Cognizant earnings disappoint, miss estimates in June quarter
Cognizant’s revenue rises 9.2% in the quarter, behind TCS’s 10% growth for the first time in years
Bengaluru: Cognizant Technology Solutions Corp’s second-quarter earnings were a tad disappointing as both revenue and profitability missed analysts estimates, although the Nasdaq-listed company retained its full-year forecast of growing at best 10% in 2018.
Significantly, for the first time in many years, Cognizant’s year-on-year revenue growth of 9.2% in the April-June period was lower than the 10% growth of Tata Consultancy Services Ltd (TCS).
Cognizant, which is based in the US but has most of its employees in India, said revenue in the three months ended 30 June increased 9.2% from a year earlier, and improved 2.4% from the preceding March quarter, to $4.01 billion.
Net profit declined 12% sequentially to $456 million in the second quarter as against $520 million in the first quarter and was also 3% less than $470 million in the year-ago period on account of unfavourable currency movements.
Analysts surveyed by Bloomberg had expected Cognizant to report a revenue of $4.03 billion and profit of $643 million.
The Teaneck, New Jersey-based company expects revenue in the September quarter to be between $4.06 billion and $4.10 billion, a sequential increase of 1.24% and 2.24%.
On Thursday, Cognizant said it reaffirmed full-year revenue to be between $16.05 billion and $16.3 billion, translating into a growth of 8.4% and 10% or adding new business of between $1.24 billion and $1.49 billion.
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At the heart of Cognizant’s soft performance is the company’s inability to generate more business from its largest banks. Cognizant’s largest revenue segment, financial services, which accounts for 37% of the firm’s total revenue, managed only a 0.5% sequential growth and 4.5% growth from the year-ago period.
TCS, on the back of two mega deals (more than $1 billion), and optimism on higher client spending in the financial services, expects to clock growth exceeding 10% in 2018-19. Mumbai-based TCS has seen its year-on-year growth improve in the January-March period and in the April-June quarter even as Cognizant’s year-on-year growth slipped.
For this reason, some analysts are of the view that TCS could grow faster than Cognizant in the current financial year.
“CTSH’s (Cognizant’s) relative growth has also slowed compared with its competitors, TCS and Infosys. More importantly, 2018 revenue growth guidance is weaker than TCS and just about in line with Infosys, which has been impacted by significant internal issues. We are now concerned that this may be a side-effect of the onus on margin expansion,” HSBC analyst Yogesh Aggarwal wrote in a 17 May note.
Still, Cognizant is the only company that has managed to improve its operating margin in the past two years even as the Indian IT firms’ higher profitability has seen erosion during this time.
“As our second-quarter results confirm, we’re making solid progress on our plan to accelerate our shift to digital services and solutions,” said Francisco D’Souza, chief executive and vice-chairman, Cognizant.
“We’ve been methodical in developing, aligning, and applying our portfolio of skills, services, and solutions to clients’ needs, so they can become fully digital organizations. We remain confident in our ability to invest for growth and achieve our financial targets,” he said.
Cognizant’s shares fell about 6% in pre-market trading in New York on Thursday.
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