Earnings Call Transcript - INFY Q4 2025

Operator, Operator

Ladies and gentlemen, good day, and welcome to Infosys Limited Q4 FY '25 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. 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.

Sandeep Mahindroo, MD

Hello, everyone, and welcome to Infosys Earnings Call for Q4 and FY '25. Joining us on this earnings call is CEO and MD, 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. Kindly note that anything we say which refers 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 explanation of these risks is available in our filings with the SEC, which can be found on www.sec.gov. I'd now like to pass on the call to Salil.

Salil Parekh, CEO

Thanks, Sandeep. Good evening and good morning to all of you. Thank you for joining us on this call. We had an excellent year in financial year 2025. Our revenues grew at 4.2% in constant currency terms, and the operating margin was 21.1%. We generated $4.1 billion in free cash flow, and we had $11.6 billion in large deals. In Q4, we had year-on-year growth of 4.8% and an operating margin of 21%. We are seeing growing demand from clients to partner with them on AI; they are moving from a use case-based approach to an AI-led transformational approach with AI agents playing a critical role. We're working on AI projects by bringing Infosys Topaz, a generative and agent AI-powered services and solutions for their benefit. Our AI work spans a wide spectrum of priority areas like process improvement, engineering, customer service, cybersecurity, and employee productivity. We are helping a large U.S. financial services company navigate the AI transformation to deliver hyper-personalized conversation AI-powered customer experience with an accuracy of over 80%. We are working with a Europe-based company to create a master solution driving multiple AI-first transformation projects, automating 70% of the process landscape. We continue with our strategic expansion with acquisitions: one in the energy consulting space in the U.S., one in cybersecurity in Australia, and a new strategic partner joining our joint venture in Japan. All of these are areas of interest and strategic focus for the company. We have a set of capabilities that support our clients in their growth areas related to AI, cloud and digital and in their efficiency areas related to automation, cost reduction, lean, and consolidation. Based on what we are seeing in the environment today and building on the large deal wins in the past quarters, our guidance for growth for financial year '26 is 0% to 3% in constant currency terms. The environment is uncertain, and we will execute our plans with agility while keeping a close watch on events as they unfold. Our margin guidance for financial year 2026 is 20% to 22%. With that, let me pass it on to Jayesh for his views.

