Infosys 3.0

| About: Infosys Limited, (INFY)
This article is now exclusive for PRO subscribers.

Infosys (NASDAQ:INFY) released its fiscal third quarter 2013 earnings report with better than expected results on all fronts. The Indian IT bellwether reported rupee revenue of Rs 10,424 crore ($1.88 billion US). The number beat analysts' expectations by approximately Rs 500 crore ($~90 million US). Net profits were also higher than expected coming in at Rs 2359 crore ($423 million US) versus and estimated at Rs 2200 crore ($394 million). In dollar terms revenue increased by 6.3%, which includes revenue from the Lodestone acquisition which was completed in the quarter. Infosys is a cash generating powerhouse and produced operating cash flow of 103% of net margins for the quarter.

Business looks strong as well, as Infosys won eight big contracts totaling to $730 million during the quarter. Four of the deals were in the United States, while three are in Europe and one in India. The deals include new client engagements as well as renewal and expansion of existing programs. The company also added 53 new clients, launched 20 new products and platforms over the last year and sold to over 70 unique clients.

This strong performance will likely get shareholders off of management's back for a little while. Infosys, like Apple (NASDAQ:AAPL) is sitting on a large pile of cash that many shareholders felt management has been too conservative with. The Lodestone acquisition was a good beginning it was thought but more needed to be done as organic growth was thought to be a more distant proposition. So, while Apple is content to run one of the world's largest hedge funds with its pile of cash - further proof of a management that lacks vision in its core competencies - Infosys is being selective in how it deploys what it has saved.

Infosys closed the acquisition of Zurich-based consulting firm Lodestone for total of $350 million. The acquisition was announced in September. While Lodestone is expected to contribute $104 million to Infosys full year revenue the real value for it to Infosys comes from its extensive client base -- adding more than 200 across a variety of industries to Infosys.

Infosys outright denied the report of the newspaper that it plans to sack approximately 5,000 "non-performing" employees and at present has total staff strength of 155,629. The outlook of the Indian IT Industry is to remain gloomy due to uncertainty in the key U.S. and European market.

Infosys 3.0

The new strategy of Infosys has been termed as Infosys 3.0 and it has already begun to show benefits. I would expect another Lodestone-type transaction in the future while the company continues to shift a greater portion of its resources to consulting versus IT outsourcing, which are easier to acquire but whose margins are eroding as other players like Wipro (NYSE:WIT) and Tata Consulting Services (NYSE:TCS) have driving prices down. This has plagued the company for a few quarters and it looks like it has begun to turn that corner, guiding a 3% organic business growth target for Q4 FY 2013.

According to a recent interview on Bloomberg of Infosys' CEO, it does not sound like they are planning on another acquisition in the near future and that uncertainties about the situation in India and around the world, especially currency instability, are still having a depressing effect on business investment. The situation in Europe will continue to be challenging and Infosys is banking on growth there. With the ECB tightening its balance sheet and strengthening the Euro for 2013 I expect the European periphery to begin to improve on cheaper effective energy prices. Infosys will pick up outsourcing clients in that environment to support that organic growth target.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.