Nasdaq-listed IT services firm Cognizant will incur cost of $400 million as it sets to restructure its operations amid slowing growth rates. The NextGen Program which aims to simplify the operating model, optimize corporate functions and consolidate and realign office space to reflect the post-pandemic hybrid work environment.
As a part of this structural shift Cognizant will eliminate 80,000 seats or 11 million square feet of real estates in large cities in India. This is expected to reduce Cognizant’s annual real estate costs by approximately $100 million compared to 2022 by 2025, said the company.
“We have to redistribute our physical workplaces. I believe we are going to enter a hybrid era of distributed life and work. Especially in India, our presence in smaller cities will be very important. A large number of our associates have moved to tier-2 cities and they will probably remain in tier-2 cities for the foreseeable future,” said Ravi Kumar, CEO of Cognizant in his first interaction with the media since he tool over the helm of the company.
As part of its NextGen program, around 3,500 jobs will get eliminated over the next two years. The layoffs will mainly come from corporate functions and non-billable employees, Kumar said.
The restructuring that Cognizant has announced holds significance, as it’s the first large-cap IT services firm which is reducing its real estate presence in tier-I cities. The $400 million costs consist of approximately $200 million of employee severance and other costs primarily related to non-billable and corporate personnel, expected to be incurred in 2023, and approximately $200 million of costs related to the consolidation of office space, with approximately $150 million in 2023 and $50 million in 2024.
The restructuring measures come from the new CEO, who also gave a revenue guidance for the year which as negative. Cognizant, said that it expects for the full-year 2023, revenue to be in the range of $19.2 - $19.6 billion, which means a decline of 1.2 per cent to growth of 0.8 per cent. In constant currency, this translates to a decline of 1 per cent to growth of 1 per cent.
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“Market (demand) is very soft, where sometimes the client priorities change. The discretionary spend is going down. While large deals are coming in, the smaller deals have started to taper down. The large deals take time to ramp up and it may probably start to add to the revenue in the second half of the year,” he said, adding that the deal pipeline for next quarter is reasonably strong,” Kumar said.
Compared to peer Infosys, Cognizant’s revenue guidance seems to be the lowest in the industry. Infosys gave a revenue guidance of 4-7 per cent for FY24. Wipro, though does not give a full year guidance, said it expects Q1 to be -3 per cent to -1 per cent. With an uncertain micro, Kumar who comes from Infosys, bringing back Cognizant to its heady days of growth seems to be an uphill task.
Cognizant managed to beat analyst expectations in the first quarter of 2023. But the company reported revenue from operations at $4.81 billion, a decline of 0.3 per cent year-over-year. Net profit grew to $580 million a three per cent increase on a year-on-year basis. In constant currency, revenue grew 1.5 per cent against its own guidance of $4.71-$4.76 billion. On a sequential basis, profits increased by 11.2 per cent.
The company’s bookings for the quarter stood at $25.6 billion on a trailing twelve-month basis, up from $24.1 billion in Q4FY22. “Our accelerated bookings growth in the quarter, which included several large deals and a healthy mix of new and expansion work, reflects the strengths of our services, our brand, and the longstanding relationships we have with our clients,” said Kumar.
Kumar, who has met about 120 clients in his first 100 days of being appointed as CEO, said that he has prioritised on getting the company back on growth momentum, as he builds on the back of a few quarters with subdued performance in terms of new bookings. He has also focused on automation and AI for delivering services more efficiently, as well as simplifying the operations and redistributing some workplaces.
“In the past we always wanted a 10X engineer. It was a myth. A 100X AI-enabled engineer in tech services is close to reality if we can get the instrumentation to amplify the human potential. It will get applied on our businesses, the work we do, and even on the client landscape,” the CEO said.
At the end of Q1 2023, the total headcount of the company stands at 351,500, a decrease of 3,800 from Q4 2022. This compares to a decline of 3,611 and 1,823 employees from the workforce of Infosys and Wipro in Q4FY23 respectively.
The Nasdaq-listed firm has the majority of its employee base located in India. Voluntary attrition in the IT services segment declined to 23 per cent from 26 per cent in Q4 2022 on a trailing-twelve-month basis.
