Stock loses nearly 4% after net falls 3% q-o-q; disappointing revenue outlook does not help
The promise of a $2-billion payback to shareholders notwithstanding, the Infosys stock lost nearly 4% on Thursday after the company reported poor fourth-quarter numbers and a disappointing revenue growth guidance of 6.5-8.5% in dollar terms for FY18. The IT major also lowered guidance for operating margins to a band of 23-25% for FY18 from the earlier range of 24-25%.
Net profit for Q4FY17 came in at Rs 3,603 crore, a sequential drop of 2.8%, while revenues stood at Rs 17,120 crore with a quarter-on-quarter dip of 0.9%. Margins dipped 50 basis points to 24.6%, hit by the appreciation of the rupee against the US dollar. Volumes grew by a mere 1.2% sequentially.
Infosys said it was setting aside $2 billion for shareholders to be used either for a buyback or a dividend payout. Amid reported differences between the founders and the Infosys board on a host of issues, Infosys appointed Ravi Venkatesan as co-chairman. R Seshasayee is chairman of the board.
Analysts remained cautious on the company’s performance. Brokerage house UBS in a note following the results said, “A softer than expected FY18 revenue and margin outlook is likely to add to ongoing concerns regarding management differences with the founders.”
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Goldman Sachs noted Infosys’ high exposure to shrinking application services business amid a shift to the cloud, low penetration in digital services and high vulnerability to potential changes in H-1B visa rules will remain key headwinds. It closed FY17 with dollar revenue growth of 7.4% against a stated guidance of 8.4-8.8%.
The IT major, while declaring a soft quarter, during which it faced headwinds in the form of Brexit, H-1B visa restrictions and an appreciating rupee, reported a 0.8% sequential decline in net profit in dollar terms for the March quarter.
Infosys reported $543 million in profit in Q4FY17 compared with $547 million recorded in the previous quarter. Revenue at end of the quarter stood at $2.57 billion, with a sequential growth of 0.7%, a shade below analysts’ estimates.
The company’s growth outlook mirrors the current trend in the global technology industry, which has not seen any major signs of a demand pick-up. Trade body Nasscom has still not given out its annual guidance for the Indian IT industry for FY18.
Commenting on the performance, Infosys CEO Vishal Sikka said, “Unanticipated execution challenges and distractions in a seasonally soft quarter affected our overall performance. At the same time, we continued to see many positive signs of our strategy execution.” These include its software-led offerings, continued adoption of its various initiatives such as Mana, AI platforms and zero distance.
The distractions during the fourth quarter were centred around the public statements made by Infosys co-founder NR Narayana Murthy, who questioned the corporate governance standards of the company which also included the compensation paid to the CEO and COO. “Looking ahead, it is imperative that we increase our resilience to the dynamics of our environment and we remain resolute in executing our strategy, our path to transform Infosys, and to drive long-term value for all stakeholders,” Sikka said.
“In FY 17, operating margins were steady as we continued our sharp focus on operational efficiencies. Cash provided by operating activities during the year was robust and exceeded $2 billion, a new high,” said chief financial officer MD Ranganath.
Given the performance of Infosys for FY18 with an annual dollar revenue having crossed the $10-billion mark, it remains to be seen how it will reach its aspirational goal of achieving $20 billion in revenue by 2020. This goal setting also has the aspiration of reaching 30% operating profit margin with revenue per employee of Rs 80,000.
Infosys closed FY17 with a total deal win of $3.4 billion against $2.8 billion in FY16. During the fourth quarter of FY18, Infosys saw 1.3% growth sequentially from its largest market North America, while it was flattish from Europe. India declined 5.4% sequentially for Infosys.
In terms of verticals, the highest sequential growth was recorded by energy, utilities, communications & services (ECS) at 3.9%, followed by financial services at 1.3%. However, the retail and healthcare vertical fell by 2.7%. On the HR front, the company made a net addition of just 6,320 people to take its total headcount for FY17 to 2,00,364 versus 1,94,044 in FY16. The attrition rate during the fourth quarter of FY18 declined to 13.5% compared with 14.9% in the third quarter. “Attrition declined during the quarter reflecting our focus on better employee engagement. Utilisation during Q4 reached 82% which is the highest in Q4 over the past several years”, said UB Pravin Rao, COO.