Infosys Q2 earnings: Five things to watch out for today

Save for Vishal Sikka’s first full quarter as CEO in October-December 2014, Infosys has tweaked its annual forecast at every earnings announcement. Will it do so again?

Infosys CEO Vishal Sikka. Photo: Hemant Mishra/Mint
Infosys CEO Vishal Sikka. Photo: Hemant Mishra/Mint

Bengaluru: It’s a given that Infosys Ltd will scale back its full-year growth forecast on Friday, when India’s second largest software exporter announces its September quarter earnings.

Under chief executive Vishal Sikka, Infosys is finding it equally arduous to get right its full-year revenue forecast.

Save for Sikka’s first full quarter as the CEO in October-December period of 2014, Infosys has tweaked its annual forecast at every possible quarterly earnings announcement (Infosys sets out its full-year target in April every year, and the management could not have changed its guidance then).

How deep will the latest round of cut in growth outlook be? Will the management leave room for another change in January, when third quarter results are announced?

Going by the management’s past record, it will be greedy to expect that it’s done with any revision, and the company will certainly take a relook at its outlook in January.

This needs to be corrected. It’s time now that Infosys starts to articulate its growth projection better.

With this as backdrop, Mint brings to you five things to watch out for when Infosys declares its earnings on 14 October:

Revenue forecast: Brokerage BNP Paribas sees Infosys recording 2.2% sequential increase in dollar revenue (2.6% in constant currency terms) at $2.56 billion for the July-September period. Management is further expected to narrow its full-year dollar revenue growth to 8-9%. This could set alarm bells ringing for investors as this suggests that Sikka’s new measures to turnaround the company are taking longer than earlier expected.

Senior management exits and steps management is taking to arrest attrition: A bigger headache for Sikka in this financial year is turning out to be the departure among senior management ranks. Exits of senior employees is leading to poor execution, a reason Sikka conceded behind company’s poor 2.2% sequential dollar growth (1.7% in constant currency terms) during the April quarter.

Large deal wins and demand from top customers are central to Sikka’s $20 billion target: Since Sikka took over as boss, Infosys has improved its large deal wins in a quarter ($809 million in April-June period). Still, this remains short of management’s stated goal of more than $1 billion.

Additionally, Infosys continues to generate more business from its top five and top 10 clients. Although Sikka may not tweak the company’s target of becoming a $20 billion firm by March 2021, for now it needs to improve on both these metrics if the management expects to meet its goals.

Key metrics: Infosys wants to increase its productivity per employee and boost its profitability by 4 percentage points to 30%. However, since September 2014, revenue per employee has been declining. Its profitability, too, has remained under pressure as it has been the most aggressive in pricing, while trying to bag large deals.

Sikka did mention that one of the priorities for the management this year is to reverse this decline in revenue per employee. Infosys’s current FTE (revenue per employee deployed on projects) totaled $50,900 at the end of June quarter, and it’s about time Infosys started showing an improvement.

Add Infosys Consulting as the third weak area, behind Infosys BPO and EdgeVerve: One sore point in Infosys’s journey since September 2014 has been the underperformance of its EdgeVerve and Infosys BPO units. Together, both accounted for a little over 13% of its $9.5 billion revenue last year.

Although Sikka has said the management has arrested loss of business in the consulting practice in the second quarter, the fact is that the company is still not able to monetize well Sikka’s novel measures like AiKiDo to drive growth. All three units have new leaders, and hence management commentary on performance and road ahead will be watched.