Cognizant, now the second largest IT firm in terms of revenues, looks to improve productivity to combat pricing pressures.
It was a phenomenal quarter for II major Cognizant. Revenues grew almost 5% to USD 1.79 billion, taking it past Infosys to become the second largest IT player.
But the truly positive surprise came when the management withheld from cutting their guidance down from the current 20%. At a time when economic pressure is squeezing other IT services firms, Cognizant believes it still can deliver the growth it targeted to achieve at the start of the year.
In an interview to CNBC-TV18, president Gordan Coburn says that the tough environment in the US and Europe is forcing to companies to cut on their cost and innovation spends. To combat this, he says that they are working on their productivity.
“It really comes down to how each company approaches the client’s need to reduce their spend. We have been doing it through productivity improvements, through value added activities and not through rate cut reductions,” he explained.
He further adds that clients are shifting towards larger, transformational deals, which is beneficial for them.
Below is an edited transcript of his interview with Shereen Bhan.
Q: You continue to hold to that guidance of 20%, even when the street was expecting a cut down to about 18-19%. What makes you so bullish and optimistic? Where do you see growth coming in from?
A: We had a great quarter; things played out as expected. We saw strength in financial services, our pharmaceutical industry has started to grow again, and we beat our guidance both on the top line and EPS. But what we are most pleased about is that despite the tough economic environment we maintained a full year guidance of at least 20%.
Maintaining that guidance included absorbing significant currency movements that happened since early May. So we absorbed over USD 20 million of negative currency movements and still maintained our guidance, and that’s been driven by our clients looking to do two things at once, which is reduce their cost and spend on innovation and to growth their top-line. We are well positioned to meet that dual mandate and customers are coming to us and we continue to take market share.
Q: Your peers have actually seen a pricing decline, but you are saying pricing continues to be stable. Can you quantify the kind of pressure that you are perhaps seeing on pricing at this point in time?
A: Our rates were stable in Q2, in the June quarter compared to the March quarter, so very stable. We do see clients coming to us and saying that they need to reduce their cost. Now there are two ways you can do that - you can cut your rates, we are surely not going to do that, or you can work with your clients to figure out how we can be more productive, how we can move more work to a global delivery model and therefore reduce their cost of ownership without impacting margins. That’s what we will do and that’s the right thing to do for a client.
So I think it really comes down to how each company approaches the client’s need to reduce their spend. We have been doing it through productivity improvements, through value added activities and not through rate cut reductions.
Q: What’s your own sense of what the deal pipeline is looking like? Also, when you say big-ticket deals, is it USD 50 million plus? What’s the kind of range that we are talking about?
A: My view would be very similar to that. We are seeing a change in the market towards what we refer to as transformation deals, which are larger deals encompassing a broad range of services, a broad range of geographies focused on how do you deliver change in operations to the clients. We won several of those this past quarter and there are clearly others in the pipeline.
I would agree with some of my peers who said there is a shift towards larger transformational deals and we are thrilled by that because we are well-positioned to win those deals. This is particularly due to the investment that we have made in consulting services. Consulting is a very important part of winning these larger deals because it is not just delivering the technology, but it is helping clients to figure out how do they want to use technology to drive improvements in the operations of their business or improvements in how they interact with their clients and we are very good at that. As a result, we expect more larger deals over time and our pipeline is robust with those source of activities.
Q: You are sitting on a fairly fat pile of cash at this point in time. The strategy so far has been niche investments. Are we likely to see any big-ticket acquisitions or will the niche strategy continues?
A: You are absolutely right, we generate a lot of cash. We generated over USD 300 million from operations in this most recent quarter. We are returning some cash through shareholders. We have actually accelerated our share repurchase programme in the June quarter and we repurchased over 6 million shares for about USD 350 million and we have already repurchased another USD 50 million with the stock this quarter.
Even with that we have meaningful cash. We use that cash for capital investments, particularly in India as well as other geographies, and we use that cash for tuck-under acquisitions. Our strategy as we articulated in the past is to focus on tuck-under acquisitions, which we define as USD 20-200 million in revenue. They tend to focuses on geographic presence, industry knowledge or technology capability and I would expect we will continue to do acquisitions in that range.