On Tuesday, Nasdaq-listed information technology (IT) services company Cognizant posted a healthy set of numbers for the quarter ended June, reaffirming hopes of a strong recovery in demand for IT outsourcing services in global markets. The company also scaled up its annual revenue estimate. Group chief executive (technology and operations) R Chandrasekaran, in an interview with T E Narasimhan, says the company would continue to focus on the North American market, while expanding our geographies. Edited excerpts:
What was the trigger for scaling up the revenue estimate for the entire financial year from 17% to 19%?
We continue to be consistent in our strategy of re-investment in the business to drive top line growth. This helped maintain stable operating margins and deliver industry-leading revenue growth.
A healthy demand environment for our services gives us the confidence to raise our guidance for the full year. The improved demand comes from a combination of macro trends and our own competitive positioning. We have seen a strong pick-up in discretionary spending, in line with what is seen in a normal budget-and-spend cycle. We continue to focus on our investment across three growth horizons in response to a fundamental long-term shift in our clients’ business imperatives.
They are increasingly looking to drive greater performance efficiencies and run differently by driving innovation and transformation. As SMAC (social, mobile, analytics and cloud) technologies represent the next secular shift in computing, we continue to build our SMAC capabilities and have had some great client wins, thanks to our early lead and thought leadership in this area.
The healthy growth in our Horizon 1 and 2 services is further validation of our balanced approach to growing and integrating our core services with our emerging and new service offerings. In the quarter ended June, we saw broad-based growth across geographies, industries and services.
North America, accounted for 78% of Cognizant’s overall revenue. Is it a good idea to depend on a single market, or does the company plan to change its strategy?
We will continue to focus on the North American market, while expanding our geographic footprint to Europe, Asia-Pacific, West Asia and Latin America. North America is the largest IT market because organisations in that area are traditionally aggressive adopters of technology; typically, they have mature global sourcing programmes. Having said that, we continue to invest aggressively and grow in the geographies such as Europe and Asia.
In the quarter ended June, our North America operations grew six% sequentially and 17% year-on-year, while Europe grew 11% sequentially and 37% year-on-year. Within Europe, the UK grew eight% sequentially and 28% annually. Including the impact of the C1 Group acquisition, continental Europe operations grew 16% sequentially and 54% on an annual basis.
With modest improvements in consumer and business confidence in North America, our clients are beginning to invest in software and services, often funded from driving efficiencies in other parts of the business.
In Europe, clients are looking to move more work to a global delivery model. A structural shift from discretionary projects to larger annuity-based outsourcing deals across Europe is being catalysed by the economic climate. Our continued investments in Europe, the local leadership and a broad range of capabilities make us optimistic about our long-term growth prospects across Europe.
Our growth in the rest of the world, including India, continued to remain strong---seven% sequentially and 25% year-on-year, as our investments in key markets such as Singapore, India and West Asia are continuing to drive accelerated growth.
What are your capital expenditure plans for this financial year? Does it include acquisitions? If so, in which geographies and verticals, and what would be the size of the acquisitions?
In 2013, we expect our capital expenditure to be about $400 million. In the quarter ended June, we spent about $50.3 million.
Our acquisition strategy remains unchanged. We will continue to look at small tuck-under acquisitions---with the target company’s revenue being lower than $200 million---while being focused on strategic benefits in terms of industry expertise, geographical expansion and service-line capabilities. As we become larger, our definition of ‘tuck-under’ will naturally expand.
In the last financial year, Cognizant announced two acquisitions. How much inorganic growth would it record in 2013?
As part of our effort to expand and strengthen our US delivery and operation capabilities to support our BPO (business process outsourcing) services, we recently completed the tuck-under acquisition of SourceNet Solutions, an accounts payable service provider located in College Station, Texas.
This was owned by our long-time global financial services client BNY Mellon. This acquisition brings SourceNet’s processing platform to Cognizant. Our revised revenue guidance of at least $8.74 billion for 2013 includes $10 million of expected revenue from this acquisition.
Earlier, we had announced the acquisition of Medicall and six C1 Group companies in Germany. The integrations of these acquisitions are progressing well. Jointly, these companies are expected to contribute $90 million in 2013.
In the quarter ended June, the net employee addition was the lowest in the last two years; it stood at 1,600, against 6,000 in the quarter ended March and 6,300 in the quarter ended December 2012.
In the past few quarters, we hired heavily, preparing to meet the growing demand. Our plan was to take up utilisation, which is what we did during the June-ended quarter. We shall continue to hire to meet the healthy demand, manifested in the company raising the full-year revenue growth forecast.
What impact would the US government’s proposed reforms, including those related to visas, have on Cognizant and the Indian IT industry?
As expected, a comprehensive immigration reform Bill was passed by the Senate in late June. Our view of the Bill remains unchanged—it includes some very good things for the American economy, our customers and our industry. But it also includes several clauses which, if enacted, would be detrimental to our clients and US competitiveness.
Now that the Senate has passed the Bill, the immigration debate shifts to the House of Representatives. The House leadership has clearly stated it does not intend to consider the Senate’s Bill but rather, follow a different approach and develop its own legislation in a step-by-step manner.
It is unclear whether the approach in the House would result in a Bill as comprehensive as the Senate’s, or several separate Bills addressing targeted components of immigration.
In late June, a high-skill immigration Bill was passed by the House Judiciary committee. This proposal included many positive components of the Senate Bill, such as increasing visa caps and streamlining the green card process. However, it did not include the onerous outplacement clause in the Senate Bill. It is clear we are still in the early days of the House’s discussion on immigration.
On the client side, we are seeing no change in buying behaviour as a result of the immigration debate. We are discussing the issue with clients and other stakeholders who are interested, though such requests have been few and far between.
