Cognizant Technology Solutions Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 10 speakers on the call.

Operator

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. You. I now like to turn the conference over to Mr.

Operator

Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.

Speaker 1

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 Q2 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.

Speaker 1

These statements are subject to the risk 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 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.

Speaker 2

Thank you, Tyler, and good afternoon, everyone. Thank you for joining our Q2 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 5 deals each with total contract value of $100,000,000 or more and announced an agreement to acquire Belcan, which is expected to expand our ER and 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.

Speaker 2

Q2 revenue was 4.8 $5,000,000,000 which was $30,000,000 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 next gen program and overall cost discipline, we achieved adjusted operating margin of 15.2 percent, 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. 2nd quarter bookings grew 5% year over year and on a trailing 12 months basis bookings were $26,200,000,000 representing a 1.4x book to bill.

Speaker 2

In addition to the 5 deals each with TCV of over $100,000,000 we signed 2 deals that were above $90,000,000 each. In the first half of this year, we have now signed 13 deals each with TCV of over $100,000,000 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 5% sequentially in constant currency driven by growth in the Americas. Within Financial Services, our banking business posted a 2nd consecutive quarter of sequential growth and returned to modest year over year growth in constant currency for the first time since Q2 of 2022. We are seeing demand being driven by client investments in hyper personalization, infrastructure and platform modernization.

Speaker 2

Our insurance sub segment also grew sequentially in Q2 and one of the $500,000,000 plus TCV deals we signed this quarter was with a large American insurance provider. I believe these results reflect our actions to stabilize the BFSI business since last year. Over that period, we put new leadership in place and drove greater industry focus on these customer segments. We also aligned our go to market approach and launched industry led service offerings in areas like real time payment fraud detection, payments hub modernization and digital banking. Health Sciences grew by 3% sequentially in constant currency and we see a number of positive secular trends.

Speaker 2

For example, payers and providers remain focused on reducing the cost of care. We believe this is benefiting our TriZetto platform, where we are helping clients manage more than $500,000,000,000 in complex claims and improve patient outcomes. TriZetto's end to end capabilities are gaining traction as clients see the value of in our ability to provide both revenue cycle management and clearinghouse services. On the payer side, we are seeing demand being driven by data and cloud modernization as our clients seek to deliver a modern best in class consumer experience for their members. And in life sciences, clients have begun moving beyond cost optimization projects to ones that accelerate their Gen AI and digital transformation in R and D and continue to drive enterprise modernization with SAP S4HANA.

Speaker 2

By region, we are very pleased with the performance in Americas, where revenue grew 2.8% sequentially and returned to growth year over year. I am extremely proud of the progress the team has made and I'm confident in our opportunities ahead. Looking back over the last 18 months, we believe our strategic investments and focus on improving our operational rigor has further strengthened a foundation on which we can drive sustainable revenue and earnings growth. We invested in our leadership team and attracted new talent to the organization. We drove internal process improvements, particularly around large deals and our talent.

Speaker 2

And we focus sharply on strengthening our relevance with clients through investments in our innovation strategy and platform offerings. We believe these changes are starting to pay off and are reflected in our recent revenue performance and year over year operating margin expansion in the first half of this year. We have maintained our focus on becoming an employer of choice in our industry and were recognized by the Newsweek as one of America's greatest places to work and greatest places for job starters. We also continue to expand our footprint in smaller cities in India with the opening of a newest office in Indore as we remain committed to bringing offices closest to where our employees are. And I'm pleased with Blue Bolt, our grassroots innovation program, which has generated 210,000 ideas by our associates since its inception last year.

Speaker 2

We're also hearing positive feedback from our customers through our project level Net Promoter Score, which I'm pleased to say has improved consistently since 2021 through the first half of twenty twenty four. This quarter marks our highest NPS to date. We have taken a number of actions to date to accelerate growth and drive operational improvements and we look forward to continuing to update shareholders on our progress. To that end, we plan to provide an investor update in the first half of twenty twenty five to discuss, among other things, our strategy, our differentiation in the market, our efforts to create long term value for our shareholders and other stakeholders. A prime example of our investments in higher growth industries and expanding capabilities is our agreements to acquire Belcan, a leading global supplier of engineering, research and development or ER and D services.

