Cognizant posts 24% rise in net profit, lowers forecast

Crosses $10 billion revenue run rate per annum in the June quarter

The June quarter earnings of Cognizant Technology Solutions, the Nasdaq-listed information technology services company, are in line with expectations. The company has, however, scaled down its annual revenue growth estimate, citing weakness at certain clients and long sales cycles for certain large deals, which dragged its shares down about 14 per cent in early trade.

The US-headquartered company said it expected its annual revenue growth for FY14 (Cognizant follows a January-December financial year) to be at least 14 per cent, against the earlier estimate of 16.5 per cent. As such, the revised growth estimate is at the mid-point of industry body Nasscom’s growth estimate of 13-15 per cent for the year.

For 2013, Cognizant had posted revenue growth of 20.3 per cent, against its projection of 17 per cent given at the beginning of the year.

“Due to weakness at certain clients and longer-than-anticipated sales cycles for certain large integrated deals, we are adopting a more conservative stance for the remainder of the year and revising our 2014 revenue estimate,” said chief executive Francisco D’Souza.

For the quarter ended June, Cognizant posted a 24 per cent increase in net profit at $371.9 million compared to the year-ago period. At $2.52 billion, the revenue was 16.5 per cent higher on a year-on-year basis. Compared to the quarter ended March this year, net profit rose 6.6 per cent, while revenue increased 3.9 per cent, lower than Tata Consultancy Services’ 5.5 per cent sequential revenue growth, though much higher than Infosys’s two per cent rise. At 19.4 per cent, Cognizant’s operating margin was well in line with expectations.

“Though the company’s performance remained in line with consensus estimates, the downward revision of full-year revenue growth estimate raises concern…this is likely to take a toll on the stocks of Indian IT companies,” equity research firm Microsec Capital said in a note.

In early trade on Wednesday, the American depositary receipts of Infosys and Wipro fell about three and four per cent, respectively.

For Cognizant, the quarter ended June was a landmark one, as it exceeded a revenue run rate of $10 billion a year, the first time.

Cognizant said during the June quarter, it had signed three transformational engagements, with a total contract value of $3.5 billion. This included a letter of intent from Health Net, a California-based managed care provider, for a seven-year contract. This is expected to be worth $2.7 billion, Cognizant’s largest contract.

“We expect three clients to generate at least $200 million in incremental revenue in 2015. These engagements are illustrative of the success of our strategy of re-investing in our business to meet our clients’ dual mandates of ‘running better’ to drive operational efficiency and ‘running different’ to drive growth and innovation,” said Gordon Coburn, the company’s president.

During the June quarter, the company’s revenue from traditional stronghold North America rose five per cent sequentially, while that from Europe fell 0.8 per cent, primarily due to the fact that revenue from the UK declined 4.1 per cent. While revenue from financial services and health care rose 3.4 and 4.8 per cent, respectively, on a sequential basis, that from manufacturing/retail/logistics grew 0.5 per cent.

For Cognizant, the quarter ended June was a landmark one, as it exceeded a revenue run rate of $10 billion a year, the first time. The company added 8,800 employees on a net basis (after discounting attrition), the most in the last few quarters. In fact, net employee addition during the June quarter was more than combined employee addition of the top four Indian IT services companies.

Meanwhile, Cognizant decided to increase its ongoing stock purchase programme by $500 million to $2 billion, apart from extending the term of the programme to December 31, 2015. Through the programme, the company has, so far, repurchased shares worth about $1.1 billion.