Connections

Digital Strength Provided Cognizant a Boost in Q1

Cognizant reported strong results for its first quarter (ended March 31) that were helped significantly by continued growth in its digital business.

“I’m pleased with the health of key leading performance indicators,” CEO Brian Humphries told analysts on an earnings call May 5.

One clear example of that was digital revenue growth that “accelerated” 15% from a year ago, he said, noting “digital now represents 44 percent of our revenue mix.”

Another positive sign was “bookings growth of 5 percent, which was strong considering outstanding December bookings and a tough comparison to a year ago”, he said.

Total Cognizant revenue grew 4.2% from $4.2 billion a year ago to $4.4 billion, while profit increased to $505 million (95 cents a share) from $367 million (67 cents a share).

Revenue in the company’s communications, media and technology business grew 5% from a year ago and made up 14.9% of total revenue, driven by what Cognizant said was “double-digit year-over-year revenue growth among our technology clients.”

“We are very pleased with the growth of our core portfolio of the technology business and expect continued solid growth for the remainder of the year,” CFO Jan Siegmund told analysts.

Financial services (33.1% of revenue) revenue grew 0.5%, while healthcare (29.3% of revenue) grew 7.9% and products and resources (22.7% of revenue) grew 4.6%.

Recruitment Efforts Update

“Although we executed well in the quarter and delivered against our expectations, revenue upside was limited by elevated attrition, reflecting the intensely competitive market for digital talent that we spoke about in our last earnings call,” Humphries told analysts.

In February, during the online Goldman Sachs Technology and Internet Conference, he said Cognizant increased its recruitment efforts in the face of an especially competitive talent market, especially when it comes to artificial intelligence (AI), machine learning (ML), data and analytics positions.

Cognizant started the recruitment campaign for talent and “will continue in the months ahead,” he said at the time. The company even “meaningfully increased our recruiting head count—the recruiters themselves – in the last few months” but “it’s a tough market out there,” he conceded.

During the May 5 earnings call, he told analysts: “To address retention challenges, we’ve been executing a multipart plan that includes stepping up our internal engagement efforts and increasing investments in our people through training and job rotations to provide opportunities for career growth, shifting to a quarterly promotion cycle for billable associates and implementing further salary increases and promotions for high-demand skills and critical positions and ramping our hiring capacity by adding hundreds of recruiters, and making 28,000-plus offers to new graduates in India, a new record.”

Although “daily resignations increased through the first quarter, peaking in March,” he said “resignations slowed in April and continued to slow in May.” But he warned: “Given two months’ notice periods in India, we anticipate further sequential increases in attrition in Q2 before a gradual recovery in the second half of this year.”

Despite the “industry attrition challenges, we remain confident in Cognizant’s standing as a magnet for skilled talent and a great place to build a career,” he said. “In recent quarters, we’ve seen a meaningful increase in our brand perception in the talent market in India,” he also noted.

However, there is now another major challenge in India, he said, pointing to the “ongoing humanitarian crisis” there caused by the COVID-19 pandemic. Cognizant has made several investments to support India, he said, noting the company continued to “prioritise the health and safety of our associates while we serve our clients.”

The Macro Environment

Cognizant’s “client conversations suggest a robust and resilient IT services demand picture for 2021 and beyond,” Humphries also told analysts. “This is fuelled by business model innovation, customer experience investments, technology modernisation, risk mitigation and efficiency initiatives.”

Clients are most interested in how they can “orchestrate technology, data and design to make their employee and customer experiences more productive, intuitive, relevant and valuable,” he said.

A good example of that is the work Cognizant has been doing with Papa John’s, he pointed out, noting his company helped the pizza restaurant chain “transform its order operations into a centralised model that enables hyper-personalised offers for customers.” To do that, Cognizant used an “end-to-end intelligent, cloud-based omni-channel solution powered by advanced analytics in 750 of its stores initially before being expanded to 1,500 stores given early success,” he said.

That solution “resulted in a revenue uplift of more than 15 percent per order, significant productivity improvements and halving the time between order placement and delivery,” he said.

“This shift from traditional to a software-centric business requires clients to transform their business processes and their IT architectures in parallel,” he explained.

“This starts with engineering a new digital stack, enabled by software and consumer-grade apps that sit on intelligence, drawn from sophisticated data sets, all of which need to be instrumented and run on cloud platforms,” he told analysts, adding: “Within this new stack, we see particularly strong opportunities to help clients in modernising their applications, data and infrastructure. And, as you can imagine, this is driving increasing demand for our digital engineering and cloud solutions portfolio.”