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Infosys (INFY) Q3 Earnings Surpass Estimates, Guidance Up

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Infosys Limited’s (INFY - Free Report) third-quarter fiscal 2019 adjusted earnings of 14 cents per share beat the Zacks Consensus Estimate by a penny.

Revenues of $2.99 billion increased 8.4% year over year and surpassed the Zacks Consensus Estimate of $2.95 billion. In terms of constant currency (CC), revenues were up 10.1%.

Infosys’ focus on Agile Digital and AI-driven Core services is a tailwind. The company is benefiting from growth across geographies and business segments. Large deal wins are a positive for the company. Higher spending on digital, analytics, cloud, cybersecurity and other new technology domains is a key driver for the company.

Given robust demand for its core services and latest digital offerings, the company raised its revenue guidance for the current fiscal year.

Quarterly Details

Digital Revenues (31.5% of total) surged 33.1% year over year to $942 million whereas Core Revenues (68.5%) marginally inched 0.4% up to $2.05 billion. Strong demand in cloud, IoT, cyber and data and analytics is a key driver.

Geographically, on a sequential basis, North America, Europe, Rest of the World and India revenues rose 2.6%, 3.8%, 0.8% and 5.2%, respectively, at CC. On a year-over-year basis, North America and Europe grew 8.7% and 9.8% each.

Segment wise, Manufacturing and Energy, Utilities, Resources & Services recorded highest sequential growth of 7.6% and 7.4%, respectively. Financial Services and Hi Tech rose 3.6% and 0.6%, respectively. Double-digit growth in Finacle is a key driver. However, slowdown in Europe especially in BFSI due to end-of-quarter furloughs has been a concern.

Meanwhile, Retail and Communication slipped 0.1% and 0.5%, respectively. Sector-specific headwinds are an overhang on Communication sector while seasonal weaknesses kept Retail segment stressed. Life Science segment remained flat due to seasonal factor.

On a year-over-year basis, Financial Services, Energy, Utilities, Resources & Services and Manufacturing increased 9.4%, 17.3% and 16.2%, all at CC.

In the reported quarter, the company signed 14 large deals with a total contract value (TCV) of more than $1.57 billion, driven by higher investment in sales and focus on building a client-supportive portfolio. The company added 101 new clients, partly backed by Fluido acquisition.

The company reported that its number of $100 million-plus clients is now 23 compared with 20 a year ago.

Infosys Limited Price, Consensus and EPS Surprise

Infosys Limited Price, Consensus and EPS Surprise | Infosys Limited Quote

Margin

Gross profit increased 4.98% year over year to $1.03 billion. Gross margin contracted nearly 110 basis points (bps) on a year-over-year basis to 34.5%.

The company’s operating income increased 0.9% year over year to $695 million. However, operating margin declined 110 bps to 23.7%.

Increase in compensation, drop in utilization, higher onsite mix, acquisitions and better sales investment were a threat to the margins.

Liquidity

As of Dec 31, 2018, Infosys had cash and cash equivalents of $2,357 million compared with $2,462 million recorded in the previous quarter.

Outlook

Infosys lifted its revenue guidance for fiscal 2019. Revenues are expected to grow in the 8.5-9% range compared with the earlier projection of 6-8% at CC.

Operating margin range is still anticipated to be between 22 and 24%.

The company expects its operating margin in the fiscal fourth quarter to be impacted by “rupee appreciation, targeted communication correction, continued investment in business and initial margin impact to transition and impact of recently won deals.”

Zacks Rank and Stocks to Consider

Infosys currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Computer and Technology sector are Synopsys, Inc. (SNPS - Free Report) , Infineon Technologies AG (IFNNY - Free Report) and Marvell Technology Group Ltd. (MRVL - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Synopsys, Infineon and Marvell is projected to be 10%, 8.62% and 9.38%, respectively.

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