The operator welcomes the participants to the Cognizant Technology Solutions First Quarter 2024 Earnings Conference Call and introduces the speakers. The speakers remind the participants about the risks and uncertainties involved in the company's statements and discuss the non-GAAP financial measures used. The CEO reports on the progress made in the first quarter, despite a difficult demand environment, with revenue growth exceeding expectations and an expansion of the adjusted operating margin.

In the first quarter, the company saw a decline in voluntary attrition and an improvement in their next-gen program. However, the demand environment remains uncertain, leading to a shift in client spending priorities. The company reported flat revenue and an increase in adjusted operating margin. Bookings also increased, with a strong momentum in large deals. The company is also seeing early success in diversifying their large deals outside of North America. Overall, the company has a healthy backlog of opportunities to improve revenue performance in the coming quarters.

The company is focused on increasing the value of large deals and has seen growth in some segments but declines in others. They are encouraged by opportunities in their pipeline, particularly in intuitive operations and automation. Demand for their services is driven by clients investing in modern technology infrastructure, hyper-personalization, and innovation. They have signed a new agreement with McCormick & Company to transform and manage their technology infrastructure and have formed a strategic alliance with Shopify and Google Cloud to drive digital transformation and platform modernization for global retailers and brands.

The article discusses the importance for retailers to modernize and invest in innovation to improve customer experiences. The company has signed a strategic agreement with Telstra to enhance their software engineering capabilities and improve operational efficiency. They have also extended their relationship with CNO financial group to implement cloud and digital technologies for personalized solutions. However, funding for innovation is being impacted by demand uncertainties in clients' end markets. The company remains committed to investing in learning and development, people, platforms, and innovation. Client feedback shows a significant improvement in project delivery quality over the last two years.

During the quarter, Cognizant was recognized by Fortune magazine as one of America's most innovative companies in 2024, highlighting their focus on helping clients innovate. This is reflected in their BlueBolt grassroots innovation initiative, which has generated over 130,000 ideas and trained over 220,000 associates. They were also named Google Cloud's 2024 breakthrough partner of the year and ranked number three on LinkedIn's top companies 2024 employer list in India. These client wins and industry recognition showcase their collaborative innovation, which is particularly in demand in the Gen AI space. Cognizant has over 450 early client engagements and 500 additional opportunities in the pipeline, with a focus on improving customer and employee experience, empowering decision making, and accelerating innovation and technology development.

Cognizant has launched an advanced artificial intelligence lab in San Francisco and has already produced 53 AI patents. They have announced partnerships with Microsoft and NVIDIA to incorporate generative AI into healthcare administration and offer training to developers. They are also leveraging Microsoft Co-Pilot and Cognizant's advisory and digital transformation services to help operationalize GenAI and realize strategic business transformation benefits. Additionally, Cognizant is collaborating with NVIDIA to utilize their pre-trained industry-specific generative AI models offered by Nemo.

Cognizant has formed a collaboration with GenAI to provide clients with model-making services and access to pre-trained models, cutting-edge frameworks, and APIs. They have also expanded their partnership with Google Cloud, training their associates to use Gemini for software development and integrating it into their internal operations and platforms. Cognizant plans to upscale over 70,000 associates on Google Cloud's AI offerings in the next 12 months as part of their Synapse initiative. They also plan to integrate Gemini into their suite of automated platforms and accelerators and have awarded $70 million in philanthropic funds to empower diversity through technology.

Cognizant plans to continue investing in AI innovation cycles by focusing on platform infrastructure, productivity studies, and capabilities. They have seen success in onboarding clients onto their AI platforms and assisting them in realizing value and adopting new use cases. Despite the current soft demand environment, they remain committed to investing in areas that will reduce costs, boost productivity, and enable better adoption of new technologies. They also plan to expand and deepen their capabilities, diversify their business, and improve their geographic mix through organic opportunities. The recent acquisition of Thirdera has already shown promising results in expanding their capabilities and generating new opportunities. The company is grateful to their employees and remains focused on increasing revenue growth, becoming the employer of choice, and simplifying their operations.

Jatin Dalal, Cognizant CFO, expresses his gratitude for the organization's culture and execution in a tough economic environment. He highlights the company's strong performance in the first quarter, with revenue exceeding guidance and growth in the communication, media, and technology segments. Dalal outlines his objectives to drive revenue growth, improve margin profile, invest in employees, and drive disciplined execution. He also discusses the company's first quarter revenue of $4.8 billion, a decline of 1.1% year-over-year, and the impact of the uncertain economic outlook and volatile geopolitical environment on client spending.

The financial services industry is facing challenges due to higher interest rates and inflation, while health sciences customers are also impacted by industry-specific headwinds. However, clients are still prioritizing investments in transformation and innovation. The products and resources segment has shown resilience, particularly in the utility and automotive sectors. The communications, media, and technology segment has also performed well, offsetting pressure from technology customers focused on cost reduction. Margins were impacted by costs related to the next-gen optimization program, but adjusted operating margin was 15.1%. Both GAAP and adjusted tax rates were 24.8%, and Q1 diluted GAAP EPS was $1.10 while adjusted EPS was $1.12.

In the first quarter, Cognizant saw a slight increase in DSO and had a free cash flow of $16 million, including payments to Indian tax authorities and bonuses. They returned $284 million to shareholders and completed an acquisition. They expect to return over $1 billion to shareholders in 2024 and will consider strategic investments. For the second quarter, they expect flat to 1.5% growth in revenue, and for the full year, they expect a decline of 2% to growth of 2% in constant currency.

