Tuesday, November 5, 2013

Cognizant again raises full-year sales forecast

Bangalore: Cognizant Technology Solutions Corp. raised its full-year sales forecast for the second time this year and said it expected clients to boost discretionary spending, reaffirming investors' belief of a revival in the fortunes of India's $108-billion information technology sector.

During the quarter ended 30 September, Cognizant displaced India's top software exporter Tata Consultancy Services Ltd (TCS) in terms of revenue from North America—the biggest market for India's IT industry. Teaneck, New Jersey-based Cognizant's revenue from the region grew 18.5% to $1.783 billion during the quarter, more than the $1.775 billion reported by TCS.

Cognizant, which has most of its 166,400 employees in India, now expects annual revenue to grow 20.3% to $8.84 billion, more than its August forecast of $8.74 billion. The pace of growth is also faster than industry lobby Nasscom's 12-14% growth forecast for Indian software exports in 2013-14.

Chief executive Francisco D'Souza said that 2014 could be even stronger for the company as customers have indicated that they will increase spending on technology .

"The discretionary demand appears to be sustainable going forward," D'Souza told investors in a conference call. "The early indications from conversations we've had with clients around 2014 budgets appear to indicate that budgets will have a modest upward bias going into next year. Overall, the demand environment is stable, and stronger than it was a couple of quarters ago."

Gordon Coburn, president of Cognizant, said the company expects $500 million of revenue from newer areas of technology such as social networking, mobility, analytics and cloud computing this year.

The company also cautioned of a weaker December quarter, which is traditionally weaker for IT firms because of furloughs at client sites.

Cognizant's full-year forecast implies a sequential revenue growth of about 2% and incremental revenue—a measure of market share growth that has evolved as the new benchmark for the Indian IT sector—of $46.6 million, compared with September quarter's $144.7 million.

Cognizant said that it had not been approached by the US government, which is currently conducting investigations into visa-related practices of IT firms, following last week's controversy surrounding Infosys Ltd—the Bangalore-based company was forced to cough up $34 million after being found guilty of failing to maintain accurate immigration records.

"We have an extraordinarily robust process to maintain the company's integrity," said Coburn. "We have multiple layers and checks in place to make sure we're following the letter and the spirit of the law."

For the September quarter, Cognizant said net profit rose 15.42% to $319.6 million from $276.9 million a year ago. Revenue jumped 22% to $2.31 billion in a traditionally strong September quarter where clients finalize more business before the end of the year.

Analysts on average had estimated a net profit of $308.4 million on revenue of $2.26 billion, according to Thomson Reuters. In August, Cognizant had forecast revenue of $2.25 billion for the September quarter.

Cognizant's operating margin for the quarter stood at 20.4% and its total cash and short-term investments increased by $460 million to about $3.4 billion.

Cognizant, which had raised its full-year revenue forecast in August as well, grew sales faster than all top Indian software exporters such as TCS, Infosys, and HCL Technologies Ltd, though these firms too recorded strong double-digit year-on-year growth rates for the September quarter.

Cognizant's 6.7% sequential revenue growth in the September quarter is also the highest among the top Indian software firms, and ahead of its forecast of 4.1% growth.

"We think Q3 results exceeded relatively high expectations—we expect the stock to be up 2-3% this morning," US-based Baird Equity Research said in a post-earnings note.

"Our sense is that CTSH (Cognizant) is generally performing fine across its three major verticals (banking, healthcare and retail) and its three focus Horizons of business. Our analysis suggests the payer side of healthcare may have seen some acceleration in Q3 as a waterfall from consulting engagements they won earlier in the year," said technology analyst James E. Friedman at Susquehanna Financial Group Llp in a 4 November note.

Cognizant, which reported $2 billion in quarterly revenue for the first time in March, has not missed its quarterly forecast in the last decade, unlike Indian peers such as Infosys that have seen a string of misses.

Cognizant's stellar run can be traced back to the time of the 2008 global financial meltdown when it invested aggressively in sales and marketing despite the tough macroeconomic conditions—unlike rivals such as Infosys that clamped down on spending.

The investments paid off and helped Cognizant attract large global corporations such as Citigroup Inc., JPMorgan Chase & Co. and eBay Inc. as customers and since then the company has disrupted the pecking order in India's $108-billion IT industry, overtaking Infosys and Wipro Ltd.

Unlike Infosys, which has always been protective of its high margins, Cognizant has always deployed a strategy of reinvesting margins into bolstering sales efforts and newer areas of technologies and been satisfied in maintaining operating margins at 19-20%.

Shares of Cognizant, which is the only consulting and IT services company to give both full-year and quarterly forecasts apart from Accenture Plc., were trading at $88.46 on Nasdaq on Tuesday, having risen about 17% so far this year.
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