Thursday, April 23, 2009

Infosys, Wipro Still Ignoring SaaS (Author: Sramana Mitra)

The Indian IT industry does not seem to be on a recovery path. With the way most players are going, I am doubtful the industry will find its way to recovery in the near future.

The leader of the pack, Infosys (NASDAQ:INFY), announced depressing Q4 and FY09 results last week. Revenues of $1.12 billion met analyst expectations but dropped 1.2% for the year and 8% sequentially. EPS of $0.56 was two cents higher than the market’s expectations. Over the year, EPS grew by a mere 1.8%, while sequentially it was down 3%.

For the year, Infosys clocked revenues of $4.66 billion, growing 12% over the year, while EPS of $2.25 grew 10.3% over the year.

Management talked about “increased focus on new engagement models such as solution-based offerings, SaaS, BPO platform[s], and Finacle™ to maximize the value” delivered to their clients. But, these seem to be more words and less action. In addition to minor steps such as the creation of a Spend Information Management solution for a multi-industry group aimed at identifying, capturing and controlling expenditure, forecasting demand, planning materials and production, and managing inventory, there is little worthy of a mention.

The company does not see any recovery in the near future. For Q1, ending June 2009, Infosys expects revenues in the range of $1.06-$1.08 billion, representing a decrease of 8.2%-6.5% over the year. EPS is also expected to fall by nearly 13% to $0.47. For 2010, they are projecting revenue declines of 6.7-3.1% with revenues of $4.35-$4.52 billion. They expect annual EPS to be in the range of $1.91-$2.00, representing a decline 15.1-11.1%. This would be the company’s first ever decline in annual revenues.

Their guidance is worsened by their expectation of a nearly 3% erosion in margins due to price pressures, which brings me back to the point that had these companies focused on SaaS instead of labor arbitrage or body shopping as their strategy, they would have been in better shape today.

The stock fell 7% on the results announcement and is currently trading at $28.77 with a market capitalization of $16.48 billion.

The other key player in the outsourcing industry, Wipro (NYSE:WIT), also announced Q4 results this week. Surprisingly, they are the only player optimistic about the future.

Q4 revenues of $1.3 billion were in line with analyst estimates though they fell 4.4% over the year. EPS of $0.12 was a cent shy of the Street’s estimates and fell 20% over the year. For the year, they clocked revenues of $5.0 billion and grew 1.4%. Annual EPS stood at $0.46 and fell 16% over the year.

Revenue from the IT business in the quarter fell 4.9% over the year to $1.046 billion. There was strong growth in the manufacturing and healthcare verticals with constant currency sequential growth of 2%. Retail and transportation also showed strong deal traction and executed YoY growth of 33% in constant currency.

Wipro has been focusing on markets outside of the US and saw the India and Middle East business grow nearly 28.5% over the year in the quarter on a constant currency basis. Other emerging markets grew 33.5% in constant currency terms.

The company expects revenues to further decline to $1.009-$1.025 billion in the coming quarter. Despite the lower outlook, management seemed very optimistic and contrary to popular belief, thinks that the worst is over.

Wipro had defined a two-pronged strategy for the year. First, they plan to reconfigure the sales engine to align to developments in the business environment and second, they will create global programs with capabilities in program management, transition management and systems integration to handle customers’ demands for vendor consolidation. They claim to have progressed significantly on both these fronts.

Wipro seems to be in rampant acquisition mode. After having acquired Citi Technology Services Ltd. last quarter, they announced the acquisition of Nokia’s Mobile Broadcast Solutions unit earlier this week. The acquisition will make Wipro a big player in the mobile TV solutions business and will help it tackle the European markets in countries such as Italy, the Netherlands, Austria and Hungary. They expect the acquisition to help them provide device manufacturers such as mobile handsets and set-top boxes for digital transmission with middleware capabilities. This embedded systems approach may also be helping Wipro.

Wipro’s stock rose 4.4% to $8.52, taking its market capitalization to $12.5 billion.

Despite all this, I still don’t think that either Infosys or Wipro are thinking differently. They are continuing to focus on standard outsourcing solutions instead of migrating to the much-needed SaaS solutions. Infosys might have missed out on the Axon acquisition last year, but there are enough similar players out there. Should any of these players want to go for big acquisitions, they could look at some of the top 8 SaaS stocks which can help them get to the next level.

Source : Sramana Mitra

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