Cognizant Technology Solutions Corporation

and the investor supplement for the company's second quarter 2023 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 Jan Siegmund, 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 risk and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC. With that, I'd like to now turn the call over to Ravi. Please go ahead.

Thank you, Tyler. Good afternoon, everyone. I would like to discuss four topics with you today. Our second quarter results, the demand environment, our comprehensive commitment to generative AI, and an update on our long-term priorities. We made continued progress during the quarter in what remains an uncertain global macroeconomic environment. Q2 came in at $4.9 billion at the high end of our guidance range. We were pleased to return to sequential revenue growth of more than 1%. Year over year, Q2 revenue showed a modest decline of 40 basis points, or essentially flat and constant currency. Our adjusted operating margin was 14.2%, and adjusted EPS was $1.10. We recorded another quarter of strong bookings growth, up 17% year over year, ending quarter two with record-trailing 12-month bookings of $26.4 billion. A book-to-bill of 1.4x, Approximately 30% of our in-quarter Q2 bookings were large deals, and five of these deals exceeded $100 million each. Our bookings continue to be a balanced mix of renewals, extensions, and new opportunities. The leadership team and I remain intensely focused on our talent, so I'm glad to see the continued reduction in our attrition with trailing 12 months of voluntary attrition for our tech services business declining to 19.9%. down 3 percentage points sequentially and 11 percentage points year-over-year. While Jan will cover our performance at a business segment level, I want to offer a quick word about financial services. Our quarterly year-over-year revenue decline in this segment reflects the soft market and continuing weakness in discretionary spending. In response, we are transitioning more existing work in the sector towards managed services as many clients remain focused on driving cost takeout, vendor consolidation, and productivity initiatives. We are also stepping up our engagement with fintech companies, which we believe offer a great opportunity for digital transformation. And we are strengthening our capabilities with the goal of capturing discretionary spending on transformation work when it returns. For example, we continue to support the modernization of S&P Global's Configure Price Code system to enable end-to-end digitization. in what we believe is the world's largest CPQ implementation on Salesforce. And we are collaborating with Max Life Insurance to launch an innovation and development center in Chennai to help accelerate the digital transformation efforts. With a flexible client-centric operating model, we can assist clients across industry sectors, take out costs, consolidate their vendors, and achieve both technology and operational efficiencies which provide opportunities for large deals. We can also help them develop digital platforms to deliver richer and more personalized experiences to their customers. What's more, we can engineer technology into their products and services. As an example, we recently extended our partnership with Gilead Sciences. This agreement includes the renewal and expansion of Cognizant services for a total expected value of $800 million over the next five years. We'll manage Gilead's global IT infrastructure while leading digital transformation initiatives designed to enhance their overall client experience and enable faster time to market for their products. We will apply the power of GenAI and intelligent automation to help improve Gilead's customer service experience and assist in driving greater manufacturing efficiencies. To support clients' transformational needs, we've established a distinctive position across industries using a platform-centric approach designed to speed clients' consumption of technology. You've seen the emphasis we've given to this platform approach. For example, Cognizant, Triseto, and Healthcare are shared investigator platform in life sciences, asset performance excellence in smart manufacturing, and car-to-cloud in automotives. Last quarter, we launched two new platforms with applications across industries, Neuro IT Operations, which enables AI-led autonomous operations, and Cognizant SkyGrade, designed to help clients maximize the full potential of cloud. Turning to AI in quarter two, we expanded our platform portfolio further with Cognizant Neuro AI. It's designed to speed the adoption of generative AI and harness its value in a flexible, secure, scalable, and responsible way. With NeuroAI, we are helping clients advance from identifying company-specific use cases to operationalizing AI. I should point out that generative AI is a natural evolution of a work across cognitive AI, enterprise applications, and data and analytics services. To extract value from GenAI, the data must be curated, trained, modernized, and made production-ready. You also need a deep understanding of clients' data estates, data architectures, data usage patterns, and business applications of the data. Our current approach to leverage third-party foundational models, enhance them with our platforms and IP, and then fine-tune the models for our clients. Today, we have more than 100 active client engagements in various stages with a focus on cognitive and generative AI, as well as hundreds more projects using AI services within the context of delivery. We're designing our generative AI offerings for industry-specific solutions, cross-industry use cases, and productivity enablement under themes like transforming code processes, improving the customer and employee experience, product innovation, software encoding, and knowledge management, to name a few. For