Infosys hears offshoring being reduced in client survey

Infosys Technologies (Infosys) held its conference call after it announced its fourth quarter results. S Gopalakrishnan, CEO and Managing Director, along with others addressed the call.

Highlights of the call

• For the quarter ended March 2009, Infosys reported 3% dip in consolidated operating revenues at Rs 5635 crore. In US dollar terms the revenues de-grew 4%. Volumes were down 1.4%: with breakup of onsite dip of 1.5% and offshore down 1.3% and rupee depreciation benefited about 1.7%, whereas realizations were down 3%: onsite down 3.9% and offshore down 3.1%.

• On constant currency basis, the US dollar terms growth would have been 1.1% against 4% dip on depreciated currency. The dip in realizations would have been 2.1%.

• For the quarter, OPM dipped 150bps at 33.6% impacted by lower revenue productivity to the extent of 150bps and higher SG&A of 60bps whereas rupee depreciation benefited 50bps.

• Utilizations dipped 90bps at 67.6% including trainees and stable at 74.5% excluding trainees.

• Other Income for the quarter surged 530% at Rs 252 crore, which includes interest of deposits of Rs 259 crore (Rs 229 crore in sequential quarter), and forex loss of Rs 15 crore against Rs 218 crore in the sequential quarter.

• For FY09, the Company has lowered its guidance from 21% revenue growth to 12%. The dip was 3% on cross currency headwinds, 1% on pricing, and 5% on volume dip.

• During the quarter, company and its subsidiaries have added 37 new clients. Out of total 579 (583 in sequential quarter) clients at the end of March 2009, 20 (20 in sequential quarter) clients have contributed more than US$ 50 million each in annual revenues with 4 (4 in sequential quarter) clients crossing the US$ 100 million mark, 1 client US$ 200 million and 1 client US$ 300 million.

• Against revenue dip of 3%, the top client contribution decreased 10.5% at 5.7% (6.2% in sequential quarter); top 2-5 clients contribution grew 0.9% at 11.5% (11.1% in sequential quarter), top 6-10 clients’ contribution decreased 5.6% at 9.6% (9.9% in sequential quarter) and other than top 10 clients contribution decreased 2.1% at 73.2% (72.8% in sequential quarter).

• The account receivable outstanding for Last twelve months for the quarter stood at 62 days stable as compared to the sequential quarter.

• The Gross addition of manpower during the quarter was at 4935 employees (net 1772) totaling to 104850 employees as on March 31, 2009. For the year gross additions was 28231 and net additions was 13663 employees. The Company had guided for gross adds of 27000 at the end of last quarter. However, campus recruitment conversion was higher during the quarter leading to high gross additions. The attrition rate was down 70bps at 11.1%. For FY10, the Company has plans for gross additions at 18000 including campus offers of 16000.

• Efforts onsite-offshore mix for the quarter was at 23:77 against sequential quarter at 23.1:76.9. The onsite-offshore mix as far as revenue generation is concerned stood at 46.2:53.8 as against 45.8:54.2 in the sequential quarter.

• As far as service offerings are concerned, against revenue dip of 3%, Maintenance services de-grew 2.6% sequentially contributing 21.7%, Development de-grew 10.1% sequentially contributing 19.2% of revenues, BPM grew 2.5% contributing 6%, Consulting & Package Implementation de-grew 1.4% contributing 25.4%, IMS grew 4.9% at 7%, product engineering services grew 20.6% at 2.6%, SI de-grew 9.9% at 3.7% and Testing dipped 5.6% at 6.3%. Products revenues de-grew 7.2% contributing 4% of revenues.

• In the industry verticals, manufacturing grew 3.4% contributing 20.8%, retail grew 4.3% contributing 13.5%, transportation grew 2.1% at 2.3% whereas, BFSI de-grew 7.9% contributing 33%, Telecom de-grew 2.6% contributing 16.7%, energy & utilities dipped 7.3% contributing 5.9% and services de-grew 9.8% contributing 5%.

• Time & Material contracts contributed 61.7% (63.7% sequential quarter) of revenues and Fixed Price contributed 38.3% (36.3% sequential quarter).

• Revenue contribution from North America was down 2.5% in absolute terms contribution up at 64.6%, Europe’s revenues dipped 7.2% with contribution down at 24.3%, India revenues increased 29.9% with contribution at 1.6% and Rest of World was up 5.1% with contribution up at 9.3%. In US dollar terms, North America was down 4.1% sequentially, Europe declined 8.8% and ROW declined 3.3%. In constant currency basis, North America de-grew 4.1%, Europe declined 5.3% and ROW grew 5.0%.

• In Europe geography, for FY09, mainland Europe is up 26% whereas UK is down mainly due to dip in Financial Services and Telecom vertical.

