Cognizant tops Q4 estimates, sees 3.5-6% growth for 2025 on better discretionary spending outlook

After the earnings announcement, shares of the company were flat 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 6.7 percent year-on-year (YoY) to $5.1 billion, beating Wall Street analyst estimate of $5.06 billion. Recent acquisitions of Belcan and Thirdera contributed approximately 450 basis points YoY growth to the fourth quarter revenue.

Nonetheless, the performance also came on the back of a 10.4 percent growth in the health sciences vertical in Q4.

The company said its bookings increased 3.1 percent YoY to $27.1 billion on a trailing twelve-month basis. During the quarter, the company signed 10 deals each with total contract value (TCV) of $100 million or more.

For the full year, revenue grew 1.9% YoY in constant currency (CC) terms to $19.7 billion, including approximately 200 basis points of growth from subsidiaries Thirdera and Belcan.

“I am deeply grateful to our employees for their commitment to our strategic priorities and rigorous execution, which drove fourth-quarter revenue growth to the high end of our guidance range. We exited the year with momentum — closing a record 29 large deals during the year — highlighting the effectiveness of our strategy,” Chief Executive Officer Ravi Kumar S told analysts in a conference call after declaring the Q4 results.

The IT major’s operating margin decreased 40 basis points (bps) year-on-year to 14.8 percent. However, full-year operating margin increased by 80 basis points YoY to 14.7%.

“Margins declined by 40 basis points, primarily reflecting the impact of Belcan and increased compensation costs. This was partially offset by savings from next-gen, high utilisation, and a favourable currency exchange rate,” Dalal said.

The company’s headcount decreased by 3,300 sequentially and by 10,700 annually at the end of Q4.

Revenue Guidance

Meanwhile, Q1 revenue guidance is projected to be in the range of 6.5 percent to 8 percent in CC terms, higher than what the company had guided for in Q4 in the range of 5.1 percent to 7.1 percent.

This is an improvement from the guidance it gave for Q4.

The full-year guidance now assumes approximately 250 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.

“The large deals for which we were always budgeting, if something goes wrong, is the bid versus large deals also contributed to the margin growth. And we have really executed our large deals very well. So we are very pleased with where we have landed on the margin and the runway we have for (20)25,” 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 said in October while addressing analysts.

Vertical Play

Revenue from the health sciences vertical increased by over 10.4 percent to $1.54 billion in CC terms, while the financial services vertical increased by 2.8 percent to $1.44 billion.

This is the fifth 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 European market after North America.

“We saw a further, albeit, gradual pickup in discretionary spending. In North America, we are seeing an improved pipeline of opportunities,” Kumar told analysts.

Last quarter the company was confident on the financial services vertical getting back on track. “Financial services have a very different muscle, I think we have now stabilised, and we do believe that we are winning wallet share,” Kumar had said then.

Revenue from the Products and Resources vertical increased 11.3 percent to $1.3 billion for the quarter under consideration.

Geography-wise, the company grew its share of revenue from North America by 8.4 percent to $3.82 billion, while the European region increased by 1.3 percent to $939 million.

Employee Metrics

The company ended Q4 with approximately 3,36,800 employees. Attrition increased by 2.1 percentage points to 15.9 percent on a trailing twelve-month basis.

The company’s utilisation rate decreased by 2 percentage points to 82 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 there’s another imported contributor to the performance for 2024 in general and specifically for quarter four. Overall, our operational rigor has improved significantly in the last two years.

And we have some runway.

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

On January 22, Kumar told Moneycontrol that after 13,000 former Cognizant employees rejoined the company in 2024, approximately 10,000 more are waiting to return to the IT major.

“We've built an extraordinary team. I have 13,000 people who have come back into Cognizant, who left Cognizant. And I have 10,000 more who want to come back. So we are a magnet for leadership,” Kumar S said at the World Economic Forum in Davos.

Generative AI

The company said the transformation of mainstream artificial intelligence (AI) is “tech-for-tech” or its application in software development cycles with the help of code-assist platforms.

“We estimated that 20 percent of our code accepted by our developers was generated by AI, allowing us to do more for less and unleash a wave of hyper-productivity,” the Cognizant management said.

In October, Cognizant said it 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.

Kumar said he believes that at “this level of hyper-productivity,” there will be an opportunity for my partners to help clients unlock the estimated trillions of dollars of technical debt, find viable ways to modernize legacy systems, and applications, automate infrastructure and operations, and eliminate the backlog of workloads.”

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.

"That (our performance in Generative AI) is a very positive indicator, it also gives us an opportunity to consolidate in places where our productivity is higher than our peers," Kumar had said in October.