Q1 2024 Cognizant Technology Solutions Corp Earnings Call
Ladies and gentlemen, welcome to the cognizant technology solutions first quarter 'twenty 'twenty four earnings conference call.
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Speaker Change: Thank you.
Speaker Change: I would now like to turn the conference over to Mr. Tyler Scott Vice President Investor Relations. Please go ahead Sir.
Tyler Scott: 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 first quarter 2024 results. If you have not copies are available on our website cognizant dot com. The speakers. We have on today's call are Ravi Kumar, Chief Executive Officer, and Jonathan them all.
Jonathan: 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 the call today, we will reference certain non-GAAP financial measures.
Jonathan: That we believe provide useful information to our investors.
Jonathan: 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 like to call turn the call over to Robin. Please go ahead.
Robin: Thank you Tyler and good afternoon, everyone.
Robin: Thank you for joining our first quarter 'twenty 'twenty four earnings calls.
Robin: I'm pleased to report that during the quarter, we continued to make progress against the strategic priorities I laid out last year, when navigating a challenging demand environment.
Robin: We delivered revenue growth that exceeded the high end of our guidance range and.
Robin: And expanded our adjusted operating margin year over year.
Robin: One tree attrition improve again, and we ended Q1 with trailing 12 month voluntary attrition.
Robin: Technology services business at 13, 1%, representing a decline of 10 percentage points year over year.
Robin: And I would Nextgen program remains on track as we continue to focus on simplification and operational excellence.
Robin: Okay.
Robin: As we've all seen in recent earning results for our peer companies and the economy headlines okay.
Robin: The demand environment remains uncertain and geopolitical risks continue.
Robin: These dynamics are shifting near term spending priorities from discretionary projects towards projects that will drive near term cost savings and fund innovation for the future.
Robin: Now moving onto Q1 highlights we delivered revenue of $4 8 billion.
Robin: Which was sequentially flat.
Robin: And represented a decline of 1% year over year, both as reported and in.
Robin: Constant currency.
Robin: We expanded our adjusted operating margin by 50 basis points to 15, 1% as we continued to execute our cost optimization strategy and take out structural costs.
Robin: First to your first quarter bookings on trailing 12 month basis, we're at $25 9 billion, an increase of 1% year over year.
Robin: While there is good sustained traction did that large deals we saw softness in smaller deals in the range of zero to $10 million total contract value, reflecting the tight discretionary environment.
Robin: Our strong deal momentum in the quarter was evidenced by the fact, we signed eight deals each with T. C V of $100 million aboard comparator won't be afforded the prior year period.
Robin: We've also seen early green shoots in our efforts to diversify our large deals outside of North America and in quarter. One two of the eight greater than $100 million contracts, we signed were in the APG adhesion.
Robin: On a trailing 12 month basis, our book to Bill ratio of 1.3 X remains strong.
Robin: Which we believe provides a healthy backlog of opportunities to improve revenue performance over the next several quarters.
Robin: We continue to grow our pipeline for larger deals.
Robin: And make progress against our goal of increasing the value of large deals in our bookings.
Robin: From a segment perspective demand trends were consistent with what we have seen in recent quarters.
Robin: We saw sequential growth in health Sciences in communications media and technology.
Robin: I'll start by declines in financial services and products and resources.
Robin: We see several teams that we believe are helping drive demand for our services. These include clients continued investments.
Robin: In developing a modern technology infrastructure related to AI cloud and digital technologies data engineering.
Robin: In addition of hyper personalization and customer experience projects and the need to deliver innovation.
Robin: One example of infrastructure modernization. This quarter was an agreement we signed with a new client Mccormick <unk> company, a global leader in flavor.
Robin: Over the next five years, we will help transform and manage its global technology infrastructure.
Robin: Leveraging AI automated tools to enhance mccormick's employee and customer experience and improving productivity and driving financial savings for our client.
Robin: Another example of monetization of the hyper personalization is our recently announced new strategic alliance with Shopify and Google Cloud.
Robin: Under this alliance will help drive digital transformation and platform modernization, enabling global retailers.
Robin: And Brian just to unlock business value from generative AI.
Robin: We believe today's retailers must drive the modernization agenda, while investing in innovation to elevate their end users and customers experiences.
Robin: Earlier this week, we signed a strategic agreement with Telstra, Australia's leading telecom and technology company to elevate the software engineering capabilities and enhance the customer experience.
Robin: We believe this is a key strategic win in our PGM market.
Robin: And we believe they got AI tools to drive innovation enable more efficient software engineering.
Robin: <unk> operations, and decommission legacy systems to improve operational efficiency.
Robin: And support the employee experience by building them is superior engineering experience.
Robin: And as a fourth example, we extended our long standing relationship with Seattle Financial group during the quarter.
Robin: Under this expanded agreement, we will implement cloud and digital technologies to help CMO deliver more personalized digital and convenient solutions to their customers well.
Robin: We will also leverage SG&A AI technologies to help drive efficiencies across infrastructure applications enterprise software and engineering services.
Robin: Our clients' desire and need to drive innovation is evident in all our client interactions.
Robin: But funding for that innovation is being impacted by demand uncertainties in our clients on the end markets.
Robin: The timing of a return in discretionary spending remains unknown, but a thesis remains simple.
Robin: We plan to be prepared when it returns.
Robin: But continuing that organic investments in learning and development people platforms and innovation.
Robin: Putting those initiatives with inorganic capability enhancing investments.
Robin: On the client side data from our project level client feedback process for the first quarter of this year.
Robin: Sure the 39% improvement in our net promoter scores regarding our project delivery quality over the last two years.
Robin: We believe this is the result of a self reinforcing cycle, we created to tighter.
Robin: Client collaboration since the beginning of 2023.
Robin: Yeah.
Robin: As a testament to our long time focus on helping clients innovate during the quarter Fortune magazine recognized cognizant as one of America's most innovative companies in 2024.
Robin: Our focus on innovation is reflected in our Blue Board grassroots innovation initiative, which we launched a year ago in April.
Robin: Bluebird has already generated more than 130000 ideas from our associates.
