Wipro’s June 2016 quarter performance once again reflected that the transformation the company is going through is still a work in progress, as the company disappointed the Street with its key financials.
The Bengaluru-headquartered company, though it managed to meet the middle end of its dollar-term revenue guidance given for the April-June period, disappointed on the net profit growth and profit margin fronts apart from giving conservative revenue guidance for the September quarter.
For the quarter ended June 30, 2016, Wipro reported ~2,050 crore ($304 million) in net profit, a decline of six per cent over the year-ago period, while revenues at ~13,600 crore ($2 billion) saw an increase of 11 per cent. The flagship information technology (IT) services business reported a three per cent decline in operating profit at ~2,330 crore ($345 million) and ~13,109 crore ($1.9 billion) in revenues, an increase of 13 per cent. On a sequential quarter basis (compared with the preceding quarter), the IT services business’s operating profit declined by 9.3 per cent, while the revenues went up 2.42 per cent.
A Bloomberg survey of 33 analysts had estimated Wipro to report a net profit of $326.35 million, or ~2,181 crore on a revenue of $2.05 billion, or ~13,778.30 crore, for the quarter.
The company said that the profit took a hit, primarily as it is in an investment mode, both in buying out assets (companies) whose margins profiles are typically different, as well as investment towards people. This also impacted the operating margin of the IT services business, which declined by around 190 basis points (bps) to ~17.8 crore, when compared with the previous quarter.
“At the beginning of the last quarter, we had said that we do want to make our investments as we are in the journey to fundamentally improve our trajectory of growth and our trajectory of margins. So we will have to make certain investments and those investments have been made in terms of the acquisition that we did,” said Chief Financial Officer Jatin Dalal.
Wipro joins cross-town rival Infosys to report less than expected numbers as global uncertainty is forcing customers to reduce IT spending. Infosys Chief Executive Vishal Sikka, who has reduced its forecast for the year ahead due to cut in discretionary spending by clients, on Monday, rejigged his leadership team to increase the focus on large deals and acquisitions to drive his strategy.
Tata Consultancy Services, however, has outperformed expectations as it saw business growing from its customers.
Wipro’s chief executive officer Abidali Neemuchwala said that while the company has delivered revenues in line with its guidance, it is expecting the growth trajectory to build up over a period of time driven by effective execution. “Overall, we see the demand environment to be quite stable. We are seeing a certain level of ‘run’ business getting automated and that has a certain level of revenue deduction, while customers are also investing in ‘change’ business, which is the digital. This is gradually picking up. I think all of that is reflected in the guidelines,” said Neemuchwala.
For the quarter ending September 30, 2016, the Bengaluru-based company has given a revenue guidance of $1931 million to $1950 million for its IT services business, indicating a flat to one per cent growth.
“Wipro’s June ’16 quarter results fail to enthuse despite broadly an inline revenue performance. Ebit (earnings before interest and tax) margins have slipped by around 230 bps (with only partial impact of wage increments), marking five quarters in a row of decline on this front,” equity analyst firm Emkay Research said, in a note, adding, “Sep ’16 quarter revenue guidance of 0.1-1 per cent quarter-on-quarter US dollar revenue growth means that Wipro will struggle to get to double-digit revenue growth in FY17.”
Interestingly, Wipro has said that it is no more pursuing the acquisition of Viteos Group, which it announced in December last year. The company said it was due to the inordinate delay in completion of the closing conditions by both the parties.
On key operating parameters, Wipro had a mixed bag, with revenue growth predominantly driven by the US, which grew 4.2 per cent sequentially, primarily aided by HealthPlan acquisition followed by Europe, which grew 0.5 per cent, in constant currency term. India and Middle East continued to struggle with a sequential decline of 2.6 per cent. Wipro has announced that it is looking at restructuring the India and Middle East business, to align it with its broader strategy.
In terms of service lines, financial services and health care grew 2.9 per cent and 17.7 per cent, respectively, while energy, manufacturing and telecom saw a decline.
“Although the current Wipro result is likely to disappoint investors, it is important to recognise that a somewhat delayed start to its transformational initiative under its new leadership will need some more time to translate into favourable financial results,” said Sanjoy Sen, a doctoral research scholar at Aston Business School, UK, adding, “The persisting global macroeconomic scenario, characterised by volatility and uncertainty, is also bound to slow down the results of such a turnaround effort.”
The Wipro stock closed down 0.47 per cent or ~2.60, at ~549.40 a share on Tuesday on the BSE, ahead of the results announcement.