Cognizant Technologies’ third quarter numbers have beaten the Street expectation, but many were disappointed with the firm’s fourth quarter expectation. The growth outlook has gone up from 26 per cent at the beginning of the year to 33 per cent for the fourth quarter (earlier 32 per cent). On a sequential basis the company has guided for 3.7 per cent growth. The disappointment was evident on the firm’s stock price.
Cognizant’s share price on Nasdaq at yesterday’s close at $69.92 was down 1.41 per cent from the previous close. During intra-day trading the share price hit a low of 67.77 per share, down 4.4 per cent from the previous close.
An Edelweiss report said that the company’s guidance was disappointing. “The guidance indicates 2.8 per cent Q-o-Q growth in organic revenues which is the lowest Q-o-Q growth in the last seven quarters. This despite a bullish commentary,” said Research Analyst Ganesh Duvvuri, Kunak Sangoi and Omkar Hadkar of Edelweiss Securities.
“Implied revenue growth guidance for 4Q is for 3.7 per cent q-q (vs Infosys’ guidance of 3.2-5.4 per cent and Wipro’s guidance of 2-4 per cent q-q). In our view this indicates no change in expectations for 4Q vs earlier. Cognizant’s 3Q results corroborate what has been seen at other Tier 1 IT players: demand continues to be resilient and FY11 IT spending is on track,” said Nomura Equity Research’s Ashwin Shah and Pappu Pappan in their note.
The company however, does not read much into either the tepid rise in guidance or the growing uncertainty in its major markets. “We should not look at any quarter in isolation. We have had three fantastic quarters of growth. With a back to back high growth, you might have one quarter a bit slow. But if you look at our full year guidance it is way ahead of what our peers have guided for. We are much more stronger as a company and reached a maturity that is making us more confident,” said R Chandrasekaran, President and Managing Director, Global Delivery, Cognizant.
Indian analyst tracking the firm, while maintained that while Cognizant’s revenue growth for the quarter has been better than Indian peers --Tata Consultancy Services, Infosys and Wipro--but in terms of management comments and outlook they are similar to their peers in India.
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“I think going ahead the slower pace of growth of Cognizant will mean that the premium difference it received vis-a-vis TCS and Infosys will shrink. Going ahead we think their revenue growth will be comparable,” said an analyst on condition of anonymity.
Meanwhile, Cognizant’s trail blazing third quarter numbers does seem to have taken it way ahead of other IT peers. The sequential volume growth of 8.5 per cent for Cognizant is way ahead of TCS (6.25 per cent), Infosys (4.5 per cent) and Wipro (6 per cent). Add to this, the Q3 was also one of the quarters when its incremental revenue were over $100 million.
Like Infosys, Cognizant too believes that the slowdown in Europe is an opportunity. “We recently had a customer conference in Europe. Given that these firms are under pressure there is a renewed interest among clients to look at offshore. Moreover, they are also looking at beyond traditional application outsourcing, they are also looking at BPO, Infrastructure outsourcing. So we think Europe despite all its challenges will prove to be a good market for us. We have hence taken all our other services lines,” added Chandrasekaran. During the analyst call the company said that they have seen a push towards offshoring across geographies. The firms offshore-onsite ratio is 79:21.
The biggest positive for the company was a price increase of four to five per cent due to price negotiations it did in 2010. “We think pricing will be flat in 2012 with an upward bias. But it is still too early to comment on that. On budgets we remain positive depending on the demand we are seeing as of now,” said Chandrasekaran.
Analyst believe some of the reasons for Cognizant to have a better results to Indian peers is due to its business models. Such as the focus of the company to keep its margins in the range of 19-20 per cent and re-investing the rest into the business. “The other thing that is working for them is the client centric model. The investments has gone into people, account management and clients. This is what is bearing fruit now. Going ahead capabilities like delivery, offshore presence will become hygiene. What is going to make difference is relationship that vendors share with clients, the ability to take risks and investments in new technologies,” said Vikash Jain, Partner, Everest Group.
Chandrasekaran, while did say that the company has been able to increase its share of revenue from outcome based pricing, but did not share the exact percentage. “It derives 31 per cent revenues from fixed price projects compared to at least 40 per cent for the tier-1 Indian IT companies,” said the Edelweiss report.