The conference call for Cognizant Technology Solutions' second quarter 2024 earnings has begun. The operator introduces the speakers and reminds participants of the question-and-answer session. The speakers are CEO Ravi Kumar and CFO Jatin Dalal. The call may contain forward-looking statements and non-GAAP financial measures. CEO Ravi Kumar is pleased with the company's strong execution and results in a challenging market.

In the second quarter, the company exceeded its revenue guidance and achieved a higher adjusted operating margin. They also sustained their large deal momentum and announced an agreement to acquire Belcan. Despite a challenging demand environment, the company believes these results demonstrate their strong execution of strategic priorities. They saw strong growth in revenue and bookings, with 13 deals over $100 million signed in the first half of the year. The Financial Services segment showed strong growth, particularly in the Americas.

In the Financial Services sector, the banking business saw growth for the second quarter in a row and returned to modest year-over-year growth. This was driven by investments, personalization, and modernization in infrastructure and platforms. The insurance sub-segment also saw growth and one of the major deals signed was with a large American insurance provider. The company has taken steps to stabilize this business segment, including new leadership and industry focus. The Health Sciences segment also saw growth, driven by trends in reducing the cost of care and digital transformation. In the Americas region, there was a 2.8% sequential growth and return to year-over-year growth.

The team has made significant progress in the past 18 months, with strategic investments, operational improvements, and a focus on innovation and talent. This has resulted in improved revenue and operating margins, as well as recognition as an employer of choice. The company is also expanding its presence in smaller cities and has a successful innovation program. Customer feedback has been positive and the company is committed to continued growth and improvement.

Cognizant plans to provide an investor update in 2025 to discuss their strategy and efforts to create value for shareholders. They have recently acquired Belcan, a leading ER&D service provider, to expand their capabilities in the growing market of digital technology and the physical world. They have also introduced a new business, Cognizant Moment, which will focus on next-generation experience services using generative AI and human ingenuity to help clients innovate and grow.

The creative and programmatic services industry is expected to undergo significant changes due to the increasing use of Gen AI. In the past quarter, the company extended its relationship with Victory Capital and signed an agreement with Gentherm to provide engineering services. They have also seen increased demand for cloud infrastructure and have over 200 clients using their Gen AI platforms. The company sees a big opportunity in applying Gen AI to their software development process to increase productivity and reduce costs.

Cognizant believes that the next wave of digital transformation will be fueled by the adoption of Gen AI technology. They have seen a strong demand from clients to move quickly in this area and have been involved in over 750 early client engagements and have over 600 opportunities in the pipeline. The demand for Gen AI is seen across various industries and for four key areas: customer and employee experience, content summarization, content generation, and tech-for-tech. Cognizant has also formed partnerships with companies like AWS to bring Gen AI solutions to market and transform industries like manufacturing.

The company helped set up a pharmaceutical company's AWS infrastructure for their Gen AI journey and automated their data sources. They also launched healthcare solutions using Google Cloud's Gen AI technology and are focused on improving healthcare processes. The company's employees have been dedicated to executing well in a challenging macro-environment. Despite unchanged customer behavior, strong execution and large deals supported sequential revenue growth of 2.1% in constant currency. The company's cost optimization efforts and structural actions under the NextGen program helped deliver adjusted operating margins of 15.2%. The company has increased the midpoint of their organic revenue growth guidance for the full year.

The company saw a modest increase in adjusted operating margin and exceeded revenue expectations in the second quarter. Year-over-year performance was down slightly but improved in the Financial Services and Health Sciences sectors. Products & Resources revenue declined due to customer spending pressures, but there were pockets of strength in areas like grid and cloud modernization and the travel and hospitality sector.

The company's Products & Resources segment is expected to grow with the acquisition of Belcan. Communications, Media & Technology also saw growth, but Europe is struggling with lower discretionary spending. The company's margins were impacted by NextGen costs, but adjusted operating margin increased. The company's GAAP tax rate was 22.7% and adjusted tax rate was 23%. The company ended the quarter with cash and short-term investments of $2.2 billion and a net cash of $1.6 billion. DSO increased by two days sequentially and five days year-over-year due to the business mix.

In the second quarter, the company had a free cash flow of $183 million and returned $226 million to shareholders through share repurchases and dividends. They have $1.6 billion remaining for share repurchases and do not anticipate any significant acquisitions for the rest of the year. They expect to return $600 million to shareholders in the second half of the year, bringing the total to $1.1 billion for the full year. The company's updated guidance for the third quarter does not include the contribution from the Belcan acquisition, which is still expected to close in the third quarter. Their organic revenue growth outlook has improved slightly and they now expect revenue to be in the range of $19.3 billion to $19.5 billion for the full year. This includes a 70 basis point contribution from completed transactions.

The company's organic growth outlook has improved by 55 basis points at the midpoint. The adjusted operating margin is expected to be in the range of 15.3% to 15.5% for the full year. Net interest income is expected to be approximately $80 million. The adjusted tax rate and free cash flow guidance remain unchanged. The company's shares outstanding and adjusted earnings per share guidance have also been unchanged. The company has had 750 early client engagements for generative AI and some clients may be moving beyond the proof of concept stage. The amount of bookings tied to generative AI is currently unknown.

The speaker discusses the rapid integration of generative AI into technology projects, with 750 projects currently in progress and 600 more in the pipeline. However, only a small number of projects have reached production stage due to various challenges such as data architecture, cloud infrastructure, and talent availability. The speaker predicts a steep increase in the use of generative AI as these challenges are overcome, with benefits including increased productivity and task automation. The potential for innovation and new revenue streams is also highlighted through a recent survey of business executives.

