Cognizant cuts its full-year revenue forecast again

Cognizant now expects full-year revenue to be between $13.47 billion and $13.60 billion, an increase of 8.5-9.5%, compared with 21% growth recorded last year

This is the second straight downward revision by Cognizant, which at the start of the year guided for 10% and 14% growth. Photo: Mint
This is the second straight downward revision by Cognizant, which at the start of the year guided for 10% and 14% growth. Photo: Mint

Bengaluru: Cognizant Technology Solutions Corp. on Friday cut its full-year revenue growth forecast sharply to 8.5-9.5%, implying the slowest pace since 1996, after posting a 5.2% sequential increase in revenue for the quarter ended 30 June.

Nasdaq-listed Cognizant, which follows a January-December fiscal year, now expects full-year revenue to be between $13.47 billion and $13.6 billion. The lowering of its growth outlook to less than half the pace at which revenue expanded last year signals turbulent times ahead for India’s $150 billion outsourcing sector.

Significantly, this is the second straight downward revision by the management at Cognizant, which at the start of the year guided for between 10% and 14% growth. That was lowered to at-best 13% when the company declared its January-March earnings in May.

The revenue forecast for 2016 implies the slowest pace of growth since 1996, when Cognizant started serving outside clients after being separated from Dun and Bradstreet.

Cognizant, which is based in the US but has most of its 244,300 employees in India, said revenue in the three months ended June increased 9.2% from a year earlier, and improved 5.2% from the first quarter, to $3.37 billion.

Net profit dropped to $252.4 million in the second quarter from $420.1 million in the year-ago period on account of a higher provision for income tax, which rose to $342.4 million from $128.7 million in the year-ago period.

Net profit dropped mainly on account of the $2.8 billion remitted by Cognizant from India to US and other international markets to provide additional financial flexibility in funding strategic investments to drive long-term growth, according to a company spokesman. This remittance resulted in a one-time tax impact of $190 million in the second quarter, with about $24 million incremental tax impact expected in each of the third and fourth quarters this year.

Analysts polled by Bloomberg had expected Cognizant to report April-June quarter revenue of $3.37 billion and net profit of $495.50 million.

The Teaneck, New Jersey-based company estimates revenue to be between $3.43 billion and $3.47 billion in the July-September period—a sequential increase of between 1.8% and 3%.

Cognizant’s lowering of full-year guidance reinforces perceived weakness in the information technology (IT) industry after India’s second largest software services firm, Infosys Ltd, revised down its dollar revenue growth forecast for the year to 12.3% from an earlier at-best 13.8%.

India’s largest software services exporter Tata Consultancy Services Ltd (TCS) and third largest IT firm Wipro Ltd do not provide a yearly forecast. HCL Technologies Ltd expects to grow at the fastest rate among all the home-grown technology firms, and even Cognizant. HCL Technologies said on Wednesday that it expects at-best 13.2% growth in revenue in dollar terms in this fiscal year.

If Cognizant grows at the upper end of its 3% growth forecast in the third quarter, the company will need to grow 2.6% in the October-December period to end this year with its now projected $13.6 billion in revenue.

This weak sequential dollar growth of 3% and 2.6% in the third and fourth quarters means that this year will be one of the most challenging years for Indian IT firms in recent years, according to some analysts.

“This is for the first time a company like Cognizant is guiding for a full-year growth in single digits. Now, for the last few quarters, Cognizant has been the first among all IT firms to flag any warnings. So these are ominous signs for Indian IT, and if it is not any client-specific challenge, then certainly it will take a herculean effort for Infosys to keep up with its revised guidance of 10.8% and 12.3%,” said a Mumbai-based analyst at a domestic brokerage on condition of anonymity.

At the core of Cognizant’s lower growth outlook is the $40 million erosion in new revenue this year on account of the negative cross-currency impact after the fall in pound sterling against the dollar.

Chief executive officer Francisco D’Souza also said macroeconomic uncertainty was impacting banks while less business was being outsourced to IT vendors by companies in the healthcare space, which is witnessing consolidation, leading many to defer technology work.

Despite lowering the growth forecast, the Cognizant management put up a brave front.

“We have been through periods of market volatility in the past. While macroeconomic factors are not within our control, we are confident that we will execute well through this cycle and continue to gain market share,” said D’Souza.

Cognizant’s sequential growth of 5.2% in the April-June period was higher than TCS’s 3.7%. Infosys and Wipro posted a rise of 2.2% and 2.6%, respectively. HCL Technologies grew at a sequential pace of 6.5%.

“For the third straight quarter, we are making the call that estimates have to move lower, including both CY16 (calendar year 2016) and CY17 estimates,” wrote Keith Bachman, analyst with BMO Capital Markets, in a note on 2 August. “We believe either these deals closing, or all companies walking away as stand-alone entities, are likely to be good news for CTSH (Cognizant), in that an outcome would likely liberate spending. However, we think having these deals remain in limbo, subject to government review, is likely not a great outcome for CTSH.”

The company’s revised full-year growth of at-best 9.5% pales in comparison with 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 revenue put together by India’s three largest software services companies—TCS, Infosys and Wipro.

Growth in the second quarter was driven largely by a 5.1% sequential improvement in business from clients in the insurance and banking and financial space, which now accounts for 40.1% of the company’s revenue. Client spending in Europe, which accounts for 16.2% of revenue, improved 4.1% while the US, which brings in 77.9% of Cognizant’s business, grew 5.1%.

Cognizant shares were trading up 0.80% at $59.23 on the Nasdaq at 8pm on Friday.