Infosys falls after outlook whiplash: 5 Takeaways from Q1 FY24

Salil Parekh, CEO, Infosys Image: Hollie Adams/Bloomberg via Getty Images
 
Infosys fell as much as 10 percent in early Mumbai trading today, after the company halved the upper bound of its forecast for the current fiscal year, on July 20, dashing hopes of a macro recovery in the US—the IT sector’s biggest market—in the near term.
 
Even though Infosys was the only company amongst its peers to post any sequential growth for the three months ended June 30, CEO Salil Parekh said clients in critical segments such as financial services are just not spending on anything outside of what is necessary.
 

That, despite a massive $2 billion contract the company announced in the current quarter, and other previous big wins this year, has prompted Infosys to slash its April forecast of 4-7 percent growth for the year that ends March 31, 2024, to 1-3.5 percent. Analysts were expecting the company will hold its April guidance or perhaps settle around the midway mark of that range.
 
Here are five takeaways from what Parekh and CFO Nilanjan Roy said on July 20, discussing the results and the outlook.
 

1. If America sneezes…

India’s IT industry catches a cold. That’s the bottom line, because the US remains the market that contributes about two-thirds of Infosys’s revenues, which is about where its peers are as well. Contribution from financial clients, overall, which had already gone below 30 percent of total revenues at the end of the previous year, at 29.8 percent versus 32 percent for FY22, came down further to 28.1 percent in Q1 FY24.
 
“In the short term, we see some clients stopping or slowing down transformation programmes and discretionary work,” Parekh said. This is especially so in financial services, mortgages, asset management, investment banking and payments, and in telecom. The company also sees some impact in the high-tech industry and in parts of its retail practice. Manufacturing and Life Sciences have been areas of strong growth.
 

2. The fewer the merrier

Infosys has reduced its workforce by almost 9,000 jobs from 3,45,218 after Q2 FY23 to 3,36,294 at the end of Q1. Over the last three quarters, as it became clear that an extended slowdown is here and worries of a US recession aren’t going away, India’s IT companies dramatically cut back on their hiring and even stopped filling vacancies wherever possible, when people left.
 
However, when workers in billable positions leave, companies often replace them at a higher cost to keep the work going. At Infosys too, employee costs went up in the quarter, despite the reduction in the workforce, a 10-percentage-point drop in staff churn over the last three quarters, and deferred pay hikes.
 

3. Mega deals

It is “paradoxical times” for Indian IT, as one reporter put it at Infosys’s earnings press conference on July 20. On the one hand, the company expects almost no revenue expansion for the rest of the current fiscal year. On the other hand, clients are handing it multi-billion-dollar contracts.
 
One of the biggest in the company’s history is a $2 billion, five-year contract that Infosys reported to the stock exchanges earlier this week. Infosys hasn’t named the client.

Also read: How TCS, Infosys see opportunity in multiple planet-scale transitions
 
And the company maintained its ‘large deal’ wins with $2.3 billion in total contract value announced for the June quarter. Infosys defines a large deal as any contract worth $50 million or more and anything worth $500 million or more is a ‘mega deal’. CEO Parekh confirmed that more large deals are in the pipeline.
 
“Even as we won two mega deals recently, we have a strong pipeline of large and mega deals,” he said. “We see revenue from some of these and other large deals towards the later part of the financial year.”
 
Or perhaps even next year, which goes some way to explain the big cut in the outlook.
 

4. A 5-pronged margins playbook

Infosys reported operating profit margins of 20.8 percent for Q1. The company has an operating margin guidance of between 20 percent and 22 percent for the current fiscal year and that remains unchanged, the CEO said.
 
Parekh and CFO Nilanjan Roy also outlined a 5-point plan to hold and expand margins. The programme will work across five areas: 1. Pyramid efficiency, meaning minimise or eliminate mid-level flab in the workforce; 2. Automation, which already includes adding an AI twin to each employee to help them do better in a data-driven fashion; 3. Improvements in critical portfolios, meaning sharpened focus on the most valuable clients and those who could move into that bracket; 4. Reducing indirect costs; and 5. Communicating and deriving value across the portfolio (of clients), which is about negotiating for higher prices based on the value that Infosys is providing as against the older models of effort and time.
 
“We have an ambition to improve our operating margins in the future periods,” Parekh said.
 

5. GenerAIting away—80 and counting

In May, Infosys launched Topaz, a Generative AI platform, which is “resonating well with our clients”, CEO Parekh told reporters in a conference on July 20. The company is working on 80 Generative AI projects for its clients currently, but these aren’t mature enough to make a dent from a revenue perspective in the near term.
 
The generative AI work Infosys is engaged in covers large language models for software development for text, document, voice and video. Internally, the company has developed generative AI tools based on opensource models of generative AI platforms that are focused on software development.
 
The company has trained 40,000 employees in this area and “we see Generative AI and Topaz being transformational for all of our clients”, Parekh said.