Cognizant sees marginal dip in June quarter revenue, headcount down by 5,900

The revenue decline reflects the soft market and continuing weakness in discretionary spending, said Cognizant CEO Ravi Kumar S

New Jersey-based IT major Cognizant beat the Street estimates for its June quarter revenue despite a 0.4 percent dip to $4.89 billion. The company, which has a significant portion of its workforce located in India, also bucked the trend of reporting dismal earnings by many of its Indian rivals in the period under review.

Cognizant revenues inched down 0.4 percent on a year-on-year basis in reported terms, and 0.1 percent in constant currency — which was the upper end of its guidance band for the quarter. The company saw its revenue increase sequentially by 1.5 percent after declining for four quarters, as it looks to turn around from a multi-year underperformance even amid a challenging demand environment.

The company logged in a net profit of $463 million, down 19.76 percent on-year and 20.17 percent on-quarter.

Speaking to analysts, CEO Ravi Kumar S said that the year-on-year revenue decline reflects the soft market and continuing weakness in discretionary spending. “We are transitioning more existing work in the sector towards managed services as many clients remain focused on driving cost takeout, vendor consolidation and productivity initiatives. We are also stepping up our engagement with fintech companies, which we believe offer a great opportunity for digital transformation. We are strengthening our capabilities with the goal of capturing discretionary spending on transformation work when it returns,” he said.

Bookings for the quarter stood at a record $26.4 billion on a trailing-twelve-month basis, up from $25.6 billion in the Q1FY23. The company follows the calendar year.

The IT major, once a barometer of growth for the IT industry, continues to struggle on the operating margin front. Its adjusted operating margin fell 40bps sequentially to 14.2 percent, which is among the lowest in the industry.

Last quarter, Cognizant kicked off a cost-cutting programme called NextGen, as part of which it planned to cut 3,500 jobs as well as give up 11 million sq ft in office space primarily in large Indian cities and moving to smaller cities — incurring a cost of $350 million as part of this ($150 million in employee separation costs and $200 million in facility exit and other costs).

Of this, it has so far incurred $117 million, consisting of $78 million in employee separation costs, $37 million in facility exit costs and $2 million in third-party and other costs. Kumar said as part of their real estate optimisation centres have been opened in Bhubaneshwar and Indore.

The company’s GAAP operating margins fell to 11.8 percent — as the $117 million costs incurred had a 240 bps impact on margins. Operating margins were also impacted due to the two salary increases done by the company since October 2022.

Guidance

For the next quarter, it expects revenues to be $4.89 - $4.94 billion, which translates to a growth of 0.6-1.6 percent or 0.5 to 0.5 percent growth in constant currency. The company also affirmed its revenue guidance for the full year of $19.2-$19.6 billion — or a decline of 0.9 percent to growth of 1.1 percent in reported terms, or -1 percent to 1 percent in constant currency.

“The midpoint of our guidance suggests a softer fourth quarter relative to historic norms as we anticipate softer demand and more volatile discretionary spending patterns driven by macroeconomic uncertainty to continue throughout the end of the year,” Chief Financial Officer Jan Siegmund told analysts.

The company called out softness in the financial services vertical, which saw a decline of 5.1 percent YoY. Siegmund attributed it to softer overall demand environment and weak discretionary spending.

“Our pipeline for work related to cost take out and productivity-led initiatives remains healthy and meaningfully higher than the prior year period. We expect the uncertainties of the macro environment to continue to impact the pace of client spending over the next several quarters,” Siegmund said.

The company said it sees a decline in smaller deals, and that the company has built a pipeline for longer revenue streams in the future pertaining to larger deals. “It also explains why we're not seeing an immediate uptick on our revenues as these bookings will take time to translate into revenue,” he added.

People metrics

On the people front, the company saw its headcount decline for three consecutive quarters, as the company ended the quarter with 5,900 employees. Attrition has also trended downwards, with 19.9 percent on a trailing twelve-month basis from 23.1 percent last quarter.

While a part of the impact is due to the NextGen programme, Kumar said there is still room to increase billable utilisation.

“As we continue to do that, we will hit the end of the runway on increased utilisation. That's when you will see a flip on how you need more headcount to increase billable headcount… I think we have some headroom for operational efficiency to conduct more billable work before we start to see a headcount increase,” Kumar said.

Leadership changes

Chief Financial Officer Jan Siegmund has chosen to retire in early 2024, and will stay in the role until a successor is found to help with the transition.

This also comes at a time that several appointees during the time of former CEO Brian Humphries have either left the company or retired. Humphries was terminated from his position in January.

Humphries-era appointees who have exited the company include Chief People Officer Becky Schmitt, EVP Strategy and Technology Anil Cheriyan, and Head of Global Delivery Andy Stafford.

CEO Kumar said the company has a healthy bench, with several employees who have spent 7-8 years at the company. He said he’s looking to build leadership from the employees within the company, bringing back Cognizant employees who previously left, and also by way of external hires.

One such instance is Archana Ramanakumar, a Cognizant veteran who had left the company to go to LTIMindtree. She rejoined the company in July 2023 as SVP and Global Head of Industry Solutions.

“I think we have a very good bench of people who have been in the company for a long time and I'm excited about promoting them to future leadership. Second is bringing some of the some of the people who want to come back and we believe that they will add significant value to the future. And third, external hiring… We have made some good progress on putting the leadership team to support us for the future,” Kumar said.

Generative AI

Cognizant will look to invest $1 billion over three years into its generative AI capabilities, Kumar told analysts. The company said that as part of its Cognizant Neuro AI platform, it has over 100 client engagements in various stages.

‘We're designing generative AI offerings for industry specific solutions, cross-industry use cases and productivity enablement under themes like transforming code processes, improving the customer and employee experience, product innovation, software encoding, and knowledge management to name a few,” he said.

Cognizant also announced an expansion of its partnership with Google Cloud. As part of its investments in developing generative AI capabilities, it will launch a Cognizant Google Cloud AI University, where 25,000 of Cognizant’s workforce will be trained on Google Cloud AI technologies.

Even as Cognizant sees a pipeline where deals are skewed towards cost and efficiency, Kumar said that given the “groundswell of interest” in generative AI and the projects they have, they see the technology generating a new wave of opportunities.