Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second Quarter 2024 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, Investor Relations. Please go ahead, sir.

Ravi Kumar:

Thank you, Tyler, and good afternoon, everyone. Thank you for joining our second quarter 2024 earnings call. I'm pleased with our strong execution and results in what remains a challenging market. We delivered revenue above the high end of our guidance range, expanded our adjusted operating margin both quarter-over-quarter and year-over-year, sustained our large deal momentum by signing five deals each with total contract value of $100 million or more, and announced an agreement to acquire Belcan, which is expected to expand our ER&D capabilities, while diversifying into the high-growth aerospace and defense sectors. Although the demand environment remains challenging and clients' discretionary spending behavior is unchanged from recent quarters, we believe these results demonstrate our rigorous execution against the strategic priorities we set forth last year. Q2 revenue was $4.85 billion, which was $30 million above the high end of our guidance range and grew 2.1% sequentially in constant currency. This was the highest quarter-over-quarter growth since 2022. With strong execution of our NextGen program and overall cost discipline, we achieved adjusted operating margin of 15.2%, an increase of 10 basis points sequentially and 100 basis points year-over-year. Our trailing 12-months voluntary attrition for tech services was 13.6% compared to nearly 20% in the prior-year period. Second quarter bookings grew 5% year-over-year and, on a trailing 12-months basis, bookings were $26.2 billion, representing a 1.4x book-to-bill. In addition to the five deals each with TCV of over $100 million, we signed two deals that were above $90 million each. In the first half of this year, we have now signed 13 deals each with TCV of over $100 million, well ahead of our 2023 pace, which included 17 deals of this size for the entire year. From a segment perspective, we are especially pleased with Financial Services, which grew 5% sequentially in constant currency, driven by growth in the Americas. Within Financial Services, our banking business posted a second consecutive quarter of sequential growth and returned to modest year-over-year growth in constant currency for the first time since Q2 of 2022. We are seeing demand being driven by client investments and hyper personalization, infrastructure and platform modernization. Our insurance sub-segment also grew sequentially in Q2, and one of the $500 million-plus TCV deals we signed this quarter was with a large American insurance provider. I believe these results reflect our actions to stabilize the BFSI business since last year. Over that period, we put new leadership in place and drove greater industry focus on this customer segments. We also aligned our go-to-market approach and launched industry-led service offerings in areas like real-time payment fraud detection, payments hub modernization and digital banking. Health Sciences grew by 3% sequentially in constant currency and we see a number of positive secular trends. For example, payers and providers remain focused on reducing the cost of care. We believe this is benefiting our TriZetto platform, where we are helping clients manage more than [$500 billion] (ph) in complex claims and improve patient outcomes. TriZetto's end-to-end capabilities are gaining traction as clients see the value of -- in our ability to provide both revenue cycle management and clearinghouse services. On the payer side, we're seeing demand being driven by data and cloud modernization as our clients seek to deliver a modern best-in-class consumer experience for the members. And in life sciences, clients have begun moving beyond cost optimization projects to once that accelerate their GenAI and digital transformation in R&D and continue to drive enterprise modernization with SAP S/4HANA. By region, we are very pleased with the performance in Americas, where revenue grew 2.8% sequentially and returned to growth year-over-year. I am extremely proud of the progress the team has made and I'm confident in our opportunities ahead. Looking back over the last 18 months, we believe our strategic investments and focus on improving our operational rigor has further strengthened a foundation on which we can drive sustainable revenue and earnings growth. We invested in our leadership team and attracted new talent to the organization. We drove internal process improvements, particularly around large deals and our talent. And we focus sharply on strengthening our relevance with clients through investments in our innovation strategy and platform offerings. We believe these changes are starting to pay off and are reflected in our recent revenue performance and year-over-year operating margin expansion in the first half of this year. We have maintained our focus on becoming an employer of choice in our industry and we're recognized by the Newsweek as one of America's Greatest Places to Work and Greatest Places for Job Starters. We also continue to expand our footprint in smaller cities in India with the opening of a newest office in Indore, as we remain committed to bringing offices closest to where our employees are. And I'm pleased with Bluebolt, our grassroots innovation program, which has generated 210,000 ideas by our associates since its inception last year. We're also hearing positive feedback from our customers through our project-level net promoter score, which I'm pleased to say has improved consistently since 2021 through the first half of 2024. This quarter marks our highest NPS to-date. We have taken a number of actions to-date to accelerate growth and drive operational improvements, and we look forward to continuing to update shareholders on our progress. To that end, we plan to provide an investor update in the first half of 2025 to discuss, among other things, our strategy, our differentiation in the market, our efforts to create long-term value for our shareholders and other stakeholders. A prime example of our investments in higher-growth industries and expanding capabilities is our agreements to acquire Belcan, a leading global supplier of engineering, research and development, or ER&D, services. We have seen growing demand in ER&D services, an estimated $190 billion market whose high growth has been fueled by the convergence of digital technology and the physical world. Over the last three years, we have strengthened our ER&D capabilities, starting with our 2021 acquisition of ESG Mobility, a digital automotive ER&D provider for connected autonomous and electric vehicles. And at the start of my term last year, we acquired Mobica, which focuses on IoT-embedded software engineering capabilities from the chip to the cloud. We expect the Belcan acquisition to provide an opportunity for us to expand our service offerings into growth vectors that help move the physical world of manufacturing aerospace and automotive into the age of digital data and AI. Earlier this week, we introduced the next evolution of our experienced practice area called Cognizant Moment, which is a new integrated business within Cognizant that builds on our over 20 years of expertise and digital experience. Cognizant Moment will focus on next-generation experience services that are dynamic, data-led and AI-powered, harnessing the content generation and personalization power that generative AI brings, combined with human ingenuity, to help clients innovate, differentiate and grow. The creative and programmatic services lifecycle is expected to go through significant transformation in the years ahead, and we see an opportunity to disrupt the status quo agency model as creative content becomes increasingly generated and orchestrated by Gen AI-led models. Moving on to additional highlights from the quarter. We extended our relationship with Victory Capital to provide IT infrastructure and data analytics support. Over the next five years, we aim to provide this client with new service management capabilities, improved service productivity, opportunities for cost savings and the ability for Victory Capital to cost effectively scale in support of business growth. Additionally, we signed an agreement to provide engineering services to Gentherm, the global market leader of innovative thermal management and pneumatic comfort technologies for the automotive industry. Under this agreement, we will expand our existing services to help develop a next-generation of products aimed at elevating customer vehicle experiences. Our expertise in firmware development and verification and validation from the Mobica acquisition played a critical role in differentiating our value proposition. We have also seen increased demand for infrastructure-led transformation to cloud, boosted in part by our Thirdera business, which we acquired in the first quarter. And our platform investments have helped drive increased Gen AI adoption. As of this quarter, we have over 200 clients on our AI-led platforms, including Neuro IT operations, Skygrade and Flowsource. Now, where are we with Gen AI? We see one of the biggest opportunities for Gen AI as tech-for-tech, which applies Gen AI to our software development cycles. With higher cost of capital in recent times, we believe that the need to do more with less combined with the leveraging of generative AI with lead companies into an era of hyper productivity. We believe this will fuel the next wave of digital transformation as clients seek to modernize the tech stack and reimagine business workflows with partners like Cognizant. In fact, in recently released follow-on analysis to our 2023 study with Oxford Economics, 70% of the respondents globally indicated they're not moving fast with Gen AI and 82% indicated a delay in execution could put them at a disadvantage. We are seeing a desire from our own clients to move more quickly. Over the past few quarters, we have become more deeply involved in our clients' Gen AI journeys. As of the end of second quarter, we have over 750 early client engagements, up from 450 in Q1, and we have over 600 opportunities in the pipeline compared to 500 last quarter. These early engagements have been across verticals with healthy activity in products and resources along with Financial Services and Health Sciences. We're seeing demand across four key areas

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.

