2nd UPDATE: Infosys First Quarter Net Profit Rises 16%, But Gives Tepid Outlook

--Infosys first-quarter net profit rises 16%, slightly below analysts' estimates 
   --Shares fall 4.3% as company gives tepid outlook weighed by economic uncertainties 

--Infosys expects operating margin to remain flat in 2Q, decline 250 basis points this fiscal year

--Infosys expects to hire 12,000 staff on a gross basis in the current quarter

(Updates share price in paragraph 10, adds analyst's comments in paragraph 11, executive comment in paragraph 18.)

By Rumman Ahmed and Dhanya Ann Thoppil

Of DOW JONES NEWSWIRES

MYSORE, India (Dow Jones)--Software exporter Infosys Ltd. (500209.BY) reported Tuesday its fiscal first-quarter net profit rose 16% from a year earlier, marginally lower than analysts' expectations, but its shares fell as the company gave a muted outlook weighed by economic uncertainties in its main markets.

The Mumbai and Nasdaq-listed technology bellwether maintained its outlook for revenue in dollar terms for the fiscal year through March, and cautioned that spending by U.S. and European clients on technology contracts may remain weak. Infosys is facing challenges in growing its business over the past few quarters, bogged down by tough competition in the outsourcing market and volatility in spending by its clients.

"This is an environment in which you have to be cautious," said Chief Operating Officer S.D. Shibulal, who will take over as chief executive in August. "We are seeing instability in the environment."

Infosys, India's second-largest software exporter by sales, is the first major technology company to report results, which usually set the tone for the performance of the sector. Bigger rival Tata Consultancy Services Ltd. is scheduled to report results on July 14, while third-ranked Wipro Ltd. will report on July 20.

The Bangalore-based company posted a net profit of INR17.22 billion (US$384 million) for the three months ended June 30 based on international accounting standards, compared with INR14.88 billion a year earlier. Revenue rose about 21% to INR74.85 billion from INR61.98 billion, with business volumes growing 4%.

Sequentially, its net profit fell 5.3%, hurt by wage increases offered to staff, while revenue rose 3.2%.

The market was expecting a net profit of INR17.26 billion on revenue of INR74.96 billion, according to a Dow Jones Newswires poll of 29 analysts.

Infosys expects revenue in the second quarter to increase 3.5%-5.0% from the previous three months to $1.73 billion-$1.76 billion.

With the business environment remaining uncertain, the outlook for the second quarter will make it difficult for Infosys to achieve its fiscal-year forecast of revenue growing 18%-20% to $7.13 billion-$7.25 billion. The October-March period is usually a weak one for software exporters.

Infosys's shares closed down 4.3% at INR2,794.25 on the Bombay Stock Exchange, slightly better than the day's low of INR2,749.35, but underperforming the benchmark Sensitive Index's 1.7% fall.

After the disappointing performance in the March quarter, Infosys needed a solid quarter to revive investors' confidence in the stock, CLSA Asia Pacific said. "Unfortunately, the June quarter has failed to provide that," the house said.

The muted outlook comes amid bullish comments from Tata Consultancy, which last month denied any potential slowdown in technology spending by clients. Research firm Gartner Inc. recently forecast global spending on information technology this year to grow 7.1% to $3.7 trillion, compared with its previous view of a 5.6% rise.

Infosys has traditionally been conservative on its margin, and had in the past declined contracts that sought large price cuts.

"We continue to focus on high-quality growth, balancing both revenue growth and margins," V. Balakrishnan, a member of the board and chief financial officer, said in a statement. He said the company may post faster revenue growth in the October-March period as its clients haven't reduced their technology budgets.

"Probably, as the environment stabilizes, clients will spend the money, because the budgets are fixed," he said. "So I think we will have our growth coming in the third and fourth quarters if they [clients] don't spend in the first two quarters."

Operating margin in the just-ended quarter fell to 26% from 29% in the previous three months and 28.3% a year earlier hurt mainly by an up to 12% increase in staff wages, Balakrishnan said. He now expects margins to contract by 250 basis points in the current fiscal year, narrower than the 300 basis points it previously forecast due to less number of staff on billable projects, wage increases and the rise in the value of Indian rupee against the dollar.

Infosys receives more than 64% of its revenue from North America and more than 21% from Europe. The company, like most of its local peers, converts its non-dollar foreign currency revenue into the dollar and then into the Indian rupee.

Balakrishnan said he expects margins in the July to September period to remain flat, compared with the fiscal first quarter, with no price increases. The company plans to hire 12,000 staff on a gross basis.

Infosys added 26 new customers during the April-June period. The company ended the quarter with 133,560 employees, after adding 2,740 people on a net basis.