Speaker 2

We have seen growing demand in ER and D services and estimated $190,000,000,000 market whose high growth has been fueled by the convergence of digital technology and the physical world. Over the last 3 years, we have strengthened our ER and D capabilities, starting with our 2021 acquisition of ESG Mobility, a digital automotive ER and D provider for connected autonomous and electric vehicles. And at the start of my term last year, we acquired Mobica, which focuses on IoT embedded software engineering capabilities from the chip to the cloud. We expect the Belcan acquisition to provide an opportunity for us to expand our service offerings into growth vectors that help move the physical world of manufacturing, aerospace and automotive into the age of digital data and AI. Earlier this week, we introduced the next evolution of our experience practice area called Cognizant Moment, which is a new integrated business within Cognizant that builds on our over 20 years of expertise in digital experience.

Speaker 2

Cognizant Moment will focus on next generation experience services that are dynamic, data led and AI powered, harnessing the content generation and personalization power that Genov AI brings combined with human ingenuity to help clients innovate, differentiate and grow. The creative and programmatic services lifecycle is expected to go through significant transformation in the years ahead and we see an opportunity to disrupt the status quo agency model as creative content becomes increasingly generated and orchestrated by Gen AI led models. Moving on to additional highlights from the quarter. We extended our relationship with Victory Capital to provide IT infrastructure and data analytics support. Over the next 5 years, we aim to provide this client with new service management capabilities, improved service productivity, opportunities for cost savings and the ability for Victory Capital to cost effectively scale in support of business growth.

Speaker 2

Additionally, we signed an agreement to provide engineering services to Gentherm, the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry. Under this agreement, we'll expand our existing services to help develop a next generation of products aimed at elevating customer vehicle experiences. Our expertise in firmware development and verification and validation from the Mobica acquisition played a critical role in differentiating our value proposition. We've also seen increased demand for infrastructure led our platform investments have helped drive increased Gen AI adoption. As of this quarter, we have over 200 clients on our AI led platforms, We see We see one of the biggest opportunities for GenAI as tech for tech, which applies GenAI to our software development cycles.

Speaker 2

With higher cost of capital in recent times, we believe that the need to do more with less combined with the leveraging of generative AI with lead companies into an era of hyper productivity. We believe this will fuel the next wave of digital transformation as clients seek to modernize the tech stack and reimagine business workflows with partners like Cognizant. In fact, in recently released follow on analysis to our 2023 study with Oxford Economics, 70% of the respondents globally indicated they're not moving fast with GenAI and 82% indicated a delay in execution could put them at a disadvantage. We are seeing a desire from our own clients to move more quickly. Over the past few quarters, we have become more deeply involved in our clients' Gen AI journeys.

Speaker 2

As of the end of Q2, we have over 7 50 early client engagements, up from 450 in Q1, and we have over 600 opportunities in the pipeline compared to 500 last quarter. These early engagements have been across verticals with healthy activity in products and resources along with financial services and health sciences. We're seeing demand across 4 key areas. 1st, customer and employee experience 2nd, content summarization 3rd, content generation and finally, tech for tech to accelerate innovation and technology development cycles. As an example of a recent work, Cognizant designed and recommended a business and technology architecture for AI development for a multinational accounting and audit services firm.

Speaker 2

This work included identifying the relevant technologies, infrastructure, skill sets, processes and data required to support AI development across the organization. And we are building a strong partnership ecosystem to support our GenAI strategy. This quarter we have selected as an AWS GenAI competency partner driven by our capabilities in addressing complex industry problems and our expertise in AWS specific GenAI solutions. And we have signed a strategic collaboration agreement with AWS to bring smart manufacturing solutions powered by GenAI to market and transform manufacturing operations across various industries. As another example, we helped set up the world's largest pharmaceutical company's AWS infrastructure as a part of their JAI journey.

Speaker 2

We also automated that client's channeling of desperate data sources into a single vector data store to build a foundation for the Gen AI programs. In Health Sciences, we launched the 1st set of healthcare large language model solutions in Google Cloud's GenAI technology, including Google's Vertex AI platform and Gemini models. The suite of solutions addressing 4 workflows, marketing operations, call center operations, provider management and contracting. Our aim is to improve healthcare administrative processes and experiences for our clients and their clients. We believe GenAI has become a catalyst for clients who are behind in the data modernization or cloud journey and we are pursuing these projects to help them lay the foundation for enterprise grade GenAI implementations.

Speaker 2

In closing, I want to thank our employees around the world for their dedication to our clients and Cognizant. We've been executing well in a challenging macro environment. In the back half of twenty twenty four, we'll remain focused on our strategic priorities to drive revenue growth, become the employer of choice in our industry and to simplify our operations. With that, I'll hand it over to Jatin.

Speaker 3

Thank you, Ravi, and thank you all for joining us. 2nd 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 percent 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%.

Speaker 3

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. 2nd quarter revenue $4,900,000,000 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.

Speaker 3

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 midsized 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.