The company is expecting a decline of 2.2% to a growth of 1.8% in revenue for the year, with an additional 100 basis points from acquisitions. They are actively looking for acquisition opportunities to support their strategic priorities. The NextGen program is on track and they plan to reinvest most of the savings into growth opportunities in the future. The adjusted operating margin for the year is expected to be in the range of 15.3% to 15.5%, with a narrow range for the second quarter. They expect net interest income of $60 million and a tax rate of 24% to 25%. Their free cash flow guidance and shares outstanding remain unchanged, resulting in adjusted earnings per share guidance of $4.50 to $4.68 for the year.

The company is opening the call for questions and the first question is about the areas that performed better than expected in the first quarter. The company's guidance for future quarters includes an improvement driven by the ramp of large deals and easier comps, but the timing of discretionary recovery is still unknown. The company has a broad range for its guidance due to the sluggish market. The company does not expect any changes in the discretionary environment.

The speaker discusses the drop in discretionary spending in the financial services sector and the company's performance in this area. They mention green shoots in BFSI and strong growth in healthcare and communications. They also highlight the increase in large deals and expansion into Asia Pacific. The speaker then addresses the margin attribution, noting a decrease in gross margin but a significant reduction in SG&A expenses.

Jatin Dalal and Ravi Kumar discuss the expected trend of SG&A improvement as the company moves through 2024, with potential leverage from growth. They also mention a good quarter for large deals and an increase in client announcements, with expansion into Europe and Asia Pacific.

The speaker discusses how smaller deals between 0 to $10 million have not changed much since the last discussion and it is hard to predict how they will look for the rest of the year. However, there are some improvements in this area, reflected in the financial services results. Most large deals are focused on cost takeout, vendor consolidation, and efficiency. The company is excited about the momentum and is tracking annual contract value in addition to total contract value. The speaker also mentions that the current environment is one of consolidation of spend and cost management, which may lead to pressure on pricing in the industry.

The current market deals are expected to have better pricing, but there is still downward pressure on pricing due to the current demand environment. The company has kept a wider range for their revenue guidance due to uncertainties, but they are making progress and expect to grow sequentially in the second quarter. To reach the higher end of the range, they would need some short-term demand work to come back, but the demand environment remains tough.

The speaker discusses four factors that could potentially impact the company's performance in the second half of the year. They mention an improvement in discretionary spending, the potential for additional revenue from committed business, the inorganic component of their guidance, and the possibility of a rebatch deal. They also address concerns about deal leakage or cancellations, stating that discretionary business must be earned every year and is not easily taken away by competitors.

The speaker discusses the concept of discretionary spend and its impact on business. They mention that there were leakages in the past due to consolidation, but now they have stable clients and no company-specific challenges. The speaker also notes that their net promoter score and attrition rates have improved. They believe that the discretionary spend behavior can lead to delays in spending, but they have been winning managed services deals and are meeting expectations.

The company has seen a significant increase in GenAI client engagements, with 450 active projects and over 500 in the pipeline. The focus is on following AI innovation cycles and building last mile infrastructure to make AI production-grade for clients. This includes improving accuracy, creating explainability, and managing AI platforms. The role of human software developers may change as GenAI tools become more prevalent.

The company has built platforms to improve observability and is investing in productivity studies to understand the impact of AI on different industries and roles. This is preparing for a future where enterprises will be a combination of people and machines. The company is also focusing on improving developer productivity by reducing time spent on repetitive tasks and increasing time spent on innovation. This is seen as a more disruptive opportunity than the cloud and can lead to reducing backlog, improving throughput, and increasing tech intensity at a lower cost. The company sees this as an opportunity to create tech intensity in industries that may not have it currently.

The speaker believes that companies like Cognizant have a big opportunity to embrace software code and build use cases for clients. They mention winning 8 large deals in the quarter and expect them to contribute to 2024 revenue. These deals were already taken into account in their original revenue guidance. The speaker explains that deals won in previous years will have a better impact in the current year, and deals won this year will have a better impact in the following years. They also mention that the span of deals has changed and they are betting on executing well and gaining more from clients.

James Faucette from Morgan Stanley asks a follow-up question about the factors that could lead to the lower end of the company's guidance range. Ravi Kumar, the speaker, explains that a negative performance in the fourth quarter and a flattish performance for the rest of the year could result in this. He also mentions that the focus on transformational deals may impact hiring and the company's pyramid structure.

In this paragraph, the speaker discusses the company's success in managing their services deals and improving utilization. They also mention their ability to adapt to changes in demand and their readiness for potential growth opportunities. The speaker also responds to a question about booking metrics and notes that they have not publicly shared the breakdown of bookings by new logos, renewals, and extensions. They do, however, track this information internally.

The company tracks various metrics related to contracts, such as total contract value, deal size, duration, and ACV. This information helps with forecasting and managing the fulfillment engine. The book-to-bill ratio is also impacted by the duration of deals. The company has a strong focus on acquiring new logos and ramping them up to larger accounts. They have a target list for new logos and separate hunting and mining engines for this purpose.

The company has not effectively communicated their success in acquiring new clients to the external market, but they are pleased with their progress internally. The Q3 and Q4 forecasts suggest a need for a strong Q3 and flat Q4 to reach the higher end of their range. The BFSI vertical has shown some positive signs, with smaller sequential drops and improvements in their offerings and team organization.

Cognizant Technology Solutions has multiple AI projects in the insurance industry, including modernizing mainframes, digitizing distribution networks, and transforming customer service. They also have offerings for fraud detection and prevention and cost reduction in regional banks. The company is stable and well-equipped to handle the current market challenges in BFSI. The expected outcome for the year is at the midpoint of their guidance, with a range of possibilities on both ends. The company responded to a question about the upper end of the range.

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