Infosys Beats Estimates on Broad-Based Growth

| About: Infosys Limited, (INFY)

Infosys Technologies Limited (INFY) reported second quarter 2011 earnings per ADS from continuing operations of 65 cents, which surpassed the Zacks Consensus Estimate of 60 cents. Earnings increased by 14.0% sequentially and 16.1% year over year, led by growth in all areas and customer base. This was the first quarter in the last three years in which the company witnessed double-digit growth.

Business Details
Total revenue for the quarter was $1,496 million, representing year-over-year growth of 29.6%. The company saw growth in retail and manufacturing, and also in energy and utilities. North America contributed 65.8% of revenues and Europe accounted for 21.8% of the same. The company derived 2.1% of its revenue from India and remaining 10.3% of total revenue was earned from rest of the world. The percentage of fixed price contracts was 39.9% in the quarter, an increase of 90 basis points from the prior quarter.

A total of 27 new clients were added during the quarter, taking the number of active clients to 592. There was a net addition of 7,646 employees, taking the total number of employees to 122,468 globally.

During the quarter, Infosys applied for 18 patent applications in India and the US. So far, Infosys has been granted 15 patents by the United States Patent and Trademark Office and it currently has 256 pending patent applications in India and the U.S.

Including and excluding trainees, there was an increase in the utilization level of employees in the quarter. Including freshers, utilization was 74.3%, compared with 73.0% in first quarter of fiscal 2011, while excluding freshers, utilization was 81.2%, compared with 78.7% in first quarter of fiscal.

During the quarter, the Infosys iEngage™ digital consumer platform was selected by one of the world’s leading semiconductor companies to deliver next generation eCommerce for its direct-to-consumer division servicing North America and four countries across Europe.

The company entered into a strategic partnership with Jive Social Business Software for the Infosys iEngage™ digital consumer platform. The venture is expected to enhance the customer and employee engagement functionalities in Infosys iEngage™. Infosys will work closely with Jive in three areas – product roadmap, platform expertise, and best practice sharing.

The company recorded an operating profit of $452 million compared with $350 million in the prior-year period. Net income after tax was $374 million, up 14.7% sequentially and 18.0% year over year.

Balance Sheet
Infosys maintain a strong liquidity position with cash & cash equivalents, including investments in available-for-sale financial assets and certificates of deposits, amounting to $3.9 billion at the end of the quarter.

The company declared an interim dividend of 22 cents and 30th year special dividend of 67 cents per ADS, at the prevailing exchange rate of INR 44.50 per USD. The record date for the payment of dividend is October 22, 2010.

For the quarter ending September 30, 2010, Infosys expects revenues to be in the range of $1,547 million to $1,562 million, up 25.6% to 26.8% year over year. Earnings per ADS are expected to be in the range of 66 cents to 67 cents, up 11.9% to 13.6%.

For fiscal year ending March 31, 2011, revenues are expected to be in the range of $5.95 billion to $6.00 billion, up 24.0% to 25.0%. Earnings per ADS are expected to be in the range of $2.54 to $2.58, up 10.4% to 12.2%.

The Indian offshore IT services market has seen tremendous growth over the past five years, and there are reasons to believe that this growth will continue in the foreseeable future. A vast pool of talented labor, an English-proficient population and a competitive cost structure characterize this market. Additionally, the Indian offshore services market only accounts for a small percentage of worldwide IT services spending, leaving room for Infosys to grow.

The company continues to focus on large transformational engagements, especially through its consulting and enterprise solutions offerings. The clients have been impressed by its engineering services. The pricing environment has stabilized and there is increasing demand for its system integration services due to Mergers & Acquisition.

However, revenues of Infosys are highly dependent on clients primarily located in the United States and Europe, as well as on clients concentrated in certain industries. The soft economy or factors that impact the economic health of the United States, Europe or these industries may affect its business.

Further, Legislation in certain countries, such as the United States and the United Kingdom, may restrict companies in those countries from outsourcing work to INFY. Client contracts can typically be terminated without cause and with little or no notice or penalty, which could negatively impact its revenues and profitability.

Intense competition in the market for technology services could affect Infosys’ cost advantages, which might reduce its share of business from clients and decrease its revenues.

Founded in 1981, Infosys Technologies Ltd. is the second-largest IT services company in terms of revenue in India. Headquartered in Bangalore, India, the company enables its clients to leverage its performance by utilizing its proprietary Global Delivery Model (GDM). Major competitors of Infosys are Tata Consultancy Services Limited and Wipro Technologies, global IT services business division of Wipro Limited (WIT).

We currently have a Neutral recommendation on INFY, with a Zacks #3 Rank (short-term Hold recommendation) over the next one-to-three months.