“Newer strategic customers embracing a wider range of our services at an earlier stage in the relationship.” Rajeev Mehta, Cognizant

Rajeev Mehta

Group Chief Executive – Industries & Markets, Cognizant

How did Cognizant perform in the quarter ended June 2013?

In the June 2013 quarter, we delivered industry-leading revenue growth yet again, not only exceeding our second quarter revenue and EPS guidance but also increasing our full-year revenue and EPS guidance.

Our quarterly revenues rose to USD 2.161 billion, up seven per cent sequentially and 20.4 per cent from the year-ago quarter. The addition of USD 141 million in sequential revenues was the second highest incremental revenue addition in the history of Cognizant. While the GAAP net income was USD 300.4 million, up 5.7 per cent sequentially and 19.2 per cent from the year-ago quarter, the non-GAAP operating margin was 21.4 per cent.

We saw broad-based growth across geographies, industries and services. North America grew six per cent sequentially and 17 per cent year-on-year (YoY), while Europe grew 11 per cent sequentially and 37 per cent YoY. Within Europe, the UK grew by eight per cent sequentially and 28 per cent YoY. Including the impact of the C1 Group acquisition, Continental Europe grew almost 16 per cent sequentially and 54 per cent on a yearly basis. Rest of the World grew seven per cent sequentially and 25 per cent YoY. Financial Services grew 6.5 per cent sequentially and 23.6 per cent YoY. Healthcare grew 6.2 per cent sequentially and 11.8 per cent YoY. Manufacturing and Retail grew 8.4 per cent sequentially and 28.7 per cent YoY.

Consulting and Technology Services (formerly known as Application Development) represented 50.5 per cent of the revenues and Outsourcing Services (formerly known as Application Management) was 49.5 per cent for the quarter. Consulting and Technology Services grew 17.8 per cent YoY and 8.7 per cent sequentially. Outsourcing Services grew 23.1 per cent YoY and 5.3 per cent sequentially.

We closed the quarter with 1100 active customers. The number of accounts we consider to be strategic — accounts with the potential to ramp up to at least USD 5 million to more than USD 50 million in annual revenue — increased by eight. This brings our total number of strategic clients to 229. We continue to see a trend towards newer strategic customers embracing a wider range of Cognizant’s services at an earlier stage in the relationship.

What were the major growth drivers for Cognizant?

In the 15 years of our listing on the NASDAQ stock exchange, one thing that has remained absolutely consistent is our strategy of re-investment in the business to drive topline growth. All along, we have maintained stable operating margins and delivered industry-leading revenue growth.[PAGE BREAK]

We see a continuation of a healthy demand environment for our services. The improved demand comes from a combination of macro trends and our own competitive positioning. We have seen a strong pick-up in discretionary spending, in line with what we see in a normal budget-and-spend cycle.

In recent years, we have focused our investment across three growth horizons. We implemented this three horizon approach in response to a fundamental long-term shift we identified in our clients’ business imperatives. We think of those imperatives in terms of a ‘dual mandate’ to run better by driving greater performance and to run differently by improving the positioning of their businesses for future success.

We continue to build our capabilities in SMAC (Social, Mobile, Analytics and Cloud) technologies. We continue to see strong evidence that SMAC is the next secular shift in computing, and are investing accordingly. We have had some great client wins across our SMAC practices. As enterprises around the world focus on digital transformation of their operations and SMAC becomes ever more prevalent in the industry, our early lead and thought leadership in this area gives us a distinctive competitive edge in the market.

We are also pleased with the healthy growth in our Horizon 1 services (application development and maintenance) and Horizon 2 services (BPO, IT infrastructure services and consulting). This is further validation of our balanced approach to growing and integrating our core services with our emerging services and new service offerings.

With modest improvements in consumer and business confidence in North America, our clients are beginning to make investments in software and services, often funded by the need to drive efficiencies in other parts of the business.

In Europe, clients are looking to move more work to a global delivery model. A structural shift from discretionary projects to larger annuity-based outsourcing deals across Europe is being catalysed by the economic climate. Our continued investments in Europe, local leadership and broad range of capabilities make us optimistic in the long-term growth prospects across the region.

Our growth in the Rest of the World continues to remain strong, as our investments in key markets such as Singapore, India and the Middle East are continuing to drive accelerated growth.

What is your outlook for the company (over the next quarter and over the long term)?

Based on our strong growth in the June-ended quarter and expectations of a continued healthy demand environment for the rest of the year, we have raised our fiscal 2013 revenue guidance to at least USD 8.74 billion, up by a minimum of 19 per cent compared to that in 2012. Third quarter 2013 revenue is anticipated to be at least USD 2.25 billion, indicating at least 4.1 per cent sequential revenue growth. While third quarter 2013 diluted EPS is expected to be USD 1 on a GAAP basis and USD 1.09 on a non-GAAP basis, the fiscal 2013 diluted EPS is expected to be at least USD 3.96 on a GAAP basis and USD 4.32 on a non-GAAP basis.