Cognizant cuts Q3, 2016 outlook as enterprises curb spending

Cognizant lowered its sales outlook for 2016 and cited macroeconomic headwinds as well as customers that have curbed spending on information technology projects.

The outlook came as Cognizant reported a solid second quarter. Cognizant is a closely watched offshore outsourcing company due to its strong growth and ability to land clients carrying out digital transformation projects.

For the third quarter, Cognizant said it expects revenue to be between $3.43 billion and $3.47 billion with non-GAAP earnings between 82 cents a share and 85 cents a share.

Wall Street was looking for third quarter revenue of $3.54 billion and non-GAAP earnings of 86 cents a share.

For 2016, Cognizant projected non-GAAP earnings between $3.32 to $3.44 a share on revenue of $13.47 billion to $13.6 billion. Earnings were in line with expectations, but sales fell short.

Cognizant's guidance overshadowed a solid second quarter that exceeded earnings expectations. The company reported second quarter earnings of $252.4 million, or 41 cents a share, on revenue of $3.37 billion, up 9.2 percent from a year ago. Non-GAAP earnings for the second quarter were 87 cents a share, a nickel ahead of estimates.

CEO Francisco D'Souza said the cut in Cognizant's outlook was due to "near-term macroeconomic headwinds," but added that the long-term prospects were strong. Cognizant said that it will up its share repurchase program to $3 billion from $2 billion.

Gordon Coburn, president of Cognizant, said Brexit, banking, and the US healthcare market also contributed to the outlook being cut. Coburn said on a conference call:

As we indicated on our last two earnings calls, discretionary spending in the banking sector remains soft weighed down by macroeconomic concerns and a prolonged low interest rate environment. While we did see a return to healthy sequential growth in the second quarter, we expect banking discretionary spending during the second half of 2016 to be slower than we anticipated three months ago. Complicating the situation is the Brexit vote in the UK. Given this new development, we see the banking sector be more cautious in spending over the near-term.

The sharp weakening of the pound sterling will have a negative impact. Assuming the currency holds at current levels. As you know the pound sterling is seeing a 12% depreciation since the Brexit vote.

As we indicated to you at the beginning of this year, consolidation within the U.S. healthcare industry has impacted the revenue growth. Given the status of the M&A regulatory approval process, we anticipate our project spending will continue to slow for clients involved in these consolidations for the remainder of the year. We're also seeing customer pull back on discretionary spending in other parts of our business.