Cognizant withdraws earnings guidance for 2020 as Covid-19 crisis spells biz uncertainty

In a first, Teaneck, New Jersey headquartered information technology (IT) services firm Cognizant has withdrawn its earnings guidance for 2020 on account of the unpredictable and unprecedented business environment it anticipates this year due to the Covid-19 pandemic.

"Given the unprecedented nature of this crisis, uncertainty around its duration and its impact on our ability to forecast performance, the company is withdrawing its 2020 guidance that was provided on February 5, 2020," the Nasdaq listed company, which follows the calendar year for its financial accounting, said in a statement on Thursday.

Earlier this week, TechCircle reported that Indian IT majors such as TCS and Infosys have delayed their March quarter and FY20 earnings announcements, which were expected this week. This is largely due to their inability to forecast earnings growth rates for FY21 growth rate. The sector is expected to post its first ever annual decline in sales.

Read: As Covid-10 crisis escalates, IT services sector prepares for bleak FY21 earnings  forecast

Cognizant, which has extensive operations in India with headquarters in Chennai, said it has proactively taken steps to strengthen its financial flexibility, including drawing down $1.74 billion on its revolving credit facility on March 23, 2020. The drawdown brought the company's total cash and investment balance as of March 31, 2020, to approximately $4.7 billion, with net cash of $2.2 billion.

During the first quarter of 2020, the company completed the acquisitions of Code Zero and Lev Digital and repurchased approximately 8 million shares. It added that the company would not initiate any new share buybacks as of now.

Last year, the company had projected a 2-4% growth rate for the calendar year 2020, which, incidentally, was also the lowest compared to previous years.

In 2019, the company reported annual revenues at $16.8 billion, up 4.1% from 2018, much lower than its Indian competitors such as Infosys and TCS and the overall IT industry growth of 7.7% during the previous financial year.

"Our priorities remain the health and safety of our associates and the business continuity of our clients," Cognizant CEO Brian Humphries said in the statement on Thursday, "We are committed to helping our clients as they navigate unprecedented business challenges as well as supporting the efforts of governments globally to contain the spread of the virus," he added.

Unfortunately for the Nasdaq-listed company, it has a larger exposure to the North American and European markets as compared to its Indian peers. About 75% of its revenues come from North America, which has come to a standstill after being ravaged by the Covid-19 pandemic. Most businesses across the country are yet to take stock of future cuts that will be required in overall and technology spends on account of the losses being sustained in the present situation.

According to Cognizant, the financial performance in the first two months of the quarter was on track to exceed the February guidance, driven by strong performance across the North American market. However, during the latter part of March, Covid-19 increasingly affected the company's business largely due to delays in project fulfilment as delivery, particularly in India and the Philippines, where the operations shifted to work-from-home, as well as reduced client demand, primarily in the travel and hospitality industries, the company said.

In late March, the company said it would provide those at the associate level and below with an additional payment of 25% of their base pay for the month of April. Additionally, it standardised 14 days sick leave coverage globally for COVID-19 cases or self-quarantine without impacting other sick leave or vacation programmes.

The company employs close to 300,000 people globally.

Earlier, global IT services and consulting firm Accenture revised its guidance for the financial year 2019-20 downwards to 3-6% from the 6-8% it had projected earlier.

Kotak Institutional Equities (KIE), the research wing of Kotak Mahindra Bank, had placed a ‘cautious’ tag on the sector, expecting a 1-5% revenue decline period on the financial year of 2021, based on an assumption that the Covid-19 pandemic would lead to a short-lived recession.

On Friday, international lender IMF said that the situation could be worse than the Great Depression of the 1930s.