Infosys Q4 results disappoint as growth sputters

Infosys March quarter results show a 0.7% sequential rise in dollar revenue to $2.57 billion, allowing it to end FY17 with a 7.4% y-o-y growth and $10.21 billion in revenue


Despite three downward revisions in annual growth, Infosys could manage only a 8.3% full-year growth in constant currency terms, missing the  guidance of 8.4-8.8% made in January. Photo: Hemant Mishra/Mint
Despite three downward revisions in annual growth, Infosys could manage only a 8.3% full-year growth in constant currency terms, missing the guidance of 8.4-8.8% made in January. Photo: Hemant Mishra/Mint

Bengaluru: Infosys Ltd reported subdued earnings for the March quarter and gave a weak forecast for 2017-18, suggesting that India’s second largest software services company has to do more to become a next-generation services-led company and meet its target of $20 billion in revenue by 2020.

In the January-March period, Infosys reported a 0.7% sequential rise in dollar revenue to $2.57 billion, allowing it to end fiscal year 2016-17 with a 7.4% year-on-year growth and $10.21 billion in revenue. Embarrassingly for the management, despite three downward revisions in annual growth, Infosys could manage only a 8.3% full-year growth in constant currency terms, missing the guidance of 8.4-8.8% made in January.

Net profit declined 0.8% to $543 million in the March quarter, from $547 million in October-December. In rupee terms, revenue declined sequentially by 0.9% to Rs17,120 crore, while net profit declined 2.8% to Rs3,603 crore.

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A Bloomberg survey of 34 analysts had forecast Infosys to report revenue of $2.68 billion, or Rs17,283.7 crore, in the quarter. The analysts estimated the company to report a net profit of $554.4 million, or Rs3,564.1 crore, in the period.

Infosys expects its dollar revenue to expand between 6.1% and 8.1% in 2017-18, lower than the growth projected by Nasdaq-listed Cognizant Technology Solutions Corp., which follows a January-December fiscal year and expects to grow between 8% and 10%.

In constant currency terms, Infosys now expects 6.5-8.5% growth for the full year.

Infosys’s lower growth guidance of 6.1-8.1% in 2017-18 means the firm expects less incremental revenue this year. In 2015-16, it reported a 9.1% growth and did $790 million in incremental business. In 2016-17, it managed $707 million in new business. The guidance of 6.1-8.1% means it expects to add between $600 and $800 million in new business.

Q4 results: Has Infosys’s recovery dissipated before it even started?

Another area of concern is Infosys’s lower profitability estimate of 23-25% for the current fiscal year—it has operated in a 24-26% band over the last few years—which implies that even as the firm sees pricing pressure for commoditized deals, it has been unable to sell more value-added services.

Even though chief executive Vishal Sikka has tried to make engineers embrace newer ways of design thinking and tried to steer the firm to focus on building platforms, for now, it is struggling to change the way it has traditionally done business.

This is the biggest worry ahead for the management, with the firm appearing to be unable to scale up business from newer offerings even as the core services business appears to be “structurally breaking down”, according to two equity analysts and one industry executive.

This fact is disappointing because until the start of last fiscal year, Infosys appeared to be in the early stages of a turnaround.

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“We believe the top-line weakness and the lower-than-expected FY18 guidance is driven by the application services (Infosys had the highest exposure of 64% of its revenues to application services among peers in fiscal 2016) weakness (amid threat from cloud and SaaS, or Software as a Service) and low penetration in digital services,” Goldman Sachs analysts Sumeet Jain and Saurabh Thadani wrote in a note after Infosys declared earnings.

Still, the management put up a brave face. “Yes, we have had challenges but I think we are progressing well despite all the macroeconomic challenges, pricing pressure and the distractions we have had over the last quarter,” Sikka said. The distractions he is referring to are the two public spats between Infosys co-founder N.R. Narayana Murthy and the board, where the former raised issues of corporate governance and disproportionately high salaries to the CEO and COO.

Although Infosys will likely grow faster than both Tata Consultancy Services Ltd and Wipro Ltd in 2016-17, its growth is lower than the 8.7% reported by Cognizant in 2016. TCS declares its earnings on 18 April and Wipro declares its fourth-quarter results on 25 April.

Industry body Nasscom also avoided giving a growth outlook for India’s $150 billion outsourcing sector in February, on account of the uncertain macroeconomic outlook.

“In order to get the stuttering sales engine firing again, Infosys needs to articulate its strategy in a more nuanced way and drive it through the organization,” said Thomas Reuner, managing director of IT outsourcing research at HfS Research. “Infosys urgently needs to focus on sales execution.”

Investors punished the stock, which fell 3.71% to Rs932.90 on BSE at the close on Thursday, dragging the benchmark Sensex down 0.61% to 29,461.45 points.

Infosys’s poor performance also hurt Sikka, who earned $6.7 million in 2016-17, less than the $7.3 million he earned in 2015-16. Sikka got $3.7 million of the promised $8 million performance related pay, despite a clause in his employment contract allowing him to end his contract if his total compensation of $11 million fell more than 10%.

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