Nasdaq-listed information technology firm Cognizant Technology Solutions (CTS) posted a fall of 1.1 percent year-on-year (YoY) in revenue to $4.8 billion due to weak discretionary spending by clients.
However, the topline was above the higher-end of its guidance range for the quarter, which was earlier forecast to decline to 2.7-1.2 percent.
CTS shares were up more than 4% in after-hours trading on Wall Street. Cognizant’s performance reflects the overall market sentiment for IT service companies in India such as Tata Consultancy Services, Infosys, and Wipro. These companies, in turn, have the majority of their clients based in the US and Europe.
The company's net profit decreased by over 6 percent to $546 million year-on-year (YoY) in the first quarter ended March 31, 2024. The Teaneck-based company, whose employees are majorly based in India, follows the calendar year cycle.
“We have seen the uncertain economic outlook and volatile geopolitical environment, weigh on our clients spending priorities, which has kept their discretionary spend muted,” said Chief Financial Officer Jatin Dalal.
Revenue Guidance
For 2024, Cognizant has issued a wide guidance a revenue decline of 2.2 percent to a growth of 1.8 percent. Usually, the company's guidance ranges within 200 basis points (bps) but sluggish market sentiment has necessitated a 400 bps guidance range, Chief Executive Officer Ravi Kumar S said while speaking to analysts after the results.
“While we are doing well and we've performed well in quarter one, the market is sluggish so we kind of kept a broader range,” Kumar said.
For the second quarter, it expects revenue to decline in the range of 2.9 percent to 1.4 percent.
The IT major’s adjusted operating margin remained flat year-on-year at 14.6 percent due to the cost-cutting programme NextGen. Bookings for the quarter stood at a record $25.9 billion on a trailing twelve-month basis, up 1 percent year-on-year.
Vertical Play
Revenue from the financial services vertical decreased by over 6 percent to $1.385 billion. This is the second consecutive quarter when financial services trailed behind health sciences verticals. In the fourth quarter of 2023, revenue from the financial services vertical trailed behind the health sciences business for the first time in 30 years of Cognizant’s history.
Discretionary spending was most impacted in the financial services vertical as it is more susceptible to higher interest rates, Dalal said. Nonetheless, the company has witnessed sequential growth among banking and financial services clients, which represents about 60% of the financial services segment, Kumar said.
Revenue from the health sciences vertical declined by over 1 percent YoY to $1.416 billion in the first quarter. Revenue from the Products and Resources vertical increased by 1.3 percent to $1.133 billion for the quarter under consideration.
Employee Metric
The company saw its headcount decrease by 3,300 sequentially and 7,100 YoY, ending with 344,400 employees in Q1. Attrition fell by 10 percentage points to 13.1 percent on a trailing twelve-month basis.
Back in India, the top five Indian IT services giants including Tata Consultancy Services (TCS), Infosys, HCLTech, Wipro, and Tech Mahindra, together lost around 69,167 employees in the fiscal year 2024 amidst an uncertain demand environment.
In Q1 2023, Cognizant kicked off the NextGen plan to cut 3,500 jobs as well as give up 11 million sq ft in office space, primarily in large Indian cities, and move to smaller cities.
So far, the company has incurred $237 million in cost, consisting of $123 million in employee separation costs, $122 million in facility exit costs, and $7 million in third-party and other costs.
Also read: Cognizant defers salary hikes by a quarter to August
Generative AI
The company said 220,000 employees have been trained in its “Bluebolt” initiative, which invests in the best-emerging technologies such as artificial intelligence (AI) and generative AI.
“We remain focused on investing in areas to help our clients reduce total cost of ownership, boost productivity, enhance technology intensity, and enable better adoption of new age technologies like AI to capture the current demand and be prepared for the future,” Kumar said.
Cognizant currently has over 450 early engagements that incorporate the use of generative AI, and another 500 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.
The company has seen increased demand for AI services across four key areas - customer and employee experience, content summarisation, content generation, and accelerated innovation and technology development cycles.
The company's free cash flow at the $16 million, down from $631 million from the year-ago period. Cognizant said free cash flow includes the negative impact from a previously disclosed $360 million payment made with the India tax authorities in connection with its ongoing appeal of a 2016 tax matter.
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