Cognizant results deepen IT gloom

Cognizant cuts full-year revenue growth forecast cut for third time this year

Cognizant expects full-year revenue to be between $13.47 billion and $13.53 billion. Photo: Mint
Cognizant expects full-year revenue to be between $13.47 billion and $13.53 billion. Photo: Mint

Cognizant Technology Solutions Corp. reported weaker-than-expected quarterly earnings and cut its full-year revenue growth forecast for the third straight time this year, portending more turbulence for India’s $150 billion information technology sector.

The company expects revenue growth of at-best 9% for the year, implying the slowest pace of growth in two decades. Cognizant had initially forecast revenue growth of between 10% and 14% for the year ending 31 December.

The latest reduction of its revenue forecast signals tougher times ahead for the outsourcing sector. Rivals Tata Consultancy Services Ltd (TCS) and Infosys Ltd have disappointed with a tepid performance in the first six months of the fiscal and now run the risk of growing at a slower pace than the 7.1% and 9.1% growth reported by the two firms, respectively, last year.

Cognizant and other Indian IT firms have been stung by weak demand from many of their largest clients. While banks are holding back on technology spending in an uncertain global economy, healthcare firms are outsourcing less work amid consolidation in the industry.

On Monday, Cognizant said it expects full-year revenue to be between $13.47 billion and $13.53 billion. It had annual revenue of $12.41 billion at the end of December 2015.

Cognizant, which is based in the US but has most of its employees in India, said revenue in the three months ended 30 September increased 8.4% from a year earlier, and improved 2.5% from the preceding June quarter, to $3.45 billion. Net profit rose to $444.4 million in the third quarter from $397.2 million in the year-ago period and $252.4 million in the second quarter. Analysts polled by Bloomberg had expected Cognizant to report revenue of $3.46 billion and profit of $511.92 million.

The Teaneck, New Jersey-based company now expects revenue in the December quarter to be between $3.45 billion and $3.51 billion, a sequential increase of between no growth and 1.7%.

Its expectation of at-best 9% growth for 2016 pales in comparison with the scorching 21% growth recorded last year, when Cognizant added $2.15 billion in incremental revenue to end the year with revenue of $12.42 billion.

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

“We believe that CTSH (Cognizant) is at the crossroads of interesting and difficult choices, which we suspect is part of the reason why CTSH has experienced recent management changes,” Keith Bachman, an analyst with BMO Capital Markets, wrote in a 2 November note.

The management changes Bachman is referring to include Cognizant appointing Srinivasan Veeraraghavachary as its new chief operating officer, Prasad Chintamaneni as its new North America head, and Debashis Chatterjee as new head of delivery.

Cognizant should try to “buy growth” through acquisitions and build a new team of “board members or new management”, Bachman suggested.

More From Livemint