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Infosys (INFY) Q3 Earnings Top, Revenues Miss Mark, Rise Y/Y

Zacks Equity Research

Infosys' INFY third-quarter fiscal 2020 adjusted earnings of 15 cents per share surpassed the Zacks Consensus Estimate by a penny as well the year-ago figure of 12 cents.

Although revenues of $3.243 billion increased 8.6% year over year, the same missed the Zacks Consensus Estimate of $3.250 billion. However, in terms of constant currency (CC), the metric was up 9.5%.

Rise in large deal wins and fast-growing digital services remain key catalysts. Strong demand for its services in cloud, IoT, cyber security, SaaS, user experience, data and analytics is a major driver. Double-digit growth across most of its seven business segments and robust growth in Europe and the United States were tailwinds.

Quarterly Details

Digital Revenues (40.6% of total) surged 39.9% year over year (40.8% at cc) to $1.318 billion while Core Revenues (59.4%) declined 5.9% (down 5% at cc) to $1.925 billion.

Geographically, North America and Europe revenues rose 10.1% and 12%, respectively, at cc. Rest of the World and India climbed 0.2% and 18.4% each.

Segment wise, Communication achieved maximum growth of 20.6%. Life Sciences, Hi Tech and Manufacturing rose 17.7%, 12.2% and 11.8%, respectively. Energy, Utilities, Resources & Services, Finances and Retail recorded growth of 8.9%, 6.2% and 2.5%, respectively.

In the quarter under review, the company added 84 clients. It also signed 14 crucial pacts with a total contract value (TCV) worth $1.8 billion. Seven of these were in Financial Services, two each in Communication and Manufacturing vertical while a single each in Retail, Energy, Utilities, Resources and Services and other segment. Geographically, eight were from America, five from Europe and one from Rest of the World.

Although headwinds in the financial services segment are still a concern, growing traction in the commercial and corporate bank, consumer, cost and payments, wealth management and custody plus mortgage portfolios of its business is an upside.

The company reported that its clients worth more than $100 million now add up to 28 compared with 23 a year ago.

The acquisition of Eishtec contributed $3 million to the quarter.

Infosys Limited Price and Consensus

Infosys Limited Price and Consensus

Infosys Limited price-consensus-chart | Infosys Limited Quote

Margin

Gross profit rose 5.1% year over year to $1.08 billion. Gross margin shrank nearly 110 basis points (bps) on a year-over-year basis to 33.4%.

The company’s operating income grew 5.4% year over year to $711 million. Operating margin shriveled 70 bps to 21.9%.

Liquidity

As of Dec 31, 2019, Infosys had cash and cash equivalents of $2,342 million compared with $2,324 million sequentially.

Outlook

In fiscal 2020, revenues are expected to grow in the 10-10.5% at cc, indicating a rise from 9-10% predicted earlier.

Operating margin is still anticipated between 21% and 23%.

Beyond 2020, cost/pricing pressure and wage inflation are likely to be major overhangs on margins.

Zacks Rank and Stocks to Consider

Currently, Infosys has a Zacks Rank #4 (Sell).

A few better-ranked stocks in the broader technology sector are Fortinet, Inc. FTNT, Synopsys, Inc. SNPS and ManTech International Corporation MANT, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Fortinet, Synopsys and ManTech is currently pegged at 14%, 12.56% and 8%, respectively.

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