The market had expected bad news from Infosys but not this bad. It dissapointed the market with lower than expected revenue and profit for Q4 2015 but added interest with the surprise acquisition of Kallidus.
In the earnings call, Vishal Sikka, CEO Infosys was up front about that disappointment but was bullish about the future.
I believe the existing model of IT services is dying but customers are looking for partners that can help them grow and innovate, can help them renew their operations and businesses and will do so in reliable and agile ways. Since I became CEO a little more than eight months ago, it has become clear we have weaknesses in sales and other processes and our delivery culture sometimes lacks proactive innovation. However I have also found that we have strengths that outweigh these challenges. We have an immense ability to educate and learn, perhaps the best in the world.
Referring to customers, Sikka went on to outline some of the successes it is seeing in providing customers with new capabilities. Referring to the recent Panaya acquisition, he said that Infosys is seeing up to 50% improvement in upgrade testing. Measures to contain employee attrition are working with attrition falling by more than half since May 2014. Along with other measures, Infosys is guiding growth in the range 10-12%.
On to the numbers from the blurbs:
- Revenues were $ 2,159 million for the quarter ended March 31, 2015 YoY growth was 3.2%; QoQ growth was (2.6%) in reported terms, YoY growth was 7.8% in constant currency;
- Net profit was $ 498 million for the quarter ended March 31, 2015 YoY growth was 2.3%; QoQ growth was (4.6%)
Infosys reported an increase in payout to 50% of post tax income from 40% and a bonus are issue of 1:1 but neither of these measures prevented the market from caning the shares by six percent in early trading.
My sense is that despite the talk of improved margins and volume, analysts are struggling to understand how Infosys will achieve its expectations in the current market and against a general backdrop of margin pressure and increased costs in some areas.
I have long held the view that Sikka's plan of widespread automation has significant potential to improve margins, even where volume falls. I also believe that Infosys - along with other service providers - need to be more focused on delivering software based solutions in a repeatable manner. This is not something that sits comfortably with a business that is based upon time and materials but does make sense in a world of fixed price, fixed outcome projects. To that extent, I recently spoke to a group of Infosys US consultants, making that specific point. They 'get it' but it remains to be seen how quickly the organization can transition to that operational model.
On the call, Sikka mentioned that Infosys consulting has had a 'checkered' history and he believes the key going forward is to have a more strategic form of engagement. In order to get there, Infosys will need to hire a different type of talent that is able to hold its own in the C-suite against the likes of Accenture and KPMG. That will be no small achievement, especially since that also means that Infosys becomes a broker in deals that might involved SAP, IBM, Microsoft, Oracle and others.
The Kallidus acquisition is interesting. Priced at $120 million, it is a relatively small investment that gives Infosys access to retail software that:
...delivers a cloud hosted platform for mobile websites, apps, and other digital shopping experiences across mobile, tablet, desktop, in-store, and all emerging channels to large retail clients worldwide. The platform enables retailers to provide a mobile specific experience to their customers through an agile and flexible environment, enabling personalization and delivering customer analytics across multiple channels.
This acquisition gives Infosys access to more than 25% of the top 30 online retailers in the US.
I like this acquisition - a lot. Rather than attempting to compete head on with more general mobile solutions, Infosys has gone straight to a vertical market opportunity. This is the right strategy because it not only helps Infosys learn new markets, it insulates the company from competitive threats.
The company also announced a small $2 million investment in AirViz, a health monitoring startup that puts Infosys into the growing health monitoring market. I suspect this arises out of Sikka's declared interest in health issues. When he was at SAP, I recall him being particularly proud of the work his team did in advancing the speed at which genome sequencing can be done since this has a direct bearing on health outcomes.
Going forward, I expect we will see volatility in Infosys results as Sikka pushes the 'renew-new' agenda. Much hinges on his ability to build a strong team that solves the sales execution problem while building new lines of business. How the market reacts is another story. In the meantime, we will be at Infosys Confluence event next week. I will provide a preview on Monday.
Disclosure: Infosys, SAP and Oracle are diginomica partners at time of writing and are or have recently been consulting clients to the author.