Cognizant’s Executive Leadership Discusses the Company’s Q3-2015 Results and Growth Outlook
Following the announcement of Cognizant’s third quarter 2015 results on November 4, 2015, the company’s executive leadership spoke with the media about the company’s performance and growth outlook for the rest of the year. Excerpts:
Francisco D’Souza, CEO, Cognizant
“We had a very strong Q3. On the back of our Q3 results, we have taken our guidance up for the third time this year. Our Q3 revenue grew 3.3 percent sequentially and 23.5 percent year over year. We beat guidance for Q3 by about $ 45 million. So it was overall a very strong quarter with broad-based growth across the business. We are happy with our performance. We are in a once-in-a-decade shift in the technology landscape and there is tremendous amount of opportunity for us at Cognizant to help our clients manage and make that transition. We are winning in the digital space because of the investments that we have made, the fact that we are innovating at scale and the broad set of integrated capabilities that we have built in the company to help our clients make the transition from the last wave of technology to the new wave of digital transformation. We feel great about the business and the performance that we have had year to date.
Success and winning in digital today requires a broad set of integrated capabilities to address the market demand. There are four key investment areas that I would point out. The first is the actual digital capabilities. Whether it is technology, strategy, design or data science, we are spending a lot of time building those core capabilities out. The second is our consulting business. Consulting plays an absolutely integral part in helping clients navigate these big shifts in the technology landscape. The third area is capabilities to help optimize and integrate digital businesses with our clients’ current legacy systems. The legacy environments form the backbone on top of which digital businesses get built. The fourth area is what we call platform-based solutions where we can create shared utilities across an industry or even across multiple industries so that investments get shared across multiple clients.
We will continue to look at M&A, as we always have, on an active basis. Our focus has always been and will continue to be primarily on small, tuck-in acquisitions that help us either add a specific capability to the business, grow our geographic footprint or increase the depth in particular industries that we serve.
Our approach has always been to keep our operating margins on a non-GAAP basis in a 19-20 percent range and reinvest everything above that back into the business. You are going to see us continue that strategy going forward and margins remain in the 19-20 percent range. This is the time when it is important for us to continue to invest organically in the business because of all of the opportunities that are available out there.”
“I think that our outperformance is driven by three things. First, we have a unique integrated set of capabilities that position us very well to address the current market demand. Second, we are winning in digital because we are innovating at scale. Our philosophy of reinvesting in the business is helping us win in this new digital era. Third, we are helping clients succeed in their digital transformations because we are able to combine the strengths that we have in digital technologies with optimizing of our clients’ legacy environments. We feel good about the strength of the business because we are winning in digital and the growth of the business is broad-based.
“We are taking our revenue guidance up for the full year as a result of the fact that we feel good about the demand environment. The fundamentals continue to remain strong in our view.
“North America continues to be a pillar of strength for the company but we are growing nicely in Europe and in Asia. In fact, those geographies had solid growth this quarter. We continue to diversify the business, make the investments that we need in other parts of the world, while at the same time continuing to make investments in North America to solidify our position of strength.
“We are at the cusp of a big shift in technology and this is going to drive a sustained period of demand over the next several years of clients investing in technology. That’s why we are seeing growth in discretionary spending. I think it is very important here is to understand that our strength doesn’t come just from our strength in digital. It comes from our ability to integrate digital with the core legacy backbones of our clients. That ability of taking the new and integrating it with the old is such a critical element of being successful in today’s digital environment. That’s why we are winning.”
“We experienced another quarter of strong performance, building on our solid momentum in the first half of the year. Cognizant’s portfolio of services is ready to take advantage of the global shift companies are making from consuming IT services that are ‘keeping the lights on’ toward services that drive innovation and growth in the digital space. Our portfolio of services is well positioned to meet their needs and capture a disproportionate share of the market.
“Cognizant is looking at acquisition targets that would supplement its growth based on geography and gaps in Cognizant’s portfolio. I wouldn’t expect to see M&A slow down, but maybe (see) a little acceleration in the pace as we become bigger. Our pipeline is as robust as it has ever been, maybe even a little stronger.”
Gordon Coburn, President, Cognizant
“We are seeing strong demand across the business. Clients are more and more spending on innovation, or running their businesses differently. Cognizant, over the years, has invested very heavily in consulting capability, analytics capability and digital capability. So as this shift in spend is happening, we are capturing a disproportionate share of the market. We have raised our guidance three times now this year, which is almost unprecedented and it is because of the demand we are seeing on the digital side and Cognizant’s ability to meet what we refer to as a dual mandate—helping clients reduce their cost of operations by running better and freeing up dollars for them to spend on improving their businesses by running different. There are only a few companies in the world that can effectively serve both sides of that dual mandate and that’s one reason why Cognizant is consistently outgrowing the industry on a year-over-year basis. We have a very healthy pipeline. We continue to win good business, particularly on the digital side, because of our consulting capability and the capabilities have built out to help clients both in the idea and design phase, and in the build phase of digital. There are very few companies that can do that.
