Ladies and gentlemen, welcome to the Cognizant Technology Solutions Fourth Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Tyler Scott, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release and the investor supplement for the company's fourth quarter and full year 2023 results. If you have not, copies are available on our website, cognizant.com. The speakers we have on today's call are Ravi Kumar, Chief Executive Officer; and Jatin Dalal, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures, where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC. With that, I'd now like to turn the call over to Ravi. Please go ahead.

Thank you, Tyler, and good afternoon, everyone. Today, I would like to cover three topics. Cognizant's fourth quarter and full year results, an assessment of our progress in 2023, and a look ahead to our focus and outlook for 2024. I've been in the CEO role now for a full year and have used this 12 months to dig into the company's client relationships, operations, services portfolio, market environment, finances and culture. I've met with about 400 clients and established a regular cadence of listening to and speaking with our employees across the world. My full year immersion into everything, Cognizant has confirmed my belief in the high level of initiative and motivation of nearly 350,000 employees as well as my belief in the company's distinctive core strengths. I have confidence in our potential to increase our revenue growth, and I'll have more to say about this in a few minutes. Let's start with the fourth quarter where we delivered on our commitments while continuing to implement our cost management program. To call out three highlights. First, we executed well, delivering revenue within our guidance range despite ongoing macroeconomic pressures and meaningfully exceeded our adjusted operating margin expectations. Second, we made further progress on our goal to increase the percentage of large deals, new clients and business in the overall mix. And third, we saw continued improvement in our voluntary attrition. Q4 revenue of $4.8 billion was in line with the guidance range we provided last quarter. Year-over-year, Q4 revenue was down 1.7% as reported or down 2.4% in constant currency. The quarter developed much as we expected as clients remain cautious and limited the discretionary spending. Our Q4 adjusted operating margin of 16.1% was meaningfully stronger than we anticipated, driven by savings from our next-gen cost management program and…

Thank you, Ravi and good afternoon everyone. I am very excited to join Cognizant, and would like to thank the entire organization for such a warm welcome. I would also like to thank, Jan, for helping me in making the onboarding experience so seamless. I have always admired Cognizant's growth mindset, client centricity and the entrepreneurial culture. While it has only been two months since I joined, the energy and passion across the organization are apparent. I have also had the opportunity to participate in our global sales kickoff events in January. This has further strengthened my conviction in Cognizant's capability and our market opportunity. I'm excited to partner with Ravi and the entire leadership team, to build on the progress we have made in 2023, as we strive to reach our full growth potential. In doing so, I believe there is a tremendous opportunity, to create long term sustainable value for our associates, clients and shareholders. With that, let's turn to our fourth quarter and full year revenue results. Fourth quarter revenue was $4.8 billion, representing a decline of 1.7% year-over-year or a decline of 2.4% in constant currency. Year-over-year performance includes approximately 90 basis points of growth from our acquisitions. This led to full year revenue of $19.4 billion, which declined 0.4% year-over-year or 0.3% in constant currency. Year-over-year growth includes approximately 110 basis points of growth from acquisitions. Ravi discussed Financial Services and Health Services, which declined 6.6% and 2.7% year-over-year in constant currency, respectively. So I will quickly comment on our other two segments. Products and Resources revenue was roughly flat year-over-year in constant currency, which included contribution from recently completed acquisitions and the ramp of new business. This helped offset the macro-driven discretionary spending pressure. We saw relatively better performance in North America, particularly among…

Thank you. [Operator Instructions] And our first question comes from the line of Ashwin Shirvaikar with Citi. Please proceed.

Thank you. Hi, Ravi and hi, Jatin, welcome. My first question is with regards to bookings, if you can provide some color as it relates to ACV versus TCV expectations. New versus -- new versus renewals by sizing perhaps, I know you provided by count. And in terms of just cadence of when you expect new contracts to start kicking in and influencing growth, if you can comment on that, that'll be great.

