Cognizant Technology Solutions Corporation

year-over-year in constant currency driven by growth among life sciences and financial services clients including UK public sector which help drive strong constant currency sequential growth of about 4% in the UK. We are encouraged by our momentum in Europe which has been driven by new logos and a more focused sales strategy. The rest of the world increased about 7% year-over-year in constant currency. Growth was driven by recent large deals, particularly within comms, media and technology, and financial services. Turning to bookings. First quarter bookings declined 7% year-over-year, driven by a decline in rest of the world region, which had $200 million plus deals in the prior year period. The mix of new and expansion bookings grew significantly year-over-year and represented more than 50% of our quarterly bookings. On a trailing 12-month basis, bookings grew 3% year-over-year to 26.7 billion and represented a 1.3x book-to-bill. Our pipeline continues to grow particularly for large deals, and we have seen healthy demand in applications, AI, and cybersecurity. Turning to margins. During the quarter, we sold an office complex in India for proceeds of 70 million and recorded a gain on transaction of 62 million. Excluding the positive impact of this transaction, adjusted operating margin was 15.5%. Year over year, margin improved by 40 basis points, primarily reflecting the net savings generated from our NextGen program and the benefit from the depreciation of the Indian rupee. This was partially offset by increased compensation cost. Utilization also increased to approximately 85% driven by operational discipline. Now moving to cash flow and capital allocation. PSO of 81 days increased by three days from both the end of 2024 and the year-ago quarter, driven by business mix. This remains in line with the assumptions in our 2025 cash flow guidance. First quarter free cash flow was $393 million. This includes the $70 million from the sale of an office complex in India, which we plan to redeploy in India over the next several years, including for the development of a new 14-acre learning campus in Chennai that we announced earlier this month. During the quarter, we returned $364 million of capital to shareholders through share repurchases and dividends. In March, we repaid The $300 million outstanding under the credit facility and we ended the quarter with cash and short-term investments of $2 billion or net cash of $1.4 billion. Now turning to our forward outlook. For the second quarter of 2025, we expect revenue to grow 5% to 6.5%. year over year in constant currency. The remaining guidance items I will discuss are for the full year 2025. In 2025, we expect revenue to grow 3.5% to 6% in constant currency. Since we last gave guidance, we have seen certain foreign currencies strengthen considerably versus the US dollar. While our constant currency guidance is unchanged, our reported range has increased by approximately $200 million. As a reminder, our guidance is based on current foreign currency exchange rates. We continue to expect full-year inorganic contribution of a little more than 250 basis points. The low end of the revenue guidance assumes further deterioration in the demand environment. And the midpoint incorporates the deterioration we have seen to date with offsets from pipeline conversion and the large deal TCV growth we saw in the first quarter. The high-end assumes an improvement in the demand environment further supported by our large deals pipeline. As Ravi discussed, the dynamics are shifting in real time and this guidance reflects the visibility we have today. Our adjusted operating margin guidance remains in the range of 15.5% to 15.7%, representing 20 to 40 basis points of expansion. Given the new realities of the macro environment, we expect growth opportunities will continue to be led by larger cost takeout and productivity-led bookings. Based on this dynamic, we now expect margin expansion will be driven primarily by cost discipline and SG&A operating leverage. That said, we remain focused on strengthening our operational rigor through AI-led efficiencies, pyramid optimization, and automation to improve gross margin over the medium term. Our adjusted tax rate guidance is unchanged at 24% to 25%. Our EPS guidance of $4.98 to $5.14 compares to our prior range of $4.90 to $5.06, primarily reflecting the currency tailwind to revenue and a lower share count. This represents 5% to 8% growth. And we continue to expect free cash flow to represent more than 90% of net income. As we discussed at our investor day, we expect to return approximately $1.7 billion to shareholders in 2025, including $1.1 billion in share repurchases and $600 million in dividends. This reflects the incremental $500 million of share repurchases planned for this year that we announced on our investor day. We believe this strategy also gives us flexibility to pursue opportunistic M&A. Therefore, we now expect a weighted average diluted share count of about 491 million compared to 493 million previously. We expect to be active in the market repurchasing shares when our trading window opens. And we remain very confident in our long-term growth opportunities and our leadership team to consistently deliver on our strategy. With that, we will open the call for your questions.

Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that you are in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you limit yourself to one question and one follow-up. One moment while we poll for questions.

And our first question comes from Tianxing Huang with JP Morgan.

Please proceed with your questions.

