Infosys Shaky

What is the outlook for India’s outsourcing industry amidst the market turmoil? The Indian IT major, Infosys Technologies (INFY) had expressed its concerns about the recession when the company announced its Q407 results earlier this year. Its Q2 results and the outlook for 2008-09, announced on October 11, quantify these concerns. For the quarter, revenues of $1.22 billion met analysts’ expectations while EPS of $0.56 exceeded expectations by $0.01. Revenues grew 19% over the year. EPS grew 16% over the year and 4% sequentially.

By region, Europe contributed 28.3% of revenues, compared with 27.3% last quarter, and the North American contribution was down slightly, to 61.8% from 62.6% in the first quarter. The rest of the world contributed 9.9% of total revenues, up from 8.8% last quarter. The heavy reliance in American business is a huge concern for the company longer term, as the U.S. is now going to be in a prolonged belt-tightening phase. Sure, companies use outsourcing to cut costs in down markets, and in fact, this decade’s boom in outsourcing was actually a product of the dotcom bust and post 9/11 trauma. However, the current market conditions may not exactly mirror the previous one, and Infosys’ guidance reflects that apprehension.

By segment, Application Development and Maintenance [ADM] contributed 44.2% of revenues while Consulting Services brought in 24.3%. Business Process Management contributed 6%, Infrastructure Management 5.2%, Product Engineering Services 2.0%, System Integration 3.1%, Testing Services 7.2%, and Other the balance 4.2%.

Infosys was looking at the Axon acquisition to help get it out of pure body-shopping and into SaaS, and remove its reliance on labor arbitrage as a strategy. However, as of now, the company has not increased its offer in retaliation to HCL’s bid. Hopefully, it will continue scouting for similar opportunities. In this down market, opportunities for inexpensive acquisitions abound.

In view of the market outlook, the company revised its guidance for the year downwards to revenue growth of 13.1-15.2% against the earlier guidance of 19-21%. For the Q3, the company expects revenues to be sequentially flat at $1.2 billion.

The stock slipped 4% from the previous day’s close of $25.02 and went down to a new two-year low of $23.91. It has recovered since, as the market overall is doing well this morning, with gains across the board.

Disclosure: None

Comments

[Thomas Victor:]

Sramana, Infosys won't change it's emphasis on, as you call it, 'labor arbitrage' because it is their special skill, at which they are better than anyone else in the world.

They are getting more and more customers and their profit margins are very high. They are able to expand their workforce without lowering quality which is pretty amazing.

Regarding Saas which you regard so highly please look up Larry Ellison's comments last week. He basically ridiculed Saas and Cloud Computing and said no one is making any money on it after all these years of hype except one single company, salesforce.com

"Infosys was looking at the Axon acquisition to help get it out of pure body-shopping and into SaaS" Not at all, how did you get that impression? It was just another attempt to move higher up in the outsourcing food chain.

2008 Oct 15 05:52 PM

[31October:]

Infosys wants customers to change product to meet their inflexible template methodology. They refuse to listen to females: I should not have to re-tell these people what my staff already told them. We try to help them, and they say, "Everybody else in the industry and IT must be wrong; this is how we do it." We contacted industry peers, and it appears to be INFY corporate culture - other clients are unhappy; they just won't switch in the middle of multi-year projects. Some industry groups like Witpro and Patni. But none have been happy with the switch to Infosys. We picked them because of scale, but Infosys labor is a handicap, because each decent consultant we had left, and each replacement was awlful. I am dumping INFY at a loss. Cognizant cared about the customer, cost less, and is transferring lower-skilled work to China, while Infosys is still hiring high-paid, yet transient, Indian workers. INFY is about to lose a big client just for being arrogant and incompetent.

We will not be the last to cancel the relationship with INFY.

2008 Nov 13 11:24 AM