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Cognizant’s revenue targets indicate growth

Cognizant’s revenue targets indicate growth

New Delhi: In what may be the first insight into how information technology (IT) companies will perform next year, Cognizant Technology Solutions Corp. has released revenue growth targets for top managers’ 2012 performance-based stock awards.

Even though the company maintains that this is not meant to be read as the outlook for next year, the revenue threshold estimates amid uncertainty about next year’s IT budgets have enthused the Street.

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Although this is not guidance, which will be released when Cognizant reports results for the three months ending December in early February, “we believe these metrics provide the first indicator of potentially strong revenue growth expectations looking into next year," Darrin D. Peller, Preeta Ragavan and Adam Carron of Barclays Capital wrote in a report.

The company usually releases board performance targets for the management for setting compensation, which is usually taken as a base level for 2012 guidance by analysts.

“We interpret these targets as management’s current views on next year’s growth with the initial guidance close to the 100% award level (although slightly adjusted for macro changes until February) and a 200% level representing what is achievable if demand environment does not further deteriorate," wrote Tien-tsin Huang and Puneet Jain of JP Morgan Securities LLC in their report on the company.

According to the SEC filing, “50% of the performance units which are awarded shall vest upon the company’s achievement of 2012 revenue of $7,243,000,000," which translates into growth of 18-19%. The management will not receive any units if revenue growth is below that level and 200% of the units if revenue growth is at 32%.

Cognizant’s optimistic estimates assume importance as India’s second largest software services export firm, Infosys Ltd, had recently warned of deterioration in the demand environment. According to a report by Nimish Joshi and Arati Mishra of CLSA, “Infosys is seeing greater instances of delays in project awards and deferment of ramp-ups." The company is also expecting some delays in the formulation of 2012 IT budgets.

Cognizant’s filing has encouraged analysts despite macroeconomic concerns.

“The disclosure appears to validate our industry checks, which suggest continued solid demand for IT-offshore services into FY12," read a report by Oppenheimer & Co. Inc.

One-third of the total performance units for Cognizant’s top management, which includes president and CEO Francisco D’Souza and four others, will be issued after 18 months and the remaining two-thirds of the performance units after 36 months.

The management achieved the 200% mark in 2010 and the 100% mark in 2011. In 2008, the year of the global economic crisis, the company missed the 50% mark. CLSA analysts Joshi and Mishra warned in their report that this may lead to the expectation, based on the past two years, that guidance will be in the order of “at least" 23% year-on-year growth. “The set-up for 2012 is much different from the previous two years and we remain wary of such extrapolations. Also, in our view, the increased uncertainty and 2008 experience suggests that this is unlikely to be the last word on sector growth prospects for the year."

Cognizant’s shares were trading at $66.87 at 8pm IST, up 3.64% on Wednesday.