Key features of Wipro Q1 FY16 results:                                                                                                                                              

• Revenue was $1,794m, up 3.1% y/y, and up 8.1% in CC (up 0.2% sequentially  in CC)
• Operating margin was 21.0%, down 1.8 pts y/y, and down 1.0 pts sequentially. Much of the decline is attributed to wage increases (7% for offshore employees).

(For full results, see here).

The 8.1% CC year-on-year growth achieved by Wipro this quarter is exactly what the company achieved in Q1 FY15, but lower than any of the intervening quarters. It continues to trail Infosys (10.9% y/y CC growth) and TCS (15.5%). And the 21.0% operating margin is the lowest since Q3 FY14 – so not an outstanding quarter.

Looking at the service lines, global infrastructure services continues to be the growth engine, contributing an estimated $502m in revenues, or around $59m more than Q1 FY15 – more than the $53m achieved across the group, indicating a net revenue decline in aggregate across the remaining service lines. But this growth engine has also seen a slowdown (we estimate incremental y/y revenues for infrastructure services were around $76m, $89m and $94m in the last three quarters). The only service line to see accelerating growth is product engineering services (we estimate around $17m incremental revenues), but it still contributes under 8% of global revenues.

In my years as an industry analyst, it has seemed to me that when a vendor keeps changing reporting segments for a service line or a vertical group, bad news is being buried (i.e. a service line or industry is underperforming). A year ago Wipro changed its service line reporting, and a new segment called “Advanced Technologies and Solutions” appeared, representing around 11.4% of total revenues. My expectation was that “Advanced Technologies and Solutions” would be one of the faster growing service lines. It was not. Wipro’s segment reporting for service lines has changed again this FY, and “Advanced Technologies and Solutions” has disappeared. All application services are now reported as a single segment “Application Services”, with revenue reporting for the “Business Application Services” business (which was delivering topline growth above overall company growth) now combined with ADM activities (which saw declining revenues throughout FY 15). The “Application services” unit accounts for nearly half total Wipro’s company revenue - and saw negative y/y growth of 3.4% this quarter. Much of Wipro’s activity here is legacy business, where pricing pressure generally continues to be a factor, as it has been for several years. Wipro, as a top five Indian oriented services provider (IOSP) should be in a relatively strong position to cope with pricing pressure. And, like other vendors, it is introducing automation. The recent expansion of the relationship at AIB to include application services is promising, but there need to be more clients like this… Wipro is not seeing revenue growth in its top 10 accounts, and although the number of $75m+ accounts grew by two this quarter to 17, there has been no substantial growth in the number of $10m+ or $20m+ accounts for some time.

What has happened with the BPO business? Three quarters of double digit growth, then two weak quarters (+1.4% reported growth last quarter, -1.1% this quarter). This deceleration appears to be due to ramp downs in a couple of contracts, but management highlights that ramp ups are about to start in some recent deal wins, also that investment in automation continues. With a new COO in place who has a strong background in BPS (Abid Neemuchwala), will we see investment in inorganic growth to expand the BPS portfolio and possibly global delivery capability? There have been rumors of interest in U.K.’s Equiniti (which itself has been on an acquisition spree under its new CEO), though there now appears to be stronger interest in Equiniti from Onnex Corp.(who recently sold its stake in Sitel).

Looking at sectors, retail and transportation had a relatively strong quarter, but revenues from healthcare sharply decelerated (has been achieving around 20% growth in CC, was 10.3% this quarter) as some projects ended: apparently some recent contracts will begin to ramp up in Q2. The energy sector has been Wipro's main growth sector for several years, and the slump in oil prices has had a major impact in the last two quarters. Management indicated that a return to positive growth is anticipated, coming from increased adoption of cost-driven outsourcing by clients.

In terms of geographies, Wipro has enjoyed two quarters of double digit CC growth in India and APAC/other emerging markets, which between them account for 22% of its global revenues. And the Americas (mostly U.S. business) continues to deliver CC growth of around 10%. But Europe continues to be problematic for Wipro. Like other vendors, Wipro has expressed an interest in strengthening its ability to serve the German market. Will we see M&A or client acquisition activity to support scale expansion in Europe, or will the focus be on growing specialist capabilities like Danish headquartered digital design agency Designit?

Although utilization has been improving, Wipro is still a long way from achieving non-linear growth. In spite of TK Kurien’s comments earlier this year about aspiring to improve employee productivity, it will be some time before automation initiatives have a noticeable impact.

Significantly - and promisingly - some of the 9.7% y/y headcount growth this quarter is in sales and support activities (up nearly 10% sin,e last quarter and up 12% y/y), indicating an increasing focus on sales and marketing (Wipro recently appointed a new Chief Marketing Officer). Will we begin to see progress in other accounts like AIB where Wipro has succeeded in growing its relationship very quickly? To service AIB, Wipro is settting up a center in Dublin and is taking on personnel; willingness for asset and/or personnel transfer would resonate in other large IT outsourcing opportunities in EMEA.

Generally, management tone was positive about the outlook for stronger topline growth in H2 FY16. Will this be acquisition driven, or will we also see stronger organic growth, perhaps driven by large outsourcing wins in the energy or financial services sectors?