Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third 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]. I would like to turn the conference over to our host Mr. Tyler Scott, Vice President of Investor Relations. Please go ahead.

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 third 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 reference 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 third quarter 2024 earnings call. We are pleased with our third quarter results, which delivered revenue and earnings growth while expanding adjusted margins sequentially and represented strong execution of our strategic priorities to accelerate growth, become an employer of choice in our industry and modernize operations. We are seeing a gradual rebound of spend cycles and gaining wallet share in financial services. While our historical strength in health sciences is driving differentiation and growth. Meanwhile, a significant traction with large deals and AI-led revenue opportunities, investments in talent and a steadfast focus on operational rigor together led to a strong all-round performance. Let me begin with a quick summary of our results before an update on our strategic priorities. Third quarter revenue was at the high end of our constant currency guidance range. Revenue of $5 billion grew 3.5% sequentially, in constant currency, including approximately 150 basis points of inorganic contribution from our recently completed acquisitions. Year-over-year revenue grew by approximately 2.7% in constant currency, including approximately 200 basis points of inorganic contribution. Adjusted operating margin of 15.3% improved sequentially, driven by strong cost discipline despite investments in Belcan in the partial quarter impact from our annual minute cycle. Adjusted EPS grew approximately 7% year-over-year, our fourth consecutive quarter of year-over-year growth, bringing our year-to-date EPS growth to approximately 5%. Now let me provide an update on the progress we made against our strategic priorities. First, accelerating growth. Our improving momentum was driven in the quarter by growth in our two largest segments, Health Sciences and Financial Services and contribution from our recently completed acquisitions. Health Sciences increased 7.6% year-over-year in constant currency backed by our strong differentiated offerings. Financial Services returned to year-over-year growth, driven by strong…

Thank you, Ravi. Good afternoon, everyone, and thank you for joining us. We delivered a solid third quarter performance with revenue at the high end of our constant currency growth guidance range and a return to organic year-over-year revenue growth for the first time in six quarters. During the quarter, we continue to focus on modernizing our operations. This helped us increase gross margin by 50 basis points sequentially, driven by improved utilization and increased adoption of automation and AI within delivery. This allowed us to deliver adjusted operating margin of 15.3%, which modestly exceeded our expectations despite headwinds from acquisition elated costs and a partial quarter impact from our annual merit cycle that became effective on August 1st. Year-to-date, we delivered adjusted operating margin of 15.2%, a 40 basis point increase year-over-year. Now let's turn to the details. Third quarter revenue was $5 billion, growing 3.5% sequentially in constant currency, including approximately 150 basis points of inorganic contribution from about five weeks of Belcan. Year-over-year, revenue increased 2.7% in constant currency. This included approximately 200 basis points of growth from recent acquisitions. From an industry standpoint, Health Sciences was our strongest segment, growing 7.6% year-over-year in constant currency. Growth here was broad-based across payer, provider and life sciences. On the payer and provider side, clients continue to seek our TriZetto platform solutions for modern scalable cloud solutions. In particular, our offering has seen healthy demand for its delivery of true end-to-end revenue cycle management, including clearing house services. On the Life Sciences side, growth has been supported by the ramp-up of recent large deal wins. Our Financial Services segment grew 0.5% year-over-year in constant currency. This performance added to last quarter's momentum and benefited from an uptick in the discretionary demand environment and better execution. Growth was led by…

Great. Thank you. At this time we will be conducting a question-and-answer session [Operator Instructions] Our first question here is from Jason Kupferberg from Bank of America. Please go ahead.

Thank you, guys. So just looking at the midpoint of Q4 guidance, our math suggests organic growth will be right around 2%. So I just wanted to check and see if that's right. And if so, is that a floor we can think about for Cognizant to accelerate off of in 2025, especially since it seems like you are starting to see a turn up in discretionary spending in your largest vertical? Thanks.

Yes. So I thought the upper end of the Y-on-Y quarter four was around 2%. So you're right that in quarter four, we are starting to build an organic Y-on-Y positive movement. I mean the midpoint is going to be 1% and the upper end is going to be 2%. So it's a good tail velocity to get into 2025.

Okay. Understood. And then I wanted to come back to some of the comments around sharing savings from the AI-enabled coding efforts with your clients. What would you estimate the productivity improvement has been that you're seeing from those AI-enabled coding efforts? And what are the sort of offsets that you're seeing to avoid revenue cannibalization?

