I-T major Cognizant targets FY12 revenue at USD 7.53 bn

Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

NASDAQ listed Cognizant delivered a strong fourth quarter performance, for the quarter ended December 31, 2011. The company reported a growth of 16.4% in its net profit at USD 240.1 million, up 5.7%.

Revenues increased 4% quarter-on-quarter to USD 1.66 billion while profits rose 6% to just over USD 240 million.

After a great finish to 2011, Francisco D'souza, the president and CEO of Cognizant tells CNBC-TV18 that the company is targeting 23% revenue growth this year. Giving its outlook for the first quarter of 2012, the company said it expects its first quarter revenue to be at least USD 1.70 billion, up 2.2%.

D'souza is positive about the business. "Clients are increasingly turning to Cognizant as one platform on which they can accomplish their objectives."

The I-T major which is witnessing discretionary spending delays in Europe did not expect to see the region rebound this fiscal but expects flat to marginally higher spending from the US.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: You have given us a guidance of 23% growth in revenue, that's the highest amongst your peer group. What are you basing your confidence on?

A: We finished a wonderful 2011 north of 33% YoY growth and we feel good as we look forward to 2012 with our guidance of at least 23% revenue growth. We really think that this is driven by the fact that more than ever our clients, who on one hand are facing significant cost pressures from economic volatility around the world and on the other side are looking to innovate and to drive topline revenue growth, are increasingly seeing Cognizant as one platform on which they can accomplish those objectives and so are increasingly turning to us. So, we feel very good about the business.

Q: Give us a sense about I-T budgets because we are hearing different things from different companies here in India. Infosys has a different point of view. TCS says that they believe their clients will see IT budgets moving up just a tad. What's your own sense about where IT budgets are going to be headed?

A: We think that I-T budgets will be flat to slightly up, but what's really important here is not the magnitude of I-T budgets as much as the shift that's going on within I-T and as operations budgets move towards the global delivery model. This is a shift that we have seen happening over several years now and we think that the current economic environment is only accelerating that shift.

More and more clients are looking at their budgets and saying if budgets are flat or modestly up, how do I get more done with the same budget. The way to do that is increasingly turn to spending more of that budget with the global delivery model with services like ours. We think that more than the actual magnitude of the I-T budget itself is the fact that we have this tremendous share shift going on to the global delivery model.

Q: What's the outlook as far as pricing and margins are concerned? Do you anticipate pressure coming in on both these fronts?

A: Pricing for Q4 of 2011 was flat compared to the prior quarter. As we look to 2012, we see pricing having a slight upward bias. Given the economic volatility we don't think that that will be. We will have a significant pricing increase in 2012, but we do see a slight upward bias in pricing. We are very comfortable with our ability to deliver non-GAAP operating margins in our stated range of 19-20% as we look to 2012.

Q: You have seen a very healthy growth of about 6% in the US and as far as your European business is concerned, it is down 5.6% sequentially. What's the outlook for both the US and Europe? How much more pain do you anticipate coming in from Europe?

A: We are very pleased with our performance in the fourth quarter in North America, growing 6%. We see encouraging signs in the economy in North America and so our outlook for 2012 is for continued strength in North America. We expect that North America across all of the industries we serve will continue to do nicely.

In Europe we saw weakness. Europe for us declined about 5.6% on a sequential basis in Q4. In the short-term, that volatility will continue, but we think that in the longer-term there is a share shift going on in Europe as our European customers shift more of their budgets from discretionary spending more towards our traditional outsourcing and cost savings types of services.

So in the longer-term, we are very optimistic about our prospects in Europe. We have not baked upside from Europe into any of our 2012 expectations at this point. We want to maintain a cautious posture in Europe and maintain modest expectations, but in the long run we expect Europe to be a solid market for us as well.

Q: You are sitting with cash of about USD 2.4 billion at this point in time. You are building a war-chest. Are you going shopping any time soon? Anything on the radar?

A: We have had a history of doing small tuck-under acquisitions focused on expanding our capabilities in particular areas whether those are geographic markets, expanding or deepening our penetration in certain key industries or accelerating our growth in new service offerings. We will continue with that strategy. We have a very active pipeline of acquisitions at any point in time that we are looking at. As we get bigger as a company, our definition of what constitutes tuck-under acquisition will also increase correspondingly.

So I expect that we will continue to do acquisitions as we did in 2011 with Zaffera for example and CoreLogic's India operations. We will continue to do those kinds of acquisitions as we go forward into 2012 and beyond. We have been very happy with our performance of our acquisition programme and we will continue to do those.

Q: Any specific verticals that you will be looking for in terms of plugging gaps in your portfolio and how broadly would your tuck under definition now change?

A: At this point, given our size, we would look to acquisitions that are sort of in the range of USD 50-200 million with sort of USD 50-70 million being our sweet spot, that is of the target revenue.

As we look at verticals, we want to deepen our penetration in all of the industries that we serve. So we are looking actively across our healthcare verticals, banking and financial services verticals and also retail manufacturing and logistics clients. We see tremendous continued opportunity in all these verticals where we have strong market positions and we will continue to invest to make sure that we are very competitive in these verticals.

Q: You have undergone a restructuring and a management change. Can you take us through the rationale and the reasons behind that?

A: We are very excited about the expansion that we announced this morning of our executive team. This is a move that we have made to take a group of long standing Cognizant veterans, broaden out our executive team by promoting a group of people who had a long track record with the company and who have played significant roles in building this company over many years.

Underlying this expansion of our management team is a belief that in order for us to continue to be successful, we mustn't fall into the trap of focusing solely on executing against the opportunity that's immediately available to us in the market place, but that we must pay equal attention to building services and capabilities for long term growth.

So the underlying management expansion that we announced this morning is the idea that a group of our most senior leaders at Cognizant - Gordon Coburn, Raj Mehta and Chandra Sekaran - will focus on running the core business that we have today and delivering industry leading growth in our core business. I will focus my attention on building out new set of services that will drive Cognizant's growth in the long term.