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IT companies: Things to know about quarterly results
Infosys – India’s second largest software exporter – kick-started the earnings season last Friday. It was once considered the bellwether of India’s $100 billion-worth IT sector. For the second successive quarter, it has posted good results. This sparked a positive trend for other IT companies like TCS, HCL Tech, Wipro among others. Tata Consultancy Services (TCS) too reported better-than-expected numbers for the July-September quarter.
To understand the IT businesses better, here are some key terms explained:
Indian IT companies earn in foreign currency. This is because their revenue comes from overseas. America accounts for over 60% of the total Software services export from India. For this purpose, revenues are reported in both dollar and rupee terms. A steady growth in revenue is important for companies in the sector.
The net profit takes into account the tax a company pays and income from non-sales related activities, like sale of a building, etc. It does not reflect the actual gap between the company’s income from its operation and its expenditures. Hence, analysts follow ‘operating profits’. It helps identify if the company’s mainstream operations are run efficiently. A fall in the operating margins number can mean that the company is finding it difficult to sustain profitability margins.
For an IT company, its employees are its main assets. Depending on the need, employees are assigned projects. This is called utilization. When not needed, they are benched. Utilization, as a percentage of the total workforce, reflects how efficiently its employees are used as well as demand for services. High utilization translates to higher bills, and thus a corresponding increase in revenue. Infosys’ utilization has improved in the September 2013 quarter to 77.8% from 73.3% last year. TCS’ Q2 utilization is higher at 83.4%.
Attrition is the gradual reduction and replacement of workforce over the years. This calculates how many employees have opted to leave the company, and have been replaced. A high attrition figure means a company’s inability to retain talent. Infosys has seen a lot of top-level exits in the past few months. Unsurprisingly, its attrition rates have continued to rise to 17.3% from 15% than in 2012. This is the highest in two years.
For any company, clients are important. An addition in clients means it is reaching out and getting more projects. Infosys and its subsidiaries added 68 clients in the September 2013 quarter, while TCS said it saw 51 new client additions.
Growth guidance for the financial year has always taken centre-stage, more than its actual results. Guidance is the expected growth in the company’s revenues, and reflects the confidence of the company. In the past, Infosys used to give guidance for earnings per share and revenue every quarter for the subsequent quarter. However, it became harder to predict future growth and the company discontinued that practice. It now gives yearly revenue guidance only. Nasscom, the software services industry body, expects Indian IT companies to report 12-14% growth in revenue for 2013-14.
Earning per share or EPS is the company’s net profit divided by the total number of its equity shares. Infosys reported earning per share of Rs 40.50. TCS EPS stood at Rs 28.60. However, TCS’ EPS has grown steeply by 70% over the quarter to June 2013. Infosys EPS grew 3.3% during the same phase. This shows that Infosys has to work hard to make profits than TCS.