Cognizant Technology Solutions Corporation

Ladies and gentlemen, welcome to the Cognizant Technology Solutions third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star 1 on your telephone keypad. A confirmation tool will indicate that your line is in the question queue. And you may press star 2 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. Thank you. I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release and investor supplement for the company's third 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. Today, I would like to cover three topics. Our third quarter results, the demand environment, and a brief update on our strategic priorities. We are pleased with the company's continued progress in the third quarter, during which clients remained cautious amid economic uncertainty and discretionary spend was under pressure. Q3 revenue came in at 4.9 billion within our guidance range. We saw sequential revenue growth of 20 basis points, Year-over-year revenue grew 0.8% as reported, or a modest decline of 20 basis points in constant currency. Our adjusted operating margin of 15.5% exceeded our expectations, mostly reflecting savings from our next-generation program, which remains on track as well as from our operational discipline and the timing of spend on investment opportunities. We recorded another quarter of bookings growth, up approximately 9% year-over-year. We ended Q3 with record trailing 12-month bookings growth of $26.9 billion, up 16% year-over-year, and a strong book-to-bill of 1.4x. We have sustained our large deal momentum through Q3. Approximately 30% of our in-quarter Q3 bookings were large deals, and three of these deals exceeded $100 million each. I believe we are getting progressively better at building a creative deal generation engine and solutioning large deals. I am especially encouraged to see our continued decline in attrition. Trailing 12-month voluntary attrition for our tech services business declined to 16.2%, down about 4 percentage points sequentially and down 13 points year-over-year. This decline in attrition was a positive factor in our just completed annual client net promoter score survey, which showed significant improvement year over year and hit a historic high for Cognizant. Clients let us know that leadership, account management, and delivery are especially important to them. And the survey results show that in these areas, we're doing a great job. This assessment of how clients perceive Cognizant underscores the interdependence of the employee and client experience that gives us confidence that the changes we are making will help strengthen the portfolio over the long run. While Lian will cover our performance at a business segment level, I want to offer a quick word about financial services. We continue to reposition our financial services segment while responding to an increasingly challenged demand environment. One of the ways we are striving to reinvigorate growth is through a sharply focused sub-industry go-to-market approach in the Americas. Directly by highly experienced leaders, we believe this change will increase our agility and deepen our domain expertise. Let's turn to the demand environment and what I'm hearing from clients. Clients remain focused on efficiency initiatives to reduce costs and consolidate providers as they increase their productivity and resilience, and we are helping them do so. This should in turn enable them to underwrite their continuing investment in digital transformation. For example, during the quarter, we expanded our relationship with Lineage, a global leader in temperature-controlled logistics, to help build an industry-leading operating platform and establish a plan to support their operations through automation and infrastructure management. We also established a new multi-year relationship with Swedish firm Intrum. We expect to provide end-to-end digital integration and core modernization services for their credit management technology platform. To dive deeper into clients' long-term objectives and discover new ways to strengthen our partnership with them, Cognizant held a two-day discovery summit last month for about 130 of our North America clients, our first large-scale client gathering in more than four years. We discussed the transformative power of generative AI and how we believe it can reshape every industry. We showed clients how to apply generative AI to create more connected, collaborative, and responsive relationships with their customers. We also ran live use cases at Cognizant's NeuroAI platform, showing generative AI working alongside legacy data and machine learning models to rapidly create end-to-end AI use cases to tackle client KPIs. As mentioned last quarter, we expect to invest approximately $1 billion in our generative AI capabilities over the next three years. focusing on areas such as platform modernization, infrastructure, recruiting, and upskilling. To that end, we opened a dedicated AI innovation studio in London, and later this year, we expect to open AI studios in New York, Dallas, and Bangalore. We have trained about 55,000 of our employees on generative AI this year, and have an additional 40,000 employees from all levels of our company registered and pursuing training on gen AI. We've also invested in AI partnerships and experimental infrastructure to support early client engagements. We believe clients will depend on partners like Cognizant to generate significant productivity gains through automated AI-powered platforms for design, engineering, and operations. This shift in client behavior further validates a recently refined strategy, which is aimed at strengthening Cognizant's differentiation to help drive growth. Our strategy is focused on three imperatives. First, We are resolved to be an industry-led, creating value for clients by integrating technology with industry use cases to drive business outcomes. We are embedding industry expertise across our value chain and select industries. We are developing more enterprise-scale platforms designed for industry and operational use cases. Partnerships have a major role to play here. We are focused on expanding our partner ecosystem across a range of technology providers. Among them, hyperscalers, cloud providers, enterprise software companies, digital software enterprises, and emerging startups. We believe this partner ecosystem will enable us to enhance our integrated offering by combining third-party products with our service solutions, helping to deliver enterprise-wide digital transformation. We believe this strategy as a full-stack provider opens new and significant managed services opportunities. Second, given today's more heterogeneous technology landscape and the desire of many clients to build their own technology muscle, we focus on operating a highly flexible business model to meet clients where they are in their digital transformation journeys. We can support them across a range of project types, whether that's structured deals, traditional managed services, build-operate transfer, co-innovation, partner solutions, or large technology transformations. And to help clients strengthen their technology expertise, We can either lend our human capital along with our human capital value chain, which includes learning, development, automation and AI infrastructure, and more. A business model flexibility is well suited to the changing nature of large deals where we see increasing demand for bundling services, often a combination of software people take over infrastructure and services. These deals have a potential to bring cognizant into the heart of clients' business landscape, putting us in a strong position to capture future services opportunities. Our third imperative is to enable more intimate levels of client collaboration and co-innovation. This effort grows out of our