Infosys Shaky

What is the outlook for India’s outsourcing industry amidst the market turmoil? The Indian IT major, Infosys Technologies (INFY) had expressed their concerns about the recession when they announced their Q407 results earlier this year. Their Q2 results and the outlook for 2008-09, announced on October 11, quantify these concerns. For the quarter, revenues of $1.22 billion met analysts’ expectations while EPS of $0.56 exceeded expectations by one cent. Revenues grew 19% over the year. EPS grew 16% over the year and 4% sequentially.

By region, Europe contributed 28.3% of revenues, compared with 27.3% last quarter, and the North American contribution was down slightly, to 61.8% from 62.6% in the first quarter. The rest of the world contributed 9.9% of total revenues, up from 8.8% last quarter. The heavy reliance in American business is a huge concern for the company longer term, as the US is now going to be in a prolonged belt-tightening phase. Sure, companies use outsourcing to cut costs in down markets, and in fact, this decade’s boom in outsourcing was actually a product of the dotcom bust and post 9/11 trauma. However, the current market conditions may not exactly mirror the previous one, and Infosys’ guidance reflects that apprehension.

By segment, Application Development and Maintenance (ADM) contributed 44.2% of revenues while Consulting Services brought in 24.3%. Business Process Management contributed 6%, Infrastructure Management 5.2%, Product Engineering Services 2.0%, System Integration 3.1%, Testing Services 7.2%, and Other the balance 4.2%.

Infosys was looking at the Axon acquisition to help them get out of pure body-shopping and into SaaS, and remove their reliance on labor arbitrage as a strategy. However, as of now, they have not increased their offer in retaliation to HCL’s bid. Hopefully, they will continue scouting for similar opportunities. In this down market, opportunities for inexpensive acquisitions abound.

In view of the market outlook, they revised their guidance for the year downwards to revenue growth of 13.1-15.2% against the earlier guidance of 19-21%. For the Q3, they expect revenues to be sequentially flat at $1.2 billion.

The stock slipped 4% from the previous day’s close of $25.02 and went down to a new two-year low of $23.91. It has recovered since, as the market overall is doing well this morning, with gains across the board.