My second question was more of a near term. So, over the last 2 quarters, we have seen the large deal TCV has picked up and you have been reporting above $3 bn of large deal TCV. And you have also spoken about vendor consolidation being one of the trends which is driving the deal signings. Looking at these large deals which you have won, how comfortable you are of their margin as they ramp up and start contributing into your revenue?
Large deals, we don't disclose the margins separately, as you know. But what we are clear on, is that we have a fairly disciplined approach as we take them on. And there, in many ways, what Satish was sharing with you, we have our Chief Delivery O fficer, Dinesh, they are both involved actively at the very start of many of all of the large deals to make sure that before we go into it, we understand what the issues are as best as possible and maintain that margin profile at the start and through the program itself. So, we are comfortable. We don't disclose the margin separately, but we don't see some unusual margin impact because of that also.
Appreciate that color. And secondly, this may be the first time we have heard you mention forward-deployed engineers. Can you unpack how they compar e relative to the teams of forward-deployed engineers that software companies are scaling? Potentially how those pools of talent are competing and whether there are higher costs associated with your forward-deployed engineers versus your traditional engineer?
So, there, Satish should also add a little bit. Let me start off. We have been using the capability of the forward-deployed engineers across our AI landscape for some time. We want to make sure that that is something we share externally. We are not commenting on the cost or nature of t hose, but they are different groups within the company in the past as well, for example, we ha ve other groups called power programmers and so on, which have different costs within our delivery structure. And so, we will use the appropriate level of cost depending on which market those engineers are operating in to fulfill that work for our clients.
And just last question on that part since you have come in, I know it might sound too optimistic. Could it actually lead to an unintended benefit that we do more of nearshoring and offshoring and that could possibly be a margin lever for us or for the industry?
Difficult to say at this point in time. But I mean, mathematically, if you do more nearshoring and more offshoring, it should mean more margin, but it depends on to what extent you are able to do offshoring, nearshoring and to what extent we will end up doing more local hiring. So, I think it is going to be a balanced act there.
Firstly, I want to understand the impact of AI on your and IT services industry’s revenue growth profile. Do you think the deflationary impact is higher than the volume growth opportunity? And maybe if you can give us a sense on your renewed deals, how much is compression due to AI versus incremental scope expansion?
This is Salil. So, there, we see 2 types of thin gs for AI. One, growth opportunities, where we see clients are starting to look at leveraging AI, whether it is in their sales function, their marketing function, how they can drive growth from it. And the second, as you point out, is more productivity or efficiency for different processes and activities within their company. Today, with the economic environment where it is, there is a lot of interest and focus on cost reduction, and that is where we see a lot of the initial work coming in. Some of the things that we are seeing, for example, the discussion we had a litt le while ago on modernization. Those discussions are much more about growth because it is not something that the company, a client is doing at all. It is a question of how they will do it, how it will be leveraged. So, at this stage, I don't have a view on which of these two factors will be larger or smaller, but we certainly see a lot of growth opportunities from what we can deliver with AI.
That is helpful. And maybe my second question is around, of course, this year, macro is pretty weak because of tariff-related uncertainty. But if the ma cro improves next year due to tariff uncertainty going away, do you think the IT services industry growth would be higher next year compared to this year, ignoring how AI will play around?
That is a very good question, if I could answer that. It is difficult to say from our side, meaning we think basically that when the macro improves, the tech improves. But now, we will see how that plays out. That’s typically been our experience from the past, but I don't have a view like for next year, how it will look.
Any color on margins for Versent? And the other one was, other questions were on furloughs versus last year and any pickup in small deals?
So, furloughs at this point in time, we do not expec t to be significantly different than the last year. And we do not disclose margins of the acquisitions.
Salil, my first question was a little of medium to l ong term. So, there is a lot of companies who have announced their capex plans for setting up the AI dat a centers. And many of these companies are our ecosystem partners. We do go to market along wi th them. We partner with them in many of the projects. In all these conversations of these capacity expansion and potential modernization in the future, are we having any conversation with them how Infosys can partner with them in the future for implementation and inference work potentially in t he future? Any of your conversation which is happening with them that you can share?
If I understood that, the question was there are partners of Infosys who are building large AI capability and are we partnering with them? So, yes, we are partnering with them. So, you look at any of the large players who are building out AI capability today. And it is at different levels - we are looking from the chip to the infrastructure to the models to basically deployment. So, there are different layers of that. And in each of those, we have, as Satish was just pointing out, several partnerships, which are going pretty well.
So, my question was that at some stage, they wi ll start looking at modernization, enterprise implementation of inferences on those large capacities. Will we be participating in any of those, any of the conversation happening on the modernization side in the future and Infosys participation in that?
So, on the enterprise side, we will participate, but the modernization is a big part of our play. So, what is happening there, in fact, is the enterprise modernization business will get a huge benefit from AI. So, before the AI, the enterprise modernization, legacy modernization had a certain time duration and a certain ROI. With many of the AI tools, that is improving quite dramatically. So, once those AI tools are in good shape and stable and so on, we see modernization as a big growth opportunity.