Robin: <unk> thousand of which have been implemented with clients overall more than 220000 cognizant associates have been trained on glue board.
Robin: In addition, <unk>.
Robin: Global deemed cognizant of Google cloud.
Robin: Our 2024 breakthrough partner.
Robin: This is one of our industry's most distinguished awards I will elaborate more on Google cloud in a moment.
Robin: And just this month Linkedin recognized cognizant as a number two on its top companies 2020 for employer list in India, which is home to more than 250000 of our valued associates.
Robin: This repeated recognition is a reminder, that our focus on becoming the employer of choice is paying off in the country that is at the heart of cognizant success, India.
Robin: These client wins and industry recognition demonstrate one of our core differentiators have collaborative innovation.
Robin: And nobody else has the demand for innovation and higher than in journey II.
Robin: We have more than 450, <unk> client engagements and more than 500 additional opportunities in the pipeline.
Robin: We have seen increased demand for AI services across four key areas first.
Robin: Customer and employee experience as clients seek to deliver improved interactions through hyper personalization second.
Robin: Content summarization and insights to empower decision making.
Robin: Yeah.
Robin: Content generation.
Robin: And finally, leveraging Gen III Gen AI to accelerate innovation and technology development cycles.
Robin: We continue to see strong interest from clients as they assess proof of concept.
Robin: And the return on investment of these opportunities. These efforts are supported by our recently launched advanced.
Robin: Artificial intelligence lab in San Francisco, where we are investing instead of the odd chord AI to search aimed to position us at the forefront of innovation in our industry.
Robin: This builds upon a network of AI Innovation Studios in London, New York, San Francisco, Dallas and Bangalore.
Robin: Incidentally, our advanced artificial intelligence lab has already produced 53 patents with applications.
Robin: So many more pending this quarter alone we had seven new AI patrons approved and granted to us.
Robin: In quarter, one we announced a series of new partnerships simple innovations behind the strategy, we announced last year to invest $1 billion in generative AI over three years.
Robin: This includes a collaboration with Microsoft to infuse Jenny I into healthcare administration.
Robin: <unk> was our fastest platform delivers azure open AI service and semantic quinlan to provide access to <unk> within the <unk> user interface.
Robin: We are already progressing from proof of concept to the piloting phase and are seeing strong interest from some of our largest healthcare customers.
Robin: And last week, we announced another element of our expanded partnership with Microsoft We plan to leverage Microsoft Copilot, and cognizant advisory and digital transformation services to help our employees and enterprise customers operationalize generative AI and realized strategic business transformation benefits from this technology.
Robin: In addition, as a part of cognizant synapses Kitting program cognizant will trained 25000 developers of the use of glass copilot doubling the number of trained on the technology.
Robin: We are also collaborating with Nvidia to leverage our deep Lifesciences NDA domain expertise with Nvidia is pre trained industry specific generative AI models offer it as a part of buying the more they.
Robin: Through this collaboration we will provide clients access to a suite of model, making services, including pre trained models cutting edge frameworks and application.
Robin: Programming interfaces.
Robin: But also our clients an accelerated path to train and customized enterprise models using our proprietary data.
Robin: Leveraging ginnie AI infused models clinical researchers can do rapidly sift through extensive datasets more accurately predict interactions between drug compounds and created new viable drug development pathways.
Robin: We also expanded our partnership with Google Cloud will adopt Gemini for Google Cloud in two ways first by training cognizant associates to use Gemini for.
Robin: Software development assistance and second by integrating Jim Nice advanced capabilities within cognizant internal operations and platforms.
Robin: Using Jim Nye for Google Cloud cognizant developers will be equipped to REIT test and deploy code faster and more effectively with the help of AI public tools, improving the reliability and cost efficiency of building and managing client applications.
Robin: Over the next 12 months cognizant expects to Upskill more than 70000 cross functional associates on Google Cloud AI off thanks.
Robin: This is another milestone in our synapse initiative to Upskill 1 million individuals globally by 2026. Additionally, cognizant will work to integrate <unk> into its suite of automated.
Robin: Platforms and accelerators, beginning with the recently announced cognizant flow source platform for developers.
Robin: As a part of our social responsibility platform, we recently announced that since 2018.
Robin: Awarded $70 million in philanthropic funds to global skilling programs for underrepresented communities.
Robin: These 117 grants combined cognizant culture of continuous scanning our focus and prioritization on empowering diversity through technology, and the philosophy that AI and other advanced technologies can be a great equalizer for the future of work.
Robin: We intend to continue following and participating in the AI innovation cycles by investing in last mile platform infrastructure productivity studies in capabilities to enable better and faster integration into enterprise landscapes.
Robin: In the last 12 months at AI platforms gained significant traction as we on boarded clients onto noodle sky grade and flow source platforms to cover various phases of AI deployment cycles.
Robin: Investing in productivity studies, which dissects, the anatomy of skills and occupations and map VA exposure scores through different roles.
Robin: We have assisted our clients and realizing value in driving the scale in place of newer AI use cases.
Robin: As we continue to navigate this ongoing soft demand environment, we remain focused on investing in areas to help our clients.
Robin: Do you still have a cost of ownership bush productivity enhanced technology intensity and enable better adoption of newer technologies like AI to capture the current demand and be prepared for the future.
Robin: And we remain invested by <unk> and we remain differentiated by investing in industrial demand capabilities and platforms in select industries.
Robin: We also believe in organic opportunities remain an important element of our investing.
Robin: Investment strategy.
Robin: We continue to seek to expand and deepen capabilities diversify our business.
Robin: Including into industries, where we are underexposed and to improve our geographic mix for.
Robin: For example, we are pleased with the early traction of our Q.
Robin: Q1 acquisition of <unk>, an industry, leading service and our platform, which has significantly expanded our capabilities and credentials.
Robin: We already see a healthy pipeline of opportunities as direct result of this acquisition to cross sell within our exist.
Robin: Existing client base.
Robin: In closing I want a tank at 345000 employees around the world for their dedication to our clients and cognizant in 2024th we will keep working to increase our revenue growth.
