Cognizant cuts revenue forecast again as demand, execution challenges persist

Nasdaq-listed Cognizant reported a sequential decline in revenue for the third quarter of the calendar year 2022, and pared its guidance for the second time, as it continues to hobble due to weak demand and poor execution.

Cognizant, which competes with Indian firms such as TCS, Infosys and Wipro, said revenue and bookings were below expectations as company-specific challenges were compounded by the impact of uncertain macroeconomic conditions.

Revenue for the July-September period declined 1 percent sequentially but was up 2.4 percent year-on-year at $4.85 billion. For the fourth quarter, Cognizant has forecast a revenue decline of 0.2-1.2 percent.

It also missed its revenue growth guidance for the quarter, coming in at 5.6 percent in constant currency as opposed to the guidance of 7.5-8.5 percent.

The company also cut its revenue growth guidance in constant currency terms for the full year from 8.5-9.5 percent to 7 percent. It was revised downwards in the previous quarter as well.

“We are revising our full-year guidance downward, which reflects headwinds from currency, lower North America billable headcount, which we expect to take several quarters to improve, and softer-than-expected bookings growth,” Chief Executive Officer Brian Humphries said.

In terms of growth in key verticals, on a year-on-year basis, financial services declined by 1.5 percent. Healthcare grew by 3.8 percent, products and resources by 3.7 percent and CMT by 6 percent.

Chief Financial Officer Jan Siegmund said the company’s Q3 revenue was below its guidance range primarily due to a lower billable headcount in North America.

“Higher-than-expected attrition, coupled with strong competition for talent in North America, made it challenging for us to maintain required staffing levels to meet our revenue forecast. An uncertain macroeconomic backdrop led to pockets of bookings and revenue weaknesses in certain industries,” he said.

The company’s attrition inched down slightly, from 36 percent to 35 percent sequentially, but continued to be significantly elevated. Humphries said that India, where a majority of its employees are based, impacted attrition the most.

The company’s headcount at the end of the quarter was 3,49,400, a net addition of 8,100 employees from the previous quarter.

During the earnings call, Humphries said while a non-certain macroeconomic backdrop impacted bookings and revenue, the primary reason for the revenue shortfall was a reduction in US onshore billable resources. This was due to a “period of elevated attrition, a reduction in visa travel and a COVID-induced shift in the near and offshore delivery centers”.

To tackle this, Humphries said they were looking at lateral hires and subcontractors, accelerated visa travel and targeted compensation programmes.

“While these actions are gaining traction, it is somewhat slower than previously anticipated. We, therefore, expect these headwinds to continue in the fourth quarter, ahead of clear progress in Q1,” he said.

Humphries added that daily resignations had gone down. He also added that employees would get salary hikes in the second quarter of 2023 and that the company completed one cycle in October.

The CEO said that most of the headcount additions were in India and the pyramid was stronger than it was in the last few years.

“That's because if you go back this year, we'll bring in about 40,000 graduates, 45,000 last year, 33,000 the year before, about 17,000 the year, less than 10,000,” he said.

US visa delays have affected the industry across the board and CFO Siegmund said that three years ago, they were "over visa-dependent" in North America and were remedying that.

Impact of macroeconomic conditions

Most of Cognizant’s peers signalled caution while saying that the demand pipeline continued to be strong. Humphries said clients were scrutinising and slowing their investment decisions due to uncertain economic conditions.

“Clients are slowing discretionary spending as they await greater clarity on the economy and navigate an increasingly complex regulatory environment,” Siegmund said.

Ravi Kumar’s appointment

Cognizant recently hired Infosys veteran Ravi Kumar as the president of Cognizant Americas. He will join the company in January, a move seen as a board-driven action to make leadership changes due to the company’s multi-year underperformance.

“Ravi brings client centricity and a growth mindset that we believe will help improve our US revenue trajectory,” Humphries said.

Pressure mounting on board

Moshe Katri, a leading analyst who has been covering IT services and payments for over two decades and is the managing director of Equity Research at Wedbush Securities, called out the company’s Board last quarter for not exercising its fiduciary duty.

This quarter’s underperformance would increase the pressure on the board to examine performance and execution, he said, adding it could potentially lead to executive role changes.

“Specifically, we continue to see the company losing market share, as it is unable to sustain a reliable recruiting engine while its ability to attract senior, seasoned executives remains questionable,” Wedbush Securities said in a note.

Kumar’s appointment is expected to be a pathway to him eventually becoming CEO, which Katri had previously alluded to as well.

A note by Kotak Institutional Equities analysts Kawaljeet Saluja and Sathishkumar S said execution challenges hit performance. The company had ceded market share in key verticals as growth slowed down to low-to-mid single digits, the note said.

Cognizant was losing share to competitors in large banking accounts and the vertical’s anaemic growth indicated a continuing loss of share, they said.

Healthcare grew but at a slower rate than peers, also indicating a relative loss of wallet share.

There is “not much readthrough for other IT services companies from these results”, the note said, a stark contrast to a few years ago when the Nasdaq-listed firm used to be a barometer of growth for the entire industry.