Cognizant Technology services held an investor meet nearly after 3 years, reported a revenue CAGR of 8-11% with highest attrition rate

Cognizant Technology services recently held their second investor meet after almost 3 years. It reported a revenue CAGR of 8- 11%, cumulative 3-year EBIT margin improvement of ~110bps over 15.4%, FCF being 100% of net income and allocation of 50% of FCF to M&A compared to 28% TTM, implying lower capital return to shareholders. 

In the near term, the digital segment is expected to grow in high-teens or low-twenties while the non-Digital segment is expected to grow at low-mid single digit levels. The company is anticipating growth on the non-Digital side while for the digital segment is expected to contribute 55%-60% to total revenue in 2024 vs the 44% in 3Q2021. CTS strategizes to focus not only on priority service lines, verticals and geographic markets, but also to de-emphasize those that CTS considers non-strategic. The company chalked out a near term action plan around rebranding and repositioning CTS, making CTS more global from delivery, revenue and management composition perspective, accelerating digital through a lot of bite sized M&A transactions and making CTS more relevant to customers by having client facing employees with greater domain knowledge and who are capable of interacting with CXOs beyond CIOs and CTOs and being in a position to suggest business solutions to customers. The dropping of content moderation services and exit from local businesses in Latin America and Africa also served as the company’s growth drivers.

The segments Healthcare, CMT, Products and Resources showed decent momentum, however, the Financial Services segment is lagging. Large global banks have been the trouble-maker for the company since the past 4 years now causing the company to lose out on market share as these clients because could not pivot quickly enough to digital and presumably were more focused on the technology side of things rather than proactively offering solutions to them. Even the lack of adequate automation skills probably did not fare well compared to the Indian peers or with Accenture. There is an expectation that over time these clients will start growing as the pivot towards digital has been quite material with US $2.5bn worth of Digital acquisitions done in 2019, client-facing teams were revamped, significant progress was made in both horizontal and vertical partnerships and automation capabilities were strengthened.

CTS has continued to sustain high attrition with LTM number at 24%, up QoQ from 18%, outperforming its peers in this aspect. The company reports these numbers as combined data factoring in IT and BPO services and trainees. Generally, India heritage peers’ attrition data focuses only on IT services and sometimes excludes trainee data. The company suggested that the attrition data will continue to be higher in the rest of 2022 as the company offers employment 50,000 freshers for 2022 vs ~30,000 in 2021 and higher than 45,000 offers during the 3QCY21 results. The high attrition numbers were achieved with great HR practices witnessed in 2020.