Talking Tech

Talking Tech is produced by the Progressive Tech Team of George O’Connor, Ian Robertson and Gareth Evans. Our aim is to bring you up to date with the tech news cycle each week. We comment via blog and podcast on the slings and arrows of the sector at a time of huge change.

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April 25, 2024

Indian IT Professional Services: “April is the cruellest month”

History doesn’t record T.S. Eliots views on the Indian System Integrators. We must make do. Reporting on Thursday (Infosys) and Friday (Wipro) and throwing in TCS earlier (12 April)– companies responsible for c1.2m FTEs just updated investors. The Indian FY typically runs to 31 March, and this week rounds out with Tech Mahindra followed by HCL ( Thursday and Friday). In a soft economy offshore economics make sense but this budges against the ‘reshore’ concerns of fragile geopolitics (recap: Ukraine had c285k software developers, Russia 765k, now out of grasp ). The companies hit their key number milestones but guidance was muted and share prices followed suit. For now, the ‘macro is the thing’ . . . Eliot might call it a Waste Land. Following the Kainos FY update, the latest offshore KPIs largely mirror the wider IT Professional Services cohort and inform us of the likely content when local SIs comment. The positive zephor was tapped (22/4) with Elixirr final results and Made Tech announcing a new £19.5m contract at DLUHC which “helps underpin FY25 revenue expectations”. Here, we update our Professional Services dashboard, tease out the KPIs from the latest reports and look at the direction of revenue/FTE, unplanned attrition and cash conversion as we create a “heap of broken images” (okay, enough with the Eliot). The KPIs are sluggishly moving positively after the Pandemic, the Great Resignation (a distant memory) and more recently ebbing growth. For the future, GenAI reverses the downbeat Productivity trend – a story for another edition. As we update the valuation table we note the cohort is ‘cheap’ – but the market is looking elsewhere for now.

Wipro: Market commentary

On 19 April Wipro announced Q4 and FY results (ended 31 March 2024). Of the P&L highlights the IT services segment operating margin increased 40 bps sequentially with Large deal bookings US$4.6bn, +17.4% Y/Y and operating cash flows 158.6% of net income. In addition the FY25 guidance was for the IT Services business segment revenue to be in the range of US$2,617 – $2,670m or sequential guidance of (-)1.5% to +0.5% C/C.

Srini Pallia, CEO and Managing Director, said that the economic environment “remains uncertain” and that “we are on the brink of a major technological shift. Artificial intelligence is transforming our clients’ needs as they seek to harness its power for competitive advantage and enhanced business value”. CFO Aparna Iyer: “We generated highest operating cash flow in recent years which is at 183% of our net- income in Q4 and 159% on an FY basis.”

Our view is that we are thru the worst of this down phase a message that surfaces as we look at the aggregated data (see below). We tend to veer to the positive but as we look to the analyst community we see (at 21 April) out of 39 analysts covering Wipro, 8 have Strong Sell rating, 14 are on Sell, 10 Hold, 4 Buy 3 Strong Buy.

Infosys: Market commentary

On 18 April Infosys FY results saw it report US$18.6bn revenue + 1.4% Y/Y in C/C and a 20.7% operating margin of 20.7% as Free Cash Flow was US$2,882m +13.7% Y/Y. Q4 revenue, US$4,564m was flat Y/Y, -2.2% sequentially, with the operating margin, 20.1%, a sequential decrease of 40 bps. Free Cash Flow was US$848m. “Our capabilities in Generative AI continue to expand. We are working on client programs leveraging large language models with impact across software engineering, process optimization, and customer support”, Salil Parekh, CEO and MD.  Guidance was for a pedestrian FY25 with revenue growth of 1%-3% in C/C and operating margin of 20%-22%. On the call we noted that Infosys said its FCF US$848m in Q4 was highest in the last 11 quarters driven by improved working capital cycle and that it is “consistent with the objective of giving high and predictable returns to shareholders”. The Board has approved the capital allocation policy under which the company “expects to return 85% over the next 5 years and progressively increase annual Dividend Per Share”, said Jayesh Sanghrajka, CFO. “Operating margin expansion in the medium-term and improving cash generation continue to remain our priorities underpinned by early success in Project Maximus”, he added.

Made Tech: Inks £19.5m contract with DLUHC

Made Tech sends a soothing balm (22/4) as it announces its latest contract with The Department for Levelling Up, Housing & Communities (“DLUHC”). The contract is worth up to £19.5m over a 24-month period with a 12 month extension option. The contract is to design and development of new digital tools and services, the first of which is to be the Privately Rented Property Portal – a national private rented sector database. Made Tech has delivered 35+ digital projects with DLUHC since 2019.

Rory MacDonald, CEO: “The award of this contract helps underpin our revenue expectations for FY25 and is a testament to the confidence in Made Tech to deliver major new programmes of work.”

Elixirr International: Final results

Elixirr International final results (FY ended 31 December) today (22/4) saw revenue grow 20% Y/Y to £85.9m (CAGR of 37% from 2019 to 2023), Adj EBITDA +24% Y/Y to £25.4m, the margin crept up to 30%, 29% Y/Y and year-end net cash was £18.1m, £20.4m Y/Y.  There is an upbeat market and trading commentary with  FY23 momentum continuing into FY 24, which has already enjoyed three record revenue months in Q1 2024 and a strong pipeline for the remainder of FY 24. Guidance is FY 24 revenue in the range of £104-110m, with Adj EBITDA margin range of 27-29% after factoring in the impact of Insigniam’s lower margins at acquisition. Founder & CEO, Stephen Newton: “our equity incentive model continues to disrupt the market, solidifying our reputation as the Challenger Consultancy and setting us up for continued success.” Also “As we look to the future, it is clear that emerging technology will have a significant impact on the Consulting industry” – we agree.

Of note:

  • Average salaries were +8.6% Y/Y to £92.6k, but this undershot revenue and headcount growth (7.6%).
  • There was a decrease in the ‘non-billable share’ to 82% from 82.9% Y/Y. In truth this is good given revenue growth, the processes need to scale.
  • The US is a very healthy 44% of revenue, unchanged Y/Y.

The data

IT Professional Services dashboard – a recovery in the trend lines

Cash conversion

This is still mixed across the reporting group. (Note: (i) We added Capgemini and Accenture to show more local compares, (ii) Lower is better.)

Source: Company data, Analyst George O’Connor

Revenue/FTE progression

This is generally inching positively across the group, but given retreating revenue growth the driver is staff count reductions.

Source: Company data, Analyst George O’Connor


The headcount numbers continue to fall sequentially, everywhere

Source: Company data, Analyst George O’Connor


Unplanned staff attrition

This continues to fall. This means less natural change among staff, forcing ‘planned’ attrition initiatives making it harder (and more costly) for companies to ‘work’ the staff pyramid. This reflects the poor macro and a tighter jobs market (a message repeated from the IT staffers). Note: Unplanned attrition is a wider Professional Services industry concern (Hat tip FT).


Source: Company data, Analyst George O’Connor

Infosys and Wipro – the KPIs

Consensus valuation – Cheap, cheap, cheap

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