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Cognizant's upward revision of CY11 revenue growth guidance to at least 29% (from 26% earlier)
with guided qoq growth rates of 5-6% from 2Q-4Q11 indicates continued robust demand visibility
for IT services. This is in line with our positive bias for Indian IT services with buys on Infosys,
TCS and HCL Tech.
Cognizant: CY11 guidance upgrade indicates healthy demand outlook
�� Cognizant upgraded its CY11 revenue growth guidance to at least 29% (versus earlier
guidance of at least 26%) with absolute upgrade in CY11 revenue guidance by US$135mn
versus guidance outperformance of just US$11mn in 1Q11.
�� On the base of 4.6% qoq revenue growth in 1Q11, Cognizant has guided for 5.7% qoq growth
in 2Q11 (versus Infosys guiding for 2.5-3.5% growth) and implied 4.6% qoq growth guidance
for 3Q11/4Q11.
�� Besides healthy upgrade in CY11 revenue guidance, 1Q11 pricing uptick of 2% qoq (on the
base of 2% qoq uptick in 4Q10) indicates healthy demand for outsourcing services, which
augurs well for Indian IT. Cognizant expects some more pricing tailwind in coming quarters,
though a significant portion of CY11 contract negotiations have already been reflected in
1Q11.
Cognizant 1Q11 results: In line on sales, higher on EBITDA versus consensus
�� Reported revenues of US$1371mn was up qoq by 4.6% (guidance: 3.8% growth) versus
Infosys, TCS, HCL Tech and Wipro reporting 1.1%, 4.7%, 5.8% and 4.2% qoq growth
respectively. Notably both TCS and HCLT outperformed Cognizant despite qoq growth in
4Q10 not being materially different amongst these three vendors. This is in contrast to
Cognizant's consistent trend of growing faster than the Indian peers.
�� Vertically Manufacturing/Retail/Logistics driven the revenue growth with 12.7% qoq uptick in
1Q11. However Cognizant's largest two verticals including BFSI and Healthcare registered
muted growth of ~2.8-2.9% qoq. In line with peers, Communication/Media/Hi-Tech growth
continue to remain soft with 2.8% qoq growth.
�� In contrast to some of the Indian peers, US grew 5.7% qoq for Cognizant, while revenues
from UK declined 3.5% qoq (due to completion of M&A related work in earlier quarters).
However, in line with peers, Continental Europe registered 11.7% qoq growth for Cognizant
(thanks to ramp up in some projects).
�� Cognizant 4Q11 results also corroborated the trend of healthy uptick in discretionary spend
with application development growing 5.4% qoq. Revenues from enterprise solution grew
14% qoq with many projects being transformational and long term in nature
�� Cognizant's +7200 net employee addition in 1Q11 is the highest in any quarter.
�� Gross margins and EBITDA margins improved qoq by 80bp and 50bp to 43% (highest in last
six quarters) and 21.3% respectively on the back of pricing uptick and currency tailwind.
However Cognizant expects margin to drop in 2Q11 on the back of wage inflation. Cognizant
is looking for 12-14% wage hikes for CY11 for offshore employees (versus Infosys guiding for
10-12% and TCS/Wipro guiding for 12-15% wage hikes).
Conference call highlights
�� Management reiterated its positive stance in the demand environment, and sees growth in
client budgets being balanced between cost/efficiency projects and discretionary projects.
Growth momentum remains strong across all its major verticals. Cognizant is also witnessing
increasing deal size as well as higher number of deals within its pipeline.
�� Cognizant expects continued higher growth from US with some softness in Europe which
impacted growth from Europe in 1Q11. However it has started witnessing healthy deal
pipeline from Europe, revenue uptick from which would be witnessed from 2H11 onwards.
�� Financial services demand is driven by cost/efficiency initiatives, adoption of mobile
technologies, CRM platforms, and legacy modernization. Within BFSI, it expect accelerated
growth in regulatory work from CY12, while continue to remain optimistic for CY11.
Healthcare growth is driven by consulting, analytics, BPO, coding transition and
modernization initiatives. Demand in Manufacturing/Retail/Logistics is driven by large scale
transformation projects, multi-channel e-commerce integration and Business Intelligence.
Cognizant expects above average growth in Manufacturing/Retail/Logistics in coming
quarters as well.
�� Management sees significant client interest for managed business deals that combine IT and
BPO solutions.
