Cigniti Technologies Ltd Management Discussions.

Founded in 1998, Cigniti is a global player in Specialized Quality Engineering Services. The company offers services including Traditional Quality Assurance & Testing, Quality Engineering, Digital Testing and many more. Headquartered in Hyderabad, India, Cigniti is North Americas largest Independent Quality Engineering Services company with operations in 13 countries. It offers a wide variety of QA testing services including Testing Advisory & consulting leveraging IP (BlueSwan) for digital transformation.

WORLD ECONOMY

The global economy started 2018 on an upbeat note, buoyed by a pickup in global manufacturing and trade through 2017, but it lost speed during the year and the ride could get even bumpier in the year ahead. According to World Bank estimates, Global economic growth is projected to soften from a downwardly revised 3.6% in 2018 to 3.2% in 2019 amid rising downside risks to the outlook.

Global GDP Growth (%)
2019 (P) 3.2
2018 (E) 3.6
2017 3.7
2016 3.2

According to an International Monetary Fund (IMF) study released during April, 2019, Chinas growth declined following a combination of needed regulatory tightening to rein in shadow banking and an increase in trade tensions with the United States. The European economy lost more momentum than expected as consumer and business confidence weakened and car production in Germany was disrupted by the introduction of new emission standards; investment dropped in Italy as sovereign spreads widened; and external demand, especially from emerging Asia, softened. Elsewhere, natural disasters hurt activity in Japan. Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of

2018 and then in advanced economies later in the year, weighing on global demand.

Conditions have eased in 2019 as the US Federal

Reserve signalled a more accommodative monetary policy stance and markets became more optimistic about a US China trade deal, but they remain slightly more restrictive than in the fall.

INDIAN ECONOMY

According to Indias official estimates, Indian economy grew 7% in FY19, slowest in the last five years. IMF expects growth to recover in the current fiscal and the next. International Monetary Fund (IMF) has pared Indias growth forecast for the just-concluded fiscal and the next two years, citing softer recent growth and weaker global outlook, but expects the country to retain its place as the fastest growing major economy. According to IMF estimates, Indias economy grew 7.1% in FY19 and is expected to accelerate to 7.3% growth this fiscal and to 7.5% in FY21. All the estimates are 0.2 percentage points less than its previous assessment in January.

India GDP Growth (%)
FY2020 (P) 7.3
FY2019 (E) 7.1
FY2018 6.7

INDIAN IT-BPM Sector

The IT-BPM sector in India expanded at a CAGR of 10.71 per cent to US$167 billion in FY18 from US$ 74 billion in FY10, which is 3 to 4 times higher than the global IT-BPM growth. It is estimated that the size of the industry is estimated to be

US$ 177 billion in FY19 and will grow to US$ 350 billion by 2025.

The growing global demand for IT & IT Services, Indias competitive advantages such as being 5-6 times cheaper in terms of resources compared to the US, having a global footprint of Indian IT & IT services and policy support continue to be key advantages for the growth of the Indian IT & ITeS sector.

Broadly, the Indian IT services under which Cignitis business is classified is estimated to be US$ 86 billon during FY18 of which over 81% of the revenue comes from the export market. IT services had around 51.7 % share in total Indian IT sector revenues in FY18.

US has traditionally been the largest importer of Indian IT export. Over 62% of Indian IT exports were absorbed by US during FY18 and 21% by non-US countries like UK.

In the coming years Indian IT & ITeS sector is expected to be driven by new technologies such as cloud computing, social media and data analytics, and AI driven digital transformation. India has become the digital capability hub of the world and is poised to benefit from the global digital spend which is projected to be US$310 billion by 2020. The country also has a large digitally skilled talent pool of 450,000-500,000 people which is equivalent to 75% of the global digital talent.

Digital India

With more than half a billion internet subscribers, India is one of the largest and fastest-growing markets for digital consumers, but adoption is uneven among businesses. As digital capabilities improve and connectivity becomes omnipresent, technology is poised to quickly and radically change nearly every sector of Indias economy. That is likely to both create significant value and change the nature of work for tens of millions of Indians.

Road Ahead

India is the topmost offshoring destination for IT companies across the world. Having proven its capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies now offer an entire new gamut of opportunities for top IT firms in India. Export revenue of the industry is expected to grow 7-9% year-on-year to US$ 135-137 billion in FY19. The industry is expected to grow to US$ 350 billion by 2025 and BPM is expected to account for US$ 50-55 billion out of the total revenue.

What does this mean for Cigniti

Headquartered in India, Cigniti is a leading player in STS. STS delivery remains India-centric.

