Cognizant beats estimates; ups full year revenue guidance

After TCS, Infosys, Wipro and HCL Tech; IT major Cognizant has kept the cheer. Its Q3 revenues have not only surprised the street but also beaten its own guidance.
 
The company reported Q3 revenues at USD 2.31billion a growth of 6.7 percent sequentially and 21.9 percent compared to the same quarter last year. Last quarter, Cognizant had given a revenue guidance of USD 2.25 billion up 4.1 percent. Owing to the performance of all four IT majors this quarter and the depreciating rupee; foreign brokerages like JP Morgan had expected Cognizant to beat its own guidance and see a revenue growth of 5 percent.

The 6.7 percent not only indicates a positive impact of the rupee but a strengthening in discretionary spending. Net income came in at USD 319.6 million a growth of 6.4 percent versus the previous quarter of this year and 15.4 percent compared to the same quarter last year. GAAP operating margin for the quarter dropped by a mere 7 basis points at 19 percent and non GAAP operating margin came in at 20.4 percent.

The company also reported a steady net headcount addition for the quarter adding 2100 employees versus a hiring of 1600 employees last year. “We delivered yet another quarter of industry-leading growth that was broad-based across our portfolio of industries, services and geographies,” said Francisco D’Souza, Chief Executive Officer. “The sheer velocity of change in the industries we serve is driving the C-suite to challenge the status quo and rethink their business models to be relevant for the future. Our investments across multiple horizons of growth position us well to deliver differentiated value as we partner with clients in this journey.”

Ups Full Year Revenue Guidance by 1.3%
 
The big news though was Cognizant’s upward revision of revenues for the full year. In Q2, 2013 the company had said that it expected revenues to come in at USD 8.74 billion, a growth of 19 percent compared to the previous year. However, Cognizant has revised this guidance. It now expects revenues to come in at USD 8.84 billion; a growth of 20.3 percent.

While the growth revision of 1.3 percent may not seem large at first sight; with the magnitude of investments and the concerns around outsourcing world over; the revision does hint at a pick up in discretionary spending. “Our strong performance in the quarter allows us to once again increase our full year revenue and EPS guidance and further strengthens our balance sheet,” said Karen McLoughlin, Chief Financial Officer.

The numbers presented by Cognizant indicate Q4, 2013 revenues at USD 2.35 billion up 1.7 percent. Q4 is typically a seasonally weak quarter for most IT companies so the growth of 1.7 percent is not meek by any accounts.
 
Pick up in discretionary spending?
What one needs to understand this quarter, however is that a large reason for all IT company performing better than expected numbers this quarter is the depreciating rupee. However, in the long term rupee volatility remains a key cause for concern for all IT companies and all five firms are working to keep themselves hedged against severe forex currents.

But the positive commentary from all four players does indicate that while clients remain cautious about the near term outsourcing pictures; they have accepted that outsourcing and software technology will play a key role in changing the way most cooperates perform. However, the kind of contracts and the diversity of contracts will now change over a period of time and all five IT companies must remain at the top of their game and keep up with the changing landscape to be able to meet the challenges.
 
However, in July Gartner cut its IT spending forecast from an expected growth of 4 percent to a growth of 2 percent at USD 3.7. This clearly indicates that a turnaround for the IT sector may not be right around the corner in 2013 but the start of a fix may have begun.