Robin: The employer of choice in our industry and to simplify our operations.
Jason: Jason over to you.
Jason: Thank you Robbie and thank you all for joining us.
Jason: And to my six month as <unk> CFO I remain deeply impressed by the culture passion and client centricity across the organization.
Jason: I am pleased with our execution in the first quarter in what remains a tough economic environment.
Jason: Revenue exceeded the high end of our guidance range supported by our communications media and technology segments.
Jason: Sequential growth of our healthcare segment was also heartening.
Jason: Strong execution on our Nextgen program and disciplined cost optimization actions allowed us to deliver a 15, 1% adjusted operating margin representing 50 basis points of expansion year on year.
Jason: Looking ahead I am focused on several objectives in support of our broader strategic priorities.
Jason: First continue to strengthen our partnerships and collaborations across the organization to improve revenue growth.
Jason: Second improve our margin profile through our Nick Tim cost program.
Jason: And process enhancements.
Jason: Even impact by leveraging AI tools.
Jason: <unk> continued to invest in our people with a focus on supporting our company wide employee skilling programs.
Jason: Designed to train our employees on delay.
Jason: It is technology, including J&J.
Jason: And finally drive disciplined execution with a focus on maximizing value creation from our M&A investments and improving our large deal.
Jason: Management framework.
Jason: Fourth quarter revenue was $4 8 billion, representing a decline of one 1% year over year or a decline of one 2% in constant currency year over year performance include approximately 70 basis points of growth from recent acquisitions.
Jason: On a sequential basis revenue was flat from the third quarter.
Jason: Across global industry segments, and geographies, we have seen the uncertain economic outlook and volatile geopolitical environment, we on our client spending priorities.
Speaker Change: Just get their discretionary spend mute it.
Jason: These headwinds are more pronounced in financial services, which is more susceptible to higher interest rates.
Jason: Health Sciences customers are also being impacted by the inflationary environment and industry specific headwinds.
Jason: At the same time clients continue to prioritize spending that can deliver cost savings quickly and continue to fund investments in transformation and innovation.
Jason: For example, within our products and resources segment, we have seen resiliency among utility customers, where grid modernization remains a critical Brad.
Jason: This has been further supported by our 2022 acquisitions of utilization.
Jason: Which helps drive S&P as for cloud opportunities with the utilities customers.
Jason: In addition, we have seen positive trends amongst automotive customer in area like software defined vehicle.
Jason: And in our products and resources segment, where the convergence of it.
Jason: And operational technology is driving transformation and Digitization strategies.
Jason: Finally, we were pleased with the performance of our communications media and technology segment.
Jason: This does help offset discretionary spending pressure among our technology customers, which we believe.
Jason: Have been impacted by clients focused on reducing costs.
Jason: Now moving on to margins.
Jason: Our Nextgen optimization program has progressed well in helping us drive structural cost savings and simplification of our operations.
Jason: During the quarter, we incurred approximately $22 million of costs related to this program.
Jason: This negatively impacted our GAAP operating margin by approximately 50 basis points. Excluding this impact adjusted operating margin was 15, 1%, which benefited from savings related to our Nextgen program and the depreciation of the Indian rupee.
Jason: Both our GAAP and adjusted tax rate in the quarter were 24, 8%.
Jason: Q1 diluted GAAP EPS was $110 in Q1, adjusted EPS was one point $12.
Speaker Change: Now turning to cash flow and the balance sheet.
Speaker Change: DSO of 78 days was up one day sequentially and increased five days year over year, primarily driven by our business mix.
Speaker Change: Free cash flow in Q1 was $16 million and included the impact of previously disclosed $360 million payment made to Indian tax authorities.
Jason: As well as the payout of bonuses that were accrued last year.
Jason: As a reminder, the tax payment to the Indian tax authority.
Jason: It was required to proceed with the appeals process relating to our 2016 tax matter.
Jason: The appeal is ongoing and final amount refunded to cognizant or view to tax authorities will be determined at the end of the process.
Jason: We also returned $284 million.
Jason: To shareholders, including $133 million through share repurchases and $151 million through our regular limit.
Jason: In addition, we completed our acquisition of <unk> in January for a total consideration net of cash acquired of approximately $420 million.
Jason: These factors drove quarterly in cash and short term investments.
Jason: $2 2 billion.
Jason: Our net cash of $1 6 billion.
Jason: In 2024.
Jason: We continue to expect to return over $1 billion to our shareholders, including at least $400 million through share repurchases and 600 million through regular dividends.
Jason: We will also continue to evaluate inorganic strategic investment opportunities.
Jason: To help accelerate our growth profile and expand our capabilities and diversify our portfolio.
Jason: Now, let me speak about the forward outlook.
Jason: For the second quarter, we expect revenue to be flat to growth of one 5% sequentially.
Jason: In constant currency.
Jason: Year over year. This implies a decline of two 5%.
Jason: Two a decline of 1% in constant currency.
Jason: On a reported basis. This translates to a revenue of $4 75 to $4 eight 2 billion, representing a year over year decline of two 9% to decline of one 4%.
Jason: For the full year, we continue to expect a revenue decline of 2% to a growth of 2% in constant currency on a reported basis. This translates to revenue in range of.
Jason: $18 nine to $19 7 billion and a decline of two 2%.
Jason: Two a growth of one 8%.
Jason: Reflecting our latest exchange assumptions.
Jason: The guidance, we are providing as of today assumes up to 100 basis points of inorganic contribution.
Jason: We see an active pipeline of acquisition opportunities and we continue to evaluate asset for the right capabilities to support our strategic priorities.
Jason: Our next Jake program remains on track and there are no changes to our assumptions regarding the program, we still intend to reinvest the majority of Nextgen savings in our growth opportunities in 2024 and beyond.
Jason: Moving on to adjusted operating margin. We are pleased with our Q1 performance and we continue to expect the full year to be in the range of $15 three to 15, 5%.
Jason: For Q1 for Q2, we expect adjusted operating margin will be in a narrow range.
