Infosys (INFY) likely to post weak Q3 earnings

Infosys Limited (NYSE: INFY) is slated to report its third-quarter 2020 earnings results on Friday before the bell. The bottom line will be hurt by higher costs and expenses as well as the charges associated with the probe into a whistleblower issue at the company.

The top line will be driven by market share gains, digital revenue, operational parameters especially in utilization and onsite-offshore mix, and large deal signings. The operating margin is expected to expand driven by a significant improvement in utilization, onsite mix, employee pyramid improvement, and tight overall cost management.

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During mid-October, the Securities and Exchange Commission launched a probe into a whistleblower issue. The company’s said it will vigorously defend itself from the federal securities class action based on whistleblower claims. This charges Infosys with unethical practices to increase short-term revenue and profits.

Despite this, the company continues to expect strong traction from the key digital areas including cloud services, data and analytics, Internet of Things (IoT), artificial intelligence (AI) services, and SAP services.

Analysts expect the company’s earnings to jump by 16.70% to $0.14 per share and revenue will increase by 8.5% to $3.24 billion for the third quarter. The company has missed analysts’ expectations twice in the past four quarters. The majority of the analysts recommended a “hold” rating with an average price target of $11.14.

For the second quarter, Infosys reported a 2% decline in earnings due to higher costs and expenses despite a 10% jump in the top line. The revenues were boosted by digital revenues growth of 34%. The operating margins expanded during the quarter helped by the improvement in operational parameters and cost efficiencies.

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For fiscal 2020, the company expects revenue growth in the range of 9-10% in constant currency and operating margin in the range of 21-23%. Infosys predicts performance in the Financial Services vertical to be impacted in the next couple of quarters due to seasonality, sluggishness in capital markets, and European banking space.

The retail segment is expected to remain cautiously optimistic, given recent deal wins and steady order pipeline. This is driven by the possible uptick in consumer experience, digital marketing, insights and investments in the platform. The manufacturing vertical continues to be hurt by the impact of trade wars and weakening automobile segments.

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