The operator of the Cognizant Technology Solutions Third Quarter 2023 Earnings Conference Call introduces the speakers, Ravi Kumar and Jan Siegmund. Tyler Scott, Vice President of Investor Relations, reminds listeners that some comments and responses may contain forward-looking statements and references non-GAAP financial measures. Ravi Kumar discusses the company's third quarter results, the demand environment, and strategic priorities. The company saw a modest decline in revenue of 20 basis points in constant currency.

Cognizant's adjusted operating margin exceeded expectations in Q3, driven by savings from their next generation program and operational discipline. Bookings grew by 9% year-over-year and the company's record trailing 12-month bookings reached $26.9 billion. The company also saw a decline in attrition and a positive client Net Promoter Score survey. The company is repositioning their Financial Services segment in response to a challenging demand environment.

Cognizant is implementing a subindustry go-to-market approach in the Americas to increase agility and deepen domain expertise. Clients are focused on efficiency and cost reduction, allowing them to invest in digital transformation. Cognizant has expanded relationships with Lineage and Intrum and held a Discovery Summit to discuss the transformative power of generative AI and its application in creating stronger relationships with customers. Live use cases were also demonstrated at Cognizant's new AI platform.

Cognizant plans to invest $1 billion in generative AI over the next 3 years, with a focus on platform modernization, infrastructure, and upskilling. They have opened an AI innovation studio in London and plan to open more in New York, Dallas, and Bangalore. 55,000 employees have been trained in generative AI and 40,000 more are registered for training. Cognizant is also investing in partnerships and experimental infrastructure to support early client engagements. Their strategy is to be industry-led and create value for clients by integrating technology with industry use cases. They are expanding their partner ecosystem to include technology providers such as hyperscalers, cloud providers, and digital software enterprises. This strategy as a full stack provider opens new opportunities for managed services.

Cognizant focuses on flexibility in their business model to meet clients' varying technology needs and offer a range of project types. They also prioritize client collaboration and co-innovation, utilizing their global teams and grassroots innovation movement to generate and implement ideas. This is particularly valuable in the context of clients' increasing use of generative AI.

Cognizant has launched Telco Assurance 360, a cloud-based AI solution for telcos, and signed a multiyear agreement with a leading provider of digital and cloud-enabled solutions. They are also expanding their collaboration with Qualcomm Technologies to implement AI-based solutions. Cognizant is currently running over 150 early client engagements using generative AI and has 300 more opportunities in their pipeline. They are focused on becoming an employer of choice in their industry as part of their long-term strategic objectives.

Cognizant values its employees and has seen a decrease in voluntary attrition, with further improvement expected. They have also announced a training initiative to help individuals gain advanced technology skills and thrive in the digital economy. The company is focused on accelerating revenue growth and has seen success in securing large deals. They are also prioritizing operational excellence by simplifying their operations and getting closer to clients.

Cognizant is working to optimize its operations and streamline processes using AI. The company has focused on building relationships with clients and has seen progress in its long-term priorities. However, the soft demand environment is expected to continue, so the company is focused on winning efficiency-led large deals. They are confident in their ability to meet margin expansion expectations next year. The CEO believes that the current period is one of great uncertainty and deep-seated change, with various domestic and international risks contributing to this uncertainty.

The article discusses the transformative changes being driven by new technologies such as generative AI and how Cognizant is in a strong position to prepare clients for this future. The company has recently appointed a new Chief Financial Officer, Jatin Dalal, who will join in December. The current CFO, Jan Siegmund, has been a valuable partner and will work with the new CFO and leadership team to ensure a smooth transition.

The company's third quarter results were in line with guidance despite a difficult spending environment. Adjusted operating margin exceeded expectations due to savings from the NextGen program. Bookings growth was driven by larger, longer-duration deals. Revenue grew slightly year-over-year, but declined in constant currency. Acquisitions contributed to growth. Financial Services revenue declined due to soft demand and macroeconomic uncertainty is expected to continue to impact the segment in the fourth quarter.

In the third quarter, the company saw a decline in Health Sciences revenue due to a large renewal with a payer customer and challenges faced by larger customers. However, there was growth in Products and Resources, Communications, Media and Technology, and global growth markets. North America revenue was down, but there was growth in Europe, particularly in the CMT, Health Sciences, and Products and Resources segments.

In the third quarter, the resale of third-party products contributed to the overall revenue growth, with a majority in the Financial Services segment. The company incurred $72 million in costs related to their NextGen program, which negatively impacted their GAAP operating margin. Adjusted operating margin was 15.5%, including the negative impact of increased compensation costs and savings from the NextGen program. The GAAP tax rate was 26.8% and adjusted tax rate was 25.7%. Diluted GAAP EPS was $1.04 and adjusted EPS was $1.16. The company ended the quarter with $2.4 billion in cash and short-term investments and a net cash of $1.7 billion. Free cash flow for the quarter was $755 million and year-to-date was approximately $1.4 billion. The company repurchased 4 million shares for $300 million and returned $147 million to shareholders through dividends. For the fourth quarter, revenue is expected to decline by 3.1% to 0.3% or 4% to 1.2% in constant currency.

The company is providing guidance for the fourth quarter and full year, with an assumption of currency and inorganic contributions. The Q4 revenue guidance range is wider due to uncertainty in client spending and decision-making. For the full year, revenue is expected to be down slightly, with a reduction in NextGen costs. The company plans to reinvest the majority of savings and growth opportunities in 2024 and beyond. The adjusted operating margin guidance has been increased, and there is an update on interest income and the adjusted tax rate for 2023.