Jason: Q1's number with Nextgen cost savings and improve utilization being offset by initial negative impact from the ramp of large deals and the revenue mix.
Jason: I am pleased with our sequential improvement in utilization during the quarter and we are sharply focused on driving further improvements to support margins next quarter.
Jason: For the full year, we anticipate net interest income of approximately six 2 million, which compares to $40 million previously, but I'm, a little reflecting updated interest rate and cash balances assumptions.
Jason: Our adjusted tax rate guidance of 24% to 25% remains unchanged.
Jason: Our full year free cash flow guidance is also unchanged and we continue to expect it will represent 80% of our net income.
Jason: This includes the previously discussed.
Jason: The negative impact of $360 million payment made with Indian tax authorities in relation to our ongoing appeal of our 2006 tax measure.
Jason: Our guidance for shares outstanding is unchanged at approximately $487 million.
Jason: This leads to our full year adjusted earnings per share guidance of $4 50 to $4 $6 unchanged from our previous guidance.
Speaker Change: With that.
Speaker Change: <unk> open the call for your questions.
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation.
Speaker Change: Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: In the interest of time, we ask that you limit yourself to one question and one follow up.
Speaker Change: One moment, please while we poll for questions.
Speaker Change: Thank you.
Speaker Change: Our first question comes from the line of Bryan Bergin with TD Cowen. Please proceed with your question.
Bryan C. Bergin: Hi, guys. Good afternoon. Thank you I guess just start can you comment on what areas performed better than your expectations here on growth in <unk> versus your guide and then as we see an implied sequential improvement in the coming quarters at least at the midpoint, how do we reconcile that with some of the commentary about the unknown timing of.
Speaker Change: Discretionary recovery I'm curious, if it's kind of a an improvement driven by the ramp of the large deals and easier comps or if you're actually forecasting some improvement in that discretionary in that decision making environment too.
Speaker Change: Thank you Brian and thank you for that question. This is Ravi here.
Ravi Kumar Singisetti: Let me give it a try him that I will ask Jeff to add in.
Speaker Change:
Ravi Kumar Singisetti: You know the way we look at our guidance range is based on the visibility we get to the middle range.
Jeff: And then.
Jeff: We'll look for what's the upside available.
Speaker Change: Outside available is based on large deal momentum.
Speaker Change: Al.
Speaker Change: That is.
Speaker Change: 30 to 40 basis points of M&A, which fed yet to do because this guidance includes.
Speaker Change: 100 basis points of M&A.
Speaker Change: And the committed spend for many of our clients.
Speaker Change: Sometimes you can get an upside on that if you ramp up for that.
Speaker Change: So that's the starting point.
Speaker Change: Why did we put this in a broad range with root and a broad range normally at this point in time, you would have 200 basis points.
Speaker Change: The range, we have 400 basis points of range because the market is sluggish when we are doing well, we performed well in quarter one.
Speaker Change: The market is sluggish so we kind of kept the broader range.
Speaker Change: How do we see discretionary today, we don't see discretionary changed since we spoke to all of you last quarter such remains the same.
Speaker Change: It Hasnt changed.
Speaker Change: Now, let's come to the performance of quarter one.
Speaker Change: If you have noticed.
Speaker Change: The biggest drop in discretionary.
Speaker Change: It has been in financial services in the past.
Speaker Change: And that has been for us as well as for the sector and the industry.
Speaker Change: If you have noticed the sequential drop from quarter four to quarter. One for US is only $10 million in banking financial services and insurance and we are seeing green shoots in BFS, which is 60% of BFS hi.
Speaker Change: Healthcare is doing well we have managed to.
Speaker Change: On a strong.
Speaker Change: Portfolio with sequential growth.
Speaker Change: You've heard about communications CMT, it's been phenomenal run for US we have had.
Speaker Change: Year on year growth as well as sequential growth that is backed by.
Speaker Change: Some large deals we won.
Speaker Change: In the last 12 months.
Speaker Change: This is also a quarter that we have eight large deals.
Speaker Change: If you compare that with quarter one of last year. It is for large deals last year.
Speaker Change: And these all of the eight five expansion plus renewal.
Speaker Change: That gives me a lot of confidence about the fact that.
Speaker Change: We are continuing to expand.
Speaker Change: On the large deals the large deal momentum continues of course, there is softness.
Speaker Change: Zero to 10 zero to $20 million of kind of deals which had discretionary in EMEA.
Speaker Change: So that's broadly Hawaii, Hawaii ship, it and if I have to add.
Speaker Change: And manufacturing and product that is pretty stable.
Speaker Change: So.
Speaker Change: This is this.
Speaker Change: This is hao.
Speaker Change: Let's see how we got to the guidance says this is how we performed in.
Speaker Change: Quarter. One we have also seen expansion of our deals outside of Americas to Asia Pacific, We have two deals or the age which have actually come from Asia Pacific you've already seen the announcement, we did with Telstra.
Speaker Change: Which is a part of our release Jonathan.
Jonathan: Yes, no bandwidth.
Jonathan: If you have any follow ups, where we can take.
Jonathan: No that was very detail I appreciate that.
Jonathan: Thoughts on margin, so just kind of unpacking the margin contribution with the gross margin contraction year over year, but the strong SG&A reduction is that a trend. We should expect that will continue as you move through 24, just given the large deal ramping and just maybe John you talk about your comfort level and reducing the SG&A profile and Nextgen stuff.
Jonathan: So.
Speaker Change: There will be puts and takes every quarter.
Speaker Change: As you very well know, but directionally SG&A should continue too so sure.
Speaker Change: Right momentum around improvement.
Speaker Change: But not so much because we have taken.
Speaker Change: Large action in 'twenty three so you would see the fag end of our Nextgen program I think through the SG&A line. During the course of the rest of the year, but it won't be up.
Speaker Change: As large an impact or a big number compared to 2023.
Speaker Change: Sure.
Jonathan: That is the view on next year.
Speaker Change: I would say the only thing I would add to what Jeff said is.
Speaker Change: SG&A also has <unk>.
Speaker Change: Rich with growth so if growth comes back.
