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Are the same IT companies sending out strikingly different messages on business outlook?

Against the backdrop of fears of a looming slowdown, it could be argued that the management at IT companies don’t want to unnecessarily spook the markets by giving a dire outlook when there is no such impact. (Photo: iStock)Premium
Against the backdrop of fears of a looming slowdown, it could be argued that the management at IT companies don’t want to unnecessarily spook the markets by giving a dire outlook when there is no such impact. (Photo: iStock)

  • Why are guidance and commentary important? Management guidance and commentary help investors navigate short-term twists and turn in a choppy market.

Tata Consultancy Services Ltd kicked off the second-quarter earnings season when it declared its earnings on 10 October.

Thanks to a good order book, it was a given that TCS would do well. It did not disappoint as both growth and profitability beat analysts' estimates.

This was the quote attributed to chief executive Rajesh Gopinathan in the earnings press release: “Demand for our services continues to be very strong. We registered strong, profitable growth across all our industry verticals and in all our major markets. Our order book is holding up well, with a healthy mix of growth and transformation initiatives, cloud migration and outsourcing engagements."

“As clients prepare for a more challenging environment ahead, technologies like cloud that have been embraced now have to be fully leveraged to realize the promised value. TCS has the combination of contextual knowledge, technology expertise and execution rigour to deliver on this imperative," Gopinathan said.

Save for the word “challenging environment", the 92-word statement suggests all is well in the IT outsourcing space.

But Twich+ would like to suggest an alternative 93-word quote that perhaps gives a fair and complete picture of the on-ground demand environment.

“Demand for our services continues to be very strong. We registered strong, profitable growth across all our industry verticals and in all our major markets. That is not to say that deteriorating macro had no impact at all. We have seen some sporadic instances of delayed decision-making on new deals. While the strength of our order book as well as the pipeline for Q3 is somewhat comforting, given the volatility, we remain very vigilant and are staying very close to our clients."

Now, your writer did not make up any of these words. Gopinathan made these remarks in a post-earnings interaction with analysts. Again, it should be underlined that none of these phrases are cherry-picked from the hour-long analyst interaction, and these statements were made in full when the CEO was quizzed by the analyst.

Surprised?

Wait.

Three days later, on 13 October, Infosys Ltd declared its second-quarter earnings.

“Our strong large deal wins and steady all-round growth in Q2 reflect the deep relevance and differentiation of our digital and cloud solutions for clients as they navigate their business transformation", Infosys boss Salil Parekh said in prepared statements. “While concerns around the economic outlook persist, our demand pipeline is strong as clients remain confident in our ability to deliver the value they seek, both on the growth and efficiency of their businesses. This is reflected in our revised revenue guidance of 15%-16% for FY 23."

In the case of Infosys, the below 89-word statement (as against the published 86-word quote) tells the story better.

“Our strong large deal wins, and steady all-round growth in Q2 reflect the deep relevance and differentiation of our digital and cloud solutions for clients as they navigate their business transformation", said Salil Parekh, CEO and MD. “While we didn’t see any project cancellations in the quarter, we saw some slowness in discretionary spending in telecommunications, mortgages space in the Financial Services and parts of the retail industry. Still, our demand pipeline is strong, and this is reflected in our revised revenue guidance of 15%-16% for FY23."

This mismatch between the prepared remarks of a CEO in the press release and what he told analysts is most stark in the case of Wipro Ltd, which declared its earnings on 12 October. In fact, CEO Thierry Delaporte’s prepared statement in the press release and his remarks in the call with analysts gave an impression to your writer as if they were actually two different companies.

