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The Bengaluru-based company lost the bell tower label to Tata Consultancy Services Ltd (TCS) a long time ago, due to a leadership crisis in the past decade. Still, the fact that it provides an annual revenue guide, while TCS doesn’t, makes its earnings announcement a long-awaited affair.
When Infosys is finally ready to announce its March quarter earnings, it will in all likelihood at least temporarily suspend its practice of forecasting annual revenue.
This is simply because the spread of covid-19 has caused an unprecedented level of uncertainty in all industries worldwide. Since customers themselves are not in a position to forecast revenue and profit, it will be folly for a service provider to go out of their way.
“We have seen several global IT (information technology) service companies withdraw or suspend their targeting in recent weeks. This includes Capita, Sopra Steria, Synnex Corp (Concentrix BPP), Virtusa and EXL Services, among others. We believe that most peers abroad face similar uncertainty and lack of visibility, “says Manik Taneja, senior research analyst at Emkay Global Financial Services Ltd.
Last week Cognizant Technology Solutions Corp. withdrew its annual guide. “Any decision on the orientation for 2020 will be made at a later date,” said a company spokesman.
“In the past few weeks, we’ve seen everything from incremental opportunities that were unexpected to the other end of project deferrals, permit applications, temporary salary concessions, deferred payment terms,” said Brian Humphries, chief executive officer (CEO), Cognizant. In a conference call with analysts: “I don’t think anyone can reliably predict how long this macroeconomic environment will persist,” he said.
In February, as results were announced for the year ending December 2019, Cognizant had forecast a steady growth in foreign exchange earnings of 2-4% for the current year 2020.
The removal of the guide reflects the disruptive wave that covid-19 has unleashed worldwide, affecting both demand and service provision.
Infosys can easily pinpoint all of these pairs and tell investors and analysts that things are too uncertain to be able to forecast earnings for an entire year.
But what about the fact that he continued his tradition of giving guidance during the global financial crisis? And what about Accenture Plc, which provided guidance for its financial year that ends in August 2020?
On March 19, Accenture cut its growth forecast. The midpoint of the guided range implies little or zero revenue growth in the second half of your fiscal year ending in August.
“The impact of the global financial crisis was much less and was largely due to the financial services sector. This time, prolonged blockades have hurt many large companies and industries and gross domestic product is expected to drop significantly in the June quarter, “said one analyst, requesting anonymity. As for Accenture’s guidance, things have worsened considerably since he announced his earnings.
Blockades are hampering both service delivery and business entry. Cognizant estimates a revenue impact of $ 30-35 million in the last quarter due largely to challenges in customer service.
ISG estimates a significant drop in orders for managed services businesses, where Indian companies have a significant presence.
The outsourcing consultant projects a sequential drop of 17% in annual contracts in the current quarter. Significant cuts in discretionary spending and price cuts are anticipated. “ISG has also noted a trend of requests for price discounts in the range of 20-50% in short-term vertical markets. The commonly agreed price reduction is in the 20-30% range, “Motilal Oswal Securities Ltd said in a note.
Among the segments, travel, transportation and hospitality, followed by retail, are the most affected. As Cognizant’s management points, industries serving these sectors, such as financial services, will also face the impact.
“We believe that the level of uncertainty about earnings increases progressively on a daily basis. Most companies suggest a 30-60 day period before having a clear idea of what the impact might be. In this context, I think most companies are likely to choose to dissolve the guidance for now until there is certainty, “said Nitin Padmanabhan, analyst at Investec Capital Services (India) Pvt. Ltd.
Wipro Ltd, which will report the results on April 15, typically provides a quarterly forecast, and it will be interesting to see if it also drops this practice. Infosys stopped giving quarterly forecasts a few years ago, but continued its annual guidance. While HCL Technologies Ltd also provides annual guidance, TCS does not provide forecasts.
Forecasts during times of uncertainty tend to be out of place, an analysis of baseline versus actual performance shows (see table).
If companies still persist in giving annual forecasts, they could also provide a broader range than usual, analysts at Kotak Institutional Equities said.
However, with the covid-19 exposing business damage and impact-reflecting actions, during the earnings season, the focus will be on corrective measures, how companies are mitigating revenue losses and containing costs. Companies like Cognizant anticipate an impact on profitability in 2020, but expect the pressures to ease as employees adopt new service delivery strategies.
