Friday, 10 July 2009

Infosys barely less bearish on FY outlook

(By Anthony Miller – Friday 10th July 2009 9:15am). OK, I’m clutching at ‘green shoots’ which really aren’t there, but anyway, those who like to see the glass as 1% full rather than 99% empty may take heart from the fact that Infosys raised the bottom end of its FY10 revenue guidance (to 31st March ’10) from $4.35b to $4.45b when it reported 1Q10 numbers (to 30th June ’09) today. The top end of FY10 guidance remains at $4.52b, so no real cause for celebrations, I’m afraid.

In the short term, Infosys is expecting this quarter’s revenues to remain broadly flat sequentially at $1.12b, about 8% down yoy. But of course, multiple volatile currencies do confuse the issue, so here’s what happened at constant currency last quarter: revenues grew 3% yoy but fell 2% seq. Europe (25% of group revenues) did slightly worse, down 3% ccy vs US flat.

But as ever with Infosys, it’s the margins you’ve got to worship. Gross margins at 42.7% are 300bps higher yoy and 70bps higher seq. The operating margin is back over 30% (30.1% to be precise) – and this is the real number, not one ‘adjusted for ‘exceptional items’, phases of the moon, etc etc – which is 330bps higher yoy and 70bps higher seq. Give praise to the mighty execution machine. OK, the Re/$ rate certainly helped yoy, giving Infosys a 16% FX tailwind. But the Rupee appreciated 3% relative to the dollar over the quarter, so that’s just damn good management.

Anyway, the concall is starting shortly so I may bring you more afterwards. But of course you will see the full comparison with peers in the next OffshoreViews quarterly review after reporting season. And remember, you can ONLY get that by subscribing to the TechMarketView research service!

Post-concall update (10:45 am)

I asked Infosys Europe head, BG Srinivas, why revenues in Europe appear to be in faster decline than in the US. He said this was partly because of the steep drop in BFSI and Telecom sectors (remember, BT is Infosys’ largest client), and partly because of the lag between Europe and the US, i.e. Europe started its decline later. He also said manufacturing sector was very muted in Europe, with clients still under severe cost pressure having built up inventories but facing low demand. BGS also observed that US companies reacted very quickly to cut costs and people; European companies didn’t, for all sorts of ‘good’ (and not so good) reasons, such as stricter labour laws. It certainly sounds like Europe will remain in a hole for some time yet.

CEO Kris Gopalakrishnan confirmed deal sizes were still getting smaller. He gave the example of an RFP issued at $300m TCV which eventually ended up half that size when the contract was awarded. He also alluded to potential increased pricing pressure if there is no let-up in the downturn. He said client (master service agreement) renegotiations are pretty much complete, but also said that clients were reserving the right to come back for keener pricing if market conditions didn’t improve.

There’s really no cause for cheer among all of this. And bearing in mind Infosys is one of the ‘quality’ players, this doesn’t bode well for some of the others, be they India-based or otherwise.

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