Company-specific troubles at IT services firm Cognizant Technology Solutions Corp. may be helping the competition gain market share, but the weak demand trends reflected in its key business verticals also point to an industry-wide problem.
Cognizant pruned the higher end of its 2019 revenue growth guidance in constant currency terms from 3.6-5.1% in May to 3.9-4.9% now. The revenue growth guidance is largely unchanged at the midpoint of the band.
The guidance implies an unexciting sequential revenue growth of 1.9% in the September quarter and flat revenues in the December 2019 quarter. “The read through for other IT companies is limited noting company-specific challenges. The only important takeaway is that weakness in financial services demand is unmistakable," analysts at Kotak Institutional Equities said in a note to clients.
Revenue for the June quarter rose 4.7% year-on-year, but only 3% after excluding the impact of acquisitions. However, key business verticals such as financial services and healthcare, where Indian IT firms have a strong presence, lagged. Financial services revenue grew just 1.7% in constant currency terms year-on-year. Revenue from the healthcare division declined 1.5% from the year earlier.
Weakness in key business verticals’ revenue has been attributed to issues specific to Cognizant. Insourcing by a large client, and merger and acquisition activity have hurt the healthcare division. Spending in financial services is constrained by growth uncertainty at a few clients’ end.
Even so, the continuing pricing pressure in legacy contracts and weak demand trends in financial services do not bode well for the Indian IT sector.
Regional banks are seeing growth pressures because of consolidation. This is making them cautious about IT spends. “We do highlight that cautious outlook on spending in financial services, especially by clients in the capital markets segment and European banks will impact growth," said the note by Kotak analysts.
The churn at the top is not helping Cognizant either. The resultant loss of focus may be helping competition gain market share, said Nirmal Bang Institutional Research. However, things should get better as the new CEO begins to set the house in order.
“Key takeaways for our coverage universe from Cognizant Q2 include (1) Continued weakness in Banks in 2H2019 (2) Likely market share gains by peers as Cognizant puts its house in order, especially with respect to its cost structure and its pivot to Digital (3) Pricing pressure in renewals continues unabated and is probably rising as customers eke out gains to reinvest in digital initiatives (4) Transformation of Cognizant seems to be ahead of CEO’s own plans and this could mean greater competition beyond 12 months for the industry," Nirmal Bang said in a note.