​Cognizant's third revised revenue guidance adds to existing woes

This re-revision comes on the heels of class action lawsuits filed in reaction to the company's disclosure about improperly obtained building licenses.
Written by Rajiv Rao, Contributing Writer

With all the excitement and furor surrounding the US presidential elections, one important and less-than-sangine milestone in the recent fortunes of Indian IT went relatively unnoticed -- that of Cognizant's latest earnings results.

Cognizant has been a bonafide star in Indian IT, a company that easily eclipsed its peers and burnished a reputation for being dynamic, youthful, and progressive in terms of embracing the brave new world of digital that other outfits weren't able to embrace with quite the same agility. It has done so despite having been around for a much shorter period of time.

This year, however, has been a wild and rocky ride to say the least. A week ago, the company reduced its revenue guidance for the third time this year -- something the Cognizant of yore would be appalled at. The company had originally predicted a 10 to 14 percent revenue growth at the beginning of the year, then slashed it to between 8.5 to 9.5 percent, and finally whittled that down further by 50 basis points to under 9 percent ($13.47 billion to $13.53 billion).

This whittling down should be taken in context, say some, and this article in Business Standard newspaper suggests that the third downward recalibration is largely because of the $18 million impact that a weakening pound against the dollar has had -- indeed Brexit woes have haunted all the other IT majors.

In fact, prominent Indian brokerage Edelweiss suggests in the same article that there are actually positives in Cognizant's results. It suggests that the IT firm's guidance has an inbuilt suggestion that the December quarter will report flat to 1.5 percentage growth despite a period that traditionally reveals seasonal weaknesses due to inactivity during December and New Year's holidays. "We believe, delayed decision has been the primary culprit behind revenue growth challenges for Indian IT players and cloudification does not have any role in it," said the Edelweiss report.

That may be so, but as I have written all year, it is hard to ignore the near-catastrophic slide in revenue growth that Indian IT has experienced as a result of a whole host of things converging all at once: less reliance on legacy systems and more SaaS and IaaS adoption; a need for more complete higher-value digital services; inability to move up the value chain; commoditization of the labour-arbitrage variety of IT services; shrinking deal sizes; rising visa costs; uncertainty of where the world is heading vis a vis Brexit and the new US president; and much more.

Cognizant is certainly not immune to this widespread existential crisis hobbling Indian IT which has slashed its growth rate down from a stratospheric 21 percent just last year to a more earthly 9 percent. However, it has somehow managed to embroil itself in other -- some would say, equally grave -- matters.

The firm launched an internal investigation when it unearthed the possibility that some of its employees may have improperly obtained licenses and permits needed for 12 of its facilities in India. Not only did this wipe $4.4 billion off Cognizant's market cap, it now is on the receiving end of numerous class action lawsuits for allegedly misleading investors, which will dog the company into the next year.

The company will be fervently wishing for a positive resolution to these, considering the perilous waters that Indian IT is already swimming in.

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