Speaker 3

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 and resources revenue was down modestly quarter over quarter and down approximately 4% year over year in constant currency. The decline was due to ongoing discretionary spending pressure among our customers.

Speaker 3

We have seen demand in areas like grid modernization and cloud modernization investments among our utility customers. We have also seen pockets of strength in the travel and hospitality sector led by improved travel demand as well as interest in Gen AI powered personalization to deliver differentiated guest experiences. Our pipeline in products and resources remains healthy and we are excited to close the Belkin acquisition, which we expect will provide new growth opportunities in this segment. Communications, Media and Technology grew year over year, again supported by recently completed acquisitions. We have also continued to benefit from the ramp of new business within Comps and Media, which has helped offset lower level of discretionary spending among the technology customers.

Speaker 3

By geography, we were pleased with the growth in North America, driven in part by large deals ramping up over the last few quarters. However, other parts of the world, particularly Europe, remain challenged by soft discretionary spending. Despite this, we were also pleased with a return to sequential growth in our Rest of the World region, where we are seeing early progress from recently won large deals and new logos and a healthy pipeline of new opportunities. Now moving to margins. Next gen cost savings continue to progress and helped us offset the margin impact of recent large deal ramps.

Speaker 3

During the quarter, we incurred approximately 29,000,000 dollars in costs related to NextGen, which negatively impacted our GAAP operating margin by approximately 60 basis points. Excluding this impact, adjusted operating margin was 15.2%, an increase of 10 basis points sequentially and 100 basis points year over year. As a reminder, the prior year period included a 60 basis points benefit from an insurance recovery. Our GAAP tax rate for the quarter was 22.7 and adjusted tax rate in the quarter was 23%, reflecting a benefit from the timing of discrete items. Q2 diluted GAAP EPS was $1.14 and Q2 adjusted EPS was $1.17 Turning to the balance sheet.

Speaker 3

We ended the quarter with cash and short term investments of 2,200,000,000 or net cash of $1,600,000,000 DSO of 80 days was up 2 days sequentially and increased 5 days year over year, driven by our business mix. Free cash flow in Q2 was $183,000,000 primarily reflecting the seasonality. During the quarter, we returned $226,000,000 to the shareholders, including $76,000,000 through share repurchases and $150,000,000 through our regular dividend. At the end of Q2, we had $1,600,000,000 remaining under our share repurchase authorization. Share repurchase authorization.

Speaker 3

As of today, other than the expected closing of Belkon, we do not anticipate any material inorganic activity for the remainder the year as our immediate focus is on closing the Belkin acquisition and its initial integration work. We expect to return approximately $600,000,000 to shareholders in form of share repurchases and dividends in the second half of this year. This is expected to bring total capital return to the shareholders to approximately $1,100,000,000 for the full year. These amounts exclude the expected additional share repurchase activity to offset the new shares we plan to issue as part of Belkin acquisition. Turning to our forward outlook now.

Speaker 3

Our updated guidance does not include contribution from Belkin. We plan to update our outlook after the acquisition has closed, which we still expect to occur in the 3rd quarter. There are no changes to the estimated financial impact that we provided at the time of the announcement. For the Q3, we expect revenue to be flat to up 1.5% year over year in constant currency. Sequentially, this implies a growth of 0.7% to 2.2% in constant currency.

Speaker 3

For the full year, our organic revenue growth outlook has modestly improved. We now expect revenue to be in the range of $19,300,000,000 to $19,500,000,000 which is a decline of 0.5% to growth of 1% year over year, both as reported and in constant currency. Our updated guidance includes approximately 70 basis points of inorganic contribution versus our prior guidance of up to 100 basis points. This reflects the contribution from only our completed transactions. Therefore, at the midpoint, our organic growth outlook has improved by approximately 55 basis points.

Speaker 3

Moving on to adjusted operating margin, we are pleased with our first half performance and we continue to expect the full year to be in the range of 15.3% to 15.5%. Our guidance includes the expected impact of our marriage cycle, which will take effect on August 1. We expect this will be partially offset by the savings from our NextGen program and operational discipline. For the full year, we anticipate net interest income of approximately $80,000,000 which compares to $60,000,000 previously. Our adjusted tax rate guidance of 24% to 25% remains unchanged.

Speaker 3

Our full year free cash flow guidance is also unchanged and we continue to expect it will represent 80% of net income. This includes the negative impact from $360,000,000 payment made to Indian tax authorities in the Q1 in relation to our ongoing appeal of our 2016 tax matter. Our guidance for shares outstanding is unchanged at approximately $497,000,000.70 which reflects a $0.07 increase in the midpoint versus our prior range of $4.50 $4.68 With that, we will open the call for your questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Jim Snyder with Goldman Sachs. Please proceed with your question.

