IGTE Has Great Quarter; Jeffries and Co., Ups Target To $19.00

On July 14, iGate Corporation IGTE reported Q2 results with upside to both the top- and bottom-lines. Analysts at Jefferies and Co. feel that iGate could be one of the few tier-two India-centric offshore players to penetrate new mega accounts, which have remained somewhat exclusively the end markets for much larger competitors. The company reported Q2 revenue of $66.9 mm v Jeffries and Co. estimate of $61.3mm. EPS of $0.20 was ahead of their estimate of $0.17 and consensus of $0.17. Double digit sequential growth (Q2 revenues up 15% q/q) was led by strong traction in top clients; Royal Bank of Canada grew well above the company average (36% of revenues versus 33% last quarter). Gross margins declined 200bps q/q primarily due to annual wage hikes of 7% and strong hiring. In addition, ongoing sales investments weighed down operating margins (down 180 bps q/q). Headcount also grew double digits (up 10% q/q). The analysts Joseph A. Vafi, CFA, Sachin Jain, CFA,and Anna Karysheva feel iTOPS could be a strategic differentiator for the company in winning new accounts. IGTE also upped its annual hiring target to 2,500 (versus previous 1,500). Despite salary hikes and higher employee turnover for offshore IT,some SGA leverage, led by better top-line momentum, should drive margins higher sequentially from the Q2 trough. The analysts stated that while the company does not provide formal guidance, commentary suggesting further 5% sequential growth quarters for the remainder of 2010 is encouraging, especially given strong Q2 results. "Additionally, though still early, we feel that penetration into the two new large financial services accounts could preliminarily be setting up the company for some growth visibility into 2011. We believe that by next quarter we should know more on this front." The analysts’ target of $19.00 from a previous target of $15.00 represents a multiple of 19x their 2011 EPS estimate remains a modest discount to larger peers. The company also has almost $4 per share in cash. Risks include supply side issues; client specific performance, higher tax rates, FX variability, and some exposure to discretionary customer spend. The stock closed at $15.97 -.18 on Friday, July 16. iGATE Corporation provides outsourcing solutions that offer a business outcome based pricing model through an integrated Technology and Operations (iTOPS) structure with global service delivery. iGATE Corporation was founded in 1996 and is headquartered in Fremont, California.