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Aim to grow 10-13% this year; see deals in digital:Cognizant

IT services major Cognizant on Friday reported a 15.2 percent increase in net profit at USD 441.2 million for the March quarter.

Cognizant’s net profit stood at USD 382.9 million in the first quarter of 2015. The US-based firm saw its revenue grow 10 percent to USD 3.2 billion in the quarter under review from USD 2.91 billion in the year-ago period. However, revenues were down 0.9 percent sequentially.

The company reports financial earnings for the calendar year.

Talking about the numbers, Gordon Coburn, President of Cognizant, said the softness in the March quarter was driven by weakness in financial services and healthcare.

“We have to grow out of it. The challenges we had are largely behind us.”

The growth for 2015 was 15 percent. This year the company is hoping to grow 10-13 percent.

In Q2, the company will have a positive sequential growth in banking and financial services, he said. Admitting there are headwinds, he said the company will return to sequential growth in banking and finance services but not at a pace that we would like.

He is hopeful the company will grow by about $140-200 million in the second quarter. He sees big integration deals in healthcare. Major deals will be seen in large pharma, banking and digital sectors, he said.

Below is the verbatim transcript of Gordon Coburn’s interview with Anuj Singhal and Kritika Saxena on CNBC-TV18.

Q: To begin with one concern that analyst seem to have is the reduction in the upward end of your guidance from 10-14 odd percent is brought down to 10-13 percent. I understand it is not a very large sum it’s only a marginal revision, but what is the reason for that. Are you expecting more pain ahead when it’s come to the banking and financial services (BFS) and the healthcare services verticals?

A: It’s actually interesting, we feel very good about the business going forward. We guided to revenue growth of USD 140-200 million in the second quarter which is very strong dollar growth, probably stronger than most of the other players in the industry. We hired 11,000 people net additions in Q1 also leading in the industry. The challenge for us obviously on a full year basis is our first quarter our March quarter was soft. It was at the lower end of our guidance really driven by weakness in financial services and healthcare, so the math is we now have to grow out of it, so even with a return to healthy sequential growth still is a challenge for the full year and that’s why we took the high end of the guidance down. The good news is both in banking and in healthcare after having a sequential decline, we now expect to return to sequential growth for the rest of the year, so the challenges that we had were largely behind us. We do think growth in financial services will be muted, we do think growth in healthcare likely will be muted, but even with that we are able to grow sequentially at a very rapid pace going into the second quarter.

Q: You said that you are seeing some signs of turned around. You feel good about the kind of order book you have, so do you expect why the next quarter or by quarter 3 you would be able to revise your guidance upwards? Is there a visibility in sight?

A: No, I would not expect that and the part of the reason why is in 2016 we changed our guidance methodology. Prior to that we guided to at least a number, now we guide to a range with the expectation as you go through the year you tighten the range. So, I would expect us to be within the 10-13 percent growth for the year where exactly within our range we land will depend on what happens in financial services as we return to growth, sequential growth in that sector, how robust is the growth and in healthcare the timing of the acquisitions being completed that are happening by our clients, so I would expect just to be in the 10-13 percent range and wherein that range will depend on in particular those two activities.

Q: If I look at the revenue growth trajectory CY15 you saw a growth of about 21.1 percent in the calendar year before that you saw a growth of about 16.1 percent. The fact that the calendar year 2016 is expected to be between 10-13 percent. Isn’t that a concern and is that a new reality that you are facing now wherein the base has become bigger and the volatility has increased?

A: So certainly the law of large number plays into it, but remember this last year’s growth included the acquisition of TriZetto, so if you exclude that we grew about 15 percent. This year we are growing about 10-13 percent that includes about a 100 basis points of foreign exchange impacts, so on a constant currency basis we are growing about 11-14 percent, so growth has slowed a bit but it not as dramatic as it would appear on the surface. That’s slowing growth I think is several things, one is the law of large numbers which as we said over the long term obviously impacts the business; and two is the specific impact of mergers and acquisitions (M&A) in the healthcare sector and the continuation of low interest rate environment and some weakness in the European economies in the financial services sector.

Q: From BFS perspective, from the clients that you have had conversations with, from the orderbook visibility insight by when can you expect to go back to sequential positive growth in the financial services sector?

A: In the second quarter we expect to have positive sequential growth in financial services after a decline in Q1. So, we are experiencing that as we speak.

Q: Would you say that the pain in the financial services sector will not continue or you can see a turnaround in financial services and it was just a one or two quarter blip?

A: It is question of how you define pain. We are back to sequential growth but it is not at a pace that one would like in a normalised environment. So, there is still caution in spending in financial services particularly around the large money centred banks and the European banks who most of them are our clients.

The good news is we are growing again in that sector. The bad news is the growth is still muted because spending is still muted.

Q: Let us talk about the healthcare space, break it up for me. The payer space for instance has seen some kind of turnaround but with M&A and consolidation healthcare space has been very sluggish for the entire sector. By when can you expect positive numbers from the healthcare space? When do you see the healthcare space stabilising for you, if you can give me a timeline?

A: On a sequential basis we expect to have sequential growth in the June quarter. So, we are experiencing that right now despite the fact that there continues to be a deferral in spending among the four clients that are going through M&A right now. However what happened is the impact of that deferral in spending hit us in the first quarter and now that is in our run rate. Therefore as other clients grow, they don’t face the headwinds of sequential declines among the clients going through M&A. So, it is in the system already which allows us to grow despite having the deferrals in M&A. The big question becomes when is that M&A completed because when it is then we would expect to see a significant amount of integration work coming to Cognizant. The lower end of our guidance assumes that the M&A isn’t completed till end of the year. Higher end of the guidance would assume some of it happens a little bit sooner. So, we will see how that plays out but once again the headwind on sequential growth has now flushed out of the system and we would expect a sequential growth in healthcare in the second quarter along with financial services.

Q: Can I say then that from the second quarter onwards you will begin seeing positive trajectory and a stronger order book when it comes to these two sectors and can you us a sense about where the larger deals are coming in, in the next say immediate quarters?

A: So after a decline in revenue in Q1 we are going to grow a USD 140-200 million in the second quarter, that includes growth in healthcare, it includes growth in financial services as well as obviously growth in our other segments. When I look at where the big deals are, that’s pretty broad, clearly we are seeing big deals where we integrate in healthcare, where we integrate the facets platform with Cognizant’s hosting capabilities, IT capabilities and business process capabilities to help clients’ modernise, transform and automate their IT, so we have a great pipeline there of deals. When we look at our more traditional IT services we are also seeing a good pipeline particularly in industries like large pharma, like banking and Europe in general where there is economic pressure, so we are seeing healthy growth there and then in digital we continue to see good growth in digital, so we are quite pleased actually with our pipeline both of new projects from existing customers as well as from new logos.

Q: In terms of acquisitions you have been surprising the street with very significant acquisitions over the last two to three years, so in this year is there an acquisition in sight. You are sitting on a USD 4 billion cash chest. Is there an acquisition in sight that can significantly give you leg up in terms of your inorganic revenue growth?

A: So our primary focus is tuck under acquisitions and I would expect at the pace of acquisition of tuck under will pick up meaningfully from where it was in the last year to. We have a very good pipeline. Those acquisitions are going to focus on geographic presence, certainly will focus on digital as well as industry capability and technology capabilities, so a very healthy pipeline there at the tuck under acquisitions. We always keep our eye out for a larger acquisitions, but our strategy is primarily organic growth with tuck under acquisitions to supplement it.