Speaker Change: You will see leverage on SG&A.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line Ken.
Ken: Hong with J P. Morgan.
Ken Hong: Please proceed with your question.
Ken Hong: Hi, Thanks, a lot just following on Bryan's question, there just thinking about bookings ahead in the second quarter, maybe second half as well.
Ken: Any callouts there around expectations.
Ken: New deals or logos versus renewals short versus large, but what do you see on the horizon there.
Speaker Change: Thank you so much for that question.
Speaker Change: We continue to see good large deal momentum.
Speaker Change: Through the whole of 2023.
Speaker Change: Whatever we did in 2023 is helping us on ramp ups this year.
Speaker Change: We will continue to build out for the rest of the year.
Speaker Change: This has been a good quarter in fact, if you just see the announcements we made with clients as a part of our earnings release, you will notice that the number of announcements have also gone up so I'm very pleased with the progress I'm also pleased with the fact that we have now started to expand that into.
Ken: Europe and Asia Pacific.
Ken: The softer nature of small smaller deals between zero to 10, and I would say zero to 15 or $20 million that hasnt changed much since we spoke last and it's hard to predict how that's going to look like for the rest of the year.
Ken: I do see some improvement some green shoots in it and that is reflected in our financial services via for Si.
Ken: Results.
Ken: But we showed we are continuing to watch that.
Ken: We're very keenly.
Ken: Essentially most of the large deals are on cost take out when the consolidation productivity.
Ken: Efficiency kind of deals.
Ken: And we are very very excited about the fact that that momentum is going to continue for us.
Ken: Those are the diesel market office and.
Ken: We seem to be winning winning well on them.
Ken: The of course, the period because of the because these large deals or cost takeout deals the period of the duration of those deals is longer.
Ken: So you will see realization of revenues over a period of time, but it is also sticky and it gives you an opportunity to create.
Ken: Better fulfillment through managed services.
Ken: So what are the other things we have.
Ken: Were tracking internally is annual contract value.
Ken: In addition to the total contract value so that we stopped at all how much is it contributing to this year.
Ken: What will be exciting for us as we now have runway from 2023 into 2024 and going into 2025, we will have a runway from <unk> 24.
Ken: Yeah.
Speaker Change: Great No complete answer thank you.
Speaker Change: Thank you. Our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
Bryan Connell Keane: Hi, guys just wanted to ask about pricing in the environment right. Now demand is low wondering if youre seeing pressure on the rate card in the industry right now and any kind of bottom.
Speaker Change: In sight for that.
Speaker Change: Yes, Brian Thanks for the question this is Jeff.
Speaker Change: So fundamentally the current environment is there.
Speaker Change: Consolidated consolidation of spin.
Speaker Change: Cost.
Speaker Change: Management improvement in the productivity and so on and so forth. So this is the characteristics of the deals that we are seeing in the market by design these deals come with.
Speaker Change: Or an expectation for.
Ken: For superior pricing than what it what is the pricing which is inherent in the current world. So yes. There is a there is a downward pressure on pricing, but it is nothing out of that one would expect in the current demand environment, we are not seeing out of ordinary behavior in the market.
Ken: As we as we compete in.
Ken: And I think it's a fed play from from that expectation standpoint.
Speaker Change: Got it got it and then as my follow up you mentioned that normally you guys would we narrowed the range for the revenue guide, but you've kept it due to some of the uncertainties.
Speaker Change: What would need to happen for you guys to get towards the high end of the range would you need some of that short term demand work to come back and what it even come back fast enough to hit hit the P&L to impact this fiscal year to get up towards the 2% constant currency revenue ranch.
Speaker Change: Sure so so.
Ken: So overall.
Ken: The reason for four large.
Ken: Larger range is as follows.
Ken: As Ravi mentioned, we start with the with the mid point and we look at what is the expected outcome that one can get to.
Ken: Then we see the.
Ken: We see the range of possibilities now if you see our own <unk>.
Ken: Guidance visa with quarter, one to quarter two that is an improvement in the guidance range that we gave and we are giving in quarter two versus quarter one.
Ken: And that also means that we will grow sequentially in quarter two.
Ken: So overall, we are making good progress, but if you see the demand environment remains.
Ken: Reasonable it up no different than what we spoke in the beginning of the year and hence there is a sort of uncertainty in the environment that we're factoring in as we look at our own performance as well as well as we look at the environment surrounding us.
Ken: Now what can what can help us go towards the higher end of the range.
Ken: A few things and one or more of this.
Ken: One is.
Ken: There is some improvement in discretionary spending in the later part of the year.
Ken: And as you know.
Ken: As Ravi mentioned earlier, a lot of things when we win a large deal that is a committed business and there is a right to to go after sort of business, which is not committed but if you fulfill well if youre if youre delivery is good.
Ken: Nature legal after that that the upside to the committed business. The second the third is <unk>.
Ken: You spoke about the inorganic component of our guidance we.
Ken: Maybe 30 to 40 basis points.
Ken: Potential.
Ken: Two two.
Ken: Execute on and that could mean in the second half that could get added to the portfolio because of yoga and only one acquisition into since the beginning of the year and then fourth is sometimes a rebates kind of deal which comes with a large volume of revenue.
Ken: Getting.
Ken: <unk> ramped up at a relatively faster pace than the normal ramp up that you'll see in a deal. So one or more of these could be at play right. Now we are we are.
Ken: We have remained.
Ken: <unk> remained true to our original guidance, we will narrow the range. When we meet you nextgen, but right now considering all of this hitting where we added in the year. We thought we'll keep the range same as it was in the beginning of the year.
Speaker Change: Thanks for the explanation and thanks for taking the question.
Speaker Change: Thank you. Our next question comes from the line of Jonathan <unk> with Guggenheim Securities. Please proceed with your question.
Jonathan: Brilliant thanks for taking our question.
Jonathan: <unk> given you a call out in your prepared remarks to peer commentary can you talk through any sort of deal leakage or cancellations delays you may have seen in recent months and if so across which types of projects or verticals are you seeing this in.