The company expects to deploy $1 billion on share repurchases in 2023, an increase from their previous estimate of $800 million. They also plan to return $1.6 billion to shareholders through share repurchases and dividends in 2023. The company's adjusted earnings per share guidance for the full year has been adjusted to $4.39 to $4.42. They reaffirm their intent to expand margins by 20 to 40 basis points off of their current adjusted margin of 14.7%. The company's bookings momentum and deal traction remain strong, with a focus on transformation and cost efficiency deals.

The speaker discusses the current state of uncertainty and change in the market, with clients looking for ways to fund their CapEx cycles. They mention that the company is well positioned to help clients take costs out and underwrite savings to support transformation. However, they note that discretionary spending has been soft and it is unclear how it will impact their business. They remain optimistic about the momentum of large deals and the potential for cost takeouts to trigger CapEx cycles for transformation. The speaker also mentions the resale of third-party products, but it is unclear how this will be affected by current market conditions.

Ravi Kumar discusses the company's strategy of pursuing large deals in all areas, including productivity, people takeover, software-led, and efficiency-led. He explains that the timing of these deals can result in varying amounts of revenue in different quarters, depending on whether there is upstream software or downstream services involved. He also mentions a recent $1 billion partnership with ServiceNow and the opportunity for bundled software and services in a managed services model. Kumar notes that it is difficult to predict which quarter will see the most revenue from these deals, but the nature of large deals allows for a consistent flow of revenue. Ashwin Shirvaikar from Citi asks about the comparison of 120 basis points in the current quarter to the average over the last 4 to 6 quarters, and whether the company's forward outlook includes resale amounts.

Jan Siegmund, Cognizant's Chief Financial Officer, thanks Jan for his work and effort over the years and asks about the company's ability to win and be competitive in discretionary work. Jan responds by stating that the company's overall position with clients has improved and they have embraced a philosophy of meeting clients' needs. Ravi Kumar, President and Chief Delivery Officer, adds that the company is focused on deepening relationships with clients and being prepared for when discretionary spending picks up.

The speaker agrees with the question asked by Ashwin and acknowledges the improvement of the company's large deals muscle over the past three quarters. They have invested in infrastructure to support this growth and are confident in sustaining it. The company also has a strong transformation infrastructure and good engagement with clients, which will support future discretionary spend. The speaker also mentions that the Net Promoter Score survey showed high scores in employee and client satisfaction, leading to improved relationships and a sense that "Cognizant is back."

The company has set a strong foundation for future growth and is focused on regaining discretionary spending from customers. Clients have praised the company's stability and leadership, which will positively impact discretionary spending. The company's disciplined approach to deals and cost controls has resulted in strong margin performance. They are confident in maintaining this balance in the coming year, despite some deals having a lower margin profile.

The company has been successful in renewing historic deals that have improved their gross margin profile. They have also been participating in deals across different areas and have strengthened their infrastructure to support execution. They continue to work on productivity and automation tools to stay competitive. The demand environment is expected to remain strong through the end of 2023 and into 2024.

The revenue guidance has been narrowed due to uncertainty around discretionary spending. The company's deal momentum and large deals continue to be strong, but they are unsure how much of the discretionary spending will be impacted. The company is being cautious and keeping a risk adjusted to account for potential softness in the fourth quarter. The company is not giving guidance for 2024 yet, but they have disclosed their commitment to 40 to 20 basis points of margin expansion. The revenue range for the future will be discussed in the next guidance call in three months.

The economic uncertainty and softening of discretionary spending have continued for the past 3 quarters, making it difficult to predict when it will stop. The company's budget is being developed simultaneously with clients' budgets, and they are making assumptions about the future economic development to determine revenue outcomes. The company has seen an increase in visibility of longer-term deals in their portfolio, providing some planning safety. The TCV to ACV mix shift towards larger deals may impact the company's duration, which has increased from 2 to 3 years in bookings.

The company's annual revenue expectations for ACV are down due to a mix shift and delayed revenue from larger deals. This, combined with a decline in smaller deals, explains the recent decline in revenue trend. The company's visibility for revenue in the upcoming year is similar to last year, but they anticipate a better contribution from larger deals. The company has consistently increased the percentage of large deals in their revenue.

The percentage of new large deals has increased, which is a positive change. However, the impact of discretionary spend on revenue growth is still uncertain. The company is focusing on large deals, which make up 30% of bookings, and some clients are using savings from cost-cutting to invest in transformation and trigger CapEx cycles. The company has also seen an increase in AI engagements, which may require CapEx investments. The source of this CapEx could either be from clients' own financial stability or from cost savings in technology.

The speaker discusses how many of their clients are looking to do more with less in terms of IT budgets and use the savings for transformation. However, the uncertain economic environment may hinder discretionary spending, but if it improves, it could trigger a cycle of spending and revenue growth. The speaker also mentions the potential for cost takeout deals to fund these transformations and thanks Jan for their work. The speaker does not provide specific metrics for revenue but mentions a 20-40 basis point range for margin improvement next year.

The company is expecting to see a 20 to 40 basis points range in margin growth next year due to the success of their NextGen initiative and potential revenue momentum. However, there are some factors that could affect this, such as the mix of revenue and the execution of large deals. Additionally, the NextGen program will have a full year impact next year, leading to potential cost savings.

The speaker shares that the company is looking to incorporate real estate savings into their workings in order to achieve margin expansion. They also mention that technology is becoming more strategic for clients and that the company sees in-sourcing as a friend, as they are well-suited to help clients build their own technology muscle through their entrepreneurial spirit and flexible operating model. The company may also lend their human capital and other resources to support clients' transformations and help them build their own captives or global capability centers.

The speaker discusses the potential for growth in the automation and AI industry, emphasizing the importance of investing in this area for long-term success. They also mention the company's positive head count growth and attribute it to their strong commercial momentum. The call concludes with the speaker thanking the participants and inviting them to join the next quarterly call.

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