Cognizant Q3 net up 36%; co expects higher revenues

Nov 04, 2009 (The Economic Times - McClatchy-Tribune Information Services via COMTEX) -- WIT | Quote | Chart | News | PowerRating -- CHENNAI and BANGALORE, India -- Cognizant reported the best sequential revenue increase in its history during the quarter ended September and provided better forecast than larger Indian peers, helped by higher investment in sales efforts and new business from top customers, including JP Morgan and UBS.

During one of the toughest periods that the global outsourcing industry has witnessed, Cognizant grew its net profit by 36 percent, ahead of rivals TCS, Infosys and Wipro, and also revised its revenue forecast for the year by around 15.5 percent to $3.255 billion. During the quarter ended June this year, Cognizant had forecast 11.5 percent growth.

"As the pace of decision making accelerated during the quarter, our strong client-facing teams were ready to react and to capitalise on the opportunities," said Francisco D'Souza, president and chief executive of Cognizant.

Cognizant, which follows the model of investing back its operating margins in excess of 20 percent, was able to secure new business from customers such as UBS even as many companies struggled to gain new orders. "At the height of recession, these teams defended our position and revenue with clients; these same teams are now playing offence as the demand environment has stabilised," Mr D'Souza added.

Indeed, during quarter ending September, Cognizant reported incremental revenues of around $77 million, ahead of TCS' $57 million and Infosys' $32 million.

Experts tracking the sector rank Cognizant ahead of its peers because of its differentiated approach when it comes to strategy. When Cognizant started in 1994, existing service providers in India were already offering low-cost, offshoring services to customers. The company decided to focus more on sustainable business growth instead of chasing better margins than others.

"Cognizant took an approach of working with and committing to a 19-20 percent operating margin target (before stock compensation expense), intending to reinvest the excess back into the business. Unlike Infosys, it believes that a trade-off between margins and growth is present and will play out in the medium-to-long term," Edelweiss analysts Viju George, Kunal Sangoi and Pratik Gandhi said.

This has started paying off. Cognizant reported revenues of $853.5 million during the September quarter, up 16 percent annually. The company saw a net headcount addition of 3,900 during the third quarter, taking the total headcount to 68,000.

Cognizant's third-quarter financial result outperformed the consensus estimate put out by at least 21 analysts who predicted an average revenue of $805.1 million. Cognizant, on its part, had guided to 3 percent sequential revenue growth at $800 million for the third quarter.

"Clients, who have come to rely on us to help them achieve operational efficiencies, are now increasingly approaching us to serve as a consultative business partner, as their industries face comprehensive upheavals from the recession, and secular shifts resulting from new technologies and other market forces," Mr D'Souza said.

When UBS, Switzerland's biggest bank by assets, wanted to sell its India back office and bundle the transaction with a multi-year outsourcing contract, TCS, Wipro and Infosys, along with Cognizant, bid aggressively. Eventually, Cognizant managed to race ahead of other bidders because of its kinship with the decision makers.

"Valuation was never too much of a concern for anybody, what really swinged the deal for Cognizant was their relationship with UBS and the comfort they had," said a senior official at one of the tech firms that lost out on the UBS captive acquisition.

In a period when new business was becoming tough to come by, Cognizant acquired UBS' India captive for around $75 million, along with a five-year outsourcing contract worth up to $442 million.

For Cognizant, deep focus on the financial services vertical has been fetching rich dividends, especially when compared with rivals TCS, Infosys and Wipro. On a run rate basis in a difficult environment, Cognizant is adding more revenues per quarter in BFSI than its larger peers. Over the past three quarters (since October 2008, right up to and including June 2009), Cognizant cumulatively added $56 million of revenues in BFSI compared with the preceding three quarters for Infosys and TCS, the corresponding numbers were in negative zone at $88 million and $43 million, respectively.

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