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TheStreet Open House

Sell Infosys Ahead of Earnings

Stocks in this article: INFY IBM

NEW YORK ( TheStreet) -- It's still anyone's guess when IT consulting services, which was once a dominant industry, will get back to its lofty levels.

Results from industry leaders IBM (IBM) and Accenture (ACN) have been less than favorable. This does not bode well for Infosys (INFY - Get Report), which is expected the report fiscal first-quarter earnings on Friday.

Indicators suggests the underlying market conditions are not stabilizing as quickly as expected. This spells doom for Infosys for several reasons. While I've always liked the company's potential, Infosys' management has made some questionable decisions causing me to rethink the company's prospects.

I don't disagree that the macro weakness in consulting services has had an impact on the company's decisions. But unlike Accenture and Cognizant (CTSH), the moves that Infosys has made recently have been too reactionary. Nor do I believe that management has responded quickly or adequately enough to the changing market. This showed in the company's fourth-quarter earnings release in April.

Although the company posted decent revenue growth up 18% year over year, Infosys had nothing to show for it in terms of profitability. Gross margin was down nearly 6% year over year and 2% sequentially. Due to an unfavorable mix and almost a 1% drop in prices, operating income plummeted 7% year over year, missing Street estimates by roughly 9%.

Read: HEADLINE

The Street showed the stock very little mercy, punishing Infosys to the extent of a 22% decline the very next day following the announcement. The bleeding didn't stop until the decline reached more than 26%. Management said the results were due to (among other things) the business being under pricing pressure, particularly the IT side of the operation, and also pointed to continued global weakness.

I'm not suggesting management is wrong. But the failure to unhinge the company from an uncertain discretionary spending environment has backfired. Now the company's ability to exploit service outsourcing if/when it does recover is in doubt. During the April conference call, management spoke about investments that the company was planning to make over the coming quarters to get Infosys back on track.

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