Thank you, Ashwin. Hope you're doing well. And I'm going to start -- this is Ravi here. I'm going to start and ask Jatin to chip in. If you look at how we shaped our 2023 bookings, we have significant upside on the category above $50 million, above $100 million and actually above $250 million TCV. Because these are large deals, managed services, cost takeout opportunities because 2023 was a lot of them, it also has a longer period if I may, in comparison to shorter deals in the range of say $0 million to $5 million versus $0 million to $10 million. The $0 million to $10 million deals actually they kind of get consumed in the same year as they form and it is actually in some ways driven by the discretionary spend. So we have more skewness. We don't comment on the ACV versus TCV. We don't publicly say that, but we have more skewness on large deals in comparison to the smaller deals. The large deals actually, we have significantly gone up over the previous years. Also, we have new renewals, new expansion, I mean renewals, new expansions and new logos in the mix I would say, we again have a significant upside on new and expansion, like we have commented on the numbers of deals. I think even in the TCV numbers, you will find new business and expansion being very, very high. In fact, we also made a point to make sure that we published some of these names in the market, for example, this quarter the important ones we published is Fortrea and if Fortrea is one of the customers we signed large deal with, we also published one on Takeda. So effectively what it does is, it gives you a good backlog for the future because the large deals have a longer period, so they are -- they give you a good backlog for the future. But they also have a runway into the current year where you win, but they have a bigger runway into the future years as you go forward. When we did 2023, we didn't have that luxury from 2022, because the large deal proportion was much lower. Now that we're entering 2024, what we won in 2023 will contribute to 2024, it did contribute to '23, but it will contribute more 2024 and it will create a backlog for the future. Now --

Understood.

The question is, what does it do to -- in our revenues. As much as it starts to contribute to revenues, it -- there is also a discretionary softness, which we had in 2023, which kind of -- a portion of it sits off. So the question is, in 2024, how much is the discretionary going to hold, depending on which you could see the impact. I mean, it's unknown at this point of time, early in the year, what is going to happen to discretionary in 2024. And discretionary in 2023 went down, and it kind of made up -- it kind of got neutralized by the extraordinary run we had on large deals. In 2024, we don't know what's going to happen to discretionary, but it will -- the '23 wins will contribute to it and the continued momentum in '24 will contribute to it as well.

So as it relates to your outlook, what are you assuming beyond 1Q in terms of discretionary? And if discretionary does not actually come back to a good extent, would you still expect things like the investment in consulting relationships, partnerships and so on, to at least incrementally contribute or are we just in a waiting game?

So Ashwin, if you do the math, you will notice that there is some sequential growth assumed in our numbers. So if you do the math, you will get that there is sequential growth assumed in our numbers. We have good traction on cost takeout, vendor consolidation, AI-led productivity deals, those are the large deals we are winning. So we want to double down on those opportunities. We think we have a winning formula, and we will continue to run on it, which will give us the new business and which will give us the expansion on our existing clients. So discretionary today is unknown. I mean -- and that's why if you notice our guidance range is broader because we do not know what we do not know. But our thesis is very simple. We are going to be prepared for a comeback of discretionary. We're going to be fully prepared for it. We will gear our operating engine. We'll gear our fulfillment engine, and we'll double down as it comes, so that we don't miss the opportunity. Equally, on a separate swim lane, we've got a winning formula on large deals for cost takeout, which will remain irrespective of discretionary comes back or not. So we're going to ride on them as well. We're going to continue on that momentum from 2023, which has contributed to new business and new logos. So we will go behind it. So we're going to be prepared on one swim lane, and we're going to double down on the other one. And if that comes back, we want to be seizing those opportunities.

Very helpful as always. All the best.

Our next question comes from the line of Tien-Tsin Huang with JP Morgan. Please proceed.

