Change seldom comes easy, particularly when the underlying market conditions are challenging. With multiple reports and warnings pointing to a tough environment overall in tech and companies like Accenture (NYSE:ACN) seeing more challenging conditions in outsourced IT, Infosys (Nasdaq:INFY) has some headwinds. At the same time, the company's fiscal fourth quarter results suggest some self-inflicted wounds. While the shares look undervalued on a long-term basis, it may be a rocky ride if near-term results don't get meaningful better soon.

Fiscal Fourth Quarter Results Miss The Mark
Infosys has been a volatile stock for a while now, and the company's fiscal fourth quarter results won't make things better.
Revenue rose 18% from last year on an as-reported basis, with revenue up very slightly on a sequential basis. Although results were slightly better on an organic basis and/or in U.S. dollars (up a bit more than 1%), pricing was soft and the company did mix. 
Margins were also weak. Gross margin fell almost six points from last year and about two points sequentially. Operating income fell 7% relative to the year-ago level, missing estimates by about 9%.

See: A Look At Corporate Profit Margins 

What's Due To The Market, And What's On The Company?
I don't want to suggest that all of the company's underperformance this quarter was company-specific. Overall IT spending does seem to be weakening, though results from IBM (NYSE:IBM), Cognizant (Nasdaq:CTSH), and Wipro (NYSE:WIT) will ultimately help quantify that further. On a more depressing note, performance was weaker across all geographies and virtually all end-market categories. 
Even if the markets are weakening, though, there are problems that point back to management performance. Deal closure and revenue conversion is taking longer, and the company's decision to target larger deals has added volatility and unpredictability to results. Infosys has likewise been slow to migrate away from its above-average exposure to discretionary spending, and that seems to be taking a tough IT environment and making it worse.
Infosys management has been saying the right things. The company is looking to plug gaps in its service offerings and strike a better balance between hunting for bigger deals and doing a better job of “farming” the clients/accounts it has. What's more, there's still potential for more operating leverage. On the other hand, management's guidance for fiscal 2014 was not particularly helpful. Both the revenue and margin guidance were pretty wide, and its clear that deal closure, employee attrition, and labor costs are still challenges today.

The Bottom Line
The unsatisfying results that Infosys has reported recently, combined with pretty non-specific guidance, has created a pretty large spread in sell-side estimates for revenue and free cash flow over the next two to three years. Situations like that tend to correlate with above-average volatility, but also above-average appreciation potential if Infosys can get its ducks back into a row. 
Global IT services growth should allow Infosys to continue growing its revenue at a high single-digit rate, provided that management's new strategy goes more or less to plan. Along the same lines, improved operating leverage should lead to very low teens free cash flow growth, supporting a fair value in the mid-$50s. That's decent potential given the risks today, but investors should realize that the next six months or so could be pretty volatile, and this likely won't be a stock for the faint of heart. 

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!