Infosys blows past revenue Q1 2016 expectations, maintains guidance for full year

Den Howlett Profile picture for user gonzodaddy July 20, 2015
In the wake of a weak Q4 2015, analysts were not expecting much from Infosys in Q1 2016. They were wrong to be pessimistic.

Vishal Sikka - Infosys

It looks like a year's work is starting to bear fruit for Vishal Sikka, CEO Infosys and his team. For Q1 2016 (from the blurbs):

  • Revenues were $ 2,256 million for the quarter ended June 30, 2015
  • QoQ growth was 4.5% in reported terms; 4.4% in constant currency terms - excluding acquisitions
  • YoY growth was 5.7% in reported terms; 10.9% in constant currency terms
  • Net profit was $ 476 million for the quarter ended June 30, 2015
    QoQ decline was 4.5%, YoY decline was 1.3%

Additional information:

  • Volume growth of 5.4%
  • 6 large deals signed with TCV of $ 688 mn
  • Added 79 clients
  • Utilization (excluding trainees) expanded 160 bps to 80.2%
  • Quarterly annualized attrition for Infosys Limited at 14.2% compared to 23.4% in Q1 15

Infosys Q1 2016 revenue growth was the highest in 15 quarters while volume growth was the highest in 19 quarters.

The company's statement exmphasized the success and expansion of Infosys core banking solutions including 19 wins and 12 go lives. Other bank industry wins included a BPO deal at Allied Irish and a recommitment from Deutsche Bank.

On platforms, the company reported 127 engagements leading to 16 pilots and 7 in production. The Panaya acquisition is bringing home business with 15 reported deals where Panaya was part of the offering.

Some may be disappointed in the net profit decline but operational profit was essentially flat. On the basis of these results, it looks like Infosys is more or less balancing investment in people that was started last year with revenue. It does not yet look like the promised efficiencies from automation have come through to any material extent.

That jibes with the company's assertion that the environment remains highly competitive and a slightly expanded attrition rate from a reported 13.4% for Q4 2015. That last metric is bound to be a disappointment since the company has made significant changes in compensation and awards to top performers.

Earlier in the month TCS reported revenue growth of 9.3% and volume growth of 4.8%. Wipro will report on 23rd July.

More will come in the company's analyst call, scheduled for a few hours' time. I will update this post for any new material facts that come out of the call.

UPDATE from the analyst call:

On numbers:

  • Panaya engagements - 137 deals in the pipeline.
  • Grass roots innovation has led to 676 ideas across many technologies.
  • The company continues to simplify internal processes.
  • 480 trained on machine learning. 40,000 trained on design thinking.
  • Goal of making all campuses carbon neutral by 2018.

On the call, Sikka said:

There continues to be a certain level of unpredictably from quarter to quarter...but we are implementing real-time get closer to what's happening. The purpose of bringing focus on the top 15 accounts is because there is so much opportunity in those accounts that can go broad across the company. We will bring this to every one of our clients over time.

Addressing the issue of automation and the role it plays on Infosys business model:

We saw a productivity improvement of up to 37% and people savings of 17% in infrastructure management. We've brought automation to more than 1,000 projects.

In questions about the impact of changes like the introduction of S/4 HANA, Sikka framed the discussion more broadly to include mention of Oracle Fusion, talking about  "knowledge based IT." KBIT aims to reduce the cost of running business critical systems while helping with innovations. The message, while not entirely clear on the call is aimed at the idea of doing more with less for more.

The success of Sikka's strategy is dependent upon the company not only improving productivity but selling value add software and services. On the call, Sikka said this requires the sales model to change such that there is a much more intimate type of relationship with clients rather than continuing to churn out RFPs.

My take

It is nine months since I heard Sikka talk live on an earnings call. I was impressed with the confident way in which he emphasized the strategy going forward. That is always easy when you're coming off a good quarter but in this case, I got the sense that he has a much better grasp of the numbers than was the case a year ago. That is to be expected.

Based upon my interactions in and around the company, it seems that Sikka's style of leadership is resonating well with the rank and file, which in turn is helping to make his vision a reality. It is early days in a fiercely competitive landscape with vendors that started transformation much earlier than Infosys. Even so, the results speak for themselves and while the company remains cautious - as it should - it will be at least another six months before we start to see the extent to which the changes needed bear a sustaining harvest of increasing revenue and profit.

Disclosure: Infosys, SAP and Oracle are premier partners at time of writing. Infosys is a consulting client of the author.

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