Growth jitters for Cognizant in 2024

Cognizant Technology Solutions Corp. on Wednesday predicted weak revenues for 2024, as businesses cut back on IT spending amid high interest rates and persistent inflation. The company said it may end the year with a revenue of $19-19.8 billion, against $19.8 billion estimated by analysts.

The Nasdaq-listed IT firm also expects its first quarter (January-March) revenue to decline by 3-1.5% in constant currency terms. Constant currency does not account for currency fluctuations.

“Discretionary spend, if you take the industry view, is the most in the banking, financial services and insurance (BFSI) sector. That is the sector that is burdened with high interest rates and because of that, there is a ‘wait and watch’ kind of a pause on discretionary wealth,” Cognizant chief executive S. Ravi Kumar said in a post-earnings call with analysts. Kumar added that discretionary spend might start to return if interest rates are cut over one or two repeated cycles.

In tough times, IT spends are seen as discretionary, which can be delayed. Discretionary spends falling in BFSI hurts Cognizant as the segment has been the top revenue earner for the company historically. In the year ended December 2023—Cognizant follows a January to December fiscal year—financial services brought in $5.8 billion of its $19.35 billion revenue.

“We see this as a period of uncertainty and change,” added Kumar, who completed a year at the top spot. “If the uncertainty starts to go away, I think the change will trigger discretionary spending to come back.”

Meanwhile, for the three months ended December 2023, the Teaneck-headquartered company reported a 6.3% sequential and 7% year-on-year (y-o-y) jump in net income to $558 million, and a 2.8% drop in revenue to $4.76 billion, according to company filings.

“Cognizant is in a phase of repair and stabilization, and will continue to focus on conserving its business after losing market share to competition through recent years,” said Manik Taneja, executive director of IT Services at Axis Capital. “Demand commentary indicates near-term pressure on discretionary in the near term, which is likely to drive a sequential drop in Q1CY24.”

The US IT major’s net income exceeded analysts’ estimate of $545.5 million, according to a Bloomberg poll of 18 analysts. But revenue lagged a $4.77 billion estimate of 22 analysts polled by Bloomberg.

For the full year ended December 2023, its net profit dipped 7.2% to $2.13 billion from the fiscal year ended December 2022, and revenue also dipped 0.4% y-o-y to $19.35 billion.

Cognizant managed to increase its profitability in the fourth quarter of 2023 from the three months ended September 2023. The software services company’s operating margins widened 120 basis points from the September quarter to 15.2% in the December quarter. However, profitability for the year ended December 2023 declined 140 basis points to 13.9% from the year-ago period.

The American IT company’s profitability was lower than each of its top four Indian IT peers in the December quarter. India’s largest IT company, Tata Consultancy Services Ltd (TCS), reported an operating margin of 25% in the December quarter whereas Infosys Ltd, HCL Technologies Ltd, and Wipro Ltd reported operating margins of 20.5%, 19.8%, and 16%, respectively.

TCS, Infosys, HCL Technologies and Wipro follow the April to March financial calendar.

In a rare instance, Cognizant’s health sciences segment revenue was higher than revenues generated by the financial services division, which has historically been the biggest contributor to the IT company’s business. At the end of December 2023, Cognizant earned $1.396 billion from its health sciences division compared to $1.395 billion for financial services.

Both segments’ contribution to overall revenues dropped from the September quarter.

While health sciences’ revenue dropped 0.64%, revenue from financial services dropped 5.42% from the previous quarter.

The company saw green shoots from its communication, media, and technology segment in 2023. Revenues of this segment grew 2.6% from the 12 months ended December 2022. However, this growth could not offset the 4.3% loss in business the tech services company suffered from its financial services segment. In 2023, Cognizant reported $5.8 billion and $3.2 billion from its financial services and communication, media, and technology segment, respectively.

In terms of geography, Cognizant earned $3.53 billion or 74% of its fourth quarter revenue from North America. Its revenue from the region was 2% lower than the previous three months. The IT giant reported a 5% sequential drop from revenues in Europe as it earned $918 million, or 19.3% of its revenue from Europe.

Cognizant’s revenue from North America dropped 1.2% y-o-y for the financial year ended December 2023 even as its business from Europe rose 5.2% on a yearly basis, fetching the company $3.79 billion.

In contrast to three of the top four Indian IT companies, Cognizant’s total headcount increased by 1,100 from the September quarter to end the financial year with 3,47,700 in the December quarter. Voluntary attrition almost halved compared to the year ago as the company reported an attrition rate of 13.8% for the year ended December 2023.