Cognizant CFO Karen McLoughlin.
Cognizant CFO Karen McLoughlin.

Clients are looking for vendors who can offer full-service fleet: Cognizant CFO

Karen McLoughlin speaks about what has not worked for Cognizant this year and challenges that lie ahead

Bangalore: US-based Cognizant Technology Solutions Corp. on Wednesday forecast its most disappointing revenue growth in recent memory, worrying investors who pulled the stock down by as much as 16%. The results will raise concerns among investors on whether it could be a sign of a slowdown in the business of IT services, given Cognizant’s position of being a bellwether stock.

In a post-earnings interview, chief financial officer Karen McLoughlin spoke about what has not worked for Cognizant this year, challenges that lie ahead and how the law of large numbers is catching up with Cognizant. Edited excerpts:

The guidance looks quite disappointing. Would it be fair to say that the scorching growth rates of the past five years are unsustainable and 14-15% is the new normal?

I think Q2 was very solid in line with our expectations. This morning we announced three large transformational transactions. The market demand is still quite healthy. What we saw as we ran into the back-half…were some client-specific issues. Typically in clients, we saw leadership changes and that’s not unusual where new leadership comes in at a client (company). They take time to re-evaluate their priorities, their sourcing strategy and you can see a little bit of a dip, and that happens initially. But we’re very confident on the strength of our client relationships and the opportunities we see across our broader client base. Market demand is strong—we’re seeing that from our competitors… I think what we’re seeing is a little bit of a delay in some of the large programmes getting started and a handful of very specific client situations that occurred in the middle of the year.

Is it a broader reflection of some of the key shifts you’re seeing in the business of IT services, with increasing commoditization in traditional services and clients now opting for smaller deals?

I think the vast majority of our revenue still comes from our ability to...win a new logo and over time, you build that relationship and take on more and more services. That is still very true in our industry. What’s becoming increasingly important is the ability to operate in multi-service lines. But I think the big change we’re seeing is that clients are now just willing to buy what we call “one tower of services". They’re looking for integrated services, vendors who can offer that full-service fleet. And that’s a capability we’ve built over the last several years.

Has discretionary spending slowed?

Actually our consulting and technology services, which includes much of our discretionary spends, has been quite strong this year. It grew 6% sequentially and almost 21% on a year-on-year basis. The client issues we’ve faced are more around the traditional outsourcing services. We saw slower growth in outsourcing in Q2.

It’s just a handful of clients, very specific client situations. Especially in retail and financial services, in UK and North America. The reality is once you get to the middle of the year and into the second quarter, there’s only so much room in the rest of the year. So even if a client starts to ramp up spends, there’s only so much that you can bring forward during the year. So that’s what really led to us adjusting our guidance.

Should we read this as a temporary blip?

We’re not providing guidance for FY15 yet… But over the long term, we expect to continue to deliver industry-leading growth.

Twenty per cent-plus growth rates look unsustainable at this point...

The growth rates were compliant to time and obviously over the long term, the law of large numbers is bound to kick in. But we believe in our strategy of re-investing in the business...we think the market demand is strong and we will continue to get market share over the next several years.

Healthcare still seems to be an area of concern...

The life sciences and pharmaceuticals business has been slow for the last couple of years. We’re starting to see a little bit of traction in life sciences. On the healthcare side, which is on the healthcare payer side, obviously last year leading up to the implementation of the Affordable Care Act, there was a lot of work that needed to be done. We saw a big surge in the middle of last year...but after that work is done, clients take a bit of a step back to understand what’s happened so far and what needs to be done next. And that’s what we saw in the first half of this year. Long-term, we’re still excited about the healthcare industry.

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