The adoption of agile is driving some work back offshore. With costs rising due to collocating agile testing with development teams onsite, organizations will increase their adoption of distributed agile, and 85% of agile testing work will be carried out in India in the long-term.

DIGITAL TRANSFORMATION

Digital transformation continues to be a priority across businesses. Organizations believe that by 2020, nearly half of their revenue will be impacted by digital in some way. Digital transformation will reach a turning point in 2019, as companies across the globe turn up investments in digital and decide what to do with those investments, according to a recent survey conducted by The

Economist Intelligence Unit (EIU).

According to EIU, companies report that digital transformation is required for them to compete and succeed. Of more than 600 senior executives at large global companies who participated in the survey, 83% say they expect to increase investment in digital technologies in the next 12 months. Most respondents directly link digital strategy to profits, as 68% say their digital strategy has helped them increase profitability over the past 3 years, and 74% expect their digital strategy will improve profits during the next 3 years.

FIVE DIGITAL TRANSFORMATION TRENDS IN 2018-19

1. Elevated and Immersive Experiences with Augmented Reality, Virtual Reality and Mixed Reality

This year companies are expected to focus on the range expansion of these conversational platforms to detect emotions, and facial cues to make the user experience more immersive. These technologies are also expected to find use in employee training besides maintenance and repairing of machineries across industries.

2. Blockchain – The Decentralised and Distributed Online Ledger

Blockchain is a system that eliminates the need of a middleman while protecting information through cryptography. Data stored on

Blockchain is resistant to unauthorized changes or intrusion. The technology is also expected to possess capability of faster, safer and more reliable automated communication based on its ability to support multi-directional communication and transactions.

3. Artificial Intelligence, Advanced Data Analytics and Machine Learning

AI has the potential to accelerate the current pace of digital transformation by making machines smarter and technologys interaction with humans transparent and explainable. Companies are already adopting artificial intelligence for various different business needs and this pace will increase in 2019. Data is at the heart of these intelligent organizations making business-critical decisions powered by AI. These technologies are also helping take better decisions on boosting innovation, marketing and sales of competitive products, delivering exceptional services, hiring the best, keeping top employees happy and implementing strategy in the smartest way.

4. Big Data and Cloud

The volume at which data is produced today and the insights underivable due to absence of analytical tools application is daunting.

However, the growth of Big Data in Cloud has led to its benefits being leveraged by companies across sizes and industries.

Predictive Analytics offering customized insights based on business needs, has helped in generation of increased customer leads, greater understanding of buying behaviour and wider scope for cross-selling.

5. Data – Management, Privacy and Protection

Big Data and advanced analytical tools have resulted in most companies accessing and extracting insights from wells of data. With insights drawn from existing data becoming the source of newer business and revenue models, Data Value Management will be a pertinent boardroom conversation. Data

Value Management is expected to become a major investment, driving digital-first companies to invest in creating more data to learn from, and leverage those insights to re-engineer models.

GLOBAL SOFTWARE TESTING – OVERVIEW

Software testing is definedas an activity to check whether the actual results match the expected results and to ensure that the software system is defect free. It involves execution of a software component or system component to evaluate one or more properties of interest. Software testing also helps to identify errors, gaps or missing requirements in contrary to the actual requirements.

Key Drivers of Software Testing Services & QA

Digital transformation IoT, mobile technology, and third party relationships escalate testing intricacy

Agile and DevOps Agile and DevOps transformation continues to put pressure on

QA

Test Automation On the way to smart, intelligent and cognitive QA

Industrialization How TCoEs adapt to the digital era

Test Data Management & Test Environment Management Test environments and test data continue to be the Achilles heel for QA and testing

QA and testing budgets Budgets in flux as changes sweep through testing

Market Size & Future Projections

The overall software testing services market has slowed down impacted by the declining number of large deals. In software testing services client demand has shifted from manual testing towards continuous and next-gen testing. According to a study by NelsonHall the current global software testing services market size stands at $42.6 bn and is expected to reach $48 bn by 2023. Growth will primarily be led by the adoption of next-gen testing, non-functional, and other specialized testing services.

Estimated STS & TTS market size in $bn

Global testing spending represents ~6% of all IT services spending and is growing by ~2.4% annually.

Service Type Est.Market Size 2018 Est.Market Size 2023 Est.CAGR 2018 – 2023 (%)
($bn) ($bn)
Total Testing Services spending 42.6 48.0 2.4
IT Services spending 694.6 839.5 3.9

Presently, Functional testing (for custom applications and COTS), both automated and manual, represents 52% of testing spending. Spending is quickly shifting from manual testing to functional automation. In five years, functional testing will only account for 40% of all testing services spending. Manual testing spending will decline by ~3% annually while automation will be up by ~11%. Spending on specialized testing services will grow rapidly (~10% annually) and will become larger than functional testing in 2019.

