At Cognizant, it is growth not profit that is the new priority

NEWDELHI: Cognizant Technology Solutions Corp. is back to what it did best for most of its 24 years: Focusing on growth.

According to its mid-term strategy beginning next year, the Nasdaq-listed company expects to grow between 7% and 11%, retain its 19% operating margin and promises to spend at least $600 million on acquisitions every year. Cognizant’s new approach is in contrast with its current strategy, which has prioritised profitability over revenue growth. The company was pushed by activist investor Elliott Management Corp. in November 2016 to abandon what it felt was an “antiquated, growth-at-all-costs” business model. In 2017, Cognizant had promised to improve its profitability to 19% by the end of December 2019. Last Friday, when Cognizant held its first ever investorday event in New York, the management reaffirmed its stated guidance of improving operating profitability. However, the company said that beginning January 2020, the firm will look to improve its profitability by only 10 basis points every year. It expects organic revenue growth of 6-9% and another 1-2% from acquisitions, translating into 7-11% growth in constant currency terms. Finally, the company will spend 25% of its annual free cash flow on acquisitions. “It is clear that Cognizant’s focus is back on getting industry-leading growth as a 10 bps improvement profitability is just another way of saying we will retain our margins,” said a Mumbai-based analyst of a domestic brokerage, requesting anonymity.

“We thought the CTSH (Cognizant) analyst event had some positives and negatives. On the positive side, management provided information around the depth of offerings, offered a longer-term margin framework that we think is entirely appropriate (10+ bps/ year starting in CY20), and it will be moving to GAAP earnings in CY19,” Keith Bachman, an analyst with BMO Capital Markets, wrote in a 16 November note.