Cognizant misses the mark in Q1, slashes full year growth target
3 min read.Updated: 03 May 2019, 11:25 PM ISTVarun Sood
This year’s growth will be the slowest at Cognizant since the company was founded in 1994
Cognizant said revenue in the three months ended 31 March declined 0.46% from the preceding quarter
Cognizant Technology Solutions Corp. reported dismal first-quarter earnings with both revenue and profitability missing analysts’ estimates, prompting the Nasdaq-listed company to slash its full-year revenue growth target to 5.1% in constant currency terms from an earlier guidance of 9%.
This will be the slowest growth at Cognizant, which follows the calendar year, since its founding in 1994, underscoring the challenges ahead for chief executive officer Brian Humphries, who took over on 1 April from Francisco D’Souza.
Under D’Souza’s watch, revenue of the Teaneck, New Jersey-based company surged more than 11-fold to $16.1 billion in his 12 years. Though based in the US, Cognizant has most of its employees working out of India.
The company said revenue in the three months ended 31 March fell 0.46% from the preceding quarter, even though it improved 5.06% from the year-ago period to $4.11 billion.
Net profit declined 32%, sequentially, and 15.2% from the year-ago period to $441 million, primarily because Cognizant made a provision of $117 million to Indian authorities following a Supreme Court ruling earlier this year.
Consequently, the company’s operating margin declined from 16.8% at the end of the December quarter to 13.1% at the end of the March quarter.
Analysts surveyed by Bloomberg had expected Cognizant to report revenue of $4.16 billion and profit of $595.27 million.
The information technology (IT) firm expects year-on-year revenue growth of 3.9-4.9% for the second quarter in constant currency terms.
Over the last three years, Cognizant’s growth has slipped with the firm reporting a third straight year of single-digit growth—it grew 8.9% to end with $16.12 billion in revenue last year. During this time, rivals Accenture Plc and Tata Consultancy Services Ltd did better. Accenture reported 13.5% growth to end with $39.57 billion in revenue, while TCS reported 9.6% growth to end with $20.91 billion last year.
“We had a disappointing first performance," Humphries said in a post-earnings call with analysts. “First, notwithstanding a disappointing first quarter, the foundation and capabilities of the business are solid and the market opportunity is robust. Second, we know we can and must do better. We are committed to delivering consistent financial performance that aligns with the expectations that we set and communicate. And third, we also recognize that the first quarter revenue weakness follows a loss of top line momentum over the past 18-24 months."
At the heart of Cognizant’s soft performance was the change in the company’s strategy of prioritizing profitability over revenue growth after activist investor Elliott Management Corp. pushed the management to agree to its terms in November 2016. Although Cognizant dumped this approach late last year, analysts maintain that its approach of focusing on improving profitability has hurt the firm.
During the January-March period, Cognizant’s largest revenue segment—financial services, which accounts for 34.9% of the firm’s total revenue—saw a 1% decline in revenue growth over the preceding three months and 1.7% fall over the year-ago period.
The IT outsourcing industry is facing threats from newer technologies such as automation software, cloud computing and artificial intelligence-powered platforms, which are redefining—and making redundant—the traditional approach of vendors deploying armies of engineers to manage the information technology infrastructure work for companies.
Only a few companies, such as Accenture, appear to have steered through this disruptive period with any degree of success.
Accenture added $4.72 billion in incremental revenue last year, which is more than the $4.059 billion in new revenue added by TCS, Cognizant, Infosys and Wipro, put together. TCS added $1.824 billion, while Cognizant, Infosys and Wipro did $1.315 billion, $860 million and $60 million in new business, respectively.
Cognizant follows a January-December financial year, Accenture follows a September-August financial year, while Indian IT firms, including TCS, follow an April-March financial year.
“We think Accenture has been helped by the slow pace of competitive moves," Keith Bachman, analyst with BMO Capital Markets, wrote in a note dated 30 April. “We believe that Accenture’s key philosophical objective is to identity how to bring more value to enterprise clients and thus generate more revenue. Accenture starts with the customer and works backwards in targeting new opportunities, and filling in the gaps largely through M&A (mergers and acquisitions)."
Cognizant declared its earnings after the markets closed for trading in New York on Thursday. During trading, Cognizant shares ended 7.72% down at $66.61 on the Nasdaq.