heritage of client-centricity and grassroots innovation. Given the scale and diversity of our global teams, we believe we have a potential to harvest an abundance of ideas, big and small, that can contribute to our clients' focus. Inspired by our Blue Bolt's grassroots innovation movement launched in quarter two, more than 35,000 of our employees have generated 75,000 ideas. We have already implemented about 14,000 of these ideas, nearly 6,000 of which are client-facing. A strengthened ability to co-innovate with clients is especially valuable as they grapple with understanding and applying generative AI. During the quarter, we launched Telco Assurance 360, a cloud-based AI-powered solution built on ServiceNow and designed to provide telcos with real-time visibility into network issues and fast, proactive resolution through AI-powered analytics. We also signed a multi-year agreement with a leading provider of digital and cloud-enabled solutions that are vital to the administration of health and human services programs across the U.S. Cognizant will serve as the client's sole provider global IT services and operations partner to help drive transformation at scale. We also provide the client with access to our AI, machine learning, and generative AI tools, along with our TriZero platform to advance revenue growth, increase administrative efficiency, and improve the member experience. What's more, we are expanding our strategic collaboration with Qualcomm Technologies to jointly implement AI-based solutions at the edge as a part of our car-to-cloud initiative. We encourage our clients who want to transform their businesses by being AI first to begin their journey by modernizing the data architecture, cloud infrastructure, and core business applications. Today, we are running more than 150 plus early client engagements that incorporate the use of generative AI. Some of the examples of this work include general productivity use cases related to writing code, code analysis, and troubleshooting, knowledge management, and translating product specs into natural chat or speech. Business specific use cases for call center automation, product prototyping, audience prediction, claims management, medical scribing, and research and development. And domain specific use cases like onboarding new employees, validating deed documents, and financial statement planning analytics. We have 300 plus additional opportunities in our pipeline that we are planning to scale. Let's turn to a quick update on our three long-term strategic objectives, starting with becoming an employer of choice in our industry. I see Carbizent as a human capital company first and a technology company second. Everything we do hinges on the quality, dedication, and scale of our talent base. That's why it is so consequential that our voluntary attrition continues to fall, putting us on par with the industry average. We expect further improvement in our attrition in quarter four. It's also worth noting that in quarter three, we had a net sequential headcount increase for the first time in several quarters. As a human capital company, we are determined to help improve the lives of workers around the world. With that in mind, we announced a groundbreaking training initiative yesterday called Cognizant's Cognizant's Synapse initiative, our job training endeavor, is aimed at empowering more than one million individuals with advanced technology skills, including generative AI, and that they will need to thrive in the digital economy. We intend to build a consortium of partners for training and jobs, which will then employ individuals who have upskilled through our Synapse initiative. Our next performance objective is to accelerate revenue growth. When I joined Cognizant in January, I said large deals are one of my top priorities. As I mentioned earlier, we are pleased to see our continuing large deals momentum, which is underpinned by the work we are doing to improve the capabilities required to seed, shape, and sell large deals, and our ongoing investment in the client-facing roles needed for driving growth. These efforts have helped to partially offset what remains a softer discretionary spending environment and provides new growth opportunities following last year's muted bookings growth. Our third performance objective is to ensure operational excellence across the company. We remain focused on simplifying our operations, including our sales and delivery structure, so we can continue to become more agile and get closer to clients in their unique business challenges. In general, we are operating with fewer layers, optimizing our day-to-day operations with enhanced system and tools, and working to streamline our processes and automate information flows using AI. Differentiation in the tech services industry happens at the client side and the project level, making relationships and strong execution key. That's why I've invested so much time in meeting with over 270 clients so far this year, building trust and learning all I can about Cognizant can deliver more value to them. Over the past three quarters, I believe Cognizant has made meaningful progress on our long-term priorities. While we have a lot of work ahead, we also have much to be proud of. This includes a continuing large deals momentum, improved employee and client satisfaction scores, declining attrition, the scaling of our industry leadership with a platform-centered approach, heightened operational discipline, and the launch of a grassroots innovation movement. Looking ahead, we believe the soft demand environment is unlikely to see a rapid rebound. Therefore, we expect clients to continue tempering the discretionary spending as they begin the new year. Given that market reality, we remain focused on winning efficiency-led large deals aimed at cost-takeout and vendor consolidation, which can offset current pressure on discretionary spending. Our focus on operating discipline and our year-to-date progress on the NextGen program gives us confidence that we can meet our expectation to deliver our 20 to 40 basis points of margin expansion next year. Jan will share more detail on next year in a moment. Taking a longer view with my read of business history, periods of great uncertainty and periods of change rarely coincide. Today, I believe we are in just such a period of simultaneous great uncertainty and deep-seated change. The uncertainty is being compounded by a number of intertwined domestic and international risks. What can become a transformative change is being driven primarily by new general-purpose technologies with immense power such as generative AI, which I believe could become as ubiquitous and consequential for business and society as the Internet did three decades ago. I expect this reality will leave most clients, however focused they are on navigating uncertainty, with no choice but to make some big bets if they are not to be left behind by their peers. I believe Cognizant is in a great position to prepare them for this future, whether by helping them achieve significant savings to underwrite investments in transformation, or by helping them build their own technology muscle, which can include becoming fully AI-ready. In closing, you are all aware that we recently appointed Jatin Dalal to be Cognizant's next Chief Financial Officer, and we are excited that he will be joining us in December. Since this is Jan's last earnings call with Cognizant, I want you all to know that what a powerful partner he's been to me across so many dimensions, strategic, financial, operational, and cultural. He left a positive and indelible mark on our global organization, and I'm especially grateful that he agreed to stay with us until early next year to ensure a smooth transition to Jatin. With that, I'll turn the call over to Jan to provide additional details on this quarter.