Infosys Q3 results fail to excite

Third quarter results of Infosys are ordinary by the company's own exalted standards, which has disappointed the markets. By Rex Mathew

The weight of expectations can sometimes be so high that even Infosys Technologies, which has a stellar track record of consistent growth, cannot always exceed market expectations.

After reporting exceptionally strong numbers for the first two quarters of the financial year, the appreciation of the rupee has prevented an encore. Results for the third quarter ended 31 December, 2006, have just about managed to meet consensus forecasts and the forward guidance is more subdued than usual.

Consolidated net profits for the third quarter went up 51.5 per cent to Rs983 crore, or Rs17.24 per share, as compared to Rs649 crore, or Rs11.52 per share, for the previous year quarter. Consolidated revenues increased 44.4 per cent to Rs3,655 crore from Rs2,532 crore for the same quarter of previous year.

On a sequential basis, net profits have increased 5.8 per cent from Rs929 crore, or Rs16.37 per share, for the September 2006 quarter. Revenues have increased 5.9 per cent from Rs3,451 crore reported for the previous quarter.

Consensus analyst estimates were for a sequential bottom line growth of between 5 per cent and 7 per cent while revenues were forecast to expand 7 per cent sequentially. Infosys had given an EPS guidance of Rs16.84 per share for the third quarter on revenues of between Rs3,602 crore and Rs3,625 crore.

Infosys said it lost close to Rs145 crore in revenues on account of the rupee appreciation. The company expects the rupee to firm up further and currently has forward currency contracts for over $350 million.

Operating profits for the quarter increased 38.9 per cent from the pervious year quarter and 7.8 per cent sequentially. Operating margins as a percentage of revenues declined to 32.72 per cent from 34 per cent for the previous year quarter. Operating margins improved marginally from 32.14 per cent achieved for the second quarter.

Staff costs and other software development expenses increased 46 per cent on a year-on-year basis and 5.7 per cent sequentially. Selling and marketing expenses went up 49.4 per cent over the previous year quarter and 6.8 per cent sequentially. General expenses jumped 53.2 per cent year-on-year, but declined a per cent sequentially.

Other income for the quarter was at Rs59 crore as compared to an expenditure of Rs5 crore for the previous year quarter and Rs66 crore for the September 2006 quarter.

The banking, financial services and insurance (BFSI) segment remained the main stay, contributing 38.6 per cent of total revenues. The segment had contributed 36 per cent of revenues a year ago and 37.4 per cent during the previous quarter.

The share of the telecom vertical was at 18.3 per cent during the quarter as compared to 15.8 per cent during the previous year quarter and 18.9 per cent for the September 2006 quarter.

Manufacturing contributed 12.8 per cent of total revenues while retail pitched in with 10.5 per cent

In terms of geographical regions, revenue contribution by the North American market continued to decline. For the latest quarter, it stood at 63.2 per cent of total revenues as compared to 65 per cent a year ago and 63.7 per cent for the previous quarter. Share of Europe increased to 26.8 per cent from 24.9 per cent for the previous year quarter and 25.8 per cent for the September 2006 quarter.

Maintenance remained the major contributor in terms of business segments, accounting for 29.8 per cent of total revenues as compared to 29.5 per cent a year ago and 29.2 per cent for the previous quarter. Share of development declined to 20.1 per cent from 21.1 per cent for the previous year quarter and 21.4 per cent during the previous quarter. Package implementation increased its share to 17.9 per cent from 17 per cent during the previous quarter while testing services improved its share to 7 per cent from 6.8 per cent. BPO services contributed 4.9 per cent of total revenues as compared to 4.5 per cent for the previous quarter.

Share of fixed price contracts in total revenues declined to 27.7 per cent from 28.4 per cent a year ago, but were higher than 26.2 per cent for the previous quarter.

Infosys added 43 new clients during the quarter, taking the total number of active clients to 488, as against 45 new clients during the previous quarter. Top-10 clients contributed 31 per cent of total revenues, an improvement from 32.9 per cent for the previous quarter.

The top client accounted for 6.9 per cent of revenues during the quarter as compared to 4.5 per cent during the previous year quarter and 6.6 per cent for the previous quarter.

Offshore revenues for the quarter were 50.8 per cent as against 51.4 per cent for last year and 49.7 per cent for the previous quarter. Repeat business formed 94.7 per cent of total revenues as compared to 93.2 per cent during the previous year quarter and 95.2 per cent for the previous quarter.

Infosys added 3,282 employees during the quarter, taking total employee strength to 69,432. Employee utilisation declined to 75.8 per cent, excluding trainees, from 78.7 per cent a year ago and 77.5 per cent for the previous quarter.

Employee attrition increased to 13.5 per cent from 10.8 per cent during the previous year quarter and 12.9 per cent for the previous quarter. Infosys currently has a total space of 11.5 million square feet at its various domestic facilities and can seat 58,488 employees. The company is currently constructing another 9.35 million square feet of space, which can accommodate 23,217 seats.

Guidance
For the last quarter, Infosys has given a revenue guidance of between Rs3,789 crore and Rs3,798 crore for a year-on-year growth of between 44.4 per cent and 44.7 per cent. EPS for the last quarter expected to be Rs17.88.

For the full year 2006-07, revenue guidance is between Rs13,910 crore and Rs13,919 crore for an annual growth of between 46.1 per cent and 46.2 per cent. EPS for the full year is expected at Rs66.63.

It was an eventful quarter for Infosys as the company completed a $1.6 billion sponsored ADS programme and also became the first Indian company to be a part of the NASDAQ-100 index.