Q3 2024 Cognizant Technology Solutions Corp Earnings Call
High end of our constant currency guidance range revenue of $5 billion grew three 5% sequentially.
In constant currency, including approximately 150 basis points of inorganic contribution from our recently completed acquisitions.
Year over year revenue grew by approximately two 7% in constant currency, including approximately 200 basis points of inorganic contribution.
Adjusted operating margin of 15, 3% improved sequentially driven by strong cost discipline. Despite investments in Bell, Canada partial quarter impact from our annual Merit cycle.
Adjusted EPS grew approximately 7% year over year, our fourth consecutive quarter of year over year growth, bringing our year to date EPS growth to approximately 5%.
Now let me provide an update on the progress we made against our strategic priorities.
First accelerating growth.
Our improving momentum was driven in the quarter by growth in our two largest segments health Sciences, and financial services and contribution from our recently completed acquisitions.
Health Sciences increased seven 6% year over year in constant currency backed by a strong and differentiated offerings.
Financial services returned to year over year growth driven by strong execution and passion return of discretionary spending.
And we maintain that large deal momentum signing six deals each with a total contract value of $100 million of malls.
Year to date, we signed 19 such deals compared to 17 during all of 2023.
We are excited about the all round sustained momentum in large deals across industries and service lines I'm, particularly pleased with the traction we're getting in digital engineering infrastructure and cloud services.
Security orchestration.
But enhanced cyber resilience and risk management. The student is designed to help improve cyber security resilience by integrating and orchestrating point cyber security solutions across the enterprise.
We are also infused AI through our <unk> product suite, helping improve end user productivity by at least 30%.
Looking across our enterprise, we now have more than 1000 Gen. II early engagements compared to about 750 at the end of the second quarter.
We're seeing significant traction in four categories of use cases, starting with tech for Teck.
Or applying AI to software development cycles, which had the highest velocity.
Followed by customer and employee experience content aggregation on the early use cases and content generation.
We see broad based demand across industries, including fraud detection credit risk assessment, and regulatory compliance and financial services drug discovery medical imaging and transcription and.
Healthcare and design optimization, and predictive maintenance and manufacturing.
Partnerships and strategic acquisitions are also important lever as and our strategy to accelerate growth.
First an update on our partnerships.
I am excited about our recently announced relationship with Palo Alto networks through which we will deliver AI driven cyber security capabilities and services for enterprises across industries.
We see significant opportunities to leverage AI to keep pace with evolving cyber security threats and improve overall levels of security.
Yeah.
We are confident that our expanded breadth of portfolio of services strengthened by our domain capabilities talent and partner ecosystem is more resilient and healthier than when I joined cognizant nearly two years ago.
And I believe we are in a strong position to capture the growing and developing area of opportunity for ourselves and our clients.
In closing a few weeks ago, we brought together over 200 clients to what America's discovery event in Austin, Texas to showcase the strength of <unk>.
Platform's capabilities and offerings, they evens buzzard enthusiasm was incredible.
We were excited about the early momentum of large deals with AI powered productivity of numerous initial products.
I believe is the AG productivity, we will evolve from task automation to business process to business model transformation, leading to new products and revenue streams and foster innovation cycles.
If flywheel of new opportunities to tap into.
I want to thank all our employees globally for their commitment to our clients and the work to strengthen our capabilities for the future.
With that I will turn the call over to Jonathan who will cover the details of the quarter and progress against our third strategic priority of modernizing operations.
Thank you Debbie good afternoon, everyone and thank you for joining us.
We delivered a solid third quarter performance with revenue at the high end of our constant currency growth guidance range and a return to organic year over year revenue growth for the first time in six quarters.
During the quarter, we continued to focus on modernizing our operations.
This helped us increase gross margin by 50 basis points sequentially, driven by improved utilization and increased adoption of automation and AI within delivery.
Yeah.
We ended the quarter with cash and short term investments of $2 billion or net cash of about $800 million.
This reflects our $1 3 billion acquisition of built in in the third quarter, which was funded primarily through combination of cash on hand, and borrowings under our revolving credit facility.
DSO of 81 days was one day up sequentially and increased four days year over year, driven by our business mix.
