Infosys (INFY) Q1 Earnings Miss, Guidance Cut; Stock Down

Infosys Ltd. (NYSE:INFY) reported first-quarter fiscal 2017 earnings per American Depository Share of 22 cents that missed the Zacks Consensus Estimate by a penny, but rose 4.8% on a year-over-year basis.

However, Infosys shares plummeted nearly 11% in pre-market trading as the company slashed its revenue forecast for the full year in light of the fact that companies worldwide are reining in IT spending and shifting to cloud-based software services

This is only the second time that Infosys has missed earnings expectations since Vishal Sikka took the helm of Asia’s second-largest software services exporter.

Decent revenue growth drove the year-over-year improvement in the bottom line. However, foreign currency volatility and slower project ramp-ups in large deals remained headwinds.

Quarterly Details

Revenues increased 10.9% year over year to $2,501 million, but missed the Zacks Consensus Estimate of $2,549 million. Moreover, in terms of constant currency, revenues were up 12.1%.

Top-line growth was largely driven by lucrative contract wins, backed by the Renew-New strategy, growth in delivery services and enhanced operational efficiency. Improvement in client relationships and better employee engagement also contributed to the overall quarterly performance.

However, revenues were negatively impacted by unexpected headwinds in discretionary spending in consulting services and package implementations. Also, slower project ramp-ups in large deals restricted growth for the quarter.

Infosys’ operating profit climbed 11.3% year over year to $602 million. Management believes that strong focus on operational improvement boosted the company’s operating profits in the quarter.

Geographical Performance

The company witnessed growth in three of the four regions where it operates. First-quarter sales in North America, Europe and Rest of the World rose about 2.5%, 0.6% and 6.9% sequentially, respectively. Meanwhile, sales in India declined 7.6%.

Industry-wise Performance

Each of the four reporting segments of the company registered modest growth. The Energy, Utilities, Communications & Services and Manufacturing & Hi-Tech divisions emerged as the biggest gainers, wherein revenues rose 3.1% and 2.9% on a sequential basis, respectively. Revenues in the Banking & Financial division improved 2.2% sequentially, while that at the Retail & Life Sciences division grew 1% on a sequential basis.

Notable Developments in the Quarter

Infosys secured major deals with the likes of Samsung (KS:005930) and Onegini for its Finacle banking solutions, to redefine mobile banking and payment services. It also partnered with KUKA Aktiengesellschaft to develop a software platform that will enable users to gather, assess and employ data to improve their own processes.

Apart from this, the company’s strategic collaborations with leading technology providers in the industry and complementary acquisition plans added to its growth. The quarter saw Infosys extending its partnership with technology behemoth, Microsoft Corp (NASDAQ:MSFT). to aid the digital transformation of health institutions through the deployment of smart analytics solutions. Also, Infosys teamed up with Amazon (NASDAQ:AMZN) Web Services (“AWS”) to offer a suite of technologies to enable transition from legacy IT to a modern cloud-based platform.

During the quarter, the company launched Infosys Mana, a knowledge-based AI platform which drives automation and innovation by integrating machine learning with an organization’s inherent knowledge.

Moreover, most of Infosys’ businesses including Panaya, Skava & Edge software product recorded solid growth in the quarter that benefited both the top and bottom lines. In a bid to expand its market share and focus more on customers, the company came up with three distinguished offerings, namely, Artificial Intelligence, Knowledge-based IT and Design Thinking last year. These services continued to gain solid traction by way of renewals.

Further, Infosys’ “Zero Distance” program, which aims to foster innovation in every project undertaken by it, witnessed steady progress during the quarter. This program contributed to employee improvement which, in turn, drove the company’s overall performance. Infosys has significantly improved its content, thanks to the Zero Distance program.

Liquidity

As of Jun 30, 2016, Infosys had cash & cash equivalents of $4,598 million, compared with $4,750 million recorded as of Jun 30, 2015. The company paid $481 million in dividends during the quarter.

Guides High

Infosys, which is considered as a gauge for the health of the $3 trillion global enterprise spending market, dramatically reduced its guidance for revenue growth this fiscal year to 10%−11.5%, from the previous expectation of 11.8%−13.8%.

To Conclude

At the core, Infosys reported steady results despite formidable headwinds like sluggish macroeconomic growth and intensifying competition. Constant innovation, business realignment to attain better operational efficiency and major contract wins are likely to support the company’s growth for the rest of the fiscal. Apart from this, rapid traction in its AiKiDo offerings and strategic alliances also bode well for future growth.

Infosys is betting on automation and other high-margin services like artificial intelligence and digital technology to drive growth, going forward.

However, the company is grappling with a fundamental shift in the way clients buy and use technology. A rapid proliferation of customizable Internet-based software is hurting Infosys’ traditional outsourcing business.

Also, macroeconomic concerns like slowdown in China and economic uncertainty around Britain’s decision to exit the European Union might compel corporations to hold back their discretionary spending. In fact, Gartner Inc. expects worldwide IT spending to be flat in 2016 over the previous year.

Infosys currently holds a Zacks Rank #4 (Sell). Better-ranked stocks in the industry include Science Applications International Corporation (NYSE:SAIC) , CDK Global, Inc. (NASDAQ:CDK) and Wix.com Ltd. (NASDAQ:WIX) , each carrying a Zacks Rank #2 (Buy).