Infosys (INFY) Reports In-Line Q4 Earnings, Outlook Bleak

Despite contracted IT spending and anti-immigration rhetoric of President Donald Trump, IT and outsourcing services behemoth, Infosys Limited (NYSE:INFY) managed to meet earnings estimates in fourth-quarter fiscal 2017 results. The company reported earnings per American Depository Share (“ADS”) of 24 cents for the quarter, in line with the Zacks Consensus Estimate and up 4.3% on a year-over-year basis.

However, investors were disappointed by the company’s subdued outlook for the coming fiscal and its shares reflected the sentiment as they declined 4.7% in pre-market trading at one point.

The bottom line benefited from a modest top-line performance and diligent operational execution.

For fiscal 2017, Infosys reported earnings of 94 cents per ADS, up 4.4% over the prior fiscal.

Quarterly Details

Revenues increased 5% year over year to $2,569 million, but missed the Zacks Consensus Estimate of $2,586 million. Moreover, in terms of constant currency, revenues were up 5.3%.

Top-line growth was largely supported by lucrative contract wins, the Renew New strategy, growth in delivery services and lucrative client wins. During the reported quarter, the company added 71 clients, which also proved conducive to revenue growth.

For fiscal 2017, revenues came in at $10,208 million, up 7.4% over fiscal 2016.

Infosys’ operating profit inched up 1.5% year over year to $634 million. Management believes that strong focus on operational improvement helped maintain the company’s operating profits in the quarter.

Geographical & Industry-wise Performance

The company witnessed growth in three of the four regions where it operates. Fourth-quarter sales in North America, India and Rest of the World improved about 4.2%, 9.6% and 9.5% year over year, respectively. However, revenues from Europe declined 2.4% year over year.

Renew New Strategy Progresses Well

Infosys has been diligently following the “Renew New” program, which lays the blueprint of its long-term growth. Under the “Renew” initiative, the company introduced offerings in the areas of Digital, Cloud, Data Sciences, Mainframe Modernization, Cyber security, API Microservices and Internet of Things.

Currently, Infosys is witnessing impressive market demand for mainframe modernization across all verticals, and is working jointly with Amazon (NASDAQ:AMZN) Web Services and Azure, to help clients embrace cloud platforms. Under the “New” initiative, Infosys has been recording robust momentum in software and services.

Moreover, most of Infosys’ businesses, particularly EdgeVerve software products, continued to deliver sturdy performance in the quarter. The EdgeVerve business clinched 30 wins and 26 go-lives from both the Finacle and Edge suite of solutions in the reported quarter.

The company’s three distinguished offerings – Artificial Intelligence, Knowledge-based IT and Design Thinking – are proving to be key profit churners, helping to expand its market share.

Liquidity & Dividend

As of Mar 31, 2017, Infosys had cash & cash equivalents of $3,489 million, compared with $4,935 million recorded as of Mar 31, 2016.

For fiscal 2017, the company announced a final dividend of $0.23 per ADS.

Infosys Limited Price, Consensus and EPS Surprise

Key Hire

Concurrent with the fiscal fourth-quarter earnings release, Infosys declared that Mr. Ravi Venkatesan, Independent Director, will be appointed as Co-Chairman of the Board.Venkatesan will support the management in executing the company’s strategy.

Outlook

Infosys, considered as a gauge for the health of the $3-trillion global enterprise spending market, reduced its guidance for revenue growth this fiscal year to 6.1–8.1%, which is much lower than the market’s expectations. In fact, the growth forecast is lower than that of rival Cognizant Technology Solutions Corporation (NASDAQ:CTSH) , which expects to grow between 8–10%.

To Conclude

Infosys faced unexpected execution challenges and diversions in what is already a seasonally soft quarter. However, CEO Vishal Sikka maintained that the company is seeing many positive developments in its strategy execution, as its software-led offerings continued to gain momentum, and client success and employee engagement continued to decrease attrition, especially with top performers.

Despite the positives, three back-to-back guidance tweaks indicate the tough macroeconomic conditions under which the company is operating. Rapid proliferation of customizable Internet-based software has been hampering Infosys’ traditional outsourcing business, thus thwarting growth. Moving ahead, developments on the H-1B visa front and the foreign currency movements could prove to be formidable risks to the company. Though the extent of this impact is yet to be determined, the Zacks Rank #3 (Hold) company is likely to face the brunt as major western clients might curtail spending further.

Stocks to Consider

Some better-ranked stocks in the broader computer & technology sector are Science Applications International Corporation (NYSE:SAIC) and Sphere 3D Corp. (NASDAQ:ANY) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Science Applications International Corporation provides technical, engineering, and enterprise information technology services in the U.S. It boasts a remarkable average surprise of 9.2% for the trailing four quarters, beating estimates all through.

Sphere 3D is a virtualization technology solution provider. This company also posted earning beats thrice in the trailing four quarters. It boasts an average beat of 25.5%.

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