Infosys Ltd. (INFY - Analyst Report) reported second-quarter fiscal 2017 earnings per American Depository Share of 24 cents. Earnings were in line with the Zacks Consensus Estimate and rose 3.8% on a year-over-year basis.
Infosys’ shares fell nearly 6% at the close of the regular trading session on Friday. Downcast revenue forecast, on account of macroeconomic uncertainties, disappointed investors. As companies worldwide are curtailing their IT spending and shifting to cloud-based software services, Infosys remains under pressure.
While decent revenue growth drove the year-over-year bottom-line performance, foreign currency volatility proved to be a headwind.
Revenues increased 8.2% year over year to $2,587 million, but missed the Zacks Consensus Estimate of $2,608 million. Moreover, in terms of constant currency, revenues were up 8.9%.
Top-line growth was largely supported by lucrative contract wins, the Renew-New strategy, growth in delivery services and enhanced operational efficiency. Improvement in client relationships and better employee engagement also contributed to the overall quarterly performance.
Infosys’ operating profit climbed 5.6% year over year to $644 million. Management believes that strong focus on operational improvement boosted the company’s operating profits in the quarter.
Geographical & Industry-wise Performance
The company witnessed growth in all the four regions where it operates. Second-quarter sales in India, Rest of the World, North America and Europe improved about 29.1%, 6.5%, 2.6% and 1.1% sequentially, respectively.
Each of the four reporting segments of the company registered modest growth. The Energy, Utilities, Communications & Services and Banking & Financial Services, Insurance division emerged as the biggest gainers, wherein revenues rose 6.9% and 4.6% on a sequential basis, respectively. While revenues in the Manufacturing & Hi-Tech division grew 2.1% sequentially, they remained relatively flat at the Retail & Life Sciences division on a sequential basis.
Notable Development during the Quarter
Infosys has been diligently following the “Renew New” program, which lays the blueprint of its long-term growth. Under the “Renew” initiative, the company strengthened its relationships with existing “core services” clients, clinched some notable deals and leveraged on the Infosys Mana & Zero Distance programs, to drive innovation. Companies like AMD, Global Production Services and Cisco Systems, Inc. (CSCO - Analyst Report) have benefitted from the Infosys Mana platform.
Under the “New” initiative, Infosys is working closely with the U.S.-based conglomerate – General Electric Company (GE - Analyst Report) – to foster co-development of new applications with advanced Artificial Intelligence.
Moreover, most of Infosys’ businesses, including Panaya, Skava & EdgeVerve software products, delivered robust performance in the quarter. This, in turn, supplemented both the top and bottom lines. The company’s three distinguished offerings – Artificial Intelligence, Knowledge-based IT and Design Thinking – are proving to be key profit churners, helping the company expand its market share. These services continued to gain solid traction by way of renewals.
During the reported quarter, Infosys launched a modular e-commerce platform – Skava Commerce. This platform is expected to aid clients in improving their omni-channel experiences. Currently, Infosys is aiding the IT infrastructure transformation of companies like – California-based shoe seller, Toms Shoes and payment processing and technology provider, Vantiv – by leveraging on the Skava platform.
Also, Infosys’ Panaya platform has gained a major client – Swiss retail trade and wholesale giant, The COOP Group. Similarly, EdgeVerve delivered a sturdy performance, ending the quarter with 48 wins and 23 go-lives from both the Finacle and Edge suite of solutions across various markets.
As of Sep 30, 2016, Infosys had cash & cash equivalents of $4,763 million, compared with $4,566 million recorded as of Sep 30, 2015.
Infosys, considered as a gauge for the health of the $3-trillion global enterprise spending market, trimmed its guidance for revenue growth this fiscal year to 8%-9%, from the previous expectation of 10%−11.5%.
Infosys’ delivered a commendable financial performance amidst formidable macroeconomic headwinds. The IT industry is in the middle of a transformation where business enterprises are increasingly adopting state-of-the-art software and impeccable Artificial Intelligence. Infosys’ future prospects largely depend on its ability to align itself with this changing environment. Currently, the company is steadily shifting its focus from “cost-based, people-only model” to software plus services model, in order to take advantage of the changing market scenario.
Despite Infosys’ diligent efforts, the downcast outlook signals rough days, at least in the near term. Rapid proliferation of customizable Internet-based software has been hurting Infosys’ traditional outsourcing business, thus thwarting growth. Management believes that economic conditions in many of its markets remain quite challenging.
For instance, in many European countries, large government deficits, along with downgrading of government debt and credit ratings, have compounded the possibility of sustained weakness. This would adversely affect the company’s growth going ahead. Reduced IT spending, in response to the challenging economic environment, has led to increased pricing pressure from clients, marring the Zacks Rank #4 (Sell) company’s prospects.
A better-ranked stock in the industry is Barracuda Networks, Inc. (CUDA - Snapshot Report) , sporting a Zacks Rank #1 (Strong Buy). The California-based security and storage solutions provider has an excellent earnings surprise history over the trailing four quarters, beating estimates all through. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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