Cognizant outpaces TCS, Infosys; stock takes off despite demand gloom

Cognizant Technology Solutions Corp. is bracing for a slower 2026 as a rebound in non-essential technology spending lags, prompting the company to cut its growth outlook to its lowest level in more than a year.

The Teaneck, New Jersey-based company, which grew by 7% in the last fiscal year, had previously set a target of 7.3% for this year. But as customers remained hesitant, the company cut its forecast to 5.9% at best, the lowest outlook since the final quarter of 2024, underlining the demand problem in the broader IT services sector.

The Indian heritage company, which is larger than Infosys in terms of revenue, ended the June quarter with revenue of $5.48 billion, up 1.3% sequentially and 4.5% annually. Although it narrowly missed analysts’ revenue estimates of $5.49 billion, investors applauded Cognizant’s earnings, with its shares rising 11% in midday trading on Nasdaq as the company outperformed Tata Consultancy Services Ltd (TCS) and Infosys. Net profit fell 3.9% from the previous quarter to $636 million. Cognizant follows a January-December fiscal year.

Protected

Management was cautious in its comments on the demand outlook.

“We achieved these results while growing at the top of our peer group despite a cautious demand environment. While we expect this caution to continue in the near term, AI is driving fundamental change in our industry that we believe creates significant long-term growth opportunities,” CEO Ravi Kumar said on the post-earnings analysts’ call.

Most of Cognizant’s growth has come from financial institutions, which account for nearly a third of its revenue. Revenues from financial institutions offset declines in revenues from life sciences and healthcare, as well as from the communications, media and technology segment.

One third of the 5.9% growth targeted for 2026 is expected to come from acquisitions.

“As we discussed in our last earnings call, our previous guidance range had anticipated an improved discretionary spending environment at the midpoint. Instead, macro uncertainty persisted,” CFO Jatin Dalal said during the call.

on the line

For now, Cognizant’s comments are in line with guidance issued by India’s two largest technology services firms.

“I don’t know when this (macroeconomic environment) will change because generally a lot of the ongoing conflicts are continuing and we have also seen a lot of situations where our customers wanted to postpone some projects during the quarter,” TCS managing director K. Krithivasan said during the company’s post-earnings analyst call on July 9.

“Overall, we see the macro environment continuing to remain uncertain,” Infosys CEO Salil Parekh said during the company’s post-earnings press conference on July 23.

TCS and Infosys finished the June quarter with revenues of $7.62 billion and $5.08 billion, respectively. While TCS’s revenue remained unchanged from the previous quarter, Infosys’ revenue increased by 0.8% sequentially.

Peter Bendor-Samuel, founder of research firm Everest Group, said IT services companies were not getting the “uptick in discretionary spending” expected from pent-up demand. “There appears to be a moderate AI push that has sparked a war for market share and significantly increased competitive intensity, leading to price cuts. At the same time, the war and resulting rising inflation have created greater caution on corporate spending. Both factors have reduced the growth rate (for the sector),” he said.

Guidance

While TCS did not issue quarterly or full-year guidance, Infosys, like Cognizant, lowered the upper end of its guidance from the previous quarter. The company realized its weakest forecast in the last four quarters, targeting 1.5-3% growth for the whole year on a constant exchange rate basis.

Accenture Plc, the world’s largest technology services company, also narrowed its growth forecast for the current fiscal year. Accenture reported a $100 million revenue loss due to the war in West Asia and narrowed its full-year revenue guidance to 3-4% from 3-5% in the previous quarter. 1.5 percent of this is expected to come from acquisitions.

This bleak outlook comes as the rise of automation tools challenges the relevance of technology services firms. Cognizant was the fastest-growing company among the world’s largest technology services firms last fiscal year; but its shares were down more than 34% as of Wednesday. On June 17, Mint He reported that shareholders were unhappy with the fact that Cognizant’s shares fell to a six-year low in May, even though it was the fastest growing company among its peers.

AI perspective

Cognizant management on Wednesday said customers are now changing the way they view artificial intelligence.

“A step back from customers is, wait a minute, I’m spending a lot of money on tokens, I’m spending a lot of money on the whole AI stack. Am I getting the value? And if not, let me reconsider how to optimize it and how to get value out of it,” Kumar said. He added that customers viewed AI as “magical” and experimental when it was first launched.

While AI is expected to further intensify pricing wars as IT services firms win deals at lower profitability, Cognizant has improved operating margins.

“Operational efficiency and positive foreign exchange movement more than offset the impact of our recently completed acquisitions, as well as higher third-party costs and compensation costs,” Dalal said.

Operating margins rose 30 basis points sequentially to 15.9% at the end of the June quarter. This was despite the company incurring $84 million in employee, software and facility-related costs due to Project Leap, which included layoffs of employees as part of the AI ​​restructuring program it announced last quarter. The company reduced its headcount by 900 people, ending last quarter with 356,700 employees.