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Cognizant confirms strong IT demand

Cognizant confirms strong IT demand
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First Published: Thu, Nov 03 2011. 01 15 AM IST

A file photo of Cognizant Technology Solutions India Pvt Ltd, a leading global IT and business process outsourcing services provider at their offices at Old Mahabalipuram Road, Chennai
A file photo of Cognizant Technology Solutions India Pvt Ltd, a leading global IT and business process outsourcing services provider at their offices at Old Mahabalipuram Road, Chennai
Updated: Thu, Nov 03 2011. 01 15 AM IST
Cognizant Technology Solutions Corp. reported strong earnings for the September quarter, rounding off the results season for the information technology (IT) outsourcing industry in style. The US-based firm, with large global delivery centres in India, reported a 7.8% sequential growth in revenue to $1.6 billion (around Rs 7,890 crore today).
This included about $8 million in revenue from the company’s recent acquisition of CoreLogic Global Services Pvt. Ltd. But even after adjusting for that, growth stood at 7.3%, with incremental revenue of $108 million. This is only the fourth occasion on which the firm has reported incremental revenue of more than $100 million. The fact that IT outsourcing companies are still setting these records shows increased uncertainty in the global economy hasn’t hit the industry yet.
A file photo of Cognizant Technology Solutions India Pvt Ltd, a leading global IT and business process outsourcing services provider at their offices at Old Mahabalipuram Road, Chennai
Last month, Tata Consultancy Services Ltd (TCS) and Infosys Ltd had reported a sequential increase of 4.7% and 4.5%, respectively, in revenue for the September quarter. In TCS’ case, volume grew by an impressive 6.25%, while Infosys reported a 4.5% rise in the same. These are healthy results, especially coming at a time when global companies are facing increased pressure because of the uncertainty in the macroeconomic environment.
But as IT outsourcing companies have been pointing out, customers are better prepared compared with the slowdown in 2008-09, and haven’t cut back on IT spending. Cognizant’s chief executive officer Francisco D’Souza said during the post-earnings analysts’ call that the pipeline of orders is strong and that clients aren’t slowing decision-making. Application development revenue grew 7.5% sequentially, indicating that discretionary spending by clients continues unabated. Revenue grew by 5.3% in constant currency terms in Europe, despite all the trouble in the region.
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According to Cognizant, the outlook remains strong in the near term. However, due to the traditional slowing of demand in the three months ended December (when clients go slow on new projects just before finalizing the budget for the new year), the revenue growth forecast for the quarter is unexciting at 3.7%. This includes about $15 million of revenue from acquisitions, adjusted for which growth is expected to be even lower at 2.7%.
This seems to have put off investors as well—Cognizant shares fell by more than 2% after the earnings were announced, extending the drop in valuations in the past three trading sessions. But the company may well end up beating its forecast and, as it has pointed out, the December quarter has traditionally been a soft quarter due to the holiday season.
What’s more important is how these companies are likely to fare in 2012. Cognizant says that clients’ IT budgets are likely to be flat or marginally up next year, and that the shift towards increased outsourcing will continue. This agrees with what most IT companies have been saying. However, in the past, IT firms have been slightly behind the curve when it comes to predicting a slowdown in demand. Investors will do well to discount the bullishness in the industry to some extent.
Graphics by Yogesh Kumar/MintWe welcome your comments at marktomarket@livemint.com
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First Published: Thu, Nov 03 2011. 01 15 AM IST
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