Hi. Thanks. Good afternoon. The margin outlook was encouraging. So I was hoping for little more detail on the gross margin versus operating margin dynamic. It sounds like utilization rates should improve. You talk about NextGen benefits, productivity, pricing, that kind of thing. So I just want to make sure I understand the callouts for the -- for margins for the year across gross margin and operating margin, if that's okay. That's all I had. Thank you.

Sure, Tien-Tsin. The -- I think the opportunity exists on both lines, and the drivers would be clearly different. The driver for gross margin would be really the efficiency of operations kicking in. We have quite a bit of utilization upside that one can capture as the growth return. The second is really deploying the tools and processes related -- around AI and automation to, to get some operational benefits out. So there's the opportunity on gross margin apart from the traditional opportunity around pyramid and Gen Zs and related traditional measures. On operating margin, definitely, there will be an upside on SG&A front led by some of the cost take-outs related with the tail end of NextGen program that will complete in 2024. So I would be -- I mean, we'll work on both, and we'll see where we go by the individual lines. But overall, we think we have sufficient actions around the overall expansion we have spoken about.

Okay. And within…

Just to add to what Jatin said. We're very pleased with our performance on the NextGen program. We do think we have an opportunity for a full year impact this year on the NextGen program. Equally, as Jatin also pointed out, in addition to the classical levers in gross margin, we do have -- I mean, classical levers being, better operational efficiency, higher utilization, better pyramid, higher offshoring, I mean all of these are -- we are very encouraged with the progress. But we also have this unique opportunity to share the productivity benefits with our clients, which is the technology arbitrage versus the labor arbitrage, driven by generative AI tooling. And I think we are ahead of the curve, which is the reason why we are winning a lot of these large deals and sharing those benefits of productivity, which will then start to contribute to growth and operating margin as we go forward.

Great. That's what I was looking for. Thank you.

Our next question comes from the line of Moshe Katri with Wedbush Securities. Please proceed.

Hey, thanks for taking my question. And Jatin, welcome. It'll be great to work with you again. So a couple of questions. If we're looking at revenue growth, and we're looking at the deal flow that you've been winning since you came on board, Ravi. When do you think we could see that inflection point in revenue growth, especially as you start seeing some of these deals ramping on top of what you won last year and obviously, factoring the fact that it takes some time for these deals to ramp. That's my first question.

Thank you, Moshe. Good to hear from you again. The wins in 2023 started to ramp in 2023, of course, they have a partial benefit in the first year and the start to get to more benefits in the second and the third year. Equally, the momentum as we got into the, into the back end of last year, we actually had more new business, more new logos in the percentage mix of our large deals, which means it'll have higher impact in the future years. So what this really does to us, it makes our business sticky, it increases our backlog for the future, and therefore you're entering the year with tail velocity. The only unknown in the mix is the $0 million to $5 million deals, which are discretionary in nature. And, they kind of neutralize if the fall-off, they kind of neutralize what you win on the large deals. I think part of that happened in 2023 because discretionary was pretty soft in 2023. 2024, we do not know what's going to happen to discretionary. Otherwise, I would say the flow of those deals, the large deals is continuing and it will strengthen in '24 and '25 when it will actually be fully realized. What it does though is -- I mean the unknown in the mix is, how much does that get neutralized by soft discretionary. If the discretionary is not soft, it comes back, we want to be prepared, it then starts to show the momentum. So it's interesting part because it's not about the large deals, it's also about the small deals, because if the small deals start to neutralize even if the plateau, then the large deals will start to show revenue momentum. That's how I see it. So we are executing to these deals pretty well. And this, Moshe, that in the first year, they always start with a transition, they start with a slower trajectory. And then once they take off, they get to a steady state of revenue. So that I'm not as worried about. I continue to believe that we are in good shape on that. What certainly I do not know is discretionary.