example, one of the world's largest healthcare product companies, we are helping to speed up their research process by deploying GenAI to author scientific content. We developed a workbench that uses GPT models to summarize and generate content from unstructured and structured data, such as laboratory information management systems, with the aim of automating the generation of regulatory content. For a top 20 property and casualty insurer, we have helped frame its GenAI strategy and conduct real-world tests based on company data. For example, we built a GenAI-based digital virtual assistant that analyzed loss complex claims submissions. By referencing the insurer's claim data, the virtual assistant was able to guide a human claims handler to gather nearly 100% of missing claims information. This simple application is expected to produce millions of dollars in savings through improved operational efficiency and reduced claim costs. In addition, We signed a new multi-year agreement with Nuance Communications, a Microsoft company, to help scale the resources for Nuance's Dragon ambient experience operations. This solution is at the forefront of conversational AI and ambient clinical intelligence. Let's turn to the essential role partners play in delivering our AI capabilities. We expanded our alliance with Google Cloud to help enterprise clients create, migrate, and modernize their AI journeys and offer clients innovative industry solutions founded on the tenet of responsible AI. Our investments in developing generative AI capabilities include launching the Cognizant Google Cloud AI University, a program designed to train 25,000 Cognizant professionals on Google Cloud AI technologies. We'll offer this program to our clients as well. And earlier today, we announced that as a part of our expanded partnership with Google, we'll be building on Google Cloud's generative AI technology with Cognizant's AI domain expertise to create a healthcare large language model. This LLM is designed to simplify and improve the accuracy of complex healthcare administrative tasks and strengthen business outcomes for healthcare organizations. We've also expanded our relationship with Microsoft to deliver industry solutions and enable AI-led transformation. This includes expanding the focus of our Microsoft Center of Excellence in AI and other next-gen technologies to drive competencies across architecture, technology leadership, value delivery tools, and enablement. Cognizant and ServiceNow have announced a strategic partnership to accelerate the adoption of AI-driven automation across industries. Our industry expertise and solutions integrated with ServiceNow's intelligent platform for end-to-end digital transformation will bring to market offerings that are designed to solve complex problems, automate operations, and enhance employee as well as end customer experiences through the use of AI. Now a quick update on our three long-term performance objectives. Becoming an employer of choice in our industry, accelerating revenue growth, and enhancing productivity. operational discipline. Let's start with the employer of choice. During our Q4 call, I talked about how tightly linked the client and the employee experience are, giving Cognizant the opportunity to create self-reinforcing cycles. Highly engaged talent with a passion for clients and a growth mindset attract the best clients. These clients, in turn, attract more of the best people, keeping the flywheel turning faster. Now, two quarters later, we are seeing the early benefits of this interdependent relationship between employees and clients. A trailing 12-month voluntary attrition has been trending downwards for the last four quarters. And a just-completed annual people engagement survey showed meaningfully improved engagement results. Among the many questions the survey poses to associates, we saw multipoint increases in three areas, strongly correlated to engagement. Would you recommend Cognizant as a great place to work? Are you excited about Cognizant's future? And do you plan to be working at Cognizant two years from now? On the client side, data from our project level client feedback process through the first half of this year shows solid improvement over the previous period scores as well as our best net promoter score since launching this program in 2021. I see us making real progress on creating a self-reinforcing cycle. From day one, my commitment to our associates has been to cultivate a diverse organization that reflects the world which we operate. Our top priority has been to increase our diverse talent, including at leadership levels. I'm delighted to say that in the past couple of months, we have appointed seven women to fill strategic roles at the senior vice president level. We are resolved to help all our associates bring their best selves to work, and that means focusing on all aspects of their Cognizant experience. For example, we develop talent early through educational partnerships and apprenticeships. We invest heavily in upskilling and reskilling current employees through our award-winning leadership and development ecosystem. We also employ innovative train-to-hire initiatives, such as the Cognizant Skills Accelerator, aimed at people seeking to kick-start a technology career in the U.S. and the Cognizant Returnship Program for technology professionals looking to restart their careers. Our next priority is to accelerate revenue growth, which is the absolute focus of the entire management team. We are differentiating Cognizant in large-deal opportunities by scaling our capabilities for cost take-out and optimization and focusing more on managed services. And we continue to see a strong pipeline of opportunities on the cost and efficiency side. Given the groundswell of interest in generative AI, the number of projects we have underway focused on cognitive