Cognizant cuts full-year guidance for the second straight quarter

Q2 net profit down 40% due to one-time remittance, revenue up 9.2% y-o-y

IT services major Cognizant Technology Solution that has been growing at trail-blazing speed slashed its full year revenue guidance (company follows Jan-Dec calendar) for the second straight quarter, emphasizing the challenges impacting the IT industry. 

The company cut its full year revenue growth target to $13.47 billion-$13.6 billion representing a growth rate of 8.45-9.5 per cent, one of the lowest ever for the company. 

Cognizant at the start of the year had guided for a growth rate of 10-14 per cent, which it reduced post first quarter to 10-13 per cent. The guidance target is lower than Nasscom’s growth estimate of 10-12 per cent and lower than the firms last year growth of 21 per cent. 

"While our revised guidance reflects the impact of near-term macroeconomic headwinds, our longer term outlook and underlying business fundamentals remain strong. We continue to see an expanding market opportunity ahead and are well positioned to capitalize on the digital transformations taking place among enterprises around the world,” said Francisco D'Souza, Chief Executive Officer of Cognizant Technology. 

For the second quarter that ended June 30, 2016, the company reported net income of $252.4 million a drop of 40 per cent, as against $420.1 million during the corresponding quarter of previous year. Profits were impacted due to higher taxes caused by a one-time remittance of $2.8 billion of cash from India on account of repurchase of shares.

The revenue for the quarter met the company guidance at $3.37 billion representing a growth of 9.2 per cent when compared to$3.09 billion registered during the same quarter of last year. 

"Our second quarter performance, as anticipated, represented broad-based revenue growth across service lines, geographies and industries, including healthcare and financial services," he added.

Cognizant revising its guidance hints towards the softness that the industry is seeing. Earlier in the month, Infosys too lowered guidance to 10.8 to 12.3 per cent for the fiscal year. TCS, while does not provide for guidance, the management said that Brexit and visa issues are a challenge going ahead.

The company incurred an incremental income tax expense of $237.5 million during 2016, of which $190 million was recognised in the quarter ended June 30, 2016, owing to a transaction happened in May, 2016, said the company. Another around $23.7 million will be recognised in each of the quarters ending September 30, 2016 and December 31, 2016.  In May 2016, Congizant's principal operating subsidiary in India repurchased shares from its shareholders, which are non-Indian Cognizant entities, resulting in a one-time remittance of $2.8 billion of cash from India.

"During the second quarter, we were pleased to execute a one-time remittance of $2.8 billion from India, which increased our cash in the US by $1 billion, net of taxes, and in other international markets by $1.6 billion," said Karen McLoughlin, Chief Financial Officer of the company. “This provides additional financial flexibility in funding our strategic investments to drive long term growth for Cognizant." 

For the third quarter of 2016, which ends in September 30, 2016, the company has given a guidance of revenue in the range of $3.43 billion-$3.47 billion.