Ravi Kumar:

Yeah, thank you for that question. I think the one thing you want to know is generative AI is diffusing into all our technology-led projects in a very, very fast way. So, the ability to ring fence it and start to think about what it does to a technology, what it doesn't do a technology or how do you trace it back is always hard. So the best metric for us was to find out the number of projects we are doing around generative AI. So, the number we gave this quarter was 750, which is up from 450 last quarter. So, we're very, very pleased with the number of early engagements. We have 600 more in the pipeline. And if you remember quarter two of last year, we spoke about 100 active engagements. So, we've gone all the way from 100 to 750. Now, how much of this is going into real production work? I would say very small number of projects are going into production work. And that number is small because of multiple reasons. One is, as you get to production-grade work, you need to start to think about your data architecture, you need to start to think about your cloud infrastructure, and you also need to start to think about the cost of compute, the availability of talent and everything else. So, only a small minor portion of it is going into live production work. But what we are pleased is as we get past these inhibitors, if I may, we're going to see a sharpest curve. I actually believe this is going to be a sharpest curve. A lot of them are related to productivity and task automation. So, the benefits are very tangible, and hence, it will go through the sharpest curve. But progressively, we will start to see more projects related to innovation, more projects related to change in operating model. And in fact, one of the surveys we did just a few weeks ago with 2,200 business executives from 15 countries has also started to tell us that productivity doesn't mean just cost reduction. Productivity also means new revenue streams and new products and new services. So, we are, again, excited about the fact that if it is revenue generating, the acceleration to the smart -- the sharp S curve is going to be much quicker. So that's one metric to know how well we're doing. The second metric I would say, which I spoke about, is we have 200-plus clients on all our platforms, AI platforms. The AI platforms we have at Cognizant are all related to how do you take foundation models and make them production grade, be it accuracy of the models, be it governance, be it management, be it responsible AI. So, these 200 clients are experimenting with us to make sure that they're getting ready for production, because they're a part of our platform. So, that gives me indication that there is a good momentum in the future. We also dissect this into four different categories. A lot of it is content aggregation and customer experience and employee experience. Again, the benefits in the business case are very tangible here. So, we will see faster acceleration. Then, of course, the biggest use case is tech for tech, which is applying it to development cycles. The challenges in that particular case, you have to share the productivity benefits with your clients. So, the good news is, it increases our win rates. And if we are ahead of the curve, we get to save some of that. And the last one, I would say, is content generation, which is more creative. It will take a little longer time. So overall, we're very pleased with where we are. We're very pleased with the fact that some of this is leading to more structural work related to data and cloud, which by itself is a heavy lift for us, which will then get monetized into services dollars. So that's broadly where generative AI story is. And I think the excitement about how much productivity we can generate for our clients and create a flywheel on this makes it the biggest opportunity for us to tap into the future.

Jatin Dalal:

Sure. So, quarter two was a good execution quarter where we improved our utilization. We continue to deliver sequential growth while actually reducing the trajectory of employees in terms of the headcount. So, overall, good execution. Why you are not seeing it yet reflected in the gross margin is really what you mentioned, the growth or the ramp up of the large deals that we have won in past, and they are ramping up and there is an initial investment of slightly lower margin as those deals ramp up. And that's the reason that gross margin number has remained flattish between quarter one and quarter two. We are optimistic that as we move into quarter three, quarter four, you should start seeing a slightly better performance on gross margin as we get through quarter four.

Jim Schneider:

Thank you very much.

Bryan Bergin:

Hey, good afternoon. Thank you. I wanted to ask on bookings, so nice to see a return to growth here. It does seem like you've had a recent uptick in deal activity just based on your announcements. Can you comment on the level of bookings that you would say are kind of net new work versus renewals? And just any common threads to highlight across the latest deals that were announced?

Bryan Bergin:

Okay. I appreciate that detail. And then my follow-up on Belcan. So, I understand you're still waiting to close the deal. I believe you mentioned it was estimated to be about 40 bps of a margin headwind and then some revenue synergies over three years. Can you detail kind of the transitory costs, the deal costs in that 40 bps versus the structural margin of Belcan? And then just any further detail on kind of how you thought about the phasing of the $100 million-plus revenue synergies over three years?

Bryan Bergin:

Thank you.

Jonathan Lee:

Great. Thanks for taking my questions. Appreciate the insight here. I understand some of the efficiency gains you're seeing, but how much room do you have in utilization before it perhaps runs too hot? And how are you thinking about pace of hiring for the remainder of the year, particularly as you look to support from the deal wins and pipeline? Additionally, any callouts here around competition for talent given the higher attrition you saw?

Ravi Kumar:

Was there a first part of the question as well, Jonathan?

Jatin Dalal:

I think we still have some headspace for sure as we exit quarter two. Certainly, not as -- I mean, the headspace we have continued to sort of utilize and this is the third quarter of improvement utilization. So, we are continuing to improve it. We have some space. I wouldn't say it's a significant space. And we are managing the supply chain with that visibility of headspace and the demand which is coming into the door. And we are confident that we'll be able to manage the demand and supply chain equation well as we execute through the second half of the year.

Jonathan Lee:

Thanks for the [detail] (ph) there. How should we think about potential for stabilization around large deal project margin, especially given some of the elongation of the duration in these large deals? And how are you thinking about pyramid structure around staffing these large deals?

Jatin Dalal:

Yeah. I think the only additional color is there are two ways of looking at a large deal sort of dynamics or financials. One way is that they initially do come with lower margins, but if you see the construct of a large deal, they are typically fixed price projects over a long-term period, which means your ability to improve overall pyramid into the company, deploy Gen Zs as we call them internally or fresh talent at the bottom of the pyramid is much better, ability to execute on your automation goal is far superior in a larger program. So overall, the second way of looking at a large deal is that you can really push the envelope of efficiency and productivity much better than what you would be able to do in a time and material construct. So, it has also a positive angle to it as the deal matures.

Operator:

Thank you. Our next question comes from the line of Rod Bourgeois with DeepDive Equity Research. Please proceed with your question.

Ravi Kumar:

Rod, thank you for that question. I've always been a believer of layering performance and change. So, for the first 18 months, I've been constantly making changes and generating performance and using the performance to make more change. At the end of first year, we bought a company called Thirdera, and that was the time I started to believe that performance has changed as you layer it. You also start to get the license to do some big bets. So, we made that big bet of buying Thirdera, which is the single largest ServiceNow standalone company. And right now, they're probably one of the top two players of ServiceNow in the market. And I'm very confident that journey will continue. In the first half of this year, we started to think that -- our business has four vectors, as I said, tech services, BPO, infrastructure-led services, which is security, cloud, everything put together, and ER&D. We always wanted to take another big bet and look for a different bio group and look for a different industry muscle, if I may, and we took a bet on Belcan, which gives us the opportunity to be in aerospace and automotive embedded software and engineering research and development, which is a different buyer group in any of our clients. And we took a bet because we think that's going to increase the breadth of services and it's going to give us a new vector for growth. So, I think I'm going to layer the performance and change on a constant basis and keep looking for big bets so that we make this a resilient platform. Remember, healthcare and financial services, we are heavy on it. Now, we're going to create muscle on manufacturing, industrial, automotive, aerospace, which is going to be a very different industry vector. We are -- we will constantly keep looking for bridging those gaps in new industries and a breadth of capabilities and also expanding internationally as we go forward because we are over indexed on the U.S. So that will be my goal to create sustained momentum and create a resilient platform for our employees and our clients.

Ravi Kumar:

Rod, that's a great question. Organically, we are seeing strength in automotive. Our pivot on Belcan is very simple. We think the next decade is going to be about digitizing everything physical, so we believe the industries like manufacturing, industrial, automotive, aero. If you pivot into services, which are embedded software, pivot into services, which are digital in nature, there's significant headroom, and there is very little spent in the last 10 years, and therefore, I think the next 10 years are going to be much better. So therefore, I actually believe there are -- there is more space and more room for us. Our concentration is very high in healthcare and financial services. So, this actually gives us much -- a very different industry vertical, but it also gives us an opportunity to bring technology closer to the physical manifestation of these industries. So, that thesis of mind still holds. And I think with AI in the mix now, I actually believe the offerings we will now present to that industry segment are going to be as contemporary, and therefore, will continue to flourish. So that's my thesis when I looked at Belcan and that would be the thesis that it will remain with me even now.

