Indian Outsourcer Wipro Outpaces U.S. Rivals

Wipro said that IT services revenues increased 33% to $472 million while total revenues also increased 33% to $617 million.

It's another sign that tech service providers in low-cost countries like India and, to a lesser extent, China, are here to stay and will increasingly challenge U.S. heavyweights for lucrative outsourcing engagements. Along with IBM, other U.S. tech mainstays, including EDS and Hewlett Packard, are watching their services businesses stagnate or grow only modestly while offshore competitors have consistently posted strong double-digit gains in recent quarters. Wipro reported some other impressive numbers for its third quarter, ended December 31st. Net income jumped 25% to $118 million while earnings per share increased 24% to eight cents. The results "signal the next phase in Wipro's growth," said company chairman Azim Premji, in a statement. Wipro said it expects its sales of IT services in its fourth quarter will hit $510 million.

Wipro, along with Indian peers Infosys and Tata Consultancy Services, is starting to gain share against Western rivals in part because it can beat them on price. The bulk of its operations are in India, where labor, real estate, and most other factors of production cost significantly less than in the U.S. Western firms are building new capacity in India and shifting work there to stay competitive, but they remain burdened with infrastructure in costly locations like Silicon Valley, Dallas, and New York state.

A key number tells the tale. Wipro's third-quarter gross margin, a measure of how profitably a company can deliver goods or services, was 34%. By contrast, IBM's gross margin for services in its recently completed fourth quarter was 27.4%. EDS, in its most recent quarter, reported an abysmally low gross margin of 12.2%.

Wipro's challenge is to sustain a healthy growth rate as it increases in size. To that end, it's looking to diversify. During its third quarter, the company acquired system-on-chip designer NewLogic Technologies AG and payments processor mPower Inc. Premzi said the acquisitions will help Wipro increase its "share of wallet" from key customers. In the process, it hopes to keep lightening the wallets of some big competitors.