Thanks so much. Congrats on getting to the winner's circle this quarter here so quickly. I want to ask on the, if you don't mind, on the bookings and pipeline, all the commentary was really helpful. I'm just curious if there's any shift in the quality of bookings or growth projects being replaced by cost-cutting projects. Sounds like that's the case. Just not sure about the pacing of that and if maybe you'll see more awards coming come faster, for example, because of it? And any interesting trends on pricing and margin to win these larger deals?

Thank you, Tinzin. This is Ravi here. I'm going to start and ask Jatin to chip in. Clearly, you know, the productivity game of leveraging AI and sharing the benefits of lower cost of deployment, I think we seem to be leading that relationship that swim lane. We are not only winning in the marketplace, but we are also originating new deals. And when we originate, we have the opportunity to sole source it. These are deals where you could consolidate if you have the wallet share and the trusted, you know, the trust of our clients. So that is going well. That's what is making a large deal stand out. Now in Specific industries like financial services, there is also discretionary growth work coming back. I mean, it was expected that financial services will go through a level of deregulation. It will pull back discretionary. I mean, it will rather accelerate discretionary. So that is coming back. I mean, look at where we are at financial services. Quarter one of last year, 2024, we were minus 6.5% YMY. Quarter one this year, all organic. We are 6.5% YMY, positive. So I would say the growth vector is already starting to apply in financial services, and it is slowly inching back, more innovation-led projects. The 1,400 AI projects I spoke about, those are starting to see especially in financial services, we're starting to see more innovation-led, growth-led. Healthcare, in commercial healthcare, I would say, commercial healthcare, large enterprises, we are seeing a lot of innovation-led work. And finally, this quarter, we announced a mega deal, and we're very happy about the mega deal we announced. In fact, The TCV of all our large deals is higher than the TCV we had last year. And we have a couple of mega deals in the pipeline in quarter two. I'm very hopeful if we happen to cross the finishing line on that, it will help us on our growth journey. And these are mega deals. I mean, I'm not talking about large deals, 500 million and above. So we're kind of starting to feel excited about a nice pipeline of mega deals lining up.

Yep. I think I'll just add to Ravi's answer related with the pricing and the margin expectations from the large deals or mega deals. Very clearly, your ability to win these deals is a factor of three things. The strength of your solution and your demonstrated execution in past on similar deals. And third is your ability to provide the productivity which is commensurate with today's environment and what the potential of Gen AI can offer. And we have scored well on all three and consistently, therefore, pricing is a question, but it is not a question of rate card, but it's really the the quality of solutioning that you are able to do and how much of AI-led productivity, the vector one sort of dynamics you are able to bring in to the answer has been the key driver. It does have margin implications in the initial year, but now we have a portfolio. We have been in large deals for three years now and the ones that we one in end of 22, beginning of 23, are at a place where we are now executing at a better margin than what we had initially. So you manage it as a portfolio because the initial margins you will have to work with in the context of the larger business and larger portfolio.

And if I may just add one other differentiator, the AI productivity We are the only one, I mean, in my peer group, which has actually called it out, and we are continuing to monitor it inside, and we are bold enough to tell our clients that this is productivity we can benefit with our client work. So, I mean, that's an evolving flywheel, which we believe we are fiercely competitive in the market.

Thank you both for that. That's interesting. Just as a quick follow-up, I think it's relevant just with the utilization moving up a little bit, just testing their productivity as well as the headcount question. Is there more room for that to improve, given that? Anything to consider as we're thinking about utilization and margin here in the coming quarters? Thank you for the opportunity.

Yeah. So, to turn it on, it's an interesting question. We went from 82% utilization last year, same quarter, to 85% utilization. So it's a huge lift. Now, when you do good fulfillment, you also need to build capacity for the future. This year, we are going to hire freshers a lot more because we want to size our pyramid. And when you get managed services work, our fixed price work over the last two years has gone up. Managed services work has gone up. So we can actually staff pyramids. but it also comes equally with a overhead of carrying higher bench at a lower cost, and actually offshore. So I'm a big fan of intertwining this with AI productivity, utilization, and right-sizing the pyramid. So that's the next big step we're gonna take. AI productivity, utilization, I mean utilization of experienced talent, you know, there is a little bit of room. But once you feed freshers in, you need some room for utilization to tick up. So we're kind of playing on all three. And, you know, we want to add freshers into the mix this year. So that's broadly how we are approaching, you know, our cost of human capital.

Thank you.

And our next question comes from the line of Ramsey LSL with Barclays. Please proceed with your question.

Hi, thanks so much for taking my questions this evening. I wanted to ask about the April slowdown in decision-making that you're seeing, and I guess in particular the comment that Jatin made about seeing the impact as isolated in the second quarter. I'm just trying to understand the degree to which maybe you see it as particularly ring-fenced by a particular client or geography or some way to kind of make it feel like it's more, you know, temporally bounded rather than something that could, you know, get worse?

