Cognizant’s investments pay off

Cognizant’s investments pay off
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First Published: Tue, May 05 2009. 10 43 PM IST

Updated: Tue, May 05 2009. 10 43 PM IST
Software services firm Cognizant Technology Solutions Corp. has reported better-than-expected results for the March quarter, with revenues of $746 million (Rs3,707.62 crore) against its guidance of $735 million.
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This represents a sequential fall of about 1%, the lowest among large information technology (IT) outsourcers based in India. Other large firms reported a decline of between 3.5% and 8% in revenues in dollar terms last quarter.
What’s more, while companies such as Infosys Technologies Ltd and Wipro Ltd, which provide quarterly guidance, have said that revenues will fall in the June quarter as well, Cognizant expects revenues to rise marginally.
For calendar year 2009, Cognizant expects revenues to rise by 10%, implying an average growth 3.2% in the September and December quarters. In comparison, Infosys expects a decline of between 3.1% and 6.7% in revenue in the year to 31 March 2010.
In the past five years, Cognizant’s growth rates have always been higher than its peers. But it’s interesting that the level of outperformance seems to have widened during the current downturn.
In the previous downturn in 2001-02, the company had underperformed Infosys in terms of growth rates.
Cognizant’s success can be attributed to its decision to reinvest relatively high sums in sales and marketing expenses. Its selling, general and administrative expenses amount to about 23% of revenues, compared with 15% in the case of Infosys.
Most of its top management is based in the US, reflecting its philosophy of investing in deep client relationships. Margins fell by less than 50 basis points last quarter, which again is among the lowest drops in the industry in the last quarter. One basis point is a hundredth of a percentage point.
Both company management and analysts feel that these investments in client relationships are now paying off.
Francisco D’Souza, president and chief executive officer of Cognizant, says: “Our continuing strategy of reinvesting in our business to deepen our expertise, experience and, ultimately, our value proposition, has meant we remain the trusted adviser to our customers in good times and bad, continuing our industry-leading growth trajectory.”
Having said that, the company is also benefiting from a relatively better client and business segment mix.
Although it has a high exposure to the financial services sector, its largest client there is JPMorgan, which is in a far better position than most banks in the US.
Cognizant’s better-than-expected results are likely to be taken positively by the street. But one must note that the company is treading its own path thanks to deep client relationships. It would be foolhardy to extrapolate this to all Indian IT companies.
Graphics by Ahmed Raza Khan / Mint
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First Published: Tue, May 05 2009. 10 43 PM IST