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NASDAQ-listed IT services company Cognizant not only grew faster than its Indian competitions year-on-year but also surpassed its own guidance whiles its peers lagged behind. On Tuesday, the IT major posted a healthy set of numbers in its financial year second quarter ended June 30, 2013 reaffirming the belief of a strong recovery in demand for technology outsourcing services in global markets, especially in North America.
The company also brought some cheer in the market, after it revised its annual revenue guidance upward by two percentage points to 19%. This is much ahead of industry body Nasscom’s annual growth guidance of 12-14%.
In an interview with T E Narasimhan, Cognizant's Group Chief Executive, Technology and Operations R Chandrasekaran says a healthy demand environment for company's services gave the confidence to raise guidance for the full year. Excerpts:
What was the trigger for changing the guidance from 17% to 19% for the whole fiscal?
We continue to be consistent in our strategy of re-investment in the business to drive top line growth and it helped to maintain stable operating margins and deliver industry-leading revenue growth.
A healthy demand environment for our services gives us the confidence to raise 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 we see 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 run better by driving greater performance efficiencies, and run differently by driving innovation and transformation for future success. As SMAC (social, mobile, analytics, and cloud) technologies represent the next secular shift in computing, we continue to build out 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 services and new service offerings.
In the June-ended quarter of 2013, 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 Cognizant plan to change its strategy?
We will continue to focus on the North American market while expanding our geographic footprint to Europe, Asia Pacific, the Middle East, and Latin America. North America is the largest IT market because organisations in North America are traditionally aggressive adopters of technology and generally have mature global sourcing programs. Having said that, we do continue to invest aggressively and grow in the other geographies such as Europe, Asia and the Middle East.
In the June-ended quarter, North America grew 6% sequentially and 17% year-over-year, while Europe grew 11% sequentially and 37% year-over-year. Within Europe, the UK grew 8% sequentially and 28% year-over-year. Including the impact of the C1 Group acquisition, Continental Europe grew almost 16% sequentially and 54% year-over-year.
With modest improvements in consumer and business confidence in North America, our clients are beginning to make investments 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 catalyzed by the economic climate. Our continued investments in Europe, local leadership and broad range of capabilities make us optimistic in our long-term growth prospects across Europe.
Our growth in the Rest of the World, which includes India, continued to remain strong, growing 7% sequentially and 25% year-over-year, as our investments in key markets, such as Singapore, India, and the Middle East are continuing to drive accelerated growth.
What are your capex plans for the current fiscal and does it include acquisitions? If so, which are the geographies and verticals and size of acquisitions?
In 2013, we expect our capex to be around $400 million. We spent approximately $50.3 million for capex during the June-ended quarter.
Our acquisition strategy remains unchanged. We will continue to look at small tuck-under acquisitions — with the target company revenue being under $200 million — focused on strategic benefits in terms of industry expertise, geographical expansion, and service line capabilities. As we get larger, our definition of “tuck-under” will naturally expand.
Last fiscal Cognizant announced two acquisitions, how much inorganic growth will they contribute in calendar year 2013?
As part of our effort to expand and strengthen our US delivery and operations capabilities to support our BPO services, we recently completed a tuck-under acquisition of SourceNet Solutions, an accounts payable service provider located in College Station, TX, which 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 calendar 2013 includes $10 million of expected revenue from the acquisition of SourceNet Solutions.
We had earlier announced the acquisition of Medicall and six companies of the C1 group companies in Germany. The integrations of these acquisitions are progressing well. Jointly, these two companies are expected to contribute to $90 million in calendar 2013.
Net employee addition was lowest in the last two years in Q2. It was 1,600 as compared to 6,000 in Q1 and 6,300 in Q4......
We hired heavily in the past few quarters in preparation to meet the growing demand. Our plan was clearly to take up utilisation, which is what we did during the June-ended quarter. We shall continue to hire to meet the continued healthy demand, which is manifest in the company taking up the full year revenue growth guidance to at least 19% from at least 17% last quarter.
What kind of impact the proposed reforms by US Government (including visa reforms) will have on Cognizant and on 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 — the bill includes some very good things for the American economy, our customers, and our industry, but also includes several clauses which, if enacted, would be detrimental to our clients and US competitiveness.
Now that the Senate has passed its bill, the immigration debate shifts to the House of Representatives. The House leadership has clearly stated that it does not intend to consider the Senate’s bill. Rather, it will follow a different approach and develop its own legislation through a step-by-step approach.
It is unclear whether the approach in the House will 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 includes many of the 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 found in the Senate bill. It is clear that we are still in the early days of the House’s discussion of immigration.
On the client side, we are seeing no change in client buying behavior 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.
