Cognizant Technologies, which ranks just below the big three IT services firms in size, beat expectations with strong growth during the December quarter and pointed continued momentum in sales and profits during the current year.
Revenues grew 20% year-on-year to $903 million during the December quarter. Net profit was $144 million, up 28% from $112.3 million last year. Cognizant’s employee additions too were aggressive at nearly 10,300 new appointments during the quarter compared to around 7,700 additions reported by TCS, India’s biggest IT services firm.
The company guided to a 20% revenue growth and 14% earnings growth for 2010, but said the current quarter (ending March) may be slightly slower as clients wait for the second quarter to implement their new budgets.
“It looks good. The key metric from the release is the guidance for 20% growth in 2010. That’s what the buy side was expecting,” Kaufman Bros analyst Karl Keirstead said, pointing to the 3% jump in the Nasdaq-listed stock. He pointed out that the company is likely to exceed expectations. “And I think there’s going to be consensus that that’s a conservative guide and they’ll be able to ultimately grow north of that,” he added.
Francisco D’Souza, CEO, Cognizant, attributed the industry-beating growth — Cognizant had grown 16% in the September quarter — to its operating margins of around 19%, well below the 30% or more reported by the frontline firms. The downturn turned positive for lower margin firms, he said.
“Years ago, we made a decision to keep our margin lower than our competitors and invest those dollars into our business. In 2009, we grew substantially faster than others,” he said. “Based on this strategy, we will be disappointed if we don’t have industry-leading growth on an organic basis,” he added.
D’Souza said that according to early indications, IT spends, particularly offshoring, will see a modest uptrend in 2010. “The IT budgets are nearing finalisation. We have a view to clients’ broad spending plans. I think it will range from flat to slightly up. But we are seeing an increase in the spending dedicated to offshoring,” he said.
However, he said the market is yet to fully recover and most of the new deals are small in size. “Clients are yet to commit to big transformational deals,” he warned.
The company has guided for an earnings growth inferior to the revenue growth as it expects some of the tax benefits to be withdrawn by the Indian government in the Budget. The company said it hopes to see a tax policy that will continue to “support economic investment in India,” noting that there were “too many moving pieces” on the tax front currently. (with Reuters inputs)
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