Cognizant Technology Solutions Corporation

Ladies and gentlemen, welcome to the Cognizant Technology Solutions second quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. 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 the investor supplement for the company's second quarter 2024 results. If you have not, copies are available on our website, cognizant.com. The speakers we have on today's call are Ravi Kumar, Chief Executive Officer, and Jatin Dalal, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risk and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will provide certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial 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 now like to turn the call over to Ravi. Please go ahead.

Thank you, Tyler, and good afternoon, everyone. Thank you for joining our second quarter 2024 earnings call. I'm pleased with our strong execution and results in what remains a challenging market. We delivered revenue above the high end of our guidance range, expanded our adjusted operating margin, both quarter over quarter and year over year, sustained our large-deal momentum by signing five deals each with total contract value of $100 million or more, and announced an agreement to acquire Belcan, which is expected to expand our ER&D capabilities while diversifying into the high-growth aerospace and defense sectors. Although the demand environment remains challenging and clients' discretionary spending behavior is unchanged from recent quarters, We believe these results demonstrate our rigorous execution against the strategic priorities we set forth last year. Q2 revenue was $4.85 billion, which was $30 million above the high end of our guidance range, and grew 2.1% sequentially in constant currency. This was the highest quarter-over-quarter growth since 2022. With strong execution of our next-gen program and overall cost discipline, we achieved a adjusted operating margin of 15.2%, an increase of 10 basis points sequentially and 100 basis points year-over-year. Our trailing 12-months voluntary attrition for tech services was 13.6% compared to nearly 20% in the prior year period. Second quarter bookings grew 5% year-over-year, and on a trailing 12-months basis, bookings were 26.2 billion, representing a 1.4x book-to-bill. In addition to the five deals each with TCV of over $100 million, we signed two deals that were above $90 million each. In the first half of this year, we have now signed 13 deals each with TCV of over $100 million, well ahead of our 2023 pace, which included 17 deals of this size for the entire year. From a segment perspective, we are especially pleased with financial services. which grew 5% sequentially in constant currency, driven by growth in the Americas. Within financial services, our banking business posted a second consecutive quarter of sequential growth and returned to modest year-over-year growth in constant currency for the first time since Q2 of 2022. We are seeing demand being driven by client investments in hyper-personalization, infrastructure, and platform modernization. Our insurance sub-segment also grew sequentially in Q2, and one of the $500 million-plus TCV deals we signed this quarter was with a large American insurance provider. I believe these results reflect our actions to stabilize the BFSI business since last year. Over that period, we put new leadership in place and drove greater industry focus on these customer segments. We also aligned our go-to-market approach and launched industry-led service offerings in areas like real-time payment fraud detection, payments hub modernization, and digital banking. Health sciences grew by 3% sequentially in constant currency, and we see a number of positive secular trends. For example, payers and providers remain focused on reducing the cost of care. We believe this is benefiting our TriZero platform where we are helping clients manage more than $500 billion in complex claims and improve patient outcomes. Trizetto's end-to-end capabilities are gaining traction as clients see the value in our ability to provide both revenue cycle management and clearinghouse services. On the payer side, we are seeing demand being driven by data and cloud modernization as our clients seek to deliver a modern, best-in-class consumer experience for their members. And in life sciences, clients have begun moving beyond cost optimization projects to ones that accelerate their gen AI and digital transformation in R&D and continue to drive enterprise modernization with SAP S4ANA. By region, we are very pleased with the performance in Americas, where revenue grew 2.8% sequentially and returned to growth year over year. I am extremely proud of the progress the team has made and I'm confident in our opportunities ahead. Looking back over the last 18 months, we believe our strategic investments and focus on improving our operational rigor has further strengthened a foundation on which we can drive sustainable revenue and earnings growth. We invested in our leadership team and attracted new talent to the organization. We drove internal process improvements, particularly around large deals and our talent. And we focus sharply on strengthening our relevance with clients through investments in our innovation strategy and platform offerings. We believe these changes are starting to pay off and are reflected in our recent revenue performance and year-over-year operating margin expansion in the first half of this year. We have maintained our focus on becoming an employer of choice in our industry and we're recognized by the Newsweek as one of America's greatest places to work and greatest places for job starters. We also continue to expand our footprint in smaller cities in India with the opening of a newest office in Indore, as we remain committed to bringing offices closest to where our employees are. And I'm pleased with Blue Bolt, our grassroots innovation program, which has generated 210,000 ideas by our associates since its inception last year. We're also hearing positive feedback from our customers through our project level net promoter score, which I'm pleased to say has improved consistently since 2021 through the first half of 2024. This quarter marks our highest NPS to date. We have taken a number of actions to date to accelerate growth and drive operational improvements, and we look forward to continuing to update shareholders on our progress. To that end, we plan to provide an investor update in the first half of 2025 to discuss, among other things, our strategy, our differentiation of the market, our efforts to create long-term