“Operationally, it has been a home run this year. We have taken utilization up materially for two quarters in a row. That has allowed us to do something very important. We want to share our success with our employees. We have significantly increased our bonus accrual. We are going to pay bonuses well above last year to our employees around the world. We would pay well above 100% payout this year. Cognizant is growing faster and we have the obligation and the opportunity to provide better career opportunities, better growth and sharing in the success.
“In the end, no one is going to have a competitive advantage on compensation on campus among the major IT players. Students are going to choose based on where the greater career opportunities are. Let me give you an interesting statistic. At the schools where we have a Day 1 slot and students have multiple offers from other Tier 1 companies, 75% of the time they choose to come to Cognizant rather than one of our competitors. Money is equal for everyone. In the end, they see greater opportunities at Cognizant than the other players in the industry. And that’s a part of our culture and part of the reason why we are so successful with our customers. We have really engaged the employees who want to do the right thing and we are attracting great talent.”
Rajeev Mehta, CEO, IT Services, Cognizant
“We are very pleased with our overall performance this quarter and for the year. I think a lot of this has been possible because of our unique and integrated capabilities to address the market demand. We are winning in digital by innovating at scale. We are helping our clients to go through the digital transformation by optimizing their legacy systems.
“We are comfortable having our operating margin between 19 and 20 percent. The rest we would like to reinvest in the business. That is important to us and that is why we are witnessing industry-leading growth.
“There is a significant cross-currency movement in Europe. We had to absorb that impact during the quarter. We see strong pipeline of deals across Europe, including the UK. Apart from the traditional application development and maintenance, and infrastructure services business, we are being invited for many opportunities on the digital side. Most of that is possible because of our strong consulting practices and deep domain expertise.
“In terms of the demand environment, it is very positive across all our geographies and all our service lines. We are very excited. As I talk to you, I am in San Francisco for the Fortune Global Forum conference. Many of our clients are here and they are all talking about how digital disruptions are disrupting their business. There is a tremendous demand for digital. Obviously, clients are looking to bring down the total cost in one part of the business to free up dollars in order to be able to invest them in digital disruptions. As we enter the next year, we have a great strategy and we are winning on both sides.
“Cognizant provides great opportunities to its associates to participate in the company’s industry-leading growth. When we are growing, both sides benefit. We have done extremely well this year in both revenues and margins and this will get reflected in the bonus for this quarter. We are also re-skilling and retraining many of our associates to participate in the next-generation of demand opportunities. We have many programs in place to encourage and motivate employees.”
Karen McLoughlin, Chief Financial Officer, Cognizant
“For several quarters now, we are seeing the outperformance coming from what we call the dual mandate to ‘run better’ and ‘run different’. On the one hand, our clients are looking to us to help them drive effectiveness and efficiency into their businesses. They then want to take those dollars and redeploy them into innovation and transformation types of projects. We have been able to build out capabilities to drive that digital transformation at scale while helping our clients optimize their legacy systems. The upside is coming from change the business. For seven quarters now, we see consulting and technology services revenues growing much faster than the traditional outsourcing business.
“We haven’t broken out digital as a standalone component of our business. What’s important is digital is becoming a component of almost everything we do for our clients. A few years ago, when people started talking about digital transformation, much of that was focused on the front-end of business-to-business or business-to-consumer interactions. Now, digital is becoming pervasive to client conversations.
Bloomberg Radio (starts at counter 4:40)
“We have had a very strong Q3. For the third time this year, we were able to raise our full year guidance. We exceeded our Q3 revenue guidance by $45 million. We are seeing very strong demand for our services in the marketplace; as we have seen for several quarters now, strong demand for digital transformation and innovation, clients looking to partners such as Cognizant who can help them drive that while optimizing their environment.
“We work with large global multinational organizations and hire the best talent from across the globe. We have a very strong brand recognition around the world in terms of recruiting and the ability to attract and retain talent. We are a very fast growing organization, so we can provide great career paths for people, allow them to grow with us and also get the experience of working with many different clients in many different industries, which a lot of young people find exciting.
“We are constantly on the lookout for appropriate acquisitions. We tend to do smaller acquisitions—TriZetto was by far the largest. We are looking for acquisitions that do a number of things—expand our geographic footprint, sometimes we are looking for technology-type acquisitions, and increasingly now we are looking for acquisitions that bring us digital and new technology solutions and capabilities.”
