Cognizant cuts revenue guidance for 2019 after underperformance in Q1

Company evaluates realignment strategies including additional employee separation programme

Teaneck-based IT major Cognizant has cut down its revenue guidance for the year 2019 to almost half after the below expected performance in the first quarter and expectations of slower growth in financial services and healthcare during the year. It has registered a decline of 15 per cent in its net income to $441 million during the first quarter of the year ended March 31, 2019, compared to $520 million during same period last year.

The full year revenue growth guidance for 2019, which was set at 7-9 per cent in constant currency during the beginning of the year, has now been revised to the range of 3.6-5.1 per cent, and guidance for the second quarter of the year at 3.9-4.9 per cent range.

"Our revised full-year outlook reflects the first-quarter underperformance and expecations of slower growth in Financial Services and Healthcare for remainder of 2019," said Karen McLoughlin, Chief Financial Officer. "Over the coming quarters we intend to bring our cost structure closer in line with our revised revenue expectations while continuing to invest in growth, talent, and our portfolio of innovative solutions to speed our pivot to digital. Our strong balance sheet enables us to maintain financial flexibility while returning capital to shareholders."

The revenue for the quarter saw a growth of 5.06 per cent to $4.1 billion compared to $3.9 billion during the corresponding period last year, with 6.8 per cent growth in constant currency as against the guidance of 7.5-8.5 per cent growth in this parameter. Revenue from financial services, which accounts to 34.9 per cent of the total revenue, declined by 1.7 per cent while other sectors saw a growth.

Based on current foreign exchange rates, the company expect second quarter and full year 2019 revenue growth to be negatively impacted by 130 basis points and 90 basis points, respectively, translating to growth of 2.6-3.6 per cent ($4.11-$4.15 billion) and 2.7-4.2 per cent ($16.55-$16.80 billion).

"Cognizant's growth and performance in the quarter leaves room for improvement," said Brian Humphries, chief executive officer. "While I am encouraged by our client centricity, our employees' winning spirit and our innovation, we are not yet delivering against the market opportunity. We are committed to strengthening our execution to invest in growth and drive shareholder value," added the official.

During the first quarter, financial services segment revenue was primarily impacted by continued softness in its business with a few of largest banking clients and several insurance and North American regional banking clients. During the quarter the company made progress in furthering its platforms and solutions strategy for banking clients through the acquisition of MeritSoft.

Revenue from healthcare, which accounts to 28.3 per cent of its overall revenue, grew 3.9 per cent year-over-year and 4.6 per cent in constant currency. Segment revenue was negatively impacted by continued industry consolidation as well as the accelerated movement of work to a captive at a large North American client. Life Sciences delivered above company average growth, driven by large enterprise deals and momentum with our industry specific platforms.

Products and Resources (22.2 per cent of overall revenues) revenue grew 11.3 per cent year-over-year and 13.8 per cent in constant currency, driven by double digit growth across key industries including retail and consumer goods, travel and hospitality, and manufacturing, logistics, energy and utilities. Results reflect continued strength in cloud and digital engineering services and increased demand for interactive, IoT and analytics solutions across clients, said the company.

Communications, Media and Technology (14.5 per cent of revenues) revenue grew 16.9 per cent year-over-year and 19.6 per cent in constant currency, led by growth among technology clients. Within media and communications, growth was driven primarily by digital services for media and entertainment clients to accelerate their transformation to modern media companies, partially offset by slower growth with communications clients involved in industry consolidation. Technology delivered double digit growth was driven primarily by its digital content solutions.

As part of its realignment program, management is currently evaluating various strategies, including additional employee separation programmes, said the company. The timing, nature and magnitude of these initiatives are not finalised at this time. At the end of March 31, 2019, the company has 2,85,800 employees, which has seen an increase of 9.33 per cent from 2,61,400 employees during same time previous year.

During the three months ended March 31, 2019, the company incurred $2 million in costs associated with the CEO transition and the departure of our President. It is expecting to incur approximately $23 million in additional compensation and benefits costs associated with the CEO transition and the departure of its President during the second quarter of 2019. 

The company expects its contribution to employees to go up in future, owing to a Supreme Court of India order. As per the apex court's order on February 28, 2019, on the defined contribution obligations of employees ane employers, which stipulated companies to cover additional portions of the employee's income, would requiere the company in future to increase its contributions for employees. It has already accrued $117 million with respect to prior periods, assuming retroactive applicaiton of the Supreme Court ruling.