Jason, this is a complicated economic and a complicated -- the response is going to be a little, I would say, complicated as well. Let me state how this works. When we have productivity, which is non-linear and not labor oriented, and it is new, you have an opportunity to go and tell your clients, if you have time and material business, we can translate that to fixed price business and share the better fit with them. If you have noticed, I mentioned about 2 million lines of code annually accepted by our developers. So that number is going to keep going up. So our ability to share those benefits with the clients actually makes us more competitive in the market. In fact, many of my clients have actually said, when you share these benefits and the cost of deployment goes down, we can take our backlog down, that's a very positive side. I mean clients are not saying because of productivity, we'll reduce our budgets. They're actually saying we want to do more for less. So that is a very positive indicator. It also gives us an opportunity to consolidate in places where our productivity is higher than our peers. We can actually -- we can offer a consolidation and, therefore, increase revenue throughput to us. One of the examples I mentioned in my remarks is about a client where we displaced an incumbent because we actually showed up with higher productivity. Now there is a third set, where you could arguably say clients -- it will cannibalize our revenue. But those are the times you want to be creative and you go back to clients and say, "Look, the work packet we did, we could do it for less. But you know what, if we consolidate it, we actually do more for less," which then means you could protect your turf, but you could still stay the productivity benefits. Then there is a fourth set, which I would actually say is time and material work, where in some ways, the productivity benefits can generate value, but you have to work with your clients to move that work to fixed price. So I would actually believe this is a very positive development. There is elasticity in tech spend. So if you can reduce the cost of deployment, clients are actually going to spend more with you. And we believe we are ahead of the curve in comparison to all our peers. And that's why we're winning more large deals and we are able to protect our tough.

Thanks, Ravi.

Our next question is from Tien-Tsin Huang from JPMorgan. Please go ahead.

Thanks a lot. Good afternoon, here. I want to ask on the large deal pipeline, considering you signed quite a bit here year-to-date more than last year, your confidence in being able to replenish the large deal pipeline from here, Ravi? .

Yes. So last year, we did 17 for the full year, $100 million deals, more than $100 million deals. This year, we are already at 19, more than $100 million deals. I'm very confident that we can sustain the momentum. The way to sustain this is not just look for transformation opportunities where the spend goes up, but also look for cost takeout efficiency and vendor consolidation opportunities. Similar to what I mentioned in my previous response, there's always an opportunity to consolidate using productivity. So we are excited about it. I think we have to – we are starting to see now large deals in Europe and Asia Pacific. In fact, out of the six deals we did this quarter, one of them was in Asia Pacific, one of them was in Europe, and we had similar large deal in Asia Pacific last quarter as well. So we can expand. I mean this is also concentrated in a few industries. Now we are stepping up and taking a broader view of other industry. So the expansion will come from more industries. The expansion will come from going beyond Americas, which has already started happening. And the expansion will come from also our services landscape. Two years ago, a lot of our work was related to tech services and BPO. Now we have tech services, BPO, engineering because of the Belcan acquisition and some of the acquisitions we did before. We are now a top five player in engineering services. And interestingly, we are getting quite a bit of traction on infrastructure services, which we historically not having those many large deals. So right now, all four capability sets are firing cylinders. So I'm very confident about how we can sustain the large deal momentum.

No, that's great. That's good color. It actually segues nicely into my follow-up question because I know one of your objectives was to diversify. You just mentioned you're doing that geographically and across some of your practices. But healthcare is now your largest vertical looks like, which is so used to seeing BFSI being the biggest recognizant. But where are you in the journey now to expand into some of other under indexed verticals. Is that still a priority? Can we expect that to come? Or is it more work to do on what we discussed before?

