 "Headwinds in N America are stabilising: Rajeev Mehta")
In the March quarter, information technology (IT) services company Cognizant grew slower in North America, a key region for the Nasdaq-listed company. Rajeev Mehta, chief executive for IT services, in an interview with Bibhu Ranjan Mishra, says the slow beginning in North America was primarily on account of some health care clients, evaluating the impact of the Affordable Care Act before deciding on their technology spending. Edited excerpts:
How’s the overall demand?
Though the demand environment is still very positive, we saw a little bit of slowness in North America. The primary reason is a lot of our clients in the health care space are still allocating appropriate spending on systems and technologies, as they step into the Affordable Care Act. In addition, inclement weather in the East Coast also delayed the budgetary planning for some clients. But overall, we saw a very healthy demand environment in our business. As we look at the rest of the year, we are seeing some headwinds in North America stablise.
It’s because of the types of deals we have won and their ramp-ups that we see. In terms of clients, deal closures, ramp-ups and hiring, we are fairly confident the headwinds we had seen in the beginning of the year will stabilise. We added about 7,000 professionals in the first quarter because we saw very healthy demand towards the end of the (last) year. Overall, we are very optimistic. While we see a lot of opportunities in the traditional outsourcing space; we are also seeing very strong growth in new areas such as digitisation.
What is dragging health care spending?
I think it is a quarterly phenomenon. As the clients come out of last year, they are evaluating the impact of the Affordable Care Act, or Obamacare. There are a lot of questions in their minds, in terms of the demand to be generated from this programme. Based on that, they will decide how much they need to invest in their systems. Therefore, I don’t see any significant concern.
You have done quite well in Europe, especially in the UK.
We have been investing in Europe for many years, both in the UK and continental Europe. As Europe has come out of the economic slowdown, lots of companies are doing very well. We have invested significantly, in terms of building consulting capabilities and local presence there. We are seeing greater acceptance of the global delivery model in the UK and also in continental Europe.
In the recent past, you have made some small acquisitions? Are you continuing with the tuck-in acquisition strategy?
Largely, we are focusing on acquisitions for building capability, not for capacity. It is because in a services company, the culture is extremely critical. That’s probably one of the reasons why you have seen the focus on tuck-in acquisitions. We will continue to build vertical and horizontal capabilities so that we establish ourselves as leaders in those spaces. For us, acquisition is a mixed spectrum; some might be small, and some large.
A few analysts say Cognizant’s revenue growth forecast of 16.5 per cent for the full year is little conservative. Do you see scope for improvement?
We are quite optimistic for the whole year. Growth of 16.5 per cent is industry-leading. So, we are very confident in terms of getting to that number. We are seeing a strong pick-up in demand in the second quarter of 2014. That gives us the confidence we are going to have a strong year.
Has there been any change in your margin strategy? Are you comfortable with an operating margin of 19-20 per cent?
From the very beginning, we have continued to maintain our operating margin in the range of 19-20 per cent. Our strategy has not changed from that at all.
Are you announcing salary increases this year? If so, what will be the range of these?
Right now, we are going through that process. We should be announcing it sometime this quarter.
How’s the overall demand?
Though the demand environment is still very positive, we saw a little bit of slowness in North America. The primary reason is a lot of our clients in the health care space are still allocating appropriate spending on systems and technologies, as they step into the Affordable Care Act. In addition, inclement weather in the East Coast also delayed the budgetary planning for some clients. But overall, we saw a very healthy demand environment in our business. As we look at the rest of the year, we are seeing some headwinds in North America stablise.
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What makes you confident about North America?
It’s because of the types of deals we have won and their ramp-ups that we see. In terms of clients, deal closures, ramp-ups and hiring, we are fairly confident the headwinds we had seen in the beginning of the year will stabilise. We added about 7,000 professionals in the first quarter because we saw very healthy demand towards the end of the (last) year. Overall, we are very optimistic. While we see a lot of opportunities in the traditional outsourcing space; we are also seeing very strong growth in new areas such as digitisation.
What is dragging health care spending?
I think it is a quarterly phenomenon. As the clients come out of last year, they are evaluating the impact of the Affordable Care Act, or Obamacare. There are a lot of questions in their minds, in terms of the demand to be generated from this programme. Based on that, they will decide how much they need to invest in their systems. Therefore, I don’t see any significant concern.
You have done quite well in Europe, especially in the UK.
We have been investing in Europe for many years, both in the UK and continental Europe. As Europe has come out of the economic slowdown, lots of companies are doing very well. We have invested significantly, in terms of building consulting capabilities and local presence there. We are seeing greater acceptance of the global delivery model in the UK and also in continental Europe.
In the recent past, you have made some small acquisitions? Are you continuing with the tuck-in acquisition strategy?
Largely, we are focusing on acquisitions for building capability, not for capacity. It is because in a services company, the culture is extremely critical. That’s probably one of the reasons why you have seen the focus on tuck-in acquisitions. We will continue to build vertical and horizontal capabilities so that we establish ourselves as leaders in those spaces. For us, acquisition is a mixed spectrum; some might be small, and some large.
A few analysts say Cognizant’s revenue growth forecast of 16.5 per cent for the full year is little conservative. Do you see scope for improvement?
We are quite optimistic for the whole year. Growth of 16.5 per cent is industry-leading. So, we are very confident in terms of getting to that number. We are seeing a strong pick-up in demand in the second quarter of 2014. That gives us the confidence we are going to have a strong year.
Has there been any change in your margin strategy? Are you comfortable with an operating margin of 19-20 per cent?
From the very beginning, we have continued to maintain our operating margin in the range of 19-20 per cent. Our strategy has not changed from that at all.
Are you announcing salary increases this year? If so, what will be the range of these?
Right now, we are going through that process. We should be announcing it sometime this quarter.