Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release and the investor supplement for the company's second quarter 2024 results. If you have not, copies are available on our website, cognizant.com. The speakers we have on today's call are Ravi Kumar, Chief Executive Officer; and Jatin Dalal, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will provide certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC. With that, I'd now like to turn the call over to Ravi. Please go ahead.

Thank you, Tyler, and good afternoon, everyone. Thank you for joining our second quarter 2024 earnings call. I'm pleased with our strong execution and results in what remains a challenging market. We delivered revenue above the high end of our guidance range, expanded our adjusted operating margin both quarter-over-quarter and year-over-year, sustained our large deal momentum by signing five deals each with total contract value of $100 million or more, and announced an agreement to acquire Belcan, which is expected to expand our ER&D capabilities, while diversifying into the high-growth aerospace and defense sectors. Although the demand environment remains challenging and clients' discretionary spending behavior is unchanged from recent quarters, we believe these results demonstrate our rigorous execution against the strategic priorities we set forth last year. Q2 revenue was $4.85 billion, which was $30 million above the high end of our guidance range and grew 2.1% sequentially in constant currency. This was the highest quarter-over-quarter growth since 2022. With strong execution of our NextGen program and overall cost discipline, we achieved adjusted operating margin of 15.2%, an increase of 10 basis points sequentially and 100 basis points year-over-year. Our trailing 12-months voluntary attrition for tech services was 13.6% compared to nearly 20% in the prior-year period. Second quarter bookings grew 5% year-over-year and, on a trailing 12-months basis, bookings were $26.2 billion, representing a 1.4x book-to-bill. In addition to the five deals each with TCV of over $100 million, we signed two deals that were above $90 million each. In the first half of this year, we have now signed 13 deals each with TCV of over $100 million, well ahead of our 2023 pace, which included 17 deals of this size for the entire year. From a segment perspective, we are especially pleased with Financial Services, which grew…

Thank you, Ravi, and thank you all for joining us. Second quarter revenue and operating margin came in above our expectations. Despite customer behavior and discretionary spending trends remaining largely unchanged, strong execution and the ramp-up of large deals supported sequential revenue growth of 2.1% in constant currency. This provides us with revenue exit velocity going into Q3, and has allowed us to increase the midpoint of our organic revenue growth guidance for the full year. Our cost optimization efforts, including structural actions under the NextGen program helped us deliver adjusted operating margins of 15.2%. This was a modest increase sequentially and 100 basis point increase from the prior-year period. We are pleased with the cost savings we have achieved under the program, which allowed us to expand adjusted operating margin while funding growth investments. Now, let's turn to the details. Second quarter revenue was approximately $4.9 billion, which, Ravi mentioned, exceeded the higher end of our guidance range. This represented a decline of 0.7% year-over-year or a decline of 0.5% in constant currency. In constant currency, growth was approximately 50 basis points better than the high end of our guidance range. Year-over-year performance includes approximately 60 basis points of growth from the recent acquisitions. Q2 bookings grew 5% year-over-year and were driven by mid-sized deals. Our trailing 12-month book-to-bill ticked up slightly to 1.4x from 1.3x in Q1. We continue to see a lengthening of contract durations, driven by a shift to larger longer-term contracts. This has extended the revenue conversion timing, but also provided improved forward visibility. As Ravi mentioned, we were pleased with the improved performance in Financial Services, which grew 5% sequentially. Our Health Sciences business grew over 3% sequentially with solid growth across payer, provider and life sciences customers. Products & Resources revenue was down…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.

Good afternoon, and thanks for taking my questions. First of all, on generative AI, helpful commentary, and Ravi, you mentioned the 750 early client engagements. Could you indicate whether any of your clients are moving beyond the proof of concept stage and what are those larger engagements -- what form are they taking? And can you maybe quantify the amount of bookings you currently have tied to generative AI at this stage?

Yeah, thank you for that question. I think the one thing you want to know is generative AI is diffusing into all our technology-led projects in a very, very fast way. So, the ability to ring fence it and start to think about what it does to a technology, what it doesn't do a technology or how do you trace it back is always hard. So the best metric for us was to find out the number of projects we are doing around generative AI. So, the number we gave this quarter was 750, which is up from 450 last quarter. So, we're very, very pleased with the number of early engagements. We have 600 more in the pipeline. And if you remember quarter two of last year, we spoke about 100 active engagements. So, we've gone all the way from 100 to 750. Now, how much of this is going into real production work? I would say very small number of projects are going into production work. And that number is small because of multiple reasons. One is, as you get to production-grade work, you need to start to think about your data architecture, you need to start to think about your cloud infrastructure, and you also need to start to think about the cost of compute, the availability of talent and everything else. So, only a small minor portion of it is going into live production work. But what we are pleased is as we get past these inhibitors, if I may, we're going to see a sharpest curve. I actually believe this is going to be a sharpest curve. A lot of them are related to productivity and task automation. So, the benefits are very tangible, and hence, it will go through the sharpest curve. But progressively,…

