Cognizant posts 17% drop in net profit; Covid-19 to impact Q2 numbers

Financial services and healthcare, which contribute around 34.3 per cent and 28.3 per cent of its revenues, grew by 1 per cent and 2.5 per cent, respectively
IT services major Cognizant joined its peers in witnessing the impact of Covid-19 pandemic on its revenues and profitability, as the ongoing crisis shaved off close to $35 million from the company's top line in the first quarter of this calendar year. The Nasdaq-listed firm, which had earlier withdrawn its revenue guidance for 2020 on the back of business uncertainty, also said that its revenue will be adversely impacted by around $50-70 million in the second quarter (April-June) due to the recent ransomware attack.

Teaneck-based IT major Cognizant posted a decline of 16.78 per cent in its net profit at $367 million for the quarter ended March 31, 2020, as compared to $441 million in the same period a year ago. Its revenue grew by 2.8 per cent year-on-year (YoY) basis to $4.22 billion during the quarter as compared to $4.11 billion a year ago.

In comparison, its bigger peer Tata Consultancy Services (TCS) reported a dollar revenues growth of 0.9 per cent  during January-March period of this year on a YoY basis, while for Infosys it was 4.5 per cent.

According to Cognizant, the Covid-19 related disruption reduced revenue in March to the tune of $30-35 million, reflecting delays in project fulfillment while the company shifted to work-from-home model. "While we posted our strongest quarterly earnings since 2017, we expect a challenging demand environment throughout 2020," said Brian Humphries, CEO of Cognizant.

During the quarter under review, the firm's operating margin saw a 190 basis point fall at 15.1 per cent. For the whole year (2020), Cognizant expects its margin to slide below 16-17 per cent as the ransomware attack is expected to to shave off around $50-$70 million of revenue in the second quarter. The impact is expected to be felt intensely in verticals such as travel, hospitality, retail, automotive, energy, and media and entertainment verticals.

"We anticipate that our Q2 adjusted operating margin will be the lowest quarter of the year, given the combined impact of Covid-19 and the ransomware attack," said Karen McLoughlin, chief financial officer at Cognizant. The IT firm, which has more than 60 per cent its staffers in India, however, said that the ransomware attack has been contained.

Among verticals, the highest growth in revenue during the quarter came from communications, media and technology, which grew 5.2 per cent to $626 million. Financial services and healthcare, which contribute around 34.3 per cent and 28.3 per cent of its revenues, grew by 1 per cent and 2.5 per cent, respectively. Products and resources grew 4.4 per cent to $954 million.

Growth in banking was driven by the contribution of the previously announced partnership with three Finnish financial institutions to transform and operate a shared core banking platform and regional banks in North America.

Meanwhile, the IT firm said it would continue with its '2020 Fit For Growth Plan' to streamline the company's operating model and reduce costs to fund growth investments. "We have suspended share repurchase activity and continue to evaluate M&A opportunities to support our long-term strategy," the company said.

During the quarter, number of employees fell by 800 in sequential term at 291,700 though the IT firm said it would onboard 20,000 fresh graduates this year. "We will continue to invest in people as we feel digital skills will be important in this down time. As far as lateral hiring is concerned, we will do this on exceptional basis," said the Cognizant CEO.

  • The IT firm expects its revenue to take a hit of $50-70 million in Q2 due to recent ransomware attack
  • It sees tough demand environment throughout 2020
  • Margin to remain below 16-17% range in 2020
  • Company will onboard 20,000 fresh graduates this year

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