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Cognizant And Genpact Deliver As Outsourcing Again Takes Center Stage

Posted on Wednesday, Nov 10th 2010

It’s been a high-profile week for outsourcing: President Obama was in India to discuss, among other issues, bilateral trade, and his trip included a meeting with the Indian prime minister, Manmohan Singh. During the trip, Obama seemed to soften his stance on outsourcing, saying “Trade between our countries is not just a one-way street of American jobs and companies moving to India. It is a dynamic two-way relationship that is creating jobs, growth and higher standards in both our countries.” At the same time, many Indian industry leaders are upset that the United States is taking protectionist measures, such as raising visa fees. In the face of almost 10% unemployment in the United States, a negative perception of the outsourcing industry persists. But Indian outsourcing players are reporting strong results, and the trend is continuing with U.S.-based players as well. Obama should offer incentives for Indian outsourcers to expand their operations in America to help lower unemployment levels and leverage the pool of highly skilled engineers and other workers, because (and others have made the same point) Obama is right; outsourcing does benefit both countries.

Cognizant’s Financials
New Jersey–based Cognizant Technologies (NASDAQ:CTSH) reported a quarter that beat the Street’s estimates and even raised their full-year outlook. Q3 revenues grew 43% over the year and 10% over the quarter to $1.22 billion compared with the market’s projections of $1.18 billion. EPS of $0.69 was also 44% higher than the previous year and exceeded the market’s projected $0.60.

For the full year, Cognizant raised their revenue projections to $4.55 billion from $4.46 billion given earlier. Margins are also now projected to be at least $2.50 per share compared with $2.42 projected earlier.

Cognizant’s Operating Metrics
Similar to others, attrition at Cognizant continued to mount. During the quarter, attrition grew to 21.8% compared with 20.7% a quarter ago. Offshore utilization excluding trainees also grew and reached 83% compared with 82% a quarter ago.

Cognizant’s Strategy
Cognizant views the market to be following three critical trends. First, the organizations are moving toward adopting distributed and virtualized business. Second, they are adopting emerging social, mobile, and cloud-enabled technologies. Finally, they are being led by consumers and employees who follow collaborative decision making. Their Cognizant 2.0 platform helps to address the need for distributed business models by connecting their global talent pool with their client base and thus increasing efficiency and effectiveness of operations. They have entered into partnerships with leading cloud providers such as Microsoft, Salesforce.com, and Amazon to address the need for cloud computing. Further, they are offering infrastructure as a service (IaaS) and platform as a service (PaaS) models through these tie-ups to help clients adopt these technologies. Finally, they are helping design to social customer relationship management systems, or social CRMs, which are enabling customers to a social layer to their core business processes. Social CRMs incorporate social media tools, like Facebook or Twitter, to engage customers in a dialogue to influence purchasing decisions or resolve problems.

Cognizant’s Global Expansion
Cognizant continued their geographical expansion and are increasing their Manila center capacity to house 600 people from the current capacity of 200. Like competitors, China is part of their growth plan; the company’s goal is to increase the employee base in China to 5,000 in the next two years. A year ago, Cognizant had nearly 800 employees based in China.

Recently, there were rumors that Cognizant considering acquiring Genpact. Cognizant’s acquisition of late have been made with a focus on expanding consulting and domain capability, grow their global footprint and diversify their services mix. They are looking for companies with a revenue turnover of $20 million–$80 million. By that criterion, Genpact, with more than $1 billion in revenues, is much bigger.

However, if the two were to merge, Cognizant would be able to expand their business process outsourcing (BPO) offering. Currently, they earn nearly 5% of their annual revenues from BPO businesses. Genpact’s acquisition would take that number to over 25%. Cognizant may not want to increase BPO revenues to such a large share. Recent acquisitions have relatively higher-end companies such as Galileo, which have helped Cognizant strengthen their consulting portfolio.

The stock is trading at $62.85 with a market capitalization of $19 billion. Earlier last month, it touched a five-year high of $68.87.

Genpact’s Financials
Meanwhile, at back office leader Genpact (NYSE:G), Q3 revenues grew 13% over the year to $321.6 million. EPS of $0.20 was a cent higher than the previous year. Revenues from clients other than GE grew 14.7% over the year and now represent 62% of total revenues. GE revenues grew 10.5% over the year to contribute the remaining 38% of the quarter’s revenues.

Fort the current year, Genpact projects revenue growth of 12%–13% over the year with an adjusted income from operations margin of 16.0%–16.3%.

Genpact’s Operating Metrics
Attrition also continued to increase and for the nine months ended September, Genpact reported attrition of 28%, compared with 23% a year ago.

Genpact’s Expansion Plan
Genpact earlier announced plans to expand in China and North America. Recently, they marked ten years of operations in China. The company wants to add nearly 6,500 employees to reach an employee base of over 10,000 in China by 2015. In America, Genpact recently announced plans to expand operations in Wilkes-Barre, Pennsylvania. The company has been awarded the Pennsylvania Economic Development Assistance Package for this expansion. The assistance package will cover nearly half of Genpact’s total cost to expand their operations, including the purchase of new equipment, leasehold improvements, and employee training in return for creation of at least 200 new full-time jobs within three years and retention of their existing 255 employees at their Wilkes-Barre service delivery center. These are the kinds of incentive packages that Obama and Congress should offer Indian players.

While Genpact too maintained silence on the market speculation of their acquisition, a merger with Cognizant will help them to expand into higher-end IT outsourcing and consulting.

Genpact’s stock is trading at $15.29 with a market capitalization of $3.4 billion. It touched a year high of $18.71 last month.

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