by Beth Bacheldor

Earnings are Bright in Outsourcing

Opinion
Feb 16, 2011
Enterprise Applications

There's plenty good financial news across the IT outsourcing industry, unless you’ve been running Wipro’s IT services group.

Relatively speaking, this is a profitable time for outsourcing companies.

Most recently, Cognizant reported upticks in its fourth-quarter profit and revenue that beat Wall Street expectations. The IT consulting and services firm, which is based in Teaneck, N.J. but has much of its workforce in India, reported that its profit rose to $206.2 million in the fourth quarter, compared with $144 million during the same period a year ago. Excluding one-time items, the company said it earned 70 cents per share. Analysts had predicted 65 cents per share on that basis, according to FactSet.

Cognizant reported that its revenue rose to $1.31 billion from $902.7 million a year ago. According to reports, analysts had expected revenue to come in at $1.28 billion. For the full year, the firm earned earned $733.5 millionon $4.59 billion in revenue. In 2009, it earned $535 million on $3.28 billion in revenue.

I don’t have the details on how its earnings break out by category, but according to this article in PC World, Cognizant is doing better than the top Indian IT outsourcers (which are doing pretty well themselves). The PC World article notes that in anticipation of ever-growing demand for outsourcing services, Cognizant has announced it will invest more than $500 million through the end of 2014 to add 8 million square feet of its own facilities in India, which will have the capacity to house over 55,000 employees. The company will also use leased facility to meet its future staffing requirements.

For the current March quarter, Cognizant expects $1.36 billion in revenue, and the company expects revenue of $5.79 billion for all of 2011.”We are pleased with how quickly our business rebounded during 2010 – a validation of our strategy of continuing to invest through the downturn,” Cognizant’s, president and CEO Francisco D’Souza said in a prepared statement.

I already shared with you Infosys’ third-quarter earnings: in U.S. dollars, the company boosted its net profit to $397 million, up by 18.9 percent, and its revenue in the quarter was $1.6 billion, up by 28.7 percent from the same quarter in the previous year. Infosys reports in accordance with International Financial Reporting Standards (IFRS) and will report its fourth quarter and fiscal year 2011 earnings at the end of March).

IBM, too, said that a boon in its outsourcing business pushed fourth-quarter profit higher than analysts’ expectations. The company, which reported in January, said its net income in the fourth quarter was $5.26 billion, compared with $4.81 a year earlier. Revenue was $29.02 billion, and analysts expected $28.18 billion, according to FactSet. What’s interesting is that IBM’s outsourcing business had declined the previous three quarters, compared with the same periods a year earlier. But IBM reported that a backlog of total services deals pushed total revenue in that category to $142 billion on Dec. 31, $5 billion over the year before.

For other Indian outsourcing companies, there’s good news too. Tata Consultancy Services (TCS) reported revenue for its fourth quarter 2010 of $2.14 billion, a 31 percent jump from the same quarter a year prior. Profit was $517 million, which was 35 percent higher than the previous quarter as well as the same quarter the year before. TCS now has 12,497 more employees (for a total of 180,000) and 35 new clients since the previous quarter.

Meanwhile HCL Technologies reported revenues of $864 million in its latest quarter, representing a growth of over 32 percent compared to the same quarter last year. Net income was $89 million, up 39.2 percent over the same quarter last year and up 23.7 percent from the previous quarter. HCL added 46 new customers and 38,000 employees in 2010.

iGate, which recently acquired Patni, reported a nearly 3 percent year-on-year fall in net profits to $39.4 million in the December quarter, while revenue was up 7.6 percent at $183 million.

Finally, there’s Wipro. Now, at glance Wipro’s financials look solid. It reported third quarter earnings of $294 million, up 10 percent from a year ago, revenues up 12 percent from a year ago, and IT services revenue was up 19 percent from a year ago. The company reported $1.27 billion in revenue in its third quarter. But when you compare its earnings with its two closest competitors, TCS’ overall profit was 35 percent higher and Infosys’ profit was 18.9 percent higher.

That was enough to trigger a change at the helm. Wipro named T.K. Kurien the new chief executive of its IT business, effective Feb. 1. Kurien replaces Girish Paranjpe and Suresh Vaswani, who served as joint CEOs for the past three years and have resigned. In a Dow Jones article, Wipro chairman Azim Premji reportedly said during a news conferences “I don’t think we should be making excuses. We have underperformed in quarter three relative to competition.” It appears there’s little margin for error in the cut-throat IT outsourcing market.