Cognizant net income down 6.64%

‘Our hiring has come down but we will still hire’

Information Technology (IT) services major Cognizant on Monday has posted a 6.6 per cent decline in its net profit during the quarter ended March 31, even though the firm met the upper end of its revenue growth guidance and marginally raised the lower end of its full year guidance.

The net profit of the Nasdaq-headquartered firm stood at $520 million. The drop in the net profit was attributed to the changes according to the New Revenue Standard, which was effected after January this year, while the numbers prior to that were reported in accordance with its historic accounting.

The revenue for the first quarter at $3.91 billion, went up 10.45 per cent when compared with the corresponding quarter of the previous year. Revenue for the quarter, however, got a benefit of $21 million owing to the adoption of the New Revenue Standard, the company said.

On a sequential quarter basis (compared with the trailing quarter ), the revenues went up 2.08 per cent. In the December quarter of 2017, Cognizant had posted a loss of $18 primarily due to a one-time provisional income tax expense of $617 million related to the Tax Reform Act in the US.

“We achieved solid financial results in the first quarter and progressed our shift to digital services and solutions,” said Francisco D’Souza, Chief Executive Officer. “We’ve developed the strong and scalable foundation on which to extend our leadership as the builder of the digital economy, and we expect our forward momentum to deliver a strong 2018,” he added.

The company which fiercely competes with large Indian IT services companies including TCS and Infosys, however largely stuck to its revenue growth guidance for the full year though its gave a slightly bullish revenue outlook for the June quarter. For the full year, Cognizant said, it is expecting its revenues to be between $16.05$16.30 billion, raising the lower end of the guidance by just 0.31 per cent while holding on to the upper end of the guidance given at the end of December quarter. For the June quarter, the company expects its revenues to be in the range of $4-$4.04 billion, an increase of 2.3 per cent 3.32 per cent over the previous quarter.

“Our business is strong, as is our ability to sense and respond quickly to market shifts…We’ve developed the strong and scalable foundation on which to extend our leadership as the builder of the digital economy,” said D’Souza.

In the quarter under review, ‘Digital’ business accounted for 29 per cent of Cognizant’s overall revenues, posting 27 per cent YoY growth, three times the company’s average growth. The company profit margin in the quarter improved by 60 basis points to 20.3 per cent on the back of improved utilisation and currency benefits.

DEBASHIS CHATTERJEE, president for global delivery at Cognizant, the US multinational professional services entity, speaks to Gireesh Babu & Bibhu Ranjan Mishra on his biz outlook, hiring plans & allied matters. Edited excerpts:

You met the upper end of the revenue expectation for the March quarter and have given a strong one for June. Were these not enough to revise upward the full-year forecast?

We had a solid start to 2018 and remain one of the fastest growing among services companies. If you talk about revenue guidance, we still expect revenue growth of eight to 10 per cent and have just taken the lower end of the range a little further. But, overall, given the scale and opportunity we see today, and given the fact that we are also very focused in terms of what type of deals to go after, we think that’s a robust growth.

In the March quarter, though you met the upper end of the earlier forecast, the company got a revenue benefit of $21 million because of the adoption of new revenue standards. Your view?

There are multiple factors. If you look at the new revenue and tax guidance (expectation) of the last quarter of

2017, we are still trying to interpret some of those things. As we go from quarter to quarter, some of the clarifications are emerging. I don’t think I will give too much attention to those. Some of the fluctuations in terms of currency are also difficult to understand ahead of time. Overall, we still feel the growth is propelled by the digital transformation we are seeing in the market.

Your profit and profitability continue to be under pressure. This quarter, too, there is a decline in net profit.

That is mostly due to the accounting standards. If you look at our non- GAAP operating margin, we are at 20.3 per cent this quarter and have already said that in 2018, we will take the non- GAAP operating margin to 21 per cent; by 2019, our target is to take it to 22 per cent. We are well on track to meet those numbers, on the back of the many initiatives we took last year and continue to do this year.

As you continue to drive localisation, will it not add to your costs?

The broad answer is No. We are talking about the digital business, around 29 per cent of our revenues right now and coming at a slightly higher margin than the overall company margin. From that perspective, this will not have any material impact on our margin. Certain parts of our business like consulting, strategy and design require more onsite presence and agile development work. We do not anticipate a material change of the overall onsite/offshore mix and we are hiring both onsite and offshore.

Do you expect to continue to hire in India, especially from campuses, at a similar pace as you earlier used to do?

Hiring will happen across the board but the nature of the business is such that you need more of a local workforce and we have been seeing that for some time. As part of shifting to digital, we will continue to hire in local markets but that doesn’t mean we won’t hire in India. The intake might have come down but we are still hiring. If you look at last year, the headcount (growth) was flat but we improved our (employee) utilisation quite significantly. I don’t think we can take the utilisation up any further. From that perspective, any growth that will happen now will definitely necessarily mean that there will be a net headcount addition.

What is your fresher hiring plan for 2018, especially the campus plan?

Campus recruitment is a little too early to say right now but, overall, I can say our hiring plan encompasses all those aspects – a mix of campus and lateral –- both in India and in local geographies. We are not in a position to give the exact numbers right now.

Your growth from financial services was a bit softer (seen quarterly), while health care was almost flat. Any reason?

From a financial services standpoint, we are up 6.2 per cent year-over-year. Within that, in the insurance practice, we had double-digit growth. We have done quite a few strategic deals in this (insurance) segment.