Free cash flow of Q3 was 791 million, bringing year to date free cash flow to approximately $1 billion.
There is no change to our full year free cash flow conversion guidance, we continue to expect full year.
Free cash flow.
To represent about 80% of the net income.
This includes previously disclosed negative impact from $360 million.
Payment made to the Indian export routines in relation to our ongoing appeal of 2016 tax matter in the first quarter.
During the quarter, we returned $391 million to shareholders, including $242 million in aggregate through share repurchases and $149 million to shareholders through our regular dividend.
As of September 30th we had $1 4 billion remaining under our share repurchase authorization.
Year to date, we have returned approximately 900 million to shareholders through share repurchases and dividend.
And for the full year, we now expect to return approximately $1 2 billion.
This includes approximately $100 million of share repurchases.
To offset.
The new shares.
Issued as part of the bolt on acreage.
Turning now to our forward outlook.
Consolidation and therefore increase.
Revenue revenue throughput to us why.
Speaker Change: One of the examples I mentioned in my remarks is a biotech client where we displaced an incumbent because we actually showed up with a higher productivity.
Now there is a third set where you could arguably say.
Clients, if we cannibalize our revenue.
But those are the times when you want to be creative and you can go back to clients and say look.
The kind of the what package, we did we could do it for less but you know what if we consolidated we could actually do more for less which then means you can protect your your.
Your tough, but you could still stay at the productivity benefits.
Then there is a fourth set which I would actually say, it's time and material work there.
In some ways.
Speaker Change: The productivity benefits.
Can can generate the value, but you have to work with your clients to move that work to fixed price. So I would actually believe this is a very positive.
Development.
There is elasticity in tech spend so if you can reduce the cost of deployment.
Things are actually going to spend more with you and we believe we are ahead of the curve in comparison to all our peers and that's why we are winning more large deals and we are able to protect our tough.
Speaker Change: Very helpful. Thanks Rami.
Our next question is from Tencent Huang from JP Morgan. Please go ahead.
Okay. Thanks, a lot good afternoon here I want to ask on a large deal pipeline considering your son.
Speaker Change: Quite a bit quite a bit here year to date more than last year.
Confidence in being able to replenish the large deal pipeline from here Ravi.
Yeah. So you know last year, we did 17 for the full year 100 million dollar deals more than 100 million dollar deals. This year, we're already at 19 more than 100 million dollar deals I'm very confident that we can sustain the momentum.
We understand this is not just look for transformational opportunities when the spend goes up but also look for cost take out efficiency and vendor consolidation opportunities similar to what I mentioned in my previous response.
There's always an opportunity to consolidate using productivity.
Speaker Change: Hmm.
So we are excited about it I think we have to we are starting to see now large deals in Europe and Asia Pacific in fact are out of the six deals we did this quarter a one.
Speaker Change: One of them was in Asia Pacific one of them was in Europe, and we had a similar similar.
A large deal in Asia Pacific last quarter as well. So we can expand I mean, you know this is also concentrated in a few industries in all we are stepping up and taking a broader view of other industries. So the expansion will come from more industries. The expansion will come from going beyond the Americas, which has already started happening and the expanse.
When will it come from also our services landscape two years ago, a lot of hard work was related to tech services and Bto now we have tech services BPL engineering because of the Wellcare acquisition and some of the acquisitions. We did before we are now a top five player in engineering services and interest.
Secondly, we are getting a quite a quite a bit of quite a bit of traction on infrastructure services, which we have historically.
Not having those many large deals so right now all four capability sets are fighting cylinder.
Confident about how we can sustain realized gains momentum.
That's great. That's good color on it it actually segways nicely into my follow up question, because I know one of your objectives was to diversify.
Just to make sure you're doing that geographically.
And across all of it some of your practices, but health care is now your largest vertical.
Looks like which is which as you know so used to seeing PFS I being the biggest for cognizant, but where where are you in that journey now to expand into some of the other.
Under indexed verticals is that still a priority can we expect that to come or is it more work to do what we've discussed before.
No. That's a great question I would say you know.
If you look at our revenue mix and the momentum we have I mean looking at health care, we have grown 776% y on y let's.
