pricing. So all of that would show up in pricing.

Sumeet Jain, Analyst

All right, that's helpful. So that's all I had. Thanks for the opportunity again and all the best.

Jayesh Sanghrajka, CFO

Thank you, Sumeet.

Operator, Operator

Thank you. Next question is from the line of Abhinav Ganeshan from SBI Pension Funds. Please go ahead.

Abhinav Ganeshan, Analyst

Hello. Thank you for the opportunity and congratulations on a great set of numbers. I just wanted some more clarity on this third-party software packages, which have risen to around 9.5% of revenue for the current quarter. I think in your comments, you alluded to retail vertical taking up some of that. If you can give some more clarity, are there any more verticals you would like to call out and also geographies?

Jayesh Sanghrajka, CFO

So Abhinav, we don't really split this by geographies and verticals. There was one specific question that Sumeet asked, and I was responding to that question. But we can't really break this up by geography or vertical.

Abhinav Ganeshan, Analyst

Okay. Just to follow up on this, but I just wanted to understand if you can give a broader color. Now if you looked at it in the last two years, if you look at it, our cost takeout deals have gone up compared to the discretionary spends. Now discretionary expenses are returning. So this number has trended up from around 6% to 9.5%. So once discretionary comes back, do you feel that this will kind of stabilize and maybe then trend down later, if you can comment on this?

Jayesh Sanghrajka, CFO

So Abhinav, as I said earlier on the call, this is going to be dependent on many of the large deals that we sign and what the controls of those large deals are. If the large deal is one where we are taking over people, process, technology from the client and providing an end-to-end solution to the client, it will come with some of these third-party costs like hardware, software, etc. And that will automatically show up on our books as cost. But then we are providing an integrated solution to our clients, which is much more secure in the long-term. So that is how it is. It is going to depend on what part of the deal or the larger deals come through as a lock stock and barrel program where we take over everything from the client.

Abhinav Ganeshan, Analyst

Got it, sir. Appreciate the same. One last question from my side. If I look at your utilization, it's around 86%. So what would be your comfort zone going forward, at least for the next quarter and the next year? And how would we get there? If you can give some color?

Jayesh Sanghrajka, CFO

So as I said earlier as well, utilization comfort level is 83% to 85%. This quarter, we are a bit above that. But yes, what would be more comfortable in a growth environment would be 83% to 85%.

Abhinav Ganeshan, Analyst

Appreciate the color. That's all from my side. Thank you and all the best.

Operator, Operator

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

Salil Parekh, CEO

Thank you. This is Salil. So first, thank you everyone for joining in. Just wanted to share a couple of observations. Very strong growth in this quarter, especially financial services, U.S. financial services. Europe now starts to see traction in discretionary retail consumer products, U.S., all of those good signs for us. Extremely strong cash generation, good large deals with very good net new. Continued deep capability building and traction on generative AI with our clients. And with that, an increase in our growth guidance, for the third consecutive quarter. So we continue to see, as the environment starts to be more supportive in FS, retail, the execution that we are driving within Infosys resonating with our clients, and we continue to see that traction with the increase in the guidance for the third consecutive quarter. Thank you, everyone, and catch up with you at the next quarterly call.

Operator, Operator

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