Cognizant overtakes Infosys on quarterly revenue

Chennai: Cognizant Technology Solutions Corp. on Monday beat its own earnings per share (EPS) outlook and met revenue guidance, upstaging Infosys Ltd as India’s No. 2 software services provider based on quarterly revenue, exactly a year after it overtook Wipro Ltd on the same basis.

India’s third largest information technology (IT) company continued its streak of industry-leading revenue growth partly due to a revival in technology spending in the financial sector—the industry bringing in the largest chunk of revenue.

The company raised its EPS guidance by 2 cents and affirmed its revenue forecast for 2012.

“Cognizant once again delivered industry-leading growth despite a challenging macro-economic environment,” Gordon Coburn, president of Cognizant, said in the earnings statement. “This market downturn, as with those before, is serving as a catalyst for clients to embrace a broader range of our services.”

The firm forecast third quarter (July-September) revenue at $1.875 billion, or nearly 5% higher than in the preceding quarter.

While Cognizant raised its annual EPS forecast to $3.38 from $3.36, it maintained the revenue outlook for the year. In May, for the first time in four years, the company slashed its 2012 revenue growth forecast by 3 percentage points to 20% at $7.34 billion, citing weak demand for computer services.

“Clearly the revenue growth and the affirmation of the whole year guidance is good in an environment where its peers are not guiding strong,” said Ankur Rudra, a Mumbai-based analyst at Ambit Capital Pvt. Ltd. “The earnings per share outlook being raised is due to benefit as expected from the depreciating rupee that is now being reflected in the bottom line.”

For the June quarter, the company posted a revenue of $1.795 billion, up about 5% from the March quarter and 21% over a year ago. It had forecast revenue at $1.79 billion amid stable pricing for its services. Net profit was $251.9 million, 21% higher than the $208 million in the year-ago period.

EPS on a GAAP (generally accepted accounting principles) basis, or US accounting rules, was 82 cents, higher than its forecast of 80 cents.

Analysts on an average had expected earnings of $259.44 million on revenue of $1.79 billion, according to Bloomberg data.

Cognizant, headquartered in New Jersey, US, follows a January-December fiscal year.

The IT sector has been anxious about growth prospects in 2012, amid a rickety pace of economic recovery in the US and the debt crisis in Europe that have forced clients to cut costs. Software lobby group Nasscom has predicted 11-14% growth for the IT sector in fiscal 2013 (FY13).

Last month, Infosys shocked investors by missing its annual revenue growth forecast for the first time and predicting FY13 revenue that fell short of investor views. The firm didn’t provide its outlook for the September quarter, again a surprising first.

Rival Wipro’s core IT services business also posted a worse-than-expected dip in dollar revenue following a fall in most of its businesses and geographies.

However, India’s largest IT company Tata Consultancy Services Ltd beat analysts’ expectations and indicated it will outperform Nasscom estimates for the year.

Francisco D’Souza, chief executive of Cognizant, said in a conference call following the earnings announcement that the company “saw a modest rebound on the banking side”.

During the quarter, banking and financial services (41% of revenue) registered 6.1% growth sequentially, and healthcare (27% of revenue) a 3.6% rise. Manufacturing and logistics-focused business, making up 20% of revenue, rose 7.1%.

D’Souza said that while banks put IT projects on hold in the last couple of quarters, many of those contracts are coming up for bidding and Cognizant has managed to win some of those businesses.

In the same call, chief financial officer Karen McLoughlin said pricing has remained stable. Still, Cognizant intends to closely monitor costs, she said.

“With investors somewhat cautious heading into Q2 results (given the mild guidance reduction last quarter), we are encouraged by solid Q2 results, reiterated revenue guidance and an EPS guidance raise,” Baird Equity Research said in a report released after the results. “We are particularly encouraged by strong financial services growth,” wrote Baird analysts, who have an “outperform” rating on the stock.

Geographically, while North America revenue grew, Europe was a drag owing to significant currency issues and economic sluggishness. The firm’s North America revenue, comprising nearly 80% of the total, grew 5.5% sequentially. Excluding the UK, Europe, at 5.6% of the pie, saw a 3.8% decline in revenue.

The lacklustre economic environment will continue to limit growth in continental Europe, Cognizant’s Coburn said on the conference call.

The company added 4,700 employees in the June quarter.

Cognizant’s GAAP operating margin was at 18.5% for the quarter based on US accounting rules. Non-GAAP operating margin, excluding a stock-based compensation expense of $26.3 million, was 20%, within its expected range.

The company has a stated strategy of managing its margins in the 19-20% range, preferring to reinvest anything in excess of this into growth.

Despite its headquarters in the US, Cognizant traces its origins to Chennai with a local venture of American research group Dun and Bradstreet Corp., and most of its nearly 145,000 employees are based in India.

anupama.c@livemint.com

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