Fractal Analytics Q3FY26 AI Summary

Business Performance Highlights

Revenue grew 21% YoY to ₹854 crores in Q3 FY26, with 7% sequential growth
Healthcare and Life Sciences vertical delivered exceptional 78% YoY growth, becoming the fastest growing segment
Net Revenue Retention (NRR) at 114% for Q3 and 115% for 9-month period, demonstrating strong client expansion
Must-win clients (MWCs) increased from 113 to 127, with 83% revenue concentration from these large clients
Clients generating $1M+ revenue increased from 53 to 58 on trailing twelve month basis
Won Microsoft Partner of the Year 2025 award in retail and consumer goods category
Secured preferred supplier status with two of the 'Magnificent Seven' tech companies
Launched Vaidya 2.0, achieving world's first 50+ score on OpenAI Health Bench Hard benchmark, and PyEvolve agent achieving 60%+ on OpenAI's MLE Bench

Executive Summary

Fractal Analytics delivered a strong Q3 FY26 with 21% YoY revenue growth to ₹854 crores, crossing ₹100 crores in quarterly PAT for the first time. The company demonstrated robust client metrics with 114% NRR, 127 must-win clients, and industry-leading 47% gross margins, while maintaining significant AI R&D investments at 4% of revenue that position them uniquely as a pure-play enterprise AI provider.

Financial Performance

Revenue for Q3 FY26 was ₹854 crores, representing 21% YoY growth (14% on constant currency basis) and 7% QoQ growth (5% constant currency). For the nine-month period, revenue grew 20% YoY (15% constant currency), entirely organically. Gross margin expanded to 47.2% in Q3, up 17 bps YoY, driven by 115 bps benefit from shift to output-based contracts, price increases, and productivity improvements. Adjusted EBITDA was 17.8% in Q3, up 43 bps YoY, with SG&A declining by 30 bps to 25.3% of revenue. PAT crossed ₹100 crores milestone at ₹100 crores (11.7% margin), up 10% YoY despite ₹19 crores loss from associate Cure.ai (vs ₹3 crores prior year) and forex headwinds reducing other income. R&D spend remained at 4.1% of revenue. Cash from operations was ₹129 crores in Q3 (16% YoY growth), with DSO improving by 14 days to 78 days. Cash and equivalents stood at ₹816 crores. Fractal Alpha segment grew 51% YoY in 9-month period with 276 bps gross margin expansion, reducing segment losses from ₹54 crores in FY23 to ₹10 crores in 9-month FY26.

Revenue

₹854 crores in Q3 FY26

Revenue Growth

21% YoY (14% constant currency), 7% QoQ (5% constant currency); 9-month: 20% YoY (15% constant currency)

Net Profit

₹100 crores in Q3 FY26 (11.7% margin)

Profit Growth

10% YoY despite associate losses and forex headwinds

EBITDA Margin

17.8% adjusted EBITDA in Q3 (up 43 bps YoY); 16% for 9-months

Management Commentary

Management displayed high confidence, with CEO Srikanth Velamakani emphasizing Fractal's unique positioning as a pure-play AI company with deep R&D capabilities that differentiate it from generic competitors. The tone was bullish on AI adoption acceleration and Fractal's ability to capture enterprise workflow transformation opportunities. Management stressed their commitment to expanding gross margins (already best-in-class at 47%), accelerating revenue growth, and continuing 6-8% R&D investments even as they grow. They highlighted strategic focus on must-win clients (10-20-30 criteria: $10B revenue, $20B market cap, or 30M customers), with confidence that client perception of Fractal has strengthened given their specialized AI capabilities. The emphasis on output-based and outcome-based models as margin-accretive opportunities showed confidence in delivery capabilities. Management positioned R&D investments as revenue and margin accelerators rather than costs, targeting benchmark AI results and credibility building. The articulated goal of building '100-year institution' and generating '$1 billion of impact for each client' reflected long-term ambitious thinking.