No, that's a great question. I would say if you look at our revenue mix and the momentum we have, I mean, look at healthcare, we have grown 7.6% Y-o-Y. Both sequentially, we've grown and we have grown Y-on-Y. So we are very excited about the opportunities in healthcare, the differentiation we have and the lead we have in some of the areas is unmatched. So healthcare, we are very confident. Financial services, we are back on track. I mean, this is the -- this quarter -- last quarter, we did sequential growth. This quarter, we have done Y-on-Y growth and sequential growth. So again, financial services has a very different muscle. I think we have now stabilized, and we do believe that we are winning the wallet share there. We now have, I would believe, a unique opportunity in industrial and manufacturing with Belcan in the mix. And that's because they have -- we have access to blue-chip clients in aerospace. We have that capability set in engineering, which gives us a chance to go into industrial and manufacturing and automotive. It is a sector where we do believe we are now going to build a muscle to win deals, large deals. And I think we have a breadth of capability way from engineering services to tech services. The vertical comps, which if you have noticed, there has been a lower pace of spend in comps. But as that picks up, I think we have put a good team to get that moving. Where we have to make progress on is energy oil and gas, where we have a much lower presence. And that's something I'm going to work on. So the idea of the last two years, what we have essentially done is we've created a breadth of capability all the way from engineering, BPO, technology services and infrastructure services. We have created now more expansive opportunities on industries. I have work to do on international markets outside the US. But very pleased with the progress we've made so far because this expansive -- the strategy of expansion has helped us to keep the sustained momentum on our large deals.

Thank you for the complete answer there. Thank you.

Next question is from Jim Schneider from Goldman Sachs. Please go ahead.

Good afternoon. Thanks for taking my question. Good to see the momentum in healthcare, you just talked about earlier. So maybe to follow up on the last question. Maybe as you think about your backlog of business for 2025. Obviously, you're not providing guidance now, but can you maybe tell us directionally which verticals do you think might outperform your overall corporate revenue growth in 2025? And then which ones might lag a little bit?

Yes. So Jim, as we look at the deal wins and -- the momentum that we have built, certainly financial services and healthcare will continue to lead the growth of the company. We have to build back momentum that we had all through 2023 in CMT, Comps Media and Telecom, as we get into next year. And manufacturing has been slow, but one hopes that, that should also come through. So I think that is the order, Jim, for us to look at who would lead the growth as we look at next few quarters.

Thank you. And then maybe as a follow-up. It was good to see the gross margin leverage you delivered in the quarter. You mentioned part of that is utilization, but also part of it was AI, as you mentioned in the quarter. Can you maybe just help us on a go-forward basis into Q4? And then 2025 with sort of the moving pieces of gross margins, how much of those gains are sustainable? And what should we think about in terms of the mix of Belcan in Q4 and beyond in terms of where gross margins should land?

Sure, Jim. So let me start with Belcan because that's easier to get out of the way. I think Belcan will not have a material movement on the gross margin number of the company they operate at a similar sort of range. So we should be okay. There should not be any noise from that. Now from a classic gross margin standpoint, the levers are utilization, automation and productivity led by AI is another one. Pyramid is the third one and the fourth is really the pricing. So I would say these are the four most or largest rivers. The fifth is offshore mix, but offshore mix, typically tends to be driven more by the requirements of our customers in time and material business. And only in the fixed-price projects, we have more flexibility around offshore. So I would count sort of four big ones and fifth on, which can be leveraged in specific situations. So -- as we look at the performance of this year, certainly utilization has continued to inch up every quarter. And I think we still have some flex left as we enter quarter four. Automation, led by AI is a tremendous opportunity. We have executed well in 2024, and I still feel we'll continue to get additional leverage of that as we build a greater rollout capability, greater absorption capability of that within our delivery -- within our spectrum of our delivery. The Pyramid is certainly an ongoing initiative. We have had, as an organization and as an industry struggle to keep up with the reason of Pyramid, all through 2020, 2021, 2022 as the industry went through a shock of a sudden drop of demand and then sudden increase in demand I think we are getting back to that rhythm of building Pyramids. So I would say it is not a lever for 2025, but it certainly is a lever as we look at next three years and that we are putting a great internal initiative around. And finally, pricing. Pricing in the current environment is, I would say, competitive. It's not something that is adding to gross margin today, but it is a factor of the demand environment. So that's how I see it.

That’s great color. Thank you.

Our next question is from Maggie Nolan from William Blair. Please go ahead.

Hi, thank you. Do you view financial services as leading in terms of how IT spend may trend across your business and end markets? Or do you view the dynamics of the financial services performance to be more vertical specific and Cognizant specific at this time?

