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Infosys Technologies Limited (INFY - Analyst Report) reported fourth-quarter 2013 financial results with earnings per ADS from continuing operations of 78 cents, beating the Zacks Consensus Estimate of 74 cents by 5.4%. However, earnings were down 3.7% year over year and 2.6% sequentially. Year-over-year earnings were impacted by a decline in margins and challenging global economic conditions.  

Business Details

Total revenue for the quarter was $1.93 billion, up 9.4% year over year and 1.4% sequentially. The increase was driven by the company’s strategic action to offer flexible pricing to customers, in order to boost sales. Further, sales growth in Europe and India also contributed to the top line growth.  

The company delivered a decent quarter in terms of client additions. During the reported quarter, Infosys added 12 new clients for its products and platforms. Apart from this, Infosys and its subsidiaries added 56 clients during the quarter. The company’s cloud-based offerings continued to gain good momentum during the quarter.

Infosys recently announced that it has been selected as the worldwide partner by German automaker BMW Group for application basis infrastructure management services. As per the agreement, Infosys will deliver maintenance and operational services for the web infrastructure, content management, SAP Basis operations and IT network of BMW Group.

This apart, Infosys has also opened a new delivery center for business process outsourcing subsidiary, Infosys BPO, in San José, Costa Rica. The new facility will primarily provide services in the areas of strategic sourcing and procurement for Procter & Gamble Co. (PG - Analyst Report).

Revenue by Geographical Segment

During the reported quarter, revenue in North America grew 0.1% in constant currency. In Europe, revenues grew 5.7% sequentially and 6.5% in constant currency. Revenues from the Indian region grew 10.0% sequentially, while revenues from the Rest of the World declined 1.5% both sequentially and 0.9% in constant currency.

Revenues by Industry segment

Revenues in the Financial Services segment (FSI) grew 2.3% sequentially and 2.7% in constant currency during the fourth quarter of 2013. Manufacturing segment (MFG) revenues increased 3.8% sequentially and 3.9% in constant currency. Revenues from the Retail and Life Sciences division (RCL) grew 0.5% sequentially and 0.8% in constant currency, while revenues from the Energy, Utilities, Communications & Services (ECS) declined 1.4% sequentially and 1.0% in constant currency.

Income

The company recorded an operating profit of $457 million compared to $528 million in the prior-year period, reflecting a decline of 13.8% year over year. Operating margin also contracted 623 basis points year over year to 23.6% from 29.8% in the comparable prior-year quarter. The decline in margin was primarily attributable to the company’s liberal pricing strategy to improve volumes and sales going forward.  

Net profit after tax was $444 million for the quarter, which was down 4.1% year over year. Higher operating expenses impacted profit during the quarter.

Balance Sheet

Infosys maintains a strong liquidity position and has cash & cash equivalents of $4.02 billion as of Mar 31, 2013 compared with $4.05 billion as of March 31, 2012. 

Outlook

Concurrent with the earnings release, management provided a brief outlook for fiscal 2014. Revenues are expected to increase in the range of 6% to 10.0%. According to a report by Moneycontro Bureau, revenue guidance is lower than 12% to 14% growth that industry body Nasscom expects for the sector as a whole.

Conclusion

Infosys reported a modest fourth quarter and margin contraction will remain a concern going forward as the company expects to continue with its pricing policy. Moreover, Infosys’ full-year guidance reflects sluggish revenue growth amid a volatile macroeconomic environment, which is expected to hurt profitability in the near term.

Infosys currently has a Zacks Rank #3 (Hold) on the stock. Two other companies operating in the same industry Cognizant Technology Solutions (CTSH - Analyst Report) and Accenture PLC (ACN - Analyst Report) also have a Zacks Rank #3 (Hold).

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