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Cognizant slashes full-year growth outlook; Q1 net income tumbles 15% to $441 million

New Delhi: IT company Cognizant has reported over 15 percent drop in net income for the quarter ended March, and slashed its full-year revenue growth outlook.

The US-headquartered company, which has a significant portion of its employees based in India, revised its full-year 2019 revenue growth outlook to 3.6-5.1 percent in constant currency, significantly less than 7-9 percent projected just months ago.

Cognizant follows January-December as financial year.

It cited "first quarter underperformance" and the likelihood of slower growth in financial services and healthcare as reasons for the massive cut in full-year outlook.

The first quarter net income at $441 million was 15 percent lower than $520 million clocked in the year-ago period. The quarterly revenue rose to $4.11 billion, up 5.1 percent (6.8 percent in constant currency) from the year-ago period - missing the company's own estimates.

"Cognizant's growth and performance in the quarter leave room for improvement," Brian Humphries, Chief Executive Officer of Cognizant, said in a statement.

 Cognizant slashes full-year growth outlook; Q1 net income tumbles 15% to 1 million

Company logo. FP photo

Humphries, who took over the baton from the Francisco D'Souza on 1 April, admitted that the company, despite its client centricity and innovative spirit, is not yet delivering against the market opportunity.

"While I am encouraged by our client centricity, our employees' winning spirit and our innovation, we are not yet delivering against the market opportunity. We are committed to strengthening our execution to invest in growth and drive shareholder value," Humphries added.

Cognizant said its second-quarter 2019 year-over-year revenue growth is estimated to be in the range of 3.9-4.9 percent in constant currency.

"Our revised full-year outlook reflects the first-quarter underperformance and expectations of slower growth in financial services and healthcare for the remaining 2019," Karen McLoughlin, Chief Financial Officer said.

In the coming quarters, the company intends to bring cost structure closer in line with the revised revenue expectations but will continue to invest in growth, talent, and innovation, McLoughlin said.

Also, the strong balance sheet enables Cognizant to maintain financial flexibility while returning capital to shareholders.

As part of our realignment programme, Cognizant management is evaluating various strategies, including additional employee separation programmes, but timing, nature and magnitude of these initiatives are not yet finalised.

"First quarter 2019 GAAP operating results include the $117 million incremental accrual related to India Defined Contribution Obligation (IDCO)," the statement added.

Explaining this, the company said that a February 2019 ruling of Supreme Court on certain statutory defined contribution obligations of employees and employers (IDCO) altered historical understandings of such obligations, extending them to cover additional portions of the employee's income.

"As a result, the contributions of our employees and the company in future periods are required to be increased. We have accrued $117 million with respect to prior periods, assuming retroactive application of the Supreme Court's ruling," Cognizant said.

Kotak Institutional Equities described the company's first quarter scorecard as "disappointing on all counts".

"Cognizant Technology Solutions'...poor performance surprised us. Weak revenue growth and guidance cut reflect execution challenges at the company rather than industry-wide growth slowdown.

"The transition to a profitable growth model initiated a couple of years back had its share of challenges which have been compounded by slippages in execution," it said.

Kotak noted that the new CEO has a challenge at hand, and added "we would not be surprised with a few leadership changes, common in any turnaround effort".

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Updated Date: May 03, 2019 14:15:31 IST