Ace that interview with IT lingo

Naresh, in his final semester of MBA, was preparing for his campus placement with a leading IT company. But when he looked at data pertaining to the company, he was faced with jargon such as ‘vertical-mix' and ‘service-mix' about which he had little idea. Mr Gupta an investor in IT companies such as Infosys, TCS, Wipro and HCL had a harrowing time trying to figure out the supposedly ‘easy to follow' company factsheets.

These aren't isolated cases. People from across different walks of life find understanding and making investment or career decisions related to IT companies difficult. But then, factsheets are exhaustive and tend to be logically designed to help stakeholders. Here we present some of the jargon you might come across in a simplified format.

Understanding segments

After presenting their financial statements, IT companies present details pertaining to segments or divisions of their operations.

The first disclosure is usually the Geographic-mix. This is the proportion of revenues that the concerned company gets from different regions in the world such as North America, Latin America, Europe, Japan, and the Middle-East. An increase or a decrease in the contribution from any of these geographies may indicate the kind of environment that clients in those regions might be facing. For instance, during the American sub-prime crisis or the European sovereign debt problems, IT companies' revenues from these regions were impacted. So, it pays to spread the risk over different geographies for these companies.

Next we have the vertical-mix. IT companies tend to categorise clients based on the kind of industry or sector that they operate in. So verticals are actually companies that fall under Banking, Financial Services and Insurance (BFSI), Manufacturing, Retail, Telecom, Pharmaceuticals and others. Here again, this distinction gives an insight on which segment is leading growth. It also helps in analysing how companies perform in their ‘stronghold' segments. For example, an Infosys and TCS with BFSI, Wipro with telecom and HCL with manufacturing.

The third and final ‘mix' is based on the services that these companies offer. Yes, there is differentiation in code-writing and it cannot be generically stated as ‘software'!

So there are low-margin services such as application development and maintenance, mid-margin ones such as product engineering services and high-margin offerings such as ERP implementation and consulting. The higher margin ones generally come under ‘discretionary' spends of clients and an uptick here would suggest a gung-ho environment for outsourcing.

The currency factor

With almost all their clients being overseas, IT companies earn their revenues in dollars, euros, pounds and a few other currencies.

It goes without saying that exchange rates can have a significant effect on the financials of these companies.

So they give out another set of numbers on how the segments mentioned above grew based on ‘constant currency' terms. This method assumes that the exchange rate remains unchanged in a reporting period (say quarter or year) and presents the growth or fall compared to the previous period. There may be cases where by constant currency terms a segment would have grown but reported numbers may show a fall, as exchange rates eat into financials. So for example, by constant currency standards, Europe may have grown 10 percent for a company, while the reported numbers would show an expansion of only 8 percent, suggesting that two percentage points were eroded by currency.

One of the key aspects of constant currency is to highlight the development in business segments assuming unchanged exchanged rates.

Other terms

Another term associated with IT companies is volume growth. When analysts speak of volumes it means the man-months or person-months that are billed in a software company. An increase in man-hours billed means increase in volumes. Volumes are indicators of increase or decrease in the momentum of business.

Blended realisation is another factor, which basically blends ‘volumes' and ‘pricing'. So if volumes have grown by 5 percent and realisations (revenue growth in dollar terms) have increased by 6 percent, we say pricing has improved by one percentage point or that blended realisation is up.

There is also utilisation, which means the ratio of the total manpower that is billed to total billable hours. This indicates, as in the case of manufacturing companies, the efficiency with which the business is operating.

One oft-used word is performance ‘metric', which is actually the generic name for all the jargon stated earlier.

While all these factors may seem daunting to a newbie in the industry, it will become clear over time that much of the facts in the ‘factsheet' are quite logically arranged. Not just Indian companies, MNCs such as Accenture, IBM and HP too periodically release factsheets. So going through some of them can be a great learning experience whether you are an investor, student sitting for a campus interview or an aspiring IT analyst!

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