Okay. That makes sense. And then the second one is more related to strategy. I've always been intrigued in terms of what Cognizant does with TriZetto. And that used to be a pretty big part of your healthcare practice, and I think you've indicated during our first introduction when you came on Board that you will be taking a second look at TriZetto and trying to kind of maybe revive the business. Are there any actions that you're doing there to, for us to see more of that reflected in the numbers and the healthcare vertical. Thanks a lot.

Moshe, I have to say this, the healthcare ecosystem for Cognizant is the strongest in the market. It's an industry which will go through a significant transformation. So we are on a pole position in healthcare -- in the healthcare economy, all the way from payer, provider, pharma benefits management to Life Sciences. We have an extraordinary strength of platforms plus services. Just look at the order of magnitude of what we do on TriZetto. 250 million plus claims on an annual basis approximately, 100 million plus enrollments on an annual basis. We do 3 billion electronic data interchange transactions. So we have an extraordinary story of TriZetto, 60-plus percent of the U.S. insured population goes through our platforms. It's the fulcrum and the nucleus of healthcare ecosystem. So we're going to invest and double down on it, and seize the opportunities which come on this transformational journey for our clients. This is going to be a sector which will significantly transform and we have an exciting clientele base across the spectrum. We've invested on generative AI. We have done multiple announcements last year of embedding generative AI, including our partnership with Microsoft on the OpenAI piece, which we have embedded into the entire stack. So we are very excited about TriZetto. I am actually doubly sure that, that is going to be an integral part of our healthcare strategy for the future.

Thanks a lot.

Our next question comes from the line of Surinder Thind with Jefferies. Please proceed.

Thank you. Just on the AI component and the potential acceleration that you may see as the year progresses. When you roll out these new products and services, is there a pricing conversation that you have with clients? Is there a way to price this differently? Can you command more? Or is it just that the expectation is you'll get a lot more in consulting services down the road? Can you maybe provide some color on that?

Surinder, that's a great question. Thank you for that. I would say three swim lanes Surinder. The first is the last -- the last mile holding. The ability to take foundational models, which are available in the market and create a funnel to make them enterprise-grade which is the work you have to do on the last mile, all the way from managing, governing and orchestrating large language models or foundational models. And that's a variety of things. It starts from accuracy of the models to reducing hallucinations, to doing performance cost optimization, to reinforced learning unlike software. Generative AI goes through reinforced learning, even after you implement it because it learns through the process. So there is a lot of heavy lift needed to take the foundation models and make it production-grade, enterprise grade. And I think we have a unique opportunity, and I'm excited about what I have actually seen with the platforms we have built, the platforms we announced to the market, and how we are helping our clients to get there. We have 250-plus prototypes running, we have 350-plus in the pipeline. Whenever those CapEx cycles trigger off, I think we are in a good position to monetize on that. That's the first swim lane. So it's -- you could call it consulting in your language the way you put it, but it is actually a bunch of things we want to work on. There is a second swim lane, I would say, which is about how do you apply it to your productivity. And that kind of switches on to two things. How -- what does it do to developer productivity? What does it do to technology life cycles, all the way from design to testing to writing code to all of it. And I…

That's helpful. And then as a follow-up, just to kind of tease out what you're seeing in the discretionary spend environment. I guess the question I would ask is how much more can clients really pull back on that spectrum of spend? And then I guess the counterquestion here would be, given the relative economic resiliency, why aren't clients spending more at this point? Like what's holding them back? Like what do they need to see? Or what are they signaling to you of when they're willing to perhaps take some risk?

