Infosys Q1 FY2017 - headwinds and Brexit

Profile picture for user gonzodaddy By Den Howlett July 14, 2016
Summary:
Infosys faced a disappointing and challenging quarter. Brexit loomed large in the analyst calls but like others, Infosys is taking a relatively neutral yet cautious approach.

vishal sikka confluence 2015
Vishal Sikka - CEO Infosys

Having seen TCS turn in a better than expected profit for its latest quarter yesterday, all eyes were on Infosys today as it reported Q1 FY2017 results.

Infosys missed top line revenue forecasts by around $50 million, growing just shy of 11% year over year to $2.5 billion, but more importantly in the eyes of investors, it cut the full year growth guidance by one percent to 10.5-12%. Operating profit grew from $541 million to $660 million.

During a call with analysts, the company offered three principle reasons why the top line came in lower than expected:

  • A challenging market for life sciences where business shrank 16%.
  • Slower than anticipated ramp up in contracts that was won in the previous quarter.
  • Lower than anticipated discretionary consulting.

Other metrics by which Infosys is measured included a jump in overall attrition to 15.7% although the company was keen to point out that attrition among its high performing employees fell 2% to 11.2%. More worrying was that revenue per employee fell from $51,700 to $50,900 year over year although this was a slight improvement on a sequential basis from $50,700. Automation may be a key theme for the company but the results are slow in coming through.

On the call, the company talked about the improvements it has seen with, for example, more than 100,000 people having now been through its Design Thinking workshops and the start of its Zero Distance initiative turning from ideas to monetization among customers.

Vishal Sikka, CEO was, unsurprisingly 'disappointed' in the outcome and was in much more serious mood on this call, compared to his usual upbeat tone of past quarters.

The Brexit impact

During the call, there were repeated questions around the impact of Brexit. That is hardly a surprise given that banking and financial services account for 27.2% of total business. Sikka commented:

It is too early to think about the impact...Brexit is an opportunity over time because when these walled gardens emerge...it could well mean systems remediation and a refresh systems landscape.

In the near term, there is a tremendous sense of volatility and uncertainty as you would expect.

Only one customer pulled back from a project citing Brexit as the reason.

We are more concerned about Brexit. Earlier, Stuart Lachlan reported on Marc Benioff, CEO Salesforce comments about what happened at Davos when David Cameron, ex-Prime Minister of the UK basically brushed off suggestions that there might be a Leave result.

It is clear that the UK vote to Leave has caught everyone by surprise. What surprises me more is that technology companies generally took Cameron at his word and didn't apparently press Cameron about 'Plan B.' We now know there was no Plan B and in any event, it would be difficult for any vendor to build an alternative model in those circumstances.

We suspect that Infosys, along with others will be watching events closely to assess what steps they need to take if projects are halted to slowed up.

My take

This was a tough quarter by any standards but as we and others have been warning, the Indian heritage outsourcers were bound to see a drop in business from their traditional 'lift and shift' businesses.

On this showing, it appears that while Sikka's team has made plenty of progress in the necessary transformation that includes an emphasis on robotization, AI and machine learning as pillars for improving productivity, the underlying core business is vulnerable to any whiff of macro economic change.

On the other hand, I am in agreement with Sikka's view that you have to look at these thing through the lens of the long haul. A reduction of one percent in overall growth projection is not the end of the world by any means. Not that the market cares. It punished the stock price with early falls of up to 9%. A bit harsh perhaps but hardly surprising when you consider the level of uncertainty to which the company freely admitted.

To that point of long and short term, and in answer to a question about market communication improvement on expectations, Sikka was very careful not to offend when he half jokingly said:

Taking the 90 day cycle with 200,ooo employees is, how can you put it, challenging. IIP (Infosys intelligent information platform) has extraordinary capabilities but I think if we put it to more work on this then we would find it hard to do what we're supposed to in running the business.

I can't blame him for that one!