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More proof of demand strength for Tier-1s likely
Cognizant (CTSH US) will report Dec-10 qtr (4Q10) results and give
guidance for 2011 on 7th Feb, pre US market open.
For 4Q10: 7.1%QQ revenue growth is possible (c.f. 4.4% guidance).
This is near the top end of peers in the IT offshoring space, in-line with
Cognizant’s historical sector-leading performance.
For full year 2011: We expect revenue growth guidance of around 26-
27%YY. This would imply 4-4.5% revenue CQGR through 2011.
The results should end a strong earnings season for offshore IT Services
providers and 2011 guidance should re-inforce confidence in the
demand environment.
Infosys and TCS remain our top-2 picks to play the demand strength.
Cognizant results in spotlight post change of guard at Wipro
Cognizant employs over 100,000 professionals, making it the 4th largest offshore
IT services vendor after TCS, Infosys and Wipro. While we do not cover the stock,
read-through from its results is important for peer stocks, and we expect the
upcoming report on 7th Feb to boost a strong demand outlook for outsourcing.
Moreover, the appointment of a new CEO at Wipro has brought Cognizant’s revenue
trajectory into the spotlight. In Jun-07 quarter, Wipro’s quarterly revenues were
50% higher than Cognizant and that gap has already been reduced to less than 5%
in the Sep-10 quarter. Assuming Wipro and Cognizant continue at their historical
growth rates, Cognizant will most likely overtake Wipro in Jun-11 quarter.
How good can Cognizant’s 4Q be?
Taking a cue from reported numbers of Tier-1 Indian techs, we believe a 7.1%QoQ
revenue growth in 4Q10 is possible, or revenues of US$1,303m c.f. guidance of
US$1,270m. This would be near the top end of comparable peers in the offshore
outsourcing space. In comparison, Infosys reported US$ revenue growth of 6%,
TCS 7%, Wipro 5.6% and HCL Tech 7.5%QQ in the December quarter. This would
imply a US$30-35m revenue increment over what Cognizant has guided for the
December quarter. In recent quarters, Cognizant has reported a beat varying from
US$20-90m (See Figure 3) versus its financial targets as articulated in its formal
guidance. December could be somewhere near the lower end given the seasonally
weaker nature of the quarter.
2011 revenue outlook should reflect the strength in demand
Cognizant’s current consensus 2011 revenue expectation stands at 25.5% with the
upper end of expectation at 30%YY revenue growth. We expect 2011 reality to be
much above the top end of expectation. That said, we believe that Cognizant will
choose to kick-off 2011 with a relatively conservative growth guidance of 26-
27%YY. Note that in Feb 2010, Cognizant had guided for 20%YY revenue growth
for 2010, implying a 3.5%CQGR through 2010. Given the improved demand
environment, higher business visibility and better preparedness to service this
demand, Cognizant’s 2011 guidance could assume a 4-4.5%CQGR for 2011. Adding
the expected beat in Dec-10 quarter, and assuming 4-4.5%QoQ growth through
2011, we arrive at the 26-27% growth number. Also, with grant of 100% of eligible
stock units to Cognizant top management linked to ~25%YY growth, we see 25%
growth as the base for 2011 guidance.
Importantly, we would not be worried about the exact quantum of guidance. In our
view 2011 reality should be in-line with 2010, somewhere in the mid to late 30s
and stock up-move is just a question of when the street gets confidence in that
growth rather than whether it will get that confidence.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
More proof of demand strength for Tier-1s likely
Cognizant (CTSH US) will report Dec-10 qtr (4Q10) results and give
guidance for 2011 on 7th Feb, pre US market open.
For 4Q10: 7.1%QQ revenue growth is possible (c.f. 4.4% guidance).
This is near the top end of peers in the IT offshoring space, in-line with
Cognizant’s historical sector-leading performance.
For full year 2011: We expect revenue growth guidance of around 26-
27%YY. This would imply 4-4.5% revenue CQGR through 2011.
The results should end a strong earnings season for offshore IT Services
providers and 2011 guidance should re-inforce confidence in the
demand environment.
Infosys and TCS remain our top-2 picks to play the demand strength.
Cognizant results in spotlight post change of guard at Wipro
Cognizant employs over 100,000 professionals, making it the 4th largest offshore
IT services vendor after TCS, Infosys and Wipro. While we do not cover the stock,
read-through from its results is important for peer stocks, and we expect the
upcoming report on 7th Feb to boost a strong demand outlook for outsourcing.
Moreover, the appointment of a new CEO at Wipro has brought Cognizant’s revenue
trajectory into the spotlight. In Jun-07 quarter, Wipro’s quarterly revenues were
50% higher than Cognizant and that gap has already been reduced to less than 5%
in the Sep-10 quarter. Assuming Wipro and Cognizant continue at their historical
growth rates, Cognizant will most likely overtake Wipro in Jun-11 quarter.
How good can Cognizant’s 4Q be?
Taking a cue from reported numbers of Tier-1 Indian techs, we believe a 7.1%QoQ
revenue growth in 4Q10 is possible, or revenues of US$1,303m c.f. guidance of
US$1,270m. This would be near the top end of comparable peers in the offshore
outsourcing space. In comparison, Infosys reported US$ revenue growth of 6%,
TCS 7%, Wipro 5.6% and HCL Tech 7.5%QQ in the December quarter. This would
imply a US$30-35m revenue increment over what Cognizant has guided for the
December quarter. In recent quarters, Cognizant has reported a beat varying from
US$20-90m (See Figure 3) versus its financial targets as articulated in its formal
guidance. December could be somewhere near the lower end given the seasonally
weaker nature of the quarter.
2011 revenue outlook should reflect the strength in demand
Cognizant’s current consensus 2011 revenue expectation stands at 25.5% with the
upper end of expectation at 30%YY revenue growth. We expect 2011 reality to be
much above the top end of expectation. That said, we believe that Cognizant will
choose to kick-off 2011 with a relatively conservative growth guidance of 26-
27%YY. Note that in Feb 2010, Cognizant had guided for 20%YY revenue growth
for 2010, implying a 3.5%CQGR through 2010. Given the improved demand
environment, higher business visibility and better preparedness to service this
demand, Cognizant’s 2011 guidance could assume a 4-4.5%CQGR for 2011. Adding
the expected beat in Dec-10 quarter, and assuming 4-4.5%QoQ growth through
2011, we arrive at the 26-27% growth number. Also, with grant of 100% of eligible
stock units to Cognizant top management linked to ~25%YY growth, we see 25%
growth as the base for 2011 guidance.
Importantly, we would not be worried about the exact quantum of guidance. In our
view 2011 reality should be in-line with 2010, somewhere in the mid to late 30s
and stock up-move is just a question of when the street gets confidence in that
growth rather than whether it will get that confidence.
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