New Delhi, July 29 -- Cognizant Technology Solutions Corp. is bracing for a slower 2026, with the delayed revival of non-essential technology spending prompting the company to cut its growth outlook to the lowest in more than a year.
The Teaneck, New Jersey-based company, which grew 7% last fiscal year, had previously set a target of 7.3% for the current year. However, as clients continue to sit on the fence, the company cut its guidance to at best 5.9%, the lowest outlook since the final quarter of 2024, and underlining the demand challenge over the broader IT services sector.
The Indian-heritage company, larger than Infosys in revenue, ended the June quarter with $5.48 billion in revenue, up 1.3% sequentially and 4.5% year over year. While it marginally missed analysts' revenue estimate of $5.49 billion, investors cheered Cognizant's earnings with its shares soaring 11% at noon on Nasdaq, as the company beat peers Tata Consultancy Services Ltd (TCS) and Infosys. Net profit fell 3.9% from the preceding quarter to $636 million. Cognizant follows a January-December fiscal year.
In its comments on the demand outlook, the management was guarded.
"We delivered these results against the cautious demand environment, while growing at the top of our peer group. While we expect that caution to persist in the near term, AI is driving fundamental change in our industry that we believe creates significant long-term growth opportunities," chief executive Ravi Kumar said at a post-earnings analysts' call.
Much of Cognizant's growth came from financial institutions, which make up almost a third of its revenue. Revenue from financial institutions offset the decline in revenue from life sciences and healthcare, as well as the communication, media, and technology segment.
Of the 5.9% growth targeted for 2026, a third is expected from acquisitions.
"As we discussed on our last earnings call, our prior guidance range contemplated an improved discretionary spending environment at the midpoint. Instead, macro uncertainty has remained," chief financial officer Jatin Dalal said during the call.
For now, Cognizant's commentary aligns with the guidance issued by two of India's largest tech services firms.
"I don't know when this (macroeconomic environment) will change, because overall, many of the ongoing conflicts are continuing, and we also saw many situations of our clients wanting to defer some of the projects during the quarter," TCS chief executive K. Krithivasan said during the company's post-earnings analyst call on 9 July.
"Overall, we continue to see the macro environment remaining uncertain," said Salil Parekh, chief executive of Infosys, during the company's post-earnings press conference on 23 July.
TCS and Infosys ended the June quarter with $7.62 billion and $5.08 billion in revenue, respectively. While TCS's revenue was unchanged from the previous quarter, Infosys's revenue jumped 0.8% sequentially.
IT services companies are not getting the "bump in discretionary spending" expected from the pent-up demand, said Peter Bendor-Samuel, founder of Everest Group, a research firm. "It appears that there is modest AI compression which has set off a war for market share and has significantly increased competitive intensity, resulting in price-cutting. At the same time, the war and resulting increased inflation have created more caution on enterprise spending. Both factors have reduced the rate of growth (for the sector)," he said.
While TCS does not issue quarterly or full-year guidance, Infosys, like Cognizant, trimmed the upper-end of its guidance from the preceding quarter. The company guided for 1.5-3% full-year growth in constant currency terms, its weakest guidance in the last four quarters.
Accenture Plc, the world's largest tech services firm, too has narrowed its growth guidance for the current fiscal. Accenture reported a $100 million revenue loss due to the war in West Asia, pushing it to narrow its full-year revenue guidance to 3-4% from the previous quarter's 3-5%. Of this, 1.5% is expected to come from acquisitions.
This gloomy outlook comes as the rise of automation tools challenge the relevance of tech services firms. Cognizant grew the fastest amongst the world's largest tech services firms last fiscal; yet its shares have fallen more than 34% as of Wednesday. On 17 June, Mint reported that shareholders were not pleased, despite Cognizant being the fastest-growing among peers, as its shares fell to a six-year low in May.
On Wednesday, the Cognizant management said clients are now changing their perspective on AI.
"The step back from clients is to say, wait a minute, I'm spending a lot of money on tokens, I'm spending a lot of money on that entire AI stack. Am I getting the value? And if I am not, let me revisit how to optimize it and get value out of it," said Kumar. He added that clients viewed AI as "magical" and experimental when it first launched.
While AI is expected to further intensify pricing wars as IT services firms win deals at lower profitability, Cognizant improved its operating margins.
"Operational efficiency and favourable currency movement more than offset higher third-party cost and compensation cost, as well as the impact of our recently completed acquisitions," said Dalal.
Its operating margins rose 30 bps sequentially to 15.9% at the end of the June quarter. This comes despite the company incurring $84 million in employee, software, and facility-related costs on account of Project Leap, its AI restructuring programme announced last quarter, which would include letting go of employees. The company cut headcount by 900 to end last quarter with 356,700 employees. Published by HT Digital Content Services with permission from MINT. For any query with respect to this article or any other content requirement, please contact Editor at [email protected]