Infosys (INFY) is set to report earnings on Friday, April 12, 2013. At present, the Street expects the company to earn $0.74 per share on revenue of $1.99 billion for its fiscal fourth quarter ended March 31, 2013. For the current June quarter (Infosys's FQ1:14), current estimates are earnings of $0.75/share on revenue of $1.99 billion as well. For FY14 ending March 31, 2014, the sell-side has modeled earnings of $3.16 per share on revenues of $8.25 billion.
INFY is currently trading at just $3 and change off its 52-week high thanks to a surprisingly strong report for the December quarter which led to a 18.81% increase in share price the day it reported earnings in the middle of January (closed at $52.22 versus $43.95 the day before it reported earnings). Having said that, INFY is still a big laggard versus the S&P500 (SPY) (or any other major US index for that matter) with a 52-week negative return of around 7% versus a positive return for the S&P500 of almost 15% for the same 52-week comparative period. However on a year to date basis Infosys has significantly outperformed the S&P500 with a return of 25.3% as of yesterdays closing price of $53/share.
There is a lot of chatter at the moment about whether INFY will provide guidance going forward for the year. I think they will, so lets put that issue to bed for now. Quarterly guidance is another thing altogether and that might not happen. No matter what, guidance is a key area that investors need to keep an eye out for if the management decides to continue at least annual guidance.
Another issue that is looming large at the moment is whether the company will increase their dividend or pay a large one-time special dividend. INFY currently has about $4.15 billion in cash. I am not holding my breath on that however, never say never.
Investors need to also keep in mind that the company's short interest (SI) has also been increasing along with its share prices. As of March 15, 2013, the current SI was at 23.4 million shares (NYSE.com) with a current short ratio (days to cover) of 12.7x.
Having said all that, what should investors and shorts expect from Infosys's FQ1:14 tomorrow morning before US markets open for regular trading?
Infosys has guided the March quarter to revenue growth of about 4% including the Lodestone acquisition. Organic growth (not counting revenue contribution from Lodestone) should be around 3.7% to 3.8% QoQ.
Last quarter, big upside was significantly attributed to the company's success in the banking and ERP verticals which accounted for almost 69% of the company's upside surprise when they reported earnings for the quarter in mid January. If one were to factor in the recent deal wins by the company, I think one can safely assume in-line revenue tomorrow.
On the earnings front, a lot depends on how the onsite wage hikes that went into effect this quarter and how much of an impact will the Lodestone acquisition and integration have on the company's margins. Management had guided to a 120-140 basis points adverse effect on margins in the March quarter due mainly to these two reasons. In addition for IT companies, tax rates for 2014 will also increase by another 1-2% which could further dampen margins and thus earnings for FQ1:14 and for FY:14 as well.
Also, look for what management says regarding order booking patterns, budgetary issues and constraints faced by clients given the global economic uncertainty, comments regarding pricing flexibility and finally, comments on how each of the verticals are faring in terms of growth and demand.
All in all, I expect INFY to move up after reporting numbers tomorrow before the open. We are adding April 19 calls to our already existing long-side position.
Good luck everyone!
Until the next time, happy and safe investing
Additional disclosure: INFY leaps, INFY april monthly calls