Operator:

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

Ravi Kumar:

Financial Services, we've been working on it since 2023. 2023, we stabilized the teams, we ensured that the leaks we had -- we were on the other side. I mean when consolidation happened, we lost business in 2022. We now are gaining market share when there is consolidation. And we did a very good job of leading that vertical with industry solutions. So that helped us to pivot into some of the small discretionary spend, which is coming back to -- we rallied behind it. So, the industry solution approach, a stable team, walking the corridors, proactively pitching for value-led work, breadth of capability now, I mean, we are no longer a tech services firm, we have a breadth of capability, all of that has helped us to stabilize financial services. Of course, there's going to be variability quarter-on-quarter, but we feel confident about the fact that each one of those subsegments underneath that are in good shape. Our business in Americas and banking has sequentially done pretty well for two quarters in a row. So, now we are starting to progressively take that -- take the same template to -- in the international market, so that we could replicate that success.

Ravi Kumar:

That's a very good question. In fact, I agree with you that a lot of the consulting dollars are getting diverted to generative AI. I mean, all the way from business case creation to governance to -- some companies are reorganizing their -- I know companies which are now saying, we need to reestablish an enterprise 2.0, so that process and technology can be together and it could be a distributed networked organization versus a hierarchical setup. So, lots of organizational change and experimentation is actually led by generative AI. So, some of the discretionary is getting diverted there. But these are small prototypes, and as you finish the prototypes, you start to see the bottlenecks to take it to production. The good news is at least you start to know what the bottlenecks are and then you start to work on it and then you take them to production grade. I have at least some projects which have started to go production grade. I've mentioned it in my earnings, which is a pharmaceutical company taking generative AI for drug development and insurers using generative AI to support claims which come in, which need to be corrected because there are either fields which have not been filled up or there are clarifications. So, I think at a task level, we are starting to see this go forward. The productivity studies we did in 2023 that helped us also to put the business case up. So, we've seen in healthcare in one of my clients, we've done auto adjudication of claims better using generative AI. So, the ability to make this a very outcome-centric business case will allow us to take this to more production-grade work, and the ability to continue to look for new use cases will help us to build the pipeline as the old ones mature.

Operator:

Thank you. Our next question comes from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.

Jatin Dalal:

Yeah, sure. So, I think fundamentally not much change in ACV as you can imagine with the deal duration going up from -- I mean over longer term, it has to reflect in a slightly slower growth in ACV and that dynamics continue. However, we are clearly winning market share in as we execute every quarter. So, the deals that are ramping up or the deal announcement that we have done are really reflection of new work that Cognizant is getting, sometimes in new accounts, but also in many accounts where we were present, but we were not addressing that segment of the work with our customer.

Tien-Tsin Huang:

Right. Heard that. Loud and clear. Thank you for that. Just my quick follow-up on the fourth quarter implied from the guide for the full year that implies some sequential deceleration. Any call outs there beyond seasonality?

Tien-Tsin Huang:

Terrific. Thank you for the time.

Dan Dolev:

Hey, guys, very strong results. Nice to see that. Can you maybe -- I mean, the number one question we get from investors right now is like have we seen the bottom in IT services spend? I mean, this is pretty much what everyone is trying to figure out. Can you maybe make a more general comment from your seat on where we are in the cycle? Thank you.

Ravi Kumar:

Just to add to that, I said this before, we are -- we don't see deterioration or improvement. We see the market unchanged, as I call it. However, our execution, our fulfillment rates and our win ratios continue to be very strong. So therefore, we are winning wallet share in a market which has remained unchanged.

Ravi Kumar:

We have to keep thinking about what are the right ways to tell the market about generative AI. It's a pervasive technology and therefore it diffuses into everything we do. And because it is diffusing so fast, you almost want to say -- you almost don't know what to categorize as Gen AI and what not to categorize as Gen AI. The only thing I can say is in this market, you could win using generative AI, you could increase your win rates, you could create new deals, you could generate more momentum with your clients, equally you could flip it around and use it on your own self to disrupt your own development cycles of our teams and create productivity, which you can share with your clients and then create a flywheel of winnability through it. So, I mean, right now, we are talking about projects which we are doing, we are talking about platforms and how many clients have onboarded on platforms. The traceability to revenues is, I mean, anybody's guess what you call generative AI as generative AI and what you can't. I mean, today, data modernization project or a cloud modernization project, which we do because generative AI is going to be the future, I actually can call it as generative AI or I can say this is not generative AI. However, it is creating more momentum because that foundation is needed for generative AI. So I mean, we have to evolve this to an extent where we could communicate to all of you much -- in a much traceable way. But nobody has found -- I mean, nobody seems to have found the right way to do it. We are trying our best to tell you the traction we have.

Jatin Dalal:

Thank you very much.

Ravi Kumar:

Thank you so much. Thank you for joining in today and looking forward to the next quarter and thank you for all your support.

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions First Quarter 2024 Earnings Conference Call. [Operator Instructions]

Tyler Scott:

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 first quarter 2024 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.

We also expanded our partnership with Google Cloud. We'll adopt Gemini for Google Cloud in two ways:

first, by training Cognizant associates to use Gemini for software development assistance; and second, by integrating Gemini's advanced capabilities within Cognizant's internal operations and platforms. Using Gemini for Google Cloud, Cognizant's developers will be equipped to write, test and deploy code faster and more effectively with the help of AI-powered tools, improving the reliability and cost efficiency of building and managing client applications.

Jatin Dalal:

Thank you, Ravi, and thank you all for joining us.

Ravi Kumar S:

Thank you, Bryan. Thank you for that question. This is Ravi here, and let me give it a try, and then I will ask Jatin to add in. The way we look at our guidance range is based on the visibility we get to the middle of the range. And then we look for what's the upside available. The upside available is based on large deal momentum. There is 30 to 40 basis points of M&A, which we are yet to do because this guidance includes 100 basis points of M&A. And the committed spend from many of our clients, sometimes, you can get an upside on it if you ramp up well. So that's the starting point.

Jatin Dalal:

Yes. No, Bryan, we are good. If you have any follow-up, we can take it.

Jatin Dalal:

There will be puts and takes every quarter, as you very well know. But directionally, SG&A should continue to show a right momentum around improvement, but not so much because we have taken a large action in '23. So you would see the [ back ] end of our NextGen program acting through the SG&A line during the course of the rest of the year, but it won't be as large an impact or a big number compared to 2023. That's the view on SG&A.

Operator:

Our next question comes from the line of Tien-Tsin Huang with JPMorgan.

Ravi Kumar S:

Tien-Tsin, thank you so much for that question. We continue to see good large deals momentum through the whole of 2023. I mean, whatever we did in 2023 is helping us on ramp-ups this year, and we'll continue to build that for the rest of the year. This has been a good quarter. In fact, if you just see the announcements we made with clients as a part of our earnings release, you would notice that the number of announcements have also gone up. So I'm very pleased with the progress. I'm also pleased with the fact that we have now started to expand that into Europe and Asia Pacific.

Operator:

Our next question comes from the line of Bryan Keane with Deutsche Bank.

Jatin Dalal:

Yes. Bryan, thanks for your question. This is Jatin. Fundamentally, the current environment is that of consolidation of spend, of cost management, improvement in the productivity and so on and so forth. So this is the characteristics of the deals that we are seeing in the market. By design, these deals come with an expectation of superior pricing than what is the pricing which is inherent in the current work. So yes, there is a downward pressure on pricing, but it is nothing out of ordinary that one would expect in the current demand environment. We are not seeing out-of-ordinary behavior in the market as we compete. And I think it's a fair play from that expectation standpoint.

Jatin Dalal:

Sure. So overall, the reason for large -- a larger range is as follows. I mean, as Ravi mentioned, we start with the midpoint and we look at what is the expected outcome that one can get to. Then we see the range of possibilities. Now if you see our own guidance vis-a-vis quarter 1 to quarter 2, there is an improvement in the guidance range that we gave in -- we are giving in quarter 2 versus quarter 1. And that also means that we will grow sequentially in quarter 2. So overall, we are making good progress. But if you see the demand environment remains reasonably tough, no different than what we spoke in the beginning of the year. And hence, there is a sort of uncertainty in the environment that we are factoring in as we look at our own performance as well as we look at the environment, which is surrounding us.

Operator:

Our next question comes from the line of Jonathan Lee with Guggenheim Securities.