�� Pricing momentum continues to be strong with the company achieving 2% qoq pricing
improvement in both onsite and offshore in 1Q11. Management said that discussions for
pricing increases for CY12 are already underway in some cases.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cognizant's upward revision of CY11 revenue growth guidance to at least 29% (from 26% earlier)
with guided qoq growth rates of 5-6% from 2Q-4Q11 indicates continued robust demand visibility
for IT services. This is in line with our positive bias for Indian IT services with buys on Infosys,
TCS and HCL Tech.
Cognizant: CY11 guidance upgrade indicates healthy demand outlook
�� Cognizant upgraded its CY11 revenue growth guidance to at least 29% (versus earlier
guidance of at least 26%) with absolute upgrade in CY11 revenue guidance by US$135mn
versus guidance outperformance of just US$11mn in 1Q11.
�� On the base of 4.6% qoq revenue growth in 1Q11, Cognizant has guided for 5.7% qoq growth
in 2Q11 (versus Infosys guiding for 2.5-3.5% growth) and implied 4.6% qoq growth guidance
for 3Q11/4Q11.
�� Besides healthy upgrade in CY11 revenue guidance, 1Q11 pricing uptick of 2% qoq (on the
base of 2% qoq uptick in 4Q10) indicates healthy demand for outsourcing services, which
augurs well for Indian IT. Cognizant expects some more pricing tailwind in coming quarters,
though a significant portion of CY11 contract negotiations have already been reflected in
1Q11.
Cognizant 1Q11 results: In line on sales, higher on EBITDA versus consensus
�� Reported revenues of US$1371mn was up qoq by 4.6% (guidance: 3.8% growth) versus
Infosys, TCS, HCL Tech and Wipro reporting 1.1%, 4.7%, 5.8% and 4.2% qoq growth
respectively. Notably both TCS and HCLT outperformed Cognizant despite qoq growth in
4Q10 not being materially different amongst these three vendors. This is in contrast to
Cognizant's consistent trend of growing faster than the Indian peers.
�� Vertically Manufacturing/Retail/Logistics driven the revenue growth with 12.7% qoq uptick in
1Q11. However Cognizant's largest two verticals including BFSI and Healthcare registered
muted growth of ~2.8-2.9% qoq. In line with peers, Communication/Media/Hi-Tech growth
continue to remain soft with 2.8% qoq growth.
�� In contrast to some of the Indian peers, US grew 5.7% qoq for Cognizant, while revenues
from UK declined 3.5% qoq (due to completion of M&A related work in earlier quarters).
However, in line with peers, Continental Europe registered 11.7% qoq growth for Cognizant
(thanks to ramp up in some projects).
�� Cognizant 4Q11 results also corroborated the trend of healthy uptick in discretionary spend
with application development growing 5.4% qoq. Revenues from enterprise solution grew
14% qoq with many projects being transformational and long term in nature
�� Cognizant's +7200 net employee addition in 1Q11 is the highest in any quarter.
�� Gross margins and EBITDA margins improved qoq by 80bp and 50bp to 43% (highest in last
six quarters) and 21.3% respectively on the back of pricing uptick and currency tailwind.
However Cognizant expects margin to drop in 2Q11 on the back of wage inflation. Cognizant
is looking for 12-14% wage hikes for CY11 for offshore employees (versus Infosys guiding for
10-12% and TCS/Wipro guiding for 12-15% wage hikes).
Conference call highlights
�� Management reiterated its positive stance in the demand environment, and sees growth in
client budgets being balanced between cost/efficiency projects and discretionary projects.
Growth momentum remains strong across all its major verticals. Cognizant is also witnessing
increasing deal size as well as higher number of deals within its pipeline.
�� Cognizant expects continued higher growth from US with some softness in Europe which
impacted growth from Europe in 1Q11. However it has started witnessing healthy deal
pipeline from Europe, revenue uptick from which would be witnessed from 2H11 onwards.
�� Financial services demand is driven by cost/efficiency initiatives, adoption of mobile
technologies, CRM platforms, and legacy modernization. Within BFSI, it expect accelerated
growth in regulatory work from CY12, while continue to remain optimistic for CY11.
Healthcare growth is driven by consulting, analytics, BPO, coding transition and
modernization initiatives. Demand in Manufacturing/Retail/Logistics is driven by large scale
transformation projects, multi-channel e-commerce integration and Business Intelligence.
Cognizant expects above average growth in Manufacturing/Retail/Logistics in coming
quarters as well.
�� Management sees significant client interest for managed business deals that combine IT and
BPO solutions.
�� Pricing momentum continues to be strong with the company achieving 2% qoq pricing
improvement in both onsite and offshore in 1Q11. Management said that discussions for
pricing increases for CY12 are already underway in some cases.
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