Seasonality no longer a concern for IT companies

Other than the December quarter, revenue growth is stable through the year

In its quarterly conference call with analysts in April, Infosys' CEO D Shibulal was asked to give some sense on how seasonality would impact revenue growth in FY15. Typically, the June and September quarters are the strongest for technology companies as these two quarters see traction from increase in budgets, which are finalised towards the end of the calendar. This is a big reason why technology stocks tend to underperform the broader markets at the start of every calendar year and pick up steam after the bellwether's growth guidance for the new fiscal.

The full year growth guidance given by Infosys has been a proxy for the entire industry, as it signifies trends in technology budgets in America, which are finalised towards the end of the calendar year. Over the last few years, seasonality has increasingly become difficult to predict given the volatility seen in Infy's quarterly numbers. The company's CEO D Shibulal has a simplistic enough explanation. He said: "We are coming out of a low momentum quarter and when we come off a low momentum Q4, it impacts next year's growth. If the fourth quarter grows at 2-3% it has an impact on the next fiscal."

With Infosys continuing to blame the external environment and seasonality for its revenue volatility, it is important to see how other players are impacted by the seasonality factor. Analysts claim that unlike Infosys and TCS, the first quarter is typically weak for Wipro as its exposure to the banking and financial services vertical is lower compared to the other two Tier I companies. Pankaj Kapoor of Standard Chartered Securities explains: "Typicaly, the BFSI industry finalises and begins its spend on technology much ahead of other industries, which is why Wipro's first and second quarter numbers do not reflect gains from higher tech spends. Due to this lag, the fourth quarter is much better for Wipro, while it is relatively weaker for Infosys and TCS."

On the other hand, HCL Tech does not get hit by any revenue volatility as a large part of its business is not impacted by seasonality. The company is focused on infrastructure management services and offers a comprehensive suite of services to its customers, as a result of which its revenue growth is more evenly spread through the year. HCL is focused on infrastructure management services and these are long-term contracts and are not directly impacted by the change in annual spending budgets. Impact of spending budgets is higher on companies in the application and maintenance business.

Anil Chanana, chief financial officer of HCL Technologies, corroborates this as seasonality does not impact the performance at all. Commenting on the issue of seasonality, Chanana says: "Other than the December quarter, which sees many holidays and furloughs, revenue growth is stable through the year."

The volatile performance of Infosys has confused analysts. The company had blamed seasonality for its weak performance in the third quarter of FY11, but revised its full year revenue guidance for FY14 in the third quarter from single digits to double digits. However, analysts claim that even though Tier I companies are still affected positively by the spending budget pattern of key clients, Infosys has now become the odd man out as it is faced with severe internal issues, which it tends to pass off as seasonality issues. Today, the Street looks at Cognizant's and Nasscom's growth guidance to get a sense of trends for the entire sector.