Cognizant revenue rises 22.6pc in 2Q

Cognizant Technology Solutions Corp., the US company that has most of its employees in India, topped analysts' quarterly revenue estimates and raised its annual sales forecast for the second time in 2015, outperforming its Indian rivals.

The Teaneck, New Jersey-based company said revenue in the three months ended 30 June rose 22.6% from a year earlier and 6% from the preceding March quarter to $3.09 billion, exceeding its earlier forecast of growing at 3.4%. Cognizant reported a 6.2% sequential growth in revenue during the January-March period.

Cognizant now expects full-year revenue to grow 20.1% to $12.33 billion, compared with its earlier forecast of $12.24 billion. It expects $3.14 billion in revenue for the third quarter ended 30 September. Its performance was lifted largely on account of higher spending by clients among large commercial banks in North America. Analysts polled by Bloomberg expected Cognizant to report June quarter revenue of $3.03 billion. Net income rose to $420.1 million in the quarter ended 30 June from $371.9 million in the year-ago period. Cognizant follows the calendar year as its fiscal year, unlike some local information technology firms, which follow an April-March fiscal year.

"This was a tremendous quarter," chief executive officer Francisco D'Souza said in a conference call with analysts after the company reported its results. "Our second quarter sequential revenue increase in dollar terms was the strongest in our history. We're seeing robust demand for our services, across geographies."

At the core of Cognizant's strong performance was a 7.7% growth in the financial services space, driven largely by higher technology spending from large commercial banks and clients in the insurance sector. The US, which accounts for 78.6% of Cognizant's revenue, grew at 5.8%. Europe ex-UK, which accounts for about 6.6% of revenue, grew at 7.3%.

"Strong execution and the approach Cognizant has taken for integrating its consulting practice along with itself helps at a time when most companies are looking for improving the way they have done business. This enables (Cognizant) to have a more pro-active approach in opening new business streams when engaging with clients and at the same generate more business from existing clients," said a Singapore-based analyst at a foreign brokerage. Cognizant's approach of having an integrated consulting practice is unlike the model followed by Indian IT majors, which have a separate consulting practice.

Over the past 24 quarters until the end of 31 March, Cognizant's sequential revenue growth in constant currency terms has grown faster than its Indian rivals, including Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd, by an average margin of 2.6%, estimates Jason Kupferberg, an analyst at brokerage Jefferies.

Cognizant's performance during the quarter was again ahead of the 3.5% sequential growth in revenues reported by larger rival TCS and 4.5% growth reported by Infosys. Wipro during the period saw its revenue growing 1.1% while HCL Technologies Ltd grew 3.2% during the April-June period.

This, despite Cognizant's $2.7 billion seven-year agreement with health insurer Health Net Inc.-which would have resulted in the IT firm earning $100 million in the second half of this fiscal and $200 million in 2016-getting cancelled after Health Net was bought by rival Centene Corp. For this reason, the healthcare segment, which brings in close to a third of Cognizant's business, logged 2.1% growth over the preceding quarter compared with a sequential growth of 13.8% in the JanuaryMarch period.

Some analysts, including James Friedman of Susquehanna International Group, said that Cognizant's focus on offering solutions to fewer industries and geographies helps it execute better than its rivals. Cognizant generates about 70% of its revenue from banking and financial and healthcare sectors and generates 95% of its business from the US and Europe.

For some of the Indian IT firms, client-specific challenges hurt growth during the April-June period. Mumbai-based TCS continues to struggle to turn around Diligenta, its UK-based pension and insurance outsourcing arm, while underperformance in emerging countries, including Japan, shaved off $20 million from the company's revenue. Wipro continues to report dismal numbers as client spending in the energy segment-which brings close to 17% of its revenue-remains weak.

One wrinkle in a good set of numbers was that Cognizant's attrition rate during the period rose to 19% as against 16.9% in the year-ago period.