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Infosys (INFY) Cuts 2016 Guidance Despite Q2 Earnings Beat

Infosys Ltd.INFY reported second-quarter fiscal 2016 earnings per American Depository Share of 23 cents which exceeded the Zacks Consensus Estimate and increased from the year-ago quarter figure, both by a penny.

Improvement in the bottom line was largely attributable to huge gains led by the company's concerted initiatives toward service differentiation as well as impressive revenue growth. Moreover, Infosys' "Renew New" strategy, with knowledge-based learning at its core, has been successful in improving its relationship with clients, strengthening capabilities and rewarding its shareholders.

Quarter in Detail

Revenues increased 8.7% year over year to $2,392 million, surpassing the Zacks Consensus Estimate of $2,330 million. Moreover, on a sequential basis, revenues, excluding acquisitions, were up 6% - the highest in the last 16 quarters.

Top-line growth was largely driven by lucrative contract wins, higher volumes and successful execution of strategic investments. Improvement in client metrics (which measure overall customer satisfaction) and stable attrition rate also contributed to the overall quarterly performance.

Infosys' operating profit rose 6.1% year over year to $610 million. Management believes that strong focus on operational improvement supported the company's operating profits during second-quarter fiscal 2016. Moreover, the company's hedging program has helped it to minimize the impact of currency fluctuations, thereby boosting overall profitability.

Infosys witnessed a remarkable second quarter, having signed 5 major deals worth $983 million with TCV, provider of growth capital to technology companies. Other notable contract wins during the quarter include a three-year agreement with TOMS Shoes, a global product compliance program with ABB Ltd. ABB and a $210-million contract with non-government, non-profit company, Goods and Services Tax Network ("GSTN").

Also, Infosys' "Zero Distance" program, which aims to foster innovation in every project undertaken by the company, continues to progress steadily, with already 5600 projects under its regime. In a bid to solidify its existing market position and become more customer-centric, the company came up with three distinguished service offerings, namely, Artificial Intelligence, Knowledge-based IT and Design thinking during the quarter.

As a result of these cumulative offerings, the company gained 82 clients during the quarter, with the total number of clients crossing the 1000th mark. Moreover, Infosys entered into multiple partnerships with major firms like Apigie, Software AG and NetSuite in the second quarter. At the same time, the company continues to strengthen its relationship with IT frontrunners like Microsoft Corporation MSFT and SAP SE SAP for building robust partnerships.

Last but not the least, as part of its philanthropic efforts, Infosys plans to invest INR270 crores toward its Corporate Social Responsibility program operated through the Infosys Foundation. This makes it one of the few companies in the contemporary market which is deeply committed toward humanitarian welfare apart from its business initiatives.

Geographical Segment Performance

On the basis of geographies, modest growth was witnessed in regions like North America and India, wherein second-quarter fiscal 2016 sales rose about 4.1% and 4.5% year over year, respectively. On the other hand, sales in Europe and Rest of the World declined 7.3% and 6.5% year over year, respectively.

Industry Segment Performance

On a year-over-year basis, revenues in Manufacturing and Retail and Life Sciences segments rose 2.2% and 5.1%, respectively. However, in the Energy, Utilities, Communications & Services division, revenues declined 8.3%. Revenues remained relatively unchanged in Insurance, Banking and Financial services.

Liquidity

As of Sep 30, 2015, Infosys had cash & cash equivalents of $4,566 million compared with $4,421 million as of Jun 30, 2015.

Guidance Cut

Infosys has cut its revenue guidance for the fiscal year ending Mar 31, 2016. Considering the impact of currency translation, the company now expects revenues to grow in a range of 6.4-8.4% (the previous projection was 7.2-9.2%).

We believe the company's guidance cut is mainly triggered by the strengthening of the U.S. dollar, which may pose a significant headwind. Also, weak IT expenditure and intensifying pricing pressure in the industry are other reasons behind the guidance cut.

To Conclude

Infosys has managed a modest earnings performance in the second quarter of fiscal 2015. The Renew New strategy, which includes restructuring of client-facing functions, streamlining of sales function, unification of delivery systems and redesigning of other fee and oral processes, is proving to be highly beneficial for the company. Also, we believe that Infosys' alliance strategy, targeted at collaboration with leading technology providers, allows it to take advantage of emerging technologies in a mutually beneficial and cost-effective manner, which in turn, boosts its profitability.

However, spending on technology products and services is subject to fluctuations, and remains dependent on certain factors, including the economic environment. We anticipate that decline in the rate of IT purchases following the 2008 recession, coupled with a highly competitive environment, might continue to trouble the Zacks Rank #3 (Hold) stock's financials, going forward.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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