In the second quarter of 2023, Cognizant reported revenue of $4.9 billion, at the high end of their guidance range. This was a 1% increase from the previous quarter and a 0.4% decrease year-over-year in constant currency. Tyler Scott, the Vice President of Investor Relations, introduced Ravi Kumar, the Chief Executive Officer, and Jan Siegmund, the Chief Financial Officer, for the call. Ravi discussed the second quarter results, the demand environment, their commitment to generative AI, and an update on their long-term priorities.

In Q2, Infosys recorded strong bookings growth of 17% year-over-year, with 30% of bookings coming from large deals. Voluntary attrition in the tech services business declined to 19.9%, down 3 percentage points sequentially and 11 percentage points year-over-year. Financial services saw a year-over-year revenue decline due to the soft market, so Infosys is transitioning existing work to managed services and engaging with fintech companies to capture discretionary spending on transformation work. Examples of this include S&P Global's Configure Prize Quote System modernization and Max Life Insurance's innovation and development center in Chennai.

Cognizant has a flexible fine-centric operating model that allows them to assist clients across industry sectors to reduce costs, consolidate vendors, and achieve both technology and operational efficiencies. They recently extended a partnership with Gilead Sciences to manage their global IT infrastructure and lead digital transformation initiatives. They also have established a platform-centric approach to speed clients' consumption of technology, and have launched two new platforms and Cognizant Neuro AI, designed to speed the adoption of generative AI.

Neuro AI is helping clients advance from identifying company-specific use cases to operationalizing AI. Generative AI is being used to curate, train, modernize, and make data production ready for clients. Neuro AI is offering industry-specific solutions, cross-industry use cases, and product innovations. An example of this is helping a healthcare product company speed up the research process by authoring scientific content and helping a property and casualty insurer analyze large loss complex claims submissions.

Cognizant has announced several partnerships to help expand their AI capabilities, including a multi-year agreement with Nuance Communications, an expanded alliance with Google Cloud, and an expanded relationship with Microsoft. They are also partnering with ServiceNow to accelerate the adoption of AI-driven automation. These partnerships will help to improve operational efficiency, reduce claim costs, and create a healthcare large language model to simplify and improve the accuracy of complex healthcare administrative tasks.

The CEO of Cognizant discussed the company's three long-term performance objectives: becoming an employer of choice in the industry, accelerating revenue growth, and enhancing operational discipline. The company has seen a decrease in voluntary attrition and improved engagement results in their annual people engagement survey. Additionally, data from their project-level client feedback process shows an improvement in scores and their best net promoter score since launching the program in 2021. The CEO is committed to creating a diverse organization that reflects the world in which they operate.

Cognizant has increased its focus on diversifying its talent and leadership, including through educational partnerships, upskilling and reskilling current employees, and hiring initiatives. They are also investing in generative AI and enhancing operational discipline to optimize cost of delivery. They have a NextGen program underway to help with this.

The CEO has been in his position for seven months and has met with clients, partners, and employees to gain insights and ideas. Cognizant is embracing its heritage of industry and technology, a flexible client-centric operating model, and a distributed delivery network. The company is also working to reduce structural costs, simplify its operating model, and redistribute development centers from India's largest cities to smaller cities. The Blue Bolt innovation movement has generated 32,000 ideas and is now serving as a company's innovation engine. The CEO expressed gratitude to all associates for their hard work and outlined plans for the future.

Jan Siegmund announced his intention to retire from Cognizant early next year, and Ravi praised his accomplishments while in the role. Jan is working closely with his eventual successor to ensure a smooth transition. The company delivered second quarter revenue at the high end of their guidance range, with bookings growth driven by larger and longer duration deals. Additionally, their NextGen program is on track and yielding savings. Year-over-year growth includes a contribution from recent acquisitions.

In the second quarter, financial services experienced a 5% decline in revenue due to weak discretionary spending. Health sciences revenue grew 2%, driven by strong demand for integrated software solutions. Products and resources revenue grew 4%, due to recent acquisitions, ramp of recent wins, and demand from automotive and travel and hospitality clients. Communications, media, and technology revenue declined 40 basis points, due to softness among both technology and communications and media clients. The company is focused on building momentum in the quarters ahead, and has experienced an increase in pipeline for cost takeout and productivity-led initiatives.

In Q2, revenue in North America declined 2%, while Global Growth Markets (GGM) grew approximately 5%. Margins were impacted by the NextGen program, and the GAAP tax rate was 21.1%. Adjusted EPS was $1.10 and the company ended the quarter with a net cash of $1.4 billion. Free-cash flow in Q2 was a negative $32 million due to a change in U.S. law.

Q2 free cash flow was negatively impacted by $420 million, including $300 million in tax payments, which was in line with expectations. During the quarter, $400 million was spent on share repurchases, and $148 million was returned to shareholders through dividends. For the third quarter, revenue is expected to increase by 0.6-1.6%, and for the full year, the guidance suggests a decline of 0.9-1.1% in constant currency. The next-gen program is on track and cost savings assumptions remain unchanged.

