It should come as no surprise that Infosys Q4 FY2017 results were below analyst expectations. Shareholder activism through much of the quarter served as a distraction which only exacerbated 'unexpected execution challenges' in the period. There was some upside with the company committing to return 70% post tax free cash in dividends and share buybacks. That is a hike of 40% from previous commitments. On to the numbers:
Revenue was $2,569 million for the quarter ended March 31, 2017 representing sequential growth of 0.7% in reported terms; flat in constant currency terms. This missed by $20 million. Infosys achieved year over year growth of 5.0% in reported terms; 5.3% in constant currency terms. Operating profit was $634 million for the quarter ended March 31, 2017 representing a QoQ decline of 0.9% and YoY growth of 1.5%.
The forecast for 2017-18 is lower than expected with revenue growth pegged at between 6.1% and 8.1% in dollar terms and 6.5-8.5% in constant currency. Cognizant, which reported yesterday guided for 8-10% growth in constant currency terms during calendar year 2017.
The regions represented a mixed bag. U.S. revenue rose 1.2% QoQ, while Europe slipped 1.6%. Revenue in India fell sharply by 6.9% while the rest of the world also slipped - 1.3% QoQ in constant currency.
In the press release, (PDF,) CEO Vishal Sikka is quoted as saying:
Unanticipated execution challenges and distractions in a seasonally soft quarter affected our overall performance. 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.
A country divided
The distractions to which Sikka refers are the ongoing public spats between co-founder NR Narayana Murthy and the Infosys board. Murthy is clearly annoyed that Sikka has seen a substantial hike in his compensation which was followed by suggestions that the outgoing compensation to the former CFO represented 'hush money' (subsequently found to be without merit) and then most recently, a revamp of COO Pravin Rao's comp plan added fuel to the flames that Murthy has been fanning across the public media.
Viewed from the west, Murthy's antics look like that of an out of sorts parent, unwilling to let their child go and make their own way. The fact remains that Sikka was brought in after a series of poor leaders had overseen Infosys decline. At the time, the introduction of Sikka was a bold move, in part because Sikka's background is rooted in the Silicon Valley model of innovation and reward.
Sikka knew (as did everyone else) that Infosys had to change. His approach was to introduce new service lines based around concepts that were fresh to Infosys such as Design Thinking and the creation of the Zero Distance program, designed to more closely align Infosys to customer problem discovery and solving needs.
All of that though seems to count for little in the minds of a founding father who is steeped in a culture he created but which is outdated for the required 21st century service delivery model. So while Murthy claims the impact of the pay awards are hurting shareholder value, the ongoing spats distract top management's ability to execute. That is the real casualty. Based upon my past experience in similar situations, I am surprised management is able to function in what is now clearly a two speed business.
On the one hand you have the die hard labor arbitrage folk who yearn for a golden age that has turned to dust. These represent a significant rump inside the organization and will likely continue to drip poison in the direction of a founder who is perfectly willing to use a public media only too keen to write up salacious rumor. That's a terrible strategy, fraught with PR risk.
On the other hand, you have those who are attempting to look forward, albeit mostly from another continent, and who would like to see themselves take a place at the top table in strategic advisory consulting as Accenture and IBM does. That would be a challenge under normal circumstances. Today they find themselves mired in arguments which, when you weigh the cost facts against the company's total revenue, represent little more than a rounding error. To make matters worse, the distracting nature of these arguments always unsettles the best talent and sooner or later, they walk away.
It is all so un-necessary, coming as it does, at a time when the transformation to which Infosys leadership has committed is underway, and according to the results release, is producing exceptional results among the top customers.
Staunching the wounds
Even so, the company seems to have found a way of staunching the wounds by promoting independent director Ravi Venkatesan into the co-chairman's seat while at the same time cranking up the payout to shareholders. I have no issue with the board appointment which I sense was inevitable given the noise in the market. But raising the payout by 40% makes it difficult to see how Infosys can cobble an M&A investment strategy that does more than tinker around the edges.
Sikka's emphasis on 'new and renew' is working as well as anyone can expect. When you look at the detail behind the company's results, it is clear the current management are exercising rigorous control over cost. All that's good. But right now, Infosys needs to make bold moves. The amount of cash going out the door in share buybacks and dividends, with no substantial increase in free cash flow forecast into 2018, makes it is hard to see where Infosys finds the money to make a significant future investment without digging into current cash reserves of $$5.979 billion.
Crimping M&A may also continue to play on Murthy's mind as he was critical of the 2015 Panaya acquisition. What he perhaps does not realize is that Panaya has grown revenue, while at the same time acting as a useful tool with which to persuade customers to go for SAP and Oracle upgrades at a time when selling back office implementations is a tough ask.