But sequentially, we've grown and we've grown Brian White. So we are very excited about the opportunities in healthcare the differentiation, we have and the lead we have in some of the areas is.
Matched so health care, we are very confident.
<unk> services, we are back on track I mean this is the.
Speaker Change: This quarter last quarter, we did sequential growth this quarter, we have done y on y growth and sequential growth. So again financial services has a very different muscle I think we have now we have now stabilized and we do believe that we are winning the watershed that.
Speaker Change: We now have.
Speaker Change: I would believe a unique opportunity in industrial and manufacturing with Bell, Canada the mix.
Speaker Change: And that's because they have we are at.
Access to Blue chip clients in aerospace, we have that capability set and engineering, which gives us a chance to go into.
The industrial and manufacturing and automotive.
It is a sector, where we do believe we are now going to build muscle to win deals large deals and I think we have a breadth of capability all the way from engineering services to Tech services.
Speaker Change: M D.
Speaker Change: Wonderful.
Speaker Change: <unk>, which which if you have noticed there has been an issue.
A lower pace of spending in comps, but as that picks up I think we've put a good team to get that moving.
Where do we have to make progress on his energy oil and gas, where we have a much lower presence and that's something I'm going to work on so the idea of the last two years, what we've essentially done is we've created breath.
The breadth of capability all the way from engineering PPO technology services.
Speaker Change: And.
Speaker Change: Infrastructure services, we've created now what expansive opportunities on industries I have work to do on.
On international markets outside the U S.
But I'm very pleased with the progress we've made so far because this expensive the strategy of.
Expansion has helped us too.
Keep the sustained momentum in our large deals.
Thank you for the complete answer there. Thank you.
The next question is from Jim Schneider from Goldman Sachs. Please go ahead.
Good afternoon, and thanks for taking my question.
Good to see the momentum in healthcare you just talked about earlier, so maybe to follow up on on the last question, maybe as you think about your bookings your backlog of business for 2025.
Jim Schneider: Not to provide guidance now, but can you maybe tell us directionally, which verticals do you think it might outperform your overall corporate revenue growth in 2025, and then which ones might might lag a little bit.
Yes, so as you look at the deal wins and the momentum that we have.
Speaker Change: Certainly financial services and healthcare will continue to lead the growth of the company we.
We hope to build back momentum that we had all through 'twenty three and CMT.
Comps media and telecom as we get into next year.
And manufacturing has been slow, but one hopes that that should also come through so I think that is the that is the order June portfolio to look at.
Speaker Change: Oh, who will lead the growth.
Look at next few quarters.
Thank you and then maybe as a follow up.
It was good to see the gross margin leverage you delivered in the quarter. You mentioned part of that is utilization, but also part of it was a was AI as you mentioned in the quarter can you maybe just help us.
On a go forward basis into Q4, and then 2025 with sort of the moving pieces of gross margins how much of those gains are sustainable and what should we think about in terms of the mix of bell can in Q4 and beyond in terms of where gross margins for land.
Sure. So let me start with broken because its easier to get out of the way I think Vulcan will not have a material movement on the gross margin number of the company they operate it.
Speaker Change: Miller.
Sort of range, so we should be okay.
That should not be any noise from that.
Speaker Change: Oh now from classic gross margin standpoint, the leavers.
Speaker Change: Utilization automation and productivity led by AI.
Speaker Change: AI.
Speaker Change: <unk> is another one.
Pyramid is the third one and the fourth is really the pricing. So I would say these are the these are the four most of the largest reverse the <unk> offshore mix, but offshore mix typically tends to be driven more by the requirements of our customer in diamond material business.
Only in the fixed price projects, we have more flexibility I don't know if sure. So I would I would call sort of four big ones and fifth one which can be leverage in specific situations. So.
Speaker Change: As you look at.
The performance of this year certainly utilization has continued to inch up every quarter and I think we still have some flex left as we as we enter quarter four.
Speaker Change: Our automation.
Speaker Change: Led by <unk>.
Speaker Change: Hi.
<unk> is a is a tremendous opportunity.
Speaker Change: You did well in 'twenty, four and I still feel we'll continue to get additional.