Thanks for that. And second one, if I may, on gross margins, in the quarter, revenue was up sequentially, headcount was down, I believe, and utilization was up. So, what were some of the factors that are pressuring the gross margins such as project pricing and higher start-up costs on large deals? And can you maybe comment on the prospects or expanding those gross margins over the next couple of quarters?

Sure. So, quarter two was a good execution quarter where we improved our utilization. We continue to deliver sequential growth while actually reducing the trajectory of employees in terms of the headcount. So, overall, good execution. Why you are not seeing it yet reflected in the gross margin is really what you mentioned, the growth or the ramp up of the large deals that we have won in past, and they are ramping up and there is an initial investment of slightly lower margin as those deals ramp up. And that's the reason that gross margin number has remained flattish between quarter one and quarter two. We are optimistic that as we move into quarter three, quarter four, you should start seeing a slightly better performance on gross margin as we get through quarter four.

Just to link back to your AI question on this, if you look at the math, we sequentially dropped by 8,000-odd people and year-on-year we dropped by 9,000 people, but we sequentially grew by 2%. And what that really means is a part of it is running with tight utilization. A part of it is related to AI, doing work with lesser number of people, and therefore, creating a productivity benefit for us. So, just to add to the AI -- the reason why some of that is explainable is also because AI and automation is starting to be applied to our projects.

Thank you very much.

Thank you. Our next question comes from the line of Bryan Bergin with Cowen. Please proceed with your question.

Hey, good afternoon. Thank you. I wanted to ask on bookings, so nice to see a return to growth here. It does seem like you've had a recent uptick in deal activity just based on your announcements. Can you comment on the level of bookings that you would say are kind of net new work versus renewals? And just any common threads to highlight across the latest deals that were announced?

So, let me take a shot at it and I'll ask Jatin to add. We don't give the renewal and -- split of renewal and new business, but I can tell you one thing that our new business is significantly higher than the renewals in 2024 versus 2023. So, we're very, very happy about it. The second is there is also new logos and expansion in the bookings. So, we are again very pleased. One of the reasons why Financial Services grew well -- I mean Financial Services grew sequentially after 2022 and it grew well, because we also opened new logos. We started to look for expansion in existing customers. So that's all contributing to our bookings. We had five large deals with more than $100 million and we had two of them with the range of $90 million-plus. In fact, all five of them actually had expansion in new business in the mix. So, we are again very pleased about how the amount of work we're getting, which is new and expansion, is increasing. Of course, the duration of deals is also increasing. On the higher end, I mean the larger deals above $50 million, the duration is increasing. While it creates stickiness, but it also creates a little bit of a tail on -- when the revenue is going to be realized as we go forward.

Okay. I appreciate that detail. And then my follow-up on Belcan. So, I understand you're still waiting to close the deal. I believe you mentioned it was estimated to be about 40 bps of a margin headwind and then some revenue synergies over three years. Can you detail kind of the transitory costs, the deal costs in that 40 bps versus the structural margin of Belcan? And then just any further detail on kind of how you thought about the phasing of the $100 million-plus revenue synergies over three years?

Yeah. So, we -- I mean the numbers that you mentioned are accurate, 40 basis point of margin dilution and the synergy numbers. We will share a more detailed update on Belcan on closing including making sure that our guidance then reflects the Belcan acquisition for the rest of the year. There is no new or -- new data point or update to the numbers that we had shared before at this juncture.

Thank you.

Thank you. Our next question comes from the line of Jonathan Lee with Guggenheim Partners. Please proceed with your question.

Great. Thanks for taking my questions. Appreciate the insight here. I understand some of the efficiency gains you're seeing, but how much room do you have in utilization before it perhaps runs too hot? And how are you thinking about pace of hiring for the remainder of the year, particularly as you look to support from the deal wins and pipeline? Additionally, any callouts here around competition for talent given the higher attrition you saw?

So, this is Jatin, and I'll go first, and I'll request Ravi to add. I think so far, we are seeing stability in the talent marketplace. It is reflected in our attrition. We are seeing sufficient availability of the talent that we need to hire for the specific skill set that we need to hire from the marketplace. There will always be couple of skill sets which are more hot or difficult to find than others, but on an aggregate basis, I think we still have a reasonably good market for talent as we look at the second half of the year.