Jayesh Sanghrajka, CFO

Thank you, Salil. Good morning, good evening, everyone, and thank you for joining the call today. We entered financial year '25 with significant uncertainties relating to interest rates, elections in large geographies, and geopolitical situations. Over the course of the year, the reduction in uncertainties and our strong market position, reflecting robust deal wins and improvement in discretionary spending in financial services, led to better growth than our initial projections. A year ago, when I started my journey as the CFO of Infosys with a vision to increase our market share, strengthened collaboration with business, drive project Maximus to expand operating margins and improve cash flow, I’m very glad that we have been able to achieve success in each of these parameters. Let me start by talking about the key highlights for the quarter and the year. We closed the year with revenues at $19.3 billion, a growth of 4.2% in constant currency terms and 3.9% in reported terms. Acquisitions contributed 80 basis points to the growth in financial year '25. Financial Services, Europe, and manufacturing grew above the company average for the year. I'm particularly glad that operating margins for the financial year improved by 50 basis points over FY '24 to 21.1 after absorbing multiple headwinds. This has been a key focus area over the last year, and I will elaborate on this later. Sequentially, revenue declined by 3.5% in constant currency terms due to a reduction in third-party costs and seasonal weakness. Approximately two-thirds of the sequential revenue drop was due to a reduction in third-party costs, with the decline being higher than our expectation. The balance one-third drop was due to volume decline and lower calendar and working days driven by Q4 seasonality. Revenue increased by 4.8% on a year-on-year basis in constant currency terms in Q4. Europe grew three times the company rate at 15% in constant currency terms driven by our focused approach of client mining, ramping up our large deals, and acquisitions. Europe now accounts for 30% of our revenues. Financial Services and Manufacturing grew in double digits year-on-year at 12.6% and 14%, respectively, in constant currency terms. In rupee terms, revenue growth for FY '25 was 6.1%. Revenue growth accompanied by operating margin expansion led to 8.3% growth in EPS terms on a normalized basis, adjusting for interest on tax refunds for FY '24 and '25. We closed 2024 large deals in Q4 with a TCV of $2.6 billion; 63% of this was net new. For the full year, we closed 96 deals with a TCV of 11.6% and 56% net new. DSO reduced by 5 days to 69 sequentially. Further, the DSO, including unbilled net of unearned, reduced by 3 days to 83. Free cash flow for FY '25 was the highest ever at $4.2 billion, which is 129% of net profit. Adjusted for tax refund, it stood at $3.5 billion, which is 112% of net profit. Headcount at the end of the year was 323,578, an increase of 6,000 year-on-year; attrition remained contained at 14.1%. Operating margin for Q4 was at 21%, a decline of 30 basis points sequentially, bringing the financial year margins to 21.1%, an increase of 50 basis points from FY '24 level. The major components of the sequential margin change for the quarter are as follows: a headwind of 140 basis points from compensation-related costs, a 40 basis points impact from acquisition, mainly on account of amortization of intangibles, partly offset by a tailwind of 80 basis points from lower postpaid customer support, 30 basis points from Maximus, 20 basis points from currency movement, and 20 basis points from lower third-party costs. Higher travel and visa costs were offset by lower other costs leading to a decline of 30 basis points sequentially. Utilization, excluding trainees, stands at 84.9%. The on-site mix further reduced to 23.6%. We hired 15,000 freshers this year and expect to hire over 20,000 freshers in FY '26. EPS increased by 1.8% in financial year '25 in rupee terms on a reported basis and 8.3% adjusted for interest on tax refund. The increase in margins by 50 basis points over FY '24 was achieved despite multiple headwinds from salary increases, higher variable pay, impact from large deal ramp-ups and acquisition-related amortization. These headwinds were more than offset by combined benefits from various tracks under project Maximus, especially value-based selling, lean and automation, improvement in critical portfolio and utilization, etc. We have been able to institutionalize these initiatives and make a structural shift in our approach. We expect project Maximus to further aid in margin improvements from current levels. Consolidated cash and cash equivalents stood at $5.56 billion at the end of the year. Yield on cash balance was 7.13% in Q4, and ROE stood at 29%. Coming to cash flows, FY '25 free cash flows are the highest ever at $4.1 billion, an increase of 42% year-on-year. Free cash flow as a percentage of net profit for the financial year was 129%. We expect FY '26 free cash flows to be above 100% of net profit. Excluding income tax refunds, our free cash flows for the year were at $3.5 billion, up 21% year-on-year. Free cash flow as a percentage of net profit was at 112%. We expect the effective tax rate for financial year '26 to be in the range of 29% to 30%. The Board has proposed a final dividend of INR22 for financial year '25; including the interim dividend, the total payout for FY '25 will be INR43, an increase of 13.2% once the final dividend is approved by the shareholders. We closed 24 deals in Q4 with a TCV of $2.6 billion, 63% of this being net new. Vertical-wise, we signed seven deals in financial services, five in Europe, four in manufacturing, three in communication, two each in high-tech and Life Sciences, and one in retail. Region-wise, we signed 12 large deals each in America and Europe. Coming to verticals, in Financial Services, budgets are flat to slightly higher in AI-regulatory compliance and cost management. We anticipate steady growth in Capital Markets and Cards & Payments in large global banks and U.S. regional banks. The mortgage sector is expected to see an uptick in spend as interest rates reduce going forward. Our investment in AI-related propositions, regulatory compliance, risk mitigation, and cost management is expected to create growth opportunities. We have been selected as an AI partner for many of our clients. The manufacturing sector has grown in double digits over the last few years; for CY '25, budgets are lower for Auto and Industrial Manufacturing and flat for Aero. Recent challenges in terms of tariffs, market uncertainties, and trade buyers are likely to lead to subdued spend and delayed decision-making. Weakness in Auto, especially in Europe, continues. We are helping clients in Aerospace resolve bottlenecks in the supply chain. The pipeline remains healthy with a focus on cost takeouts, opportunities in infra transformation and consolidation, and some traction in ERP modernization programs. The retail sector has been impacted by economic uncertainty, resulting in lower consumer spending in core markets due to recent tariff announcements. Client budgets are expected to be tightened, and there is increased caution. Decision cycles are getting stretched for discretionary spending and larger deals. Across geographies, there is an increased focus on AI, cloud, asset modernization, cost takeout, and investing in core tech capabilities. The energy utility resources and services sector continues to grow, and we see a strong pipeline of opportunities both from existing and potential clients. Energy prices remain volatile. However, new markets in midstream and downstream energy are opening in the U.S. region. There is increased M&A and tax-related work with service clients focusing on cloud migration and vendor consolidation. Utilization is prioritizing AI-driven enterprise transformation and services and is seeing traction in software services and IPD. The acquisition that we announced today will strengthen our vertical expertise and open new buying centers in energy trading and risk management areas. The communications sector continues to remain soft, with discretionary funding under pressure as clients focus on cutting costs, restructuring, and consolidation deals. Our growth will be led by recent deal wins and opportunities in areas like cost reduction, AI, database solutions, and cybersecurity. Lower interest rates could improve the profitability of telco OEMs, which in turn can help increase IT budgets. In high tech, most clients remain cautious due to the macroeconomic headwinds and tariff announcements, with discretionary spending still remaining under pressure. There is increased margin pressure due to committed spending on data centers. As we exit FY '25, global uncertainties related to tariffs and the impact of debt on client sentiments and spend are taking center stage. Based on our assessment of the current macroeconomic environment and the visibility we have today, we expect FY '26 growth to be 0% to 3% in constant currency terms. This excludes the acquisition we announced today and assumes a reduction in third-party revenues versus FY '25 based on existing deals and the new deals in our pipeline today. Our operating margin guidance for the year is 20% to 22%. We will continue to keep a close watch on the economic environment and its impact on our client budgets and reassess our guidance as we progress during the year. With that, we can open the floor for questions.

Operator, Operator

The first question is from Ankur Rudra from JPMorgan. Please go ahead.

