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Can Infosys Overcome Weak Services Demand?

NEW YORK ( TheStreet) -- When I called for investors to sell Infosys (INFY - Get Report) a couple of weeks ago, it was based on several factors.

One was the assumption that the IT services market, in which the company competes with the likes of IBM (IBM - Get Report), has started to shrink. Infosys would find it increasingly more challenging to maintain the portion of the market that it currently has.

On the heels of its earnings results for its most recent quarter, investors have begun to wonder if perhaps the company's position in the market just might be on even shakier ground than previously thought.

The Quarter That Was

The company disappointed analysts with second-quarter fiscal 2013 earnings results by missing both top and bottom line estimates. For the quarter ending Sept 28, Infosys reported net income of 75 cents per share on revenue of $1.8 billion. While the revenue total was almost a 3% improvement year over year, this fell short of estimates of $1.9 billion. Likewise, profits missed the mark of 77 cents per share.

While the earnings miss was disappointing, the overall outsourcing market has experienced considerable amount of weakness over the past several quarters. Rival IBM missed revenue estimates and Accenture (ACN - Get Report) reported per share earnings of 88 cents vs. estimates of 89 cents. On the other hand, Accenture impressed analysts by exceeding revenue projections of $7.16 billion by reporting sales of $7.29 billion.

Although Accenture saw EPS drop by over 3%, its growing sales mean it is winning in market share from Infosys, which continues to suffer from declining revenue.

Similarly, another Infosys rival, Cognizant Technology (CTSH - Get Report) seems to be doing pretty well from both EPS and revenue perspective. Cognizant recently reported an increase of 22% in net income while revenues soared 21% from the same period of a year ago.

What's more, Cognizant has averaged 28% revenue growth over the past five quarters while producing three consecutive quarters of profit growth.

These facts have not escaped current Infosys investors who have shown some signs of frustration. Also, that the most recent quarter yielded the smallest number of new customers (39) in more than a year proves investors' fear is justified.

What are investors willing to do in the meantime?

This is the essential question in the investment thesis. But analysts have become concerned that Infosys might not be able to execute effectively amid such headwinds stemming from weak IT spending.
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