Look Abroad for Your Next Tech Play
Infosys (NAS: INFY) beat Street estimates in its recently announced Q2 results. India's second-largest software-services exporter by revenue reported a 9.7% increase in its quarterly earnings, but it trimmed its fiscal revenue outlook. Let's find out why.
Getting into the figures
Revenues jumped 16.6% to $1.6 billion while net earnings rose 9.7% to $387 million over the year-ago quarter because of higher outsourcing orders and the depreciating value of the rupee. More importantly, the addition of 45 new companies to its client list -- which already includes biggies like Goldman Sachs, BT Group, and BP -- drove the revenue gains.
The numbers may look fine, but there are some things that should worry investors a bit.
Bangalore-based Infosys generates more than half of its revenue from United States, followed by Europe, which accounted for 20.5% of the total revenue this quarter. All told, more than 97% of its revenue is dependent on foreign income. Thus, it's highly prone to volatility. Although the company hedges itself, the risks from currency fluctuations can be reduced but not avoided altogether.
Moreover, while Europe continues to struggle with its sovereign-debt crisis, the U.S. suffers from economic uncertainty. Companies operating in these regions are resorting to cost-cutting measures to weather the fall, resulting in declining new orders and pressurizing prices.
The company also faces stiff competition, not only from local rivals such as Wipro (NYS: WIT) and Tata Consultancy Services, but also from global peers such as IBM (NYS: IBM) and Accenture (NYS: ACN) . On the other hand, the fact that Indian IT companies have an indisputable cost advantage cannot be disregarded.
The global currency market still remains highly volatile in the midst of the global economic scenario, which still looks uncertain. This is worrisome for the IT industry. Clients are looking for a better return on investment, innovations, and other growth opportunities, and as their search for cost-cutting measures will directly hit the number of order requests for the IT sector.
Infosys is thus taking strategic initiatives to build long-term partnerships with clients for mutual benefit. The company's operating margin is therefore anticipated to slide a percentage point for 2012, though Q3 results could be even more affected by the weakening rupee.
Still, investors shouldn't worry too much about the company's performance in the long run, as it has the potential to grow and return value to its stakeholders. Keep in mind that Infosys carries a 22.2% annual sales growth rate over the past five years. Revenues should stabilize and orders should climb fast once the global economy steadies.
The Foolish bottom line
The immediate future looks dim, but hopes are still strong. Several companies across 30 countries rely on the services this IT giant offers. It's a dedicated service provider, and clients keep coming back. Infosys remains a reliable bet.
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At the time this article was published Fool contributor Navneet Bajaj owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of IBMMotley Fool newsletter serviceshave recommended buying shares of Accenture. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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