Nasdaq-listed software giant, Cognizant reported a 19.9% rise in its first quarter earnings for the quarter ending March to $2.42 billion.
In October-December quarter, Cognizant had reported a 20.9% rise in revenues. On a sequential basis, however, Cognizant's revenue rose higher at 2.8%, better than the 2.2% rise in the last quarter.
Cognizant's closest peer, TCS reported revenue growth of 31.2% in the same quarter, while Infosys, second largest Indian software firm, 24.2%.
As a result of the softer-than-expected Q1, according to management, guidance remained virtually unchanged at 16.5% for fiscal 2014, at $10.3 billion. However, the company expects Q2 revenues to rise to between $2.50 billion and $2.53 billion, as Europe continues to show steady growth at 9.6% sequentially and 35% on year in Q1, with the UK alone reporting a strong 12.8% sequential growth and 28.2% growth year-over-year, hitting the $1 billion run rate for the first time.
Cognizant's net income rose to $348.9 million, or 57 cents per share, in the first quarter from $284.2 million, or 47 cents per share, a year earlier.
The recent acquisition of US-based digital video solutions firm, itaas last month is not expected to significantly impact Cognizant's revenues in 2014.
Cognizant's softer Q1 came on the back of marginal North America revenue growth at just 1% sequentially, and 16.1% on year.
Growth in Cognizant's usually strong healthcare vertical was also flat at 0.4% in Q1, even as it grew above company growth at 20.8% on year. Financial services vertical also saw a dip in revenue growth at 2.7% sequentially, while it grew 19.7% on year. Manufacturing/retail/logistics, however, showed a steady growth of 4.4% sequentially and 20.2% on year.
Solution-wise, Consulting and Technology Services (formerly known as Application Development) and Outsourcing Services (formerly known as Application Management) represented 51% (up 5.5% sequentially and 23.7% yoy) and 49% (flat sequentially and up 16.1% yoy) of revenue respectively for the quarter.
Explaining the reasons for the softness in Q1, R. Chandrasekaran, executive vice chairman, Cognizant India said, "We achieved our Q1 growth and prior guidance despite facing some headwinds in North America from one-off events. These include, structural changes from our healthcare-related clients on account of Affordable Care Act and commercial market, contributing to a slow start in spending, leadership transitions for some clients which caused delays in the ramp-up of some outsourcing programs, and thirdly, general economic and weather-related distractions in the U.S. that had some minor impact."
In the quarter, Cognizant closed with 1,223 active clients and 7 strategic clients, bringing the total strategic clients to 250. 36% of revenues in the quarter came from fixed price contracts, and pricing continues to be stable. A majority of revenues are from new verticals like social, mobility, analytics, cloud (SMAC), which contributed $500 million to the company's revenues in 2013. However, the adaptation of new technology will lead to volatile discretionary spends for the next two years, remarked, Francisco D'Souza, chief executive officer, Cognizant.
Commenting on the SMAC focus, Chandrasekaran said, "SMAC technologies are allowing our clients to differentiate themselves and drive new sources of revenue. Awareness and investment in SMAC has clearly gone mainstream across most industries we serve—and is an investment priority for many clients."
The company also hired 7,200 employees in the quarter – the highest in 2.5 years, out of which 44% were freshers and 56% were laterals, taking total employee headcount to 178,600 employees globally.
Utilization stood at 76% offshore and 92% onsite, and attrition also fell to 14.1% in the quarter, compared to 14.5% last quarter. Wage hikes that will be given out in July are expected to be competitive to retain and attract the best talent.
In Q1, Cognizant repurchased 600,000 shares for a total cost of $29.3 million. The company finished the quarter with approximately $3.86 billion of cash and short-term investments. It spent approximately $43 million for capital expenditures during the quarter.