Cognizant Q1 profit declines 17%; Covid-19, Maze ransomware to hurt FY20 growth

Cognizant, the Teaneck, New Jersey and Chennai based information technology (IT) services firm, has reported a 17% drop in net profits even as it reported a 2.8% increase in revenues during the first quarter of the financial year 2020 ended March. The company expects to continue to face headwinds through the year, it said. 

Profits for the January-March quarter stood at $367 million against the $441 million it had reported in the corresponding quarter of 2019. The company's revenues grew to $4.2 billion from the $4.1 billion it reported during the same quarter of the previous year. It saw a 0.5% revenue loss due to its exit from the content moderation business.

Covid-19-related disruptions reduced revenues in March, creating delays in project fulfilment, the company said in a statement. 

CEO Brian Humphries said the company expects a challenging environment throughout 2020 even as the pandemic has accelerated cloud migration and digitalisation. 

The lockdown started only during mid-March and did not impact the toplines of most IT services firms as they quickly moved to the work from home (WFH) model. Most companies are expected to feel the impact of the pandemic during the April-June quarter.

Apart from the pandemic, Cognizant also has had to deal with Maze ransomware attacks. Last month, it warned that the incident could hurt its financial performance.  Although the company has given assurances that it has contained the attack, it steered clear of revealing the extent of the financial fallout. 

In a first, Cognizant also withdrew its revenue guidance for the current financial year last month, citing business uncertainties due to the Covid-19 pandemic. The company added that it does not see any reason to revise its stance now as the extent of the pandemic continues to be unpredictable. 

Incidentally, during the September-December 2019 quarter, the company had reported its slowest revenue growth in 12 quarters after demand in its two key verticals BFSI and healthcare slumped. 

"We executed well in what was a challenging quarter and posted our strongest quarterly signings since 2017. The digital and cloud trends play directly to Cognizant's strategy," Humphries said.

Cognizant derives two-thirds of its revenue from the financial and healthcare verticals and the segments saw mere 1% and 2.5% growth year-on-year respectively, driving the company's growth below that of peers such as Infosys, TCS and Wipro, all of which had reported much higher growth rates.

"We entered 2020 with a strong balance sheet and further strengthened our financial flexibility in the first quarter. Against an uncertain economic backdrop, we will continue with our 2020 'Fit For Growth' plan to streamline the operating model and reduce costs to fund growth investments that align to our long-term growth strategy," CFO Karen McLoughlin said.

Earlier this week, Cognizant signed a pact to acquire finance and human resources cloud services provider Collaborative Solutions by June 30, the company’s fourth acquisition in 2020. 

In late April, lower revenue growth coupled with Covid-19 induced recession prompted Cognizant’s shareholders to ask the company’s top executives to realign the compensation structure with its revenue growth. 

While most IT services companies are optimistic about a financial turnaround in the current year, analysts expect the year will likely be a washout for the industry.

One glimmer of hope for the industry is that the financial sector, which contributes one-third of the revenue, might come to the rescue with increased digital spending.