STS: Focus on Project Services

According to NelsonHall, since 2015, the number of new large-scale managed testing service contracts has decreased, and related spending is decelerating. NelsonHall expects this trend to continue, with clients looking to continue to decrease the cost of their managed testing contracts and reallocating services towards project services around automation, continuous testing and reskilling of their testing workforce.

Service Type Est.Market Size 2018 Est.Market Size 2023 Est.CAGR 2018 – 2023
($bn) ($bn) (%)
Managed Testing Services 10.5 13.0 4.5
Project Services 12.5 17 3.9
Total STS 23.0 30.0 5.6

Focus on Specialized Testing Services

Clients are investing in automating their functional testing activities and moving away from manual testing. NelsonHall is, therefore, expecting functional testing to remain flat, with initial automation investment resulting in less manual activities.

Est.Market Est.Market Est.CAGR
Service Type Size 2018 Size 2023 2018 – 2023
($bn) ($bn) (%)
Functional Testing 12 12.1 0.2
Specialized Testing 11 17.9 10.2
Total STS 23.0 30.0 5.6

Next-Gen Testing

Next-gen testing is the highest growth area among specialized testing services with mobile testing accounting for 75% of next-gen testing. Next generation testing accounts for 24% of STS spending. It is the fastest-growth offering with a 12.8% CAGR for the 2018-2023.

Growth is driven by mobile testing, which still accounts for ~75% of all next-gen testing spending.

UX testing spending is much smaller than mobile testing (~$1.3bn). Its growth rate is higher (12.7%) than mobile testing; on one hand, usability and accessibility testing are driving growth; on the other, testing service vendors are not heavily promoting UX testing largely for the different skills and tools they require.

Cognitive and robotic testing, which designate the testing of AI and RPA, and usage of AI and RPA software, are driving much less spending. Most of the spending on cognitive is around AI use cases (i.e., applying AI to automate testing further).

Est.Market Est.Market Est.CAGR
Service Type Size 2018 Size 2023 2018 – 2023
($bn) ($bn) (%)
Next-Gen Testing 5.5 10.0 12.8
STS 23 30 5.6
Next-Gen as a % of STS 24 333

Within specialized testing, next-gen testing spending accounts for 56% of specialized testing by 2023 and grow rapidly (+12% annually). Other offerings that will grow fast include nonfunctional (and in particular, security testing), and test support testing services (test data and environment management and service virtualization).

Mobile testing is the largest activity within next-gen testing and continues to grow rapidly.

UX testing is rising, thanks to compliance-led accessibility testing and usability testing.

Demand for AI use cases for automating testing services is growing from low-levels of spending.

Mobile testing will increasingly overlap with UX testing, forcing clients to gain new skills and new software for activities such as content testing and email campaign testing. Clients focus on AI use cases increasingly in testing AIs and bots. RPA will be an alternative for test execution software, for clients that acquired RPA software licenses for their BPS automation needs.

Key Markets

North America continues to be the largest spender of software testing services, followed by

EMEA. It is also the fastest-growing. NelsonHall has based its geographical forecasts on the softness of macro-economic conditions, leading to a spending growth deceleration, in the following countries: the U.K., China, Brazil, and Japan.

Est.Market Est. Market Est. CAGR 2018-
Regions Size 2018 Size 2023 2023
($bn) ($bn) (%)
North America 10.1 13.6 6.2
Latin America 0.7 0.8 2.5
EMEA 8.6 11.0 5.1
APAC 3.6 4.6 5.5
STS 23.0 30.0 5.6

What does this mean for Cigniti

In line with the geographical trend in STS, North America continues to be the main market for Cignitis team of 2300+ professionals spread across US, UK, India, Australia, Canada, and South Africa.

Cigniti Revenue by Geography

Key Sectors of STS

The market for STS remains structured around

BFSI, which represents ~41% of testing service spending; manufacturing (~17%); telecom & media (~14%). According to the study by NelsonHall, BFSIs high growth in managed testing services is over, as the market is moving closer to saturation. However, its appetite for next-gen testing continues to be a strong driver for growth. Manufacturing is back to solid spending, due to market conditions and thanks to a new cycle of investment around Industry 4.0, which is impacting digital and back-end systems, driving new testing activities.

What does this mean for Cigniti

Cigniti remains sector agnostic. The company approaches the market from the point of view of IT and STS budget of the clients. However the company has proven strength across sectors which include Travel & Hospitality, ISVs, Insurance, Banking and Healthcare.

