Cognizant raises forecast as discretionary spending returns

Cognizant Technology Solutions Corp reported better-than-expected quarterly results and raised its forecast for the year as clients in North America invest more in IT services and software, encouraged by a steady economic recovery.

Companies cut back on discretionary IT spending, delayed deals and signed fewer large contracts for most of last year.

But strong quarterly results from Cognizant and its Indian rivals, Tata Consultancy Services Ltd, Infosys Ltd and Wipro Ltd, suggest that corporate technology spending is back.

"It feels like the good old days," Citi Research analyst Ashwin Shirvaikar wrote in a note.

Cognizant said revenue from North America rose 17 per cent to $1.68 billion in the second quarter as customers increased budgets and cut costs in other parts of their businesses.

Revenue from its much smaller continental European business soared 54 per cent to $153.4 million.

Instability in Europe has forced companies in the region to outsource and cut costs. But Cognizant, which operates on lower margins than its rivals, has been able to win a larger share of the business.

"We saw it (discretionary spending) start at the end of Q1 and clearly continued into Q2," Cognizant President Gordon Coburn said on a conference call with analysts.

"And based on what customers are telling us, the pipeline deals that are happening, we think that continues for the remainder of the year."

Cognizant won several large deals in the second quarter, including an IT infrastructure outsourcing contract with Norway's consumer brands company Orkla.

The company defines large deals as those worth tens of million of dollars in total contract value, McLoughlin said.

Tata Consultancy Services, Infosys and Wipro reported strong results and gave better-than-expected forecasts last month.

Second-quarter beat

Teaneck, New Jersey-based Cognizant, which has most of its employees in India, said it expects 2013 earnings of at least $3.96 per share on revenue growth of at least 19 per cent to $8.74 billion.

It had previously forecast earnings of at least $3.95 per share on revenue growth of at least 17 per cent to $8.60 billion.

The National Association of Software and Services Companies, the $108 billion Indian IT sector's industry lobby group, has forecast exports growth of about 12-14 per cent for this financial year.

Cognizant's net income rose to $300.4 million, or 99 cents per share, in the second quarter from $251.9 million, or 82 cents per share, a year earlier.

Excluding items, earnings were $1.07 per share.

Revenue rose 20.4 per cent to $2.16 billion.

Analysts on average had expected earnings of 97 cents per share on revenue of $2.13 billion, according to Thomson Reuters I/B/E/S.

Cognizant shares rose 2.6 per cent to $75.29 in late morning trade on the Nasdaq on Tuesday. 

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