Ouch, Cognizant

Last week, IT services major Cognizant Technology Solutions reported a net profit of $577 million for the second quarter ended June 30, 2022. This was a 12.7 per cent increase in net profit up from $512 million in the same quarter last year. It also reported a $4.9 billion revenue (6.5 per cent YoY growth compared to last year). But this revenue fell below the expected rate. 

Dip in full-year 2022 revenue growth guidance

Cognizant has reduced its full-year 2022 revenue growth guidance to 8.5% – 9.5% in constant currency from the 9-11% in the previous quarter. 

During the earnings call, Jan Siegmund, CFO, Cognizant said that the company has been absent from large and mega deals in the past. This has obviously hit the economic growth, but Jan feels that this also allowed the company “to control our balanced portfolio of the revenue growth much better within the corridors that we outlined, plus the margin expansion”. 

Samlink subsidiary sale impacted financial services revenue growth

The company claimed that the financial services revenue dipped due to the sale of its Samlink subsidiary. The subsidiary only grew 2.7% year-on-year. The sale negatively impacted segment revenue growth by approximately 190 basis points. 

In 2019, Cognizant acquired Finnish IT solutions provider Samlink to build a core banking platform. During the Q4 2020 earnings call, Humphries spoke about how that quarter’s revenue saw a 3% decline year-over-year in constant currency. This was partly due to a negative 250 basis points impact related to the anticipated exit from a large financial services engagement (hinting at the Samlink project). He called the Samlink prospect a “complex ambitious project” and revealed that both the parties involved in the project had gradually realised that the transformation aspect of the project was unlikely to achieve the shared expectations as initially planned. 

This quarter, the health sciences revenue grew 6.3% year-over-year and the products and resources revenue grew 8.1% year-over-year. In addition, the communications, media and technology sector saw good performance with a revenue growth of 16.1% year-over-year. 

Image: Cognizant

Focus on digital for the future

Digital revenue, which grew 13 per cent year-on-year, was the highlight this quarter. Digital represented approximately 50% of total revenue, this time. 

In an interaction with Deccan Chronicle after the quarterly results, Cognizant India chairman and MD Rajesh Nambiar spoke about the company’s future plans. The software giant is looking at acquisitions in the next six months as it aims to expand its presence in digital technologies.

High attrition this quarter; likely to stay

IT firms have been battling high attrition since last year and Cognizant is no different. This quarter, it witnessed a rather alarming attrition rate of 31 per cent. The company said this was higher than expected and has impacted this quarter’s revenue performance. Cognizant expects to see “elevated attrition for the remainder of the year”, the CEO informed. For the previous quarter, the voluntary attrition fell 5 points to 26% on an annualised basis. For the second quarter of 2021, voluntary attrition had reached 29%. 

Cognizant’s headcount expanded to 341,000 employees in the past quarter. In fact, Cognizant is ramping up its hirings. A report earlier this year had predicted that Cognizant would be onboarding 50,000 freshers from India in CY22. This is a big jump from the 33,000 freshers it added in CY21. In the same report, Nambiar had said that this would be one of the biggest hirings for the company. In the past, the software provider had focused more on lateral hires but is now also increasing its fresher count.

Flexibility of work,  hybrid models for employee retention

In the earnings call, Humphries spoke about how the company is taking various measures to arrest the growing attrition. Cognizant has invested in better compensation, focused on employee learning and development initiatives, he asserted. 

Owing to the COVID-19 pandemic, a lot of techies prefer the “work from home” or a hybrid working model. Cognizant too is focusing in that direction. “We’ve also recognised how important flexibility is to our associates and have, therefore, communicated a hybrid model that will define our approach to work,” he adds. 

Recently, Cognizant opened a new office with a capacity of over 5000 associates at Navalur, near Chennai. Nambiar said that this space has been designed for a hybrid work-from-home and work-from-office model.