Ravi Kumar S:

Yes. So let me start and get Jatin to add. Discretionary has to be earned every year, so the discretionary doesn't come back. You could call it as structural leakage, if I may, but it isn't as much. It's not like somebody else is taking that away. So discretionary is always the unknown part, if I may. On the -- when I started the year in 2023, we had leakages because when there was a consolidation, somebody else was winning it and not us. That isn't happening anymore. I mean we are very stable with our clients. Our clients are continuing to invest in customers. There's no company-specific challenges, which have led to leakage or there is a potential of leakage. We see that as a very stable platform.

Operator:

Our next question comes from the line of Jason Kupferberg with Bank of America.

Ravi Kumar S:

Thank you, Jason. The 450 -- let me start with the first one. The 450-odd client engagements, we've come a long way. If you remember, in quarter 2, 2023, we spoke about 100, and now we have 400 early client engagements. And these are very short prototype, rapid prototype kind of deals. 500 of them -- more than 500 of them, we have in the pipeline, and the thing to watch for now is how many of these will go into scaled execution for our clients. And that's where the monetize-able opportunities are. So we are continuing to work on it.

Ravi Kumar S:

Yes, I mean the visibility we have so far on the deals we have won, we have baked it into our guidance range. But Jason, you know this, the deals we won last year have a better throughput this year. And the deals we win this year will have a better throughput in the second half of this year and in 2025. The challenge in 2023 was we did have that backlog as we got into 2023 because we were not playing on large deals. Right now, I don't have that challenge because I had a good, healthy pipeline in 2023 that's contributing to 2024. And then we keep doing this in the same sustained manner, we will exit into 2025 with tail velocity. So the first year is normally lower than the second year. And by the end of the second year, you get to the run rate you have to. Normally, the span of the deals has changed. Earlier, it used to be lower. Now, it's 3.5 years or plus because large deals now come on a cost-takeout model, unlike transformation related to -- unlike transformation-related large deals.

Operator:

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

Jatin Dalal:

Yes, sure. So if you do that mathematically, I'm sure you already looked at those numbers, and those numbers really mean a very flattish performance for rest of the year and a negative performance that typically happens in quarter 4, given the furloughs. So that's the sort of trajectory we are looking at if markets really tanked and our performance didn't show any positive progress.

Ravi Kumar S:

Yes. So discretionary is small projects. Normally, in smaller projects, you have a different kind of a pyramid versus large deals, where you have a much healthy pyramid, if I may. So with discretionary -- normally, when discretionary comes in, you hire more lateral hires with experience. And when you deal with managed services deals, you hire the pyramid because the pyramid rightly fits in there. So that's probably how it is.

Moshe Katri:

It's Moshe Katri from Wedbush. Ravi, congrats on strong execution in a pretty tough environment. I just want to go back to the booking kind of metrics, 1.3x book-to-bill. Is there a way to kind of break it down by new logos to the renewals and extensions and maybe compared to last year of, I guess, you mentioned ACV? I think you said bookings on a 12-month basis were up 1%. Is there a way to kind of get the same comps for ACVs?

Ravi Kumar S:

So we have had a very healthy new logo program, Moshe. Since I've come on board, we have a specific program for new logos. We also have a program to ramp new logos to, say, a $50 million or $100 million client, an annual spend of $100 million, $50 million client. I mean opening new logos is one thing, but ramping them up to a $50 million account is another thing. So we have put both swim lanes. We're very, very active in our journey.

James Friedman:

Jatin, I just want to make sure I'm understanding how you're thinking about the shape of the year. If I take the midpoint of your Q2 sequential and if I make the assumption that the Q4 is flat, and I know in most years, it's not, but just for simple math, I'm getting about a 2.5% sequential in the Q3. Does that sound about right to you?

James Friedman:

Okay. And then Ravi, you, I think, used the word green shoot in the context of the BFS letters in BFSI. And it's the first time I've heard your company or most companies use that language with those 3 letters in years. Can you elaborate on that?

Jatin Dalal:

Yes. Sorry, Jamie. I just add to what I just said before. It's -- I want to go back to what I said in response to an earlier question saying, our expected likely outcome is what we see at the midpoint of the guidance. And then we see the range of possibility on the both ends. And when you specifically asked, I was reacting to the range of possibility on the upper end. I mean, I just want to reflect accordingly so that I respond to you in its completeness.

Operator:

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.

Ravi Kumar:

