Will Infosys break its tradition of annual revenue guidance?

The Bengaluru-based company lost the bellwether tag to Tata Consultancy Services Ltd (TCS) long ago, owing to a leadership crisis in the past decade. Still, the fact that it provides an annual revenue guidance, while TCS doesn’t, makes its results announcement an eagerly anticipated affair.

When Infosys is eventually ready to announce its March quarter earnings, it will in all likelihood at least temporarily discontinue its practice of giving an annual revenue forecast.

This is simply because the spread of covid-19 has caused an unprecedented level of uncertainty across industries globally. With clients themselves not in any position to forecast revenues and profits, it will be foolhardy for a services vendor to stick its neck out.

“We have seen several global IT (information technology) services companies either withdraw/suspend their guidance in recent weeks. This includes Capita, Sopra Steria, Synnex Corp (Concentrix BPP), Virtusa and EXL Services, among others. We believe that most offshore peers face a similar uncertainty and lack of visibility,” says Manik Taneja, senior research analyst, Emkay Global Financial Services Ltd.

Last week, Cognizant Technology Solutions Corp. withdrew its annual guidance. “Any decisions about 2020 guidance will be made at a later date,” a company spokesperson said.

“The last few weeks, we have seen everything from incremental opportunities that were unexpected to the other extreme of project deferrals, request for furloughs, temporary wage concessions, deferred payment terms,” Brian Humphries, chief executive officer (CEO), Cognizant, said in a conference call with analysts. “I don’t think anybody can reliably predict how long this macro-economic environment will persist,” he said.

In February, while announcing is results for the year ended December 2019, Cognizant had forecast constant currency revenue growth of 2-4% for current year 2020.

The guidance withdrawal reflects the disruptive wave covid-19 has unleashed across the globe, impacting both demand and service delivery.

Infosys can easily point to all these peers and tell investors and analysts that things are far too uncertain to be able to forecast revenues for a whole year.

But what about the fact that it continued with its tradition of giving guidance during the global financial crisis? And what about Accenture Plc, which provided guidance for its financial year ending August 2020.

On 19 March, Accenture slashed its growth forecast. The mid-point of the guided range imply a meagre or zero revenue growth in the second half of its fiscal year ending August.

“The impact of the global financial crisis was far lower and was largely on the financial services sector. This time around, extended lockdowns have hurt many large companies and industries and gross domestic product is expected to fall significantly in the June quarter,” an analyst said, requesting anonymity. As far as Accenture’s guidance goes, things have worsened considerably since it announced its earnings.

Lockdowns are hampering both service delivery and business inflow. Cognizant estimates a revenue impact of $30-35 million last quarter largely due to customer service challenges.

ISG estimates a significant fall in managed services business orders, where Indian companies have significant presence.

The outsourcing consultant projects a 17% sequential fall in annual contracts in current quarter. It foresees significant cuts to discretionary spending and price cuts. “ISG has also called out a trend of requests for price discounts in the range of 20-50% across verticals for the near term. Commonly agreed upon price reduction is in the range of 20-30%,” Motilal Oswal Securities Ltd said in a note.

Among the segments, travel, transportation, hospitality followed by retail are seen to be worst hit. As Cognizant’s management points, industries that serve these sectors such as financial services will face the impact as well.

“We think the level of uncertainty on earnings is incrementally increasing on a daily basis. Most companies are suggesting a 30-60 day period before they have a fair sense of what the impact could be. In this context, I think it’s likely that most companies choose to disband guidance for now until there is certainty,” said Nitin Padmanabhan, an analyst at Investec Capital Services (India) Pvt. Ltd.

Wipro Ltd, which will report results on 15 April, normally gives a quarterly forecast, and it will be interesting to see if it drops this practice as well. Infosys stopped giving quarterly forecasts some years ago, but continued its annual guidance. While HCL Technologies Ltd also provides annual guidance, TCS does not give forecasts.

Forecasts during times of uncertainty tend to be way off the mark, an analysis of initial guidance versus actual performances shows (See chart).

If the companies still persist with giving annual forecasts, they may as well provide wider than usual range, analysts at Kotak Institutional Equities said.

Nevertheless, with the covid-19 laying bare the business damage and stocks reflecting the impact, the focus during the results season will be on remedial measures, how companies are mitigating revenue losses and containing costs. Companies such as Cognizant foresee impact on profitability in 2020 but expect the pressures to mitigate as employees adopt new service delivery strategies.

―Livemint