R. Chandrasekaran, Executive Vice Chairman, Cognizant India
“We’re very pleased with the way the quarter has turned out. This is the third quarter in a sequence now when we’ve raised our revenue guidance. The reason for superior performance is our integrated approach to take care of client needs end-to-end. More recently, we’ve been seeing a lot of demand for helping our customers drive digital transformation. The investments we’ve been making for several years now are helping us innovate at scale for helping our customers drive this digital transformation.
“Our growth has been broad-based and it’s all because of digital transformation. In fact, every one of the customers that I meet in every industry domain is trying to make a differentiation for themselves, for their products and services, leveraging digital technologies. Digital is driving demand for all services across all segments.
“Given our services mix, we feel pretty good about the demand environment. Customers are now wanting us to drive efficiencies, freeing up dollars that they can reinvest in driving some of the things that they want to differentiate themselves in the marketplace with digital transformation. We have capability in that space too. We play a major role on both sides of the equation: ‘run better’ as well as ‘run different’. We are uniquely positioned to seize every opportunity out there and see a very healthy demand environment for our services portfolio.”
Debashis Chatterjee, President, Technology Solutions, Cognizant
“We had another solid quarter and saw good demand across the business, with particular strength in Consulting and Technology services as clients continue to focus on implementing digital technologies to drive business transformation.
“We saw a continuation of the trend we have seen in recent quarters whereby clients are shifting spend from legacy application maintenance towards project-based work, including digital and other transformational programs.
“Growth continues to be broad based across our banking clients, who remain focused on cost optimization, vendor consolidation, regulatory compliance and cyber security. As the healthcare industry shifts from fee-for-service to value-based care models, healthcare organizations are looking for new ways to deliver consumer-centric care while simultaneously looking for ways to drive operational efficiency.
“Our retail and manufacturing clients are focused on modernizing their technology environment, particularly around supply chains and omnichannel commerce solutions. On the manufacturing side, in particular, we are seeing strong demand around product transformation.
“Our clients recognize that becoming a digital enterprise is now a necessity, a matter of survival, as businesses, products, people and devices become more connected. Therefore, they are looking for innovative ways to combine their traditional business models and product sets with new and continuously evolving digital technologies. This is leading to a significant change in the way IT and operations budgets are allocated. Clients are recalibrating their spending, moving dollars from ‘keep-the-lights-on’ maintenance and operations projects to new digital initiatives that create competitive advantage by enabling new levels of business performance.”
“Because of our strong performance during the quarter, we have increased our year-to-date bonus accrual for our employees to levels well above last year. Our belief is that our strong revenue performance this year, combined with our continued success in driving higher operational efficiency, was only possible through the efforts of our incredible employees across the globe. We believe that we should share the rewards of our performance with them.
“For the quarter, we outperformed our guidance by $45 million. The demand situation as well as our outperformance has led us to taking up our revenue and EPS guidance for the third time this year.
“Our continued momentum reflects a healthy demand environment for Cognizant’s services that drive innovation, growth and efficiencies in the digital era. The strong relevance of our services portfolio to clients is reflected in our strong results this quarter, our guidance for the full year and the above company average growth in our consulting and technology services.
“As clients continue to focus on implementing digital technologies to drive business transformation, they are shifting spend from legacy application maintenance towards project-based work, including digital and other transformational programs.
“The role of IT is more strategic today than ever before. Today, clients are faced with the dual mandate to simultaneously ‘run better’ by driving productivity and efficiency, and ‘run different’ by reimagining organizations and business models for future growth. Effectively addressing the dual mandate for clients requires partners that can combine strategy, technology and business consulting in one integrated model. Equally important is a deep understanding of clients’ legacy environments and business processes so that these can be leveraged and integrated into new digital backbones.
“Our strength in the market comes from the fact that we have built and integrated this breadth of capabilities in our Digital Works methodology for maximum client impact. Our culture of innovation and adaptability, coupled with our commitment to continuous investment in the business, has positioned us to be the partner of choice for our clients as they navigate this tremendous period of change.”
“The demand environment remains very strong and we also see a healthy deal pipeline. There has been the dual mandate to ‘run better’ and ‘run different’ where clients are focused on higher efficiency as well as transformation. We believe that the whole innovation engine is happening faster than ever. We think we are better positioned. Today, there are conversations with clients where they are talking about business outcomes, not just the inputs that we provide.
“We are continuing on our growth momentum as we have been investing ahead of time, which has been the case with digital also. At this point, we are fairly engaged with many clients where we are driving digital, innovation and other transformation at scale. This is driving growth for Cognizant on both the digital and innovation agendas. We look at existing business models and see how we can bring about transformation, how that will impact the entire business cycle from end to end. Talk about digital is about helping the clients redefine their business models.”