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Cognizant March 2019 Quarter- Weak performance, Steep Guidance Cut Quick Pointers:
* Cognizant delivered weak revenue growth, missed margin guidance & delivered weak commentary for BFSI vertical.
* Cognizant CTSH has cut CY2019 c/c revenue growth guidance to 3.6-5.1%, down from 7-9% at the beginning of the year citing weakness in banking, healthcare and weaker execution.
* We see a large part of challenges of Cognizant as company specific weakness & not representative of growth across industry. However, clients in capital market & regional banks in US have turned cautious in spending outlook.
* We see weak guidance from Cognizant & weakness in financial services in US inline with our hypothesis of limited revenue acceleration & tepid margin expansion in FY20E for Indian IT services.
Cognizant’s Q1 performance (USD 4,110 mn; -0.5% QoQ growth) was a miss to its guidance (USD 4,159mn) and consensus expectations (USD 4,163 mn). Management has cut the guidance for CY19 to 3.6-5.1% YoY growth from 7- 9% YoY revenue growth in CC term whereas guidance on the current exchange rate translates to growth of 2.7-4.2% YoY growth compared to consensus expectation of ~7.5% YoY growth in USD term. The slowdown in revenue growth was mainly due to weak performance in financial services vertical.
* Revenue guidance missed:
Cognizant reported constant revenue growth of 6.8% in c/c, lower than guidance range of 7.5- 8.5% for March 2019 quarter. On organic c/c basis growth was 4.2%. On a sequential basis, Cognizant reported revenue decline of 0.5% to US$4.11 bn
* Steep cut in revenue guidance for FY19:
Cognizant has cut CY2019 revenue growth guidance to 3.6-5.1% in c/c (guidance includes inorganic component), down from 7-9% growth guidance set out at the beginning of the year. The revised guidance includes 170bps contribution from inorganic revenue growth. Reason for cut in guidance were i) Healthcare vertical (28% of the revenues) was impacted by M&A in client base ii) Slowdown in BFSI vertical (35% of the revenue. Management mentioned there is a revenue decline from 3 out of 5 large banking clients.
* Cut in Margin guidance:
Cognizant also cut adjusted EBIT margin guidance to 17% from 19% for CY2019. EBIT margin expectation for 1HCY19 stands at 16% with recovery expectation in 2HCY19. The company expects margins to improve in 2HCY19 on the back of procurement optimization, better utilization, improved pricing, rationalization of delivery costs and shift to higher value services such as digital.
* Weak BFSI outlook:
BFSI vertical posted flat YoY growth in CC. There is softness with a few of largest banking clients and North American regional banking clients along with several insurance clients. According to the management, there are some cautiousness in the banking sector.
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