Cognizant profit rises 26%, but soft guidance is a cause for worry

Cognizant results show Q1 profit rose to $557 million from $441 million in the year-ago period, but its soft guidance for the current quarter is worrying news


Francisco D’Souza, chief executive of Cognizant Technology Solutions Corp. Photo: AFP
Francisco D’Souza, chief executive of Cognizant Technology Solutions Corp. Photo: AFP

Bengaluru: Cognizant Technology Solutions Corp. on Friday reported a 2.4% sequential revenue increase in the quarter to March, which came at the top end of management’s stated expectation, as it benefited from higher client spending.

The Nasdaq-listed firm, which has most of its 261,200 employees based in India, reaffirmed its revenue growth forecast of 8-10% for calendar year 2017.

From a year ago, Cognizant’s revenue in the three months ended 31 March increased 10.7% to $3.55 billion. The company had guided for revenue of between $3.51 billion and $3.55 billion in the quarter.

Net income rose to $557 million in the first quarter from $441 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 revenue of $3.52 billion and net income of $508.33 million.

The Teaneck, New Jersey-based company estimates revenue to be between $3.63 billion and $3.68 billion in the April-June period—a sequential increase of between 2.3% and 3.7%, lower than the 4-6.25% guidance by the company in the year-ago period.

Although Cognizant’s sequential growth in the January-March period was lower than the 2.7% sequential dollar revenue growth reported by Wipro Ltd, it was better than the 1.5% and 0.7% growth posted by Tata Consultancy Services Ltd (TCS) and Infosys Ltd, respectively.

Cognizant reported 7.1% sequential growth in revenue from clients in the retail, manufacturing and logistics industries, which together bring in 21% of the company’s business. Client spending in financial services, which account for 39% of the company’s total business, improved 1.6%.

Nonetheless, its soft guidance for the current quarter (traditionally a strong one) is worrying news for India’s largest outsourcing companies, as it reflects weakening demand for solutions offered by them.

Infosys expects dollar revenue growth of between 6.1% and 8.1% in the current financial year. TCS does not offer any quarterly or yearly growth outlook. Wipro’s management does not expect any growth in the April-June period.

Cognizant expects to grow between 8% and 10% this year, after reporting 8.62% growth in 2016.

“Cognizant still is the only large IT outsourcing company which continues to report a double digit year-over-year growth. Year-over-year growth of TCS, Infosys and Wipro has been in single digits for the past few quarters. Cognizant’s revenue during the quarter was at the top end of their guidance. Considering last year, when management had to cut its guidance thrice, we believe the guidance for the second quarter is a tad conservative, and Cognizant may surprise on the upside in the second quarter and the year,” a Mumbai-based analyst with a domestic brokerage said on condition of anonymity.

Globally, companies across industries are looking at technology outsourcing companies to offer them more value-added services, such as helping them run their business more efficiently through crunching large sets of data, which is called data analytics. For this reason, technology outsourcing companies including Cognizant are building capabilities and strengthening their offerings in the digital space.

“We delivered solid results in the first quarter and continued to build our digital solutions portfolio, expand our skills and enhance our engagement with clients,” Francisco D’Souza, chief executive officer, said in a statement.

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