Cognizant rides on robust financial services vertical, beats revenue estimates in Q2

“We are clearly winning market share as we execute every quarter… the deals that are ramping up are a reflection of new work that Cognizant is getting,” Chief Financial Officer Jatin Dalal told analysts after declaring the Q2 results.

On a trailing twelve-month basis, bookings declined 1 percent YoY to $26.2 billion, however, the metric was up from the $25.9 billion that it recorded in Q1.

“Our execution, our fulfilment rate, and our win ratios continue to be very strong. Therefore, we are winning wallet share in a market which has remained unchanged,” Chief Executive Officer Ravi Kumar S told analysts in a conference call after declaring Q2 results.

Cognizant follows the calendar year.

The IT major also delivered on the operating margin front, which rose 280 basis points (bps) year-on-year to 14.6 percent. In the previous quarter, the IT major’s adjusted operating margin remained flat on-year at 14.6 percent due to the cost-cutting programme NextGen.

When asked whether sequential headcount reduction of over 8,000 contributed to margins, Dalal said it is one factor that contributed to margins. "However a better contribution came through revenue growth... which automatically provides operating leverage for fixed expenses, you're able to maintain and manage your pyramid better and it improves utilisation. So all three played a part in margin management," Dalal said addressing a press conference.

Revenue Guidance

For Q3, the company expects its revenue to be flat to 1.5 percent up in constant currency terms, which is an improvement from the guidance that the company had given for Q2. In May, the company had guided for a decline of 2.5 percent to a decline of 1 percent in constant currency for the second quarter.

The company also gave better full-year guidance, raising the lower end but lowering the upper end of the band. Full-year guidance now stands in the range of a decline of 0.5 percent to a growth of 1 percent in constant currency. In Q1, the company had forecast this metric in the range of a decline of 2 percent to growth of 2 percent in constant currency terms.

The full-year guidance now assumes approximately 70 basis points of inorganic contribution. In June, Cognizant agreed to acquire digital engineering firm Belcan for nearly $1.3 billion in cash and stock.

The company’s management indicated that it does not foresee any other acquisition, in at least 2024, as the company wants to focus on completely integrating Belcan.

“We believe our performance this quarter and the improved organic growth outlook for the full year demonstrate how our execution against these priorities is beginning to translate to our results and support long-term shareholder value,” Kumar was quoted as saying in the earnings release.

Dalal said sequential revenue growth of 2.1 percent in constant currency terms was driven by the company’s financial services and health sciences segments.

Vertical Play

Revenue from the financial services vertical decreased over 0.8 percent to $1.45 billion in constant currency terms. This is the third 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 on the financial services recovery, as well as recovery in the North American market. “Our business in America and banking has sequentially done well for two quarters in a row so now we are now progressively taking that template in the international market so that we can replicate the success,” Kumar told analysts.

Discretionary spending was most impacted in the financial services vertical as it is more susceptible to higher interest rates.

Revenue from the health sciences vertical declined 1.7 percent YoY to $1.46 billion in the first quarter in constant currency terms. Revenue from the Products and Resources vertical decreased 4.1 percent to $1.13 billion for the quarter under consideration.

Employee metrics

The company saw its headcount decrease by 8,100 sequentially and 3,300 YoY, ending with 336,300 employees in Q2. Attrition fell by 6.3 percentage points to 13.6 percent on a trailing twelve-month basis.

The company’s utilisation rate also increased by a percentage point to 83 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 said the company is witnessing a historic “return of returnees” into the company, implying former Cognizant employees coming back into the fold.

Generative AI

Cognizant currently has over 750 early engagements that incorporate the use of Generative artificial intelligence (Gen AI), increasing from 450 the company disclosed in the previous quarter. The company has another 600 Gen AI PoCs in the pipeline, and the management hope some of them go into actual production.

The company said it has onboarded over 200 clients on Cognizant AI platforms who are experimenting with taking Proof of Concept (PoC) into production-grade products. This has given the company a good indicator that the momentum is here to stay, Cognizant's management said while not disclosing the amount of revenue it has generated from the sale of this nascent technology.

"It is a pervasive technology (Generative AI), 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 categorise as Gen AI," Kumar told analysts after disclosing the quarterly numbers.

On July 11, India’s largest software exporter Tata Consultancy Services (TCS) said it has $1.5 billion worth of AI and Gen AI projects in the pipeline as of Q1, closing in with rival Accenture’s $2 billion in cumulative Gen AI revenue.

However, these engagements continue to be for smaller-duration projects, TCS’ management had said.

At a time when companies are in the race to declare Gen AI revenues, experts question how many can be scaled up for value to be derived.

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

Last quarter, the company said 220,000 employees were trained in its “Bluebolt” initiative, which invests in the best-emerging technologies such as artificial intelligence (AI) and generative AI.