Cognizant Technology Solutions Corp. on Monday slashed its 2012 revenue growth forecast by 3 percentage points, citing less-than-expected demand for computer services, in one more worrying signal to an industry that’s already been fretting about reduced client budgets in the US and Europe.
The last time Cognizant had to cut its full-year outlook was in 2008 at the height of the global financial crisis.
But Cognizant, which follows a January-December fiscal year, met its own estimate for first quarter (Q1) revenue growth and forecast Q2 sales at the higher end of the range expected by Infosys Ltd. That keeps it on track to overtake Infosys as India’s second largest information technology (IT) firm by revenue in the April-June quarter, having raced past Wipro Ltd to the No. 3 position in the 12 months ended 31 March.
“Due to a slower-than-anticipated acceleration in demand as we entered the second quarter, we are adopting a more conservative stance for the remainder of the year and revising our guidance to at least 20% revenue growth for 2012,” chief executive officer Francisco D’Souza said in Cognizant’s earnings statement.
The company now expects 2012 revenue of $7.34 billion (around Rs 39,122 crore today). It had previously estimated revenue growth in 2012 at 23% to $7.53 billion.
Cognizant’s shares, which fell 12% in pre-market trading after the results were announced, were down 18% to $57.10 in mid-morning trading on the Nasdaq exchange, their steepest drop in nearly 4.5 years. The stock had closed at $69.66 on Friday after gaining 30% in value since touching a year’s low of $53.54 apiece in August.
D’Souza said in a conference call following the earnings announcement that business in the key North American market had failed to pick up as expected.
The IT industry has been worried about growth prospects in 2012, given the uneven pace of economic recovery in the US and the debt crisis in Europe that has forced clients to trim spending. Infosys and Wipro posted disappointing results for the March quarter, and Cognizant’s reduced 2012 revenue forecast appeared to reinforce the trend.
But even with a reduced growth estimate, Cognizant’s forecast and results were better than those of Infosys and Wipro.
“The downward guidance, while unusual for the company, is not shocking as the previous guidance implied aggressive quarter-on-quarter growth rates this year,” JP Morgan Securities Llc researchers said in a report released after the earnings announcement. “The new guidance now sets a beatable bar of 4.5% growth rest of the year (versus 6.5% previously.)”
Cognizant forecast Q2 revenue at $1.79 billion, or 4.6% higher than in the preceding quarter, amid stable pricing for its services. For the June quarter, Infosys forecast flat revenue growth of 0-1% to between $1.771 billion and $1.789 billion.
Still, Cognizant’s Q2 revenue forecast was lower than average analyst expectations of $1.83 billion, according to Bloomberg.
“The guideline revision is unexpected and can be viewed only as a negative trend, but otherwise they have performed slightly better than our estimates,” said Harit Shah, a senior research analyst at Nirmal Bang Institutional Equities.
The Nasdaq-listed company posted Q1 revenue of $1.71 billion, in line with its own estimates. With the announcement, Cognizant raced past Wipro’s revenue for all four quarters starting in April 2011.
Revenue grew 3% from Q4 and 25% over last year’s quarter to $1.71 billion in the three months to 31 March, Cognizant said. It had forecast Q1 revenue at $1.7 billion, or 2.2% higher than in the preceding quarter.
The company’s Q1 net profit was $243.7 million, 17% higher than the $208.3 million in the year-ago period.
The earnings were slightly below the average profit forecast of $244 million, but revenue was in line at $1.7 billion, according to Bloomberg data.
Cognizant’s GAAP (generally accepted accounting principles) operating margin was at 18.6% for the quarter, and non-GAAP operating margin, excluding a stock-based compensation expense of $31.4 million, was 20.4%.
The company, which is based in New Jersey, has a stated strategy of managing its margins in the 19-20% range, preferring to reinvest anything in excess of this into growth.
Cognizant’s US revenue, comprising 79.5% of the total, grew just 2.5% sequentially, weighed down by weaknesses in the banking and pharmaceutical sectors. Europe, at 16.6% of revenue, grew at a higher pace of 3.5%.
During the quarter, banking and financial services registered weak 2.2% growth sequentially at 40.6% of revenue, and healthcare a lacklustre 2.3% at 27.3% of revenue. The manufacturing and logistics-focused business, making up 19.6% of revenue, rose 5%.
The firm added 2,800 employees in Q1, but will likely slow hiring following the reduced forecast, Cognizant executives said on the conference call.
Despite being headquartered in the US, Cognizant traces its origins to Chennai with a local venture of American research group Dun and Bradstreet, and most of its nearly 140,000 employees are based in India.
Cognizant also announced that its board authorized the expansion of its existing share repurchase programme from $600 million to $1 billion. Share repurchases reduce the amount of outstanding shares, boosting earnings per share.
Amritha Venketakrishnan contributed to this story.
• Mark to market: Cognizant guidance revision underlines slowdown in IT