Cognizant emerges new leader, serious challenger to IBM, Accenture

CHENNAI/BANGALORE Cognizant Technology Solutions kept up its searing pace of expansion in the July-September quarter, establishing itself as the clear growth leader for India-based rivals to emulate and mounting a serious challenge to multinational competitors such as IBM and Accenture.
For the fifth quarter in a row, Cognizant's revenue growth topped 30% and it bumped up sales and earnings forecasts for the financial year which ends in December.
President and CEO Francisco D'Souza said in a conference call with analysts on Wednesday that the strong results and growing market share are a testament to Cognizant's agility. The New Jersey-based firm said it expects to end its financial year in December with revenue of at least $6.11 billion, one percentage point higher than its guidance three months ago.
Cognizant also increased its forecast for earnings per share to $2.83 from $2.78. Its shares were trading around 2.5% lower in early morning trade on the Nasdaq stock exchange whose main index was up 1%. Cognizant is in the middle of a share buyback programme with authorisation to purchase up to $600 million of its stock.
Results for the July-September quarter from top IT services providers TCS, Infosys, Cognizant, Wipro andHCL show that demand remains strong in an uncertain global economy even though some of them are finding that margins are coming under pressure.
Cognizant, which is also a component of the S&P 500 index, has an operating philosophy that puts growth at the top of its priorities. The IT company is happy with operating margins of 18-20%, pays no dividends at all, and reinvests surpluses to further the cause of growth.
Such an approach has resulted in Cognizant increasing its market share by 300 basis points in the past two years among India's top five IT providers.
During the September quarter, incremental revenues, at $116 million, were the highest for Cognizant. Top exporter TCS only managed $113 million and Wipro, which will be eclipsed by Cognizant as the third-largest exporter at the end of the year, added $65 million.
"Cognizant has become a serious challenger to the biggest global firms including Accenture and IBM. It is doing everything right at the moment," said Peter Schumacher of Germany-based business advisory services provider Value Leadership Group.
Cognizant was founded as an arm of Dun & Bradstreet in 1994 and listed on the Nasdaq four years later. A big part of the reason for its success is that it pays intimate attention to its customers, analysts said.
For every customer account, Cognizant has a senior account manager onsite, a dedicated delivery head and a consultant. Some 1,000 client-facing professionals form the company's so-called 'threein-a-box' team, helped by the same number of staff in delivery locations such as India. During the third quarter, Cognizant's revenue grew by 31.6% to $1.6 billion. Net income was $227.1 million, or $0.73 per share, three cents higher than forecast.

Citi analysts Ashwin Shirvaikar and William Mania wrote that Cognizant's revenue guidance of at least $1.66 billion for the fourth quarter is above the consensus of $1.65 billion. "They have historically beaten their initial guide and specifically this year they have beaten each quarter by $10-35 million, so we remain quite comfortable with our estimate." Citi maintains a buy on the stock.

R Chandrasekaran, president and managing director for global delivery, said price negotiations are continuing with customers, but "it is not going to be rosy as last year. It would be flat". He expected clarity on pricing in the early part of 2012.
Nearly four-fifths of revenue came from North America and 18% from Europe. The financial services sector, with clients such as JPMorgan Chase and UBS, contributed 40% to revenue. Cognizant added 12,000 employees in the quarter, including approximately 4,000 from the acquisition of CoreLogic India. Competitors keeping a close watch on Cognizant privately doff their hats to the company and its seeming ability to run a marathon at the speed of a sprint.