Infosys Q1 FY 16 results:

• Revenues were $2,256m, up 5.8% year-over-year (y/y) as reported, up 10.9% in constant currency and up 4.5% sequentially
• Operating income (EBIT) was $541m, a margin of 24.0%, a y/y decrease of 115 bps, and a sequential decrease of 173 bps.

See here for the full results

"I’m very pleased with our overall performance for the quarter” said CEO Vishal Sikka at the start of his prepared comments on Infosys Q1 FY 16 results. “This was the best (sequential) quarterly growth in revenue in the last 15 quarters and in volume growth in the last 19 quarters, excluding the effect of acquisitions”.

Our interest at NelsonHall, unlike India-based financial analysts, is on y/y growth rather than sequential growth (which is always going to be impacted by seasonality). In many respects this was a promising quarter, for example:

• Constant currency y/y growth of 10.9% is the highest for six quarters. Acquisition-related revenues (from Panaya and Skava) were around $7m so most of this growth was organic
• Annualized attrition was vastly improved from Q1 FY15, when it peaked at 26.4% for Infosys consolidated and 23.4% for Infosys standalone.
• All service lines, apart from (surprisingly, testing services) delivered y/y growth in US$ terms, and both application management and consulting/packaged implementation had their strongest quarter’s growth for several years. Infrastructure services, a growth engine for all the larges five IOSPs, continues to deliver double digit growth
• Revenues from the top 10 clients are up, in particular at the largest client, a high-tech giant
• During the quarter, Infosys signed six large deals (including some renewals/expansions) of which three had a LTV of >$100m each.

The push to strengthen Infosys’ sales engine and key account management appears to be bearing fruit already. Sales and support headcount at the end of the quarter was up a massive 16% y/y. The company has also been working on improving its approach to the RFP process, including through the application of design thinking. And the top 15 accounts now each have an exec sponsor.

Aspects that might seem less positive include:

• Annualized attrition (both for Infosys standalone and for Infosys consolidated), is slightly higher than it was last quarter. Some of this can be attributed to a seasonal effect for the June quarter (when some employees leave to pursue higher studies), but reducing attrition appears to be still a work in progress
• In spite of a benefit of around 60 bps from rupee depreciation, operating margin of 24.0% was down 115 pts y/y. This is attributed to wage hikes (7.5% to 8% for offshore employees, 2.5% for onshore) and increased visa costs. Sub-contractor costs have also been rising and are now 5% of revenues. The increase is due to needing to ramp up quickly for projects, either in skills that Infosys does not have internally or because of visa issues. As we are hearing with other vendors, training and re-skilling staff is a high priority. And while utilization is improving, it is still below the 83-84% that Infosys would like
• Revenue per capita is down, from $52.6k in Q1 FY15 to $51.7k this quarter. But the decline is much less than the 7.3% y/y decline in pricing for “traditional” services.

During the earnings call Sikka highlighted progress in various initiatives that will improve revenue per capita, including:

• Leveraging Panaya to increase automation in ERP upgrade projects and packaged implementation services: sold into 15 engagements this quarter, with a pipeline of 137
• Rolling out the Infosys Automation Platform to 10 infrastructure services clients, with people savings of 17% achieved in early pilots
• The Infosys “zero distance” to innovation initiative launched last quarter, where for every project the project manager is given a “five point innovation agenda”
• Acceleration in deploying automation solutions for application maintenance BPO services
• Traction in the Finacle and Edge units (software had its best quarter since Q3 FY14)
• Application of design thinking in 100 engagements
• Grass roots initiatives to improve employee productivity.

Infosys’ target for 2020 includes $20bn in revenues, 30% in operating margin, and $80k revenue per capita. Q1 FY16 performance is in line with the guidance for FY 16 of constant currency growth of 10-12% and an operating margin of 24-26%. What should we expect to see over the next few quarters? It is still very early days in the company's drive to achieve non-linear growth - to put things into persective, approaches like IIP, Panaya and Design Thinking are between them impacting less than 5% of all Infosys' projects. But as each of these begins to scale, their impact on overall margin performance may start to become more evident, perhaps by the end of this fiscal. Finally, with the increased investment in sales and key account management, expect to see more big deal signings.