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Infosys, India's second-largest IT services company, has reported strong financial results for the December quarter (Q3), exceeding analysts' expectations and surpassing its larger competitor, Tata Consultancy Services (TCS). This success is largely attributed to the robust performance of its North American business, which constitutes a significant portion of its overall revenue. The company's growth trajectory indicates a positive trend in the IT services sector, particularly within financial services in the US and Europe, where discretionary spending is showing signs of improvement. This positive momentum allowed Infosys to raise its full-year revenue outlook for the third time this fiscal year, demonstrating a renewed confidence in the market's recovery and its own ability to capture significant market share.
The details of Infosys's Q3 performance paint a picture of sustained growth despite seasonal challenges. Revenue reached $4.94 billion, exceeding the Bloomberg consensus estimate of $4.81 billion. This represents a slight increase of 0.92% compared to the previous quarter, a notable achievement considering that the October-December period is typically a seasonally weak quarter for IT services companies due to fewer working days and the holiday season. In contrast, TCS experienced a 1.7% sequential decline in revenue, dropping to $7.54 billion, while HCL Technologies reported stronger growth with a 2.6% increase, reaching $3.5 billion. This underscores Infosys's superior performance relative to its key competitors in a generally challenging market environment. The company's consistent improvement reflects a strategic focus on key sectors and geographic regions.
A key driver of Infosys's success is the revitalized discretionary spending within the financial services sector. CEO Salil Parekh highlighted the positive shift in spending patterns, noting improvements both in the US and, more recently, in Europe. This upswing in discretionary spending is a significant factor in Infosys's improved revenue outlook. The company has increased its revenue growth guidance for 2024-25 to 4.5-5% in constant currency terms, a significant upgrade from the previously projected 3.75-4.5% and the initial forecast of 1-3%. This upward revision underscores the management's confidence in the continuing strength of demand for its services. The increase in net new deals, reaching 63% of the total contract value of $2.5 billion, further substantiates this positive outlook, signifying a return of discretionary spending and increased confidence from clients.
While Infosys's overall growth is impressive, a closer examination of specific metrics reveals further insights. Incremental revenue from April to December increased by $550 million, representing a growth of 3.93% compared to the same period last year. However, the full-year growth of 1.9% in FY24 marked the slowest annual growth since Parekh became CEO in 2018. This slower overall annual growth, despite the impressive quarterly results, highlights the impact of the seasonally weak quarter and the lingering effects of macroeconomic uncertainty. Despite the slower overall annual growth, the company's positive momentum in the latter half of the fiscal year signals a promising trajectory for the upcoming year. The improvement in net profit, reaching $804 million (exceeding analyst expectations of $790 million), further underscores the positive financial health of the company.
The regional breakdown of Infosys's performance sheds light on the source of its strength. The North American market, representing 58% of its revenue, played a pivotal role in its overall growth, with incremental revenue from the region increasing by 2.8% sequentially. The financial institutions sector also contributed significantly, with revenue reaching $1.37 billion, a 2.9% sequential increase. This strong performance in key sectors underscores Infosys's ability to successfully cater to the evolving needs of its client base. Despite these positive indicators, the company's profitability, while showing slight improvement (21.3%, up 20 basis points sequentially), could face pressure due to the planned annual wage hikes for employees. The margin pressure is particularly notable when compared to peers like HCLTech, whose operating margin improved by 90 basis points to 19.5%, and TCS, which saw a 40 basis points improvement, reaching 24.5%. The absence of any mega-deals (over $1 billion) in the December quarter is another factor to consider in evaluating the company’s performance.
The contrasting approaches to headcount management among Infosys and its competitors are also noteworthy. While TCS reduced its headcount by 5,370 in the December quarter, Infosys continued to add employees, with a net increase of 5,591, bringing its total employee count to 323,379. This headcount increase reflects Infosys's proactive strategy to meet growing project demands and maintain a competitive advantage in the market. HCLTech also increased its headcount, adding 2,134 employees. This demonstrates differing strategic approaches by these major players in the IT industry, reflecting their distinct assessments of market dynamics and future growth opportunities. The overall picture suggests a dynamic and competitive environment within the IT services sector, with Infosys demonstrating a remarkable ability to navigate the challenges and capitalize on emerging opportunities. While the full impact of macroeconomic factors remains uncertain, Infosys's strong Q3 performance and positive outlook provide reason for optimism regarding its future growth trajectory.
Source: Infosys beats TCS as growth continues on the back of North America business