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 better execution on our operational efficiencies. We sustained our large deal momentum in the quarter, winning seven deals exceeding $100 million each. Of these seven deals, two were new business and five were a mix of renewals and expansions. I am especially pleased to see our continued decline in employee attrition, trailing 12-month voluntary attrition for our tech services business declined to 13.8%, that is down 2.4 percentage points sequentially and down 12 points year-over-year. Turning to the full year. Revenue of $19.4 billion was down slightly from the prior year and in line with the guidance we set on our Q3 call. A strong Q4 margin performance enabled us to achieve a full year adjusted operating margin of 15.1% compared with a guidance of approximately 14.7%. We ended Q4 with a trailing 12 months booking growth of $26.3 billion, up 9% year-over-year, resulting in a book-to-bill of 1.4x. For 2023, about 30% of our TCV exceeded 50 billion plus deals, compared with approximately 20% in the previous year. We signed 17 deals that exceeded $100 million TCV, $100 million TCV. Total TCV for deals above $100 million increased 42% year-over-year. Several factors contributed to this progress. We have reoriented our teams to large deal demand generation and execution across all service lines. We have strengthened our ability to seed (ph), shape and sell large deals. And we have made progress in industrializing delivery with automation and productivity tools to create repeatable solutions and enable a consistent and efficient delivery operating model for large deals. Turning to our business segments where Jatin will cover our financial performance, I want to comment on our two largest segments. In financial services, while responding to a demand environment that remains challenging. We are increasing our efforts to stimulate growth. We've installed new leaders in a number of key positions across the segment. We have invested in consulting and commercial resources and targets of industries and in partner relationships. We are also focused on expanding our service offerings and on enhancing our industry solutions powered by new technologies like Generative AI. In Health Sciences, as the healthcare industry continues to undergo major transformation, we believe Cognizant is well positioned to become the nucleus of an emerging healthcare ecosystem through our platform's data and solutions. With these dynamics in mind, we are investing in the expansion of our TriZetto platform and our healthcare BPaaS solution capabilities. We are also capitalizing on the opportunity Gen AI presents to the healthcare market. For instance, LLM can be used to streamline payer administrative processes, automate clinical documentation and enhance clinical decision support systems. I remain confident in the value of our health sciences portfolio provides to clients. For example, Fortrea recently chose Cognizant as its technology transformation partner to deploy a modern secure digital ecosystem to help bring treatments to patients faster while strengthening its position in the life sciences industry. And Takeda, a global biopharma company with whom we have had a long relationship has selected us to help modernize their infrastructure and application management in support of the digital transformation. Now let's turn to an assessment of how we move the company forward in 2023. To begin, we made considerable progress enhancing three core strengths that taken together, I believe, Cognizant set apart in the market. First, industry expertise. In 2023, we further deepened our expertise at the intersection of technology and industry use cases to deliver industry specific solutions in service of business outcomes. We also enhanced our collaboration and co-creation with clients and the broader partner ecosystem to stitch together industry-leading capabilities. A good example is our strategic partnership with ServiceNow to advance the adoption of AI-driven automation across industries. We are also collaborating with ServiceNow to enhance Cognizant's WorkNEXT modern workplace services solution with generative AI capabilities. WorkNEXT aims to provide more intuitive and personalized experiences for employees, while helping to better quantify and improve the return on experience for enterprise customers. A second core strength we are collaborative partners to our clients. As mentioned on our Q3 call, our annual client Net Promoter Score survey hit a historic high for Cognizant last year. Our empathy for clients as a part of our DNA and we believe we have become even better at listening carefully to, learning from, and working with clients to earn their trust, solve their problems and help them succeed. Third, we are passionate innovators. Last April, we launched Cognizant's Bluebolt grassroots innovation program calling on all our employees to help us solve client problems, look for unmet or latent client needs and challenge the status quo. And in just nine months, our employees generated more than 100,000 ideas, 21,000 of which we have already implemented. We expect to augment our Bluebolt program through a new collaboration with Microsoft to launch the innovation assistant as generative AI-powered tool built on Azure OpenAI service. Shortly after my arrival, we consolidated our performance objectives, the way we measure success. But just three long strategic priorities, long-term strategic priorities. Become the employer of choice in our industry, accelerate revenue growth and simplify our operations. I'll touch on our progress beginning with employer of choice. Our voluntary attrition improved throughout 2023 to multi-year lows, while our employee engagement scores improved to capitalize Cognizant's entrepreneurial spirit, we have given greater autonomy and accountability to business unit leaders. This is helping increase our responsiveness to client needs and market conditions. We remain committed to providing our teams with continuous learning, upskilling and professional development. In 2023, 90% of our global workforce spent time in learning with 270,000 of our employees acquiring at least one new skill proficiency. And 88,000 completing AI and generative AI courses. We've also established programs provide more opportunities for employees to advance their cadence. I'm pleased to say, we promoted nearly 30,000 people across the company last year. Later this month, we'll bring together our entire employee population and gatherings, physical and virtual to recognize excellence across the business with Cognizant's companywide awards program the IMPACT Awards. Late last year, we introduced an initiative called Shakti that will unify our women-centric programs to further advance carriers and boost women leadership in technology. Shakti will encompass Cognizant's leadership development programs for our senior level women globally and for our mid-level women in India along with our period upskilling program for women returning to work after a career break. Our second performance objective is to accelerate revenue growth. We've invested heavily in platform-centric approaches to further differentiate Cognizant in select industries. I've talked about our core platform just TriZetto in healthcare, Shared Investigator in life sciences and asset performance in smart manufacturing to name a few. Last year, we also began industrializing solutions for the next wave of technologies with our AI portfolio. We introduced Cognizant Neuro IT Operations, our AI led platform built to reduce the complexity and costs of enterprise infrastructure. We launched Cognizant Skygrade our cloud orchestration platform designed to help clients to rapidly transition to modern cloud-native architectures. In addition, we introduced Cognizant Neuro AI, developed to speed clients' adoption of generative AI. With Neuro AI, we are able to quickly build AI enablement use cases for clients that are specific to their businesses. And just last week, we expanded our GenAI portfolio with the introduction of Cognizant Flowsource, developed to help engineering teams, deliver high-quality code faster with increased control and transparency. Today, we have over 250 early engagements that incorporate the use of generative AI. Some examples are creating a virtual coach for a diabetic patient for a pharma company, predicting the size of target audiences for a TV network, conducting sentiment analysis and summarization of user comments for a large bank, developing field services expert advisor for a manufacturer, enabling conversational intelligence for an insurance call center and auto generating a sales pitch for a tech company. We have another 350 plus opportunities in our pipeline that we are planning to scale. We aim to infuse AI, not only into our core offerings but into everything we do, including using generative AI to create industry and functional services. It's worth mentioning that one of our integrated practices, intuitive operations and automation which helps clients, build and plan modern operations across $2.5 billion of revenue in 2023. Our tech-driven modern BPO and automation services helps clients achieve higher levels of productivity and reap benefits of generative AI in the core processes. We strive to stay tuned to market shifts, which is why last month, we acquired Thirdera. And Elite ServiceNow Partner that specializes in solutions for the ServiceNow platform. Adding Thirdera brings an on and near-shore global presence to our own ServiceNow Business Group. With Thirdera, we'll continue to advance the efforts of our strategic partnership with ServiceNow to build a $1 billion combined business focused on AI driven automation. Our third performance objective is to simplify our business. We executed well on our NextGen program, which is aimed at simplifying our operating model, optimizing corporate functions and consolidating and realigning workspace to reflect the post pandemic work environment. Our cost management enabled us to achieve a 2023 adjusted operating margin performance that exceeded our expectations from early in the year. Simplifying our business goes beyond structurally reducing costs. It also helps us become more agile and productive and innovative. Last year, we further streamlined our operating model and what we -- what was a complex metrics structure to focus primarily on our markets and integrated service lines. We are moving towards fewer layers in the organization, which we believe will bring us closer to our clients and associates, help drive strong coordination across the company and further empower account teams to make decisions. In summary, 2023 was a year of strengthening our company's fundamentals. Now let's look at -- look to our focus in 2024. We have selected six strategic imperatives that will help further sharpen our differentiation across clients' primary needs, while strengthening our ability to achieve our performance objectives. These imperatives are to grow in select industries, expand internationally, with large deals capabilities, capture the AI opportunity, deliver our talent strategy, and implement our IT roadmap. In the interest of time, I'll focus on only one of those initiatives which is capturing the substantial AI opportunity. Although, consumer use of generative AI is starting to explore, enterprise use cases have been ramping slowly. That said, we expect the pace of enterprise adoption to pick up soon and believe that after a slow takeoff movement of this curve will accelerate sharply. The results we have seen from initial GenAI proof-of-concepts are very encouraging. We believe system integrators like Cognizant will play a major role in managing, governing and optimizing generative AI initiatives upscale. This includes building accuracy in output, reducing hallucinations continued reenforced learning and testing incorporate -- incorporating transparency and accountability and iteratively driving performance optimization. Therefore on -- as mentioned on our prior calls, we expect to invest approximately $1 billion in our generative AI capabilities over the next three years, spanning people, platforms, partnerships and M&A. We believe generative AI is becoming a driving force for the economy and society. In partnership with Oxford Economics, Cognizant developed and published a new economic impact study end of last month's World Economic Forum that predicts, generative AI could inject up to $1 trillion into the U.S. economy over 10 years. Our research also predicts that 90% of the jobs will be disrupted in some way by this technology. From 2023 to 2032 the percent of jobs with high exposure scores, meaning the degree to which an occupation will be affected by generative AI could increase from 8% (ph) to 52%. Setting the stage for a profound shift in how we approach work, productivity and economic growth. One last topic to cover and that's the demand environment. We see little change from the assessment we have provided in recent quarters about uncertain and weak discretionary spending in the early part of 2024. Given that clients are experiencing a period that has brought both change and uncertainty together, we expect them to continue to focus on reducing costs, consolidating vendors, modernizing the data and the processes and increasing the productivity, so that they can imply savings to AI led transformation. On a closing note, we celebrated our 30th anniversary just last month. We have stood the test of time and we are determined to sustain and extend the momentum we've created last year. As optimistic as I was about our company's future, when I joined last January, I'm doubly so now. Whatever the future may hold, I believe we are in a significantly strong position today than we were one year ago to seize the market opportunity ahead. Now it's my pleasure to turn the call over to Jatin, who joined us on December 4th for his initial observations about Cognizant and additional details on the quarter.

Operator:

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

Ravi Kumar:

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 --

Ravi Kumar:

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.

Ravi Kumar:

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.

Operator:

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

Jatin Dalal:

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.

Ravi Kumar:

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.

Operator:

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

Ravi Kumar:

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.

Ravi Kumar:

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.

Operator:

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

Ravi Kumar:

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 call them to subsegments because one is to cannibalize the business you do and share the benefits with your clients. The second is to go and cannibalize or rather go and propose something provocative on the work. We don't do as an incumbent, but we could actually create better productivity to our clients. And one of the reasons why we are winning those large deals is that's a pivot on our large deal story. We actually go and disrupt client landscapes with -- which is where we are not incumbent with not just labor arbitrage, but arbitrage powered by AI. So I would say there are opportunities all through, all the way from applying it to the landscapes to -- applying productivity to the technology life cycles, be it our business, we do or be it where we are not an incumbent. And I would say this is a pervasive opportunity. It will be a short -- it will be a slow takeoff, but it will be a short cycle of a slow takeoff, and it will then get into a sharp S-curve, as I mentioned on my preliminary comments. So it's a very pervasive technology. It diffuses very fast, and it has a very good distribution network. So I'm excited about the prospects, excited about the investments we're making, excited about how we're staying relevant with our clients. We've also embedded it into our platforms like TriZetto. So we are equipped to seize these opportunities as the CapEx cycles of generative AI trigger to enterprise grade work.

Ravi Kumar:

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.

Ravi Kumar:

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.

Operator:

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

Ravi Kumar:

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.

Jatin Dalal:

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.

