IT Slowdown? Infosys Delays Q4 Numbers 1st Time Ever; Cognizant Unsure About Growth Forecast
For the first time ever, Infosys is expected to delay the declaration of its quarterly results because of the uncertain environment looming over the IT sector. Similarly, Cognizant Technology Solutions has also withdrawn its 2020 revenue guidance (growth forecast).
Read to find out more…
Infosys Delays Q4 Results!
According to the sources familiar with the matter and close to the company said that the Q4 results of Infosys will be delayed and that no new date has been finalised yet.
Analysts tracking Infosys and the IT sector said that it is likely that the company might delay its FY21 growth/margin guidance to the next quarters.
What do the Financial Services Firms Have to Say About the Delay?
Motilal Oswal in a note to its investors, said, “Even if they were to guide, these guidance bands will likely be wider than usual and subject to sharp revisions later on, as clients relook at their IT budgets.” The note also read that given the unprecedented level of uncertainty around the global macro and the multiple moving parts, visibility on near-term growth/profitability is challenged.
In addition the deal signings during the second half of Q4 will likely be a crucial area of focus for the investors as it is the latest available proxy for demand. The note also said, “In addition, qualitative cues around the adaptability of different companies to the new work paradigm will be the key thing to watch out for.” The qualitative cues might include the company’s ability for end-to-end digitisation of key processes like deal signings, employee onboardings and deal ramp-ups.
Rishit Parekh of Nomura said that Infosys is expected to deliver 0.2% quarter-on-quarter constant currency (CC) growth in Q4FY20 (at the lower end of the guidance range for Q4). Infosys had indicated an aftermath of the pandemic to be $8-10 million (0.3% of quarterly growth) due to lost billings in China, though presence in Italy is small. He also said, “There could be lower investments in sales/digital and lower travel costs partly offset by lower utilisation, investments to adapt WFH and cross-currency impacts (INR depreciated 1-3% vs USD/GBP/EUR).”
Parekh also wrote in the note that deal-win numbers are likely to be lower for Infosys on,
1) post the sharp rise in the past three quarters (average of $2.4 billion), and
2) delay in decision-making in March, 2020.
In addition he said, “While the guidance is less relevant in the current context, we expect Infosys to start the year with a guidance of low to mid-single-digit CC revenue growth and retain EBIT margin guidance to 21-23 per cent.”
Cognizant Withdraws Revenue Growth Forecast!
Cognizant’s withdrawal of 2020 revenue guidance has been cited to the unprecedented nature of the COVID-19 pandemic, unpredictability of its duration and impact on the company’s ability to forecast performance. The news comes after Accenture, on March 20, lowered its revenue forecast for FY20 to 3-6% as against the earlier guidance of 6-8%.
In February 2020, the company had forecast a revenue growth of 2-4% in CC growth terms for 2020.
The company issued a statement in which it stated that while its financial performance in the first two months of the quarter was on track to exceed previous guidance, driven by strong performance from the North America market. However there have been delays in project fulfilment with delivery, particularly after India and the Philippines shifted to work-from-home.
In Q1 however, Cognizant has said that it expects the first quarter revenue to be $4.22-$4.23 billion, up 2.7-2.9% (3.4-3.6% in constant currency) from the same quarter last year, including a negative 50 basis point impact from the exit of certain content services.
The reduced client demand, primarily in the travel and hospitality industries, has affected Cognizant’s business. The Q2 of 2020 is expected to further reduce client demand as its societal and economic impact causes broader disruptions across industries.
Cognizant, however, says that it has proactively taken steps to strengthen its financial flexibility, including drawing down $1.74 billion on its revolving credit facility on March 23, 2020, bringing the company’s total cash and investment balance as of March 31 to approximately $4.7 billion, or net cash of $2.2 billion. The company has no significant debt maturities until 2023.
What Does Cognizant Have to Say?
Brian Humphries, Chief Executive Officer, said in a statement, “In this fluid environment where uncertainty prevails, we are well-positioned with deep client relationships across more than a dozen industries, and a strong balance sheet that provides solid financial flexibility. As ever, we stand committed to help our clients manage through economic, technological and other disruptions through our innovative solutions and talented associates. I am proud of our 292,000 associates who have risen to the challenge of serving our clients with empathy, initiative and courage, and confident that we will emerge from this global crisis stronger together.”
Cognizant has announced an additional payment of 25% of the base pay for April for employees up to the associate level in India and the Philippines. This is two-thirds of the company’s employees.On the other hand, the company has also announced an initial Rs 760 cr philanthropic commitment to support communities around the world in addressing the immediate and long-term impact of COVID-19.
What does Delay of Q4 Results and Withdrawal of Revenue Growth Forecast Indicate?
The delay of Q4 Results and withdrawal of revenue growth forecast does not predict any good news on the Indian IT sector front.
Indian IT companies have a chunk of their revenue coming from clients based out of the US and European countries. All these factors indicate that clients are cutting down on their spending.
According to an analysis by International Data Corporation (IDC) the hardware businesses will take the biggest hit, and this is likely to affect the IT and ITeS industry across the world.
With several companies, especially in the aviation, retail, hospitality industry taking pay cuts, a possible slowdown in the IT industry brings about fear of layoffs and pay cuts in the near future. The IT industry employs the maximum people of all the industries in India.