Cognizant cuts revenue forecast, flags attrition impact on business

CEO says revenue and bookings below expectations, but company will return to 'accelerated growth'

Unlike its peers, Nasdaq-listed IT services firm Cognizant continues to see attrition that is impacting operations. The company, in its Q3 results report, guided for a decline in Q4 and full-year revenue.

The company’s Q4 revenue guidance is a decline of 0.2 per cent to 1.2 per cent (growth of 2-3 per cent in constant currency). This means that its full year revenue guidance has also come down. The company now expects its FY22 guidance to be 7 per cent in constant currency from the earlier 8.5 per cent to 9.5 per cent.

Q3 revenue came in at $4.9 billion, a growth of 5.6 per cent in constant currency terms. This was lower than expected and met the lower end of the company’s own Q3 guidance. Cognizant has guided for a revenue of $4.98-$5.03 billion.

The guidance was reduced due to headwinds from currency, lower North America billable headcount, which the company expects to take several quarters to improve, and softer-than-expected bookings growth.

The bigger issue at the company seems to be attrition. Till a few quarters back, attrition in its offshore centres had impacted operations. This time the management said that onshore attrition and uncertain economic conditions are impacting performance.

"Revenue and bookings were below our expectations as company specific fulfillment challenges were compounded by the impact of an uncertain macroeconomic backdrop," said Brian Humphries, Cognizant’s chief executive officer. "We are confident the steps we are taking will return the company to accelerated growth over the medium to long term."

Humphries, in the earnings call, said that while a non-certain macroeconomic backdrop impacted bookings and revenue, “the primary driver of the revenue shortfall relates to a reduction in US onshore billable resources in recent quarters, following a period of elevated attrition, a reduction in visa travel and a COVID-induced shift in the near and offshore delivery centers.”

Attrition for the quarter was at 29 per cent, lower than the preceding quarter. In Q2, Cognizant had reported attrition of 32 per cent on a trailing 12 month basis.

Voluntary attrition fell 2 points sequentially to 29 per cent on an annualized basis and fell 3 points sequentially on a trailing 12-month basis. Compared to peers these numbers are however still very high.

The company, to continue to tackle the falling attrition, announced that it will accelerate next year's merit to the second quarter of 2023, meaning employees will have 2 more cycles in the space of 6 months.

The company cautioned about macroeconomics impacting discretionary spends. “We see clients closely scrutinizing and slowing their investment decisions in the backdrop of uncertain economic conditions. Spends have been reduced on lower-priority projects or those with a longer return on investment. We're seeing some early signs of slowing in discretionary digital projects,” said Humphries.

Industries such as mortgage within banking, healthcare and retail were flagged out as verticals which are seeing some slowdown.