Infosys sales guidance disappoints, shares plunge

April 13, 2012

MUMBAI, India (AP) — Infosys Technologies reported quarterly profit of $463 million Friday and said its revenue will grow more slowly than the industry's this fiscal year, eroding its position as India's outsourcing bellwether.

Infosys shares plunged as much as 11 percent in Mumbai.

Net income for the quarter ended March grew 15.2 percent in dollar terms from a year earlier to $463 million. Sales grew 10.5 percent, to $1.8 billion, in line with analyst expectations but lower than the company's earlier guidance.

A survey of analysts by FactSet predicted quarterly sales of $1.8 billion and net income of $443.7 million.

Infosys said revenue for the fiscal year ending March 2013 would grow 8 to 10 percent, to between $7.6 billion and $7.7 billion — less than industry body Nasscom's forecast of 11 percent to 14 percent export revenue growth for the industry. Ninety-eight percent of Infosys' revenues come from outside India.

The guidance unnerved investors worried about the impact of global uncertainty on India's outsourcing sector, dragging shares of competitors Tata Consultancy Services down 3.9 percent and Wipro down 2.9 percent in otherwise flat morning trade.

"It has been a pretty challenging quarter for us," chief executive S.D. Shibulal told India's CNBC-TV18. "We have seen contract delays, delays in some anticipated ramp-ups we'd planned and ramp-downs in quite a few accounts, particularly in financial services and the U.S."

He and other executives struck an ominous mantra, repeating that the company is facing a "new normal" of global uncertainty and volatility.

He said client confidence dipped sharply in the last month, triggering a low growth phase which the company expects to continue this quarter. Infosys said revenues would grow by 0 to 1 percent in dollar terms this quarter over last quarter.

Despite the difficulties, Infosys has seen pricing increase 4.7 percent for the year ending March 2012 over the prior year, a vindication, executives said, of their strategy to chase high-margin business.

Infosys said it expects operating margins to decrease by two percentage points this quarter, largely because of fees for U.S. visas and the cost of hiring in the U.S., both of which will likely be bunched in the June quarter.

Infosys has hired 1,200 locals in the U.S. in each of the last two years and said it expects to hire another 1,200 Americans — out of 35,000 global hires — this fiscal.

Infosys sends a large number of Indian employees to the U.S. on H1B and L1 visas to work with clients on site. The U.S. raised the cost of those visas in 2010 in a way that Indian outsourcing companies said targeted them.

The fees, which are used to pay for heightened security on the U.S.-Mexico border, are now the subject of a brewing trade dispute between India and the U.S. at the World Trade Organization.

At the time the new fees were implemented, New Delhi said they would cost Indian companies over $200 million a year.

Infosys gets over 62 percent of its revenue from North America. A quarter of its manpower is deployed with clients on site.

Infosys said it is not planning to raise salaries right now, but will revisit that decision midyear. It expects pricing to be stable in the year ahead.

Infosys' focus on high-margin business may be eroding earnings in the short term, said Kotak Securities analyst Dipen Shah.

"Guidance has been greatly disappointing. They are focusing only on high quality growth. It seems they are letting go of some business which is not available at the level of margins they expect," he said. "That is what has likely impacted them."

Earnings for the March quarter grew 1.1 percent from the prior quarter in dollar terms, despite a 1.9 percent quarterly decline in sales thanks to an unusually large $17 million cut in administrative expenses.