Cognizant cuts profit forecast due to tax hit

By Arjun Panchadar

(Reuters) - IT services firm Cognizant lowered its forecast for annual earnings on Monday saying that it now expected to pay higher taxes than previously thought, driving its shares down 6 percent.

The forecast overshadowed double-digit growth in Cognizant's first-quarter revenue that beat Wall Street expectations, as businesses continued to spend more on digital services such as analytics, cloud computing and cyber-security.

The Teaneck, New Jersey-based company predicted a 9-cent hit to 2018 earnings per share due to an updated interpretation of new U.S. tax laws, which limits the amount of foreign tax credits that Cognizant can receive for the overseas taxes paid by it.

Much of Cognizant's operations are overseas, and some 70 percent of its roughly 260,000 employees were based in India as of end-2017.

The U.S. Tax Cuts and Jobs Act has slashed effective tax rates for hundreds of major U.S. companies, although many have taken one-time charges to implement the changes. Cognizant recorded a $617 million charge in the three months to the end of December.

The company on Monday cut its 2018 earnings forecast to at least $4.47 per share from $4.53 per share.

Cognizant's shares fell 6.1 percent in response on a day when technology stocks were generally helping pull Wall Street higher.

Still, most of the analysts commenting immediately on the company's results day were upbeat.

Jefferies' Ramsey El-Assal said he viewed Cognizant's "underlying fundamentals as solid."

Pivotal Research analyst Lou Miscioscia added: "Keep in mind most of Cognizant's Indian competitors are growing revenue in the mid-single digit range, thus the company is outperforming peers."

Major Indian software services exporters Tata Consultancy Services and Infosys each recorded revenue growth of about 8 percent and 6 percent in their latest quarters. Wipro reported a fall in revenue.

Cognizant's revenue rose 10 percent to $3.91 billion in the three months ended March 31, edging past analysts' estimates of $3.90 billion.

The company also raised the lower end of its expected range for full-year revenue, forecasting revenue of between $16.05 billion and $16.30 billion.

Revenue from healthcare clients rose 11.8 percent, while financial services revenue climbed 6.2 percent.

"We are starting to see a little more improvement (in the financial services sector), but it does continue to remain behind company average," Chief Financial Officer Karen McLoughlin said in an interview.

While spending from insurance industry clients remained strong, the banking sector was the weakest link, she added.

Cognizant's first-quarter net income fell 6.6 percent to $520 million. Excluding one-time items, the company earned $1.06 per share, matching analysts' expectations.

(Reporting by Arjun Panchadar in Bengaluru; Editing by Sai Sachin Ravikumar)