2 Nov 2023 , 10:45 AM
CTSH’s Q3CY23 revenue grew 0.2% QoQ (-0.2% cc YoY), at the lower end of the guided range of -0.5% to +0.5% cc YoY. Bookings in Q3 increased 9% YoY led by continued momentum in large deals (~30% of TCV), taking TTM bookings to USD26.9bn (+16% YoY), implying a book-to-bill of 1.4x. Headcount increased by 1k sequentially, after two quarters of decline. CTSH continues to invest in building GenAI capabilities and has trained 55k employees this year. CTSH is currently running over 150 active client engagements to incorporate the use of GenAI. CTSH narrowed down CY23 revenue growth guidance to -0.7% to 0% cc YoY (was -1% to +1%) and for Q4 to be -4% to -1.2% cc YoY, as it expects continued softness in the discretionary spend. Adjusted operating margins in Q3 came in at 15.5% (-90bps YoY), primarily due to two wage hikes over the last 12 months.
Comm, Media and Tech led sequential growth:
BFSI grew 0.8% QoQ (-4% cc YoY), due to continued weakness in discretionary spending. CTSH is using a sub-industry GTM approach in Americas as clients focus on driving cost take outs, vendor consolidation and productivity initiatives. Health Sciences declined -2.4% QoQ (-0.8% cc YoY). Products & Resources declined 0.6% QoQ (+0.6% cc YoY) while Comm, Media & Tech grew 5.1% QoQ (+7.3% cc YoY), partly driven by inorganic contribution.
Bookings remain healthy driven by large deals momentum:
Bookings for the quarter increased 9% YoY, led by several large deals (~30% of the TCV) including 3 USD100mn+ deals. TTM bookings came in at USD26.9bn (+16% YoY), implying its TTM book-to-bill being steady at 1.4X. CTSH continues to see momentum in large deal closures. CTSH narrowed down CY23 revenue growth guidance of -0.7% to 0% cc YoY and expects Q4 revenue growth to be -4% to -1.2% cc YoY.
Wage hikes improve sequentially:
CTSH’s adjusted operating margins stood at 15.5% (+130ps QoQ/-90bps YoY), due to increased compensation costs which was partially offset by tailwinds from FX and its cost cutting program. TTM voluntary attrition reduced further by 4pp QoQ to 16.2%. CY23 operating margins guidance increased to ~14.7% (was 14.2%-14.7%).
Muted Q4 reaffirms near term weakness:
Analysts of IIFL Capital Services believe CTSH’s muted Q4 guidance is a reflection of the near-term macro challenges and lower discretionary spending and corroborates with the commentary from the managements of Indian IT service companies. Under the new management and a refreshed strategy, CTSH has started focusing more on large deals and productivity led initiatives by enterprises, which has resulted in a higher large deal win success rate and increased the competitive intensity in the sector. However, in the near-term analysts of IIFL Capital Services believe Indian IT peers will continue to gain market share over CTSH, as reflected in narrowing down of its CY23 and muted Q4 guidance. Analysts of IIFL Capital Services recommend staying selective in picking stocks given the macro uncertainties. They continue to prefer stocks with better growth visibility in large caps (INFO/TCS) and midcaps (PSYS/COFO/CYL).
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