After Indian IT provider Infosys' (Nasdaq: INFY) earnings conference call yesterday, Global Gains advisor Bill Mann and I talked two-on-one with Infosys' CFO, Vibin "Bala" Balakrishnan.
It was a comfortable late morning in our offices near Washington, D.C., but in India it was the end of a long working day for Bala. Fortunately, thanks to a solid quarter and strong guidance, our conversation was upbeat.
The results
Before we get to what Bala had to say, let's run through the fourth-quarter results. Revenue clocked in north of $1.1 billion, up 32% over the same period in the prior year. Diluted earnings per share increased only 20% to $0.54, which was in line with Wall Street estimates. However, for the full year, EPS growth kept pace with the 35% revenue growth.
Despite the tough economy in the U.S., where Infosys does about 60% of its business and anticipates a wage increase of 11% to 13% for offshore employees, it is guiding to 19% to 21% revenue growth for fiscal 2009, leading to 17% to 19% EPS growth. The solid earnings and strong guidance led to Infosys' stock rallying 8.5% yesterday.
Power to the people
We asked Bala how Infosys maintains its quality workforce. After all, barring price increases, Infosys' IT outsourcing and consulting revenues are driven by staffing increases. Last year alone, Infosys hired 33,000 people (19,000 net of attrition) to bring its staffing above 90,000. If Infosys has problems hiring high-quality employees, or if these employees leave at a faster pace, the company's growth plans would be in trouble.
Infosys keeps its attrition under control (per Bala, it's been creeping downward the past few quarters) by being selective about whom they hire, training those hires well, and taking actions such as this year's expected wage increase. Bala also noted that as India's growth rate slows from its torrid pace, Infosys will have an easier time attracting the cream of the crop.
In fiscal 2009, Infosys plans to increase its maximum dividend payout from 20% to 30% of net profits. We were curious why the company chose dividends versus share buybacks. Bala's answer underscores how complicated international investing can be. He notes that in India, dividends aren't taxed; meanwhile, a company can't issue new stock for a year after share buybacks. So, for capital flexibility reasons, Infosys prefers dividends to buybacks.
Who's the competition?
The IT space is rife with competition. The two giants are IBM (NYSE: IBM) and Accenture (NYSE: ACN). The Indian companies such as Infosys and its rivals Tata, Wipro (NYSE: WIT), and Satyam (NYSE: SAY) have also thrived because of their access to India's relatively cheap, highly skilled labor. Meanwhile, as India's labor market has been demanding higher wages, the prospect of even cheaper labor in other countries has been increasing as a threat.
We asked Bala what he viewed as the biggest threat: (1) IBM and Accenture, (2) the other Indian companies, or (3) other countries out-India-ing India. He didn't hesitate. He views IBM and Accenture as Infosys' main competition because Infosys has to battle these top dogs for many of its large contracts.
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