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Cognizant cuts revenue guidance, attrition zooms to 36%

Growth across the company’s key verticals was also impacted barring communications, media and technology

July 28, 2022 / 06:29 PM IST

Nasdaq-listed Cognizant pared its revenue growth guidance for the full year and also saw muted revenue growth during the second quarter, signalling tough times for the software firm.

Cognizant, which competes with Indian firms such as TCS and Wipro, has also been losing market share in key accounts, even as its attrition touched a historic high of 36 percent. A majority of Cognizant’s employees are based in India.

Revenue for the quarter grew 1.7 percent sequentially and 7 percent year-on-year to $4.9 billion.

Cognizant follows the calendar year, and for the quarter ending June 30, 2022, reported a net profit of $577 million, up by 2.5 percent sequentially.

Growth across the company’s key verticals was also impacted barring communications, media and technology (CMT). Sequentially, financial services grew by 0.9 percent, healthcare by 1.1 percent, products and resources by 0.9 percent and CMT by 5.2 percent.

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During the company’s analyst call, Chief Financial Officer Jan Siegmund said Cognizant has “been absent from large and mega deals in the past and in the last couple of years. And arguably, that had slowed our revenue growth”. However, he added that staying out of large deals has enabled the company to have better control over its existing portfolio's revenue growth and margin expansion.

The company cut its revenue growth guidance in constant currency from 8.5-9.5 percent, down from 9-11 percent previously. In reported terms, it gave a guidance of 6.3 percent to 7.3 percent for 2022. This, it said, in part reflects the impact of supply-demand imbalances, elevated attrition and softer-than-expected hiring.

A note by Kotak Institutional Equities said the company has benefitted from a strong discretionary environment, which can moderate. It added that Cognizant is losing its share in key verticals.

Its total contract value (TCV) for the quarter was $23.2 bn on a trailing twelve-month basis, and bookings declined 3 percent YoY.

The company’s operating margin was at 15.5 percent, up 30 bps year-on-year, and the company’s leadership said the third quarter is traditionally its highest margin quarter.

With regard to the demand environment, Chief Executive Officer Brian Humphries said the company was monitoring the impact of a worsening economy in the pipeline, but has not seen a significant slowdown for IT services so far. “That said, as we serve some of the largest clients in the world, we are aware that should they see slowing earnings growth, nonessential projects or those with longer ROI may be paused,” he said.

Attrition

The company’s attrition also climbed. It saw voluntary attrition of 32 percent on a trailing-twelve-month basis. Voluntary Annualised Attrition came in at 31 percent, and involuntary attrition rose to 5 percent.

Attrition of 36 percent is the second-worst quarter in the company’s history, as well as significantly above its Indian peers such as Infosys (28.4 percent), TCS (19.7 percent), Wipro (23.3 percent), and HCL Tech (23.8 percent). This is also the company’s fifth straight quarter of seeing attrition levels above 30 percent.

Cognizant’s headcount came in at 3,41,300, up by a modest addition of 900 employees sequentially.

CEO Humphries said in a statement that this was a period of “unprecedented labour market conditions characterised by elevated attrition and significant wage inflation,” and that the company will continue to invest in employees, clients and capabilities.

He said during the company’s analyst call that the industry has been faced with a “musical chair situation”, but early indications show that it is looking up.

CFO Jan Siegmund said the second quarter is typically a higher attrition quarter for the company and has to do with the bonus payments given by the company at the end of March. “We knew that we would have increased attrition that we don't expect to continue throughout the year,” he said, adding that resignation trends in July have been improving.

Kotak Institutional Equities in a note said: “We are surprised with rather high involuntary attrition of 5 percent, especially against the backdrop of a talent crunch. Attrition rate is high onsite as well. Interventions are necessary; else it can impact growth as well as margins in the future”.
Haripriya Suresh
first published: Jul 28, 2022 02:34 pm
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