Infosys Technologies – Pricing under Pressure – Renegotiating

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

Highlights of the call

• For the quarter ended December 2008, Infosys reported 7% growth in consolidated operating revenues at Rs 5786 crore. In US dollar terms the revenues de-grew 3.7%. The volume growth was 2%: with breakup of onsite dip of 1% and offshore up 3.3% and rupee depreciation benefited about 6%, whereas realizations were down 6.1%: onsite down 5.8% and offshore down 4.6%.

• The dip in onsite volumes was as per plan in discussion with clients for better service offering to clients.

• On constant currency basis, the US dollar terms growth would have been 1% against 3.7% dip on depreciated currency. The dip in realizations would have been 1.8%.

• OPM for the quarter improved 200bps at 35.1% with rupee depreciation benefiting 470bps, cross currency headwinds impacted 100bps and dip in utilization impacted 130bps.

• Utilizations dipped 90bps at 68.5% including trainees and improved 80bps to 74.5% excluding trainees.

• Other Income for the quarter dipped 39% at Rs 40 crore, which includes interest of deposits of Rs 229 crore (Rs 190 crore in sequential quarter), and forex loss of Rs 218 crore against Rs 126 crore in the sequential quarter. Other income also includes inducement fees received from Axon Plc of Rs 32.5 crore (Rs 17 crore net of expenses).

• During the quarter, company and its subsidiaries have added 30 new clients. Out of total 583 (586 in sequential quarter) clients at the end of December 2008, 20 (20 in sequential quarter) clients have contributed more than US$ 50 million each in annual revenues with 4 (5 in sequential quarter) clients crossing the US$ 100 million mark, 1 client US$ 200 million and 1 client US$ 300 million. There is change in clients mainly due to forex movement and no large client has been lost.

• The top client contribution decreased 12.9% at 6.2% (7.6% in sequential quarter); top 2-5 clients contribution grew 7.8% at 11.1% (11% in sequential quarter), top 6-10 clients’ contribution increased 12.5% at 9.9% (9.4% in sequential quarter) and other than top 10 clients contribution increased 8% at 72.8% (72% in sequential quarter).

• The account receivable outstanding for Last twelve months for the quarter stood at 62 days up from 60 days in the sequential quarter.

• The Gross addition of manpower during the quarter was at 5997 employees (net 2772) totaling to 103078 employees as on December 31, 2008. The attrition rate was down 100bps at 11.8%. For Q4FY09, the company plans to add 3700 employees (gross). For FY09 the company has increased its guidance to about 27000 employees (gross). The increase is mainly on account of honouring of fresher offers and higher BPO hiring in March to be ready for FY10. The company has made 20000 campus offers for FY10. The conversion rate is about 75%. The training period has been increased to 16-24 weeks with training in additional languages. The management believes that most of the additions in FY2010 would not be billable in FY10.

• Efforts onsite-offshore mix for the quarter was at 23.1:76.9 against sequential quarter at 24:76. The onsite-offshore mix as far as revenue generation is concerned stood at 45.8:54.2 as against 47.3:52.7 in the sequential quarter.

• As far as service offerings are concerned, Maintenance services grew 4.9% sequentially contributing 21.7%, Development grew 7.8% sequentially contributing 20.8% of revenues, BPM grew 1.5% contributing 5.7%, Consulting & Package Implementation grew 5.9% contributing 25.1%, IMS grew 17.7% at 6.5%, product engineering services grew 6.8% at 2.1%, SI grew 22% at 4% and Testing dipped 0.8% at 6.5%. Products revenues grew 24.6% contributing 4.2% of revenues.

• In the industry verticals, manufacturing grew 4.1% contributing 19.6%, BFSI grew 11.6% contributing 34.9%, retail grew 11.2% contributing 12.6%, energy & utilities grew 20.4% contributing 6.2% transportation grew 2.1% and services grew 13.1% contributing 5.4% whereas Telecom de-grew 6.1% contributing 16.7%.

• The company added 9 clients in the BFSI vertical. There is some turmoil in the segment and budgets are lowered but they will come back to normal levels. There would be some variations in budgets depending upon performance of companies. There is pricing pressure from the vertical.

• The Company won 4 large deals during the quarter of more than US$ 50 million. Currently, the company is pursuing 10 such deals.

• Time & Material contracts contributed 63.7% (65.9% sequential quarter) of revenues and Fixed Price contributed 36.3% (34.1% sequential quarter).

