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A strong performance by Cognizant in the quarter ended March and a robust forecast allay concern about the demand environment. And, as the nature of demand has seen a change, companies such as Cognizant, which have invested in new technologies by plugging gaps in their service offerings, are starting to reap the benefits.
For the quarter ended March, Cognizant reported 20.2 per cent growth in revenue at $2.91 billion, while raising its full-year revenue growth forecast to 19.3 per cent. On a sequential basis, its revenue grew 6.2 per cent. While much of this was driven by TriZetto, a US-based health care solutions provider it had acquired in September 2014 for $2.7 billion, Cognizant showed all-round growth in almost all counts, even if the revenue generated by TriZetto isn’t factored in.
“Cognizant beat the consensus top line expectation for the third consecutive quarter. The company has guided for second-quarter CY15 and CY15 dollar revenue ahead of the consensus expectations. The management highlighted abatement of the concern highlighted in CY14. Also, the demand remains more broad-based, with no budgetary concern,” Shashi Bhusan, a research analyst with equity analyst firm Prabhudas Lilladher, said in a note. “We see the first-quarter CY15 performance and the CY15 guidance revision as an indicator of a sustained healthy demand environment for the sector.”
The performance of most Indian IT services players in the March quarter was patchy, with shrinking of growth in key sectors, partly due to exposure to sectors such as oil & gas, which are going through a turbulent phase. Currency volatility also added to woes. Experts say while there is no clear indication of slackening of demand, there has been a marked departure in the way global clients address their IT services requirements. For instance, while the demand for digital offerings is expected to rise, ticket sizes are getting smaller, as clients are approaching specialist players for specific requirements.
“Cognizant’s focus on fewer sectors such as financial services, health care and digital and its ability to mine customer accounts fast, especially for digital and business transformation, were the primary drivers of its good performance in the past quarter,” said Pareekh Jain, research director, HfS Research.
Through the past few years, Cognizant has been strengthening its digital offerings with a series of tuck-in acquisitions. Last year, apart from TriZetto, the company acquired Cadient Group, a provider of digital marketing services to the health care sector; and Odecce, which provides online and mobile services to companies in Australia and New Zealand.
“This is a critical juncture for Cognizant, as it looks to leverage the investment made in digital capabilities, industry-specific assets from the Trizetto, Cadient, and itass acquisitions, and other IP into cohesive value proposition, or clients in the “as-a-service economy’,” said Jain of HfS.
“We have grown across all our businesses and the acquisitions have only furthered it. While TriZetto is our largest acquisition ever, smaller ones such as Cadient, Odecce and itass have offered us platforms for digital offerings,” said Rajeev Mehta, chief executive of Cognizant’s IT services business.
While most large Indian IT services players are seen warming up to opportunities in the digital space by organically building capabilities and through acquisitions, it might take some time for them to start seeing revenue flowing in from such offerings.
Cognizant’s sequential revenue growth of 6.2 per cent in the March quarter was the highest among the offshore-centric IT services providers; Infosys reported 2.6 per cent sequential revenue growth (in dollar terms), while for TCS, it was 0.8 per cent. HCL Technologies’ dollar revenue growth in the quarter was flat, while Wipro’s IT services business revenue declined 1.16 per cent on a sequential basis.
