Cognizant cuts outlook on weak banking demand

Tue May 8, 2012 9:07am IST

Workers are seen at their workstations on the floor of an outsourcing centre in Bangalore, February 29, 2012. REUTERS/Vivek Prakash

Workers are seen at their workstations on the floor of an outsourcing centre in Bangalore, February 29, 2012.

Credit: Reuters/Vivek Prakash

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REUTERS - Information technology services provider Cognizant Technology Solutions CorP(CTSH.O) lowered its full-year forecast for the first time in nearly four years, citing weak demand from financial services clients in North America.

The company echoed sentiments expressed by its India-based rivals like Infosys Ltd (INFY.NS) and Wipro Ltd (WIPR.NS) as they battle lower discretionary spending by clients especially in the financial services segment.

However, analysts believe Cognizant will continue to outperform rivals and beat its full-year targets.

Morningstar Inc analyst Swami Shanmugasundaram sees the company continuing to outperform Infosys and Wipro.

"Infosys is walking out of some of the client contracts because it wasn't willing to compromise, which should help Cognizant because its margins are lower," he said.

Bernstein Research analyst Rod Bourgeois said Cognizant added some extra conservatism to its revised 2012 forecast to deter risk of needing to revise forecast again.

The outlook has essentially been "de-risked" as the company is assuming less discretionary spending by its clients, he said.

"I wouldn't be surprised if they come back and beat it (their outlook) at the end of the year.... They tend to be very conservative, like Infosys used to be in the past," he said.

Shares of the company fell as much as 20 percent - their sharpest fall in more than four years - to $55.70. The stock was among the top percentage losers on the Nasdaq.

N. AMERICA DISAPPOINTS

Cognizant said it expects its banking and pharmaceutical sectors to remain sluggish for the rest of the year.

"The rate of acceleration is not as strong as we would have anticipated and that's particularly true in financial services and the pharmaceutical industry," President Gordon Coburn told Reuters.

The banking sector - which brings in a quarter of Cognizant's revenue - was flat in the first quarter for the company, hurt by softness among top North American clients.

"In North America ... the incredible volatility many of our (banking) clients are seeing right now is causing them to pause," CEO Francisco D'Souza said on a conference call.

The company counts J.P. Morgan Chase & Co, Rabobank and UBS AG among its core banking clients.

Weakness in the pharma segment in the first quarter was more pronounced this year. Pharmaceutical is a part of its healthcare business, which brings in 26.5 percent of its total revenue.

The company lowered its adjusted earnings outlook for 2012 to $3.62 per share on revenue of at least $7.34 billion - from earnings of $3.69 per share on revenue of $7.53 billion.

The lowering of outlook was not shocking as its previous forecast implied aggressive sequential growth rates, J.P. Morgan Securities analyst Tien-tsin Huang wrote in a note.

Last month, Wipro and Infosys forecast muted revenue growth. But India's top software services exporter, Tata Consultancy Services Ltd (TCS.NS), said it expects to outperform the sector outlook.

In January, market research firm Gartner cut its forecast for worldwide IT spending growth this year to 3.7 percent from the 4.6 percent it estimated earlier.

Net income for the first quarter rose to $243.6 million, or 79 cents per share, from $208.3 million, or 67 cents per share, a year earlier.

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