Was there a first part of the question as well, Jonathan?

Yeah, it was more about the room you have in utilization before it perhaps runs too hot.

I think we still have some headspace for sure as we exit quarter two. Certainly, not as -- I mean, the headspace we have continued to sort of utilize and this is the third quarter of improvement utilization. So, we are continuing to improve it. We have some space. I wouldn't say it's a significant space. And we are managing the supply chain with that visibility of headspace and the demand which is coming into the door. And we are confident that we'll be able to manage the demand and supply chain equation well as we execute through the second half of the year.

Yeah. So, just to add some more color, Jonathan, on this, we are now at a spot where we have significant attractiveness in the market for employees to join us. I mean, our momentum in the market also allows us, gives us the ability to hire. We also have returners. In fact, we have a historic return of returners as I call it. I mean, it is people coming back who worked at Cognizant before. And our fulfillment engine is a combination of four things: freshers, rotating talent inside the company, reskilling from the adjacencies, and hiring lateral talent. All four, I think, we are getting better and better and better since the last 18 months. So, we are gearing up for a high-demand situation whenever, but we want to be prepared for it. Our two big industries, financial services and healthcare, together is 60% of our business. They're both in great and in a good spot. So that gives us confidence. I mean these were two verticals where Cognizant's legacy and heritage was so strong. So, we are back on those two verticals with a good positive momentum.

Thanks for the [detail] (ph) there. How should we think about potential for stabilization around large deal project margin, especially given some of the elongation of the duration in these large deals? And how are you thinking about pyramid structure around staffing these large deals?

Yeah. So, large deals -- and Jatin chip-in as I complete. Large deals always have upfront cost and downstream revenue kind of a thing, because you do transition and a lot of these are vendor consolidation, cost optimization kind of deal. So, you will have to invest on transition and everything else. So, there is lumpiness on how that works, but we have now muscle to execute them pretty well. We have done this for 18 months now. We've been on a cycle of winning and delivering the large deals. So we're very confident of continuing on that process. We are not only doing this on application services now, which was the heritage and the historic muscle of Cognizant. We are doing it in BPO and infrastructure services, and now we're starting to see good traction in ER&D and as Belcan comes in subsequently, we will -- hopefully as it gets close, we will hopefully have more of it as well. So, it's a much more comprehensive breadth of capability and the breadth of large deals which we are executing on. We are competing in the market and the levers to compete are not just arbitrage on labor, the levers to compete are also productivity levers powered by automation and AI. And I think we are ahead of the curve. That's one of the reasons why we are winning more. It is a wallet share, which we are picking up from our peers. Jatin, do you want to add anything?

Yeah. I think the only additional color is there are two ways of looking at a large deal sort of dynamics or financials. One way is that they initially do come with lower margins, but if you see the construct of a large deal, they are typically fixed price projects over a long-term period, which means your ability to improve overall pyramid into the company, deploy Gen Zs as we call them internally or fresh talent at the bottom of the pyramid is much better, ability to execute on your automation goal is far superior in a larger program. So overall, the second way of looking at a large deal is that you can really push the envelope of efficiency and productivity much better than what you would be able to do in a time and material construct. So, it has also a positive angle to it as the deal matures.

Always appreciate the color. Thank you, guys.

Thank you. Our next question comes from the line of Rod Bourgeois with DeepDive Equity Research. Please proceed with your question.

Okay, great. Hey, Ravi, a couple of big picture questions. Over the last year and a half, you've been in a turnaround situation, while also wrestling with a cyclical downturn in demand. You've definitely made progress on shoring up talent and the culture and you're now winning these large deals. I just wanted to see if you can now speak to like your main goals for the next phase of Cognizant's improvement process?

