Cognizant has said its revenues will decline in 2023, underscoring the pain in the IT services industry, which derives a major chunk of its revenue from the US. The company, which used to be a barometer for industry growth many years ago, will lay off 3,500 employees and also give up millions of square feet in office space to save costs.
These were among the measures unveiled by newly appointed CEO Ravi Kumar S, who faces an uphill task in reviving the Nasdaq-listed IT major, which competes with the likes of Accenture, TCS and Infosys. While the company is listed in the US, a majority of its operations are based in India.
Cognizant provided revenue guidance of $19.2 - $19.6 billion, or -1.2 percent to 0.8 percent in reported terms, or -1 to 1 percent growth in constant currency for the full year. For the second quarter, it guided for a revenue band of $4.83 - $4.88 billion, -1.6 percent to -0.6 percent, or a decline of 1 percent to flat in constant currency.
At 14.6 percent, Cognizant’s margins are among the lowest in the IT industry, comparable to Tech Mahindra. For the full year, the company has guided for the adjusted operating margin to be in the range of 14.2-14.7 percent.
Also Read: Former Cognizant CEO Brian Humphries was 'involuntarily terminated'
For the first quarter of FY23, it beat analyst expectations in what is the first quarter where Kumar oversaw most of the period. He took over on January 12 as CEO, in what was a surprise announcement after former CEO Brian Humphries was “involuntarily terminated”. The change in the company’s leadership and chairman of the board also comes at a challenging time for the industry which is facing several headwinds.
Cognizant reported a 3 percent increase in net profit on a year-on-year basis at $580 million. Sequentially, profits increased by 11.2 percent. The company saw its revenue come in at $4.81 billion, a decline of 0.3 percent year-over-year or growing 1.5 percent in constant currency, beating its guidance of where it expected revenue to be in the range of $4.71-$4.76 billion.
Demand and large deal bookings
The company’s bookings for the quarter stood at $25.6 billion on a trailing twelve-month basis, up from $24.1 billion in Q4FY22.
“Our accelerated bookings growth in the quarter, which included several large deals and a healthy mix of new and expansion work, reflects the strengths of our services, our brand, and the longstanding relationships we have with our clients,” said CEO Kumar in a statement.
This is significant as Kumar met over 100 clients in 100 days as he said last quarter, at which time he said he would also monitor large deals — and that strengthening the company’s ability to win large deals was one of his key priorities. Under the tenure of his predecessor, Cognizant had ceded market share in key verticals that it now has to claw back, and it had also stayed away from participating in large deals as the company saw extremely high levels of attrition. It was this multi-year underperformance that led to Humphries’ ouster.
Kumar told analysts that the company’s “renewed strength in bookings momentum” is helping it replace a softer backlog from the last nine months and that it can demonstrate improved growth towards the end of 2023 and in 2024.
The banking and financial services segment, which has impacted all major IT players due to the crisis in the industry, impacted Cognizant as well. The CEO said that they believe that company-specific operational challenges in financial firms have largely subsided.
“We're also seeing the impact from softer discretionary spending and decision delays by existing and potential clients. In the US, our banking clients are generally large institutions, and we've seen an uptick in our deal pipeline. Overall, we've seen early green shoots that we're moving this portfolio in the right direction while navigating the macro dynamics,” he said, adding that they will be monitoring the environment.
“Our large deal pipeline remains healthy for the next couple of quarters large deal bookings that align with our risk appetite are essential to building commercial momentum. But they can take time to ramp up and realize revenue. We're working on strengthening and industrializing delivery to support our execution of large deals,” he added.
Speaking to analysts, Kumar said the company won four deals of over $100 million in Q1, which was up from nil in the same quarter last year.
According to Chief Financial Officer Jan Siegmund, the company saw pressure in smaller contracts, which it believes is a result of softer discretionary spending being driven by the macro environment. “This environment has a near-term impact on our revenue in the second quarter,” he said.
Last quarter, on Kumar’s list of priorities, was to enhance operating discipline, a move that will now impact 3,500 jobs at the company. Layoffs at Cognizant follow that of Accenture, which had announced that 19,000 people would be let go.
Cognizant attributed the move to its NextGen program, under which the company said it wants to simplify its operating model and optimise corporate functions.
“Our drive for simplification will include operating with fewer layers in an effort to enhance agility and enable faster decision-making. We expect the savings generated by the program to help fund continued investments in our people, revenue growth opportunities and the modernisation of our office space,” the company said. It is as part of this that the company expects 3,500 people to be impacted.
The company will incur $200 million in employee severance and other costs, which it said is “primarily related to nonbillable and corporate personnel, which we expect to mostly incur in 2023”.
It is also looking at “consolidating and realigning office space to reflect the post-pandemic hybrid work environment.” Cognizant is looking to reduce $100 million in real estate costs by 2025 as compared to 2022.
“This reduction in real estate costs is net of investments to expand our real estate footprint in smaller cities, primarily in India, in support of our hybrid work strategy,” the company said. The company is also looking at bringing employees back to offices.
On the people front, Cognizant saw its headcount decline by 3,800 in Q1FY23 from Q4FY22, and it now has a total of 3,51,500 employees. The company used to previously report its involuntary attrition numbers but has changed its reporting metric this time around.
Voluntary attrition on a trailing twelve-month basis has declined to 23 percent from 26 percent sequentially. This figure is only that of tech services employees and excludes employees in the company’s Intuitive Operations and Automation practice.
This also follows the CEO’s declaration last quarter that the company aims to be an employer of choice.
The company rolled out its third salary hike in 18 months to most of its employees earlier this month.
Kumar said that the company has made “career progression easier” by expanding the process of the internal job and redesigning the promotion process to increase movement within the company.
As has been the case with Cognizant’s Indian peers, Kumar said that recent breakthroughs in generative AI offer the potential to “fundamentally transform our client's businesses and increase our own productivity”.
For this, the company said it is accelerating investment in this space and is working with clients to identify priority AI use cases. “We've conducted ideation sessions with over 30 clients and are now working to industrialise solutions to the common challenges,” Kumar said.
We believe generative AI will revolutionise the technology services industry, creating higher rates of productivity and driving greater prominence for software and data engineering expertise. We are using AI to enhance our own creativity and productivity. We are operating pilots that use generative AI to accelerate consulting, design, engineering and operations with the long-term goal of doubling the productivity of our associates,” he added.
According to him, adapting new IT operations can reduce operational costs by 25-45 percent, reduce mean to delivery and detech by 30-50 percent, and reduce FTE’s (full-time equivalent) by 15-30 percent as compared to the use of traditional approaches.