Infosys 3.0 may take a back seat for now
5 min read 11 Oct 2013, 09:31 AM ISTInfosys raises lower end of its full-year guidance from 6% to 9%, keeping the higher end unchanged at 10%
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Bangalore: Infosys Ltd’s chief executive officer (CEO) S.D. Shibulal and finance chief Rajiv Bansal on Friday stressed the need for a greater focus on traditional, large outsourcing deals in a sign the company’s controversial 3.0 strategy of earning more revenue from newer areas of technology such as big data, analytics and cloud computing may take a back seat for now.
After Infosys posted better-than-expected 3.8% growth in dollar revenue and raised the lower end of its full-year forecast, both Shibulal and Bansal spoke about the importance of tapping demand for plain-vanilla information technology (IT) services—a theme stressed by N.R. Narayana Murthy, who returned from retirement to become executive chairman in June.
CEO Shibulal said the company needs to win more large outsourcing contracts to recapture its past glory. As part of the 3.0 strategy that he drew up, Infosys had aimed at earning one-third of its revenue from new technology areas.
“In terms of large deal wins, to take stock of what we have now is not enough for a company of our size and we need to focus more on that," Shibulal said at a post-earnings press conference.
“The right strategy in the long run is to definitely move up the value chain, focus more on products and platforms," chief financial officer (CFO) Bansal said in an interview. “Now what we’ve articulated is that in pursuit of the strategy, we also have to take care of the near future... If you keep focusing on your large transformational deals and the business is actually on the ADM (application development and maintenance) space, you’re actually missing out on bigger material. So, I think the long-term strategy is right, but we have to focus and make tactical changes depending on how the environment is."
Experts tracking the company said Infosys could put the 3.0 strategy on hold for now.
The 58-year-old Shibulal also signalled caution and played down hopes of stronger times ahead for a company that over the last two years has underperformed its own expectations and lost significant market share to faster growing rivals.
“Two quarters don’t make a secular trend," Shibulal said. “Last quarter I said one quarter does not make a secular trend. I believe it is true even today."
In a traditionally strong September quarter, revenue rose 15% to $2.07 billion, marking the first time that the company has passed the quarterly $2 billion mark. Net profit was down 11% to $383 million from last year, largely because of visa-related costs arising from an investigation by the US government.
Analysts had been expecting net profit of $425.75 million on a revenue of $2.06 billion, according to Bloomberg estimates.
The revenue increase lifted the stock by as much as 7.5% in early trade on BSE before it closed up nearly 5% at ₹ 3,273.90 on a day the benchmark Sensex gained 1.26% to close at 20,528.59 points.
The results bode well for India’s other top IT firms such as Tata Consultancy Services Ltd, which reports results next week, and will boost the confidence of investors in a sector likely to witness its strongest quarter of the year.
Infosys also declared an interim dividend of ₹ 20 per share compared with ₹ 15 during the same period last year.
Investors and experts tracking the company cheered the results, saying the revenue growth indicated that the former IT bellwether could be on the way to rediscovering its form after more than two years of underperformance. In that time, the company had missed its own expectations and lost market share and the IT flag-bearer tag.
“A second consecutive quarter of decent revenue growth suggests that Infosys’s revenue engine seems to be getting back on track after 18 months of severe flux," said analyst Nimish Joshi at CLSA India in a post-earnings note to clients.
Infosys raised the lower end of its revenue growth forecast for 2013-14 to 9% from 6%, keeping the top end of the range at 10%, signalling greater confidence after it signed five new deals and booked $400 million of total contract value in the July-September quarter, adding to the seven it signed in the preceding three months.
“Traditionally Q3 and Q4 (third and fourth quarters) are weaker quarters... We need to see consistent performance at least for four-five quarters to really believe that our sales engine is now able to deliver sustainable growth. We therefore all felt that it’s probably better not to change the (upper end of the) guidance," CFO Bansal said.
The 9-10% forecast, though, is still lower than industry lobby Nasscom’s forecast of 12-14% growth for India’s software export revenue in 2013-14, but experts said that would not concern investors too much.
“While a section of the Street might be disappointed by the lack of increase at the upper end of the FY14 (fiscal 2014) revenue guidance, we are not too concerned," Joshi added. “Given Infosys’s poor performance in the March quarter in the last three years, which led (it) to miss (out) on full year numbers, it is natural to expect Infosys to be cautious. We expect the upper end to be easily beaten given the current momentum in the business."
As for the visa-related costs, Infosys in a statement issued separately said it was in the middle of an investigation by the US government on the company’s use of B-1 visas.
“Infosys is engaged in discussions with the US Attorney General’s office and other government departments regarding a civil resolution of the government’s investigation into the company’s compliance with Form I-9 requirements and past use of B-1 visas," the company said. “Based on the status of those discussions, Infosys has set aside a reserve of $35 million including legal costs. Because the discussions are ongoing, Infosys cannot provide additional details at this time."
Murthy is overseeing an organizational overhaul since taking over in the last quarter, which saw the exits of several top-level executives, including Americas head Ashok Vemuri and global sales head Basab Pradhan.
Shibulal explained that the steps taken by executive chairman Murthy’s office such as cost optimization, strengthening of the sales force, increasing productivity through automation and moving more work offshore, would take time to reflect in the numbers.
“Those changes are at a very early stage," he said.
Bansal said that the next fiscal year would be better for Infosys, driven by investments the company is currently making to strengthen its sales workforce and improved discretionary spending from clients.
Infosys, which stopped giving quarterly guidance last year after missing its own estimates twice, also indicated that it could resume quarterly forecasts next year, depending on whether the company recaptures sustainable growth.
“It’s always going to come up for discussion. Nothing permanent has been decided on this," Bansal said, when asked whether the company would resume quarterly forecasts.