We're very pleased with how we have gone about structurally turning around our financial services business. When I came on board, we had both company-specific issues and market-specific issues. I'd say the company-specific issues have more or less gone. They have gone at least a few quarters ago. We put a good team on board now very stable team. We now have compelling offerings, and we are working the corridors of our clients. So we are starting to see the wallet share gain for ourselves. There is uptick in spending in financial services clients, and we are probably seizing those dollars of our peers, and therefore, we are starting to see that. I am very optimistic that financial services will continue to go back to a high discretionary environment at some point in time because it's also one of the most cutting-edge innovative industries. And they all have retailed organizations where a lot of technology innovation is done in partnership with companies like ours. We always had that muscle before. I mean, we were one of the leading financial services players across the world, and it does -- I do believe that we have got that module back. So depending on how the market turns around in financial services, we will grab those opportunities. We do not have any specific company-specific challenges which we had in the past. So that gives me the confidence that we have the differentiation, the agility, the team and as the market keeps bouncing back. I mean there is a rebound of discretionary dollars in financial services. And as that continues to go up. We are in a great start to gain more wallet share.

Okay. Thank you. And then any changes that you're seeing in the sales cycle and the conversion rate, both for this quarter that you just reported? And then also your forward expectations just given that continued large deal traction, but also what appears to be the early return of some the smaller discretionary deals and demand?

Yes. The smaller discretionary deals have started to take a little momentum. So -- on the large deals, I would say the biggest change I have seen in the last few months is -- if we are able to put a proposal on the table where you can feed to the legacy, make savings, underwrite those savings for innovation. Our clients love that flywheel. So times are not saying I'm going to spend more. But try times are saying, can you do more for less. So the AI tooling is helping us do more for less. And those savings are getting translated to innovation dollars and translate it to backlog getting cleared. I think that is a new -- it's a new model which is helping us to win those deals. I mean, when we win these large deals, those dollars are not going back elsewhere, they're actually going back to technology. And we are able to put a model where we underwrite those dollars for the innovation. So that's the change. That's what clients are looking for in an industry of this kind where you can do more for less, the spend is elastic. I mean, you can -- if you do more or less the spend, you could get more done, and therefore, clients are going to get for you more. That's because the spend is elastic. You get more value, you get more projects to be done.

Makes sense. Thank you.

Our next question is from Jamie Friedman from Susquehanna. Please go ahead.

Thank you. So I wanted to ask briefly on your view of the durability of the Health Science recovery. Ravi, results speak for themselves. It's a very -- this is a clear turnaround. But we're getting a lot of questions that the end market seems to be volatile. And if you could unpack that maybe to the payer and Life Science side, but how do you see the changes in the end market, especially on the payer side potentially impacting the demand for your services?

It's a great question. There are four segments here, there is payer provider, pharma benefit and Life Sciences. Life Sciences clearly is a standout because Life Sciences clients are no longer using technology for enabling their business, they're using technology at the core. And we have some extraordinary capability of partnering with our clients for that core business. This is not enabling the business I mean enabling the business is IT systems, enabling the core as their discovery cycles, the drug discovery cycles and the ability to apply technology to support it. We have really some very good capability there, including Life Sciences manufacturing. So I think that's a sector which we'll continue to invest in technology to reduce the drug development cycle, and we think we have a good opportunity there. On payer, as you would have noticed, there's a lot of cost takeout, which is going to happen because the PMPM as I call it, the cost per member per month that is under pressure. So you have to start to think about how do payers reduce their cost and increase the value towards care. So we think technology can be that enable us to reduce cost. Just to give you an example, on TriZetto, we applied Generative AI. And we are able to take out 30% cost for case managers and end users who are processing claims. The administrative costs and payers are so high that you produce technology and you could use the power of AI to create more -- generate more value, more straight through processing. Our auto adjudication on claims has significantly gone up. I mean we could auto adjudicate claims without human intervention. So there is so much happening on the payer side on technology that it's a cost takeout opportunity rather than anything else. Cost is going to lead to transformation of payer. Provider a very distributed market, and there is consolidation happening on providers. And I think we have, again, a unique opportunity because our TriZetto platform today has a large pool of providers. In fact, we have 200 million members, and we have thousands of providers who are on our platform. We also do Clearing House, which is a combination of payer and provider because the Clearing House actually sits on the gateways between providers and payers. Pharma benefit companies, very small number and they are themselves going to transformation. So is there going to there going to be more consolidation? Is there going to be more change? Is there going to be more transformation in this sector? Yes, but they're all going to be powered by technology. So we think our unique position in healthcare, our unique edition in healthcare is going to be a huge benefit for the opportunities which come out where. So I'm excited about the transformation in that entire value chain, which is going to happen in the next few years.

