Once a growth darling and a play on the rise of outsourcing, Infosys (Nasdaq:INFY) has had a rougher go of it over the past few years an strategic missteps compromised the company's growth and market share. More recently, investors have cheered the return of NR Narayana Murthy to the company as executive chairman and the vision he laid out for a return to success based around improving employee morale/performance and better appreciating the actual needs of customers. It's much too soon for any of that to make a major difference, but Infosys's strong first fiscal quarter results are a positive step all the same. If nothing else, it does show that the company is not so far behind that it can't still win deals and deliver good results. While the shares have already bounced about 20% off of a recent low, a fair value in the mid-$50s gives investors a reason to hang on for a little while longer. Surprising Fiscal First Quarter ResultsInfosys surprised the Street with its fiscal first quarter numbers, and for once it was a positive surprise as the company saw solid wins and client additions, good volume, and stability in margins. Revenue rose 17% as reported in rupees, or about 14% as reported in dollars. Volume increased about 4% on a sequential basis (against 8% overall sequential revenue growth), and the company added 66 new clients (bringing the total of active clients to 836). Not unlike Accenture (NYSE:ACN), growth was strong in the U.S., with a 5% sequential improvement, and the financial services and manufacturing verticals both showed sequential growth. SEE: 5 Earnings Season Investing Tips

Margin improvement is still a work in progress. Gross margin fell more than four points from last year, but stayed flat on a sequential basis. Operating earnings fell 1% in rupees and 4% in U.S. dollars, but both figures were up sequentially (8% and 2%). Outsourcing Good, Higher-Value Consulting Maybe Not So GoodWhile the reaction to Infosys's results has been considerably more positive than the reaction to Accenture's, the underlying trends do seem consistent. Outsourcing was the stronger business for Accenture in its fiscal third quarter (ended May), with revenue up 7% in constant currency against the flat consulting business. Likewise, outsourcing bookings were quite strong while consulting was weak. All things considered, then, this should be an encouraging number for Infosys peers like Cognizant (Nasdaq:CTSH) and Tata. I'm not quite so sure what this says for companies like IBM (NYSE: IBM), Xerox (NYSE:XRX), and Computer Sciences (NYSE:CSC). Odds are that there is still pressure in the higher-value, faster-turning consulting sectors, and that could lead to another mixed result for IBM. Can Infosys Change Enough To Be A Leader Again?Much as investors were pleased to see the return of Mr. Murthy, I have my doubts about the long-term benefits of the move. The history of former leaders returning to their post is spotty – for every Apple (Nasdaq:AAPL) success story, there are at least two Dell (Nasdaq:DELL) stories where the second coming disappoints. That said, the plan laid out recently at the annual shareholder meeting is a credible one. An immediate wage hike for employees should improve morale and reduce attrition of quality workers, and that should ultimately be good for margins (paying them more hurts margins, but having to constantly higher and train new workers hurts even more). Likewise, approaching clients to figure out how they can better serve their needs is a common sense move that should pay off in better retention. Even so, there are reasons to be skeptical. IBM and Accenture have largely cloned Infosys's offshore leverage and rivals like Tata and Cognizant outmaneuvered Infosys in markets like remote infrastructure management. So even if Mr. Murthy's ideas are sound, the history of turnarounds in the IT services space is spotty at best, and this isn't a market like the consumer market where a few clever product introductions (like the iPod/iPhone) can make a big difference right away. SEE: A Look At Corporate Profit MarginsThe Bottom LineI was positive on Infosys three months ago (with some caveats), and I still am. I believe the company can produce long-term growth around 10%, and that's good for a price target in the $50s. My concern, though, is that the company's decision to go elephant hunting (that is, targeting large deals) is going to lead to a lot of quarter-to-quarter volatility, and I think there's a reasonable chance Infosys will stumble in the next quarter or two. Even so, for investors who can live with some ups and downs along the way, I think these shares still offer reasonable potential.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. 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.
  10. 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.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Information Management Technology ...

    Information management technology is the distribution, organization ...
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Hard-To-Sell Asset

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

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

    The portion of a company's profit allocated to each outstanding ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

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!