Cognizant results provide little cheer for IT sector investors

Cognizant Technology Solutions Corp.’s shares rose around 4% in early trading on Monday on the Nasdaq. But that had nothing to do with its results announcement. Investors seem to be relieved the quantum of improper payments made by the company while procuring real estate in India was only around $5 million.

In early October, Cognizant shares had lost $4.4 billion in market capitalization after it revealed a corruption probe and the resignation of one of its senior-most executives. Investors feared president Gordon Coburn’s resignation was possibly because the scale of the improper payments was significant. Now, nearly all of those losses have been erased.

Cognizant’s September quarter results, meanwhile, were hardly anything to get excited about. Revenue grew 2.5% sequentially, almost exactly in line with the Street’s expectations. But the forecast for the December quarter was cut, and revenues are expected to grow by 1.5% sequentially at best.

The higher end of the guidance range has been cut by $70 million. Of this, around $18 million is because of the incremental depreciation in the British pound. As the chart alongside shows, growth has more than halved in the past four quarters. From a high of around 17% about a year ago, growth is expected to fall to around 7.5% in the December quarter.

In the key banking and financial services segment, which accounts for around 40% of Cognizant’s revenues, demand has been hit because of persistent low interest rates, the company said. The healthcare segment, which contributes around 29% to revenue, has been affected because of the ongoing consolidation in the sector.

The company said on a call with analysts that it’s too early to comment on demand in the coming year as clients are still firming up budgets. But it seems unlikely things will improve in a hurry. Analysts at Kotak Institutional Equities said in a note to clients, “A few large clients, especially in the financial services vertical, are either shifting software development and maintenance work to their own captive centers or insourcing work that is considered as a strategic priority… None of the shift is structural in nature; however, bunching up of such decisions by different banks/companies has impacted growth.”

Meanwhile, the uncertainty on account of Brexit continues and the overall macroeconomic environment provides little hope of a quick recovery. The lowering of Cognizant’s guidance only attests this.