So let me start and ask Jatin chip in. I would say, the discretion or the spend, if you take industry view is the motion banking, financial services and insurance. That's a sector which is burdened with high interest rates. And because of the high interest rate, there is a wait-and-watch and kind of a pause on discretionary work. Remember, these are financial services is one of the sectors which also has a strong technology retained organization. So what they outsource is dependent on how much is the discretionary. Let's see how the industry shape up in the year. And normally what I have seen based on the experience is, if there are one or two repeatable cycles of interest rate adjustments downwards, we will start to see the spend to come back. Discretionary is also tied to transformational work, that means transformational work, normally it takes off when there is a period of certainty. I've said this before in my remarks that we see this as a period of uncertainty and a period of change. I mean the change is -- the change ahead of us is, is such a positive catalyst. So if the uncertainty starts to go away. I think that change will trigger discretionary to come back. It's also a deal where, at the back end of the year, we -- in many parts of the world there are elections, so I don't know what impact does to discretionary. But, the AI cycle can trigger the discretionary back the industry rates drop can trigger the discretionary back, financial services is the biggest one. So we are hoping that the stability in that sector based on interest rate cuts can drive that discretionary back. So it's a little bit of -- I'm waiting for how the interest rate shape up for the -- in this year to really say whether it is going to come back or not.

Yes. So Surinder my -- this is Jatin. I will just add to say that, there is this -- if you see the history of IT services industries and shocks and shock recoveries is always some event led. And as we all know, the current situation is not a shock, it's not an event, it is an overall high interest cost across the spectrum of the yield curve, which is weighing down on minds of decision-maker. It is difficult to call when the discretionary comes back, it's very sector-specific. And it is a little novel from what the world has seen in last 20 years, where there was one big event and then you actually saw interest rates go down very, very sharply, very quickly, and there was a bounce back of the demand. This time, it is a new slowdown that we are -- and I'm sure all our customers are coping to deal with that in terms of how they react to it.

Also one other, one other, I would say, one other event in the mix is, during the COVID era there was a heavy discretionary in many sectors. And that's going to -- that went through -- that's kind of gone through a course correction, if I may, including the fact that there was uncertainty. So it's going to be an interesting year to watch on discretionary and that's probably as we go through the year, we'll probably get more visibility on it.

That's very helpful. Thank you.

Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed.

Great. Thank you very much and really appreciate all the color and detail you are giving today. I'm wondering, just in terms of the larger deals that you've talked about, can you talk about the scenario of win rates for Cognizant? Sounds like you're pretty confident, etc., but just wanted to get a sense for how you're perceiving your competitiveness right now in the market.

Yes. So you would have noticed that these large deals we are doing, we're doing based on a differentiated value proposition, and we are holding our pricing. I mean that's one of the reasons why our margins were good enough, good in 2023. And we gave 20 basis points to 40 basis points improvement this year. Our strength on our large deals is the following. We are able to unify the company together with the velocity, which is in line with what our clients are looking for. I mean, the velocity of these deals is very high, because these are cost takeout, vendor consolidation kind of deals. So you need that velocity, you need the unification of -- to come together, it's in our DNA, so I have kind of energized the DNA if I may in 2023, and that has helped us significantly. The second I would say is, there are sectors where we have strong capabilities. And in those sectors, we are a formidable force. We can be provocative in those sectors. We don't need to wait for a request for a consolidation or a request for productivity. We can actually work with our clients. We are very sticky. I mean we are also a company over the 30 years of Cognizant's heritage. We are very sticky to our client. So we could be provocative with bold ideas. I see that as a trade and an integral part of the DNA. And as a CEO of the company, I've been able to lead those provocative conversations with our clients. That has helped us significantly. We have an extraordinary front-end team, if I may. The third, I would say, is our execution muscle, which we built in the last one year, I'm very proud about it. And that has helped us to not just deliver these deals well, but also hold our margins as we execute these deals. The last one, I would say, in the mix is we also have, I would say, uniquely a differentiated value proposition related to productivity led by automation and AI, which can actually help to that provocative board thinking to support construction of these deals and share the benefits about the extraordinary opportunity AI provides to us. So I would say these are the three or four things which have helped us to win deals. And I would like to continue on that momentum in 2024.

