iGATE Corporation (NASDAQ:IGTE), an integrated technology and outsourcing firm, reported adjusted Earnings per Share of -$0.63, below Wall Street expectations. Fourth quarter revenue of $331.5 million, which was an increase of 10.7 percent compared to the same period last year, exceeded forecasts.

Profits rose to $38.0 million in the quarter vs. $33.1 million in Q4 2013. Ashok Vemuri, President and CEO of iGATE, attributed the performance to enhanced client-centricity, streamlined execution, build-out of next-generation capabilities, and committed IGATORs.

He also noted that foreign exchange volatility was a headwind for the company, given the strength of the US dollar.

This earnings release follows the earnings announcements from the following peers of iGATE Corporation – Accenture Plc (NYSE:ACN) , Infosys Limited Sponsored ADR (NYSE:INFY) and Wipro Limited Sponsored ADR (NYSE:WIT).

Highlights

  • Summary numbers: Revenues of USD 331.50 million; Net Earnings of USD 38.0 million; and Earnings per Share (EPS) of -$0.63.
  • Gross margins narrowed from 39.81% to 34.77% compared to the same quarter last year, operating (EBITDA margins now 17.30% from 23.40%.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth.

12/31/2013 3/30/2014 6/29/2014 9/29/2014 12/31/2014
Revenues $299.33 $302.21 $311.75 $322.77 $331.50
Revenue Growth (YOY) 10.22% 9.93% 10.05% 10.01% 10.75%
Earnings $26.34 $25.40 $4.55 $29.68 $37.97
Earnings Growth (YOY) -14.24% -26.70% -84.77% -6.58% 44.14%
Net Margin 8.80% 8.40% 1.46% 9.20% 11.45%
EPS $0.30 $0.29 ($0.07) $0.34 ($0.63)
Return on Equity 15.86% 13.17% -2.83% 14.61% -34.39%
Return on Assets 6.02% 5.23% 1.04% 8.14% 10.85%

Market Share Versus Profits

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

Revenues Trend

Earnings Trend

Compared to the same quarter last year, iGATE’s change in revenue trailed its change in earnings, which was 44.14%. The company’s performance this period suggests a focus on boosting bottom-line earnings. While the revenue performance could be better, it is important to note that the quarterly change in revenue was among the highest in the peer group thus far. Also, for comparison purposes, revenue changed by 2.70% and earnings by 27.93% compared to the immediate last quarter.

Revenues vs Earnings

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins narrowed to 34.77% from 39.81% for the same period last year, while operating margins (EBITDA margins) went from 17.30% to 23.40% over the same time frame.

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

iGATE Corporation’s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days have fallen to 68.44 days from 115.74 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Margins

The company’s operating (EBIT) margins contracted from 20.44% to 14.11%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from 13.04% to 14.15%.

EBIT Margin vs Pretax Margin

EPS Growth Versus Earnings Growth

IGTE-US’s year-on-year change in Earnings per Share (EPS) of -303.70% is less than its change in earnings of 44.14%. This is mainly due to the fact that IGATE in Nov ‘2014 entered into an exchange agreement with Viscaria Limited and paid $80 million cash.

EPS Growth vs Earnings Growth