Cognizant revenue drops sequentially; likely to lag Infosys on 2016 growth

Bengaluru: Cognizant Technology Solutions Corp. on Friday reported a sequential decline in revenue in the quarter to March marking the Nasdaq-listed firm’s slowest start to a calendar year since 2009.

Worryingly for investors, Cognizant slightly revised down its forecast for 2016 revenue growth, with the management now expecting full-year revenue to be between $13.65 billion and $14 billion, an increase of 10-13%, as against the earlier guidance of 10-14%.

This guidance of at-best 13% growth means Cognizant expects the slowest growth since its inception in 1996, when the US-based firm started serving outside clients after being separated from Dun and Bradstreet.

This also means that Infosys Ltd, which has guided for at-best 13.8% growth, may grow faster than Cognizant, the first time in more than 13 years.

Cognizant, which has most of its 233,000 employees based in India, said revenue in the three months ended 31 March increased 10% from a year earlier, and declined 0.9% from the fourth quarter, to $3.20 billion.

The company last reported a sequential decline of 0.94% in the January-March period of 2009, a year in which it still managed to grow at 16.42% over the year-ago period.

Net income rose to $441.2 million in the first quarter from $382.9 million in the year-ago period, said the company, which follows a January-December accounting year.

Analysts polled by Bloomberg had expected Cognizant to report January-March quarter revenue of $3.22 billion and net income of $481.40 million.

The Teaneck, New Jersey-based company estimates revenue to be between $3.34 billion and $3.4 billion in the April-June period—a sequential growth of between 4% and 6.25%.

“Overall, our first quarter results were in line with our expectations and guidance. Client demand for our digital expertise, services and technologies remains strong,” Francisco D’Souza, chief executive officer, said in a statement.

At the core of Cognizant’s soft outlook is the slow client spending among global banks and the healthcare space and the company losing out on outsourcing deals to some of its rivals, including Infosys and Tata Consultancy Services Ltd (TCS).

“We think CTSH (Cognizant) has lost several deals to INFY (Infosys), which is affecting CY16 growth,” Keith Bachman, analyst with BMO Capital Markets, wrote in a note dated 1 May.

Nonetheless, Bachman also wrote that Cognizant should “improve its growth in CY17 vs. CY16” as the company can leverage its strong position in the US to win new deals and the current challenges it faces from healthcare firms holding back tech spending should abate.

India’s largest technology firm, TCS, reported a 1.5% sequential dollar revenue increase in the January-March period while Infosys and Wipro Ltd recorded a 1.6% and 2.4% rise, respectively. HCL Technologies grew at a sequential pace of 1.3%.

Uncertainty over a global economic recovery is making Cognizant’s largest clients, especially banks, put technology spending on hold. This forced the company to depart from its practice of specifying expected annual revenue, and rather, Cognizant at the start of this year gave a broad revenue growth range.

Cognizant’s revised full-year growth of at-best 13% estimate pales in comparison to the scorching 21% growth recorded last year (2015), when Cognizant added $2.15 billion in incremental revenue to end the year with revenue of $12.42 billion.

Cognizant did more new business last year than the $1.96 billion in new revenues put together by India’s three largest software services companies—TCS Infosys and Wipro.

 


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