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Cognizant expects growth to dip in 2011

Cognizant Technologies, the fastest growing India-based IT services firm, warned of slower growth in 2011 compared to 2010 due to the exhaustion of ‘pent up’ demand. The firm, which posted another blockbuster quarter with a 45.2% jump in revenues, also announced an aggressive $500 million office-expansion program for accommodating 55,000 more employees. The firm, likely to overtake Wipro as the third largest IT services provider in a quarter or two, recently announced its employee number 1 lakh thanks to a bout of fast growth.

“The biggest difference [in the new year] is that in 2010, we benefited from pent up demand in second and third quarter from 2009,” pointed out Gordon Coburn, head of finance and chief operating officer. “We don’t have two years two years of spend pent up and released all at once [in 2010,]” he pointed out.

As a result, Cognizant expects revenue growth in 2011 to dip to 26% or more, compared to 40% registered in 2010. The firm, which posted revenues of $1.31 billion in the December quarter — marginally lower than Wipro’s $1.34 billion — also said bigger rivals (read Infosys, TCS, Wipro) are trying to emulate its low-margin strategy. Coburn, however, was not very hopeful that they would succeed.

He pointed out that Cognizant is today known for having invested heavily into its on-shore (US-based) talent, unlike typical Indian outsourcing players who rely heavily on off-shore (India-based) workers. “There is a recognition that our strategy is what clients are looking for right now,” he pointed out, adding that the competitors, however, seem to be caught between trying to save their substantial margins and hiring more expert on-shore workers, who tend to be more expensive.

“People are caught between maximizing margins or making the required investments.. It wll be very difficult for them to execute on,“ he pointed out. Thanks partly to lower billing rates and to higher employee expenses, Cognizant has one of the lowest profit margins among the big players in the sector, hovering around 19% compared to 30% or more for others. Howver, it grew nearly twice as fast as the others in 2010.

To accomodate the new employees, this year, it will spend nearly double what it spent last year in capital expenditure. Against $185 million spent last year, it has plans to spend $285 million and at least another $215 million in 2012 to 2014, nearly all of it in Special Economic Zones in four cities — Chennai, Pune, Coimbatore, and Kolkata.

The company added 8,300 new employees — one of the highest additions, taking the total to around 104,000. Attrition dipped from 20% to 16% during the quarter.

During the quarter, 77.2% of revenue came from clients in North America. Europe was 19.2% of total revenue and 3.6% of revenue came from the Asian Pacific, Middle Eastern and Latin American markets. For the quarter, Europe grew by 9.8% sequentially and 50.3% year over year. For the full year, Europe grew by 41%.

During Q4, European revenue was positively impacted by approximately $6.2 million compared to the 3rd Quarter due to the strengthening of the European currencies. On a constant dollar basis, Europe grew 7.1% sequentially.

For the quarter, application management represented 50% of revenues and grew 31% year-over-year and 7% sequentially. Application development was 50% of revenues and grew 64% year-over-year and 8% sequentially. For the full year, application management grew 30% while application development grew 52%.

Pricing, on a sequential basis, was up 1.5% onsite and 2% offshore.

Offshore utilization was approximately 73% during the quarter. Offshore utilization, excluding recent college graduates who were in our training program during the quarter, was approximately 82%. Onsite utilization was approximately 91% during the quarter.

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