Cognizant Meets 20% Guidance In CY12, Lowers 2013 Guidance To 17%

Tech giant Cognizant has announced its results for the quarter and year ending December 2012. For this period, the revenues have been exactly in line with the guidance given by Cognizant earlier. At the same time, however, there has been downward pressure on the margins. Moreover, the guidance for the year 2013 has been lowered to 17%, which is quite low as compared to the average growth rate seen in the past.

The revenues for the company in the quarter ending December 2012 came in at USD 1.95 billion, sequentially up by 3%. At the same time, the US GAAP operating margin stood at 18.3% in Q4CY12 as compared to 18.8% in Q2CY12. The net profit remained flat, having increased by 0.69% sequentially to USD 278.8 million.

Annual revenues of Cognizant stood at USD 7.35 billion, just as the guidance, growing by 20% YoY. The margins were pressured lightly, similar to the trend seen in Q4CY12. The operating margin reduced by 4 basis points to 18.53% and the net profit margin by 13 basis points to 14.31% in 2012.

Earlier this month, in an SEC filing, Cognizant said that it would dole out 100% performance units if it achieves a revenue of USD 8.52 billion. This translates into a growth of 16% over its expected revenues of 2012, which is way lower than the average 30.41% growth rate of Cognizant in the last 5 years. This ran a scare through the markets and had the company’s stock prices spiralling down.

Although the management clarified that the performance-linked incentive scheme was not indicative of the guidance for 2013, it has turned out to be that way. However, it has been reported to be 17% after factoring in the revenues from Cognizant’s later acquisition of 6 C1 Group companies.

Although the revenues of Cognizant have been in line with estimates, there is clearly mild pressure on the margins. More importantly, its future outlook seems pretty moderate considering the pace that the company has grown at in the last 5 years. As the markets have already factored in the relatively bleak outlook due to the SEC filings earlier, the stock prices of Cognizant will not see that much of a negative movement on opening on the Nasdaq.

For long, Cognizant’s outperformance had been a benchmark for Indian IT firms, and a modest outlook by this company has been perceived to have a direct impact on the performance of Indian IT firms. No wonder then, that during the first scare of Cognizant’s 2013 guidance, the BSE IT index fell for 3 straight days. However, the results for Indian IT companies have been good so far and companies have expressed a positive outlook for 2013. More than considering this outlook to be industry-wide, we think it is company specific.