Cognizant edges past expectations in June quarter, but future imperfect

Cognizant Technology Solutions Corp. reported better-than-expected growth for the June quarter, fueled by improving business from financial institutions and healthcare companies, but signalled that the market for technology services remains challenging.

The company’s management in a post-earnings call maintained a muted commentary, raising questions if Cognizant can maintain its growth, also because of its biggest headcount decline in a three-month period.

“Although the demand environment remains challenging and clients' discretionary spending behaviour is unchanged from recent quarters…,” chief executive officer Ravi Kumar S. said in a post-earnings interaction with analysts.

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Nasdaq-listed Cognizant reported a 1.9% sequential rise in revenue to end the April-June quarter with $4.85 billion in revenue. On a yearly basis, however, its revenue had declined by 0.74%. Still, its performance edged past the median expectations of 25 analysts polled by Bloomberg, who had projected $4.8 billion in revenue.

Teaneck, New Jersey-headquartered Cognizant follows the calendar year.

Financial institutions fuelled as much as 69% of the company’s $90 million incremental revenue for the June quarter. Cognizant’s largest cash cow, its health sciences business, added $45 million in incremental revenue, giving the company $1.46 billion in revenue. 

Together, these two verticals account for 60% of Cognizant’s overall revenue.

No meaningful signs of a demand inflection

The information technology company had narrowed its growth outlook in the previous quarter. It now expects to end 2024 with $19.3-19.5 billion in revenue. Bengaluru-based Infosys Ltd, on the basis of its constant currency guidance, expects to end the year with $19.3 billion in revenue as well. 

Cognizant’s guidance does not include any impact from its second-largest acquisition, of engineering, research and development service provider Belcan, for about $1.3 billion. 

“CTSH (Cognizant) delivered better-than-expected results and raised FY guidance on an organic basis. In aggregate, we think CTSH execution continues to improve highlighted by solid sequential growth in Financial Services,” Keith Bachman, an analyst with BMO Capital Markets, wrote in a note after the company declared its earnings.

“We thought CTSH demand tone was a bit muted versus peers though we think it is appropriate to set reasonable expectations especially given that there are little signs of a meaningful demand inflection,” Bachman added. “Rather, we think CTSH is more of an execution story.”

Cognizant’s performance mirrors that of homegrown IT services firms, even though Tata Consultancy Services Ltd and Infosys Ltd fared better in terms of revenue and net profit, respectively. 

Mumbai-based TCS reported revenue of $7.51 billion and net profit of $1.44 billion for the June quarter, whereas Bengaluru-based Infosys reported $4.71 billion in revenue and $763 million in net profit. 

A common theme across all three IT services companies is the tempered outlook and commentary of their CEOs.

Headcount on the chopping block

Cognizant trimmed its headcount by 8,100 from the March quarter. This is the sharpest decline in personnel among the top six Indian IT services companies. Cognizant had 73% of its global workforce in India as at the end of December.

The company’s home ground, North America, offset much of its revenue loss from Europe, its second-largest market. Cognizant got $3.62 billion, or 75% of its overall revenue, from North America. 

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There was cheer on the profitability side. Cognizant reported a 3.7% and 22% sequential and yearly increase in net income, respectively, to $566 million, buoyed by an $88 million drop in restructuring charges from the previous year. 

A median poll of 20 analysts by Bloomberg had expected the company to report $553 million in net income. 

Cognizant’s operating margin remained flat on a sequential basis at 14.6% but gained 280 basis points from the year-ago period.

The company’s share price fell 0.18% to $75.68 on Nasdaq at the end of 31 July.