Rod, thank you for that question. I've always been a believer of layering performance and change. So, for the first 18 months, I've been constantly making changes and generating performance and using the performance to make more change. At the end of first year, we bought a company called Thirdera, and that was the time I started to believe that performance has changed as you layer it. You also start to get the license to do some big bets. So, we made that big bet of buying Thirdera, which is the single largest ServiceNow standalone company. And right now, they're probably one of the top two players of ServiceNow in the market. And I'm very confident that journey will continue. In the first half of this year, we started to think that -- our business has four vectors, as I said, tech services, BPO, infrastructure-led services, which is security, cloud, everything put together, and ER&D. We always wanted to take another big bet and look for a different bio group and look for a different industry muscle, if I may, and we took a bet on Belcan, which gives us the opportunity to be in aerospace and automotive embedded software and engineering research and development, which is a different buyer group in any of our clients. And we took a bet because we think that's going to increase the breadth of services and it's going to give us a new vector for growth. So, I think I'm going to layer the performance and change on a constant basis and keep looking for big bets so that we make this a resilient platform. Remember, healthcare and financial services, we are heavy on it. Now, we're going to create muscle on manufacturing, industrial, automotive, aerospace, which is going to be a very different industry vector. We are -- we will constantly keep looking for bridging those gaps in new industries and a breadth of capabilities and also expanding internationally as we go forward because we are over indexed on the U.S. So that will be my goal to create sustained momentum and create a resilient platform for our employees and our clients.

Great. That's very helpful. Thanks for sharing that. And maybe I'll change my follow-up given your answer related to Belcan. One of the questions that we're seeing right now Capgemini recently cited weakened demand in aerospace and automotive. Those are verticals that had been very strong over the last year at most players. Are you seeing similar trends in aerospace and automotive weakening, or is that not really a concern, especially as you onboard the Belcan business?

Rod, that's a great question. Organically, we are seeing strength in automotive. Our pivot on Belcan is very simple. We think the next decade is going to be about digitizing everything physical, so we believe the industries like manufacturing, industrial, automotive, aero. If you pivot into services, which are embedded software, pivot into services, which are digital in nature, there's significant headroom, and there is very little spent in the last 10 years, and therefore, I think the next 10 years are going to be much better. So therefore, I actually believe there are -- there is more space and more room for us. Our concentration is very high in healthcare and financial services. So, this actually gives us much -- a very different industry vertical, but it also gives us an opportunity to bring technology closer to the physical manifestation of these industries. So, that thesis of mind still holds. And I think with AI in the mix now, I actually believe the offerings we will now present to that industry segment are going to be as contemporary, and therefore, will continue to flourish. So that's my thesis when I looked at Belcan and that would be the thesis that it will remain with me even now.

Great. Thank you.

Thank you. Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.

Great. Thank you so much. Appreciate all the color. Encouraging to see the turn in in the financial services end market, et cetera. And it seems like [indiscernible] things from others. Kind of wondering what your visibility is on that part of your end market base. And what the nature of the work is that you're doing now say versus before it kind of turned down and if that's changed at all?

Financial Services, we've been working on it since 2023. 2023, we stabilized the teams, we ensured that the leaks we had -- we were on the other side. I mean when consolidation happened, we lost business in 2022. We now are gaining market share when there is consolidation. And we did a very good job of leading that vertical with industry solutions. So that helped us to pivot into some of the small discretionary spend, which is coming back to -- we rallied behind it. So, the industry solution approach, a stable team, walking the corridors, proactively pitching for value-led work, breadth of capability now, I mean, we are no longer a tech services firm, we have a breadth of capability, all of that has helped us to stabilize financial services. Of course, there's going to be variability quarter-on-quarter, but we feel confident about the fact that each one of those subsegments underneath that are in good shape. Our business in Americas and banking has sequentially done pretty well for two quarters in a row. So, now we are starting to progressively take that -- take the same template to -- in the international market, so that we could replicate that success.

Got it. Appreciate that. And then, back on Gen AI, I'm just wondering if you're seeing those projects crowd out other consulting priorities. And if so, which ones? Or are we still -- as you suggested, still so early before moving to full production implementation of AI -- Gen AI projects that it's not really having much of an impact?

That's a very good question. In fact, I agree with you that a lot of the consulting dollars are getting diverted to generative AI. I mean, all the way from business case creation to governance to -- some companies are reorganizing their -- I know companies which are now saying, we need to reestablish an enterprise 2.0, so that process and technology can be together and it could be a distributed networked organization versus a hierarchical setup. So, lots of organizational change and experimentation is actually led by generative AI. So, some of the discretionary is getting diverted there. But these are small prototypes, and as you finish the prototypes, you start to see the bottlenecks to take it to production. The good news is at least you start to know what the bottlenecks are and then you start to work on it and then you take them to production grade. I have at least some projects which have started to go production grade. I've mentioned it in my earnings, which is a pharmaceutical company taking generative AI for drug development and insurers using generative AI to support claims which come in, which need to be corrected because there are either fields which have not been filled up or there are clarifications. So, I think at a task level, we are starting to see this go forward. The productivity studies we did in 2023 that helped us also to put the business case up. So, we've seen in healthcare in one of my clients, we've done auto adjudication of claims better using generative AI. So, the ability to make this a very outcome-centric business case will allow us to take this to more production-grade work, and the ability to continue to look for new use cases will help us to build the pipeline as the old ones mature.

