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. 

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