Cognizant lowers revenue outlook for 2024 after slow March quarter

The Nasdaq-listed company said it now expects revenue of between $18.9 billion and $19.7 billion in 2024. The lower end of that projection is a 2.2% decline in reported currency from the year prior, while the upper end would make for a 1.8% growth. 

Cognizant, which follows a January-December financial year, had previously projected a revenue of $19.8 billion for 2024. In 2023, the company’s revenue $19.35 billion, down from $19.43 billion in 2022.

For the three months ended June, the outlook appears less promising. Cognizant expects a revenue of $4.75 billion to $4.82 billion for the June quarter, which is a fall of 2.9% to 1.4% in reported currency. 

Cognizant’s revenue for the January-March period totalled $4.76 billion, largely unchanged from the preceding three months, but was down about 1% from the corresponding year-ago period.

The decline in the March quarter was largely because of lower revenue from Cognizant’s ‘financial services’ business, which is one of its biggest segments. Also, business from North America, its largest geography, came in lower at $1.39 billion for the March quarter, as compared with $1.40 billion in the October-December period. 

Operating margin for the March quarter fell 60 basis points sequentially to 14.6%, although it was the same as the year-ago period. 

While the IT major reported a 2% sequential fall in net profit to $546 million for the March quarter, the fall was more pronounced on a yearly basis. Net income fell 5.9% as compared with the year-ago January-March period. 

A net positive

The Teaneck-headquartered company’s performance lagged street estimates on the net income front but exceeded expectations on revenue. 

According to a Bloomberg poll of 17 analysts, Cognizant was expected to report a net profit of $551 million for the March quarter; a second poll of 23 analysts had projected a revenue of $4.7 billion. 

Still, at least one analyst did not think Cognizant’s earnings were disappointing. 

“We believe CTSH (Cognizant) maintaining its previous CY24 guidance range, while still a wide range, is a net positive in this backdrop,” Keith Bachman, an analyst with BMO Capital Markets, wrote in a note after Cognizant declared its earnings. 

“Moreover, Cognizant was able to hold the margin guide as well, which calls for 20-40bps of y/y growth, as we had suspected. Net, while we think the demand environment remains challenging, Q1 and FY24 commentary is encouraging given other IT service reports,” said Bachman. 

Two of Cognizant’s biggest businesses, financial services and health sciences, saw a year-on-year decline of 6.2% and 1.2%, respectively. Revenue from its financial services segment totalled $1.39 billion, and from its health sciences business totalled 1.42 billion.

The March quarter was the second consecutive quarter when revenue from Cognizant’s health sciences segment exceeded that of its financial services business, which has historically contributed most to its revenue in its 30 years of existence.

Cognizant’s headcount fell sequentially by 3,300 employees between January and March, mirroring a similar decline in other large Indian IT firms. The company ended the March quarter with 344,400 employees. As of December, about 73%, or 250,000 of Cognizant’s employees, were based out of India.

Last among peers

“Demand environment remains uncertain and geopolitical risks continue. These dynamics are shifting near-term client spending priorities from discretionary projects to projects that will drive near-term cost savings and fund innovation for the future,” said chief executive S. Ravi Kumar.

Chief financial officer Jatin Dalal said improvement in discretionary spending can help Cognizant reach the top end of its revenue guidance in the later part of the year.  

Notably, this is the second consecutive quarter when Cognizant’s profitability was lower than that of each of the top four Indian IT companies for the three months ended 31 March. 

Indian IT bluechips, namely Tata Consultancy Services Ltd (TCS), Infosys Ltd, HCL Technologies Ltd, and Wipro Ltd, reported an operating margin of 26%, 20.1%, 17.6%, and 16.4% respectively. 

Indian IT companies follow the April-March financial calendar. 

On the metric of revenue growth, Cognizant’s revenue for the March quarter grew at a slower clip sequentially compared with TCS, HCLTech, and Wipro, which saw a sequential revenue growth of 1.1%, 0.4%, and 0.05% respectively. Cognizant’s revenue grew 0.04% from December 2023 to March 2024. 

While Infosys is ahead of Cognizant on the count of net profit for the December-March period, the former’s sequential fall in revenue might not bridge the gap in revenue. 

Infosys expects 1-3% revenue growth in constant currency terms for FY25 while HCL Technologies is projecting 3-5% constant currency revenue growth for the same period. TCS and Wipro have not given projections. Constant currency does not take currency fluctuations into account.

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Published: 02 May 2024, 05:29 PM IST