The speaker is excited about the potential revenue generated by AI technology and believes it will lead to a quick acceleration in growth. They mention having 200 clients using their AI platforms and see this as a sign of good momentum for the future. They break down the use cases into four categories, with content aggregation and customer/employee experience showing tangible benefits. They also mention the challenges of sharing productivity benefits with clients in the tech for tech use case. The last use case, content generation, is expected to take longer. Overall, the speaker is pleased with the progress and sees it leading to more structural work related to data and cloud, which will lead to monetization. They believe AI is the biggest opportunity for future growth.

In the paragraph, Jatin Dalal and Ravi Kumar discuss the factors that have affected the company's gross margins in the previous quarter. They mention that despite a decrease in headcount and an increase in utilization, the gross margin has remained flat due to the initial investment and lower margins of large deals that are ramping up. They are optimistic that the gross margin will improve in the next quarter. They also mention that the use of AI and automation has contributed to their productivity and growth. Bryan Bergin then asks a question, but it is not mentioned in the summary.

The speaker asks about the level of bookings and whether they are mostly new work or renewals. The speaker responds that new business is significantly higher than renewals and there have been new logos and expansion in bookings. They also mention five large deals with new business and expansion, but note that the duration of deals is increasing. The speaker also addresses the impact of the Belcan deal on margins and revenue synergies over three years.

The company is seeing stability in the talent marketplace and is not facing significant challenges in hiring. They still have room in utilization before it becomes an issue as they enter the second half of the year. They will provide a more detailed update on the Belcan acquisition and its impact on their guidance.

The company has been utilizing headspace and improving it for three quarters, but it is not significant. They are managing the supply chain with visibility of headspace and demand, and are confident in managing the demand and supply chain equation in the second half of the year. The company has significant attractiveness in the market for employees to join, and they have a combination of four things for their fulfillment engine: freshers, rotating talent, reskilling, and hiring lateral talent. The company is gearing up for high-demand situations and is confident in their two big industries, financial services and healthcare. They are back on track with positive momentum in these two verticals. The question was asked about stabilization around large deal project margin and the pyramid structure around staffing these deals. The response was that large deals are being managed well, and the company is confident in their two big industries. The pyramid structure is being improved and the company is back on track with positive momentum.

Cognizant has been successful in winning and delivering large deals for the past 18 months. These deals require upfront investment for transition and cost optimization, but the company is confident in its ability to execute them well. They are not just focusing on application services, but also BPO, infrastructure services, and ER&D. The company is ahead of the curve in competing for these deals, using not just labor arbitrage but also productivity levers like automation and AI. These deals initially have lower margins but can lead to long-term benefits such as improving the overall pyramid and deploying fresh talent.

Ravi Kumar, CEO of Cognizant, discusses the company's progress in the past 18 months, including a focus on improving talent and culture and winning large deals. He believes in layering performance and change, and after seeing success with this approach, the company made a big bet by acquiring Thirdera, a leading ServiceNow company. Kumar also shares that the company's business has four main areas of focus: tech services, BPO, infrastructure-led services, and ER&D.

The company has made a big bet on Belcan, a new bio group and industry muscle, to expand into aerospace and automotive embedded software and engineering research and development. This move is expected to increase the breadth of services and provide a new vector for growth. The company plans to constantly look for big bets to make the platform more resilient, with a focus on bridging gaps in new industries and expanding internationally. While Capgemini recently cited weakened demand in aerospace and automotive, the company is seeing strength in these areas and believes the next decade will be focused on digitizing physical industries.

The company has seen a turnaround in the financial services end market and has been working on it since 2023. They stabilized teams and gained market share during consolidation. They have also focused on industry solutions to pivot into small discretionary spending, which is now coming back.

The company has been successful in stabilizing their financial services sector by implementing an industry solution approach, maintaining a stable team, and actively seeking value-led work. They have a broad range of capabilities and have seen success in the Americas and banking sectors. The implementation of generative AI projects has diverted consulting dollars and led to organizational changes, but these are still in the prototype stage and the company is working to address bottlenecks to move them into production.

The speaker discusses the progress of their company's projects and mentions examples of how they are being used in production. They also mention the importance of focusing on new use cases and building a pipeline as old ones mature. In response to a question about bookings, they mention that the duration of deals has increased, leading to slower growth in ACV but they are still winning market share.

The recent deals and announcements made by Cognizant reflect new work and expansion in both new and existing accounts. The company is also focusing on acquiring new clients. The growth in new work is outpacing renewals in 2024. The company expects a deceleration in the fourth quarter due to seasonality. When asked about the bottom of the IT services spend cycle, Cognizant stated that they have seen an uptick in growth and are on a positive trajectory.

The speaker is commenting on the current market and how it remains uncertain. However, they are still seeing opportunities and have performed well in the BFSI and health sectors. They also mention their success in winning wallet share and their strong execution and fulfillment rates. When asked about Gen AI, the speaker explains that it is a pervasive technology that is difficult to categorize and quantify in terms of revenue. They mention its potential to improve win rates and create productivity, but it is unclear how much revenue can be directly attributed to it.

The speaker discusses the increasing importance of generative AI and how it is becoming a key part of data and cloud modernization projects. They acknowledge the need for better communication and traceability in this area, and express gratitude for the support of their audience.

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