This Stock Proves IT Outsourcing Is Far From Dead

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In the tech sector, two industries have been proclaimed dead. While the PC business continues to affirm its morbid outlook, this is not the case for IT outsourcing services. Although companies such as Infosys (NYSE: INFY) have struggled with shrinking demand, on the heels of third-quarter results that topped analyst estimates, it’s time for market sentiment to change.

An Impressive Beat

For the period ending in December, the company posted an operating profit of $491 million. Although this represents a year-over-year decline of 12%, it advanced 18% sequentially. The company also reported revenue of $1.911 billion, up 5.8% year-over-year and 6.3% percent sequentially -- helping the company to beat EPS estimates by 4 cents.

Not only was this performance impressive, but it also prompted management to raise guidance by roughly 3%. For the Q4 period ending in March, Infosys now projects revenue for fiscal 2013 to approach $7.45 billion, up from previous guidance of $7.34 billion. This would be enough to produce 7% growth year-over-year.

The company also sees profits coming in at $2.97 per share, slightly higher than Street estimates of $2.95 per share. During the report, CEO S. D. Shibulal said:

We have done well in this quarter despite an uncertain environment. We continue to gain confidence from a strong pipeline of large deals. However, the broader economic environment remains difficult. Even so, we remain cautiously optimistic about the January-March quarter.

Can Infosys Outperform the Competition?

This is the main question investors want answered. And the company’s CFO, Rajiov Bansal, also talked about the company's efforts to maintain margins through efficiency improvements despite growing operating expenses. Margin pressure has also also been a cause for investors’ concern, particularly from rivals such as IBM (NYSE: IBM) and Accenture (NYSE: ACN). That Infosys reported a dismal Q2 didn’t help matters.

Then again, neither IBM nor Accenture performed any better. Take Accenture, for example. The company missed EPS targets by reporting 88 cents per share versus Street estimates of 89 cents. On the other hand, Accenture did beat on revenue projections, posting sales of $7.29 billion versus Street estimates of $7.16 billion.

This means that despite Accenture's profitability woes, the company was stealing market share from both IBM and Infosys. Meanwhile, another rival, Cognizant (NASDAQ: CTSH), proved to have no struggles with sales or profitability. Cognizant recently reported an increase of 22% in net income while revenues soared 21% year-over-year.

What’s more, Cognizant has averaged 28% revenue growth over the past five quarters while producing three consecutive quarters of profit growth. By contrast IBM has posted two consecutive quarters of sales declines, including its Q3 that fell short of analysts’ EPS estimates of $3.61 per share.

Moving Forward

In many respects, Infosys’s Q3 report answered several questions. That the company was able to add 89 new clients during the quarter, which brought its total to 776, means that the company is doing more than holding its own against the competition.

Too, that the company’s platform division was able to secure 14 new contracts speaks to how highly regarded Infosys continues to be – despite market headwinds. What’s more, at some point IT spending in the U.S. and within Infosys’s primary market (Europe) has to rebound. At that point, the company has as good of a shot as any to capitalize on that recovery.

Bottom Line

During the conference call, management said, “We remain focused on making the right investments for profitable and sustainable growth in the longer term.”

That sounds great, but it won’t be easy. With the competition vying for the same business, Infosys will have to look to expand into emerging markets to boost revenue. The good news is, the company has an excellent management team that steered the company through rough turbulence. However, for the stock to truly work in the long term, the company must also figure out a way to get margins going in the right direction again.

rsaintvilus has no position in any stocks mentioned. The Motley Fool recommends Accenture Ltd. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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