• For the quarter under review, Infosys Australia clocked revenues of US$ 28 million with PAT at US$ 2.89 million against revenues of US$ 26.03 million with PAT at US$ 1.62 million in sequential quarter. Infosys BPO clocked revenues of US$ 67.28 million with PAT at US$ 11.49 million against revenues of US$ 67.06 million with PAT at US$ 10.86 million in the sequential quarter.

• The two businesses in investment mode, Infosys-China clocked revenues of US$ 9.14 million with net profit of US$ 1.59 million against revenue of US$ 6.67 million and net loss of US$ 1.98 million in sequential quarter. Infosys-Consultancy clocked revenues of US$ 13.58 million with net loss at US$ 6.62 million against revenues of US$ 13.5 million with net loss at US$ 2.65 million in the sequential quarter. Infosys – Mexico had revenues of US$ 2.36 million with net loss of US$ 0.06 million.

• As of March 31, 2009, infrastructure of about 2,26,42,767 sq. ft. built up area with capacity of 95,048 seats is completed in Bangalore, Pune, Chennai, Hyderabad, Bhubaneshwar, Mangalore, Mysore, Mohali, Thiruvananthapuram and Mauritius. Work in progress is about 45,54,616 sq. ft. built up area with capacity of 20756 seats.

• The hedging position at the end of the quarter was US$ 506 million down from US$ 576 million in the sequential quarter. The company has forward contracts of US$ 278 million, Euro 27 million, GBP 21 million and option contracts of US$ 163 million.

Future Expectations

• In a survey done by the Company of 135 clients covering 83% of the revenues, 89% said that IT budgets are down with 69% saying that IT budgets would be down in single digits. 61% of the clients surveyed had finalized budgets. 22% clients said that offshoring would increase with 5% saying offshoring would increase by double digit. The balance however, said that offshoring would be flat or down. For the first time has the Company heard of offshoring being down. In terms of recovery, 57% clients’ surveyed expect recovery by mid CY2010. The clients also believe that recovery in Financial Services vertical has started.

• The Company has not seen any cancellation of contracts.

• The pricing is down. For FY10 guidance, the management has assumed Q4FY09 pricing which is 5.7% lower than FY09 billing rates.

• For FY10, the Company has plans for gross additions at 18000 including campus offers of 16000. Visa application for 2009-2010 would be at 500.

• There would no salary hike in April. The Company would review the position and decide later.

• For FY10, the management has guided for 300bps dip in OPM: 300bps on lower pricing, 100bps on higher SG&A and 300bps on lower utilization whereas rupee depreciation will benefit 450bps. The net margins are guided down 200bps.

• The yield on cash/cash equivalents for FY09 was 9.6%, which would go down to 7%.

• The effective tax rate for FY09 was 14.9%, which would be 16-16.5% in FY10. SEZ contribute about 9% of revenues.

• Taking Rupee/US$ at Rs 50.72/US$, the Company’s outlook under Indian GAAP Consolidated for the quarter ending June 2009 is Income is expected to be in the range of Rs 5379 – 5480 crore; Y-o-Y growth of 10.8 – 12.9% and Q-o-Q de-growth of 4.5 – 2.8%. Earnings per share (not annualized) before exceptional items and tax write-backs are expected to be Rs 23.55, growth of 3.5% on y-o-y and dip of 15.7% on q-o-q basis.

• Taking Rupee/US$ at Rs 50.72/US$, the Company’s outlook under Indian GAAP Consolidated for the fiscal year ending March 31, 2010 is income from services is expected to be between Rs 22066 – 22928 crore implying a growth rate of 3.5% over fiscal 2009 income of Rs 21693 crore. EPS for FY2010 is expected to be Rs 96.65 – 101.18 implying a decline of 5.9 – 1.5% over FY2009 excluding the tax reversal.

• The Company’s outlook under IFRS Consolidated for the quarter ending June 2009 is Income is expected to be in the range of US$ 1060 – 1080 million; Y-o-Y decline of 8.2 – 6.5% and Q-o-Q de-growth of 5.4 – 3.7%. Earnings per share (not annualized) before exceptional items and tax write-backs are expected to be US$ 0.47 de-growth of 11.3% on y-o-y and of 14.5% on q-o-q basis.

• The Company’s outlook under IFRS Consolidated for the fiscal year ending March 31, 2010 is income from services is expected to be between US$ 4350 – 4520 million implying a de-growth rate of 6.7 – 3.1% over fiscal 2009 income of US$ 4663 million. EPS for FY2010 is expected to be US$ 1.91 – 2 implying a decline of 13.6 – 9.5% over FY2009 excluding the tax reversal.