When Cognizant, the fastest growing India-centric IT services player, has second thoughts about its growth rate, perhaps it’s time to start worrying about the marketplace!
After just scraping in with its Q4 numbers (see Cognizant makes it by a whisker as Europe wobbles), management was a little more circumspect than usual, guiding to 23% revenue growth for 2012. As we said at the time, this rate is hardly shabby but it was not what the market was really hoping for. But CEO Francisco D'Souza cooled things down even further today, reducing FY guidance to 20% headline growth “due to a slower than anticipated acceleration in demand”. This will unsettle everyone - indeed, Cognizant's shares lost nearly 20% on the news.
The Q1 numbers in themselves were good enough to pass muster, with revenues rising by 25% to $1.71b, a shade above guidance. However, the 2.9% sequential growth was the slowest recorded since Q1 ‘09 – the only quarter in which Cognizant ever went backwards. UK revenues grew by 10.7% yoy as reported, though I reckon this was closer to 13% at constant exchange rates.
Margins were within the usual range as always, at 18.6%. It certainly helps manage market expectations when you run an EBIT margin 10 points below your key competitors (TCS, Infosys) yet enjoy the same 40%+ gross margins!
Management's guidance for the current quarter makes interesting reading. With an expectation of Q2 revenues exceeding $1.79b, Cognizant could be set to topple Infosys as the second largest of the India-centric offshore services players. This says as much about Infosys as it does about Cognizant.
We’ll pick the bones out of the numbers once we have heard from management, and there’ll be much more for eligible TechMarketView subscription service clients in the next edition of OffshoreViews.