Cognizant revenue dips 1.7% to hit an 8-quarter low

Revenue from the financial services vertical decreased by 5.8 percent, a first in 30 years when Cognizant’s revenue from financial services vertical is trailing the health sciences business

Nasdaq-listed information technology firm Cognizant posted a fall of 1.7 percent in revenue to $4.76 billion year-on-year (YoY), sending its shares down over 5 percent in extended trading. Cognizant said discretionary spending by clients has still not picked up.

The poor show, though expected, points towards the continuing overall weak demand environment for IT companies.

Though a US-based company, Cognizant's performance reflects overall market sentiment for IT service companies in India such as Tata Consultancy Services, Infosys, and Wipro. These companies, in turn, have majority of their clients based in the US and Europe.

While the company had guided for a decline of 4 to 1.2 percent for the quarter, its revenue fell 2.4 percent in constant currency terms. Sequentially, revenue decreased by 2.9 percent.

The company's net profit increased by over 7 percent to $558 million YoY in the fourth quarter. The New Jersey-based company, whose employees are majorly based in India, follows calendar year.

For the full year 2023, the IT major posted a 0.4 percent YoY decline in revenue at $19.4 billion. In constant currency terms, it was 0.3 percent lower.

Cognizant has given a guidance of $4.68-$4.76 billion for Q1FY24, which translates to a decline of 2.7 percent to 1.2 percent.

"Our guidance range is broader because we do not know what we do not know," Kumar said while addressing analysts after declaring the results. "But our thesis is very simple, we are going to be prepared for a comeback of discretionary," Kumar added.

For 2024, the company has guided for a revenue of $19-$19.8 billion, which translates to a decline of 1.8 percent to a growth of 2.2 percent. Last year, while reporting its Q4 earnings, Cognizant did not provide a full year guidance. For 2022, the company had pegged the full year guidance at $20-20.5 billion.

Despite acquisitions contributing to about $200 million to topline, Cognizant provided an anaemic guidance.

CEO Ravi Kumar S, who has been at the helm for a year, said the company delivered its Q4 revenue within the guided range, maintaining its commercial momentum.

“If you dissect our guidance, you would see that there is a certain sequential growth that we have assumed during the course of the year. But environment remains uncertain, and it's certainly a slower start to the year,” Jatin Dalal, the new chief financial officer said.

The IT major’s adjusted operating margin rose 190 basis points (bps) year-on-year to 16.1 percent.

Bookings for the quarter stood at a record $26.3 billion on a trailing-twelve-month basis, up 9 percent year-on-year.

Kumar explained that the proportion of large deals was lower in 2022 compared to 2023. "Now that we're entering 2024, what we won in 2023 will contribute to 2024, it did contribute to 2023, but it will contribute more in 2024 and it will create a backlog for the future," Kumar said.

Vertical play

Revenue from the financial services vertical decreased by 5.8 percent to $1.395 billion. This is the first time in 30 years of Cognizant’s history when revenue from the financial services vertical is trailing the health sciences business.

Revenue from the health sciences vertical declined by 2.1 percent YoY to $1.396 billion in the fourth quarter. This is not because health sciences division grew faster, but because the financial services shrank faster by 6% YoY and the health sciences division shrinking by 2% in the same period.

During 2023, three leaders from the Financial Services vertical quit the company. Meera Krishnamurthy, who was the head of banking and financial services, was one amongst the several big-wigs who exited the company.

Kumar said the financial services vertical churns out a higher number of discretionary deals. And because the sector carries the burden of high interest rates, it is leading clients to a wait-and-watch scenario, thereby pausing discretionary work.

"Let's see how the industry (financial services) shapes up in the year. And normally what I have seen based on the experience is, if there are one or two repeatable cycles of interest rate adjustments downwards, we will start to see the spend coming back," Kumar said.

Revenue from the Products and Resources vertical increased by 3.1 percent to $1.2 billion for the quarter under consideration.

Employee metrics

The company saw its headcount increase by 1,100 sequentially, ending with 347,700 employees in 2023. Attrition fell by 11.8 percentage points to 13.8 percent on a trailing twelve-month basis.

Back in India, IT services companies have seen a steady decline in headcount. India’s top three IT companies have reported a reduction of 16,254 employees cumulatively in the third quarter of FY24, amid an uncertain demand environment.

In Q1, 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).

In 2023, it has so far incurred $229 million, consisting of $115 million in employee separation costs, $108 million in facility exit costs, and $6 million in third-party and other costs.

Generative AI

The company said 88,000 of its employees have completed artificial intelligence (AI) and generative AI courses.

Cognizant currently has over 250 early engagements that incorporate the use of generative AI, and another 350 are in the pipeline. "We aim to infuse AI, not only into our core offerings but into everything we do, including using generative AI to create industry and functional services," Kumar said.

Although, consumer use of generative AI is starting to explore, enterprise use cases have been ramping slowly, Kumar told analysts. However, the company expects the pace of enterprise adoption to pick up soon, and after a slow takeoff, the movement of the curve will be accelerate sharply, he said.

"Our research also predicts that 90% of the jobs will be disrupted in some way by this technology," Kumar said.

From 2023-2032, the percent of jobs with high exposure scores, meaning the degree to which an occupation will be affected by generative AI could increase from 8% to 52%, he further said. Setting the stage for a profound shift in how we approach work, productivity and economic growth.