If you take a look at the newspapers today, you’ll find that practically everyone is talking about how Cognizant Technology has beaten Wipro in terms of quarterly revenue to become India’s No. 3 information technology (IT) company.
On 2 August, the Nasdaq-listed firm announced revenues of $1.48 billion, 34 percent higher from a year ago, beating market expectations. Net profit jumped 21 percent to $208.04 million. In an interview with Forbes, Cognizant CFO Gordon Coburn said: “It was a terrific quarter.”
Yes, it was. Growth in all the industries the company operates in, such as healthcare, financial services and the retail segment, was more than 7 percent than that of the previous quarter. Healthcare sizzled, expanding at about 10.5 percent, Cognizant said.
In fact, so upbeat was the company that it lifted its full-year guidance. “We upped our full-year guidance to around 32 percent year-on-year growth, a little over $6 billion for 2011 and that is a reflection of the fact that we are seeing a very strong pipeline at this point,” president and chief executive Francisco D’Souza told CNBC. “We are confident about our ability to execute this pipeline and capture business for the rest of the year. There had been a certain amount of economic volatility for half of the year. We have factored those in and we are still comfortable raising our guidance to at least 32 percent for the full year.”
Three factors have contributed to the company’s climb to the third position in the Indian IT industry. The first is a long-standing emphasis on the quality of its work-force. The second: Wipro, the company it toppled, has been preoccupied with a host of problems stemming from a corporate restructuring, leading to a loss of business focus and the resignation or exit of several top executives. Third, it is highly likely that being headquartered in the US, Cognizant’s main market, the company has been able to focus better on servicing clients and bagging orders in the industries it serves.
The skills
D’Souza told Dow Jones Newswires that Cognizant has focussed — sometimes at the expense of margins — on hiring a skilled workforce that has a deep understanding of its clients’ businesses. “Very deep technology knowledge combined with having a deep understanding of the business they operate in helped the company capture market share,” D’Souza said.
In fact, the company is bringing its first-ever class of recruits from US universities soon. In the June-ended quarter, Cognizant went on a determined hiring drive, adding 7,200 professionals against Wipro’s 2,894 and Infosys’ 3,041. Currently, about 70 percent of Cognizant’s software developers are in India.
Only TCS recruited more employees, with a net addition of 11,700 people in the quarter. “At this point, we have some 12,000 employees that are part of our training programme, who will become ready for deployment across Q3 and Q4,” said D’Souza. Cognizant had over 1,18,300 employees globally at the end of the June quarter.
Right through the past decade, the company has earned a reputation for hiring highly skilled professionals from global companies such as IBM, PriceWaterhouseCoopers, Booz Allen and Mckinsey. The company has always been investing heavily in a “client-facing” organisation, which basically means doing everything they can to ensure their operations are a cultural fit with their market clients — something other companies have not paid as much attention to in the past.
Now, however, that trend seems to be catching now. A report in equitymaster.com recently noted that several IT companies had been diversifying their talent pool to cater to different kinds of customers around the globe by hiring people of different nationalities and skills.
The sector edge
In addition, Cognizant is benefiting from the fact that clients are starting to invest in discretionary expenditures — basically, new projects — as opposed to just cutting costs. Clients are once again interested in promoting growth in earnings per share for the long term, according to the company.
Financial-services revenue, which accounts for the largest share of total revenue, jumped 30 percent on increased spending on “mobile computing and social or cloud-based programmes,” Coburn said during a conference call with analysts.
Financial services – 41 percent of revenues during the June quarter – and healthcare (26 percent) are Cognizant’s two biggest growth drivers. Improved prices have also helped. “About 0.5 percent of our growth on a sequential basis can be attributed to pricing improvement,” said D’Souza.
Geographically, about 78 percent of Cognizant’s revenues come from North America, 19 percent from Europe and 4 percent from the Asia Pacific region, West Asia and Latin America. Company executives said the European market is “stable”, despite the sovereign debt crisis and its other economic problems. Revenues from North America climbed 33 percent during the quarter while revenues from Europe grew 38 percent.
Moreover, Cognizant has traditionally worked with lower margins than its rivals to gain market share. It has no intention of changing this strategy, CFO Coburn said, adding that he is comfortable with margins of 19-20 percent on an adjusted basis.
In contrast, Wipro is struggling to find growth as it grapples with management issues. After the appointment of T K Kurien as sole chief executive officer (CEO) of the IT business and scrapping the joint CEO model in January, a string of top executives have left the company, including Girish Paranjpe and Suresh Vaswani, formerly the joint CEOs.
A recent report said another four top-ranking executives left the company in the past three months.
Organisational turmoil has made it difficult for the company to focus on its business. In the June-ended quarter, the company reported a 3 percent fall in net profit from the previous quarter. The beleaguered IT major has said it expects to return to stability and normal growth in the December-ending quarter.
Even as it struggles to regain its ranking, the question on everyone’s mind is whether Cognizant will now overtake Infosys next. In the medium term, however, challenges remain. A rupee appreciation, triggered by rising foreign inflows because of rising interest rates, and continuing economic problems in the US and Europe, the key markets for the top-tier IT companies in India, could still turn future profit and growth calculations upside down.
Still, Cognizant has said it expects revenues of $1.57 billion in the September-ending quarter; Wipro has offered its guidance somewhere between $1.39 billion and $1.42 billion.
Certainly, Cognizant seems more confident among its peers. After the June-ending quarter results, Infosys sounded a note of caution, saying: “…we are seeing a slight slowness in decision-making and also shorter reaction time from our clients. It is a reflection of the continued economic uncertainty, unemployment, lack of consumer confidence and some of the sovereign crisis.”
