Infosys delivers a shock with Q1 results, investors glum

Goutam Das

Infosys delivered a shocker as it took the lid off the first quarter IT earnings calendar on Thursday, disappointing investors (and some of its rivals) on all counts by reporting lower than expected net profit, margins, revenue and guidance numbers. 

The company's stock was down 8.41 per cent to Rs 2,259 on the BSE at 3PM.

Cognizant is likely to replace Infosys as India's second largest IT bigwig this quarter, going by its guidance. Cognizant has guided to revenues of $1,790 million for the June quarter and Infosys' poor topline numbers only make it easier for Cognizant to pull ahead.

Here's the summary: Infosys' June quarter revenues stood at $1,752 million. This is not only below street expectations, but also below its own guidance given at the end of the March quarter. The firm had guided to revenues between $1771 million and $1789 million. Compared to the last quarter, the topline shrank by about $19 million. 

Infosys also scaled down its full year guidance and now sees growth of about 5 per cent to $7.3 billion versus the 8-10 per cent growth that had been projected by the company earlier. While most analysts expected that Infosys would revise its full year outlook, a growth prediction of just 5 per cent was below almost all expectations.

Operating margins slid 190 basis points compared to the March quarter on the back of higher visa costs and more hiring abroad. The firm's strategy of focusing more on consulting and system integration business has meant that it needs to invest more in local resources.  Net profits in rupee terms dipped 120 basis points to Rs 2,289 crore or Rs 40.06 a share.

The company added only 1,157 people during the quarter, one of the lowest net additions seen in recent quarters by a top tier IT firm.

In another surprise move, the firm has for the first time done away with quarterly guidance, indicating poor short-term visibility. The street was eagerly awaiting Infosys' second quarter outlook. 



Infosys' problems appear to be a mix of macroeconomic  factors and internal issues. The firm has been struggling with an internal restructuring plan and client ramp down of projects. In the June quarter, the firm wrote off $15 million due to a transformational project cancellation in Europe. 

Transformational projects, which include a fair degree of high-margin consulting and system integration work, are clearly not doing well in this climate. Customers have become hesitant to spend big dollars on projects that have a longer return on investment cycle.  Pricing declined by 3 per cent during the quarter as some of the company's clients requested pricing discounts.  

Infosys' management blamed its poor performance on its exposure to such high-margin business (30 per cent of its revenues). CEO SD Shibulal, however, reiterated that Infosys will stay its course. "We have made a choice to focus on consulting and system integration business. We are running a marathon and not a sprint," he said, after being questioned on the company's strategy.  

A few analysts share Shibulal's optimism and remain hopeful the company will turn around.  "We believe that growth rates for Infosys will improve at a faster pace once there is revival in the industry growth," Dipen Shah of Kotak Securities said.

No doubt the powers that be at Infosys will be hoping that happens soon.