Infosys (INFY) Q4 Earnings Match Estimates, Revenues Surpass

Infosys Limited’s (NYSE:INFY) fourth-quarter fiscal 2019 adjusted earnings of 13 cents per share were in line with the Zacks Consensus Estimate.

Revenues of $3.06 billion increased 9.1% year over year and also surpassed the Zacks Consensus Estimate of $3.04 billion. In terms of constant currency (CC), revenues were up 11.7%.

Rise in large deal wins and fast growing digital services remain key catalysts. However, contraction in margins remains a key concern.

Quarterly Details

Digital Revenues (34% of total) surged 37.5% year over year to $1.04 billion while Core Revenues (66%) dipped 1% to $2.03 billion.

Strong demand for cloud, IoT, cyber plus data and analytics is a key driver. Robust digital demand across regions and particularly, in client segments like telco, energy, utilities, retail, insurance and manufacturing is a steady tailwind. Higher investments by clients in digital transformation, artificial intelligence and automation are an upside.

Geographically, on a sequential basis, North America and Europe revenues rose 3.7% and 1.4%, respectively, at CC. While, Rest of the World and India declined 1.3% and 9.1%, each.

Segment wise, Communication achieved maximum sequential growth of 16.6%. Hi Tech, Energy, Utilities, Resources & Services and Manufacturing rose 6.9%, 1.5% and 1.6%, respectively.

Escalating client spends on automation, analytics, VPN, cloud area and ERP (Enterprise resource planning) implementation are boosting the Hi Tech vertical. The Utility segment is driven by “investments in the pipeline modernization initiative and digitalization of legacy stacks”.

Meanwhile, Financial Services, Retail and Life Sciences slid 0.8%, 0.9% and 1.9%, respectively. Budget constraints of some U.S. clients were an overhang on Financial Services. Slowing growth and steep cost pressures are adversely impacting Life Science clients.

In the last reported quarter, the company inked 13 large deals with a total contract value (TCV) of more than $1.6 billion. Three of these were in Financial Services, Manufacturing and Life Sciences, two in Hi Tech and one in Retail and other segment.

Geographically, seven were from America, five from Europe and one from India.

The company reported that its $100 million-plus clients are now 25 compared with 20 a year ago.

Augmenting traction of the company’s digital banking platform with new major global logos adopting it in fiscal 2019 is a key driver.

Margin

Gross profit inched up 2% year over year to $1.03 billion. Gross margin shrank nearly 230 basis points (bps) on a year-over-year basis to 33.7%.

The company’s operating income grew 5% year over year to $658 million. However, operating margin shriveled 320 bps to 21.5%.

Elevated investments in sales and localization, cost to ramp up large deal wins and drop in utilization were a threat to the margins.

Liquidity

As of Mar 31, 2019, Infosys had cash and cash equivalents of $2,829 million compared with $2,357 million sequentially.

Operating cash flow in the quarter under review was $583 million and free cash flow was $467 million.

Outlook

In fiscal 2020, revenues are expected to grow in the range of 7.5-9.5% at constant currency.

Operating margin range is anticipated between 21% and 23%.

Increasing investments on sales and localization, higher compensation to tackle the rising attrition and costs due to more number of recent large deals persist to weigh heavily on the margins. However, the company expects operational efficiencies, a better mix from higher-margin digital revenues and onshore utilization rates to be positive.

Management mentioned customer acquisition, digital banking, cybersecurity and lending to be the key areas of strategic focus and spending in the current year.

The company expects Communication business to witness a consistent performance in fiscal 2020. Investments in this sector are centered around adoption and the deployment of 5G, leading to an advanced enterprise IoT.

Zacks Rank and Stocks to Consider

Currently, Infosys has a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader Computer and Technology sector are MeetMe, Inc. (NASDAQ:MEET) , Cadence Design Systems, Inc. (NASDAQ:CDNS) and Alteryx, Inc. (NYSE:AYX) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for MeetMe, Cadence and Alteryx is projected at 20%, 12% and 15.4%, respectively.

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