Infosys Q3 Earnings Preview: AI Strategy Faces Crucial Test
Infosys Ltd heads into its December-quarter earnings announcement with significant attention on its artificial intelligence strategy. The company faces a pivotal moment as it navigates uneven demand in the technology services sector.
Chief Executive Salil Parekh completes eight years at the helm this month. His tenure makes him the second-longest serving CEO in Infosys history, trailing only co-founder N.R. Narayana Murthy who led for 21 years.
AI Strategy Evolution
Infosys is actively reworking its approach to artificial intelligence. The company moves beyond simply passing productivity gains to clients. Senior executives now focus on making AI offerings enterprise-grade through the Topaz platform.
"Clients were not getting much from our Topaz offering except productivity gains," said an Infosys executive familiar with the matter. "They would prefer Microsoft's Co-pilot because it comes with the entire Microsoft product line."
Management responds to this feedback by recalibrating flagship AI offerings. The recent partnership with Cognition represents this shift. Infosys plans to deploy AI agents capable of handling complete software engineering work rather than automating isolated tasks.
Demand Environment Challenges
The broader demand picture remains mixed for IT services companies. Tata Consultancy Services recently suggested discretionary technology spending might improve. HCL Technologies offered a more cautious assessment, pointing to continued weakness.
Geopolitical tensions in West Asia add another layer of uncertainty. Muted demand for IT services could further weigh on market sentiment. Investors will closely track Infosys's commentary on demand conditions during the earnings call.
Revenue Levers and Pressures
Infosys growth in a subdued environment depends on two key developments. The company needs successful ramp-up of its $1.6 billion mega deal with UK-based healthcare provider NHS. This contract was signed in October last year.
Simultaneously, Infosys faces revenue loss from its Daimler contract. The eight-year, $3.2 billion deal with the German auto major has encountered challenges. Reports suggest it results in annual revenue reduction of at least $150 million.
HSBC analysts note Infosys has the highest exposure to the US market among Indian IT peers. "We expect macro-related uncertainty in the US to wane," they wrote in a January research note. "This should improve decisions by US companies for IT budget expansions."
Margin and Hiring Considerations
India's new labour codes create one-time expenses for IT companies. TCS and HCLTech together earmarked $350 million for gratuity and provident fund contributions. While currency movements could help margins, these costs might pressure profitability.
Infosys guides for hiring 20,000 freshers this fiscal year, up from 15,000 last year. However, management previously indicated fresher requirements would decline over time. With AI automating entry-level coding tasks, and peers reducing headcount, hiring plans warrant close observation.
Previous Quarter Performance
In the September quarter, Infosys reported sequential revenue growth of 2.7% to $5.08 billion. Net profit reached $839 million. Operating margin improved by 20 basis points to 21% despite tepid demand.
The company narrowed its full-year revenue growth guidance to 2-3% for FY26. This conservative outlook reflects the challenging environment facing technology services providers.
As Infosys prepares to announce third-quarter results, investors seek clarity on multiple fronts. The company's ability to monetize AI, navigate demand uncertainty, and manage margins will determine market reaction. Salil Parekh's eight-year leadership faces one of its most consequential tests yet.