Yeah, sure. So clearly it is, let me start with the positive news is that, you know, as I mentioned that financial services continues to present a lot of opportunity and there is a lot of strength there. You know, communication, media, and technology is stable demand. It certainly remains unaffected. We do see pockets of caution in health business because there is a little bit of wait and watch and assessment of what is the implication of the final policies on the spend by some of our customers. The one where we see an impact is products and resources, business, which has more direct impact and implication from tariff, be it a manufacturing sector or our consumer and retail sector. So this is how we see the spectrum of segments and how they're impacted within the U.S.

Okay. And, you know, acknowledging your exposure to U.S. government work is really small, and I know you also called out that you haven't seen any contract terminations. Will Belkin kind of completely dodge the Doge Axe, just given the critical nature of the offerings there, or is there still any risk that you're seeing? Again, acknowledging that it's a very small part of your business that you could see some contracts terminated on the government side. Thanks.

Yeah. So, you know, Belkin... mostly works on engineering and not on enabling technology. So engineering is building things for the future. And in some ways, engineering has always been on the revenue side of the equation or building side of the equation versus enabling side. So that is one part. The second is the exposure to government is Very little for them, and some of it is a little bit through the primes and contractors. It is primarily a lot of commercial aerospace work they do, which has no impact on us. So, so far, we have not seen any impact, and the exposure they have is pretty small.

Thank you.

And our next question comes from the line of Aaron Eller with Wolf Research. Please proceed with your question.

Hey guys, thanks. So your organic constant currency growth did look like it did continue to notably accelerate this quarter. So maybe just revisit that for a minute. If we, other than the financial services discretionary talents you're starting to see, which is good to hear, is this associated with just large deals from the prior year transitioning into revenue now and Where are we on the conversion from existing bookings into revenue, and how could we expect the cadence from an organic standpoint to shake out for the rest of the year from your perspective?

So a large part of, if you have seen the industry vertical split, a large part of organic growth has actually come from health care, and health care has been comprehensive all the way from provider to life sciences. And financial services, which has gone through, I mean, both these sectors have gone through significant upside for us. And we've been, look at our deals in the last two years. We did $2,900 million deals last year. We did $1,700 million deals the year before. And the third year, at the end of the second year and the start of the third year are the ones where you start to see the ramp in a big way. So certainly that's where we are seeing traction. This is also a quarter where all three geographies have five cylinders. I mean, we've had some great traction in Europe. We've had, if you remember the deal we did with Telstra in Australia, that has had traction that is already into the second year. So large deals. And discretionary small deals coming back in financial services. I would say I would put these two as the mix. In fact, this quarter, one of the things we don't tell the street, but we kind of monitor internally, is ACV. Our ACV on a year-on-year basis has gone up as well. The size of the large deals have gone up, and the ACV has gone up. year over year. So that's an important metric. I mean, book-to-bill is at 1.3, trailing 12 months, but our ACV has gone up, and our net new proportion on our large deals has also gone up this quarter, which kind of gives us incremental push. So that's how we're seeing it. The two big industries for us are actually fighting cylinders, which is helping us in the process. And these two sectors, in some ways, also don't have an indirect impact related to the larger economic situation around tariffs and everything else.

All right. That's really helpful. Just maybe touch on the labor market conditions also and what you're seeing there. Obviously, we saw attrition was pretty, I think it was pretty flat quarter over quarter. So just help us understand where you stand there as well as any elements of wage inflation or any changes in the environment. Thanks again, guys. Nice job.

We see stability on attrition. As you can see, it's actually down slightly and And we don't see any undue pressure of attrition and, therefore, either impact on wage, which can raise up, or any impact on our ability to deliver our projects to our customers. I think we are in a good spot, in a healthy spot, and between quarter four and quarter one, there is a continuous stability on that.

Just to add to that, there's one other aspect which helps on our – helps on our growth is fulfillment. We've had an extraordinary period of fulfillment. The number of people we can hire as an attractive employer, the percentage of offers which get accepted, and the percentage of people who are coming back. I've actually mentioned about it in my previous public presentation. earnings that we have a huge number of returners coming back and we have a big pipe of it. That is helping us on fulfillment, which in turn is going to help in discretionary because discretionary is smaller projects with more experienced people. So in addition to a lower attrition flattish curve, we're also seeing good fulfillment.

Thank you.

And our next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.

