Cognizant Technology Solutions Corp. reported revenues of $3.19 billion for the September quarter, marginally higher than the Street’s estimate of $3.16 billion. On a sequential basis, revenues grew by 3.3%, which again doesn’t look impressive for the traditionally strong September quarter. After the June quarter’s impressive 6% sequential growth, investors are evidently feeling let down.
But these quibbles aside, Cognizant’s results reiterate the fact that the company has been miles ahead of the competition this year. On a year-on-year (y-o-y) basis, its revenues grew by 16.5%, after adjusting for incremental revenues from the TriZetto Corp. acquisition. In comparison, industry leader Tata Consultancy Services Ltd (TCS) grew revenues by just 5.8% y-o-y. Infosys Ltd grew revenues by 7.6% and Wipro Ltd’s growth stood at just 3.4%.
Just a year ago, TCS’s growth was higher by about 300 basis points, when it was growing at a healthy pace of almost 15%. But while its growth has slipped sharply in the past four quarters, Cognizant has done just the opposite. The latter’s growth rate is now almost 11 percentage points higher, an unusually high differential in an industry that is so competitive. One basis point is 0.01%.
Also note that Cognizant has raised its revenue growth guidance for 2015 each quarter, for the past three quarters, while analysts have been cutting growth estimates for most Indian tech leaders.
Cognizant has benefited from not having any material exposure to troubled sectors such as energy and telecom. But that’s not the only reason for its outperformance. There has also been a shift in the nature of IT spending in the past year, and Cognizant, with its higher exposure to discretionary services such as consulting (58% of revenues last quarter), has gained. Analysts at Kotak Institutional Equities said in a recent note to clients, “Companies with inherent strength in run-the-business services are struggling to sustain momentum, while those with greater exposure to discretionary spending are gaining.” Last quarter, the so-called run-the-business part of Cognizant’s portfolio grew by 1.5% sequentially, while growth in segments that depend on discretionary spending stood three times higher at 4.6%.
As pointed out earlier in this column, Cognizant appears to have made disproportionate gains in the trend towards increasing spend on digital services. According to analysts, the company’s early investments in this segment, including acquisitions it has made in the space, coupled with its consulting expertise, has helped it gain a higher share of this relatively new revenue stream.
It’s not that others haven’t had any success. TCS said after its September quarter results that revenues from digital services grew by 10% sequentially last quarter. Be that as it may, overall revenue growth numbers suggest that Cognizant has gained considerable market share this year, at the expense of large India-based IT companies. Last quarter, its incremental revenues of $426 million (on a y-o-y basis) were nearly double that of TCS’s ($227 million), and higher than the cumulative incremental revenues of TCS and Infosys.
This clear divergence is also reflected in the way these stocks have moved in the past year—Cognizant’s shares have risen by over 35%, while those of TCS have fallen by 3%.
The writer does not own shares in the above-mentioned companies.