Speaker Change: Additional leverage of that as we as we bid on.
Speaker Change: Great.
A greater rollout capability greater absorption capability of that within our delivery.
Within our spectrum of our delivery.
Speaker Change: The.
Speaker Change: Pyramid.
It's certainly an ongoing initiative.
We have had.
Speaker Change: The organization and as an industry.
Struggle to keep up with that.
The rhythm of of of pyramid, all through 2021 'twenty two as the industry went through a shock of.
Speaker Change: Southern drop of demand and then sudden increase in demand I think we are we are getting back to that rhythm of building pyramid. So I would say it is not a lever for 25, but it's certainly the lever as you look at next.
The next three years and that we're putting in are putting.
Speaker Change: Right.
Speaker Change: Internally.
The initiative around and finally pricing pricing in the current environment is is I would say competitive it's not something that is adding to gross margin today, but it is it is a factor of the demand environment. So that's how I'd say it.
That's great color. Thank you.
Our next question is from Maggie Nolan from William Blair. Please go ahead.
Hi, Thank you.
Financial services.
Leading in terms of how I spend my trend across your business and end markets.
Speaker Change: Or are do you view the dynamics of the financial services performance to be more vertical specific cognizant specific at this time.
We're very pleased with how.
Oh, we have.
Speaker Change: Gone about structurally turning around our financial services business, but I came on board.
We had bought.
Company specific issues and and market specific issues I would say at.
Speaker Change: The company specific issues are more or less gone they are gone.
Just a few quarters ago, we put a good team on board now.
Stable team, we now have.
Speaker Change: Compelling offerings and we are walking the corridors of our clients. So we are starting to see the watershed gain for ourselves there is uptick in spending in financial services clients.
Speaker Change: And we are.
Speaker Change: Probably.
Speaker Change: <unk> seizing those dollars.
Some of our peers and therefore, we are starting to see that.
I am very optimistic that financial services will.
Continue to go back to.
Hi, discretionary environment at some point in time because it is also one of the most cutting edge innovative industries.
And they all have retained organizations, where a lot of technology innovation is done in partnership with.
Companies like ours, we always have that muscle before.
I mean, we've got one of the leading financial services players across the world and it does I do believe that we've got that module back so depending on how the market turns around and financial services.
We will.
We didn't grab those opportunities we do not have it.
Speaker Change: Any specific company specific challenges, which we had in the past so that gives me the confidence that we have the differentiation the agility the team.
And as the market.
Speaker Change: <unk>.
Bouncing back I mean, there is a rebound of.
Discretionary dollars in financial services and as that continues to go up.
We are in a rich part too.
Speaker Change: Gain more wallet share.
Okay. Thank you and then any changes that you're seeing in the sales cycle and the conversion rate. Both for this quarter that you just reported and then also your forward expectations. Just given that continued large deal traction, but also what appears to be the early return.
And some of the smaller discretionary.
Speaker Change: Deals in end demand.
Yes, the smaller discretionary deals are starting to pick a little momentum.
On the large deals I would say.
The biggest change I've seen in the last.
Speaker Change: Few months is.
If we are unable to put a proposal on the table.
You can.
Peter to the legacy.
Makes savings underwrite those savings for innovation I.
Speaker Change: I think clients love.
Speaker Change: Love that flywheel so.
Clients are not saying I'm going to spend more and more our clients are saying can you do more for less so the AI tooling is helping us to do more for less and those savings are getting translated to innovation and translate it to backlog getting cleared.
I think that is the new you.
It's a new model, which is helping us to.
Speaker Change: Windows deals I mean, when we win these large deals those dollars are not going back elsewhere that actually going back to technology and.
Speaker Change: <unk>.
We are we are able to put a model where we underwrite those dollars for the for the for the innovation. So that's the change that's what clients are looking for.
Speaker Change: Industrial of this kind, where you can do more for less.
Spend is elastic I mean, you can do more for less to spend.
You could get more more done and therefore clients I would offer you more.
Because of the spend is elastic you know you've got more value there.
You had more projects to be done.
Makes sense. Thank you.
Speaker Change: Our next question is from Jamie Friedman from Susquehanna. Please go ahead.