James Faucette:

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

Operator:

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

Jatin Dalal:

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.

Ravi Kumar:

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.

Operator:

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

Operator:

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

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.

Ravi Kumar:

Thank you, Tyler. Good afternoon, everyone. Today, I would like to cover 3 topics

Operator:

[Operator Instructions] Our first question comes from the line of Bryan Bergin with TD Cowen.

Jan Siegmund:

Yes. So Bryan, I'll catch the easy one first. Yes, the reaffirmation of our intent to expand our margins by 20 to 40 basis points is up midpoint of our expectation or our point of landing at 14.7%, so that's a good assumption. For the bookings momentum, Ravi might be giving you a little bit of color around what we're seeing in the markets.

Bryan Bergin:

Okay. Understood. And then a follow-up here, just on the resale piece of the third-party products. I think you mentioned 120 bps in the quarter, how does that compare to maybe the average over the last 4 to 6 quarters? And are you assuming resale amounts in the forward outlook?

Operator:

Our next question comes from the line of Ashwin Shirvaikar with Citi.

Jan Siegmund:

Yes, I'll give a little bit of an answer but I think Ravi will be adding much more color to this. The overall position that we have in -- with our clients, I think, has really meaningfully improved over the last 3 or 4 quarters. We have -- in the Net Promoter Scores that Ravi was reporting on is kind of really the statistical leverage of this coming in at a historic high. But we can just see from the comments and the number of escalations is another one. We haven't talked in the call about it but obviously, that has been in parallel coming down. So the service quality has been better. That's partially fueled by low attrition rates. So the overall relationships that we have with our clients have really very meaningfully improved. And I think we have embraced kind of a philosophy of meeting the client where the client has needs. And right now, the needs are more on the structural cost improvement and productivity type, vendor consolidation type deals and discretionary spending has taken the back row. We want to be there for our clients when that discretionary spend comes and the transformative deals are popping up and going part of it. So we're going to be having deep relationships with our clients and the high focus on client relationships and I feel we should be ready for that to do so. Ravi?

Ashwin Shirvaikar:

Good to hear. The second question, again, it's a good job on the margin performance. The question I have is on the deals that you are signing, you mentioned that there is now need to be flexible in terms of structuring, in terms of bringing various partners together and so on and so forth. Does any of what you are doing today to get new deals affect how you think of future margin potential?

Ravi Kumar:

So Ashwin, we are -- the first thing we just changed is we are participating on deals across the swim lanes I just spoke about and we are competitive enough and we have built the institutional infrastructure to support execution and actually better our performance to the metrics which we commit when we win those deals. So we have to keep strengthening that. This is always a work in progress. We have to continue to stay competitive and we have to continue to price them to win and deliver them to margins as I call it. And we continue to keep our competitiveness by strengthening our productivity tools and our automation tools and our AI tools. So this is an ongoing process and you have to keep changing the baseline because as you want to be competitive, you have to continue to keep working on the productivity levers. Unlike in the past, where these productivity levers were labor-oriented or, I would say, they were classical, now they are technology oriented. And hence, we have a unique opportunity to create some nonlinearity. In the past, we did not participate in those deals. Now we are participating and winning them, so the confidence has been really high.

Tyler DuPont:

This is Tyler DuPont on for Jason. I wanted to ask about the demand environment you're seeing as we start -- as we look into the end of 2023 and as we start to look into even the beginning of 2024. When looking at the updated revenue guidance being narrowed, I'm just curious what incremental trends you've seen over the past couple of months, whether that's changes in win rates, ramp times or softness, whether that's a particular service offering, vertical, geography, anything like that, that may be driving the additional cautious stance.

Tyler DuPont:

Okay, that's very helpful. And then, I guess, just to kind of go even just a little bit deeper into visibility into 2024 budgeting decisions. I know it's still early and you don't give guidance on '24 or anything yet. But just given the current rather choppy macro environment that we're seeing and have seen, can you just speak to sort of the conversations you're having with clients regarding '24 budgets, sort of how does that visibility compare with this time last year? And is there more certainty in certain verticals than others? Or just any clarity there would be very appreciated.

Operator:

Our next question comes from the line of Tien-Tsin Huang with JPMorgan.

Jan Siegmund:

Thank you, Tien-Tsin, for that. The -- I gave, in my remarks, this duration comment. And I think we had, in previous calls and historically, disclosed that our average duration was roughly around 2 years and now our duration in the bookings is about 3 years, so it's a meaningful increase. And obviously, then ACV, the annual revenue expectations for this is down. And that's actually -- on top, you have also that mix shift. The larger deals need some scaling. So they have -- the ACV is not completely symmetrical because in the first year, you're building up the infrastructure and you're starting transferring assets and do your thing, what you need to do to get ready. So some of the ACV of the larger deals is delayed and will come in '24. And at the same time, we have a decline of deals below $5 million of TCV which are typically deals that always translate in here to revenue. So those things together are basically a 90% explanation of what you see in our revenue trend actuals in the last few quarters. And I'm anticipating unless the discretionary spend is coming back, roaring that, that won't change. Now, so the -- we're entering the year with all these moving parts, probably in a position that is not too different from last year in terms of visibility of revenue going forward, so. And mysteriously, it balances out because some of our larger deals now maturing and scaling, having a little bit better contribution to next year. And then, we'll -- as I said in my prior answer, we'll have our estimate to make on how short-term demand is going to be developing. So the net of it is that factors within the setup have changed compared to the beginning of '23 but in '24, we are kind of approximately in a similar position to stock.

Operator:

Our next question comes from the line of Keith Bachman with BMO Capital Markets.

Ravi Kumar:

It's a difficult question to answer now on how it's going to be next year. I mean, the swim lane of large deals we are doing and then that is 30% of bookings. The swim lane of large deals we're doing, always the savings of those large deals, some of the smarter clients are not necessarily taking it to savings but they are actually underwriting it for transformation which means if some of them can trigger the CapEx cycles, then you're going to see some of that discretionary coming back because the savings you do on productivity will allow you to trigger the CapEx cycle. I mean, I spoke about 150-plus AI -- preliminary early AI engagements. The reality is if they have to scale up, you need the CapEx. The CapEx will either come because our clients have, themselves, navigated the uncertainty and got the CapEx covered, or they would use some of the savings from the cost cutting and the cost takeout they have done related to technology to leverage it into discretionary. I mean, many of my clients today, I've met 270 of them this year. They're not saying they want to take their IT budgets down. What they're really saying is, can you do more for less. And can you actually divert the savings to the transformation they're looking forward to and they're very, very anxious about the transformation because we are all living in this period of change. The issue is -- what I do not know is whether the economic and the overall environment which is really a headwind, is that going to change significantly next year? That's something that's hard to predict now. But if that uncertainty continues, you're obviously not going to see the discretionary spend coming back. But if you see that triggering positively, then you're going to see the savings of these cost takeout initiatives to move into transformation and that will trigger another cycle of spend which in turn, hopefully, will trigger revenue cycles for our clients which will then hopefully create a virtuous positive cycle. So it's a tricky one to answer. You need a trigger for the CapEx cycles of discretionary. And all the discretionary spend, as Jan mentioned, these are all deals between $0 to $10 million. They all get they all get realized within the same year because these are small deals. So it's a very unusual time, a time of uncertainty and a time of change coming simultaneously. So the cost takeout deals potentially can fund them and that's the point I'm making. And if they don't, then there are other triggers of CapEx cycles which have to fund them.

Jan Siegmund:

Look, we're entering the year with the NextGen initiative executing well and according to our plans. And we're going to have what were -- some impact in the third quarter but really not full run rate impact yet. And so we will have a lot of momentum on NextGen next year. So we offered the savings opportunity for '24 to -- for '25 to REIT, in real estate, $100 million savings. And you all have your own assumptions on our head count reduction program, easy to be calculated and that's a lot of efficiency that we can book on our side. I anticipate the revenue momentum is obviously the mix factor for us that will shift. And in that revenue growth factor that determines the scale of our SG&A development and other elements, it's kind of probably a big factor. And the second one I would give to you is the style and the execution of our large deal scaling. With larger deals, there is a little bit of risk factor just by the nature of their scope involved. And if we are executing well and the deals don't develop problems, that will help us to be very solid in our margin expectation. And if we run into some problems, maybe we'll need to invest a little bit more cost. So those will be the 2 major factors, I think, that we're going to be considering as we give our margin range and the substantiation of it.

