Cog­nizant’s prof­itabil­ity fo­cus may­be­hurt­in­grev­enue growth

The IT firm says it walked away from sev­eral deals that of­fered lower mar­gins as rev­enue growth fell 1.6% in the past 15 months

Mint Asia ST - - News - B Y VA RUN S OOD

Cog­nizant Tech­nol­ogy So­lu­tions Corp.’s fo­cus on im­prov­ing prof­itabil­ity has slowed rev­enue growth, as the com­pany chose to shun con­tracts that of­fer lower mar­gins.

For the first time last week, the man­age­ment ac­knowl­edged that Cog­nizant has walked away from sev­eral such deals since March 2017.

“(We) made a com­mit­ment to you that we were go­ing to go fo­cus, shift our busi­ness to­wards more high-value-added dig­i­tal work and add healthy mar­gins….so an­swer is yes. If there is some work that we feel that doesn’t present—meet that cri­te­ria, we have cho­sen to walk away from,” said Cog­nizant pres­i­dent Ra­jeev Mehta when quizzed by an an­a­lyst in a post-earn­ings con­fer­ence if the com­pany was se­lec­tive in bid­ding for new work.

“We’re be­ing pru­dent about mak­ing choi-

TCS VER­SUS COG­NIZANT

Rev­enue ces of the kind of work we go af­ter,” said Fran­cisco D’souza, chief ex­ec­u­tive at Cog­nizant.

“So it’s the smart move to pick your bat­tles care­fully and fo­cus on the work that you think is go­ing to be most strate­gi­cally sig­nif­i­cant to the client over the long run,” said D’souza.

Cog­nizant has now grown at a less than 10% pace from a year ear­lier in three of the past five quar­ters, a sharp de­cline from the con­sis­tent dou­ble-digit growth un­til the end of 2016. TCS has man­aged to dou­ble its year-over-year rev­enue growth from 5.8% in March 2017 to 10% in june 2018. Cog­nizant's growth has slipped from 10.74% to 9.15% dur­ing the same time The rev­enue gap be­tween TCS and Cog­nizant widened to $1.045 bil­lion in April-june 2018 from $906 mil­lion in Jan­uary-march 2017 Cog­nizant has im­proved its op­er­at­ing mar­gin by 60 ba­sis points while TCS'S op­er­at­ing mar­gin slipped by 70 ba­sis points dur­ing this time

Rev­enue growth has fallen 1.6 per­cent­age points in the past 15 months.

Tea­neck, New Jersey-based Cog­nizant was pushed by ac­tivist in­vestor El­liott Man­age­ment Corp. in Novem­ber 2016 to aban­don what it felt was an “an­ti­quated, growth-at-all­costs” busi­ness model, and fo­cus in­stead on im­prov­ing prof­itabil­ity and share­holder re­turns.

Sub­se­quently, the board of Cog­nizant in Fe­bru­ary last year con­ceded to the de­mands of its ac­tivist share­holder and out­lined a three-year road map to im­prove prof­itabil­ity.

Cog­nizant, which saw a 10.74% year-onyear rev­enue growth in Jan­uary-march quar­ter last year, saw its rev­enue grow 9.15% in April-june 2018, even as its over­all prof­itabil­ity im­proved 60 ba­sis points over the past 15 months, ac­cord­ing to a Mint anal­y­sis.

Cog­nizant Tech­nol­ogy So­lu­tions’ de­cline is in con­trast to the re­ver­sal in for­tunes at Tata Con­sul­tancy Ser­vices (TCS), which has more than dou­bled its pace of growth and con­se­quently widened the rev­enue gap with Cog­nizant dur­ing this time.

Sam­ple this: Cog­nizant Tech­nol­ogy So­lu­tions re­ported a 21% growth and added $2.15 bil­lion in in­cre­men­tal rev­enue in Jan­uary-de­cem­ber 2015, higher than the $1.96 bil­lion in new rev­enue brought by TCS, In­fosys and Wipro put to­gether.

For this rea­son, a few an­a­lysts now say that El­liot’s de­ci­sion was noth­ing short of “de­struc­tive ac­tivism”.

“We are con­cerned CTSH’S growth slow­down may be a side ef­fect of tight mar­gin ex­pan­sion tar­gets,” HSBC an­a­lyst Yo­gesh Ag­gar­wal wrote in a 17 May note, ti­tled De­struc­tive Ac­tivism. “We see ev­i­dence for this in the rise in at­tri­tion, other sup­ply is­sues and TCS’S ac­cel­er­a­tion”.

“We think CTSH’S June quar­ter raised more ques­tions than an­swers,” wrote Keith Bach­man, an an­a­lyst with BMO Cap­i­tal Mar­kets, in a note dated 2 Au­gust af­ter Cog­nizant’s se­cond-quar­ter earn­ings that fell short of Street es­ti­mates. “Rev­enues fell short of ex­pec­ta­tions while op­er­at­ing mar­gin and EPS beat. We ex­pect CTSH to con­tinue to fo­cus on grow­ing mar­gins, though we won­der about the longer-term im­pact to rev­enues. We are mod­estly low­er­ing our es­ti­mates and are low­er­ing our tar­get price from $86 to $85,” Bach­man added.

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