That's great. And then wanted to ask is -- it's interesting in each of the last couple of quarters, you've increased net head count slightly. I think usually, that's taken as a positive indicator. Can you just talk about, as you're maintaining head count even in the face of potentially being down as much as 2% at the bottom end of your guided range this year, how you're thinking about managing that? And is the nature of the people you're adding and retaining just to serve kind of these larger deals that you've already booked? And how much of it is just in anticipation that more discretionary and smaller deals could come back? Just trying to get a sense for how you're thinking about managing head count and what we should take from that?

Yeah. So James, this is really a combination of both retaining sufficient flexibility for the growth to come. If the growth comes back, you should have sufficient flexibility on the bench. That's one. And two is really some plant addition that we do systematically to certain skill sets and certain part of our pyramid that has both contributed to this small addition that you are seeing on the total headcount.

Also, just to add to what Jatin said, you should remember, we have an extraordinary story on how well we have done on attrition. I mean we are now really a top-notch player with industry-leading retention plan. I mean we have -- look at where we were at the start of quarter one in 2023 to now, our attrition has significantly improved. That is also helping us to be ready for the discretionary at any point in time it comes back, because it gives you the cast and capacity to fulfill.

That's great. Thank you so much to both of you for your help.

Thank you, James.

Our next question comes from the line of Ramsey El-Assal with Barclays. Please proceed.

Hi. Thank you for taking my questions this evening. I wanted to ask you if you could comment on how much visibility or maybe relative visibility you have right now into fiscal '24? And I guess I mean relative to a more settled normal environment, and I guess the underlying question is, are you having to bake in more conservatism into your guidance this year to account for environmental, external factors that are difficult to kind of see through at this point?

Sure, Ramsey. Ramsey, I mean, this is a typical beginning of the year where we don't know what we don't know. If you really see mathematically, if you dissect our guidance, you would see that there is a certain growth -- sequential growth that we have assumed during the course of the year. So there is a certain growth assumption that we are working in with. But environment remains uncertain, and it's certainly a slower start to the year, as Ravi indicated in his opening remarks.

Got it. Okay. Thank you. And then a quick follow-up from me. Could you also give us your view on the extent to which clients are prepared to embrace generative AI? How much work still needs to be done on core sort of underlying technologies at this point for enterprises to start taking advantage of the new technology?

I would say, in some areas, we are seeing more confidence. The two big areas I want to highlight is employee productivity and the second is customer service. We see them getting faster to production grade. Employee productivity is amplifying human potential, as we call it. Customer service always had uniquely opportunities here because remember, when robotic process automation, which is down the chain and the continuum of AI and generative AI, we also had the most reduction there. These are the two areas where they are ready. I think the things that grappling with is, as I mentioned, and the need of a system integrator like Cognizant plays an important role. The things they're grappling with is the accuracy of the models. They explain ability of the models, the traceability of the datasets. So that the explainability could be judged. I mean, remember this is, this is output, which is coming out from a computer which is building logic, which means you need to have explainability behind it to make it responsible enough. And I think the other thing that grappling with is -- I mean, we call that hallucinations but that's what it means in different ways. The other thing that they are grappling with this performance versus cost. So that they can make it production grade. But we will -- If it will disrupt, one of the studies we did with Oxford Economics is it will disrupt 90% of the jobs. Some jobs will get disrupted more, some jobs will get disrupted less. The tasks within jobs will get disrupted and we created something called an exposure of core on jobs which gives us the opportunity to figure out with jobs will actually go through more disruption. But at a high level I would say, these are the two broad areas where customers are probably going to be more prepared to cross the bridge on embracing generative AI into enterprises. Needless to say, this is going to be one of the most pervasive technologies in -- at times. So, I'm excited about the prospects but I'm equally, I'm equally getting prepared to what it means for a system integrator.

Very interesting. Thanks.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the call back to management.

Great. Thank you all for your interest in Cognizant and for joining our call. We look forward to catching up next quarter. Thank you.

This concludes today's conference. You may now disconnect. Enjoy the rest of your evening.