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Infosys Q1 results highlight potential of new services; forecast unchanged

Roughly half of the $2 billion that the company added over the last two years came from new, higher-growth services and software

Harichandan Arakali
Published: Jul 14, 2017 10:35:14 AM IST
Updated: Jul 20, 2017 04:14:35 PM IST

Infosys Q1 results highlight potential of new services; forecast unchanged
Image: Danish Siddiqui / Reuters
Infosys, India’s second biggest software services company, beat some analysts' expectations after a slightly stronger than expected performance for its fiscal first quarter. Shares rose as much as 3.35 percent in early Mumbai trading.

Revenue for the three months ended June 30, 2017, rose 3.2 percent in reported terms and 2.7 percent on a constant-currency basis over the previous quarter. That beat the 2-percent constant-currency growth expectation at brokerage ICICI Securities, which has a ‘Buy’ rating on the stock.

Bengaluru-based Infosys, however, retained the revenue growth forecast for the current fiscal year at between 6.5 percent and 8.5 percent, it gave in April, suggesting potential dampeners will remain. Those include higher cost of doing business from greater local hiring in America, and the cost of transitioning to a provider of more cloud-based services as growth stagnates across the sector in traditional IT outsourcing.

Massive changes that their largest clients themselves are facing in the age of cloud computing, automation and artificial intelligence — for instance, the big churn among US retailers — are also contributing to the uncertainty over how tech spending will pan out in the IT sector’s biggest market for the rest of the year.

“If you look at the American companies, they are in the throes of a massive digital transformation,” CEO Vishal Sikka told reporters in Bengaluru in a conference. “The kinds of services, capabilities that businesses need in this time are all about being close by, being able to work on the next generation of technologies rapidly, bringing together local talent with the best of global talent in new ways of working,” he said.

Infosys, which recently announced a plan to recruit 10,000 employees across four innovation centres in the US, is moving CFO Ranganath D. Mavinakere to America to personally, and more closely, oversee this work, Sikka said.

Sikka is a former SAP SE top executive, with a Stanford University computer science PhD in artificial intelligence. Over the last three years, he has pushed Infoscions, as employees are referred to within the company, to ferret out areas where they can sell innovation to clients at every level, using AI tools, automation and cloud-based applications.

“The widespread adoption of our grassroots innovation and education initiatives continue to fuel our transformation, and I am proud to see Infoscions embrace and drive Infosys toward becoming a next-generation services company.”

Over the last two years, the company has built new software including an AI platform, and added multiple new services. Services that didn’t exist two years ago contributed 8.3 percent of the revenues during the three months ended June 30, Sikka said, and another 1.6 percent of revenues came from new software that the company didn’t have two years ago.

Overall, about half of the $2 billion that Infosys added in incremental annual revenue in the last two years came from these new services and software, the CEO said. This has to an extent helped the company tackle the mismatch between high demand in areas that today account for a smaller proportion of the company’s sales and literally no growth in areas that still account for about two-thirds of revenue.

However, the mismatch, across the entire IT industry, is at a stage where the new services and software are only just beginning to make a difference to the bottomline. This is also reflected in the pressure on prices on commoditised traditional services such as maintaining aging applications. The new, high-growth services aren’t yet big enough to bring in substantial profits.

Consolidated profits for the three months ended June 30 was Rs 3,483 crore, compared with Rs 3,436 crore for the year earlier period, a 1.36 percent increase. Profit fell by 3.3 percent versus the March quarter, beating the 5.1 decrease estimated by analysts at ICICI Securities.

There was “strong momentum in our new high-growth services and software,” CEO Vishal Sikka said in a press release on Friday. The company would accelerate these efforts he said, adding Infosys had now reported an uptick in revenue per employee for six quarters in a row.

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