Cognizant tapping emerging markets to skirt US pinch

Cognizant Technology Solutions, rattled by the downturn in the U.S. economy, is expanding rapidly in emerging markets like China and India as it looks for succour, but the move may take a while to provide a balm for the information-technology services provider.

"Investments being made in those geographies will start showing results two to three years from now," Chief Executive Francisco D'Souza said in an interview with Reuters.

While competitors like Tata Consultancy Services and Infosys Technologies have made strides in galloping economies like China and India, Cognizant lags far behind with only 1.5 percent of its revenue coming from Asia.

The company, which gets the bulk of its revenue from the United States, drew 20 percent of its second-quarter revenue from Europe.

Cognizant, which serves many U.S. financial firms battered in the wake of the credit crunch and housing market slump, has been trying to diversify its business and beef up business in Europe as it fights the slowdown in the United States.

But as the malaise in the United States spreads to the other side of the Atlantic, and concerns mount about the company's ability to sustain its strong growth rate in Europe, Cognizant is testing other shores.

"We continue to focus on the markets in Asia and we have also started, in a preliminary way, to look at some of the markets in Latin America and the Middle East," CEO D'Souza, who has been with the company since its inception in 1994, told Reuters.

Kaufman Bros. analyst Karl Keirstead expects Cognizant to get about 10 to 15 percent of revenue from outside the United States and Europe in the next two to three years.

Almost three quarters of the company's 59,000 employees are based in India, providing low-cost software development services primarily to U.S. companies.

Shares of the company, which cut its 2008 outlook last week, have lost close to 30 percent of their value in the last 52 months. The broader S&P 1500 IT Services Industry Index has dropped about 11 percent during the period.

LOOKING BEYOND FINACIALS

IT infrastructure services, business process outsourcing (BPO) and Knowledge Process Outsourcing (KPO) are areas with potential for tremendous growth in a relatively short period of time, Cognizant's D'Souza, who graduated from Hong Kong's University of East Asia, said.

In 2006, Cognizant bought infrastructure and professional services firm AimNet Solutions to set up its IT Infrastructure Management business. For the second quarter, IT Infrastructure accounted for 5 percent of revenue.

"I expect this segment to continue to grow ahead of our company's average growth for some time to come," D'Souza, who holds an MBA from Carnegie-Mellon University, said.

The company's financial services segment, which serves customers like Citigroup , CompuCredit and Netherlands' Rabobank, posted 7 percent sequential growth in the second quarter and accounted for half of overall revenue.

But D'Souza expects concerns about the segment to prevail for the rest of the year because of the increasing turmoil in the industry.

Cognizant also expects slower growth in its health insurance business for the rest of the year as one of its top-five clients has decided to scale back spending significantly.

The company's healthcare segment, which contributed 20 percent to second-quarter revenue, provides services for clients in the health-insurance and life sciences sector including Aetna Inc and Molina Healthcare.