Risks & Challenges Discussed

CPG and retail segment, representing 36% of revenue, showed modest 14% YoY growth due to tariff and macroeconomic uncertainties, particularly impacting the year's start with Liberation Day announcements creating client spending delays. Telecom, media, and technology segment experienced 2% YoY degrowth due to two client-specific issues: one telecom client in Australia going through restructuring, and one US technology client - both contributing to volatility. APAC region declined 6% YoY due to client-specific issues. Associate company Cure.ai faced significant headwinds from USAID cuts, increasing losses from ₹3 crores to ₹19 crores (2.2% of revenue), impacting overall profitability. Forex losses reduced other income from ₹24 crores (3.4% of revenue) in Q3 FY25 to ₹2 crores (0.2%) in Q3 FY26. The company acknowledged that enterprise AI adoption remains 'moderate' because AI accuracy doesn't consistently match/exceed human performance in every application, limiting near-term addressable market. Fractal Alpha showed sequential revenue decline in Q3 due to cyclicality in Analytics Vidhya (Data Hack Summit timing) and slower Asper new client additions from CPG/retail uncertainty. Generic competition and strategic partner consolidation by clients pose ongoing competitive risks, though management expressed confidence in their differentiated positioning.

Forward Guidance

Revenue Outlook: Management expects to continue historical 30% CAGR growth trajectory (achieved over last 10 years, 29% over last 5 years) as AI enterprise adoption accelerates, though noted not every year hits 30% with some quarters affected by macro factors. No specific numerical guidance provided but emphasized accelerating revenue growth as key objective.

Margin Outlook: Management committed to expanding gross margins from current best-in-class 47% level, with flow-through to EBITDA and PAT margin expansion. Excluding 4.1% R&D spend, adjusted EBITDA would be 22% for Q3 (vs reported 17.8%). Expect SG&A to decline as percentage of revenue through operating leverage and AI-driven productivity improvements.

Key Targets:

Generate at least $1 billion of impact for each must-win client
Continue 6-8% of revenue investment in AI R&D, potentially expanding absolute investment
Expand gross margins through increased output-based and outcome-based engagement models
Achieve two-thirds revenue visibility entering each fiscal year from order book, renewals, and weighted pipeline
Scale must-win clients and $1M+ client cohorts
Build institution for '100 years'

Key Takeaways from the Call

What Went Well

Strong NRR of 114-115% demonstrates deep client relationships and expansion potential, with existing clients contributing 14-15 points to growth
Healthcare and life sciences vertical growing at 78% YoY, becoming fastest growing segment with Vaidya 2.0 achieving world-first benchmark results
Gross margins at industry-leading 47% with clear expansion runway through output-based models and productivity improvements
Must-win client base expanded from 113 to 127 (12% growth in 9 months) with deepening relationships evident in revenue concentration at 83%
Secured preferred supplier status with 2 of Magnificent Seven tech companies, validating enterprise AI capabilities
PAT crossed ₹100 crore milestone with 10% growth despite significant headwinds (Cure.ai losses, forex), showing underlying business strength
AI R&D producing tangible results: PyEvolve ranking in world's top agents (60%+ MLE Bench score), Vaidya achieving 50+ Health Bench Hard score
DSO improved 14 days to 78 days showing strong collections; cash from operations up 16% YoY (38% adjusting for one-time items)
Revenue per billable employee up 6% in rupee terms showing productivity gains
Fractal Alpha losses reduced from ₹54 crores (FY23) to ₹10 crores (9M FY26) with 51% revenue growth and 276 bps gross margin expansion

Areas of Concern

CPG and retail vertical (36% of revenue) showed only 14% growth due to tariff and macro uncertainties, with business impacted at year start by Liberation Day announcements
Cure.ai associate losses ballooned from ₹3 crores to ₹19 crores (2.2% of revenue) due to USAID cuts, significantly impacting PAT
TMT segment experienced 2% degrowth with two client-specific issues (Australia telecom restructuring, US tech client reduction)
APAC region declined 6% YoY due to client concentration risk with telecom client issues
Forex headwinds reduced other income from ₹24 crores (3.4% of revenue) to ₹2 crores (0.2%), a ₹22 crore negative swing
Management acknowledged enterprise AI adoption remains 'moderate' as AI doesn't consistently match human accuracy everywhere, limiting near-term TAM
Fractal Alpha showed sequential revenue decline in Q3 due to seasonality and slower new client additions in Asper
Overall growth rate of 21% below historical 30% CAGR target due to CPG vertical headwinds (rest of business grew 25-26%)
Client churn, while modest at ~1% annually, contributed negative 0.5 points to Q3 growth
Heavy R&D investment at 4.1% of revenue (with plans to potentially increase) pressures near-term margins despite long-term strategic rationale

Analyst Q&A Highlights

Q: Can you provide revenue growth and margin guidance for next 1-2 years, and where do you see adjusted EBITDA margins stabilizing?

