How The RBS Contract Loss Forced Infosys’ Guidance Revision
The downward revision in dollar revenue guidance by Infosys took the Street by surprise.
Infosys Ltd.’s second quarter earnings not only met analyst expectations on all counts but also surpassed consensus estimates.
What took the Street by surprise however, was the downward revision in its full-year revenue guidance for the second time in three months. It’s not as though the guidance cut was not expected but the quantum of the downward revision is what baffled the Street.
At the end of the first quarter, Infosys had lowered its dollar revenue guidance for the financial year to 10.5-12 percent. This guidance came under threat as soon as the company announced the RBS ramp down.
In August this year, Infosys announced the ramp down of about 3,000 roles after its client Royal Bank of Scotland Group Plc scrapped plans to set up a separate bank, Williams and Glyn (W&G), in the U.K. Infosys had been the technology partner to develop a separate IT platform for the bank.
The Street had estimated a 200 basis point (100 basis points = 1 percent) downward revision due to the RBS ramp down. The broad consensus among analysts was that the revenue guidance in the July-September quarter will be revised downwards to 8.5 to 10 percent in dollar terms.
The Guidance
The IT major finally revised downwards its revenue guidance in dollar terms to 7.5 to 8.5 percent compared to 10.8 to 12.3 percent earlier, according to its stock exchange filing. Vishal Sikka, the chief executive officer of the company, attributed this higher-than-expected downward revision to the RBS ramp down, structural shift in large orders, that is, value compression of large orders due automation, and slowdown in some of its internal service lines.
Infosys revised its lower band of revenue guidance by 300 basis points and upper band of the revenue guidance by 400 basis points, thereby narrowing the revenue guidance band to 100 basis points. This is a very narrow band of guidance with a downward bias, for a company which sees structural, geopolitical, and seasonal headwinds in the next few quarters.
The RBS Ramp Down
RBS would have accounted for nearly $200 million in revenue for Infosys, before the project was scrapped following the Brexit referendum. Infosys will undertake the ramp-down over the next two to three quarters, which will involve nearly 3,000 employees – nearly 1.5 percent of the current employee strength – going off projects and either being re-deployed or put on the bench. The company ended the second quarter with an employee strength of 1,99,829.
Mohit Joshi, president and head of Infosys’ financial services vertical said the next few quarters will be challenging as RBS and slow ramp-ups by a few other clients will keep growth for the financial services segment muted.
The financial services segment grew at over 5 percent in the second quarter.
