Cognizant Technology Solutions delivered a revenue decline of 2.4 per cent year-on-year in the December 2023 quarter, within the guided band of (-)1.2 to 4 per cent. The company’s revenue growth guidance of (-)2 to 2 per cent for CY2024 highlights a weak discretionary spending environment, resulting in barely any improvement in growth when compared to CY2023, said analysts at Kotak Institutional Equities.
“The guidance includes a contribution of 100 bps from acquisitions. The revenue guidance in absolute terms stands at $19- 19.8 billion. Revenue growth guidance is back-ended, not surprising, and implies exit growth of mid-single digits by end-CY2024. The start of the year will be weak, with March 2024 quarter guidance of a revenue decline of -3 per cent to -1.5 per cent. The revenue guidance of $4.68-4.76 billion signals a decline of -1.5 per cent to flat revenues qoq. The guidance implies sequential growth of 1-2.6 per cent from Q2-Q4 of CY2024 and captures:
(1) large-deal ramp-ups
(2) some improvement in discretionary spending.
The uncertainty is captured in the wider-than-usual guidance band,” said Kawaljeet Saluja, Head of Research, Kotak Institutional Equities.
Cognizant had reported Q4CY23 revenues of $4.758 billion, posting a sequential decline of 2.9 per cent and within the guided band. Revenues included the contribution of 0.9 per cent YoY from acquisitions. The revenue decline was mainly on account of financial services (down 6.6 per cent YoY in c/c), followed by healthcare (down 2.7 per cent YoY in c/c), while growth in products & resources (up 0.3 per cent) and CMT (up 2 per cent) slowed down to a trickle. The surprise package, the Kotak analysis stated, was an EBIT margin of 16.1 per cent, which came in well ahead of the guidance band.
Bookings during quarter
Cognizant’s bookings declined 6 per cent year-on-year, while on a trailing 12-month basis, it grew 9 per cent to $26.3 billion. ACV trends, meanwhile, are weak as bookings are dominated by longer-tenured cost takeout deals. “The weak discretionary spending environment has resulted in a decline in the contribution of small-ticket but high-velocity deals; these are typically less than $10 million and tend to get consumed in the same year of wins,” Kotak Institutional Equities stated. Total bookings included five large deals above $100 million each in TCV (CTSH won three such deals in 3QCY23). Further, as per the management, the deals won in CY2023 will contribute to CY2024 growth.
Readthrough negative for rest of the IT pack
Management indicated caution and uncertainty in improvement in discretionary spending, which is captured in the wider-than-usual revenue guidance band. The uncertainty is higher in interest rate sensitive sectors, said Kotak analysts. “Cognizant’s success in large deals have not gone unnoticed. The easy share gains at the expense of Cognizant, for competition has reduced making the market lot more competitive,” the analyst concluded.
