Infosys is off to a cautious start as it posts better than expected Q1 FY2018 results

SUMMARY:

Posting a good Q1 FY208 is only half the story as Infosys goes through its own transformation journey. The devil – and the signs – are in the detail. All is much more promising than it was a few months ago.

Eric Holcomb, Vishal and Vandana Sikka – backstage Confluence 2017

Infosys reported Q1 FY2018 earnings with slightly better than expected results. The company posted revenue of $2.541 billion for the quarter compared to $2.501 billion in Q1 2016, that’s up 3.2% quarter over quarter in reported terms and 2.7% in constant currency. Year over year growth was 6% reported and 6.3% in constant currencies.

Operating profit was $638 million compared to $602 million while total comprehensive income came in at $595 million compared to $331 million. Most of the bottom line difference was made up of favorable currency swings amounting to $233 million.

Cash, cash equivalents and investments were $6.1 billion from $6 billion in March with a slight improvement in operating cash flow from the previous quarter to $644 million. The company restated its previous revenue guidance at constant currencies for the remainder of the year at 6.5-8.5% and also its margin guidance of 23-25%.

As always, the devil is in the detail and while there was significant churn in the whole customer base – 59 gross adds in the quarter but only 1,164 active clients compared to 1,162 in the previous quarter, Infosys clients spending more than $25 million with the company jumped from 91 to 97.

The net result of changes in the mix saw the top 25 clients account for 36% of business compared to 36.5% in the previous quarter. Having said that, Infosys called out a number of major engagements across all offerings. In the press release, the company focused on U.S. and Australia based wins, chalking up impressive new wins at Levi Strauss for eye catching first party data analytics running on AWS and and HR onboarding process change at BP surfaced via design thinking.

Commenting on the results, Dr. Tom Reuner, Senior Vice-President, HfS Research said:

By leveraging and integrating a broad set of artificial intelligence technologies, Infosys is supporting customers on their journey toward business transformation. The modular set up of Infosys Nia allows for more flexibility when addressing diverse sets of use cases. On this journey, Infosys’ expansive AI and cognitive computing capabilities provide customers with solutions that put data at the center of their service delivery strategies.

Vishal Sikka, CEO infosys has always insisted that success in the company’s transformation in a post-labor arbitrage world will come from ramping Infosys emphasis on lifelong learning and design thinking. In prepared remarks, the company said:

The Digital Tutor social learning platform which is now made available on cloud and accessible on mobile devices, has gained momentum with 3,528 learning videos that are accessible to our employees. Additionally, the Infosys Learning Platform has been enhanced with 177 courses on topics spanning different technologies and business effectiveness, and has witnessed over 45,000 unique users till date. Following the launch of Infosys Nia in April 2017, we have trained over 2,100 employees in this new product. Design Thinking, the driving force for change at Infosys, has now covered 142,218 employees across the organization.

How is that working out? According to Sikka, software that didn’t exist several years ago contributed 8.3% in growth, 1.6% in revenue and accounts for half the growth the company has seen in contracted services in the last two years. In short, Infosys is steering a fine line between growth and replacement revenue at a time when many pundits believe the world of Indian heritage labor arbitrage business is coming to an end.

To counterbalance those macro trends, Infosys focused on optimizing utilization, hitting 84%, net of new hires, the highest level in the company’s history. Per employee productivity now stands at a whisker under $52,000 pa, again a high point in the company’s history. On the cost side, Infosys has been raising pay for many employees which accounted for a full 1% of the margin, which declined 60 basis points.

Stock pickers will look at these results and likely shrug, but what many are failing to see is that Infosys, in common with its competitors, is attempting the equivalent of a high wire balancing act while spinning plates and in the teeth of a storm. On the one hand cost and market volatility across multiple industries is impacting top and bottom lines while there are positives to be found in automation and new service lines. It should however be noted that Infosys continues its understated emphasis away from India and towards the U.S. with commitments to establish local centers in Indiana and North Carolina. In Sikka’s words:

As to guidance, we say it as we see it…but in the current climate we’re relentlessly focused upon execution.

One snippet that passed many by and that is the news that the CFO is moving to the U.S. I’ve long held the view that CEOs always need their CFO in close proximity and especially when the business climate brings change. While CFOs are not normally seen as adding directly to top and bottom lines, having the CFO close by means faster decision taking on matters that do impact results, coupled with the welcome relief of far fewer sleepless nights. In this case, having the CFO to hand in deals will help Infosys get more ‘share of voice’ in the C-Suite as it pushes forward with a ‘hire local’ agenda to counterbalance the Hi-B visa issue.

My take

There’s never a dull moment at Infosys and yet in one sense these results must come as a relief. Recent turbulence brought on by founder interference which marred the previous quarter may not have gone away entirely but it is off the table as a talking point as the company gets back to business. The detail behind the continuing transformation strategy is coherent and should give Infosys a solid ‘we eat our own dog food’ story as it endeavors to get those prized seats at the top table of the marquee customers it would love to win over.

A more cautious set of presentations on the investor call suggest that Infosys leadership is firmly focused in the manner Sikka describes. Having the CFO at his side can only be good going forward. Confidence restored? We shall see,

Image credit - via the author and Infosys

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