Infosys quarterly update was positive on the operational performance. However, revenue guidance cut was a disappointment leading to adverse stock reaction seen for the ADRs trading in the USA market. Having said that, investors can take note the company is gradually getting back to business, setting aside some of the non-operational issues.
Sustenance of operating performance
Infosys’ dollar revenue growth of 2.9 percent quarter-on-quarter (QoQ) was slightly lower compared to expectations, and that of its closest peer TCS (3.2 percent). Realizations for the quarter have slightly improved on sequential basis. However, realisations for the first half of the year have remained essentially stable year-on-year.
The operating performance has been upbeat with operating profit being 4 percent ahead of the consensus expectations. Operating profit margin of 24.2 percent was tad higher than the margin in previous quarter due to better pricing, onsite mix and utilization being partially offset by higher compensation.
Revenue guidance cut
The company now expects revenues to grow by 5.5 – 6.5 percent in constant currency terms compared to previous guidance of 6.5 – 8.5 percent. The cut was much steeper than anticipated. However, in constant currency terms, the company has already clocked about 5.7 percent growth in H1 2018. With Q3 and Q4 being seasonally weak quarters, the revised outlook seems closer to reality.
Margin guidance band has been maintained at 23–25 percent. Since the performance so far is closer to the midpoint of the guidance, this suggests the company expects a stable pricing environment for the rest of the year.
Increasing share of digital
High-margin “New Services” contributed 9.4 percent of the revenue in the quarter compared to 8.3 percent in Q1 2018. Including “New software”, high margin digital solutions contributed 11 percent to the revenue. It is noteworthy that, New Services, as recently categorized by the company, includes Cloud Ecosystem, Big Data and Analytics, API and Micro services, Data and Mainframe Modernization, Cyber Security, IoT Engineering Services. Management mentioned good traction for Infrastrucure services and Enterprise cloud services.
Segments: Improved traction for insurance
Though management was positive about the traction so far this year in financials, healthcare, life science segments, it guided for seasonal softness in the some of the segments, particularly BFSI (33.4 percent of revenue Q2 2018). However, it has been positive about insurance sub segment where it saw addition of 13 new accounts this quarter. It also mentioned that retail and telecom end markets are witnessing various technology led transitions.
Strategy assessment – execution is the key
Nandan Nilekani, the recently-appointed Non-Executive Chairman, outlined the strategic plans after a thorough assessment. He acknowledged multiple disruptive challenges for end-markets the company is serving which includes customer-led innovations in the digital front. This has led to huge disruption in the distribution network of product and services for the clients (eg: media, film distribution). Among the challenges outlined are integration of product and services offerings, scale-up of new services, secure integration of legacy applications, huge need for re-skilling.
Focus on On-shore offerings was mentioned for a comprehensive IT solution offerings for the client.
In a nutshell, it was a reiteration of the earlier priorities with an emphasis on execution.
Acquisition of Panaya and the severance payment issue
The management reported there is no merit to the allegations of wrongdoing after reviewing earlier investigations on the Panaya acquisition, and severance payment to the former CFO. A quick investigation closure by the company, and Nilekani’s statement should now put the clamour on corporate governance to rest.
Next key event – selection of new CEO
Overall, first quarterly result of Infosys, after Nilekani took office, is about a refocus on earlier defined strategic and operational priorities. To that extent, it allays some of the investors’ concerns, affirms confidence in the current management, and appears to have been able to take along promoter shareholders, till now.
Operationally, it was a good quarter guided by better utilisation levels, and stable pricing. Guidance cut, though, was a disappointment.
However, the ongoing buyback offer provides a downside protection in the near term. Infosys is getting back to business with a refocus on strategy execution, improved contribution from new services and higher automation, and investors should take a note of that. Selection of the new CEO would be a key event to watch out for.