Operator:

Our final question of the night will come from the line of Jamie Friedman with Susquehanna.

Ravi Kumar:

That's great question. I see that as a friend. In fact, I stated that if you carefully observe my initial comments, even before you asked this question, I had stated that if technology is strategic to our clients. And remember, technology was an enabler for our clients. Now it is strategic to them because is deeply embedded into their products. It is integral to the differentiation in the market. Every industry is a tech industry. We have to help our clients build their own technology muscle. And to help our clients build their own technology muscle, I think Cognizant is probably best suited to do so. Our entrepreneurial spirit, our flexible operating model, our co-creation attitude and our co-creation culture. We think, as companies build their own technology muscle, we will lend our human capital and I stated this in my remarks, that we would even lend this value chain of human capital which is not just the people to support their transformation but potentially lending our training infrastructure, our learning infrastructure, our ability to actually help them build their own captives if they want to, or global capability centers. And I think that is sticky because once you do so, you can even lend your automation infrastructure, AI infrastructure and actually take them through that maturity curve. So it's much more sticky than before. So I see this as an unique opportunity for Cognizant and we want to double down on this offering.

Ravi Kumar:

After very many quarters, we had sequential positive head count growth. Of course, it is a tiny number but it is reflective of the momentum of -- the commercial momentum of large deals and bookings. It is reflective of the needs for the future and it is reflective of the needs of the near future. So I'm very, very -- I'm very confident that if we continue on the deal booking momentum, we will have to increase our head count to fulfill and satisfy those programs. So it's encouraging -- it's a very encouraging indicator about how well our commercial momentum is shaping up.

Tyler Scott:

Great. Thank you all very much for joining. We look forward to catching up next quarter.

Operator:

Greetings, and welcome to the Cognizant Second Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tyler Scott, the Vice President of Investor Relations. Please go ahead.

Ravi Kumar:

Thank you, Tyler. Good afternoon, everyone. I would like to discuss four topics with you today. Our second quarter results, the demand environment of comprehensive commitment to generative AI and an update on our long-term priorities. We made continued progress during the quarter in what remains an uncertain global macroeconomic environment. Q2 came in at $4.9 billion at the high end of our guidance range. We were pleased to return to sequential revenue growth of more than 1%. Year-over-year Q2 revenue showed a modest decline of 40 basis points or essentially flat in constant currency. Our adjusted operating margin was 14.2% and adjusted EPS was $1.10. We recorded another quarter of strong bookings growth 17% year-over-year ending quarter two with record trailing 12-months bookings of $26.4 billion. A book-to-bill of 1.4x approximately 30% of our in quarter Q2 bookings were large deals and five of this deals exceeded $100 million each. Our bookings continue to be a balance mix of renewables, extensions and new opportunities. The leadership team and I remain intensely focused on a talent. So I am glad to see the continued reduction in our iteration with trailing 12-months voluntary attrition for our tech services business declining to 19.9% down 3 percentage points sequentially and 11 percentage points year-over-year. While Jan will cover our performance at a business segment level, I want to offer a quick word about financial services. Our quarterly year-over-year revenue decline in the segment reflects the soft market and continuing weakness in discretionary spending. In response, we are transitioning more existing work in the sector towards managed services as many clients remain focused on driving cost takeout, vendor consolidation and productivity initiatives. We also stepping up our engagement with fintech companies which we believe offer a great opportunity for digital transformation. And we are strengthening our capabilities with a goal of capturing discretionary spending on transformation work when it returns. For example, we continue to support the modernization of S&P Global's Configure Prize Quote System to enable end-to-end digitization in what we believe is the world's largest CPQ implementation on Salesforce. And we are collaborating with Max, Life Insurance to launch an innovation and development center in Chennai to help accelerate the digital transformation efforts. With a flexible fine-centric operating model, we can assist clients across industry sectors, takeout costs, consolidate their vendors and achieve both technology and operational efficiencies which provide opportunities for large deals. We can also help them develop digital platforms to deliver richer and more personalized experiences to their customers. What's more, we can engineer technology into their products and services. As an example, we recently extended a partnership with Gilead Sciences. This agreement includes the renewable and expansion of Cognizant services for a total expected value of $800 million over the next five years. We'll manage Gilead's global idea infrastructure while leading digital transformation initiatives designed to enhance their overall client experience and enable faster time to market for the products. We will apply the power of GenAI and Intelligent Automation to help improve Gilead's customer service experience and assist in driving greater manufacturing efficiencies. To support clients' transformation leads, we've established a distinctive position across industry using a platform-centric approach designed to speed clients' consumption of technology. You've seen the emphasis we've given to this platform approach. For example, Cognizant, TriZetto and healthcare are shared investigator platform in life sciences, asset performance excellence in smart manufacturing and Car-to-Cloud in automotive. Last quarter, we launched two new platforms with applications across industries, new royalty operations, which enables AI-led autonomous operations and Cognizant Sky-grade designed to help clients maximize the full potential of cloud. Turning to AI in quarter two, we expanded our platform portfolio further with Cognizant Neuro AI. It's designed to speed the adoption of generative AI and harness its value in a flexible, secure, scalable and responsible way. With Neuro AI, we are helping clients advance from identifying company-specific use cases to operationalizing AI. I should point out that generative AI is a natural evolution of a work-crossed cognitive AI enterprise applications in data analytics services. To extract value from GenAI, the data must be curated, trained, modernized and made production ready. You also need a deep understanding of clients' data estate, data architectures, data usage patterns, and business applications of the data. Our current approach to leverage third-party foundational models and enhance them with our platforms and IP and then fine tune the models for clients. Today we have more than 100 active client engagements in various stages with the focus on cognitive and generative AI, as well as hundreds more projects using AI services within the context of delivery. We're designing a generative AI offerings for industry-specific solutions, cross-industry use cases in productivity, enablement, under themes like transforming code processes, improving the customer and employee experience, product innovations, software and coding, and knowledge management to name a few. For example, one of the world's largest healthcare product companies, we are helping to speed up the research process by deploying GenAI to author scientific content. We developed a workbench that uses GPT models to summarize and generate content from unstructured and structured data, such as laboratory information management systems with the aim of automating the generation of regulatory content. For a top-20 property and casualty insurer, we have helped frame its GenAI strategy and conduct real-world tests based on company data. For example, we built a GenAI-based digital virtual assistant that analyzed large loss complex claims submissions. By referencing the insurer's claim data, the virtual assistant was able to guide a human claims handler to gather nearly 100% of missing claims information. This simple application is expected to produce millions of dollars in savings through improved operational efficiency and reduced claim costs. In addition, we signed a new multi-year agreement with Nuance Communications, a Microsoft company, to help scale the resources for Nuance's Dragon ambient experience operations. This solution is at the forefront of conversational AI and ambient clinical intelligence. Let's turn to the essential role partners play in delivering our AI capabilities. We expanded our alliance with Google Cloud to help enterprise clients create, migrate, and modernize their AI journeys, and offer clients innovative industry solutions founded on the tenet of responsible AI. Our investments in developing GenAI capabilities include launching the Cognizant Google Cloud AI University, a program designed to train 25,000 Cognizant professionals on Google Cloud AI technologies. We'll offer this program to our clients as well. And earlier today, we announced that as a part of our expanded partnership with Google, we'll be building on Google Cloud's Generative AI technology with Cognizant's AI domain expertise to create a healthcare large language model. This LLM is designed to simplify and improve the accuracy of complex healthcare administrative tasks and strengthen business outcomes for healthcare organizations. We've also expanded our relationship with Microsoft to deliver industry solutions and enable AI-led transformation. This includes expanding the focus of our Microsoft Center of Excellence in AI and other next-gen technologies to drive competencies across architecture, technology leadership, value delivery tools, and enablement. Cognizant and ServiceNow have announced a strategic partnership to accelerate the adoption of AI-driven automation across industries. Our industry expertise and solutions integrated with ServiceNow's intelligent platform for end-to-end digital transformation will bring to market offerings that are designed to solve complex problems, automate operations, and enhance employee as well as end-customer experiences through the use of AI. Now a quick update on our three long-term performance objectives, becoming an employer of choice in our industry, accelerating revenue growth, and enhancing operational discipline. Let's start with the employer of choice. During our Q4 call, I talked about how tightly linked the client and the employee experience are, giving Cognizant the opportunity to create self-reinforcing cycles. Highly engaged talent with a passion for clients and a growth mindset attract the best clients. These clients, in turn, attract more of the best people, keeping the flywheel turning faster. Now, two quarters later, we are seeing the early benefits of this interdependent relationship between employees and clients. Our trailing 12-month voluntary attrition has been trending downwards for the last four quarters. And our just-completed annual people engagement survey showed meaningfully improved engagement results. Among the many questions the survey poses to associates, we saw multipoint increases in three areas strongly correlated to engagement. Would you recommend Cognizant as a great place to work? Are you excited about Cognizant's future? And do you plan to be working at Cognizant two years from now? On the client side, data from our project-level client feedback process through the first half of this year shows solid improvement over the previous period scores as well as our best net promoter score since launching this program in 2021. I see us making real progress on creating a self-reinforcing cycle. From day one, my commitment to our associates has been to cultivate a diverse organization that reflects the world in which we operate. Our top priority has been to increase a diverse talent including at leadership levels. I’m delighted to say that in the past couple of months we have appointed 7 women to fill strategic roles at the Senior Vice President level. We are resolved to help all our associates bring their best selves to work and that means focusing on all aspects of their Cognizant experience. For example, we develop talent early through educational partnerships and apprenticeships. We invest heavily in upskilling and reskilling current employees through our award-winning leadership and development ecosystem. We also employ innovative trained to hire initiatives such as the Cognizant's Skills Accelerators aimed at people seeking to kickstart a technology career in the U.S. and the Cognizant internship program for technology professionals looking to restart their careers. Our next priority is to accelerate revenue growth which is the absolute focus of the entire management team. We are differentiating Cognizant and large-deal opportunities by scaling our capabilities for cost take-out and optimization and focusing more on managed services. And we continue to see a strong pipeline of opportunities of the cost and efficiency side. Given the groundswell of interest in generative AI, the number of projects we have underway focused on cognitive and generative AI, we see this technology generating a new wave of opportunities for us. Accordingly we expect to invest approximately $1 billion in our generative AI capabilities over the next three years. Our third long-term priority is to enhance our operational discipline. We are working to fortify a day-to-day business execution and optimize cost of delivery by driving higher productivity powered by advances in tooling platforms and automation technologies and by improving their operational labor in areas like billable utilization. Our NextGen program which we announced last quarter is on track. We are making progress on removing structural costs as we continue to simplify our operating model and reline our office space to the future of hybrid work. Or our last call, I talked about a plan to redistribute some of our development centers from India's largest cities to smaller cities. I'm pleased to announce the first phase of this shift with the planned opening of two new centers, one in Bhubaneswar and the other in Indore India, which offer great talent pools. Keep in mind the next generation next-generation program, over rights, overriding aim is to generate savings to invest in our people and our growth. Yan will provide additional details in his remarks on the next-gen program. In closing, I'm now seven months into my tenure as a CEO. I've met with more than 200 clients, dozens of our partners and through in-person and virtual town halls with most of our workforce. I've also made a point to continuously soliciting ideas and perspectives from our top thousand leaders on strategic topics of importance to our future. Further, a company-wide grassroots innovation movement launched earlier this year, Blue Bolt, has led to such a surge of fresh ideas with more than 32,000 generated so far that it's now serving as a company's innovation engine. I'm convinced Cognizant path to winning in the market place, runs through fully embracing our heritage and DNA. We are leaning into our heritage at the intersection of industry and technology, a flexible client-centric operating model and a distributed delivery network that bring together global and local capabilities. All-in-all, we've been making good progress, but to recognize how much more work lies ahead, continuing to build on our growth imperatives as the goal on which everyone in the company is focused. I especially want to express my heartfelt gratitude to all our associates for the extraordinary work they do each day. Before I turn the call to Jan, I want to comment on his plans for the future. Jan let me and the board knows his intention to retire from Cognizant early next year. Jan has been a wonderful business partner to me and over the past three years he's played an instrumental role in designing and executing a strategic financial and operation operating plan while developing superb talent with our finance organization. As we begin the search for the company's next CFO, I'm grateful for Jan's willingness to work closely with his eventual successor to ensure his smooth transition. With that, I turn the call over to him to provide additional details on the quarter. Thank you.

