Infosys delivers a knock-out Q2; ups guidance

Infosys Technologies has once again presented the markets a pleasant surprise with better than expected quarterly results on the back of improved margins. The company has also revised its guidance upwards and announced another sponsored ADR offering.

Infosys Technologies has once again kick-started the earnings season with spectacular set of numbers, beating analyst expectations and its own forecasts. To make it even better, the company managed to improve operating margins during the quarter and has raised its revenue and profit guidance for the full year 2006-07.

For the quarter ended 30th September 2006, Infosys has reported a consolidated net profit of Rs929 crore or Rs16.37 per share – a growth of 53.3 per cent as compared to Rs606 crore or Rs10.82 crore for the previous year quarter. On a sequential basis, net profits have increased 16.1 per cent from Rs800 crore or Rs14.02 per share during the first quarter ended 30th June 2006.

Consolidated revenues have increased 50.4 per cent to Rs3,451 crore from Rs2,294 crore for the previous year quarter. Sequentially, revenues have increased 14.5 per cent from Rs3,015 crore reported for the June 2006 quarter.

Consensus profit estimates by analysts for the second quarter was in the region of Rs850 crore on revenues of close to Rs3,300 crore. The company had given a profit guidance of Rs823 crore on revenues of Rs3,280 crore for the quarter.

Operating profits, excluding other income, for the quarter has gone up by 51.1 per cent to Rs1,109 crore from Rs734 crore for the previous year quarter. Sequential growth in operating profits is 24.7 per cent from Rs889 crore for the first quarter.

Operating margins have improved to 32.14 per cent of net revenues as compared to 32 per cent for the previous year quarter. When compared to the first quarter of current year, operating margins have gone up substantially by 265 basis points from 29.49 per cent.

The improvement in margins is a result of slower expansion - as compared to revenue growth - in operating expenses, including staff costs. Sequential growth in staff costs and development expenses is only 8 per cent. Selling and marketing expenses have increased by 8.3 per cent while general and administrative expenses were higher by 12.5 per cent sequentially.

Other income declined to Rs66 crore, including Rs31 crore from dividend income and Rs23 crore of interest earned, from Rs128 crore for the previous quarter. Exchange gains were lower at Rs11 crore as compared to Rs52 crore for the June 2006 quarter.

Depreciation charges were higher by 27.1 per cent at Rs122 crore as compared to Rs96 crore for the September 2005 quarter and 15.1 per cent higher than Rs106 crore for the previous quarter. Tax provisions increased 78.3 per cent year-on-year and 16 per cent to Rs123 crore.

Revenue mix unchanged
Share of services and products as a percentage of total revenues remained unchanged at 96.3 per cent and 3.7 per cent respectively. Within services, maintenance remained the biggest revenue stream with 29.2 per cent followed by development at 21.4 per cent and package implementation at 17 per cent.

BPO services contributed 4.5 per cent, up from 4.2 per cent for the previous quarter. Consulting contributed 3.6 per cent to revenues as compared to 3 per cent for the first quarter and 3.8 per cent for the previous year quarter. Testing services improved its contribution to 6.8 per cent from 6.2 per cent for the previous quarter.

The share of fixed-price contracts as a percentage of total service revenues continued to decline. Fixed price contracts contributed only 26.2 per cent during the latest quarter as compared to 26.9 per cent for the first quarter and 28.7 per cent for the previous year quarter.

On-site revenues declined to 50.3 per cent from 50.5 per cent for the pervious quarter while offshore revenues increased to 49.7 per cent from 49.5 per cent.

In terms of verticals, banking, financial services and insurance (BFSI) improved its share to 37.4 per cent of revenues from 36.4 per cent for the previous quarter. Revenues from telecom sector improved to 18.9 per cent from 17.7 per cent while that from manufacturing declined to 14 per cent from 14.5 per cent.

Geographical split of revenues remained more or less unchanged. North American revenues declined to 63.7 per cent from 64 per cent of total revenues while revenues from Europe were lower at 25.8 per cent as compared to 26.2 per cent for the previous quarter. Rest of the world increased its contribution to 8.9 per cent from 8.4 per cent while domestic revenues increased to 1.6 per cent from 1.4 per cent for the June 2006 quarter.

New business
Infosys added 45 new clients during the quarter as compared to 38 in the previous quarter and 34 a year ago. Number of clients contributing over $1 million or more increased to 232 out of a total of 476 active clients. However, client concentration worsened modestly with the contribution of top-10 clients increasing to 32.9 per cent of total revenues from 31.7 per cent for the previous quarter and 30.6 per cent a year ago.

Number of employees increased to 66,150 from 58,409 during the previous quarter or a net addition of 7,741 for the quarter. Employee utilisation, including trainees, declined to 67.5 per cent from 71.1 per cent for the previous quarter. Excluding trainees, utilisation has increased to 77.5 per cent from 76.1 per cent.

Infosys had 1.12 crore square feet of built-up space with a seating capacity of over 57,000 as at the end of the latest quarter. Another 70 lakh square feet of space with a seating capacity of 13,400 is under construction. The company acquired more than 30 hectares of land in Chandigarh during the quarter for constructing a development centre.

Guidance
For the quarter ending 31st December 2006, Infosys has given an EPS guidance of Rs16.84 per share, a growth of 42.2 per cent, on revenues of between Rs3,602 crore and Rs3,625 crore, a growth of between 42.3 per cent and 43.2 per cent.

For the full year 2006-07, the company has forecast an EPS growth of 46.6 per cent to Rs66 per share on revenues of Rs13,853 crore and Rs13,899 crore – a growth of between 45.5 per cent and 46 per cent.

Sponsored ADS
The Infosys board has approved a sponsored ADS of up to 30 million shares offering in the international markets. Under a sponsored ADS programme, the company would not be issuing any new shares but existing shareholders can tender their shares to international shares. This is the second sponsored ADS from Infosys.

The underwriters to the issue would decide the pricing of the sponsored ADS offer at a later date. The company would also be offering ADS's under this programme to Japanese investors through a 'public offer without listing' (POWL), or an offer without a subsequent local listing in Japanese stock exchanges.