Gordon J. Coburn | Our strategy is to maximize revenue growth4 min read . Updated: 25 Aug 2010, 11:32 PM IST
Gordon J. Coburn | Our strategy is to maximize revenue growth
Gordon J. Coburn | Our strategy is to maximize revenue growth
Bangalore: Cognizant Technology Solutions Corp., the fourth largest exporter of information technology (IT) services from India, increased its revenue by 15.15% in the three months to 30 June compared with the preceding quarter. Its sequential growth pace was much faster than that of bigger rivals Tata Consultancy Services Ltd(6.4%), Infosys Technologies Ltd(4.8%) and Wipro Ltd(3.24%). New Jersey-based Cognizant was also the most aggressive in its projections, saying it would end this year with 36% growth over the previous year and revenue of at least $4.46 billion. However, its profit margin of around 16% is lower compared to Infosys’s 24%. This is reflected in the market capitalization of the two companies—while Cognizant is valued at around $18 billion(Rs39.59trillion), Infosys is valued at $34 billion.
Gordon J. Coburn, the chief strategy and financial officer of Cognizant, which is listed on the Nasdaq, said in an interview on a visit to India that he isn’t worried about the margins. Cognizant would rather be the leader in revenue growth than margins, he said. Edited excerpts:
The market came back big. After a period of instability of three years, we saw a degree of stability and some growth, and that benefitted all of us. Tough economic times meant the trend towards offshoring got accelerated. The key thing was (that) discretionary spending went up, as reflected by the growth in our application development (as opposed to application maintenance) revenues.
Development work related to efficiency and effectiveness of our clients picked up. What really surprised us was the demand for work related to innovation. Cognizant, because of the investments it made during the downturn, got a disproportionate share of the innovation business.
Your SGA (sales, general and administration) expenses are 22% of your revenue, while they are just around 13% for companies like Infosys and Wipro. Are you temporarily purchasing market share?
While I have immense respect for our competitors, our strategy is a little bit different from theirs. Our strategy is to maximize revenue growth, and that costs money. I would rather have a slightly lower (profit) margin and lead the industry in revenue growth. Some others want to maximize their margins. That is their strategy. I am not saying one is better than the other, but both create value to shareholders.
It is dangerous to be caught in the middle. In our model, there is recurring revenue, so we are not temporarily purchasing market share. We want to maximize revenues before the industry completely matures. Part of it is cultural. In the US, the emphasis is more on revenue growth rather than just focus on margins, as in India. If you look at the gross margins, all of us are roughly in the 40-42% bracket. So what we are doing is investing an additional 300 to 700 basis points more than our competitors in sales and marketing and that clearly has started paying off. (A basis point is one-hundredth of a percentage point.)
It is more of creating relationships rather than one-off sales. If you peel the onion, you will see that it is not necessarily that we are winning (a) dramatically more number of customers than some of our competitors. Our secret sauce is that we are able to grow the relationships, mine clients better to cross-sell and upsell services better than our competition. I am not worried about short-term market capitalization, but rather long-term. Over a period of time as margins stablize, they (competitors) will have lower growth rates and we will grow faster, which will eventually get reflected in market cap.
Yes, you are right. Our Q2 was an aberration. We cannot have a 15-16% growth quarter-on-quarter over a long period. It is clearly not sustainable. We had so many development projects start in Q2 and that will not continue at that pace. But there is very healthy growth out there, as the global economy recovers and becomes stronger. I am confident that the long-term secular growth story is sustainable.
Cognizant is accused of being a two-trick pony. Sector-wise, some 65-70% of your revenues come from serving BFSI (banking, financial services and insurance) and healthcare industries; and regionally, 80% of revenues come from North America. Are you trying to address this issue?
I don’t think I would agree with that assessment. It might have been true a number of years back. We are (a) very focused player, who does what they do very well. In Europe, for instance, from where we now get about 18% of our revenues, we have been the player growing the fastest.
Our heavy investment in Europe is mostly done. Asia will be our focus now. India, for instance, is a very critical and important market for us. Pharma, telecom, information, media, infrastructure management, high-end BPO (business process outsourcing) are some areas we have grown in.
While we may have started off serving a couple of industries, today we get about 18% of our revenue from manufacturing, retail and logistics segment. We are far more diversified and have a more balanced portfolio than we did earlier. To do that (diversification), acquisitions are clearly an important part of our strategy. We will do acquisitions for industry expertise, speed-to-market, geographic footprint or to expand our technology and service line capability, but never for revenue accretion as organically itself we are growing very fast.
With growth back, attrition has become a worry. Last quarter, you suffered 20% attrition. Your utilization rate is also very high.
With growth back, execution is the key. Attrition is measured by different players differently. If you look at the trailing 12 months metric, we are at around 15%, which is comparable to our peers or even a little lower. Yes, the utilization rate which we had is not sustainable. Surge of demand caught us unawares and we used up a lot of our bench. So we have turned on our hiring spigot. We will accelerate based on our requirements.