Okay. Great answer. I’ll jump back in the queue. Thank you.

Next question is from Bryan Keane from Deutsche Bank. Please go ahead.

Hi. Hey, Ravi, to me, it sounds like you're using GenAI as an advantage to come in and price below some of the peers using you guys' expertise in the technology to replace some incumbents and pass on some productivity gains. Is that fair?

Yes. I know Yes. If the engagement model allows us to do that, we could share those benefits with our clients. In the past, it was labor-led the labor-led cycles are pretty much -- I mean, we have really optimized it across the industry. The new cycles are technology-led. And AI-led and automation-led productivity sharing the benefit to clients, I think, is a mainstream model which we are adapting to win these large deals where we have had sustained momentum.

Yes, because the argument will be that it's a deflationary environment for the overall IT services adds more of the cost save productivity in GenAI gets passed on, the old time and materials models come under pressure and the yields are lower. The outcomes-based pricing is going to yield the outcome for the contracts. So it's got a deflationary impact. So you've got to make it up by volume is the only way you can make faster growth.

Yes. So my thesis there is almost every CIO, I have spoken about has actually said, they have a backlog, which they want to clear. And this is our opportunity to clear backlog. There are CIOs who have actually told us that, look, there is so much technical debt sitting with us. I mean there is a report which talks about $1 trillion of technical debt in US balance sheets -- American Corporation balance sheets. Almost $400 billion is actually being spent on again, another report which talks about spent on servicing the debt. And because of that, a lot of money is being spent on the run versus the bid. So this is our opportunity to readjust the run in the bid. So -- and that's what I was referring to earlier. We were able to reduce the run costs and transfer that to the bid, you can actually build more stuff. So technology spend is so elastic that -- I mean it will remain elastic because it is such a transformational tool that you could -- if you do more for less, you're actually going to get more to do because there is no -- the headroom is so high. So I actually believe that the thesis of doing more for less is only going to generate more opportunities for us.

And is it roughly 20% to 40% less or how much more or less is it?

Yes, it's a hard put a number because it depends on the phase of the technology cycle. If it's pure play development, it is much higher. If it's testing, it is much higher. Equally, if you're in a fiercely competitive situation, you probably give it away to – you partially give it away to clients. There's also the maturity of the client, which kind of determines how much you can get productivity. So there is a compelling proposition to do fixed price and managed services deals. But there are always companies which have huge retained organizations, and they use companies like us to engage on a time and material or a capacity-based because they have strategically taken a call to build their own tech shop. In fact, we are actually helping some of those clients to build the tech shop. There are captives being set in India. We are actually a pioneering partner to partner with our clients to set up their captives. Another opportunity which has kind of evolved in the last one year. And again, I'm excited about it. I don't see that as cannibalization. I see that as an opportunity to stay more relevant with them.

Great. Thanks for taking the question.

The last question is from Bryan Bergin from TD Cowen. Please go ahead.

Hi, guys. Good afternoon. Thank you. I do have a follow-up question here on the forward view. If you're targeting kind of an organic exit rate of about 1% of the midpoint, and flattish bookings here when we consider the year ahead, are there puts and takes about the conversion of the multiyear larger deals versus some of the smaller deals picking up to support the near-term growth reacceleration. Just any thoughts you want to share directionally about growth considerations as we get closer to 2025?

Sure. So if you see this year, every quarter, we have been able to execute to the growth agenda that we set in the beginning of the quarter. This is first quarter, quarter three was our first quarter of organic growth in -- over the last few quarters. We are exiting with a significantly better velocity than what we had at the end 2023. So that certainly sets up well. But we will -- I think it's -- what is critical for us is really focus and execute well to quarter four, and then look at the opportunity that presents us in beginning of 2025 and then guide for 2025. So I would say little early to talk about 2025, but quite happy with the progress that we are making every quarter in -- on the trajectory.

Okay. Understood. And then when we think about the margin levers, specifically on utilization. Do you have a targeted optimal level for you as you manage the bench, so you've gotten 84%. Can you lean on that more until demand recovers? Or is that an upper bound as you think about utilization?

I do think there is a little more flat left on that, certainly, that I see, but not a lot more.

Okay. Thank you.

Thank you. This concludes the question-and-answer session. This also concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.