AI slows growth for Infosys and keeps it afloat at the same time

Savings derived from automation are impacting the pricing of extended agreements, creating a mixed picture for Infosys regarding AI's influence.

The Indian tech services giant reported a 29 percent sequential increase in AI revenue during its latest quarterly results, which now accounts for 10.5 percent of Infosys' incoming cash. This contrasts sharply with the 1.5 percent year-on-year revenue growth reported for the second quarter.

Chief financial officer Jayesh Sanghrajka informed investors that "Growth was below our expectations. Volume was softer, and price increases were lower than anticipated amid high competitive intensity." A factor contributing to reduced price hikes is that clients anticipate Infosys will charge less when leveraging AI, with those cost savings now "baked in" across multi-year contracts.

CEO and managing director Salil Parekh also cited AI as a driver for service cost declines. He observed, "I think what we see today is there is definitely some of our peers who are putting, I would say, more intense effort into the pricing pressure," adding that this trend is widespread due to the environment and the discussion around AI productivity, especially when clients discuss large programs over a three or five-year outlook.

This situation leaves Infosys reliant on securing new AI-driven work to elevate revenue growth, even as AI complicates growth from established clientele. Sanghrajka affirmed that Infosys intends to maintain margins around 21 percent and will not lower prices to secure deals, referencing "a large deal that we walked out of, or we did not pursue because it did not meet our return expectations."

To safeguard its margins, the firm is implementing "Project Maximus" to streamline internal operations, alongside incorporating AI-powered tools aimed at winning more sales.

The company anticipates challenging months ahead, as Sanghrajka noted that services spending has slowed in the retail and high-tech sectors, and the second half of Infosys’ financial year typically presents a slower period.

Despite these headwinds, Infosys attempted to reassure investors by highlighting $8.8 billion in new deals secured during the first half of its financial year, 68 percent of which involved net new customers, suggesting the fundamentals remain solid. However, the outlook became less optimistic; in Q1, the company forecast full-year revenue growth between 1.5 to 3.0 percent, subsequently revising this in Q2 to a range of 1.0 to 2.0 percent.