Infosys Earnings Call Insights: Growth Outlook and Infrastructure Management Business

Infosys  (NASDAQ:INFY) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Growth Outlook

Nitin Mohta – Macquarie Capital Securities: Thanks for the opportunity. I just wanted to understand, if I look at the low end of your guidance, the growth is going to be quite similar to what we have done in fiscal ’13. How do I look at that disconnect? Was this the commentary on discretionary spending better in CY’13? Also if I look at the last six months, the deal wins and the new logos that you have added, I would have assumed that would give us more confidence for next year. So just your thoughts there.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

S. D. Shibulal – Co-Founder and CEO: So I think the first point on the discretionary spend, actually what I said was that the higher discretionary spend in calendar ’13 in two – only in two areas, RCL, that is retail and manufacturing. There are challenges in other areas, so I will note that the discretionary spending is going to be higher in FY ’13 and calendar ’13 all around, that is one. Now we have seen a volatile eight quarters, for various reasons, whether it is volume or whether it is revenue productivity, we have seen in volatile eight quarters. So even if you look at this year, let’s take a look at the years just passed. We are given a guidance of the 8% to 10%, our volume grew 8.8%, but our revenue only grew by 4.5%, because we lost revenue productivity of 3%. So the volume landed right where we thought it will land and we had assumed the flat pricing in the beginning of the year when we gave the guidance, but the volatility in the revenue productivity created bumps. So in Q3 the volume was 1.5% up and the revenue productivity was 1.8% up, it contributed towards 4.2% growth, whereas in Q4, the volume is up actually more than Q3, 1.8%, but we had a situation where we to get revenue productivity down of 0.7%. So if you look at the last eight quarters it has been pretty volatile for us, because of the portfolio, because of the environment. So we have taken a (indiscernible) the safe approach to the guidance and broaden the guidance itself from 6% to 10%. It is true, at the lower end the guidance, the growth will be only 0.5%, but at upper end it will be 0.2% quarter-on-quarter. Given all the information we have at this point, we are confident of meeting the guidance. Where exactly to end, we will see as we go along.

Nitin Mohta – Macquarie Capital Securities: Thanks for those comments and if I can squeeze another one, I understand it’s been a tough environment to operate and just the volatility around the business flow because of service offering. Are there some of them which are more difficult as you see now? Was this three months ago? Just in terms of volatility and uncertainty if you can point out or highlight which are the areas which are causing it to be as a difficult proposition to call out the future?

S. D. Shibulal – Co-Founder and CEO: I clearly see higher ratios in telecom – in telecom sector because I think (air traffic) top lines increase or they are seeing — they continue to see top lines increase, so that is in sector where we have considerable of revenue in one of our large verticals and volatility there will directly impact us. Financial services continues to be indecisive, lack of any other term — indecisive for us and also very cost conscious. When we look at the future, we have to also — we look at it in two different ways, we have to look at it from a volume growth perspective, at the same time in fact because the revenue productivity changes. So the decision might have been taken but they are very cost conscious that have an impact on our revenue productivity, so I would consider these two sectors.

 

Infrastructure Management Business

Edward Caso – Wells Fargo Securities LLC.: Shibu I was curious about your infrastructure management business or (RIM) business, how big a focus is that for you? How are the contracts laying out? Historically these tend to be lower margin upfront and rising margins over time, is that what you’re experiencing and is that some of the other pricing pressure that you’re seeing?

S. D. Shibulal – Co-Founder and CEO: So, let me say a few words and then I’ll hand it over to Kakal. So in Digital, it will be a big focus area for us. If you look at the second half of last year, we had the Harley-Davidson in which we are disclose in the public to which we acquired the people and the process (happened infrastructure both) (indiscernible) data-center development in Milwaukee there to support that deal and for other clients. With that, let me now hand it to Kakal to give much better color on Infosys.

Chandrashekar Kakal – SVP, Global Head of Business IT Services: Just continuing from where Shibu left. On the infrastructure management space, (having) considerable progress in the last one year, earlier our positioning was only to remotely mange the infrastructure or (indiscernible) services, which is a marginal place, but now we have a developed (portal) ecosystem and we have been able to take the end-to-end responsibility of the infrastructure management, starting from Data-center management to asset management, to remote management of infrastructure as well. So some of the example (technical difficulty) BWM and few others are reflection of our new positioning and ability. In terms of the revenue sharing, the margin and all that, of course when it’s an ecosystem partner, ecosystem play, we have to share the revenue with further partners as well, but that makes us complete in terms of our offering and the clients are looking at us for integrated sourcing, which involves infrastructure management, as well as application management and in some cases BPO as well, which results in our ability to focus on large deals and have a long-term contract which is (Citi) and multi-year kind of a thing. In case of infrastructure management, it has also worked well to operate more from offshore, and onsite percentage will be lower than the other services. So hence we could be able to gain some margin leverage back from the offshoring. Otherwise it’s a competitive space and with the end-to-end responsibility that we are taking now, we are trying to manage between the growth and the margin in this infrastructure space. I hope that answers your question…

Edward Caso – Wells Fargo Securities LLC.: My other question is around the wage assumptions for next year. You gave the wage increases later in the year and fiscal ’13, are you going to go back to a normal cycle of the April cycle, what should we assume?

S. D. Shibulal – Co-Founder and CEO: Did you get the answer from Kakal?

Edward Caso – Wells Fargo Securities LLC.: I got the answer on infrastructure management and I was curious what the timing of any wage increases might be in the coming year.

S. D. Shibulal – Co-Founder and CEO: Let me hand it over to Tan Moorthy, Human Resources.

Srikantan Moorthy – SVP, Group Head of Human Resources: So we have done compensation changes since last October for various segments of the population. We started with India, we went onto the United States to do market risk corrections and we’ll continue that process towards the course of this year, both across geographies and across levels of people in the organization. We are also planning a change in the structure of the salary components to bring in much more simplicity in the way it’s calculated.

Edward Caso – Wells Fargo Securities LLC.: Are you planning to go back to the April cycle or are you sort of out of that traditional cycle given what happened last year?

Rajiv Bansal – CFO: Since the corrections and changes happened, as we look at the data coming in from different markets at different points in time, we are not going through a specific cycle for everybody. It happens as required in the geographies and for the levels.