Cognizant Reports Strong First Quarter on Strength of Outsourcing Business

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Cognizant reported first-quarter results that came in line with analyst’s expecations. The company’s first-quarter revenue increased 3.7% sequentially and 18.1% year-over-year to $2.02 billion. The company’s results largely resembled the pattern that we had already seen from the likes of Accenture ACN and Tata Consultancy Services. Consulting services reported relatively weak numbers as companies remain cautious of discretionary spending while outsourcing services continue to see strong demand.

Cognizant reported 2% sequential growth on consulting and technology services while outsourcing witnessed 5.3% sequential growth. Short-term outlook calls for a cautious IT spending environment, which points to a continuation of this trend in the near term. Cognizant’s European operations had another strong quarter (22.7% growth), vindicating the company’s decision to tweak its business mix in Europe last year. As Europe gradually opens up to offshore outsourcing, we think Cognizant is in for a solid run in this region.

IT service providers, including Cognizant, have been under pressure recently given the uncertainty surrounding the changes proposed by the immigration bill. While we expect the bill to have a long-term negative impact on the current business model of outsourcing service providers, we don’t see any threat in the near term. Our view was reaffirmed when Cognizant maintained its forecast for the next quarter and the full year.

Cognizant reported a 50-basis-point decline in operating margin during the quarter (18.1% versus 18.6% in the prior year), driven by a dip in employee utilization levels. Offshore utilization rate excluding trainees stood at 71%, as opposed to 78% last year. Based on the company’s hiring plans, we expected to see some weakness in utilization during the quarter but didn’t anticipate this large of a drop. However, we aren’t concerned as most of the new hires were laterals and they typically ramp up faster than new graduates. Given the continued strong demand for Cognizant’s services, we expect utilization to bounce back in the coming quarters.

 

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