Europe to weaken CY12 results: Cognizant

Nasdaq-listed Cognizant’s second quarter results are a study in contrast with its first quarter numbers.

After its first quarter, ended March 31, it had cut its FY12 expectation (‘guidance’) to $7.34 billion (up at least 20 per cent from 2011), from the $7.53 billion forecast earlier. However, a quarter later, while reaffirming its FY12 revenue expectation, it announced an increase in those for earnings. Despite the uncertainty and volatility in the markets, it said, clients continued to spend, with a mandate of cost savings and operational efficiencies, combined with one for innovation and transformation.

Growth for Cognizant was across divisions and regions. The only concern area remains Europe and pharmaceuticals under its healthcare service line. Gordon Coburn, president, also stated during the post-results analyst call that significant currency pressures, coupled with continued economic uncertainty, would limit growth opportunities in Europe for the remainder of the year.

For the June quarter, Europe (excluding UK) growth was down 3.8 per cent sequentially and 0.7 per cent year-on-year. Though made up by the UK which grew 1.5 per cent during the second quarter, overall Europe was down 0.4 per cent. Compared to its competitors, Cognizant’s performance in Europe was a bit behind Wipro (1.4 per cent) and way behind Tata Consultancy Services (19.1 per cent). But it did beat Infosys, which saw revenue dip 7.2 per cent.

Karen McLoughlin, chief financial officer, said the company had factored in a slow-growing Europe for the year. She also said it did not see any significant turnaround in the region.

“For us, the majority of work in the regions is discretionary. The good part of Europe is that the pipeline we see is healthy. But, in Europe, it takes time to convert discussion into deals. The problem in Europe is that when you talk of outsourcing, you need to work with the labour councils and unions. So, a customer might sign for a deal but it would be a couple of months before we actually get to work on it. The good part is that customers are much more open now to have such discussions with labour councils,” she added.

Francisco D’Souza, chief executive officer, said Europe was a long-term play and they were working towards building a delivery system catering to clients in the region.

“In Europe, you need at least two things — local country presence and local or near-shore delivery centres. Cognizant is focused on both and we are building capabilities in these,” he said, during the analyst call.

He added that Cognizant had near-shore centers in Hungary, and France. The company is also looking at other near-shore centres in and around the region. “And when it comes to building local teams in the respective countries, we have looked at doing that both organically and through, as in the past, tuck-in acquisitions in different countries around Europe. We’ll continue to look actively at both organic and inorganic options to build out the local in-country presence,” he said.

On the reaffirmation of its revenue guidance McLoughlin said the company felt that as the discretionary spending was not as strong as expected, there was a need to cut the expectation earlier. “But at the same time, we wanted to be aggressive enough to pursue growth opportunities and we have managed to do that. Hence, we have reaffirmed our guidance for FY2012,” said McLoughlin. Cognizant has said it expects 20 per cent growth for calendar year 2012.