Cognizant withdraws FY20 revenue growth guidance amid coronavirus lockdown

Firm builds up war chest by drawing down $1.7 bn worth of revolving credit

Cognizant became the first IT services company to withdraw its annual revenue guidance for 2020 in light of the coronavirus disease (Covid-19)-induced global crisis and the resultant uncertainty in business outlook.
 

Though Accenture slashed its revenue guidance for the year, Cognizant’s action is an indicator of the severity of the crisis. Apart from withdrawing the guidance, the IT firm said it was also building up a war chest by increasing its cash and investment balance to tide over potential liquidity issues.
 

“The long-term fundamentals of our business remain strong. However, given the unprecedented nature of this crisis, uncertainty around its duration and its impact on our ability to forecast performance, the company is withdrawing its 2020 guidance that was provided on February 5,” said Brian Humphries, chief executive officer of Cognizant.
 

In February, Cognizant guided for a top line growth of 2-4 per cent in constant currency terms after posting better-than-expected performance in the fourth quarter of calendar year 2019.
 

The IT services firm said that though it was on track to exceed its first quarter guidance based on the performance of the first two months, the pandemic derailed its plans in March because of delays in project fulfillment, as the company moved to a work-from-home model apart from dip in demand, particularly in the travel and hospitality segment.
 

“Entering the second quarter (April-June), Cognizant expects the pandemic to further reduce client demand as its societal and economic impact causes broader disruptions across industries,” it said.

Despite the disruption, the company expects its first quarter revenue to be in the range of $4.22-4.23 billion, a rise of 3.4-3.6 per cent in constant currency terms over the corresponding period last year. Top line growth in the first quarter is likely to be in line with its projection of 2-8-3.8 per cent.

The IT firm, which has over 60 per cent of its employees operating out of India, has also taken various measures to improve financial flexibility. It has drawn down $1.74 billion of its revolving credit facility, taking its cash and investment balance to around $4.7 billion or a net cash of $2.2 billion. It also said that it has no significant debt maturities till 2023.
 

“We are confident that the combination of our strong balance sheet, and our robust operating and cash generative business model, will enable us to weather this disruption,” said Karen McLoughlin, chief financial officer of the firm. To save cash reserve, the firm has also not initiated any share buyback since March 31, the company said.
 

Late last month, Cognizant announced that it would pay employees at the associate level or below an additional 25 per cent of their base salary in April in recognition of their “extraordinary continuity-of-service efforts” amid the outbreak.