and generative AI, we see this technology generating a new wave of opportunities for us. Accordingly, we expect to invest approximately $1 billion in our generative AI capabilities over the next three years. Our third long-term priority is to enhance our operational discipline. We are working to fortify our day-to-day business execution and optimize cost of delivery in by driving higher productivity powered by advances in tooling platforms and automation technologies, and by improving our operational leader in areas like billable utilization. Our next-gen program, which we announced last quarter, is on track. We are making progress on removing structural costs as we continue to simplify our operating model and realign our office space to the future of hybrid work. On our last call, I talked about a plan to redistribute some of our development centers from India's largest cities to smaller cities. I'm pleased to announce the first phase of this shift with the planned opening of two new centers, one in Bhubaneswar and the other in Indore, India, which offer great talent pools. Keep in mind the Next Generation program's overriding aim is to generate savings to invest in our people and our growth. Jan will provide additional details in his remarks on the NextGen program. In closing, I'm now seven months into my tenure as a CEO. I've met with more than 200 clients, dozens of our partners, and through in-person and virtual town halls with most of our workforce. I've also made a point to continuously soliciting ideas and perspectives from our top thousand leaders on strategic topics of importance to our future. Further, a company-wide grassroots innovation movement launched earlier this year, Blue Bolt, has led to such a surge of fresh ideas with more than 32,000 generated so far that it's now serving as our company's innovation engine. I'm convinced Cognizant's path to winning in the marketplace runs through fully embracing our heritage in DNA. We are leaning into our heritage at the intersection of industry and technology. A flexible client-centric operating model and a distributed delivery network that bring together global and local capabilities. All in all, we've been making good progress, but recognize how much more work lies ahead. Continuing to build on our growth imperatives is the goal on which everyone in the company is focused. I especially want to express my heartfelt gratitude to all our associates for the extraordinary work they do each day. Before I turn the call to Jan, I want to comment on his plans for the future. Jan let me and the board know of his intention to retire from Cognizant early next year. Jan has been a wonderful business partner to me, and over the past three years, he's played an instrumental role in designing and executing a strategic financial and operating plan while developing superb talent with our finance organizations. As we begin the search for the company's next CFO, I'm grateful for Jan's willingness to work closely with his eventual successor to ensure a smooth transition. With that, I'll turn the call over to him to provide additional details on the quarter. Thank you.

Thank you, Ravi, for the kind words. I'm proud of what we have accomplished over the last three years, including our work together over the last seven months. I'm looking forward to continuing our partnership in the months ahead and while the search for my successor is underway. Until then, it's business as usual. So with that, let's turn out to our second quarter results. We delivered second quarter revenue at the high end of our guidance range and adjusted operating margins above expectations. We were pleased to deliver another strong quarter of bookings growth driven by larger and longer duration deals. Our pipeline for larger bookings also remains strong and is up meaningfully year over year. Additionally, our NextGen program is on track and yielding early savings through our efforts to structurally reduce our cost base and fund investments for growth. Moving on to the details of the quarter. Second quarter revenue was $4.9 billion, representing an increase of over 1% sequentially and a decline of 40 basis points year over year, or roughly flat and constant currency. Year-over-year growth includes approximately 130 basis points of contribution from our recent acquisitions. Bookings growth in the quarter was again driven by a mixed shift towards larger deals, which had in turn led to longer average duration of our bookings. We are pleased with our bookings performance in the quarter and are focused on building momentum in the quarters ahead. Consistent with the first quarter, we have continued to experience softness in smaller, shorter duration contracts, which we attribute to weaker discretionary spending. The translation of bookings to revenue growth is impacted by this change in deal mix. As duration has increased, the conversion to revenue will be longer, but helps to improve our forward visibility. Moving on to segments results for the second quarter, where all growth rates provided will be year-over-year in constant currency. Within financial services, revenues declined 5%, which reflects a softer overall demand environment and weak discretionary spending. As we navigate this environment, we have continued to strengthen our leadership team and sharpen our client engagement. While our pipeline for work related to cost takeout and productivity-led initiatives remains healthy and meaningfully higher than prior year period, we expect the uncertainties of the macro environment to continue to impact the pace of client spending over the next several quarters. Health sciences revenue grew 2%. Growth was again driven by strong demand from healthcare clients for our integrated software solutions. which increased mid-teens year over year. While the life sciences was down year over year and impacted by