Ankur Rudra, Analyst

Thank you. On the fourth quarter, can you talk a bit about the linearity?

Operator, Operator

Ankur, sorry to interrupt you. Your audio is not clear. Can I request you to come to a better reception area, please?

Ankur Rudra, Analyst

Okay. Is it better now?

Operator, Operator

No, sorry, network is not clear at your end.

Salil Parekh, CEO

Ankur, is this better? Go ahead, Ankur.

Ankur Rudra, Analyst

All right. Thanks. Okay. So the question was in terms of the fourth quarter, can you talk a bit about linearity? Did the softness or the relative miss to guidance play out only in March? Or was there something you saw over the course of the quarter?

Jayesh Sanghrajka, CFO

Ankur, as I said earlier, two-thirds of our decline was on account of third-party costs and the revenue related to that. Some of the deals that we had in the pipeline had slipped, so this decline was higher than what we anticipated. The balance was the usual Q4 seasonality and the volume decline that we saw. But two-thirds of our 3.5% decline was on the back of third-party cost and revenue.

Ankur Rudra, Analyst

I appreciate it totally. I was curious if that played out more in March or if that played out over the course of the entire quarter.

Jayesh Sanghrajka, CFO

Yes. So generally, these deals happen towards the end of the quarter, and that's where it slid from there.

Ankur Rudra, Analyst

Okay. Understood. If I talk a bit about the guidance, it seems to imply something like 0.8% to 1.9% as it relates for the rest of the year. Could you highlight that this will be a normal seasonality? Or is it going to be different given the heightened uncertainty you might be seeing right now?

Sandeep Mahindroo, MD

I'm sorry, can you repeat the question? I wasn't very clear.

Ankur Rudra, Analyst

The guidance, does it imply a normal seasonality for the year?

Jayesh Sanghrajka, CFO

Yes. So as we said earlier, we do see heightened uncertainty in the environment, and that's the reason we have given a 3-point guidance. Depending on which end of the guidance you are looking at, the seasonality will also change, and uncertainty will also change. But outside of that, we are expecting normal seasonality.

Ankur Rudra, Analyst

Okay. Understood. Just the last question. You mentioned the AI-led transformation that clients are anticipating from you. Are you integrating AI into existing projects that could potentially lead to any revenue decline that you need to address?

Salil Parekh, CEO

Hi, Ankur. This is Salil. So first, AI is part of all the discussions on the new deals. We are using AI in many of our existing programs. But here, we are seeing benefits that relate to how we can now use AI with clients in different areas. So as a composite, what we saw last year 4%, 4.2% growth, we feel pretty confident that we will see benefits from it even as we see some productivity improvement. So we don't see anything in terms of the revenue on that.

Ankur Rudra, Analyst

Okay. Appreciate it. Thanks, and best of luck.

Operator, Operator

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

Kumar Rakesh, Analyst

Hi, good evening. And thank you for taking my question. My first question was you spoke about that the third-party slip towards the end of the quarter. So how has the volume trend during the quarter? And does that imply that as they come back in the next quarter in the guidance you are expecting the third-party contribution to be higher in FY '26?

Jayesh Sanghrajka, CFO

If you look at what I said through the quarter, we had a softer start at the beginning of the quarter from a volume perspective, but we did see some recovery there in terms of volumes. But on the third-party, we are expecting for FY '26, the third party to be lower than FY '25, considering the deals that we have signed and the deals that we have in the pipeline. So that is baked in.

Kumar Rakesh, Analyst

And volume trend during the quarter?

Jayesh Sanghrajka, CFO

Yes. The volume trend during the quarter, we had a softer start in January, generally, the soft month, and then the volumes started stacking up. And we saw a similar trend this quarter as well.

Kumar Rakesh, Analyst

Okay. My second question was from a longer-term perspective over the last 2, 3 years, we have seen all the fraud which was created in many of the deals with very low ROIs being signed. They were reassessed by the clients. And many of them were ramped down, and we saw the impact of that in terms of revenue growth. Do you see there is still some scope left if clients start reassessing the projects again if the macroeconomic uncertainty continues for a little longer? Is there more of reassessment of the projects which may again start happening the way we have seen over the last year or two?

Salil Parekh, CEO

Hi. First, the changes that we have seen in the economic environment impact has happened very recently and over a short span. Having said that, the discussions we've had, specifically on some of the deals we have signed in the recent quarters, we have not seen a change in that, like the trajectory that we were anticipating at this stage. However, we'll keep a lookout on that as we develop it.

Kumar Rakesh, Analyst

Thanks for that, Salil. Just a clarification. So my question was more around that ROI is now that we are offering in terms of the lease which we are doing for the client. Now has it on a portfolio level, has it improved so that we are no longer at risk if such a reassessment happens? Or do you still see that there are some of the projects, which are at risk, which could be reassessed?

Salil Parekh, CEO

What we observed in the past was that clients reduced their discretionary spending or paused their projects. If the situation worsens significantly from our current state, clients may reconsider some of their spending. However, at this time, we are not observing any significant changes in that regard.

Kumar Rakesh, Analyst

Great. Thank you.