Jamie Friedman: Alright, thank you.
I wanted to ask briefly on your view of the durability of the house.
Its recovery rather the results speak for themselves.
This is a clear turnaround, but we're getting a lot of questions that the end market seems to be volatile.
And if you could unpack that may be to the payer and life science side, but how do you see the changes in the end market, especially on the peer side potentially.
Impacting the.
The demand for your services.
That's a great question.
Jamie Friedman: Therefore segments here it is payer provider.
Jamie Friedman: Pharma benefit spend.
And life Sciences.
Jamie Friedman: Life Sciences clearly is.
A standout because life sciences clients are no longer using technology.
Enabling their business, they're using technology at the core.
And we have some extraordinary capability of.
Jamie Friedman: Partnering with our clients for the core business. This is not enabling the business I mean, everything the business as I D systems.
Jamie Friedman: Enabling the Cortez.
Uh huh.
Discovery cycles, the drug discovery cycle then.
And the ability to apply technology to support it we have it.
Really some very good capability that including life Sciences manufacturing. So I think that's that's a sector, which will continue to invest in technology to reduce the.
Jamie Friedman: The.
Drug development cycles, and we think we have good we have a good opportunity that Pierre as you as you would have noticed.
Jamie Friedman: There's a lot of cost take out which is going to happen because.
PMT him as a colleague.
Jamie Friedman:
Jamie Friedman: The cost split or a cost per member.
Jamie Friedman: Per month.
Jamie Friedman: <unk>.
That is under pressure. So you have to start to think about auto peers reduce that cost.
Jamie Friedman: And.
And increase and increase the value towards towards kit.
Jamie Friedman: So.
We think technology can be that.
Jamie Friedman: Enabler.
To reduce cost just to give you and give you an example.
Jamie Friedman: On <unk>, we applied generative AI.
And we are able to take out 30% cost per case managers and end users what processing claims the administrative costs and pay it is so high that you could use technology and you could use the power of AI to create more.
Generate more value is more straight through processing.
Auto adjudication on claims has significantly gone up.
We've got auto adjudicated claims without human intervention. So there is so much happening on the payer side on technology that is cost take out opportunity rather than anything else cost take out is going to need to transformational care provider is already distributed market.
Jamie Friedman: And there is consolidation happening on providers and I think we have again, a unique opportunity because I try let a platform today.
<unk> has.
A large pool of providers.
In fact, we have 200 billion.
Our members and we have.
Houses of providers, who are on <unk>.
On our platform and we also look clearinghouse, which is a combination of payer and provider because the clearinghouse actually sits on the gateways between providers.
Jamie Friedman: And pitch.
Jamie Friedman: Well pharma, but if it companies.
Jamie Friedman: A small number.
And then the subsequent two transformation. So is there going to be more consolidation is there going to be more changes are going to be more transformation in this sector, yes, but they're all going to be powered by technology. So we think our unique position in health care, our unique leadership position in health care is going to be huge.
Jamie Friedman: Huge huge benefit for.
But for the opportunities, which come out of it. So I am excited about the transformation in the entire value chain, which is going to happen in the next few years.
Okay, Great answer I'll drop back in the queue. Thank you.
Speaker Change: Next question is from Bryan Keane from Deutsche Bank. Please go ahead.
Jamie Friedman: Hi.
Rami to me it sounds like you're using Gen AI as an advantage to come in and price below some of the peers using your guidance.
Expertise and technology to replace some incumbents and pass on some product activity gains is that fair.
Speaker Change: Yes, I know.
Jamie Friedman: Yeah.
Speaker Change: If the operator.
Engagement model allows us to do that.
We could share those benefits with our clients in the past it was labor led the.
The labor lead cycles are pretty much I mean, we have really optimize victim across the industry, the new cycle technology and.
You know AI late in automation led productivity sharing the benefits with our clients I think as Ed.
Speaker Change: <unk> is a mainstream model, which we are adapting to win.
Speaker Change: When these large deals.
Speaker Change: Our sustained momentum.
Speaker Change: Yes, because your argument will be then its a deflationary environment for the overall it services adds more of the cost savings and productivity gains from <unk>.
