Margin guidance disappoints
While Infosys met the Street’s expectations, the company’s revenue growth guidance for 2018-19
(FY19), especially the projection on the operating margin, disappointed investors. The Bengaluru-based company said it was expecting its operating margin in FY19 to be in the range of 22-24 per cent as it looked at making investments in enhancing digital capabilities, reskilling people, and expanding operations in global locations. It also projected revenue growth to be in the range of 6-8 per cent in constant currency terms. Even though the Infosys numbers were announced at the close of the market hours in India, the company’s American Depository Receipts (ADRs) fell 7.61 per cent on the NYSE to $16.64 as global investors were seen unhappy with the company’s margin growth guidance.
Infosys met Street expectations on financial numbers for the January-March quarter (Q4) as well as for 2017-18. But the firm’s revenue growth guidance for 2018-19, especially the projection on operating margin, disappointed investors.
The Bengaluru-based company projected the revenue growth to be in the range of 6-8 per cent in constant currency terms. Operating margin in 2018-19 is expected to be in the range of 22-24 per cent, as the company is looking at spending on digital capabilities, reskilling staff and expanding globally.
Though the numbers were announced after market hours in India, the firm’s American depositary receipts fell sharply by 7.61 per cent to $16.64 (as of 12.15 am IST on April 14) on NYSE, possibly indicating global investors were unhappy with the margin growth guidance.
“The 2018-19 revenue guidance is in line with our expectations, while margin guidance disappoints a little bit considering its additional investments in digital and settingup onsite delivery centres,” said Sanjeev Hota, AVP-Research, Sharekhan by BNP Paribas.
At the end of Q4, the company’s operating margin stood at 24.7 per cent, an improvement of 40 basis points over the previous quarter. For the quarter ended December 2017, the firm had posted a 2.4 per cent growth in its net profit at ~36.90 million and 5.6 per cent growth in revenues at ~180.83 billion compared with the year-ago period.
A Bloomberg estimate had projected net profit of ~37.11 billion and revenues of ~181.1 billion.
Sequentially (compared with the trailing quarter), net profit declined 28.1 per cent and revenues grew 1.6 per cent. The decline in sequential net profit was primarily on account of a one-time tax gain incurred in the previous quarter due to an
advance pricing agreement with the US Internal Revenue Service.
For the full year, net profit grew 11.7 per cent at ~160.29 billion, while revenues grew 3 per cent to ~705.22 billion. “Our robust performance is a reflection of the strong impact we have with our clients and the dedication of our employees,” Salil Parekh, chief executive officer and managing director, said.
Growth during the quarter was aided by a strong performance of the firm’s digital portfolio, which grew 3.6 per cent (in constant currency terms) in Q4 and accounted for 25.5 per cent of its total revenues
in 2017-18. The company said its focus on driving automation, product and platforms helped its revenue productivity and non-linearity.
“If you look, our revenues in 2017-18 grew 7.2 per cent (in dollar terms) and our employee count grew by 1.9 per cent over the previous year,” M D Ranganath, chief financial officer, said.
Infosys said its revenue growth guidance was based on the visibility it had on clients’ budget and spending patterns at the moment. “In terms of spends, we see that the market is in a reasonably strong position,” Parekh said.
In Q4, Infosys showed growth in most of its markets, except for India, where it is reorienting its focus towards the corporate sector rather than focusing on seasonal government projects. The growth in the rest of the world and Europe markets were 8.3 per cent and 3.6 per cent, respectively. Growth in the North American market was nearly flat.
Out of the cash on the balance sheet, the board has identified an amount of up to ~130 billion to be paid to shareholders. At the end of 2017-18, the company had cash and cash equivalents of $3.04 billion.