TCS begins earnings season with worst third-quarter results in nine years

Tata Consultancy Services Ltd. started the quarterly earnings season on a gloomy note, posting its worst third-quarter revenue decline since December 2015. The main reason: Weak business in the US and Europe, the biggest markets for India’s largest IT services company.

TCS reported December quarter sales of $7.54 billion, down 1.7% from the September quarter and close to the $7.55 billion estimated in a Bloomberg analyst survey. This was also the worst quarterly earnings performance since K. Kritivasan took over as CEO in June 2023.

“Given this quarter’s seasonal weakness and the software discretionary demand environment, most industries and markets continued to experience negative quarter-on-quarter growth,” Kritivasan said at a post-earnings press conference. Indeed, TCS had pointed to the impact of seasonality and discretionary spending in the last quarter as well.

Although the regional market, including India, grew approximately 3% quarter-on-quarter to $1.23 billion, overall growth slowed as revenue from other businesses decreased quarter-on-quarter. Even revenue from Bharat Sanchar Nigam Limited (BSNL), which boosted revenue from regional markets, failed to boost overall growth. TCS is setting up data centers for national carriers across India as part of a $1.83 billion 4G network deployment order awarded in May 2023.

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The company achieved revenue growth of $997 million in the April-December period, an increase of 4.6% year-on-year. TCS doesn’t provide revenue guidance, but at the current pace, it doesn’t mean it will perform much better than last year, when revenue grew 4.1% on an annualized basis.

Still, TCS posted a 2.6% quarter-over-quarter increase in net income to $1.46 billion, in line with a Bloomberg survey estimate of $1.46 billion. Another bright spot is that the company managed to halt the steady decline in profit margins that began in early 2024. Third-quarter margin was 24.5%, up 40 basis points from the prior quarter.

Please note that the December quarter has a lower billing rate than other quarters due to multiple holidays during the quarter.

H-1B visas are not a major concern

TCS was unfazed by the controversy over H-1B visas in the US. President-elect Donald Trump’s support base has called for restrictions on the visa program, which is critical to software services companies with large U.S. employees.

“We have a global operating model and we have a global workforce,” Chief Human Resources Officer Milind Lakkad said in a press conference. “And ultimately it depends on the visa category, but obviously we want to provide opportunities for people, but I don’t think that’s a big concern for us because we Because we are implementing a global model,” Lakhad said.

At the heart of TCS’ poor performance is its European business, which accounts for nearly one-third of its sales. Business from Europe decreased 5% sequentially to $2.3 billion. As the company commented in the previous quarter, sales continued to be weak in this region.

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Among business segments, revenue from banking was the hardest hit. TCS earned $2.3 billion in revenue from banks and financial institutions, which was 2.7% lower than the previous quarter.

At least one analyst blamed the decline in earnings on the overall slump in the industry.

“TCS’ weak third quarter results were driven by weaker revenues in key developed markets such as North America, the UK and Europe, as well as key customers such as financial services, manufacturing, telecommunications and life sciences.” said Manik Taneja, Executive Director of IT Services. At Axis Capital.

GenAI Engine

In contrast to peer Accenture, which reports $900 million in revenue from generative artificial intelligence (GenAI), TCS once again cites specific revenue from this emerging technology. I’m refraining from doing that. However, management said clients are now deploying technology in real time at a faster pace than in the past.

“With GenAI, we’re probably going to see more and more adoption. At this point, we were seeing some daily pilots and everyone was looking to try something new. But going forward, this It will become more purposeful,” Kritivasan said.

So far, none of India’s top five IT services companies have classified their revenue from GenAI.

Employment, a key growth indicator for India’s $254 billion IT industry, was on the decline. TCS saw its headcount decline by 5,370 people to 607,354 in the latest quarter. The cooling employment engine casts doubt on the narrative that the worst is yet to come for the IT services industry, which grew at its slowest pace last year. Yet, TCS managed to increase its headcount by 5,808 people in the first nine months of the current financial year.

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Domestic business was strong. Business from India surged 70% from last year to 9.8% of quarterly sales, the highest since going public in August 2004.

Management was optimistic about the future.

“Customer confidence has increased when it comes to discretionary spending, something we haven’t seen in the past few quarters.We also saw overall transaction cycles shorten by several weeks this quarter compared to the previous quarter. We’ve also seen a slight increase in discretionary spend due to the mix of deals we’re winning. All of this together makes us think our clients should pay more attention to the changes. I am sure,” Kritivasan said.

TCS announced its results after market hours. The company’s shares closed down 1.72%. INREarly on Thursday it was 4036.65.