Cognizant Technology Solutions Corp. reported a strong performance for the September quarter, beating larger competitors such as Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd in revenue growth.
Among India-based firms, TCS had led in terms of growth, with its revenue increasing 3.9% sequentially in dollar terms to $1.5 billion (Rs7,050 crore) in the quarter.
Cognizant reported a 9.9% jump in revenue to $853.5 million. Consensus estimates stood at $805 million, and the outperformance by around 6% needs to be seen in the context of a subdued environment for information technology spending. The firm has raised its annual revenue guidance to $3.255 billion, a growth of 15.5%, considerably higher than the 11.5% growth it had indicated three months ago. Operating profit grew at a lower rate of 6.7% (compared with revenue growth) owing to higher investments in selling expenses.
One way of looking at Cognizant’s industry-leading growth is that it’s gained share at the expense of competitors. Revenue grew $76.9 million compared with the June quarter, considerably more than the incremental revenue of $57.3 million reported by TCS. Note that TCS is almost twice the size of Cognizant, measured by trailing 12-month revenues. Infosys, which is also a much larger firm compared with Cognizant (1.5 times the size), reported incremental revenue of just $32 million.
While there are some one-off factors that drove the unusually high growth for Cognizant last quarter, it must be noted here that it has beaten its larger peers in terms of incremental revenues even in the 12-month period between April 2008 and March 2009.
Adjusted for acquisitions, Cognizant’s incremental revenue stood at $558 million during that period. This was much higher than the incremental revenue of $487 million reported by Infosys and the $310 million (adjusted for acquisitions) reported by TCS. At the end of March, its size was around 52% of TCS. This has grown to 55.5% in June-September.
Cognizant’s president and chief executive officer, Francisco D’Souza, pointed out in a call with analysts that the September quarter performance benefited from pent-up demand in the system getting released because of greater stability in the economy. Owing to the severity of the slowdown earlier in the year, some projects had been held back, creating a sort of a backlog. D’Souza said clients have been saying the worst is over, leading to faster decision-making and hence faster implementation of these projects. Besides, the retail sector, that grew 15% sequentially, saw a seasonal increase in demand as retailers wanted to get software systems in place before the shopping season in the December quarter. In that sense, there was some form of surge in demand and he expects it to return to normalcy in the coming quarters. This is also reflected in the company’s guidance of a smaller 3% growth in revenues in the December quarter.
Having said that, one must note that the same conditions existed for the whole industry and it is quite evident that Cognizant has been able to make the most of the turnaround in sentiment. What’s more, it has been able to do this with relatively high employee utilization rates of 74% (including trainees).
As pointed out before in this column, one of the key reasons for the company’s success is its willingness to send large amounts in selling and marketing. Selling, general and administrative (SG&A) expenses were increased by 14% last quarter, much higher than the 9.9% growth in sales. SG&A expenses accounted for a high 22.7% of revenues last quarter, way higher than TCS’ 18.4% and Infosys’ 12.3%. The results are evidently showing.
Not unexpectedly, Cognizant’s shares rose around 8% in early trading on the Nasdaq, while Infosys’ American depository receipts were flat.
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