I wanted to ask on deal activity and kind of average sizes. Can you comment on what you are seeing in some of the smaller deal activity? Any changes there versus the prior quarter? And then just on the signings, so the TCV has been healthy now for 2 quarters. Can you comment on just how ACV levels in new work that you are booking may be trending?
So, on the smaller deals, no real change, it is simi lar to what we have been seeing so far. On the large deals, the vast majority of them is focused on cost reduction, vendor consolidation, using AI for productivity, lean automation, those sort of areas. On ACV, again, no real comment. We don't see a change that this quarter's large deal had a different type of ACV than last quarter, essentially a simila r type of structure. But again, we don't share the ACV numbers separately.
And then my follow-up on the delivery and the operat ing model. So, I am curious how you may see the delivery mix changing beyond Fiscal '26 when you consider navigating the visa changes next year. Just understanding you have a majority of your employee base in the U.S. that are not on visas. But as we look at the numbers, subcon mix, pi cked up here in the quarter, while your offshore mix also rose. So, I am curious if you think those two trends will continue? And where do you think the potential ceilings of those are as it relates to offshore mix and subcon usage?
So, on the subcon, I don't think that is a long-term lever in terms of how we will change the mix. There will be ups and downs as we go through the next few phases of this . The approach we are taking is, we built over the years what we call localization in all of our geographies outside India and especially in the U.S., and that comprises of buildi ng local technology up, so local recruiting, near-shore centers, which are ones around, for example, Canada, Mexico, other places in South America and then offshore. Now, it will be a combination of these that we are us ing or we will use further in the future to make sure that essentially our overall delivery approach remains consistent for the clients. We don't have a view on where the offshore ratio will end, but we do see from some early cl ient discussions that there will be an increase over time in what they want to offshore.
Can you help us unpack the step down in utilizat ion despite the step-up of subcontractor usage? Where are the potential skill gaps or pyramid gaps that you are looking to fill by using your subcontractors?
So, if you look at our subcon a couple of quarters back (editor comment – few years back), it was in the range of 11%. It has come down now to 8.5%. So , there has been a consistent effort to bring it down on a long-term basis. Having said that, on a quarter-to-quarter basis, there could be ups and downs depending on the demand that we have, the skills that we have, at which location the skills are and you would dip into subcon or you would wind down subcon accordingly. So, that is how the subcons typically are there. Typically, the subcons are used to bridge the skill gaps across the projects that we deliver for the clients. We don't expect at this point in time the subcons to increase signifi cantly from the current levels.
Salil, just a question on the overall uncertainty that we are facing in the environment, especially in the light of the recent H-1B visa hike. So, just wanted to pick your brain as to, first of all, I mean, in the near term, let's say, in the last couple of week s or few weeks that that event has passed by, did we see a heightened level of uncertainty, which ma ybe might have led to some of the deals being pushed off and some of the concerns cropping up from the clients? And from a longer-term point of view, I know we and many, most of the industry experts have basically explained that this should not be a big det errent in terms of our business model. But how do you see this change changing the business model? I mean, do we believe that there is a possibility of higher offshoring that can be done now with this when companies try to avoid the higher H-1B visa fee and clients would also be amenable to that? C ould that be, let's say, an unintended benefit that could actually trickle by because of this event that took place?
So, on the short term, I am not sure I followed everything, but basically, we have not seen any change if that was the question in the short term. On the medium, long term, the model will change as we were discussing earlier, which is essentially, we have been working on localization for quite some y ears in most of our markets outside India, so U.S. also. So, there will be more work in our technology hubs and centers there with local employees. There will be more nearshore work. There will be more offshore work. And that is the approach that we will put in place, essentially ensuring that the client delivery remains in a good place. So, that is what we see. If you are looking at like, let's say, some percentages and so on, we don't have that sort of a view, but that is the general approach and the model change that we see coming.
A bit farfetched maybe, but let's say, if we try to do more of nearshoring and offshoring, do you think clients would be okay with this? Because let's be honest. I mean, I am assuming that at this point of time before, let's say, the announcement, we were operating at a specific onsite to offshore ratio, which we would have tried to optimize by ourselves. So, if there was a specific onsite presence, it would have been maybe requirement of the client, maybe requirement of regulator or our own requirements. So, would it be easy to get this th rough to move that business? There will be some part, as you rightly said, that you will have local hi res. But the part that we are planning to move to nearshore and offshore, how easy or difficult will it be for clients to accept that?
So, this is a broad approach. We will work jointly with each client to define specifically how it will work for the client. It is a little bit if you go back to the time when there was the COVID, everyone was working remotely for so much time, and we just figured it out. We were quite adept at it at that time. So, now there is a model that we have built. We are working with clients. What we do feel is quite comfortable that we will not have any constraints in client delivery through different levers in the model. It is not that one lever. Some clients may have a different lever and some may have another type of lever, but we feel comfortable with that.
Jayesh, in your prepared remarks, you called out a 70-basis point impact from higher post-sale customer support, I am just reading from the transcrip t. Is that a normal thing? Or is that something different? What is that about?
