Cognizant sees uptick in discretionary demand in Q3, raises revenue guidance

The company raised its annual and quarterly revenue guidance, reflecting improved revenue growth visibility.

Cognizant said it has seen an uptick in discretionary demand in the quarter ended September 30, 2024, beating Street estimates on the revenue front. This prompted the Nasdaq-listed information technology company to raise its annual and quarterly revenue guidance across both the upper and lower ends of the range, reflecting improved revenue growth visibility.

“This performance added to last quarter's momentum and benefited from an uptick in the discretionary demand environment and better execution,” Chief Financial Officer Jatin Dalal told analysts after declaring the Q3 results.

Investors welcomed the results, with shares gaining over 3.5 percent in after-hours trading on the tech-heavy index.

The company’s revenue came in at the higher end of its guidance range, increasing by 2 percent year-on-year (YoY) to $5 billion, beating the Street estimate of $4.98 billion.

The performance came on the back of a 7.8 percent growth in the health sciences vertical in Q2, which was driven by artificial intelligence (AI)-led deals.

Full-year 2024 revenue guidance now stands in the range of 1.4 percent to 1.9 percent in constant currency (CC) terms, while Q4 revenue guidance is projected to be in the range of 5.1 percent to 7.1 percent.

Cognizant follows the calendar year.

The company said its bookings declined 2 percent YoY to $26.2 billion on a trailing twelve-month basis. During the quarter, the company signed six deals each with total contract value (TCV) of $100 million or more. “We also saw TCV from smaller deals stabilised sequentially… We are seeing this reflected in our improved revenue performance this quarter, despite muted TCV performance,” Chief Executive Officer Ravi Kumar S told analysts in a conference call after declaring the Q3 results.

The IT major achieved a 60 basis-point year-on-year increase in operating margin, reaching 14.6 percent. Cognizant delivered this through operational efficiencies, improved utilisation, and lower bench costs. “We are also making progress in modernising our operation, increasingly leveraging our AI platforms in delivery to help improve fulfillment and increase productivity with fewer resources in Q3,” Dalal said.

The company saw its headcount increase by 3,800 sequentially and decreased by 6,500 annually at the end of Q3.

Revenue Guidance

For Q4, the company expects its revenue to be in the range of 5.1 to 7.1 percent in CC terms, which is an improvement from the guidance it gave for Q3. In August, the company had guided for a flat to 1.5 percent increase for Q3.

The full-year guidance now assumes approximately 200 basis points of inorganic contribution from its Belcan acquisition. In June, Cognizant agreed to acquire digital engineering, research, and development (ER&D) firm Belcan for nearly $1.3 billion in cash and stock.

“Our acquisition of Belcan has significantly broadened our access to the $190-billion ER&D services market, which is projected to outpace the legacy IT services market through 2026,” Kumar said.

Moreover, the acquisition has increased Cognizant’s footprint in the aerospace and defence industries with an attractive blue-chip client base. “We have seen early pipeline opportunities and identified the potential for new joint offerings in areas such as model-based system in systems engineering,” Kumar told analysts.

Vertical Play

Revenue from the health sciences vertical increased by over 7 percent to $1.51 billion in CC terms, while the financial services vertical increased by 0.5 percent to $1.49 billion.

This is the fourth consecutive quarter when financial services trailed behind the health sciences vertical. In the fourth quarter of 2023, revenue from the financial services vertical trailed behind health sciences for the first time in 30 years of Cognizant’s history.

The management was upbeat about the recovery of financial services, as well as the recovery in the North American market. “So, healthcare, we are very confident (and) financial services, we are back on track again. Financial services have a very different muscle, I think we have now stabilised, and we do believe that we are winning wallet share,” Kumar told analysts.

Revenue from the Products and Resources vertical increased 5 percent to $1.23 billion for the quarter under consideration.

Geography-wise, the company grew its share of revenue from North America to almost 4 percent to $3.74 billion, while the European region declined by marginally to $967 million.

Employee Metrics

The company ended Q2 with approximately 3,40,100 employees. Attrition increased by 1 percentage point to 14.6 percent on a trailing twelve-month basis.

The company’s utilisation rate also increased by 1 percentage point to 84 percent in the quarter. The management believes that the company still has some headspace to improve the metric for the rest of the year.

Kumar believes utilisation can go up a few notches but not a “lot more”. In August, he said the company is witnessing a historic “return of returnees” into the company, implying former Cognizant employees coming back into the fold.

Generative AI

The company said it has over 225 projects on Cognizant AI platforms with over 120 clients who are taking Proof of Concept (PoC) into production-grade products. This has given the company a good indicator that the momentum is here to stay, the Cognizant management said without disclosing the amount of revenue it has generated from the sale of this nascent technology.

Additionally, Cognizant generates 1,50,000 lines of accepted codes per month, or about 2 million lines of code on an annualised basis, using AI tooling into projects to deliver to clients.

On April 18, 2024, rival Infosys said it has an absolute leadership position in Gen AI and it has generated three million lines of codes using large language models (LLMs).

Kumar said many clients want to reduce the backlog when the cost of deployment goes down as a result of applying AI. He further said that clients do not want to reduce budget due to productivity benefits, but they want to do more for less. “So that is a very positive indicator, it also gives us an opportunity to consolidate in places where our productivity is higher than our peers.”

In Q2, the company said it had over 750 early engagements that incorporate the use of Gen AI, increasing from 450 the company disclosed in the quarter prior to that. The company has another 600 Gen AI PoCs in the pipeline, and the management hopes some of them go into actual production.

"It (Generative AI) is a pervasive technology, therefore, it diffuses into everything we do and because it is diffusing so fast you almost don’t know what to categorise as Gen AI and what not to," Kumar had said in August.

Also read: Only 10% of 300-400 Gen AI implementations have scaled, delivered value, says TCS