Infosys Limited Form 20-F Summary
Business context and reporting period
Infosys is an India-based provider of consulting, technology, outsourcing, business process management and digital services. The filing is an annual report for the fiscal year ended March 31, 2018, prepared under IFRS as issued by the IASB and presented in U.S. dollars. The filing is not a quarterly report; the requested “2017 Q4” period corresponds most closely to the fiscal year-end reporting period.
Primary markets were North America, Europe, the rest of the world and India, representing 60.4%, 23.7%, 12.7% and 3.2% of fiscal 2018 revenue, respectively. Financial services accounted for 26.4% of revenue. Infosys had 204,107 employees at March 31, 2018.
Key financial metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $10,939 million | $10,208 million | 7.2% increase |
| Gross profit | $3,938 million | $3,762 million | 4.7% increase |
| Gross margin | 36.0% | 36.9% | Down 0.9 percentage points |
| Operating profit | $2,659 million | $2,520 million | 5.5% increase |
| Operating margin | 24.3% | 24.7% | Down 0.4 percentage points |
| Profit before tax | $3,143 million | $2,974 million | 5.7% increase |
| Net profit | $2,486 million | $2,140 million | 16.2% increase |
| Net margin | 22.7% | 21.0% | Up 1.7 percentage points |
| Basic and diluted EPS | $1.10 | $0.94 | 17.0% increase |
| Net cash from operations | $2,257 million | $2,099 million | 7.5% increase |
| Capital expenditures | $310 million | $411 million | 24.6% decrease |
Cash and cash equivalents were $3,041 million and current investments were $982 million at March 31, 2018. Working capital was $5,243 million. Infosys reported no outstanding borrowings. Trade receivables were $2,016 million, unbilled revenue was $654 million and days sales outstanding was 67 days.
Net cash used in investing activities was $482 million, reflecting investment redemptions exceeding purchases and $310 million of capital expenditure. Net cash used in financing activities was $3,197 million, including $2,042 million for the share buyback and $1,156 million for dividends and related distribution tax.
Material changes versus the prior comparable period
- Revenue increased 7.2% on a reported basis and 5.8% on a constant-currency basis. Digital revenue was $2,791 million, or 25.5% of total revenue.
- Profit growth exceeded revenue growth principally because of lower income tax expense and higher other income, despite lower gross and operating margins.
- Income tax expense declined to $657 million from $834 million, and the effective tax rate declined to 20.9% from 28.0%.
- Infosys recognized a $225 million tax provision reversal following an Advance Pricing Agreement with the U.S. Internal Revenue Service covering fiscal years 2011 through 2021. The company expects approximately $233 million of related prior-period taxes to be payable and had paid $138 million as of the filing.
- Utilization excluding trainees increased to 84.6% from 81.7%; utilization including trainees increased to 81.2% from 77.6%.
- Fixed-price, fixed-timeframe contracts increased to 50.5% of services revenue from 48.0%, while onsite revenue declined to 55.4% from 56.8%.
- The company completed a buyback of 113,043,478 shares, or 4.92% of paid-up equity capital, at ₹1,150 per share. Shares outstanding declined to 2,184,114,257 at March 31, 2018.
- Infosys classified Panaya, Kallidus and Skava as held for sale, with $316 million of assets and $50 million of liabilities reclassified. A $18 million reduction in fair value was recognized in other income. The sale had not been agreed as of the filing date, and management indicated that the eventual Panaya sale price could be lower than the recorded fair value.
- Infosys wrote down its investment in DWA Nova LLC by $11 million; the associate was subsequently liquidated.
Guidance, outlook, commentary and risks
Management’s strategy centers on scaling digital services, strengthening the traditional core business through automation and artificial intelligence, reskilling employees and expanding local hiring in key markets. The company planned additional U.S. innovation hubs and continued investment in cloud, analytics, cybersecurity, AI, robotic process automation and related platforms.
The filing does not provide a clear fiscal 2019 revenue or margin guidance figure. Management identified continued demand for digital transformation but also emphasized pricing pressure, competition, changing client IT budgets, project cancellations and the difficulty of forecasting period-to-period revenue.
- Currency: A significant share of revenue is denominated in foreign currencies while a substantial portion of costs is in Indian rupees. Management estimated that a 1% movement in the rupee against the U.S. dollar affects incremental operating margins by approximately 0.50%.
- Client and market concentration: North America and Europe represented 84.1% of revenue; financial services represented 26.4%. The largest client contributed 3.4% and the ten largest clients contributed 19.3%.
- Execution and pricing: Fixed-price contracts, short termination periods, benchmarking clauses, wage inflation, subcontractor costs and failure to achieve productivity improvements could reduce profitability.
- Talent and immigration: Visa restrictions, anti-outsourcing legislation, wage pressure and the need to hire and retain specialized digital talent may increase costs and limit delivery capacity.
- Tax and contingencies: Claims from income-tax authorities not acknowledged as debts totaled $467 million at March 31, 2018; $1,003 million had been paid to statutory authorities against such claims. Unrecognized tax benefits totaled $478 million.
- Legal and governance matters: Infosys had submitted a settlement application to SEBI concerning the severance agreement with former CFO Rajiv Bansal. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
- Cybersecurity and data protection: Breaches, service interruptions, regulatory action, litigation and inadequate insurance could materially affect operations and financial results.
- Portfolio and impairment risk: The planned disposal of Panaya, Kallidus and Skava remained uncertain, and the filing stated that the eventual Panaya sale price could be below the March 31, 2018 fair value.
The board recommended a fiscal 2018 final dividend of ₹20.50 per share and a special dividend of ₹10 per share. The company’s capital allocation policy targeted returning up to 70% of annual free cash flow, including dividend distribution tax, subject to approvals and applicable law. A subsequent bonus issue recommendation of one share for every share held was subject to shareholder and regulatory approval.
Important facts for investors to verify
- Confirm that fiscal 2018 results, rather than a standalone fiscal fourth-quarter dataset, are being used for comparison.
- Adjust earnings analysis for the non-recurring $225 million U.S. APA tax reversal and assess the related $233 million payment obligation.
- Review the carrying value, negotiations and final proceeds from the proposed Panaya, Kallidus and Skava disposal.
- Reconcile reported cash, current investments, restricted cash and the substantial cash distributions made through the buyback and dividends.
- Assess the sustainability of the 24.3% operating margin after currency effects, compensation increases, subcontractor costs and tax-benefit changes.
- Review outstanding income-tax claims, uncertain tax positions, contractual commitments and the $12 million uncalled innovation-fund commitment.
- Consider the impact of the CEO transition, board changes, governance matters and employee turnover on execution.
- Verify the status and terms of the recommended bonus issue, subsequent dividends and the later WongDoody acquisition.