Good afternoon. Thanks for taking my question. I was wondering if you could maybe just give us a bit of a perspective on sort of your level of comfort. It seems like the current emphasis on cost takeout by your companies is really kind of playing to your strengths right now. Maybe give us a sense about relative to your – your outlook for the year, how much backlog coverage do you have in the current revenue outlook for the year? And then maybe secondly, can we talk a little bit about the gross margin trends? I think you talked about maybe not expecting so much of the margin improvement to come from gross margin, but rather from operating expenses. Maybe give us a little bit of color on if anything has changed with respect to the gross margin composition, whether that's due to the wage increases or something else. Thank you.

Sure, Jim. So on the commentary on the way we look at the guidance for the year is really at the lower end that the environment has to further worsen for that to come true at the lower end. The midpoint of the guidance really factors the impact that we have seen so far which is offset by the pipeline that we see and which is offset by the dilvents that we have had in quarter one. And at the higher end of the guidance, we are assuming that the environment has to become better from where we are in quarter three and quarter four. So that's the sort of spectrum of possibilities that we see for the rest of the year. We do feel good for what we have as our backlog, as Ravi also spoke about it. A couple of points there is that on a trailing development basis, our book-to-bill ratio is 1.3x, which is quite healthy. We have seen a higher net new or expansion deals, more than 50% of total bookings that we have seen in quarter one, which is another healthy aspect of the booking. So that provides the coverage that we see for the rest of the year as we anchor ourselves around the midpoint of the guidance. Your question around, if I cover the gross margin question, I think our context of that comment was more around the fact that the pricing ability to get a superior pricing in an environment like this, as you can imagine, is low. And therefore, it's really the cost discipline that will drive the outcomes on the operating margin for the rest of the year. Ravi spoke about earlier, on gross margin, there are clearly three levers. One is the utilization. Second is is the productivity that we can drive through Gen AI. And third is the pyramid correction through inclusion of recent college graduates into the workforce. And this will continue to be the driver for us to improve the gross margin. Of course, an environment like this also offers opportunity for you to correct your you know, look at all the cost aspects which go in your GNA line and continue to find opportunities there. So that also remains as an option that will continue to pursue. So that's the context of what we have baked in for our operating margin guidance for 2025.

Just a quick color on the, I mean, a different lens on the pipeline to what Jatin just mentioned. You know, We spoke about ACV going up, mega deals in the pipe in quarter two, and hopefully it continues, and net new business higher than the renewal in our mix. Now, there are two other aspects which are starting to make me feel very optimistic. One is our new logo hunting. has really improved since the time I have come. I've not seen such an extraordinary run on new logos. We are starting to feel very confident about not just winning large deals, but winning large deals in new logos. And there is one other aspect. The 1,400 AI projects we are doing, a lot of them are innovation-led. They're small prototypes, proof of concepts and rapid prototypes. But as the discretionary starts to trigger, and more importantly, when we do this cost takeouts, we underwrite some of that money, that downstream opportunities are huge. And we think we are in a pole position on that. So as I mentioned in my remarks, we want to build this company for slow and fast velocity. Right now it is cost takeout and vendor consolidation and productivity. But when the innovation engine fires, like it is doing today in financial services, it will in other sectors, we think we are in a good position to seize those opportunities.

Thank you. Thank you.

And our next question comes from the line of Brian Keane with Deutsche Bank. Please proceed with your question.

Yeah, thanks for taking my questions. Congrats on entering the winner's circle. I guess, Ravi, my question is how sustainable is it? Can you stay in the winner's circle and why would that be?

Yeah, so I want to be humble here to say that one quarter is not enough. We have to consistently do this every quarter. And our belief is being in the winner's circle is about consistency and durability of who we are. What we did this quarter, we're very proud of it, but I would feel like I would say I am in the winner's circle with a sense of pride only when I do this consistently for a couple of quarters. We feel excited about where we are in relative to our peer group, how we are winning, and if we get some tailwinds from the external market as the high-velocity market kicks in, we get to much bigger growth numbers. But what we are comparing ourselves now is relative growth, relative organic growth. And we feel like it's a good starting point. It is, to answer your question, I think it can be sustained. I mean, we just have to keep doing this again and again. And it's a treadmill. We just have to keep running on it again and again. And we have the gas in the tank to sustain it. And I'll tell you why I feel so. We've also built a portfolio which is broad-based. We are an all-weather company. It's broad-based. We are now operating on four pillars of services. Tech services, BPO services, infra-led cloud transformation, and engineering services. We were not operating before on four pillars. Now we are operating on four pillars. We are now expensive beyond healthcare and financial services. I have a new leader for manufacturing now who has come on board. We are going to five cylinders there. We have had traction in comps, comps and technology, retail and CPG. So we have a breadth of industries and not dependent on just two. And as you have seen this quarter, we now have growth beyond North America. North America, we are leading. I think we are leading. We are probably the number one player in North America today, but we now want to do this globally. So if we broad-base this, it gives us the opportunity to make it consistent and resilient because if one falls, the other picks up, and it gives us the opportunity to keep our numbers intact. So that's how we have built this portfolio, and therefore I feel confident to say You know, hopefully sustain this and hopefully do it for at least a couple of quarters and then say, well, you know, I truly think we are in the winner's circle.