Speaker 4

Good afternoon. 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?

Speaker 4

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?

Speaker 2

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.

Speaker 2

So we're very, very pleased with the number of early engagements. We have 600 more in the pipeline. And if you remember, quarter 2 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?

Speaker 2

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.

Speaker 2

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, we will start to see more projects related to innovation, more projects related to change in operating model. And in fact, one of the surveys we did just a few weeks ago with 2,200 business executives from 15 countries has also started to tell us that productivity doesn't mean just cost reduction.

Speaker 2

Productivity also means new revenue streams and new products and new services. So we are again excited about the fact that if it is revenue generating, the acceleration to the smart the sharpest curve is going to be much quicker. So that's one metric to know how well we're doing. The second metric I would say, which I spoke about is we have 200 plus clients on all our platforms, AI platforms. The AI platforms we have at Cognizant are all related to how do you take foundation models and make them production grade, be it accuracy of the models, be it governance, be it management, be it responsible AI.

Speaker 2

So these 200 clients are experimenting with us to make sure that they're getting ready for production because they're a part of our platform. So that gives me indication that there is a good momentum in the future. We also dissect this into 4 different categories. A lot of it is content aggregation and customer experience and employee experience. Again, the benefits in the business case are very tangible here.

Speaker 2

So we see we will see faster acceleration. Then of course, the biggest use case is tech for tech, which is applying it to development cycles. The challenge is in that particular case, you have to share the productivity benefits with your clients. So the good news is it increases our win rates. And if we are ahead of the curve, we get to save some of that.

Speaker 2

And the last one, I would say, is content generation, which is more creative. It will take a little longer time. So overall, we're very pleased with where we are. We're very pleased with the fact that some of this is leading to more structural work related to data and cloud, which by itself is a heavy lift for us, which will then get monetized into services dollars. So that's broadly where generative AI story is.

Speaker 2

And I think the excitement about how much productivity we can generate for our clients and create a flywheel of this makes it the biggest opportunity for us to tap into in the future.

Speaker 4

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. 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 for expanding those gross margins over the next couple of quarters?

Speaker 3

Sure. So quarter 2 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.

Speaker 3

The growth or the ramp up of the large fields 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 1 and quarter 2. We are optimistic that as we move into quarter 3, quarter 4, you should start seeing a slightly better performance on gross margin as we get through quarter.

Speaker 2

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.

Speaker 4

Thank you very much.

Operator

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

Speaker 5

Hey, good afternoon. Thank you. I wanted to ask on bookings, so nice to see a return to growth here. And 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?

Speaker 5

And just any common threads to highlight across the latest deals that were announced?

Speaker 2

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.

Speaker 2

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 5 large deals with more than $100,000,000 and we had 2 of them with in the range of $90,000,000 plus. In fact, all 5 of them actually had expansion in new business in the mix.

Speaker 2

So we are again very pleased about how the amount of work we are 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 $50,000,000 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.

Speaker 5

Okay. I appreciate that detail. And then my follow-up on Belkin. So I understand you're still waiting to close a deal. I believe you mentioned it was estimated to be about 40 bps of a margin headwind and then, some revenue synergies over 3 years.

Speaker 5

Can you detail kind of the transitory costs, the deal costs in that 40 bps versus the structural margin of Belkin? And then just any further detail on kind of how you thought about the phasing of the $100,000,000 plus revenue synergies over 3 years?

Speaker 3

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

Speaker 6

Thank you.

Operator

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

Speaker 6

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 some of the deal wins and pipeline?

Speaker 6

Additionally, any call outs here around competition for talent given the higher attrition you

Speaker 2

saw? Yes.

Speaker 3

So this is Jatin and I'll go first and 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 a couple of skill sets which are more hot or difficult to find than others.

Speaker 3

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.

Speaker 2

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

Speaker 5

Yes.

Speaker 6

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

Speaker 3

I think we still have some headspace for sure as we exit quarter 2. Certainly, not as I mean, it's the headspace we have continued to sort of utilize, and this is the Q3 of improvement in utilization. So we are continuing to improve it. We have some space. I wouldn't say it's a significant space.

Speaker 3

And we are managing 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. Yes. So just to

Speaker 2

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 off returners, as I call it.

Speaker 2

I mean, it is people coming back who worked at Cognizant before. And our fulfillment engine is a combination of 4 things freshers, rotating talent inside the company, re skilling from the adjacencies and hiring lateral talent. All 4, 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 2 big industries, financial services and healthcare together is 60% of our business.

