May 4, 2009 / 3:43 PM / 10 years ago

PREVIEW-Cognizant seen posting higher Q1 profit

* What: Q1 results

* When: Tuesday, May 5

* Company expected to back full-year revenue view By Bijoy Anandoth Koyitty

BANGALORE, May 4 (Reuters) - IT service provider Cognizant Technology Solutions Corp (CTSH.O) is expected to post a higher first-quarter profit as it benefits from a stable and diversified customer base, even as the sector has been hit by delays in client decision-making and sluggish demand.

Analysts expect Cognizant to back its 2009 revenue outlook, citing its ability to handle pricing pressure and the offshore focus maintained by its largest customer, JPMorgan Chase (JPM.N).

“JPMorgan, among other banks, is probably in a better shape, and on top of that the bank seems to be continuing to have a very strong commitment to its offshore strategy,” Cowen & Co analyst Moshe Katri said by phone.

JPMorgan accounts for about 4 percent to 6 percent of Cognizant’s revenue, according to Katri. Other key customers include Pfizer Inc (PFE.N), eBay Inc (EBAY.O) and Credit Suisse CSGN.VX.

“The better sentiment around financials and stock markets is an incremental positive as Cognizant gets 45 percent of revenue from the financial services sector,” UBS analyst Jason Kupferberg said.

For the first quarter, analysts on average expect the company to earn 37 cents a share, excluding items, on revenue of $735.4 million, according to Reuters Estimates. The company posted a profit of 34 cents a share in the year-earlier quarter.

In February, Cognizant had forecast 2009 full-year revenue of at least $3.1 billion. Analysts are expecting $3.06 billion.


Research company Gartner said in March that prices of IT outsourcing services would shrink 5 percent to 20 percent through 2010 due to the uncertain economy, IT budget constraints and competition between vendors. [ID:nLN398055]

Analysts expect Cognizant to lean on offshore resources to withstand pricing pressure.

A check on hiring and the weaker Indian rupee versus the U.S. dollar would also help, UBS’ Kupferberg said.

Cognizant can boost headcount in India, where labor costs are cheaper, and pricing pressures can be offset by higher volume, said James Friedman of Susquehanna Financial Group, who rates the stock “buy”.


A relatively stable and diversified customer base would help Cognizant to stick to its 10 percent revenue growth outlook for 2009, at a time when some of its peers see a tough year ahead.

Dismal demand trends have forced outsourcing giant Infosys Technologies Ltd (INFY.BO) INFY.O to forecast an annual sales drop for the first time in its history, while rival Wipro Ltd (WIPR.BO) has forecast a fall in June-quarter revenue.

Ashwin Shirvaikar of Citigroup expects Cognizant’s “healthy pipeline of contracts will give it the confidence to reaffirm its revenue guidance.”

Susquehanna’s Friedman said customer additions in 2008 would be the key for the IT service provider.

“Cognizant signed twenty $25 million deals in 2008 and they need to see those deals ramp. They also need to make sure that the old contracts don’t sunset,” he said.

Cognizant’s efforts to leverage some of the under-penetrated verticals such as life sciences will play a crucial role in 2009.

“More than people sometime realize, they get more than 20 percent of their revenue now from life science, and that sector is growing,” Friedman said.

Shares of Cognizant have gained more than 33 percent in the past three months, while Infosys and Wipro have risen 15 percent and 46 percent, respectively. (Editing by Ratul Ray Chaudhuri)

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