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Cognizant Sheds 4,400 Employees As It Pivots Workforce Toward Higher-End Digital Skills

Michael Novinson
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Cognizant slashed headcount by 4,400 workers last quarter through voluntary separation packages and the performance evaluation process as the company seeks to boost operating margins.

Yet despite the cuts, the Teaneck, N.J.-based company, No. 7 on the 2017 CRN Solution Provider 500, also made 10,800 "growth hires" in the most recent quarter to infuse its workforce with more higher-end consulting, design and data science capabilities, according to Karen McLoughlin, Cognizant's chief financial officer, on the company's second-quarter earnings call Thursday.

Cognizant's attrition rate leapt from 17.1 percent a year ago to 23.6 percent last quarter due to reductions resulting from performance evaluations and the 400 employees who accepted voluntary separation packages, McLoughlin said.

[RELATED: Reports: Cognizant Could Lay Off 6,000-10,000 Employees As Part of Digital Services Shift]

The company will incur $35 million of severance-related costs from its voluntary separation packages – which were initiated and concluded last quarter – but expects to achieve an annualized cost savings of $60 million from the program, according to McLoughlin. All told, Cognizant's workforce stood at 256,800 at the end of June, down 1.7 percent from 261,200 three months earlier.

"We will continue to hire and invest in critical skills needed to grow our digital business, and we expect attrition to decline in the coming months," McLoughlin said. "I think we've sort of reached a low point, at least for 2017 anyhow."

Nonetheless, McLoughlin said Cognizant slowed its pace of hiring in the most recent quarter and is undertaking structural changes and realigning resources to improve its profitability through operational efficiency. The company reached an agreement with activist investor Elliott Management in February to boost its non-GAAP operating margins from 19.5 percent in 2016 to 22 percent by 2019.

Reports in March indicated that Cognizant planned to lay off some 6,000 to 10,000 workers – or between 2.3 percent and 5 percent of its workforce – as the company shifts its focus from traditional to digital IT services. The moves were expected to go well beyond Cognizant's late March elimination of the bottom 1 percent of its workforce for non-performance.

Meanwhile, the high-end consultants, designers and data scientists brought in by Cognizant last quarter will be expected to support the company's infrastructure business, McLoughlin said, as well as its fast-growing digital operations business. McLoughlin expects Cognizant's headcount to start picking back up as the company invests for growth in 2018 and beyond.

In addition, Cognizant is investing tens of millions of dollars this year to broaden the skills and capabilities of its existing workforce around analytics, artificial intelligence, data science and digital security, according to Cognizant President Rajeev Mehta. The investment will be focused on workers in Cognizant's digital practice to ensure they stay on the cutting edge of technology trends, Mehta said.

Cognizant saw sales in the quarter ended June 30 jump to $3.67 billion, up 8.9 percent from $3.37 billion a year ago. That edged out Seeking Alpha's projection of $3.66 billion.

Net income skyrocketed to $470 million, or 80 cents per diluted share, up 86.5 percent from $252 million, or 41 cents per diluted share, last year. On a non-GAAP basis, earnings jumped to 93 cents per diluted share, up 6.9 percent from 87 cents per share a year ago. That beat Seeking Alpha's earnings estimate of 91 cents per share.

Cognizant's shares climbed $0.25 (0.36%) to $68.77 in trading Thursday morning. The company announced its earnings before the market opened.

Cognizant's financial services segment saw 4.1 percent year-over-year sales growth to $1.41 billion due to growth in insurance and among midtier banking accounts. Large banks, however, continue to take a conservative approach to spending and are focused on optimizing costs, the company said.

Health-care segment sales grew 9.5 percent to $1.05 billion driven by both life sciences and health-care payer clients. Activity from payer clients increased due to pent-up demand from actors involved in mergers or acquisitions last year.

Sales for Cognizant's products and resources segments increased 13.2 percent to $747 million due to high demand from manufacturing and logistics clients, particularly for enterprise digital transformation. And revenue from the communications, media and technology segment jumped 16.8 percent to $467 million due to digital content operations solutions that deliver personalized content to customers.

On a geographic basis, Cognizant's North American sales increased 8.7 percent to $2.85 billion, while sales from Continental Europe skyrocketed 22.8 percent to $291 million due to strength in France and the Netherlands. Sales in the United Kingdom, however, fell by 7.4 percent to $288 million.

Revenue from the rest of the world increased 21.2 percent to $240 million due to strength in India and Australia.

For the coming quarter, Cognizant expects to deliver non-GAAP diluted earnings per share of at least 94 cents per share on sales ranging between $3.73 billion and $3.78 billion. That compares to Thomson Reuters projecting earnings of 95 cents per share on revenue of $3.76 billion.

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