Cognizant posts strong Q1; marginally raises FY guidance

BENGALURU: Cognizant Technology Solutions, the US-headquartered software outsourcer that has most of its operations and employees based out of India, on Monday posted solid quarterly results, in stark contrast to the disappointing results its top Indian rivals have reported over the past few weeks.

In its first quarter ended on March 31, Cognizant posted a 9.7% increase in net profit and 20% expansion in revenue. The robust performance was driven by higher spending from top clients in the US such as JP Morgan Chase, as well as strong revenue growth in the healthcare segment.

Cognizant's shares ended higher, up 6.15 per cent at $62.78 on Nasdaq.

"We had another great quarter and a solid start to 2015. Our sequential growth was well ahead of our previous guidance and was driven by strong organic growth in our core business coupled with solid inline performance in the TriZetto business," said Cognizant CEO Francisco D'Souza in a post-earnings conference call. D'Souza also added that a strong performance from digital was also in turn driving business in traditional outsourcing services, with an increasing number of clients now starting to ask for end-t-o-end solutions from vendors like Cognizant.

The company marginally raised its revenue growth forecast for 2015, to 19.3% in constant currency terms from 19% given in February, and predicted a 3.4% sequential increase in April-June revenue.

Cognizant's guidance is way ahead of Nasscom's revenue guidance of 12-14% for software export revenues this financial year and also peers such as Infosys which has guided to 10-12% revenue growth in constant currency terms.

"This strong show (hopefully) allays concerns on the state of demand that formed in the wake of a poor earnings season from peers," JPMorgan analysts Viju George, Amit Sharma and Tien-tsin Huang wrote in a post-earnings note to clients. Investors were concerned about the demand situation in the outsourcing sector after India's top software exporters, including Tata Consultancy Services and Infosys, posted their worst January-March results since 2010, hurt by currency volatility and weak discretionary spending by clients. Some analysts had warned about these factors continuing to drag their performance in the coming quarters. Teaneck, New Jersey-based Cognizant, which is benchmarked against Indian software companies since most of its revenue comes from work done out of India, doesn't expect any major hindrances. In fact, it is expecting some tailwinds. During the quarter, Cognizant added seven strategic customers, or clients that have the potential to generate at least $5 million to $50 million or more in annual revenue, bringing the total number of its strategic clients to 278, CFO Karen McLoughlin said in a post-earnings conference call.

Annualised attrition during the quarter stood at 14% and it added about 6200 employees during the period, taking its total headcount to 217,700 employees worldwide. "Cognizant's performance is very reflective of the targeted investments the company has been making over a period of time, especially in digital," said Sandra Notardonato, vice-president and research analyst at Gartner. "For them, the fact that they have managed to attract discretionary spending from top clients has been a key differentiator -- they've captured more discretionary spending than peers." Over the past five years, Cognizant, along with TCS, has set the standards for the sector, grabbing market share away from former bellwether Infosys and Wipro, which faced a decline in their fortunes during the same period and prompted massive organisational overhauls at both Bengaluru-based firms.