Cognizant Tops Market Expectations; Investors Want More

03 November, 2011

US-based Cognizant Technology Solutions Corp forecast financial results ahead of Wall Street targets but failed to satisfy growth-hungry investors accustomed to seeing the company outperform peers in India’s showcase software and services sector.

Cognizant has topped market expectations for over two years and continued its run with an 11 per cent jump in third-quarter profit driven by growth across all its business units.

Its fourth quarter earnings-per-share outlook was 7 cents higher analysts’ predictions — but none of this impressed investors, who sent the stock down as much as 4 per cent on Wednesday.

“Cognizant kind of gave a muted guidance for the next quarter. I was expecting more from Cognizant,” said Swami Shanmugasundaram, an analyst with Morningstar.

Discretionary development spending by clients has been spurring growth at Cognizant, while many of its biggest rivals in India’s IT sector have raised concerns over economic uncertainties.

Last month, India’s top software exporter Tata Consultancy Services posted a slightly lower-than-expected quarterly net profit and flagged concerns over its ability to hike prices due to the global economic uncertainty.

Infosys, India’s No.2 software services exporter, posted a 9.7-per cent rise in quarterly profit and cut its sales outlook by less than expected, while Wipro trumped estimates with its second-quarter profit.

Muted Growth?

Cognizant projected fourth-quarter revenue of at least $1.66 billion, above analysts’ forecasts for $1.65 billion, according to Thomson Reuters I/B/E/S.

The revenue outlook tranlates to at least a 27 per cent jump from last year and a 3.7 per cent rise from July-September.

BB&T Capital Markets analyst George Price said Cognizant’s stock has the highest valuation in its group, with higher expectations than just 3-4 per cent sequential growth.

Will Cognizant be able to maintain their pace of growth into 2012?

“We’re engaging with clients as they go through their annual budgeting cycles,” Cognizant Chief Executive Francisco D’Souza said.

“While it’s still early in that process our view is that clients’ 2012 and IT and operations budget will remain somewhat flat with perhaps a slight upward bias.”

Cognizant has traditionally worked with lower margins than its rivals Infosys, TCS and Wipro to gain market share.

For the fourth quarter, Cognizant targets adjusted operating margin 19-20 percent range, lower than its peers’ margins in the high twenties.

“Their low margin strategy has worked for them,” Kaufman Bros analyst Sachin Jain said.

“That’s the reason even during the economic downturn in 2008-2009 they were ahead of peers in investing and so when the markets came back they were in better position to capitalize on it.”

Cognizant added 10,000 employees during the quarter and had a staff of 1,22,000 at the end of September.

The company’s July-September profit rose to $227.1 million, or 73 cents a share, from $203.7 million, or 66 cents per share, a year ago. Excluding items, it earned 80 cents a share, while revenue rose 31.6 per cent to $1.60 billion.

Analysts, on average, had expected earnings of 71 cents a share, on revenue of $1.58 billion.

Shares of the company were trading down 1 per cent at $70.19 in Wednesday afternoon trading on Nasdaq.

 


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Cognizant Tops Market Expectations; Investors Want More

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