Infosys (INFY) Q2 Earnings Beat, Revenues Miss, View Bleak

Infosys Limited (NYSE:INFY) has braved formidable odds like a high-profile CEO’s exit, contracted IT spending and unfavorable political climate in the United States to score an earnings beat in second-quarter fiscal 2018.

The company reported earnings per American Depository Share (“ADS”) of 25 cents for the quarter, which topped the Zacks Consensus Estimate by a penny and was up 4.2% on a year-over-year basis. The bottom line benefited from a modest top-line performance and diligent operational execution.

Quarterly Details

Revenues increased 5.5% year over year to $2,728 million, but lagged the Zacks Consensus Estimate of $2,782 million. In terms of constant currency, revenues were up 4.6%.

Top-line growth was largely supported by lucrative client wins and impressive traction of new high growth services and software business. The company’s Renew New Strategy is proving to be a solid growth driver, helping in earning more clients. The company added 72 new clients in the quarter.

Infosys’ investments in new services, particularly in Cloud Ecosystem, Big Data and Analytics, Data and Mainframe Modernization, Cyber Security, API and Micro services and IoT Engineering Services have been showing promising results. In the reported quarter, the company’s offerings have seen increased traction with clients, and contributed 9.4% of the company quarterly revenues.

Infosys’ new software business also continues to show momentum, and contributed 1.6% to fiscal second-quarter revenues, driven by offerings across Finacle, Edge, NIA, Panaya and Skava.

Infosys’ operating profit rose 2.4% year over year to $659 million. Strong focus on operational improvement helped maintain the company’s operating profits, despite strong headwinds.

Renew New Strategy Progresses Well

Infosys has been diligently following the “Renew New” program, which lays the blueprint of its long-term growth. The company’s three distinguished offerings — Artificial Intelligence, Knowledge-based IT and Design Thinking — are proving to be key profit churners, helping expand its market share.

During the reported quarter, Infosys continued to renew traditional services and rolled out others in areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Cyber Security, and IoT Engineering Services. It also launched some software-led offerings.

Infosys Limited Price, Consensus and EPS Surprise

Under the “Renew” initiative, Infosys helped clients renew traditional IT services and infrastructure. Meanwhile, the company has been recording robust momentum in software and services business under the “New” initiative. Skava, which has expanded its footprint beyond retail, and Panaya, continued to witness robust momentum, thus stoking top-line growth.

The company’s integrated artificial intelligence platform — Nia — continued its positive momentum in the quarter and featured in several large new deals. Currently, Nia has over 200 engagements across more than 100 clients. The company remains bullish about its prospects, going forward.

Also, during the quarter, Infosys acquired Brilliant Basics, a product design and customer experience innovator. This acquisition is set to enhance the company’s digital capabilities.

Liquidity & Share Buyback

As of Sep 30, 2017, Infosys had cash and cash equivalents of $3,575 million compared with $4,763 million recorded a year back. During the quarter, Infosys announced a $2-billion share-repurchase program to boost stakeholder returns. Asia’s second-largest software services developer plans to repurchase more than 113 million shares at Rs 1,150 apiece, per an exchange filing.

Outlook

Concurrent with its fiscal second-quarter results, Infosys lowered its fiscal 2018 guidance. Plagues by numerous headwinds, the company now forecasts revenue growth in the range of 6.5-7.5%, up from the earlier guided range of 7.1-9.1%. Both the figures are in USD terms, based on the exchange rates as of Sep 30, 2017.

Our Take

Fiscal 2018 has been an eventful year for Infosys. The company’s share price was badly affected in August when the former CEO — Vishal Sikka — resigned after a prolonged period of disagreement between the board and the company’s founders, led by NR Narayana Murthy.

The company’s well structured “Renew New” strategy has proven to be a consistent profit churner. Infosys’ lucrative client wins and solid operational execution are likely to drive growth for the rest of the fiscal year. Also, its partnership with leading technology providers like Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN) are anticipated to unlock fresh growth opportunities.

Despite these positives, this Zacks Rank #3 (Hold) company’s growth momentum may be thwarted on account of unfavorable political climate in the United States. Over the past few months, Infosys has been struggling to adapt itself to the changing political climate in the region. This is a direct threat to the company’s economical cost structure, which focuses on using its workforce on sites located abroad.

A better-ranked stock in the industry is MAM Software Group, Inc. (NASDAQ:MAMS) . This Zacks Rank #1 (Strong Buy) company has an outstanding average positive earnings surprise of 104.2% for the trailing four quarters, beating estimates thrice. You can see the complete list of today’s Zacks #1 Rank stocks here.

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