Infosys (INFY F2Q05 Conf Call Quotes) Jul-Sep Quarter Results and Q&A

Oct.11.05 | About: Infosys Limited, (INFY)

Infosys (INFY) just had their Jul-Sep quarter earnings conference call. Infosys posted excellent numbers overall. On the conference call, most analysts asking questions were congratulatory and positive.

Nandan Nilekani, CEO, Infosys on the July-September quarter, along with Kris Gopalkrishnan, COO & Mohandas Pai, CFO:

Key results:

  • Sequential revenue growth of 10.7% (Indian GAAP), 10.1% (U.S. GAAP)
  • Profit for the July-September quarter rose 36 percent from a year earlier to $137.7 million
  • Reached a revnue of US$1 Billion for the half year, compared to US$1 Billion for the full year in FY04
  • Gross margin 47.2% operating margin 32%, stable
  • Pricing stable, with small upward bias; getting 3% to 4% more (above Infosys average) from new clients; renewals of existing contracts for the most part are following the same pattern.
  • Added record number of employees, 8026 gross, with approximately 1000 with prior experience in other companies; total employees now approximately 46,100
  • Declared interim dividend of INR 6.5/share compared to INR 5/share to corresponding period last year

On Outlook:

  • Revenue now expected to be between $2.12 billion and $2.13 billion for the current fiscal year, higher than the $2.03 billion to $2.05 billion range forecast earlier
  • Company's fiscal fourth quarter revenue will be "positively impacted" by the effect of a weak rupee on its software exports. The Indian Rupee fell 2.1 percent against the U.S. Dollar in October.
  • We have to choose between expanding margins and expanding growth. At this time we are choosing growth.

On Positioning:

  • Infosys now a very strong global brand
  • We deliver services “better, faster and cheaper,” are are instrument of substitution and it keeps happening
  • Customers around the world have discovered our business model and are forcing legacy providers to provide the value that we do. That is why they are also coming to India. Some traumatic events are going to take place [for them].

Key business metrics:

  • 34 clients added this quarter, 36 last quarter, 32 year-ago quarter
  • 5 of the 34 new clients this quarter are Global-500 companies
  • Number of million dollar clients up to 191 from 172 last quarter
  • Number of five million dollar clients up to 76 from 73 last quarter
  • Number of ten million dollar clients up to 48 from 43 last quarter
  • Of top 10 clients, 2 are new this year
  • Number of clients lost in past 4 quarters now 126, up from 45 at same point year ago
  • 953 employees joined in one particular week; new training center in Mysore enables company to absorb such influxes
  • Attrition 10% this quarter, vs. 9.8% last quarter
  • Utilization rate, including trainees, is 79%, steady despite influxes
  • Sales from Infosys’s largest client declined 10% last quarter, and again 7% this quarter
  • Financial services a stronghold; Uptick in Retail this quarter

On the ABN-AMRO deal:

  • Will start generating revenue in Q4
  • Some minor margin pressure as it ramps up
  • ABN-AMRO chose multiple vendors of which Infosys is one. We believe this is an important trend: going away from one vendor, to multiple vendors and could influence other deals which are in the pipeline

On the predictability of large deals such as the ABN-AMRO deal:

  • Basically they are not predictable
  • We don’t have significant pipeline; at any point we are trying to win 4 or 5 of such deals
  • Unless we are awarded the deal, there is nothing to speak of; numbers are hence not large enough to build a forecasting model

On why revenue rate bounces around so much if Infosys’s business is supposed to be predictable:

  • Nothing structural
  • Company is larger
  • We perform and meet expectations

On status of China operations:

  • Subsidiary in China is losing money (revenue approx US$10M)
  • Going as planned, though
  • 303 employees there; targeting 1100 people by end of year
  • Acquired land; planning capacity for 10,000 people or more

On competing with Eastern Europe:

  • Presence in Czech Republic, Prague; Looking at other Eastern Europe locations
  • Mainly “enterprise services” (accounting, bookkeeping, HR, order management, etc.) are delivered from Eastern Europe locations
  • Attractive location for delivering multi-language services, but have to bear in mind that these are small countries with populations between 10 and 30 million each, so they do not have the kind of scalability that India does

On overall location expansion plans:

  • In 9 cities in India; looking at many Tier-2 centers within India to get access to the best and brightest people; be one of the preferred employers in those areas and get the best people
  • “Global Centers” in a few key places such as India, China, Czech Republic.
  • “Proximity Centers” in every major market
  • Optimized model of distributing our capacity

On outlook of outsourcing to Indian companies in particular:

  • Very strong. All data points positive: volume growth, types of relationships, large deals coming to Indian companies, growth of the verticals.

“Anything you can say about a rumored deal with General Motors?”

  • No
  • We are working on a number of deals

On why Consulting (technology consulting, architecture consulting, security consulting, some business consulting) has declined:

  • Mostly on track
  • It’s just that other services are growing faster

“It has been 18 months since the last special dividend. What is the dividend policy these days?”

  • To distribute not more than 20% of the profits earned during the year
  • In the event of a huge cash surplus, return the money to shareholders
  • No plans right now, but will convey your sentiments to the board

“Why have margins from European clients been falling? Is there pricing pressure there?”

  • They bounce around, yes, but margins are still in expected narrow range
  • Pricing is stable; exchange rate pressure not significant
  • Margins in Europe higher than in the U.S. because we did a lot of work in the U.K. and we get certain tax benefits on U.K. work
  • Margins in the U.S. depend on (i) mix of business, and (ii) spending on marketing and sales in the U.S.
  • Consulting subsidiary in the U.S. (Infosys Consulting) is losing money (revenue approx US$25M)
  • Australian subsidiary margins are low (revenue approx US$100M)

On Pinnacle (Infosys’s Banking / Call Center Product):

  • Spending about US$10M to add features and keep technology up to date
  • 70% of the large banks in India use Pinnacle
  • Product is in use in about 50 countries
  • For developed markets (Australia, Singapore, etc.) the product needs more features
  • Lack of right features in the product is preventing us from jumping into markets such as the U.S.

The audio.