Speaker Change: Yes so.
Speaker Change: Maybe let me start and get jump into add.
Speaker Change: Discretionary has to be earned every year.
Speaker Change: So the discretionary it doesn't come back you could call it as structurally leakage if I may.
Speaker Change: But it isn't as much.
Speaker Change: It sounds like somebody else is taking that away.
Speaker Change: So discretionary is always.
Speaker Change: The.
Speaker Change: The unknown part if I may.
Speaker Change: On the <unk>.
Speaker Change: When I started the year at 2023.
Speaker Change: We had.
Speaker Change: Leakages, because when there was a consolidation somebody else was winning it and not us.
Speaker Change: That isn't happening anymore I mean, we are.
Speaker Change: Very stable with our clients.
Speaker Change: Clients are continuing to invest in customers, there's no company specific challenges.
Speaker Change: Which have led to leakage or there is a potential of leakage, we see that as a very stable platform in fact.
Speaker Change: Net promoter scores with clients is continuing to scale up every quarter since 2023.
Speaker Change: Our attrition rates have fallen significantly that 10 percentage points, we've dropped Y on Y in this quarter that is an important part of what clients Trust provide us like us. So there is no structural leakage if I may.
Speaker Change: The discretionary which is.
Speaker Change: The behavior of discretionary spend.
Speaker Change: Leaves too is not coming back sometimes coming back in short spurts coming back in a delayed visit.
Speaker Change: Those are the ones you would be.
Speaker Change: It would be watchful about.
Speaker Change: So that's broadly how I see it I mean, most of the managed services deals we are winning both with existing clients new business as well, some which are proactively bid.
Speaker Change: On the winning side, we are mostly on the winning side in the last I would say 15 months or so.
Speaker Change: Yes.
Speaker Change: If I just.
Speaker Change: Are the perspective of the deals that we have won and lost.
Speaker Change: Let's say 18 months.
Speaker Change: Yes.
Speaker Change: Typically you would see that.
Speaker Change: Compared to what you expected at the time when we won the deal.
Speaker Change: Quickly, we'll go sometimes faster because you are fulfilling better you are executing better than what you initially thought or customer thought and sometimes it will be slower because there are more change management issues they need to deal with.
Speaker Change: Et cetera, So I think we are we.
Speaker Change: We are evenly placed VW the pace firstly, the expectation I don't see anything out of ordinary there will always be one of the deals that.
Speaker Change: That is taking a little longer time to ramp up because there is some change in the client organization, but nothing that is out of volatility.
Speaker Change: On a win versus execution.
Speaker Change: Operator.
Speaker Change: That's great color. Thank you.
Speaker Change: Thank you. Our next question comes from the line of Jason Cooper Berg with Bank of America. Please proceed with your question.
Speaker Change: Thank you guys I just wanted to start on Jan AI I kind of had a two part question there because I know Rob you mentioned.
Speaker Change: G Nai and accelerating software development a couple of times just curious what your longer term views are on all of the human software developer will change as Jen AI tools potentially do more of the actual coding.
Speaker Change: And then just you mentioned 450 active client engagements can you give us a sense of the average project size there. Thank you.
Speaker Change: Thank you Jason.
Speaker Change: <unk> hundred 50, <unk>, let me start with the first one the full 50 yard client engagements. We've come we've come a long way if you remember in quarter. Two 2023, we spoke about 100 and now we have.
Speaker Change: 400 early client engagements and these are some very shocked prototype rapid prototype kind of kind of deals.
Speaker Change: 500 of them more than 500 of them, we have in the pipeline and.
Speaker Change: The the thing to watch for now is how many of these will go into skewed execution.
Speaker Change: For our clients and that's where that's where the monetization opportunities up.
Speaker Change: So we are continuing to work on it.
Speaker Change: There are broadly.
Speaker Change: <unk>, we are investing on.
Speaker Change: Alright, three first follow the innovation cycles of AI.
Speaker Change: Second.
Speaker Change: Bill the last mile infrastructure, so that the raw power of AI can be made production grade enterprise grade for our clients that means last mile infrastructure related to managing AD platforms orchestration.
Speaker Change: In case of AI. Unlike other discontinued is how do you improve the accuracy of the models.
Speaker Change: How do you create explainable because this is a black box. So you did explain a bit how do you create observer ability.
Speaker Change: So all of those platforms, we have built and we have announced is the last mile infrastructure I kind of referred to.
Speaker Change: It helps us to take the drop over and make it production related the second thing. We are investing on is productivity studies I mean, what does AI due to different roles and different operations of different industries, and how do we make embrace of AI much faster.
Speaker Change: Larger cohorts.
Speaker Change: And we partnered with Oxford Economics, and we created templates for every industry every role.
Speaker Change: So that we can we can do it and ultimately of past as I call. It and then we then start to figure out how to how to create a much faster at a much broader embrace and enterprise. So this is the cladding for for the future that we believe.
Speaker Change: Enterprises are going to be our.
Speaker Change: People plus machine endeavor.
Speaker Change: So what does it do to our operating model.
Speaker Change: <unk> as I call it.
Speaker Change: It of course changes the productivity of our developer.
Speaker Change: When the cloud came into picture a couple of years ago, it flipped that productivity.
Speaker Change: Used as a developer you spend very little time.
Speaker Change: On the pumping, but you'll spend a lot of time on innovation you spent a lot of time building.
Speaker Change: This is a second shot at improving developer productivity.
Speaker Change: And not actually spending time on the potato patch not actually spending time on things, which a machine can ride, but you could actually you could actually put a developer productivity.
Speaker Change: Productivity on innovation. So this is a second shot at it and.
Speaker Change: And I will believe this is this.
Speaker Change: This is.
Speaker Change: Probably more disruptive than what the cloud that.
Speaker Change: And we think what will happen is this will lead to reducing backlog improving.
Speaker Change: The throughput of <unk>.
Speaker Change: Throughput to our clients increasing the second density at a lower cost.
Speaker Change: So I am I.
Speaker Change: I always believe that this is going to be opportunities in attractive, we can pivot ourselves well and the opportunity is about creating the tech intensity.