The company expects to incur $350 million in total charges versus $400 million previously, with $250 million of NextGen costs in 2023 and $150 million related to office space consolidation. The adjusted operating margin is unchanged at 14.2-14.7%, and interest income is expected to be approximately $115 million, with an adjusted tax rate of 23-24%. The company will return approximately $1.4 billion to shareholders and anticipates full year adjusted earnings per share of $4.25-$4.48. The company was asked for more color on the nature of bookings and discussions with clients.

Ravi Kumar spoke about the bookings growth of 17% year-over-year and the two swim lanes of deals: transformation and efficiencies, productivity, cost takeout. He mentioned that the deals they are seeing are over-indexed to cost takeout and consolidation. Five deals over $100 million TCV were booked, two of which were renewals and two were net new. He also discussed the difficulty of creating a rhythm for large deals and how financial services are muted on discretionary small deals. Jan Siegmund then added something to the conversation.

Jan answered part of the question regarding why the full year range for margins was not increased, citing ramp costs. However, there are other factors to consider, such as investments in R&D and payment capabilities, that have contributed to the decision not to increase the margin range. The decrease in smaller deals with lower values was offset by larger deal volume, however, the immediate effect of this on revenue was lower than the comparable quarter. The longer-term deals signed will take time to translate into revenue.

Jan Siegmund discussed the absence of the fourth quarter merit cycle this year and the progress made on the NextGen initiative, which includes severance costs and restructuring of the real estate portfolio. He noted that this could help offset expected pressure on larger deal rollouts and the uncertain business environment. He concluded by expressing confidence in the success of the NextGen program.

Ravi Kumar explains that Cognizant is embracing GenAI in three parts. The first is using it to run their business, the second is building their operating model using GenAI, and the third is to arbitrage on technology. To increase the productivity of the organization, they are partnering with big tech companies to train 25,000 people.

Microsoft and Google partnered with the company to run initiatives on GenAI and language models. They are also building cognitive skills in the company, and are experimenting with generative AI with their clients in order to increase efficiency, productivity, and better experiences. They have over 100 early engagements in customer service.

Ravi Kumar has been at Cognizant for almost a year and is looking to promote and progress people inside the company to build leadership from within. He is also excited to bring back former Cognizant employees who have left in the last few years to take on leadership roles. He has already hired one leader for his Industry Solutions Group and another leader for his Infrastructure Sales.

Ravi Kumar discussed the demand profile over the past three months, noting that it has been very volatile. He stated that opportunities related to discretionary spending and future transformation of enterprise landscapes have either been uncertain or have fallen off. He noted that Financial Services have been the most impacted sector, but other sectors have been affected as well.

This paragraph discusses the opportunities for consolidation that have opened up due to technology arbitrage. It is a win-win value proposition for both the company and the customer, and it has allowed the company to keep their large deal pipeline healthy. Additionally, headcount has gone down quarter-over-quarter due to the NextGen initiative.

Ravi Kumar discusses the potential to increase billable utilization and decrease attrition to increase headcount, while also mentioning the potential risks of generative AI, such as short contract lengths or pricing pressures. He states that the industry has always had productivity tools, and that there is headroom for operational efficiency to conduct more billable work.

Productivity tools have been a way to differentiate for the last twenty-five years, and automation technologies have been embedded into services in the past five years. Robotic process automation is a continual embedment, and technology is deeply embedded into operations. Embedding these tools allows companies to stay competitive and win business. GenAI is a bigger inflection point that can be an opportunity for companies to create technology arbitrage. If it is not embraced, it will become a threat.

Jan Siegmund explains that their guidance reflects their true expectations for the second half of the year, but they are carefully watching the scaling of their large contracts and the general economic climate of their clients. He acknowledges that there is potential for upside if the projects scale faster than anticipated, but also potential for downside from unexpected bad news and discretionary spend.

Jan Siegmund discussed the success they had with larger deals and the factors which contributed to their success, such as pricing. He also mentioned that financial services were still experiencing downward pressure, while healthcare was relatively strong due to their strong market position. He concluded by saying that pricing was an important factor in their success.

Ravi Kumar explains that the company has been successful in winning large deals due to their commitment to the clients, their strong solutions, and their institutional infrastructure. They have also strengthened their outreach to partners, hyperscalers, and deal advisors. This has enabled them to price the deals to win and deliver them to margins.

Tyler Scott and Tien-Tsin Huang discussed the importance of having an entrepreneurial spirit and a growth mindset when it comes to creating deals for clients. They believe investing in deal infrastructure, being bold and creative with clients, and investing in new automation and AI-led productivity tools will give them a competitive edge in the market. They concluded the call by thanking everyone for joining and looking forward to speaking with them again soon.

This summary was generated with AI and may contain some inaccuracies.