Speaker 2

They're both in great in a good spot. That gives us confidence. I mean these were 2 verticals where Cognizant's legacy and heritage was so strong. So we are back on those 2 verticals with a good positive momentum.

Speaker 6

Thanks for the love of the detail 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?

Speaker 2

Yes. So large deals and Jatin and 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 deals. So you will have to invest on transition and everything else. So there is lumpiness on how that works.

Speaker 2

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 to 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.

Speaker 2

We are doing it in BPO and infrastructure services. And now we're starting to see good traction in the R and D. And as Belcan comes in, subsequently we will hopefully as it get close, we'll 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.

Speaker 2

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're winning more. It is a wallet share, which we are picking up from our peers.

Speaker 5

Jatin, do you want to

Speaker 2

add anything?

Speaker 3

Yes. I think the only additional color is there are 2 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 you call them internally, or fresh talent at the bottom of the pyramid is much better. Your ability to execute on your automation goal is far superior in a larger program.

Speaker 3

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.

Speaker 6

Always appreciate the color. Thank you, guys.

Operator

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

Speaker 5

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?

Speaker 2

Rod, thank you for that question. I've always been a believer of layering performance and change. So for the 1st 18 months, I've been constantly making changes and generating performance and using the performance to make more change. At the end of 1st year, we bought a company called Thadira 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, some big bets.

Speaker 2

So we made that big bet of buying Tredera, which is the single largest ServiceNow standalone company. And right now, they're probably one of the top 2 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 4 vectors, as I said, tech services, BPO, infrastructure led services, which is security, cloud, everything put together and ER and D. We always wanted to take another big bet and look for a different buyer 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.

Speaker 2

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.

Speaker 2

S. So that will be my goal to create sustained momentum and create a resilient platform for our employees and our clients.

Speaker 5

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.

Speaker 5

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 Bellcam business?

Speaker 2

Rod, that's a great question. Organically, we are seeing strength in automotive. Our pivot on Bellcan 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.

Speaker 2

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 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.

Speaker 2

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 would remain with me even now.

Speaker 5

Great. Thank you.

Operator

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

Speaker 7

Great. Thank you so much. Appreciate all the color. Encouraging to see the turn in, in the financial services end market, etcetera. It seems like we've heard some other things from others.

Speaker 7

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?

Speaker 2

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.

Speaker 2

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.

Speaker 2

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 sub segments underneath it are in good shape. Our business in Americas and Banking has sequentially done pretty well for 2 quarters in a row. So now we are starting to progressively take that take the same template to in the international markets so that we could replicate that success.

Speaker 7

Got it. Appreciate that. And then back on GenAI, 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 is not really having much of an impact?

Speaker 2

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 network 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.

Speaker 2

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.

Speaker 2

The productivity studies we did in 2023, that's 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 Genov 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 a pipeline as the old ones mature.

Speaker 7

Great. Appreciate all that color.

Operator

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

Speaker 8

Hey, thanks so much. Just wanted to follow-up on your answer to Brian's, I think, question on bookings. Rob, 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?

Speaker 8

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.

Speaker 3

Yes, sure. So I think fundamentally not much change in ACV, as you can imagine, with the deal duration going up from 1 point I mean or 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.

Speaker 2

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.

Speaker 8

Right. I heard that loud and clear. Thank you for that. Just my quick follow-up on the Q4 implied from the guide for the full year, imply some sequential deceleration? Any call outs there beyond seasonality?

Speaker 3

Yes. So you're right. It does at the midpoint of quarter 3 performance, it would imply a deceleration in quarter 4, but that is really seasonality right now as we see it.

Speaker 8

Terrific. Thank you for the time.

Operator

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

Speaker 9

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?

Speaker 9

Thank you.

Speaker 3

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 3 after a decline sort of a performance for if passed. So certainly, we are seeing an uptick and improvement from where we were. So certainly, there is an uptick in the numbers in the positive growth trajectory as we progress through the year.

Speaker 3

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.

Speaker 2

Just to add to that, I said this before, we don't see deterioration 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.

Speaker 9

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?

Speaker 2

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 this in this market, you could win using generative AI, You could increase your win rates. You could create new deals.

Speaker 2

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're talking about platforms and how many clients have onboard 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.

Speaker 2

I mean, today, a 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 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.

Speaker 9

Fair enough. Great results again. Thank you.

Speaker 6

Thank you very much.

Operator

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

Speaker 2

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

Operator

This concludes today's Cognizant Technology Solutions Q2 2024 Earnings Conference Call. You may now disconnect.

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Earnings Conference Call
Cognizant Technology Solutions Q2 2024
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