Got it. Got it. And then, Jatin, just a two-part question. I guess, first, I know we talked about 4% organic growth in the first quarter. If I do another 400 basis points of M&A or so, we're talking about a one to two and a half percent organic in the second quarter. So it's a little bit of a decel. Is that just the reflection of what you're seeing in April and pushing it through the model? That's question one. And then question two is just that gap between organic revenue growth and headcount growth widened again. Is that just utilization or is that some GNI benefits as well? Thanks.

Sure. So the answer to your first question is yes. The environmental uncertainty that we saw in April has been factored in our quarter two guidance and therefore the numbers that you described are directionally where they are. And we'll continue to see how we execute during the course of the quarter. To your second question, yes, absolutely. I think we have driven We have driven significant utilization improvement, which is from 82% to 85%. But let me just share a simple math. If you see compared to last year, our headcount, and now we are down 8,000 employees. And if I add back another 6,000 odd, that came through Belkan, which is there in the numbers now, but were not present in the numbers for Q1 of 24. We are talking about approximately 14,000 employees lower now than what we had before. And we have delivered 4% organic growth with that many lower number of employees. And utilization is a part of it, 3%. The total number is somewhere around 7% to 8%. So the remaining number has really come through a superior utilization of our resources in delivering the outcome, which has been growing.

Thank you.

And our next and final question comes from Maggie Nolan from William Blair. Please proceed with your question.

Thank you. My question is about the pace of conversion. If the mix of business shifts more toward larger scale costs takeout deals, do you feel confident that those can be signed and start contributing to revenue before the end of the calendar year, or is there a possible push out in revenue to next year?

Great question. In fact, this is an interesting one. Every time a client has come to me saying, the environment is uncertain, I actually felt there will be more paranoia to close cost takeout deals. So there has been in some pockets, I mean, you know, the mega deals that I mentioned I'm chasing, they were in this quarter. They rolled over to the next quarter. But The paranoia about cost and productivity, the timing can never be better than now. I mean, when you're on a slowdown, there is one way to look at cost-takeout deals. When there is a high-velocity market, there's another way to look at it. This is not a slow or a high market. This is an uncertain market. So when in an uncertain market, you really want to get the best values, In a slow market, you might still not take a risk, but in an uncertain market, you want to get the best value. So I think there could be some movement lumpiness of these deals, but when can be a better time than an uncertain complex environment to do cost takeout? And cost takeout not through labor, cost takeout through technology. I mean, the labor cycles have gone through multiple times. There's very little left on the runway. It's actually a technology-led arbitrage. And therefore, I do believe this will be active. I mean, this is a double-engine transformation, the AI piece. The moment the markets take a little high velocity, we can swing to innovation. I mean, that's what's happening in financial services today. Financial services is a little running on its own. because they've had a lull for two years of spend, and now that spend is coming back, and that spend is also getting the sentiment about deregulation, which is helping us. So I would say in a very optimistic way that there cannot be a better time to win in terms. Cost takeout deals is, I mean, the time for them is now when the market is uncertain. Will there be some lumpiness and deals moving between quarters? I think it would be. But it is going to be a re-baselining of the cost of technology deployment. And we want to lead the way.

Thank you. And then what are you seeing in the pricing environment from clients and conversations with clients as well as any competitive behaviors from peers? Thanks for taking my question.

It's intense. Intensity is certainly there on the pricing for large deals, but it is more led by your ability to reduce the total cost of ownership of owning a project or owning a technology for customer as against negotiations around outright rate cards. So the better you are at the vector one capabilities of deploying Gen AI into your solution and overall architecture of the deal, the superior your pricing would be. And that's what is playing out in the marketplace. And as you can imagine, there are differing scales of of technologies, of capabilities out there, and we believe that we do have an early-mover advantage there, as Ravi summarized in the beginning of the call.

Okay.

With that, I would now like to turn the call back to management for any closing remarks.

Thank you. Thank you so much for listening to us. I look forward to more dialogue and looking forward to the rest of the year. Thank you again. Thanks for joining today.

And with that, this does conclude today's Cognizant Technology Solutions first quarter 2025 earnings conference call. You may now disconnect.