Cognizant’s 2023 revenue decrease underscores the IT services industry’s woes, which relies on US sales. The corporation, which was once a bellwether of industry growth, will also lay off 3,500 workers and give up millions of square feet of office space to save costs.
New CEO Ravi Kumar S announced these efforts to revive the Nasdaq-listed IT firm, which competes with Accenture, TCS, and Infosys. The corporation is listed in the US but operates mostly in India.
Cognizant forecasts full-year revenue of $19.2–$19.6 billion, or -1.2–0.8% in reported terms or -1–1% in constant currency. It forecast second-quarter revenue of $4.83–$4.88 billion, -1.6 percent to -0.6 percent, or 1 percent to flat in constant currency.
Tech Mahindra and Cognizant have IT industry-low margins of 14.6 percent. The company forecasts 14.2-14.7 percent adjusted operating margin for the year.
In its first quarter under Kumar, it outperformed analyst projections. After Brian Humphries was “involuntarily terminated,” he became CEO on January 12. The industry is facing multiple challenges, and the change in leadership and chairman of the board comes at a difficult moment.
Net profit rose 3% to $580 million for Cognizant. Profits rose 11.2%. Revenue was $4.81 billion, down 0.3 percent year-over-year but up 1.5 percent in constant currency, topping its target of $4.71–$4.76 billion.
Demand and big deals
Q4FY22 bookings were $24.1 billion, but Q4FY23 bookings were $25.6 billion.
“Our accelerated bookings growth in the quarter, which included several large deals and a healthy mix of new and expansion work, reflects the strengths of our services, our brand, and our longstanding relationships with our clients,” said CEO Kumar.
Last quarter, Kumar met over 100 clients in 100 days and stated he would watch huge deals and increase the company’s capacity to win them. Cognizant lost market share in key sectors under his predecessor and avoided significant acquisitions due to excessive attrition. Humphries was fired for this multi-year underperformance.
Kumar told analysts that the company’s “renewed strength in bookings momentum” is replacing a lower backlog from the prior nine months and that it will show higher growth in 2023 and 2024.
The banking and financial services crisis has hit all major IT players, including Cognizant. The CEO believes company-specific operational issues in banking organizations have mostly subsided.
We’re also seeing lower discretionary spending and decision delays by existing and potential clients. Our deal pipeline has increased due to significant US financial clients. He stated, “Overall, we’ve seen early green shoots that we’re moving this portfolio in the right direction while navigating the macro dynamics.” They will evaluate the environment.
“Large deal bookings that align with our risk appetite are essential to building commercial momentum. They may take time to generate revenue. He continued, “We’re strengthening and industrializing delivery to support large deals.”
Kumar told analysts that the company got four deals over $100 million in Q1, up from none in Q1.
Chief Financial Officer Jan Siegmund said the company encountered pressure in smaller contracts due to macroeconomic factors lowering discretionary spending. “This environment affects our second-quarter revenue,” he said.
Kumar prioritized operating discipline last quarter, affecting 3,500 corporate employees. Cognizant follows Accenture’s 19,000 layoffs.
Under its NextGen program, Cognizant wants to simplify its operating model and optimize corporate functions.
“Our simplification will include operating with fewer layers to improve agility and decision-making. The company said it expects program savings to enable sustained investments in people, revenue development, and office space modernization. The company anticipates 3,500 affected people.
“Primarily related to nonbillable and corporate personnel, which we expect to mostly incur in 2023,” the corporation will spend $200 million on severance and other costs.
“Consolidating and realigning office space to reflect the post-pandemic hybrid work environment” is another goal. Cognizant wants to save $100 million in real estate costs by 2025 compared to 2022.
The company said this reduction in real estate costs is net of expenditures to increase its real estate footprint in smaller locations, especially in India, to support its hybrid work strategy. Employees may return to work.
Cognizant has 3,51,500 employees, down 3,800 from Q4FY22. The corporation has stopped reporting involuntary attrition.
Trailing-twelve-month voluntary attrition dropped to 23% from 26% sequentially. Tech services employees only; Intuitive Operations and Automation employees are excluded.
The CEO stated last quarter that the company wants to be an employer of choice.
Most employees received their third salary increase in 18 months this month.
Kumar claimed the organization has made “career progression easier” by expanding the internal jobs process and restructuring the promotion process to increase corporate movement.
Kumar said generative AI may “fundamentally transform our client’s businesses and increase our own productivity” like Cognizant’s Indian peers.
The company is investing more in AI and working with clients to identify critical use cases. “We’ve conducted ideation sessions with over 30 clients and are now working to industrialize solutions to the common challenges,” Kumar said.
We believe generative AI will revolutionize the technology services business, increasing productivity and software and data engineering prominence. AI boosts our creativity and productivity. He continued, “We are piloting generative AI to accelerate consulting, design, engineering, and operations to double our associates’ productivity.”
He claims that modern IT operations can cut operating costs by 25–45%, mean to delivery and detech by 30–50%, and FTEs by 15–30% compared to existing methods.