Seasonal discretionary spending pressures mute growth in 3Q16 as Cognizant’s rapid headcount expansion and digital investment dampens profit, says Ryan Blanchard, analyst at TBR.
The report said digital adoption drives Cognizant’s broad-based revenue growth in 3Q16, though rapid headcount expansion hampered profitability.
Cognizant’s revenue expanded 8.4 percent year-to-year in 3Q16 to $3.45 billion. The company continued to build out its global delivery network and invest in its digital portfolio during the quarter while reducing operating expenses through a decrease in incentive-based compensation, which marginally offset its rapid headcount expansion during the quarter.
Cognizant benefited from broad-based demand for digital solutions, generating growth across verticals and geographies despite market-wide reductions in discretionary spending from financial services and retail clients. Top-line growth will remain pressured in the near-term compare but will regain its historically double-digit pace as discretionary spending picks up in 1Q17.
Attract new logos with Digital Works consulting capabilities and cloud-delivered platform solutions.
Cognizant continues to gain traction with clients across verticals as it aims to better engage their respective clients through the adoption of cloud-based, digitally enabled solutions. The company will replicate successful practices from developed markets to drive its international expansion efforts. In September Cognizant unveiled plans to establish a Digital Works collaboratory in Melbourne, Australia. The facility, which also services as Cognizant’s regional headquarters, will provide the company a venue to display its digital expertise to current and prospective clients throughout Australia and New Zealand, driving adoption of its customized business cloud and Trizetto platforms to address specific client pain points.
Cognizant resumes its aggressive acquisition pace in early 2016, announcing four tuck-in purchases to bolster its digital consulting bench and expand its Nordic footprint.
During the first three quarters of 2016 Cognizant has maintained its aggressive acquisition pace as it seeks to rapidly build out its digital portfolio and support its consulting-led Digital Works program. The acquisition of KBACE Technologies in January expanded Cognizant’s Oracle Cloud expertise, while the minority investment in Red Associates in April provided Cognizant access to high-value behavioral analytics skills. In July Cognizant acquired Toronto-based digital consultancy, Idea Couture, augmenting its expertise around digital strategy, innovation and solution development. Idea Couture contributes over 170 employees across the U.S., Canada, Europe and Latin America.
In early October Cognizant announced its fourth acquisition this year with its purchase of Norway-based IT and business process outsourcing vendor Frontica for $128 million. Frontica bolsters Cognizant’s portfolio of outsourcing and SAP consulting services tailored to clients in the oil and gas sector, and touts a backlog of approximately $640 million.
The acquisition reinforces Cognizant’s dedication to leveraging niche buys to expand its core outsourcing services into underpenetrated markets and geographies, as Frontica expands its Nordic presence and breaches the oil & gas sector. Given Cognizant’s relatively underdeveloped presence in the oil & gas sector, we believe the firm will need to acquire consulting expertise specifically dedicated to the space to maximize its value proposition when competing against industry stalwarts including TCS and Wipro.