Great. Appreciate all that color.

Thank you. Our next question comes from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.

Hey, thanks so much. Just want to follow-up on your answer to Bryan's, I think, question on bookings. Ravi, you mentioned duration. I always ask you, but I'd love to hear your updated thoughts on just the ACV versus TCV dynamic. Has that changed, improved, worsened? And then also on incremental bookings, where is the work coming from? Is it new work or take away from other vendors? Has that changed at all in terms of sourcing deals? Thanks.

Yeah, sure. So, I think fundamentally not much change in ACV as you can imagine with the deal duration going up from -- I mean over longer term, it has to reflect in a slightly slower growth in ACV and that dynamics continue. However, we are clearly winning market share in as we execute every quarter. So, the deals that are ramping up or the deal announcement that we have done are really reflection of new work that Cognizant is getting, sometimes in new accounts, but also in many accounts where we were present, but we were not addressing that segment of the work with our customer.

There's also focus on new logos. So, it's a combination of new logos expansion and new work. And I can certainly tell you that the new work is outpacing the renewals at least in 2024.

Right. Heard that. Loud and clear. Thank you for that. Just my quick follow-up on the fourth quarter implied from the guide for the full year that implies some sequential deceleration. Any call outs there beyond seasonality?

Yeah. So, you're right, it does at the midpoint of quarter three performance, it would imply a deceleration in quarter four, but that is really seasonality right now as we see it.

Terrific. Thank you for the time.

Thank you. Our next question comes from the line of Dan Dolev with Mizuho. Please proceed with your question.

Hey, guys, very strong results. Nice to see that. Can you maybe -- I mean, the number one question we get from investors right now is like have we seen the bottom in IT services spend? I mean, this is pretty much what everyone is trying to figure out. Can you maybe make a more general comment from your seat on where we are in the cycle? Thank you.

So, it's a broad question. Let me address it from the context of Cognizant, clearly, for us, we see a growth as a guidance range that we have given for quarter three after a decline sort of a performance for [indiscernible]. So certainly, we are seeing an uptick and an improvement from where we were. So certainly, there is an uptick in the numbers in a positive growth trajectory as we progress through the year. It's difficult to make a comment on a larger market as we covered in our prepared remarks, market still remains uncertain, but clearly, there are pockets where there are opportunities and we are capitalizing on those opportunities as has been reflected in our BFSI performance, as has been reflected in our health performance, both of which our largest sector, we have delivered very strong sequential numbers.

Just to add to that, I said this before, we are -- we don't see deterioration or improvement. We see the market unchanged, as I call it. However, our execution, our fulfillment rates and our win ratios continue to be very strong. So therefore, we are winning wallet share in a market which has remained unchanged.

Understood. And then maybe a follow-up on Gen AI. I know everyone's talking about this, but would you feel comfortable, I guess, at some point providing dollar value of the scope of the AI projects?

We have to keep thinking about what are the right ways to tell the market about generative AI. It's a pervasive technology and therefore it diffuses into everything we do. And because it is diffusing so fast, you almost want to say -- you almost don't know what to categorize as Gen AI and what not to categorize as Gen AI. The only thing I can say is in this market, you could win using generative AI, you could increase your win rates, you could create new deals, you could generate more momentum with your clients, equally you could flip it around and use it on your own self to disrupt your own development cycles of our teams and create productivity, which you can share with your clients and then create a flywheel of winnability through it. So, I mean, right now, we are talking about projects which we are doing, we are talking about platforms and how many clients have onboarded on platforms. The traceability to revenues is, I mean, anybody's guess what you call generative AI as generative AI and what you can't. I mean, today, data modernization project or a cloud modernization project, which we do because generative AI is going to be the future, I actually can call it as generative AI or I can say this is not generative AI. However, it is creating more momentum because that foundation is needed for generative AI. So I mean, we have to evolve this to an extent where we could communicate to all of you much -- in a much traceable way. But nobody has found -- I mean, nobody seems to have found the right way to do it. We are trying our best to tell you the traction we have.

Fair enough. Great results again. Thank you.

Thank you very much.

Thank you. There are no further questions. I would like to turn the floor back over to management for closing comments.

Thank you so much. Thank you for joining in today and looking forward to the next quarter and thank you for all your support.

This concludes today's Cognizant Technology Solutions' second quarter 2024 earnings conference call. You may now disconnect.