Speaker Change: Every industry it doesn't have that intensity. So we have this unique opportunity to create that intensity at a lower cost and lower entry barrier. I mean, you don't need to be a developer to embrace software cord, so which means that <unk> goes down. So we think we have a bigger opportunity than before.
Speaker Change: As long as we can and.
Speaker Change: Brace this into our own landscape and equally basically use cases for our clients to address it so I see this as a uniquely.
Speaker Change: A uniquely big opportunity for companies like cognizant.
Speaker Change: That's good color and then just a quick follow up you mentioned eight large deals you won in the quarter $100 million plus PCB I think are those expected to contribute materially to 2020 for revenue and if so where they already contemplated in your original revenue guidance.
Speaker Change: Yes.
Speaker Change: The visibility we have so far on the deals we have won we have baked it into our.
Speaker Change: Into our guidance range.
Speaker Change: But.
Speaker Change: There are some you know this.
Speaker Change: The deals we won last year's have better throughput this year and the deals we win win this year, we'll have a better throughput for the second half of this year and in the <unk>.
Speaker Change: Sure.
Speaker Change: In the same sustained manner, we will exit into 2025 with the tail velocity.
Speaker Change: So.
Speaker Change: The first year is normally is lower than the second year and by the end of the second year you get to you get to the run rate you have to.
Speaker Change: Anomaly.
Speaker Change: Spiral the deals has changed earlier produced with lower now three five years or plus.
Speaker Change: Because large deals now come on the cost takeout model, unlike transformation related to them.
Speaker Change: Flight transformation related large deals.
Speaker Change: But once we start to execute and get the bid versus did in a good shape.
Speaker Change: Then the committed spend will then slip over the new spend because you're already in the group. So that's what we're betting on Israel I mean, once you start to perform well you have the license to take more from from our clients.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from the line of James Fawcett with Morgan Stanley. Please proceed with your question.
James Eugene Faucette: Thank you so much I wanted to ask a couple of follow up questions you kind of laid out.
James Eugene Faucette: What needed to happen, particularly on a return of discretionary deals in order to get to the high end of your guidance range.
Speaker Change: Firstly.
James Eugene Faucette: What would be the scenario in your mind would end up with you towards the lower end of that guided range. I mean are we looking at incremental push outs and delays of of starting of deals or I'm, just trying to get a gauge there on the on the bottom end.
Speaker Change: Yes, sure. So if you do that mathematically I'm sure you already look back those numbers and those numbers really mean.
Speaker Change: A very flattish performance for rest of the year and a negative performance that typically happens in quarter four given the furloughs, so thats the sort of.
Speaker Change: Trajectory, we are looking at.
Speaker Change: If market really.
Speaker Change: And then our performance.
Speaker Change: Show any positive progress.
Speaker Change: Got it got it Okay and then.
Speaker Change: There's been a lot of talk about the transformational.
Speaker Change: Or discretionary deals and more focus on transformational and it seems like that that's directly impacting your bookings in the types of things that you were able to put in into the pipeline right now, but is that having any impact on what youre doing from a hiring or or skilling perspective, and how should we.
Speaker Change: About that as we go into the into next year.
Speaker Change: Kind of environment persist or are there other considerations, we should be taking into account in terms of how you will you'll be hiring them and what impact that could have on on profitability et cetera.
Speaker Change: Yes.
Speaker Change: Discretionary is small projects nominee and smaller projects.
Speaker Change: <unk>.
Speaker Change: You have a different kind of Panama.
Speaker Change: Was.
Speaker Change: Large deals where you have.
Speaker Change: Much healthy permanent if I may so the discretionary nominally when discretionary comes in you hired more lateral highest with experience.
Speaker Change: And when you do.
Speaker Change: Deal with managed services deals you hired the pyramid.
Speaker Change: Okay fixing that.
Speaker Change: So that's probably how it is if you have noticed we improved.
Speaker Change: Utilization from quarter four to quarter, one so that gave us the extra runway and we'll continue to sharpen our utilization so that gives us the continued extra runway.
Speaker Change: To grow.
Speaker Change: Keep the engine agile enough to hire the senior people you need.
Speaker Change: And repaired the people from existing teams into newer projects as that happens I think we have that agility now on our fulfillment engines are very pleased not just about the how we attack on the demand environment. We are very pleased with what we have done on the utilization what we have done on.
Speaker Change: Fulfillment fulfillment of Av.
Speaker Change: Deals we have.
Speaker Change: We have one as well as.
Speaker Change: Getting prepared for the discretionary spend.
Speaker Change: Eventually it comes back.
Speaker Change: So.
Speaker Change: The engine is as agile enough.
Speaker Change: The current demand situation as well as if there is a spike in the demand.
Speaker Change: We are well placed to seize those opportunities.
Speaker Change: That's great I appreciate that incremental color.
Speaker Change: Thank you. Our next question comes from the line of Moses T. P. <unk> with Wedbush Securities. Please proceed with your question.
Speaker Change: Thanks, Marcia catch rate from Wedbush.
Speaker Change: Robbie Congrats on strong execution in a pretty tough environment.
Speaker Change: I just wanted to go back to the booking kind of metrics. One three times book to Bill is there a way to kind of break it down by new logos to renewals and extensions and maybe compared to a loss here yeah.
Speaker Change: Yeah.
Speaker Change: As you mentioned PCB I think you said bookings on a 12 months basis were up 1% is there a way to kind of get the same comps for <unk>. Thanks.
Speaker Change: Okay.
Speaker Change: Tim will achieve good to hear from you.
Tim: I would say so we don't have that visibility we have not published that externally.
Speaker Change: What we track is.
Speaker Change: Multiple tanks, we track.
Speaker Change: The total contract value with the size of the deals the duration of the deals.
Speaker Change: How much of that translates to <unk> for this year at ECB for the next year. So for the first for the first 12 months or the next 12 months.
Speaker Change: And.
Speaker Change: We also track the pyramid attached to it and the capability set needed so.
Speaker Change: I pretty much have that information to rely on so that we can.