• Revenue contribution from North America was up 12% in absolute terms contribution up at 64.5%, Europe’s revenues dipped 3.1% with contribution down at 25.5%, India revenues decreased 1.4% with contribution at 1.2% and Rest of World was up 3.3% with contribution down at 8.8%. In US dollar terms, North America was up 1.1% sequentially, Europe declined 12.5% and ROW declined 6.4%. In constant currency basis, North America grew 1.5%, Europe declined 1.2% and ROW grew 5.8%.

• For the quarter under review, Infosys Australia clocked revenues of US$ 26.03 million with PAT at US$ 1.62 million against revenues of US$ 30.84 million with PAT at US$ 2.08 million in sequential quarter. The dip has mainly been due to depreciation of Australian Dollar against the US Dollar. Infosys BPO clocked revenues of US$ 67.06 million with PAT at US$ 10.86 million against revenues of US$ 72.55 million with PAT at US$ 10.98 million in the sequential quarter.

• The two businesses in investment mode, Infosys-China clocked revenues of US$ 6.67 million with net loss of US$ 1.98 million against revenue of US$ 5.79 million and net loss of US$ 1.85 million in sequential quarter. Infosys-Consultancy clocked revenues of US$ 13.5 million with net loss at US$ 2.65 million against revenues of US$ 17.67 million with net loss at US$ 1.09 million in the sequential quarter. Infosys – Mexico had revenues of US$ 2.30 million with net loss of US$ 0.49 million. Management expects Infosys – Consulting to break even sometime in FY10.

• As of December 31, 2008, infrastructure of about 2,12,92,642 sq. ft. built up area with capacity of 90,470 seats is completed in Bangalore, Pune, Chennai, Hyderabad, Bhubaneshwar, Mangalore, Mysore, Mohali, Thiruvananthapuram and Mauritius. Work in progress is about 38,57,483 sq. ft. built up area with capacity of 14171 seats.

• The hedging position at the end of the quarter was US$ 576 million down from US$ 932 million in the sequential quarter. The management has approval to hedge upto two quarters’ receivables. The company has forward contracts of US$ 255 million, Euro 20 million, GBP 13.5 million and AUD 3 million and option contracts of US$ 269.5 million.

Future Expectations

• The environment is challenging and clients are cutting budgets. However, there have been no cancellations. The IT budgets for 2009 would be finalized by February – March 2009. The management is seeing positive medium and long-term prospects.

• The pricing environment is becoming cautious. The last 2 months have seen enquiries for price cut. There are multiple price re-negotiations and competition cutting prices in some circumstances has been seen. If the environment remains challenging pricing problems would aggravate. The cutting of prices has been seen with both Indian as well as MNC vendors.

• The company is seeing concerns creeping in client’s minds about corporate governance and trust. It is in touch with its clients.

• The company would not approach any Satyam Computer clients. There are common clients of the company and Satyam. Only if the clients come to them, they will go through the procedure and take it as a new deal.

• The company has made 20000 campus offers for FY10.

• The effective tax rate for FY09 would be 15-16% which would go up slightly in FY10 and would be 20-22% in FY11. SEZ contribute about 7-8% of revenues.

• The Company’s outlook under Indian GAAP Consolidated for the quarter ending March 2009 is Income is expected to be in the range of Rs 5494 – 5699 crore; Y-o-Y growth of 21 – 25.5% and Q-o-Q de-growth of 5 – 1.5%. Earnings per share (not annualized) before exceptional items and tax write-backs are expected to be Rs 26.49 growth of 23.4% on y-o-y and dip of 4.2% on q-o-q basis.

• The Company’s outlook under Indian GAAP Consolidated for the fiscal year ending March 31, 2009 is income from services is expected to be between Rs 21552 – 21757 crore against earlier guided Rs 21309 – 21731 crore implying a growth rate of 29.1 – 30.3% over fiscal 2008 income of Rs 16692 crore. The change is mainly on account of higher than expected revenues for December 2008 quarter adjusted for exchange rate fluctuation both Indian Rupee to US Dollar and cross currency headwinds. EPS for the fiscal FY 2009 is expected to be Rs 101.30 against earlier guided Rs 100.51 implying a growth rate of 27.6% over fiscal 2008 excluding the tax reversal.

• For FY2009, the company has cut the full year US dollar guidance to 11.8-12.8% growth against 13-15.2% growth given at the end of sequential quarter. The dip in guidance can be attributed to cross currency headwinds. The growth guidance in constant currency is 15.6-17.6%. The earnings growth guidance has been cut to 9.9% from 12.6% guided in the sequential quarter for full year (excluding tax write backs).