Why Infosys Earnings Are Under Siege

Infosys (INFY -2.60%) will release its quarterly earnings report next Monday, but investors are already skittish about how well the IT services company will be able to perform. In a sluggish environment for global economic growth generally and for IT spending in particular, the entire outsourcing and consulting industry has felt the pressure, and as a primary beneficiary of more positive trends in the industry over the years, Infosys is potentially vulnerable to a reversal in those trends.

Even under tough conditions, though, Infosys remains a leader in IT services, and the need for those services is only likely to increase in the long run. Does that make current weakness a buying opportunity? Let's take an early look at what's been happening with Infosys over the past quarter and what we're likely to see in its report.

Stats on Infosys

Source: Yahoo! Finance.

How will Infosys handle earnings headwinds?
Analysts have pulled back on their earnings views for Infosys over the past few months, cutting their June-quarter estimates by $0.03 per share and slashing $0.17 to $0.18 from their estimates for both this fiscal year and next. The stock has responded quite unfavorably, falling 17% since early April.

Most of the damage for Infosys came at two important points during the quarter. After Infosys announced its previous-quarter earnings in mid-April, the stock plunged 20%, as the company missed its revenue estimates and gave guidance that led to the downgrades in earnings that we've seen. Growth of 6% to 10% in revenue might seem healthy, but for the emerging-market company, it's a severe slowdown that reflects the uncertainty in the global IT economy right now.

The second hit came late last month, when rival Accenture (ACN 0.46%) announced its own earnings weakness. For Accenture, IT consulting has become an increasingly important part of its overall business as it seeks to keep cashing in on the highly profitable opportunities in the space. But the company lowered its guidance for earnings by about 2% and reduced its revenue-growth guidance to the 3% to 4% range. Investors also bid down shares of Infosys in sympathy, seeing Accenture's challenges as applying to the entire industry.

One big problem that Infosys faces is that its remote location from the North American market creates some competitive disadvantages for the company. Rival consultant Cognizant Technology (CTSH -0.61%) hasn't been immune to the downdraft that has taken IT-services stocks lower, but its New Jersey location has been instrumental in drawing about 80% of its revenue from North America, whose economies have held up far better than those in other regions. By contrast, Infosys gets a greater proportion of its sales from Europe and the rest of the world, which have been challenging lately.

When Infosys announces earnings next week, look to see how the company is working to expand its North American presence while also holding off some of its fellow Indian competitors to maintain its strength in other markets. Eventually, when the tide turns in the technology economy, Infosys should be in a better position to restore its past pace of earnings growth.

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