Speaker Change: Can get a replay fulfillment engine intact as well as forecasted better. So it is something we have we have not published that externally, but keeping a constant track on it I mean, the book to Bill ratios Moshe you know this.
Speaker Change: It also depends on what are the duration of the deals I'm sure. You you asked this question because of that.
Speaker Change: The duration of the deals.
Speaker Change: When you take large deals that go up when you take small deals of course down so the book to Bill has a meaningful impact between the two so one of the other metrics. We have internally tracking is SCV. Because then that gives us what is the incremental revenue will get for the for the current calendar year.
Speaker Change: So it's a combination of things you have to put together.
Speaker Change: To get to.
Speaker Change: Get to a point, where you know how much is it going to incrementally contribute to cloud.
Speaker Change: Okay, and then is there a way to get that mix.
Speaker Change: New logos to renewals or that's also a kind of internal and you don't disclose that.
Speaker Change: So we don't we Havent had a very healthy.
Speaker Change: Our new logo.
Speaker Change: New logo.
Speaker Change: Program Moshe since I've come on board, we have a.
Speaker Change: Specific program for new logos.
Speaker Change: We also have a program to ramp new logos to say $50 million to $100 million.
Speaker Change: Client annual spend of $100 million, who could be another client.
Speaker Change: Opening new logos is one thing, but ramping them up to a $50 million accounted as another pain. So we have put blood swim lanes with very very active.
Speaker Change: In our journey, we also have a target list of new logos.
Speaker Change: Geo based.
Speaker Change: And.
Speaker Change: We have kind of separated back from the mining engine because they are hunting engine has to the hunting engine is humming pretty well.
Speaker Change: And there is a transition to remote mining engine as the.
Speaker Change: The annual annual size of those accounts.
Speaker Change: Changes.
Speaker Change: What we have not done is we have not we have not expressed this to a market.
Speaker Change: How many new logos, we are opening and we have not created that.
Speaker Change: That information pack in the external market, but internally we have a very.
Speaker Change: Very pleased with.
Speaker Change: Where we added new logos.
Speaker Change: We are ramping it up.
Speaker Change: Understood. Thanks Robyn.
Speaker Change: Thank you. Our next question comes from the line of Jamie Friedman with <unk>. Please proceed with your question.
James Eric Friedman: Hi, Thank you for sneaking me in here.
James Eric Friedman: Jonathan I, just wanted to make sure I'm understanding how you're thinking about the shape of the year.
James Eric Friedman: If I take the midpoint of your Q2 sequential.
James Eric Friedman: And if.
James Eric Friedman: If I make the assumption that the Q4 is flat.
James Eric Friedman: And I know in most years, its not but just for simple math getting to about two 5% sequential in Q3.
Speaker Change: Does that sound about right to you.
Speaker Change:
Speaker Change: Don't have the medicine in front of me, but I mean qualitatively I would agree with you that will have to have a strong quarter, three and a flattish quarter for for us to get to the towards the higher range higher end of our range for sure.
James Eric Friedman: Okay.
Speaker Change: And then.
James Eric Friedman: Ravi you I think used the word green shoe in the context of the DSS letters in BFS.
James Eric Friedman: And it's the first time I've heard your company or most companies use that language with those three letters in years.
James Eric Friedman:
Ravi Kumar Singisetti: Can you elaborate on that.
James Eric Friedman: Yes.
James Eric Friedman: The context was if you look at the last few quarters.
James Eric Friedman: The sequential drop in BFS.
James Eric Friedman: You would notice that the sequential drop is relatively smaller within quarter four quarter. One so something has happened in between.
James Eric Friedman: So in the last 12 months, we have worked on reorganizing.
James Eric Friedman: Beer for Si.
James Eric Friedman: Vertical.
Speaker Change: We have.
Speaker Change: Energized the teams with.
James Eric Friedman: Some new hires.
James Eric Friedman: We have we have now.
James Eric Friedman: Exceptionally good list of offerings.
James Eric Friedman: I mean, I now have an offering list for banking banking and financial services.
James Eric Friedman: Insurance will open doors on Fintech.
James Eric Friedman: We have taken AI has created small discretionary spend opportunities for ourselves.
James Eric Friedman: Just to give you a sense in insurance, we have quite a few projects.
James Eric Friedman: So we have a variety of things happening and I'll give you one or two examples in insurance that is mainframe modernization, which is important.
James Eric Friedman: Patent initiative.
James Eric Friedman: In P&C insurance that is digitizing the distribution network, which is primarily agents and platforms.
James Eric Friedman: The group benefits and the policy admin platforms are going through significant change.
James Eric Friedman: In banking and financial services.
James Eric Friedman: <unk> service is going through significant transformation. So we have an offering.
James Eric Friedman: It is an offering which is bundled with AI.
James Eric Friedman: Fraud detection.
James Eric Friedman: And prevention, which is an important opportunity.
James Eric Friedman: The regional banks are going through massive cost take out we have an offering out there. So I think we now have I mean, there is there is a market reality of what whats happening in BFS Si.
James Eric Friedman: And that is the organizational strength to counter that market reality.
James Eric Friedman: So we had a stable shop with all of the offerings in place with the right teams and we are climbing up the ladder. We're trying everything we can in a tough market.
James Eric Friedman: Hey, Jeremy.
Jeremy: You're welcome.
Jeremy: Yes, sorry, I mean, I'd just add to what I just said before is.
Speaker Change: I want to go back to what I say.
Jeremy: In response to an earlier efficient thing our expected.
James Eric Friedman: Euro.
James Eric Friedman: Lately outcome is what we see at the midpoint of the guidance and then we see the range of possibility on the both ends and when you specifically asked I was reacting to the range of possibility on that but I just want to.
James Eric Friedman: Reflect accordingly, so that respond to you.
James Eric Friedman: And its completeness.
Speaker Change: Thank you so much.
Speaker Change: Thank you.
Speaker Change: This concludes today's cognizant technology solutions Q1, 'twenty 'twenty four earnings conference call you.
Speaker Change: You may now disconnect.
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