Cognizant’s 2023 revenue drop highlights the IT services industry’s US sales problems. To cut costs, the once-booming company will lay off 3,500 staff and give up millions of square feet of office space.
The Nasdaq-listed IT firm competes with Accenture, TCS, and Infosys. New CEO Ravi Kumar S announced these attempts to revitalize it. The US-listed company operates largely in India.
Cognizant predicted full-year revenue of $19.2–$19.6 billion, -1.2–0.8% in reported terms or -1–1% in constant currency. It predicted second-quarter revenue of $4.83–$4.88 billion, down 1.6–0.6 percent or 1–flat in constant currency.
Tech Mahindra and Cognizant have IT industry-low margins of 14.6%. 14.2-14.7 percent adjusted operating margin is expected.
Kumar’s first quarter beat analyst expectations. After Brian Humphries was “involuntarily terminated,” he became CEO on January 12. The shift in leadership and board chairman comes at a tough time for the industry.
Cognizant earned $580 million, up 3%. Profits grew 11.2%. Revenue was $4.81 billion, down 0.3 percent year-over-year but up 1.5 percent in constant currency, exceeding its $4.71–$4.76 billion target.
Big deals
Q4FY22 bookings were $24.1 billion, but Q4FY23 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, brand, and longstanding relationships with our clients,” said CEO Kumar.
Kumar met over 100 clients in 100 days last quarter and said he would watch big deals and help the company win them. Cognizant lost market share in key categories under his predecessor and avoided major 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” will boost growth in 2023 and 2024.
The banking and financial services crisis has hurt all major IT players, including Cognizant. The CEO believes bank-specific operational concerns have mainly subsided.
Existing and potential clients are delaying decisions and spending less. US financial clients have boosted our business pipeline. “Overall, we’ve seen early green shoots that we’re moving this portfolio in the right direction while navigating the macro dynamics.” Environment evaluation.
Commercial momentum requires large deal bookings that match our risk appetite. Revenue may take time. Adding, “We’re strengthening and industrializing delivery to support large deals.”
Kumar told analysts that Q1 saw four $100 million deals, up from none in Q1.
Jan Siegmund, CFO, said macroeconomic issues lowered discretionary expenditure, putting pressure on smaller contracts. He stated this atmosphere hurts second-quarter sales.
Layoffs
Kumar prioritized operating discipline last quarter, affecting 3,500 business personnel. Cognizant follows Accenture’s 19,000 layoffs.
Cognizant’s NextGen program aims to streamline operations and improve corporate processes.
“We’ll reduce layers to improve agility and decision-making. The corporation expects program savings to support continuous investments in people, revenue development, and office space upgrading. Company estimates 3,500 affected.
“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 investments to extend its footprint in smaller locations, especially in India, to support its hybrid work approach. Return to work.
People
Cognizant employs 3,51,500, down 3,800 from Q4FY22. The company stopped reporting involuntary attrition.
Trailing-twelve-month voluntary attrition fell to 23% from 26% sequentially. Tech services only, no Intuitive Operations and Automation.
Last quarter, the CEO said the company aims to be a top employer.
Most workers got their third raise in 18 months this month.
Kumar stated the company had made “career progression easier” by expanding the internal jobs process and streamlining the promotion process to increase corporate movement.
Generative AI
Kumar said generative AI may “fundamentally transform our client’s businesses and increase our own productivity” like Cognizant’s Indian peers.
AI investments and customer use cases are increasing. “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 transform technology services, improving productivity and software and data engineering prominence. AI promotes creativity and productivity. Adding, “We are piloting generative AI to accelerate consulting, design, engineering, and operations to double our associates’ productivity.”
Modern IT operations can reduce operating expenses by 25–45%, mean to delivery and detech by 30–50%, and FTEs by 15–30% compared to current approaches.