“Our strong performance in the quarter is further proof that our strategy is yielding the intended results. The solid growth in our bookings, large deal signings, and revenues underscores our improved market competitiveness and enhanced value proposition," Thierry Delaporte was quoted in the press release issued by Wipro. “Our ongoing investments in high-growth strategic areas have allowed us to steadily increase our win rate and enhance the quality of our pipeline. As a result of these efforts and our sharp focus on operational excellence, we are now seeing an improvement in our margins. We continue to invest in and upskill our talent to stay ahead of our client’s evolving needs. In the second quarter, we promoted more than 10,000 colleagues and increased salaries across bands. We are pleased to report that we recorded a third consecutive quarter of moderation in attrition. As the market conditions evolve, I believe our comprehensive portfolio of differentiated offerings position us extremely well to serve the changing needs of our clients and help them face the challenges of an uncertain macro environment with confidence."

Shareholders of Wipro could have been served better had the company, instead of the trite 168-word quote, used a shorter and simpler quote (like this 132-word statement made by your writer).

“Since July, we have seen the macroeconomic conditions across almost all markets and sectors have changed. In speaking to our clients every day, we are seeing a change in the level of optimism. As businesses around the world are dealing with inflation pressure, geopolitical turmoil, the energy crisis, also rising interest rates, almost every major economy is experiencing economic deceleration. And it’s against this backdrop that we delivered a strong quarter. Our business strategy is sound, and our value proposition continues to resonate with clients across markets. This is reflected in robust bookings, healthy deal signings, growth in revenues, as well as operating margins. Our guidance of 0.5-2% growth in constant currency terms in Q3 is because there will be furloughs in a seasonally weak quarter. We are cautiously optimistic."

Why are guidance and commentary important? Management guidance and commentary help investors navigate short-term twists and turn in a choppy market. More so in the case of TCS: India’s largest technology services company does not give forward-looking numbers on revenue growth or profitability.

Understandably, management commentary becomes sacrosanct.

Unlike TCS, both Infosys and HCL Technologies Ltd give a full-year revenue outlook in constant currency terms and estimate on profitability. Wipro only outlines a quarterly revenue target.

At the start of the financial year in April, Infosys had projected its full-year revenue to grow between 13% and 15% and guided its profitability to be between 21% and 23%. Last week, Infosys said it expects full-year revenue to grow between 15% and 16% and its operating margin to be between 21% and 22%. HCL, too upped its revenue guidance after it first outlined to grow between 12% and 14% with a profitability of 18% and 20%. Now the Noida-based company estimates revenue to grow between 13.5% and 14.5% with an at-best operating margin of 19%.

This could make one conclude that the demand for services is IT services is improving.

That is not true.

Simply because Infosys has grown much faster in the first six months of the current fiscal and the company’s reworked full-year guidance of 16% implies a slower compounded quarterly growth of 2% in the December and March quarters.

Wipro’s tepid at-best 2% sequential growth in the December quarter again underlines things are getting difficult for the country’s fourth-largest IT services company.

Both Infosys and Wipro acknowledge that the soft growth outlook is primarily on account of more holidays in the December quarter (which translates to fewer billings days and consequently less revenue).

Still, what is not clear is if the macroeconomic uncertainty is already biting into the growth of homegrown outsourcing giants.

Agreed, not many (including many journalists your writer knows of) bother to hear the analyst conference calls. And so goes the logic, companies don’t reveal bad news to the press.

But expecting ra-ra coverage in the press the day after earnings is silly. Staid earnings copies in the business papers did not help Wipro stock from the drubbing as it ended the day 7% down on 13 October.

Against the backdrop of fears of a looming slowdown, it could be argued that the management at these companies don’t want to unnecessarily spook the markets by giving a dire outlook when there is no such impact.

The least the companies can do is to avoid any perception of different commentaries when meeting the media and analysts.

ABOUT THE AUTHOR

Varun Sood

Varun Sood is a business journalist writing on corporate affairs for the last fifteen years. He also writes a weekly newsletter, TWICH+ on the largest technology services companies. He is based in Bangalore. Varun's first book, Azim Premji: The Man Beyond the Billions, was brought out by HarperCollins in October 2020.
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