Fractal Q1 Results LIVE | CEO Srikanth Velamakanni On 92% Profit Jump, AI Demand & Growth Outlook

Great. When we went public last year, earlier this year, one of the most frequently asked questions was why do you not make money all the time? Like why are your margins inconsistent? So I think we have built the muscle to consistently improve our profitability. Over the last three quarters, we have shown that we can make very steady margins. We were always very good at gross margins but bringing that to even margins and net profit, I think we've built the discipline to improve our profitability consistently over the last few months. So that's number one. So it's a disciplined execution that's resulted in that. From a growth standpoint, we've had a 20% growth quarter-on-quarter last year and excluding TMT that growth would have been 35%. I would have been much happier with the 35% if that was the overall growth but today we have to settle for 20%. We expect that we would like to be growing faster because the overall expansion in the total addressable market and the kind of demand expansion and explosion we are seeing in AI is incredible and really if you're growing at 20% it's because our execution is lacking. We need to improve our execution to increase our growth rate overall.

See, overall I can't specifically comment on FY27, but we would like to build this company in such a way that we can deliver a much higher level of growth for a continuous period of time, for a sustained period of time over the next 3 to 5 years. Now FY27 is a change, this is just, we've just gone public. AI is changing the shape of demand in a very significant way and therefore we have to factor that in in the way we think of growth. We've also reorganized Fractal in a way that really addresses the massive demand that is coming through and we've called these three vectors as AI Transformation or AIT, AI Foundations AIF, and AI for Work and Workforce Reimagination AIW. Now what are those? AIT is essentially about the biggest opportunity in companies is to reimagine every business workflow. Whether it's my operations workflow, my supply chain workflow, finance workflow, it's my customer understanding, all of these can be reimagined with AI. You can dramatically improve your decision making and not just automate a dumb process, but to reimagine the process in an AI native, AI smart way. That's AIT. AI Foundation is about building the foundations that can create that, which is about building the knowledge layer, the ontological layer or the context layer as it's being called, the harness layer, so that AI can get better. And three is in an AI first world I have to reimagine my talent, I have to reskill them, upskill them and make them work alongside with agents. So I have to think of an organization differently, so how do we help that. So these are the biggest drivers of demand and as we execute against these, we will see tremendous sort of growth for Fractal in the coming few quarters and years.

Yes. So, our adjusted EBITDA margin is at roughly 17% up from 15% same quarter last year. We would like our adjusted EBITDA margin to hit something like a 20% for Fractal overall and 22% for the Fractal.ai business. So that is the goal, that's where we want to go and we should get there sooner than later. Right? That's really the kind of trajectory we want to be in. This is completely feasible given our current gross margins of between 46 and 50%. It automatically lends to a higher EBITDA margin as well. It's just that we have some of those things to play out and there is also a seasonality effect. First quarter is usually the lowest margin quarter for us and by fourth quarter our margins expand. So you will see that quarter-on-quarter our margins will expand till the fourth quarter to get us to as close to that number as possible.

Yeah, I think that's a misconception because every single year first quarter profitability is lower than the fourth quarter profitability because in the first quarter we'll have to adjust for the fact that we have salary increases. We have a significant bunch of people joining us from campus hiring and so on which creates the first quarter related profitability pressures but steadily margin expands over the next two three quarters and this has been something that's happened with Fractal for many many years. So it's something that we understand quite well. So the best way to look at is year-over-year and you rightly pointed out that our year-over-year profitability numbers are pretty impressive.

Yeah, firstly I would blame our execution more than blaming the market or the world or something else because eventually it is our execution. Overall AI demand is exploding very nicely. So we should have executed better. Now having said that if you want to look at structural reasons that could be happening it is that some of the very big tech companies, all of the very big tech companies, many of them are our clients and they are moving from AI opex to AI capex. They're significantly expanding data center capacities, buying chips and making significant AI capex commitments and in the process there is pressure on AI opex and really that's something that you are seeing in how they are thinking of working with people like us and therefore there is some short-term pressure there but we expect the TMT vertical to work itself out even as early as next quarter. So sequentially TMT will start to show some growth as early as Q2.