Infosys Tops Estimates; Outsourcing Market Still Strong

| About: Infosys Limited, (INFY)
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Infosys (NASDAQ:INFY) reported fiscal third quarter earnings and gave a barometer of Indian outsourcing health. The prognosis: Budgets are still rising for offshore outsourcing, but India's leading IT companies still wrestle with turnover and wage increases.

By the numbers, Infosys reported third quarter revenue of $821 million and earnings per American Depository Share of 39 cents. The results topped Thomson Financial estimates by 2 cents. Infosys also upped its outlook for the fourth quarter.

One of the key issues on the Infosys conference call (see SeekingAlpha transcript) was wage increases and turnover. Although Wall Street worries about turnover, CIOs also worry about it. Wage increases can creep into contracts and turnover can hinder IT project continuity.

Here are a few mileposts from Infosys:

–Overall demand: Infosys CEO Nandan M. Nilekani says offshoring "continues to be a strong secular trend." Nilekani says Infosys believes IT spending will increase by a "few percentage points," but the spend on "offshore and global sourcing is going to go up."

Nilekani also noted that "the risk perception of our clients about offshoring has reduced even further, and now they are quite comfortable with having several thousand employees of theirs working in India, through various partnerships or through their own units. So, I think, the risk perception in the mind of the global CEO has come down." Strongest sectors for Infosys include banking and insurance, retail services. The company is seeing a slowdown in transportation and logistics.

–Attrition: Infosys chief operating officer Kris Gopalakrishnan says Infosys has 488 active clients and added 6,092 employees this quarter gross. Of those employees, 1,676 of them came with prior experience. "We continue to add experienced employees to the workforce," he says. "Attrition is slightly up at 13.5% compared to 12.9% last quarter. Attrition, if I exclude involuntary separation, especially at the entry-level, it comes down to 12.2%. The corresponding number last quarter is 12%."

Meanwhile, Infosys plans to hire 5,000 in the next quarter. Many workers leave the company after getting two or three years experience. Here's Gopalakrishnan's breakdown:

–46% of people who leave us go to join other companies;

–20% for higher studies;

–10% drop out of the workforce.

Those rates have been constant for many quarters. "People leave for various reasons, not necessarily because of other companies coming to India and setting up shop. If you look at the attrition data, we've 1.3% involuntary attrition over the 13.5% primarily driven by people who did not pass our training course at the end of 14 or 16 weeks of training, because we've toughened the entry norms," says Gopalakrishnan.

–The scrum for new employees. CEO Nilekani says wages in India are increasing at a rapid clip. He adds that it's hard to get entry level employees. Nilekani says the biggest threat to Infosys' wage scale for the best workers is financial service firms.

"Entry level wages in the country are being influenced by only two industries: the IT industry, and the financial services industry. The financial service industry this year will hire maybe about 75,000 to 100,000 people and the IT industry about 380,000 people. These two are driving up the demand for entry level people, and the IT industry is hiring the largest number of people. You get the best of the crop. But obviously, the competition is for the best of the best. And here the financial services could offer a slightly higher wage to grab them. And certainly the glamour quotient of financial service industry is getting higher, because of investment banking and [absurd] incomes that they earn. As far as entry wages go, we raised them from 240,000 rupees a year to 270,000 rupees a year for the next year, and it could go up by maybe 10% a year after that…It is going to become very-very challenging to get more and more people in."

–Pricing: Infosys officials note that for new customers they can get 3% to 4% above our average. For existing customers renegotiating deals Infosys can raise prices 2% to 4%.

–Onsite vs. offshore. Overall, the company tries to limit onsite work, say Infosys employees working at a company in the U.S., to 30% to 35% of total work.