So, James, if you recollect last quarter, we had a benefit on this. So, on a quarter-on-quarter basis, it is an impact from a margin walk perspective. This quarter, it is at a normalized level. So, last quarter is where we had a benefit.
Now I remember. I apologize. I got it. And then in terms of your offshore/onsite, what you are contemplating longer term, I was just wondering, how do you think about AI delivery impacting the regionalization of your headcount, AI delivery? And does AI impact where your people need to be?
Hi, this is Salil addressing that point. I think we already see projects where we have agents, which is with AI working alongside the people on the project. So , that will also be part of this new delivery model. There is one change which is based on the vi sa discussion we were having. And everything with or without the visa will be changed with the agent s and how that will work over time. So, those are two different sorts of trends, but they will both come together and sort of the ratios and so on will develop as we build out the business.
So, maybe, Salil, prodding it further, do you think the IT service budgets of your clients are expanding due to AI?
So, there, what we see now is, a lot of companies are in mode of a lot of cost control with the changes in the economic environment. So, it is difficult to ascertain what they will use it for in different economic environments. So, today, if I look at it, whether it is AI or non-AI, meaning we do a lot of work on, let's say, consolidation. We do a lot of work on automation, non-AI automation. So, there is a real interest from clients that, look, can you help us through these ot her techniques, also reduce cost. And that is the predominant way that we are looking, we are seeing some of the large deals come about. My sense is as there are AI approaches, which are showing clients where they can impact the business on the growth side and where the economic environment supports it, we will see more and more of those opportunities.
So, a couple of questions. So, one is you spoke about volumes being sort of flattish where realizations being a bigger driver of growth. If you could help contextualize what is driving that? So, that is the first one. The second is any color you can give on the Versent JV, both in terms of when it could sort of accrue the kind of revenue or margins there? And finally, your thoughts on how do you see furloughs this time versus last year? And in terms of smaller deals, do you see any pickup?
So, Nitin, this is Jayesh here. Let me take that. We did say that volumes were softer and the large part of the growth came from the RPP expansion. Part of that was because we had a higher working day and calendar day this quarter, which reflects in pr icing in a way. The part of that is also Project Maximus, where we have been trying to drive or getting the effective pricing increases through various levers within that, and that is where it has helped in terms of revenue. Your second question was on Versent. We haven't been able to close that yet because it is pending for few of the regulatory approvals. So, as, and when we get the approvals, we will announce the closure. At this point in time, we do not know. We expect it to be closed in this year, but we do not know the exact timelines, and therefore, it is not baked in the guidance at this point in time. The last year revenue was around Australian $210 mn. So, that is all I can give you as a reference to put in an estimate once it is closed.
Perfect. Any pickup in small deals that you have seen?
I think small deals have remained similar as compared to last year. The overall pipeline continues to remain strong. There is nothing unusual to call out there.
I have a question on your second half outlook. Now we understand the seasonal factors and probably that is what is driving decline at the midpoint of the implied guidance. But I just wanted to get a sense that this year, deal wins has been strong, then you have closed $1.6 bn deal, which if my calculation is right, is a $100 mn-plus ACV deal. So, is it just your conservatism at this stage, given Q4 generally is weaker? Or is there anything else that is restricting you from raising the upper end of the guidance?
So, Abhishek, like we have always said, the way we look at guidance is to reduce the asymmetry of information between us and the investor community . At this point in time, based on the various models that we run, that leads us to various leve ls of guidance, and that is how we have arrived at the guidance. Like what we have been saying for the last couple of quarters, at the lower end of the guidance, we have baked in elevated level of uncertainty and at the upper end of the guidance, we have baked in a stable environment. Having said that, as you know, H2 is softer from a seasonality perspective. We have lower working days, lower calendar days, higher impact from furloughs , etc. So, all of that impacts our H2 versus H1. And we also need to remember that we have delivered a stronger H1 versus many of our peers. So, from that perspective, the H2 automatically gets impacted.
So, maybe a quick follow-up on the mega deal you ju st announced. Is it expected to start ramping up this fiscal year? And what would be net new contribution, if you can call that out?
Abhishek, the deal that we have announced is completely 100% net new, and it will start ramping up this year.
Jayesh, just wanted to understand, in your guidanc e assumption for the second half, are you also expecting further lower pass-through, the third-party item sales? Because in the first half, it has been 7.4% versus 8.2% for the whole year last y ear. And generally, Q3 sees seasonal strength on the third-party items. So this time, you believe it could not show the strength, and it could be further down from 7.4% in the 1H versus what you expect in 2H?
Yes. So, Sandeep, like we said at the beginning of the year, this year, we expect the third party to be lower than what we had last year, and we expect the similar trend to continue. So, we do not expect unusual growth or unusual elevation in third party in Q3.
And second, just the follow-up. In terms of seasonal softness, which is reflecting in your 2H implied guidance, what was the urgency to deploy 8,000 net additions in the employee side? Can you explain the high recruitment versus seasonal softness in the 2H?
So, Sandeep, it is a factor of the demand and supply environment. We are already at 85% utilization. And we also onboarded 12,000 freshers. So, that just talks about the visibility that we have in our business.