Cognizant strikes deal with Elliott Management, announces buyback

CHENNAI: In a first for the company, US-headquartered Cognizant Technology Solutions (CTS) on Tuesday announced its plan to return $3.4 billion to its shareholders over the next two years through share repurchase and dividends. CTS is likely to start a $1.5 billion accelerated share repurchase program in the first-quarter of 2017, hand out quarterly dividend of $0.15 per share commencing in the next quarter and buyback $1.2 billion shares between 2017-18.

This announcement comes after CTS saw pressure from activist investor Elliott Management — which holds 4% stake — last November to boost profitability and return cash to shareholders. Elliott wanted a $2.5 billion buyback, dividend payouts, other operational changes. Significantly, CTS has never declared a dividend since its inception. CTS’s announcement comes at a time when market speculation is rife about rival Infosys considering upto a Rs 12,000 crore ($1.8 billion) share buyback. CTS stock rose nearly 3% in early trades on NASDAQ.

Heeding to investor’s demands, CTS said it would make that they would make changes in their board by naming three new independent directors. They also said three existing members will not concurrently stand for re-election. The company said it would form a financial policy committee that would advise the board.

Francisco D’Souza, CEO, CTS said, “We are pleased to be working with Elliott and look forward to welcoming new colleagues to the board. In addition, As part of today's full-year earnings release, we announced a plan to accelerate our shift to digital, expand margin targets and launch a robust new capital return program. Taken together, these initiatives will make Cognizant even stronger. I am confident that we are well-positioned to drive long-term shareholder value as we continue investing in exciting new areas of growth for Cognizant and our clients around the world." The company reported revenues for December quarter at $3.46 billion, slightly below street expectations of $3.49 billion. Quarterly revenues were up 7.1% from $3.23 billion from the year-ago quarter and up 0.3% sequentially from $3.45 billion. For the calendar year 2016, the company registered revenues of $13.49 billion, up 8.6% from $12.42 billion for 2015. Cognizant also announced a raised guidance for 2017, estimating revenue to be in the range of $14.56-$14.84 billion.

December quarter saw CTS lag Infosys and HCL Technologies in annual growth of revenues and net profits. Sequential growth for the quarter was muted or negative for all IT majors except Shiv Nadar controlled HCL Technologies which zoomed past its peers to record a 3% sequential growth. The quarter traditionally is a weak quarter for IT companies given the furloughs and holiday season.

Analysts at Credit Suisse said, “While results are uninspiring, the focus today will be on the guidance. Having seen growth decelerate all through FY16 from 10% in Q1 to exiting Q4 at 7%, Q1 guidance is for an improvement to 10% growth. As we are halfway through the quarter, there should be some visibility to this, lending credence to the full year targets. FY17 guidance is not dramatically different from consensus, but our investor feedback suggests wide-spread fears that growth guidance would need to be cut. So unchanged expectations should be well received.”