softer discretionary spending, we experienced strong sequential growth driven by increased volumes with existing customers. Products and resources revenue grew 4%, reflecting the benefit from recently completed acquisitions, ramp of recent wins, and demand from automotive, and travel and hospitality clients. This was partially offset by softer discretionary spending across industries. Communications, media, and technology revenue declined 40 basis points, reflecting softness among both technology and our communications and media clients. We expect growth to improve in Q3 as recent new bookings have already begun to ramp. Continuing with year-over-year revenue growth and constant currency, from a geographic perspective in Q2, North America revenue declined 2%, reflecting softness within our financial services and CMT portfolio. This was partially offset by growth in health sciences and products and resources. Our global growth markets, or GGM, which includes all revenue outside North America, grew approximately 5%. Growth was led by Europe, which grew 6%, and included strong growth within CMT and products and resources, particularly within automotive. Now, moving on to margins. During the quarter, we incurred approximately $117 million cost related to our previously announced NextGen program. This negatively impacted our gap operating margin by approximately 240 basis points. Excluding this impact, adjusted operating margin was 14.2%. Operating margin included the negative impact from an increase in compensation cost, primarily the result of our two merit cycles since October 2022. This has impacted both gross margin and SG&A. This was partially offset by tailwinds from the depreciation of the Indian rupee and higher utilization. It also included an approximate 60 basis points benefit from an insurance recovery related to our previously disclosed 2020 cyber incident. Our gap tax rate in the quarter was 21.1%. Adjusted tax rate in the quarter was 21.7%. Our effective tax rate included a discrete benefit from a settlement related to U.S. state income taxes. Q2 diluted gap EPS was $0.91, and adjusted EPS was $1.10. Now turning to the balance sheet. We ended the quarter with cash and short-term investments of $2.1 billion, or net cash of $1.4 billion. DSO of 75 days increased two days sequentially, and one day year over year. Free cash flow in Q2 was a negative $32 million, which reflects the previously disclosed impact from the change in the US law that we discussed earlier this year. This change negatively impacted Q2 free cash flow by approximately $420 million, which included tax payments of approximately $300 million related to 2022. This impact was largely in line with our expectations and we continue to expect free cash flow to represent approximately 90% of net income this year. During the quarter, we've repurchased about 3 million shares for $200 million under our share repurchase program and returned $148 million to shareholders through our regular dividend. Year-to-date, we have repurchased approximately 6 million shares for about $400 million. At quarter end, we had $2.4 billion remaining under our share repurchase authorization. Turning to our forward outlook. For the third quarter, we expect revenue in the range of $4.9 to $4.94 billion, representing a year-over-year increase of 0.6% to 1.6%, or a decline of 2%. 50 basis points to an increase of 50 basis points in current constant currency. Our guidance assumes currency will have a positive impact of 110 basis points as well as an inorganic contribution of approximately 100 basis points. For the full year, we are reiterating our constant currency revenue growth guidance. Our range is slightly wider than our historical practice reflecting a heightened level of uncertainty at the recent pace of client decision-making. For 2023, we expect revenue of $19.2 to $19.6 billion, representing a decline of 0.9% to a growth of 1.1%, or a decline of 1% to growth of 1% in constant currency. Inorganic contribution is still expected to be approximately 100 basis points. The midpoint of our guidance suggests a softer fourth quarter relative to historic norms as we anticipate softer demand and more volatile discretionary spending patterns driven by macroeconomic uncertainty to continue throughout the end of the year. As I mentioned earlier, the NextGen program is on track and our assumptions for cost savings are unchanged. However, we now expect to incur $350 million in total charges versus $400 million previously. This reflects our assumption for lower employee separation costs as a result of voluntary attrition trend. We now expect to incur approximately $250 million of next-gen costs in 2023, including approximately $100 million relating to employee severance, and an unchanged $150 million related to net consolidation of office space. Moving on to adjusted operating margin, our guidance is unchanged at 14.2% to 14.7%. Our margin outlook is impacted by several factors, but primarily the negative impact from recent merit cycles. It also reflects our assumption for next-gen savings and growth investments. including the dilutive early impact associates with large deals. We anticipate 2023 interest income of approximately 115 million versus 85 million previously, reflecting the higher interest rate environment. Adjusted tax rate is expected to be in the range of 23 to 24 percent versus 24 to 26 percent previously due to several discrete items in the first half of the year. In 2023, we continue to expect to return approximately $1.4 billion to shareholders through share repurchases and our regular quarterly dividend. We continue to expect full-year average shares outstanding of approximately $506 million. This leads to our full-year adjusted earnings per share guidance of $4.25 to $4.48 versus $4.11 to $4.34 previously. With that, we will open the call for your questions.