Fractal Analytics Ltd Q1 FY2027 Concall Summary

Key Takeaways

• Strong headline growth, one vertical drags: Revenue grew 20% YoY (9% CC), but excluding the TMT vertical, growth would have been 37% YoY. TMT declined 22% YoY as big tech clients shifted spend from opex to AI capex.
• Profitability levers firing: Adjusted EBITDA margin expanded 189 bps YoY to 16.8%, driven by operating leverage in SG&A. Net income nearly doubled, and gross margin expanded despite headcount investment.
• Demand shape is transforming, not shrinking: AI is compressing project timelines (a year-long project done in a month) but multiplying the number of deals (1,000 vs 10). Ad hoc analytics and dashboard work is going to zero, replaced by AI workflow re-imagination.
• Investing through the cycle: R&D spend rose 31% YoY, with a stated intent to take it to 10% of revenue funded only by expanded gross margins. The Fractal Alpha segment loss widened as product investments scaled.
• What to watch next quarter: Whether TMT delivers the promised sequential growth recovery, the size and details of the landmark healthcare AI foundations win, and any disclosure framework for Cogentiq revenue.

TMT Vertical: The Drag and the Bet

• The mechanics of the decline: Big tech clients nearly doubled their AI capex, creating opex pressure that directly reduced spending on Fractal's services. Management declined to discuss client-specific issues going forward unless dramatic, taking accountability for its own performance.
• Bottoming-out call: Management stated TMT performance is bottoming out and expects healthy sequential growth next quarter, driven by new deals from existing clients. The worst is behind, but no specific recovery magnitude was given.
• Concentration risk easing: One TMT client that was above the INR 2 crore threshold slipped below it, reducing the count of such clients from six to five. Top 10 client concentration decreased to 51.8% from 55.9% a year ago.
• The ex-TMT story: Excluding TMT, overall growth was 37% YoY, with Healthcare & Life Sciences up 69%, BFSI up 36%, and CPG & Retail up 19%. Management emphasized that clients are growing and deepening relationships when looking past the overall number.

Srikanth Velamakanni: "There is a lot of opex pressure when capex has gone up by this much. Therefore, you are seeing big adjustments taking place in the TMT industry in terms of how they look at the overall spends and allocating more of that to capex and less of that to opex."

AI Demand Transformation

• Work compression, deal multiplication: AI compresses work so that a year-long project can be done in a month, which shrinks individual deal size but multiplies the number of deals from 10 to 1,000. Management argues the revenue opportunity expands, not shrinks, because companies will spend more on tech overall.
• Budget migration to core: Enterprises are moving AI into their core budget, and AI addressable spend is dramatically improving. Ad hoc analysis and dashboard building are going to zero, replaced by AI workflow re-imagination, AI foundations, and workforce re-imagination.
• Partnerships becoming deal gateways: Five of the largest deals this quarter came through a partner. Partnerships with Databricks, OpenAI, and Anthropic were created, and management is building this as a new muscle, though partnership-led revenue has been small historically.
• Cogentiq platform gaining traction: Early wins with more than 10 clients. Specific products built include Cogentiq Underwriting for insurance, and offerings for e-commerce, supply chain, and customer service. License revenue is currently 3% and expected to go north of that.

Srikanth Velamakanni: "Something that we would have taken a year to do could be done in a month, which means that that per se looks like it shrunk, but there are now 1,000 such deals rather than 10 such deals earlier."

Margin & Profitability Walk

• Gross margin: Expanded 29 bps YoY to 45.7%. A weaker rupee drove 273 bps improvement, offset by 75 bps from the annual merit increase and 169 bps from headcount additions to support future growth.
• Adjusted EBITDA: Margin improved 189 bps YoY to 16.8%, from 15% to 17%. SG&A reduced from 26.2% to 24.3% of revenue, demonstrating operating leverage. Adjusted EBITDA grew 35% on 20% revenue growth.
• Net income: Grew 92% to INR 72 crore; margin expanded 296 bps to 7.9%. Excluding share of loss in associate Qure.ai, net income was INR 95.7 crore or 10.5%. ESOP charges declined to 1.2% of revenue from 1.4%.
• Seasonality note: Q1 profitability is always a little lower than following quarters; YoY is the better comparison. Over the last three earnings calls, gross margins and EBITDA margins have been improving quarter-over-quarter.
• R&D funding discipline: Management will continue to increase R&D spend as a percentage of revenue, targeting as much as 10%, but only on the back of expanded gross margins. A portion of expanded margins will flow through to higher R&D spends the next quarter.

Segment & Investment Deep Dives

• Fractal Alpha: Revenue grew 20% YoY with a 65% gross margin. Segment loss widened from INR 4 crore to INR 14 crore, largely due to the integration of iqigai and EdTech teams from Fractal.ai into Analytics Vidhya. Operating leverage is expected as the integrated unit scales.
• Qure.ai: Share of loss increased slightly from INR 22 crore to INR 23 crore YoY, but Qure.ai's own revenue grew 160% YoY to INR 24 crore. Backlog substantially increased to INR 100+ crore vs INR 20 crore same time last year, with a big jump expected from H1 to H2.
• Asper: Revenue was flat in Q1 but ARR is up 59% in dollar terms to $9 million. The timing gap between contract signing and revenue recognition means H2 should be much stronger.
• R&D investments: INR 61 crore invested, 31% higher YoY; INR 41 crore (4.5% of revenue) expensed. Building Cogentiq, Asper, and Analytics Vidhya. Management is pushing for faster R&D-to-revenue conversion, working backwards from revenue.
• Balance sheet: Long-term debt fully repaid in April 2026 from IPO proceeds. Cash from operations was negative INR 103 crore due to variable pay payout for the previous fiscal year in Q1, but 20% better versus the same period last year. DSO improved from 73 to 71 days.

Srikanth Velamakanni: "Yes, R&D is super important, but you have to have revenue in mind and work backwards from revenue, and you will see some of that alignment also kind of streamline and improve our overall R&D productivity as we go forward."

Strategic Moves & Organizational Changes

• CFO transition: Ashwath Bhat is departing after 5.5 years for personal reasons. Successor identification is in progress; more details will be shared once the process is completed.
• Go-to-market reorganization: Brought under a new Chief Commercial Officer, Matt, with three vectors: AIT (AI-led Transformation), AIF (AI Foundations), and AIW (AI for Work and Workforce Re-imagination). Management expects growth to dramatically accelerate once the reorganization settles.
• New leadership hires: Leandro appointed Chief Practice Officer for Banking and Financial Services; a new head of Europe is being hired; new leaders are being brought into parts of the business with significant growth opportunities. Europe growth, currently at 25%, is expected to meaningfully accelerate.
• Landmark healthcare win: Won one of the largest single programs in Fractal's history: building AI foundations for a large healthcare player and modernizing their data estate using AI. More details expected within a few days.
• BMC MoU for Vaidya.ai: Signed an MoU with Mumbai's municipal corporation to pilot Vaidya.ai (Cogentiq Health) across several public hospitals. The pilot will be evaluated on staff training, citizen feedback, and doctor experience before a citywide rollout decision. A successful citywide rollout becomes a blueprint for other states and cities.
• Revenue mix ambition: Management wants to get the outcome/output/license mix to 60% over the next few quarters.

Ashwath Bhat: "It has been a privilege representing Fractal over these last five-and-a-half years. I would like to thank my incredible finance and legal team, Srikanth and Pranay, our executive team, especially Satish, with whom I have spent countless hours, 6,000+ Fractalites, and our Board of Directors."

Guidance & Commitments

Key Metrics