CIGNITIS STRATEGIC POSITIONING

A global research by Everest Group Enterprise QA Services positions Cigniti as a major contender in the Enterprise Q&A services. According to this study Cigniti is not far behind the Leaders and the companys initiatives in upskilling the workforce, developing new tools and frameworks for improved service delivery, and expansion of geographic presence are resonating well with companys clients. The study says contenders are in a good position to challenge leaders with greater investments in automation and AI-powered QA solutions to deliver more value to their customers.

INTERNAL CONTROLS

The Company has framed satisfactory internal controls and governance within the company as detailed elsewhere in this annual report.

OPPORTUNITIES & THREATS

As mentioned in the Chairmans message, CEOs

Review and in further discussions made in the

Management Discussion and Analysis section (MD&A), there is ample growth opportunity for the company in the independent software testing services business market. The company looks forward to technologically advanced innovations for mitigating its business threats. The company consistently invests in future technologies along with getting accredited by the leading industry technology analysts.

OUTLOOK

Cigniti Technologies continues to win a sizable share of the worlds digital spending. We look forward to build sustainable growth backed by enhanced profitability. New age enterprises and legacy businesses can bank on our proficiency digital, IoT, Agile, DevOps, etc. We keep ourselves focused in increasing our deal size by winning new enterprise accounts and mining existing accounts. Our continuous focus is on value-based selling. Cigniti looks forward to adopt state-of-the-art digital practices and assist companies to actualize their business goals. We aim for penetrating into new geographies, win new clients across industry and domains, and further strengthen our leadership.

HUMAN RESOURCES

HR is critical in ensuring that our most valuable asset, employees, are empowered, enabled, and supported in driving our key business objectives.

Our policies, processes, and practices are centered around to attract, engage, empower, and retain the best and the brightest talent. Over the last year, HR has focused on continuous process reengineering, automation and bringing in innovative ways of employee engagement.

Detailed review of HR Activities are covered on page # 26 & 27.

REVIEW OF FINANCIAL PERFORMANCE Revenue

Revenue for the year was at Rs. 81,608 Lakh, a growth of 18% as compared to the FY 2017-18.

EBITDA

The EBITDA for the year stood at Rs. 13,277 Lakh as against Rs. 5,173 Lakhs in in the previous year, up by 157%.

Profit After Tax

The Company has reported a 4.5 time increase in Profit After Tax (PAT) for the FY 19 to Rs. 14,736 Lakh as against Rs. 3,217 Lakh in the previous year.

Earnings per Share

The EPS (Basic) of the company stood at Rs. 53.62 in FY19 as against Rs.12.08 in FY18.

Financial Ratios

Following are ratios for the current financial year and their comparision with preceeding financial year, along with explanations where the change has been 25% or more when compared to immediately preceeding financial year:

March 31, 2019 March 31, 2018 Change % Explanation
Ratio description
1 Debtors Turnover (in days) 55 60 -8%
2 Inventrory Turnover (in days) NA NA NA NA
3 Interest coverage ratio 0 0.11 -100% Nil debt as at Mar19
4 Current Ratios 1.57 0.82 91%
5 Debt Equity ratio 0 0.54 -100% Refer note 14 on consolidated accounts
6 Operating margin (%) 14.0% 7.5% 87%
7 Net profit margin 14.5% 4.6% 215%
8 Return on Net Worth (%) 98% 467% -79% Refer note 12 & 13 on consolidated accounts

RISK MANAGEMENT

Risk How it Relates to Mitigation
Cigniti
Geographic Concentration Risk Reliance on a single geography can impact revenue growth • While the U.S. contributes to a major of Cignitis revenue, Cigniti has also been steadily expanding across geographies such as Europe & Asia Pacific. Cigniti has also been focusing on strategies to enhance revenues from existing geographies like Europe.
• Cigniti also has offices in UK & Australia to add new logos and deepen its presence in the existing accounts from these geographies.
Competition Risk Increasing competition in software testing may affect the market share of the Company • Cigniti through a mixture of organic and inorganic routes has been developing capabilities to remain competitive.
• Cigniti is the worlds second largest Independent Software Testing Services Company by headcount, and has secured a technical positioning of the company brand in the global arena. Through a smart mix of global marketing initiatives, sound industry analyst relations and other brand building initiatives, the Company has been consistently strengthening its brand.
• Most importantly, Cignitis consistent endeavor to be a thought leader in independent software testing through its offerings, IP, building labs for the connected world, commitment to test engineering community through world class quality engineering events (such as LiQE and meet ups) to engage the best minds in quality engineering landscape, has ensured that it comes across as the most respected independent software testing services vendor.