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Infosys Beats Estimates – Earnings Analysis

Infosys (NYSE:INFY), headquartered in Bangalore, India, reported results for the quarter ending December 31, 2014, that exceeded analysts’ expectations, and its stock rose on results. Revenue was us 5.6% to $2.2 B.

The increase in earnings was driven by increase in volume, productivity and utilization rates. However, the strengthening US dollar was a headwind for the quarter, as Infosys has a strong market presence in the US.


• Summary numbers: Revenues of USD 2.21 billion, net earnings of USD 522.60 million, and Earnings per Share (EPS) of USD 0.46.

• Gross margins widened from 39.28% to 41.04% compared to the same quarter last year, operating (EBITDA margins) now 29.12% from 28.17%.

• Ability to declare a higher earnings number? Change in operating cash flow of 37.40% compared to same quarter last year better than change in earnings.

Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

Item 12/31/2013 3/30/2014 6/29/2014 9/29/2014 12/31/2014
Revenues $ 2,103.70 $ 2,096.05 $ 2,133.87 $ 2,188.09 $ 2,218.40
Revenue Growth(Qtr YOY) 9.62% 8.20% 7.00% 6.48% 5.45%
Earnings $ 464.31 $ 487.10 $ 482.25 $ 507.74 $ 522.60
Earnings Growth (Qtr YOY) 6.46% 9.80% 14.77% 33.09% 12.55%
Net Margin 22.07% 23.24% 22.60% 23.20% 23.56%
EPS $ 0.41 $ 0.43 $ 0.42 $ 0.44 $ 0.46
Return on Equity 26.30% 26.54% 25.12% 25.24% 25.50%
Return on Assets 21.69% 21.27% 20.07% 20.71% 20.90%

Market Share Versus Profits

Companies sometimes focus on market share at the expense of profits or earnings growth.

Revenues Trend

Earnings Trend

Infosys’ change in revenue compared to the same period last year of 5.45% lagged its change in earnings, which was 12.55%. The company’s performance this period suggests an effort to boost profitability. While this is good to a point, the fact that the company’s revenue performance is lower than the average of the results announced to date by its peers does not bode well from a long-term market share perspective. Also, for comparison purposes, revenues changed by 1.39% and earnings by 2.93% compared to the immediate last quarter.

Revenues vs Earnings

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 39.28% to 41.04% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 28.17% to 29.12% compared to the same period last year. For comparison, gross margins were 41.16% and EBITDA margins were 28.74% in the quarter ending September 30, 2014.

Gross Margin vs. EBITDA Margin

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace, and not simply an accounting prop-up using the balance sheet.

Gross Margin vs Working Capital Days.

Infosys Limited Sponsored ADR’s improvement in gross margins have been accompanied by a deterioration in the management of working capital. This leads Capital Cube to conclude that the improvements in gross margins are likely accounting trade-offs with the balance sheet and not strictly from operating decisions. Its working capital days have risen to 241.23 days from last year’s levels of 216.38 days.

Gross Margins

Working Capital

Cash vs. Earnings – Sustainable Performance?

Infosys’ year-on-year change in operating cash flow of 37.40% is better than its change in earnings. This suggests that the company might have been able to declare a higher earnings number. But this change in operating cash flow is lower than the average of the results announced to date by its peer group.

Operating Cash Flow vs Earnings


The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 25.40% to 27.20% and (2) one-time items. The company’s pretax margins are now 32.83% compared to 30.63% for the same period last year.

EBIT Margin vs Pretax Margin

Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:

Item 12/31/2013 3/30/2014 6/29/2014 9/29/2014 12/31/2014
Revenues $2103.70 $2096.05 $2133.87 $2188.09 $2218.40
Revenue Growth (Qtr YOY) 9.62% 8.20% 7.00% 6.48% 5.45%
Peer Average Revenue Growth (Qtr YOY) 1.72% 6.56% 7.00% 9.86% 5.94%
Earnings $464.31 $487.10 $482.25 $507.74 $522.60
Earnings Growth (Qtr YOY) 6.46% 9.80% 14.77% 33.09% 12.55%
Peer Average Earnings Growth (Qtr YOY) 6.46% 9.80% 14.77% 11.65% 10.60%
Operating Cash Flow $457.01 $494.17 $476.74 $719.99 $627.93
Peer Average Operating Cash Flow $282.54 $451.19 $476.74 $719.99 $627.93
Operating Cash Flow Growth (Qtr YOY) 18.70% -0.34% 13.17% 44.24% 11.22%
Gross Margin 39.28% 40.19% 39.23% 41.16% 41.04%
Peer Average Gross Margin 34.89% 35.68% 35.12% 33.19% 33.47%
EBITDA Margin 28.17% 28.71% 27.38% 28.74% 29.12%
Peer Average EBITDA Margin 23.00% 24.18% 22.91% 21.24% 22.31%
Net Margin 22.07% 23.24% 22.60% 23.20% 23.56%
Peer Average Net Margin 17.87% 19.11% 18.89% 17.84% 18.28%
EPS $0.41 $0.43 $0.42 $0.44 $0.46
Peer Average EPS $0.41 $0.43 $0.42 $0.44 $0.46
EPS Growth (Qtr YOY) 6.44% 9.82% 14.80% 33.10% 12.55%
Peer Average EPS Growth (Qtr YOY) 6.44% 9.82% 14.80% 11.41% 12.17%
Return on Equity 26.30% 26.54% 25.12% 25.24% 25.50%
Peer Average Return on Equity 26.30% 26.54% 25.12% 25.24% 25.50%
Return on Assets 21.69% 21.27% 20.07% 20.71% 20.90%
Peer Average Return on Assets 18.02% 17.89% 19.60% 16.05% 18.71%

Company Profile

Infosys Ltd. is a consulting, technology and outsourcing company, which provides end-to-end business solutions thereby enabling clients to enhance business performance, delivered to customers globally operating in various industry segments. The company’s industry segments are primarily financial services and insurance comprising enterprises providing banking, finance and insurance services, manufacturing, enterprises in the energy, utilities, communication and services and retail, consumer packaged goods, logistics and life sciences. Its offerings include IT Services, Engineering Services, Consulting Services, BPO Services, and Products and Platforms. The company’s end-to-end business solutions include Business IT services, comprising application development and maintenance, independent validation services, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; Consulting and systems integration services, comprising consulting, enterprise solutions, systems integration and advanced technologies; Products, business platforms and solutions to accelerate intellectual property-led innovation, including Finacle, its banking product, which offers solutions to address core banking, mobile banking and e-banking needs of retail, corporate and universal banks worldwide. Infosys was founded by K. Dinesh, S. Gopalakrishnan, Narayana Ramarao Nagavara Murthy, Nandan M. Nilekani, Pandit Shrikant and S. D. Shibulal on July 2, 1981 and is headquartered in Bangalore, India.