Cognizant plans to make fewer acquisitions this year

Cognizant Technology Solutions Corp. has posted an 11.5% growth in March quarter net profit to $563 million, and revised its full-year revenue growth guidance for 2022 to 9-11% in constant currency terms. In an interview, Rajesh Nambiar, chairman and managing director, Cognizant India and president of digital business and technology, said that the inorganic part, mergers and acquisitions (M&As), of the revenue guidance has come down, since the company has become more choosy about the targets and the price. Nambiar spoke about Cognizant’s mergers and acquisitions strategy, deals pipeline, and expansion in other geographies. Edited excerpts:

What do we read into Cognizant’s revision in revenue growth guidance for 2022?

We have sort of narrowed down the revenue growth guidance range from 8.5-11.5% to 9-11% as we get closer. However, we will still be able to deliver the $20-billion revenue range we guided last quarter. The midpoint of our current readings is still the same. However, if you look at our constant currency guidance from an organic business point of view, it has actually gone up by about 0.5%. The inorganic part is what we are changing as this year we believe that our M&As are going to be lower than what we did in 2021. We want to be very choosy in terms of the M&As that we go after. Traditionally, we acquired a lot of companies and they have been able to strengthen our broader digital portfolio. However, in the first quarter, we didn’t do much of M&As. This is because we want to be sure that we only go after the right deals. We need to protect shareholder value in terms of how much money we pay for these deals and what is the right level of margins. We continue to be very disciplined in terms of our M&A portfolio and that is what you see in terms of the reduction in the inorganic component of our growth.

Have clients already finalized their budgets and where do you see the spending coming from?

The broad trends that we have been seeing have not changed significantly. The client conversations have also been unchanged. We are looking at various use case scenarios and industries such as telco and insurance have been more pronounced in terms of investments. From an industry trend point of view, artificial intelligence (AI) and analytics, insights and hyper-personalized offers, and user experience, across customer journeys, are getting prioritized. From a business trend point of view, clients have gone past the initial spending hesitancy around covid and are making investments, being decisive, growing their cloud adoption, and sharpening their innovation cycles.

As digital deals take centre stage, how have the nature of deals changed in terms of their size and tenure?

From the number of deals point of view, the large deals have been coming down. If you look at digital, they tend to be addressing a specific client pain point and thus they tend to be smaller in nature. However, our booking of the last 12 months stood at $23.4 billion, which is a sizable number for a company. This too, we have been able to achieve without any major large deals. However, we will continue to focus on large deals at the right margin levels.

How are you expanding into markets other than the US?

North America is our largest market and grew 8.7% year-on-year (y-o-y) in constant currency. However, we have been growing rapidly in our other markets as well. For instance, Europe grew 15.6% y-o-y in constant currency while the Rest of World or global growth markets, as we call them, grew at a very fast pace at 22.2% y-o-y in constant currency. We have taken a series of actions to focus on our global growth markets in the past one year. We have hired new leaders in the UK, ANZ, and Japan, who have made a huge difference for us. They bring in new talent and capabilities, which is helping drive our shift from traditional to digital. Our digital revenue grew 20% annually and contributed 50% to the total revenues for the March quarter.