Cognizant doesn’t seem to share any such concerns. For now, the company’s winning streak continues.
On 2 August, the Nasdaq-listed firm announced revenues of $1.48 billion, 34 percent higher from a year ago, beating market expectations. Net profit jumped 21 percent to $208.04 million. In an interview with Forbes, Cognizant CFO Gordon Coburn said: “It was a terrific quarter.”
Yes, it was. Growth in all the industries the company operates in, such as healthcare, financial services and the retail segment, was more than 7 percent than that of the previous quarter. Healthcare sizzled, expanding at about 10.5 percent, Cognizant said.
In fact, so upbeat was the company that it lifted its full-year guidance. “We upped our full-year guidance to around 32 percent year-on-year growth, a little over $6 billion for 2011 and that is a reflection of the fact that we are seeing a very strong pipeline at this point,” president and chief executive Francisco D’Souza told CNBC. “We are confident about our ability to execute this pipeline and capture business for the rest of the year. There had been a certain amount of economic volatility for half of the year. We have factored those in and we are still comfortable raising our guidance to at least 32 percent for the full year.”
Three factors have contributed to the company’s climb to the third position in the Indian IT industry. The first is a long-standing emphasis on the quality of its work-force. The second: Wipro, the company it toppled, has been preoccupied with a host of problems stemming from a corporate restructuring, leading to a loss of business focus and the resignation or exit of several top executives. Third, it is highly likely that being headquartered in the US, Cognizant’s main market, the company has been able to focus better on servicing clients and bagging orders in the industries it serves.
The skills
D’Souza told Dow Jones Newswires that Cognizant has focussed — sometimes at the expense of margins — on hiring a skilled workforce that has a deep understanding of its clients’ businesses. “Very deep technology knowledge combined with having a deep understanding of the business they operate in helped the company capture market share,” D’Souza said.
In fact, the company is bringing its first-ever class of recruits from US universities soon. In the June-ended quarter, Cognizant went on a determined hiring drive, adding 7,200 professionals against Wipro’s 2,894 and Infosys’ 3,041. Currently, about 70 percent of Cognizant’s software developers are in India.
Only TCS recruited more employees, with a net addition of 11,700 people in the quarter. “At this point, we have some 12,000 employees that are part of our training programme, who will become ready for deployment across Q3 and Q4,” said D’Souza. Cognizant had over 1,18,300 employees globally at the end of the June quarter.
Right through the past decade, the company has earned a reputation for hiring highly skilled professionals from global companies such as IBM, PriceWaterhouseCoopers, Booz Allen and Mckinsey. The company has always been investing heavily in a “client-facing” organisation, which basically means doing everything they can to ensure their operations are a cultural fit with their market clients — something other companies have not paid as much attention to in the past.
Now, however, that trend seems to be catching now. A report in equitymaster.com recently noted that several IT companies had been diversifying their talent pool to cater to different kinds of customers around the globe by hiring people of different nationalities and skills.
In addition, Cognizant is benefiting from the fact that clients are starting to invest in discretionary expenditures — basically, new projects — as opposed to just cutting costs. Clients are once again interested in promoting growth in earnings per share for the long term, according to the company.
Financial-services revenue, which accounts for the largest share of total revenue, jumped 30 percent on increased spending on “mobile computing and social or cloud-based programmes,” Coburn said during a conference call with analysts.
Financial services – 41 percent of revenues during the June quarter – and healthcare (26 percent) are Cognizant’s two biggest growth drivers. Improved prices have also helped. “About 0.5 percent of our growth on a sequential basis can be attributed to pricing improvement,” said D’Souza.
Geographically, about 78 percent of Cognizant’s revenues come from North America, 19 percent from Europe and 4 percent from the Asia Pacific region, West Asia and Latin America. Company executives said the European market is “stable”, despite the sovereign debt crisis and its other economic problems. Revenues from North America climbed 33 percent during the quarter while revenues from Europe grew 38 percent.
Moreover, Cognizant has traditionally worked with lower margins than its rivals to gain market share. It has no intention of changing this strategy, CFO Coburn said, adding that he is comfortable with margins of 19-20 percent on an adjusted basis.
In contrast, Wipro is struggling to find growth as it grapples with management issues. After the appointment of T K Kurien as sole chief executive officer (CEO) of the IT business and scrapping the joint CEO model in January, a string of top executives have left the company, including Girish Paranjpe and Suresh Vaswani, formerly the joint CEOs.
A recent report said another four top-ranking executives left the company in the past three months.
Organisational turmoil has made it difficult for the company to focus on its business. In the June-ended quarter, the company reported a 3 percent fall in net profit from the previous quarter. The beleaguered IT major has said it expects to return to stability and normal growth in the December-ending quarter.
Even as it struggles to regain its ranking, the question on everyone’s mind is whether Cognizant will now overtake Infosys next. In the medium term, however, challenges remain. A rupee appreciation, triggered by rising foreign inflows because of rising interest rates, and continuing economic problems in the US and Europe, the key markets for the top-tier IT companies in India, could still turn future profit and growth calculations upside down.
Still, Cognizant has said it expects revenues of $1.57 billion in the September-ending quarter; Wipro has offered its guidance somewhere between $1.39 billion and $1.42 billion.
Certainly, Cognizant seems more confident among its peers. After the June-ending quarter results, Infosys sounded a note of caution, saying: “…we are seeing a slight slowness in decision-making and also shorter reaction time from our clients. It is a reflection of the continued economic uncertainty, unemployment, lack of consumer confidence and some of the sovereign crisis.”
Cognizant doesn’t seem to share any such concerns. For now, the company’s winning streak continues.
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