value for our shareholders and other stakeholders. A prime example of our investments in higher growth industries and expanding capabilities is our agreements to acquire Belcan, a leading global supplier of engineering, research, and development, or ER&D services. We have seen growing demand in ER&D services and estimated $190 billion market, whose high growth has been fueled by the convergence of digital technology and the physical world. Over the last three years, we have strengthened our ER&D capabilities, starting with our 2021 acquisition of ESG Mobility, a digital automotive ER&D provider for connected autonomous and electric vehicles. And at the start of my term last year, we acquired Mobica, which focuses on IoT embedded software engineering capabilities from the chip to the cloud. We expect the Belcan acquisition to provide an opportunity for us to expand our service offerings into growth vectors that help move the physical world of manufacturing aerospace and automotive into the age of digital data and AI. Earlier this week, we introduced the next evolution of our experience practice area called Cognizant Moment. which is a new integrated business within Cognizant that builds on our over 20 years of expertise in digital experience. Cognizant Moment will focus on next-generation experience services that are dynamic, data-led, and AI-powered, harnessing the content generation and personalization power that general AI brings, combined with human ingenuity, to help clients innovate, differentiate, and grow. The creative and programmatic process Services lifecycle is expected to go through significant transformation in the years ahead, and we see an opportunity to disrupt the status quo agency model as creative content becomes increasingly generated and orchestrated by Gen-AI-led models. Moving on to additional highlights from the quarter. We extended our relationship with Victory Capital to provide IT infrastructure and data analytics support. Over the next five years, we aim to provide this client with new service management capabilities, improved service productivity, opportunities for cost savings, and the ability for Victory Capital to cost-effectively scale in support of business growth. Additionally, we signed an agreement to provide engineering services to GenTherm, the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry. Under this agreement, we'll expand our existing services to help develop a next generation of products aimed at elevating customer vehicle experiences. Our expertise in firmware development and verification and validation from the Mobica acquisition played a critical role in differentiating our value proposition. We've also seen increased demand for infrastructure-led transformation to cloud, boosted in part by our third era business, which we acquired in the first quarter. And our platform investments have helped drive increased GenAI adoption. As of this quarter, we have over 200 clients on our AI-led platforms, including Neuro IT operations, SkyGrade, and FlowSource. Now, where are we with GenAI? We see one of the biggest opportunities for GenAI as tech for tech, which applies GenAI to our software development cycles. With higher cost of capital in recent times, we believe that the need to do more with less combined with the leveraging of generative AI with lead companies into an era of hyperproductivity. We believe this will fuel the next wave of digital transformation as clients seek to modernize the tech stack and reimagine business workflows with partners like Cognizant. In fact, in recently released follow-on analysis to our 2023 study with Oxford Economics, 70% of the respondents globally indicated they're not moving fast with generative AI, and 82% indicated a delay in execution could put them at a disadvantage. We are seeing a desire from our own clients to move more quickly. Over the past few quarters, we have become more deeply involved in our clients' GenAI journeys. As of the end of second quarter, we have over 750 early client engagements, up from 450 in Q1, and we have over 600 opportunities in the pipeline compared to 500 last quarter. These early engagements have been across verticals with healthy activity in products and resources along with financial services and health sciences. We're seeing demand across four key areas. First, customer and employee experience. Second, content summarization. Third, content generation. And finally, tech for tech to accelerate innovation and technology development cycles. As an example of a recent work, Cognizant designed and recommended a business and technology architecture for AI development for a multinational accounting and audit services firm. This work included identifying the relevant technologies, infrastructure, skill sets, processes, and data required to support AI development across the organization. And we are building a strong partnership ecosystem to support our Gen AI strategy. This quarter we are selected as an AWS GenAI competency partner driven by our capabilities in addressing complex industry problems and our expertise in AWS specific GenAI solutions. And we have signed a strategic collaboration agreement with AWS to bring smart manufacturing solutions powered by GenAI to market and transform manufacturing operations across various industries. As another example, we helped set up the world's largest pharmaceutical company's AWS infrastructure as a part of their GenAI journey. We also automated that client's channeling of desperate data sources into a single vector data store to build a foundation for the GenAI programs. In health sciences, we launched a first set of healthcare large language model solutions on Google Cloud's GenAI technology, including Google's Vetex AI platform and Gemini models. The suite of solutions addressing four workflows, marketing operations, call center operations, provider management, and contracting. Our aim is to improve healthcare administrative processes and experiences for our clients and their clients. We believe GenAI has become a catalyst for clients who are behind in the data modernization or cloud journey, and we are pursuing these projects to help them lay the foundation for enterprise-grade GenAI implementations. In closing, I want to thank our employees around the world for their dedication to our clients and cognizant. We have been executing well in a challenging macro environment. In the back half of 2024, we'll remain focused on our strategic priorities to drive revenue growth, become the employer of choice in our industry, and to simplify our operations. With that, I'll hand it over to Jatin.