Cognizant: Mighty growth engine comes to near halt

BENGALURU: Cognizant was as soon as the toast of Wall Street, the poster boy of IT outsourcing. It had a earnings CAGR of 48% between 2004 and 2008, and 28% between 2009 and 2013, a long way ahead of TCS, Infosys and Wipro. Even in 2014 and 2015, it grew 16% and 21% respectively, with the others nowhere shut, excluding TCS in 2014. Even all over the worldwide financial disaster of 2009, when Indian IT went for the primary time into flat and damaging territory, Cognizant grew at 16%.

The first signs that one thing had modified got here in 2016, when growth all at once slumped to 8.6%. And it remained thereabouts for the next two years. And now, the corporate’s new CEO, Brian Humphries, says growth is anticipated to be between 3.6% and five.1% this yr. Investors were clearly shocked. The share worth at the Nasdaq plummeted by 11% on Friday.

A Bloomberg report mentioned Cognizant had neared a doubtful milestone after “a disappointing forecast led a minimum of 9 analysts to chop their ratings at the inventory, drawing near essentially the most downgrades in a single day this century.” It mentioned that with a minimum of 33 analysts protecting the inventory on Wall Street, there may well be extra downgrades nonetheless to come back for Cognizant.

Two issues took place around 2016 that might provide a clue to this cave in. That was the yr when Cognizant, partly under force from activist investor Elliott Management – which owned 4% of the corporate’s shares – modified its technique on margins. It was also the yr when it was hit by a significant bribery scandal in India. It appears that those issues changed into an excessive amount of to handle for former CEO Francisco D’Souza and his crew that had led the corporate via the ones years of searing growth.

Cognizant always had much decrease margins than Indian friends TCS and Infosys. It mentioned this was because it was investing extra in the trade, and it was this funding that enabled it to develop so fast. Sometime in 2015-2016 it decided it will have to raise margins. In August 2017, in an interaction with TOI, D’Souza mentioned: “We concept it was crucial to shift the point of interest of the corporate and our messaging and worth proposition to investors from industry leading growth to high quality sustainable growth. We have reached some degree now the place we predict it is vital not just to be serious about growth for the sake of growth and to truly be thoughtful about what are the expansion alternatives to head after and the way we pass after them in order that the expansion is sustainable longer.”

Elliott, he indicated, had advised an acceleration of this move. A letter Elliott wrote in 2016 mentioned its price enhancement plan requires a 23% adjusted running margin in 2018, in comparison to a 19.7% margin in 2015.

Bert Hochfeld, CEO of Ticker Target Investments, told IdealNews ultimate yr that Elliott got concerned with Cognizant because the corporate was not being smartly run. But Elliott’s plan didn’t mesh smartly with the culture at Cognizant, he mentioned, and they were not able to do what they had to do. “It's not that i am positive that Elliott had some specific knowledge/understanding that its technique would problem the expansion possible of Cognizant, even supposing that might be the case. But I have watched Elliott for some years and their propensity to industry and to take earnings could be very prime, and that may be what I feel took place. No extra and no less,” he mentioned, when requested whether or not Elliott’s roadmap posed demanding situations to its earnings growth.

Phil Fersht, CEO of HFS Research, mentioned Cognizant’s previous power was being a real danger to the likes of Accenture with its virtual technique, but “with the affect of Elliott, the company struggled to make investments to keep up and the management gave the impression tired and burned out in recent times.”

“You had a CEO serious about EPS and coping with activist investors just at a time once they needed to be serious about exterior wins instead of internal politics,” mentioned Ray Wang, CEO of Constellation Research.

The different huge distraction was the bribery case. The corporate voluntarily disclosed that it had started an internal investigation into whether or not positive bills when it comes to amenities in India were made improperly, and in possible violation of the United States Foreign Corrupt Practices Act and different applicable laws. On the similar day, the corporate announced the resignation of its president, Gordon Coburn. Criminal fees were filed in opposition to Coburn and previous leader legal officer Steven Schwartz by US prosecutors in what was mentioned to be a $2 million bribery of Tamil Nadu government officers to get building lets in for a campus in Chennai.

The corporate spent a minimum of $60 million bucks investigating the case, and it paid a fine of $28 million to US government to settle the case. Multiple heads are mentioned to have rolled, together with in Chennai, the corporate’s delivery headquarters. “The base line is morale at Cognizant is awful now,” mentioned Wang. And it might get worse earlier than it gets higher. Humphries has indicated he desires extra potency at the delivery aspect, and that can include some other round of layoff.
Cognizant: Mighty growth engine comes to near halt Cognizant: Mighty growth engine comes to near halt Reviewed by Kailash on May 08, 2019 Rating: 5
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