A: "Management expects to continue historical 30% CAGR trajectory with accelerating AI adoption. Gross margins (currently 47%) will expand, flowing through to EBITDA and PAT expansion. Excluding 4.1% R&D spend, adjusted EBITDA would be 22% vs reported 17.8%. They expect SG&A improvements through AI-driven productivity tools like PitchDark (sales) and Ikigai (hiring). No specific numerical guidance provided but clear commitment to margin expansion alongside revenue acceleration."

Q: Why is EBITDA margin lower than peers despite significantly higher gross margins? What's the path to improvement?

A: "Management highlighted that 4.1% R&D spend directly reduces EBITDA by 4 points versus peers who don't have AI R&D. They've already improved SG&A by 7 points over time and expect continued improvement through operating leverage and AI tools. Gross margin expansion through output-based models plus SG&A efficiency will drive EBITDA from current 17.8% toward 22%+ excluding R&D. Historical trajectory shows adjusted EBITDA improved from 7% three years ago to 18% now."

Q: How has Fractal's client perception changed with evolving technology landscape, and are you at risk of clients consolidating strategic AI partners?

A: "Management expressed high confidence that perception has strengthened. As AI accelerates, clients need more specialized, higher-quality vendors with deep AI R&D. Generic competitors without AI research are struggling. Fractal's pure-play AI positioning with demonstrated R&D outputs (Vaidya, PyEvolve, Fathom) creates 'special place' even in vendor consolidation scenarios. Evidence: NRR at 114-115%, MWC expansion to 127, and clients see Fractal as one of very few credible enterprise AI names."

Q: What are the different outcome-based engagement models you can underwrite due to your AI capabilities that others cannot?

A: "Management highlighted output-based (not pure outcome yet, which is quite limited) engagement models where Fractal manages entire projects end-to-end using productivity tools and AI, delivering higher margins. Their Cogentic platform, deep domain expertise in workflows like revenue growth management, and AI R&D capabilities enable them to confidently underwrite outputs. They're actively converting existing relationships to output/outcome models as these are 'gross margin accretive.' Pricing separates model inference costs (charged directly to clients) from Cogentic platform license fees."

Q: Where will incremental R&D spend be allocated and how do you assess efficacy of these investments?

A: "Three allocation areas: (1) Fractal.ai business - tools like PyEvolve agent to accelerate ML productivity and expand margins; (2) Cogentic platform - building best-in-class agentic AI for enterprise workflow transformation; (3) Vaidya healthcare model - aiming for India AI mission to serve 1.4B people and achieve frontier AI. Efficacy measured by: accelerated revenue growth, gross margin expansion (long-term), benchmark AI results (medium-term), and platform adoption by clients and internal teams."

Q: Can you provide more color on the two client-specific issues in TMT vertical (Australia telecom and US tech)?

A: "Australia telecom client undergoing internal restructuring impacting spend. US technology client reduced business. Management noted these situations happen occasionally when clients face their own business challenges. The Australia client was 'not a typical Fractal client' in terms of scale (doesn't meet 10-20-30 criteria), hence more volatility. These issues reflected in overall ~1% annual churn rate. Not considered unusual but rather normal course of business for any services company."

Call Summary

The Q&A session revealed analyst focus on three main areas: (1) growth and margin guidance/trajectory, (2) competitive positioning and defensibility in evolving AI landscape, and (3) R&D investment rationale and returns. Analysts were particularly interested in reconciling Fractal's industry-leading 47% gross margins with EBITDA margins that appear lower than some peers, seeking clarity on the path to margin expansion. Management responded confidently throughout, emphasizing that 4.1% R&D spend explains much of the EBITDA gap and positioning these investments as strategic accelerators rather than costs. On competitive concerns, management was notably bullish, arguing that AI acceleration favors specialized pure-play providers like Fractal over generic competitors, with client metrics (NRR, MWC growth, NPS of 77) validating this thesis. Concerns about CPG vertical headwinds from tariffs and two client-specific issues in TMT were acknowledged but characterized as temporary/manageable rather than structural problems. The tone from management was consistently optimistic about AI-driven enterprise transformation creating 'massive opportunities' for Fractal, while demonstrating operational discipline through gross margin expansion and SG&A efficiency improvements. Analysts appeared generally satisfied with responses, though pressed for more specific numerical guidance which management declined to provide beyond historical context and directional commitments. The associate company Cure.ai losses drew some attention but management treated this as a separate issue not reflective of core business health.