Cognizant lags Indian peers in March quarter

The financial results of top Indian information technology (IT) services players have largely lifted the mood of the industry but Cognizant seems  entangled in the same issues it had referred to in the previous quarter.

The Nasdaq-listed company just managed to meet the lower end of its revenue expectation for the quarter ended March, while reducing the upper end of its revenue growth forecast by around $200 mn. Its quarterly revenue growth for the period was the lowest in 14 years.

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During the March quarter, the Teaneck, New Jersey-headquartered company’s net profit, at $441.2 mn, saw a 15.2 per cent growth against the year-ago period. Revenues grew 10 per cent at $3.20 bn. On a sequential basis (compared with the trailing quarter), the net profit grew 4.2 per cent while revenues declined close to one per cent, the slowest growth in 14 years.

“As anticipated, during the first quarter we saw softness in our health care segment due to M&A activity, as well as softness in our banking segment due to financial market volatility,” said Gordon Coburn, president. “As we move into the second quarter, we are quite pleased with our momentum with new and existing clients, which we expect to drive sequential revenue growth in the second quarter of $140-200 mn.” To support the expected growth in the June quarter, the company has added 11,300 employees in December-March. For the first time in several quarters, Cognizant’s performance was lacklustre and lagged behind Infosys and Tata Consultancy Services (TCS). Infosys, especially, seems to have stolen the limelight in the March quarter. Infosys’s  year-on-year revenue growth (in dollar terms) during the quarter at 13.3 per cent was the highest compared to Cognizant’s 10 per cent and TCS’s 7.9 per cent. In terms of sequential revenue growth, Infosys grew 1.6 per cent, while Cognizant’s saw a decline of 0.9 per cent.

Though the Cognizant management sounded optimistic about June quarter growth, it did not reflect in the company’s full-year guidance. The upper end of the guidance has been reduced and there has been a marginal increase in the lower end.

While announcing its December quarter and full-year results earlier this year, the company had said it was expecting its full-year revenues to be $13.6-14.2 billion, growth of 9.9-14.3 per cent, considered conservative as it grew 21 per cent in the preceding year.

“Based on first-quarter results and our visibility on deals ramping up throughout the year, we have tightened our 2016 revenue guidance range to $13.65-14.0 billion, representing approximately 10-13 per cent growth year-over-year,” said Karen McLoughlin, chief financial officer.  

In terms of business verticals, Cognizant’s growth during this quarter was squeezed by a slump in the key health care segment, which accounts for 29 per cent of its revenues. Revenues from the vertical declined four per cent on a quarter-on-quarter basis; the struggling financial services segment witnessed a sequential decline of 1.7 per cent.

Except for TCS, most large offshore-centric IT services players experienced pangs in the financial services segment in the March quarter, owing to slower spending by clients. The financial services segment accounts for 40 per cent of Cognizant’s revenues.

North America, from where Cognizant derives 78 per cent of business, posted a sequential 1.4 per cent decline while revenues from the other key market, the UK, declined 2.3 per cent sequentially. However, the company managed to keep its operating profit margin at its desirable level of 19.9 per cent.

“Overall, our first-quarter results were in line with our expectations and guidance,” said Francisco D’Souza, chief executive officer.  “We continue to see positive returns from our extensive strategic investment in disruptive technologies, new digital business models and best-in-class delivery capabilities.”

Employee attrition, which has gone up significantly at the company, came down by 450 basis points over the previous quarter to 14.6 per cent.