Gets passed on.
Time and materials models come under pressure.
And the yields are lower so the outcomes based pricing is going to yield a lower outcome for the contracts.
So it's kind of a deflationary impact so you got to make it up by volume is the only way you can make faster growth.
Yes. So my thesis there is almost every CIO I've spoken about has actually said.
Speaker Change: They have.
Speaker Change: <unk>.
Backlog, which they want to clear.
Speaker Change: And.
This is our opportunity to clear that backlog.
Speaker Change: <unk>.
They told us that look there is so much technical debt sitting with US I mean, there is a report which talks about a trillion dollars of technical debt in U S balance sheets American Corporation balance sheets.
400 billion is actually being spent.
Speaker Change: The report.
Which talks about spent on servicing the debt.
And because of that a lot of money is being spent on the run what's the debate. So this is our opportunity to readjust the run and the Baird.
And that's why that's what I was referring to earlier.
Speaker Change: If we are able to reduce the run around costs and transfer that to the Baird you can actually build more stuff.
So technology spend is so elastic.
But I mean, it will demand elastic because it is such a transformational tool that.
You know you could if you do more if you do more for less.
Youre actually going to get more to do.
Because there is no. The headroom is so high so I actually believe that the thesis of doing more for less is only able to generate more opportunities for us.
And is it roughly 20% to 40% last year, how much more or less seasonal.
Speaker Change: Yeah, it's hard to put it and put it a number because it depends on this phase of the technology cycle.
If it is pure play development it.
It is much higher if its.
Testing that is much higher.
Equally if youre in a fiercely competitive situation you you probably give it away too.
Speaker Change: Youll give away partially give it away to clients.
There's also the maturity of the client which which.
Good to mind, how much you can get productivity.
Speaker Change: So.
There is a compelling proposition to do fixed price and more managed services deals, but there are always companies, which have huge retail organizations in the us companies like us to.
Engage on a time and material big audit capacity base because.
They have they have strategically taken a call to build their own tech shop in.
Speaker Change: In fact, we are actually helping some of those clients to build a tech shop.
Their captives being set in India, we are actually a pioneering partner.
To partner with our clients to set up there.
Captives, that's another opportunity, which has kind of evolved in the last one.
Speaker Change: <unk> and <unk>.
Speaker Change: Again.
Excited about it I don't see that as cannibalization I see that as an opportunity to stay more relevant with them.
Speaker Change: Great. Thanks for taking the questions.
Our last question is from Bryan Bergin from TD gallon. Please go ahead.
Hi, guys. Good afternoon. Thank you.
I have a follow up question here on the forward view, if you're targeting kind of an organic exit rate of about 1% of the midpoint and flattish bookings here. When we consider the year ahead are there puts and takes about the conversion of the multiyear larger deals versus some of the smaller deals picking up to support the near term growth Reacceleration.
Just any thoughts you want to share directionally about growth considerations as we get closer to 'twenty five.
Speaker Change: So.
Sure. So if you see this here every quarter.
Being able to execute.
Speaker Change: To put our growth agenda that we set in the beginning of the quarter.
Speaker Change: All.
Speaker Change: This is the first quarter quarter, three was the first quarter of organic growth.
In all of last few quarters, we're exiting with a significantly better velocity than what we had at the end of 'twenty three so that certainly sets up well.
But we will I think it's what is critical for us is really focused and execute well to quarter four.
And then look at the opportunity that prevents us in beginning of 2000 and.
And then then guide for 25, so I would say little early to talk about 'twenty, five but quite happy with the progress that we're making every quarter.
Speaker Change: On the trajectory.
Speaker Change: Okay understood and then when we think about the margin levers specifically on utilization do you have a targeted the optimal level for you guys amount of debentures, so you've gotten back to 84% and you can lean on that more.
Until demand recovers or is that an upper bound as you think about utilization.
I do think there is a literal reflects left.
On that certainly that I see but not a lot more.
Speaker Change: Okay. Thank you.
Thank you. This concludes the question and answer session. This also concludes today's teleconference. You may disconnect. Your lines at this time. Thank you again for your participation.
Speaker Change: Yeah.
Speaker Change: Yeah.
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