Operator:

Thank you. [Operator Instructions] Your first question comes from Ashwin Shirvaikar with Citi. Please go ahead.

Ravi Kumar:

Thank you, Ashwin. This is Ravi here. We had another good quarter of bookings growth, 17% Y&Y. We are excited about -- I've spoken about this before -- there are two swim lanes on large deals. One is related to transformation. One is related to efficiencies, productivity, cost takeout. I think it's fair to say that at this point of time the deals we are seeing in the market are over-indexed to efficiency, cost takeout, consolidation kind of deals. We are excited about the fact that we are starting to win them and translate that into revenues for the future. You would understand that these deals come with a gestation period which is longer than the smaller deals or the transformational deals because of the nature of them. We had five deals more than $100 million TCV in the bookings. Two of them were renewals. One of them had renewals plus expansion. Two of them are net new. So a very healthy mix if I may, of our bookings. The interesting part of doing large deals is you build the rhythm so that even if the period is long enough, as you keep building the rhythm, it will start to contribute to the next year and the next year. I wish I had a big pipe the year before so that it would have contributed this year. So that's how you see it. You have to create that rhythm. Financial services, of course, is less on small deals. Financial services and, for that matter, most of the sectors are muted on discretionary spend on small deals. So that's the color of what we are seeing. We continue to be excited about our ability to win, our ability to also build the organizational infrastructure to execute them, including the productivity gains which we have baked into those deals as we factor them to win and execute. Jan, do you want to add anything?

Ashwin Shirvaikar:

Thank you, that's very useful. This second question on margins, pretty solid performance here and the question with regards to why you might not increase the full year range. I think Jan you answered part of that question in your prepared remarks when you said that there's a ramp cost. I just want to make sure are there other things investments you're making, from a R&D perspective perhaps into GenAI capabilities or things like that, investment payment, are there non-deal related factors also included in your decision to think the margin is unchanged.

Ashwin Shirvaikar:

Makes sense. Thank you both.

Lisa Ellis:

Hi, good afternoon. Thanks for taking my question. Oh, follow up. Maybe first on the GenAI thread and Ravi you commented extensively on what at Cognizant you're doing on GenAI externally with partners and to help clients transform their businesses. Can you comment maybe a little bit more detail on how you are deploying GenAI internally at Cognizant and how you see it over time you know being able to transform your business operations and maybe give you more competitive edge relative to peers. Thank you.

Lisa Ellis:

Terrific. Thank you. And then maybe for my question, my follow-up. I guess thinking about it as I'm being sad about Jan’s departure. But Ravi, maybe back on you know that you've been at Cognizant I guess coming up on a year or so. How are you thinking about kind of shaping the senior executive team at Cognizant? Are there some other kind of senior leaders you would point to that you're bringing in and that you're thinking about finding a replacement for Jan sort of what's the profile and of folks that you're looking at and bringing in given the priority you highlighted about making the Cognizant a top place an employer of choice. Thank you.

Operator:

Next question, Bryan Bergin with TD Cowen. Please go ahead.

Ravi Kumar:

That's a great question, actually. I mean, the demand profile has certainly been very volatile. I mean, if you are capturing opportunities related to discretionary spend, capturing opportunities related to future transformation of enterprise landscapes, it's either been uncertain or it's been kind of, in some places, it has fallen off. And that's one of the reasons why Jan mentioned that smaller deals have -- we have lesser volume of smaller deals and which is true for what the market situation is. Of course, Financial Services is the most impacted but we do see that in other sectors as well. I equally believe it also opens up an opportunity in places to consolidate. It opens up an opportunity to proactively go to our clients who are paranoid about the costs and give them a value proposition which appeals to them where their total cost -- the total cost of ownership goes down but we've been in the process. It's a win-win value proposition. So I'm seeing more of those deals and I'm doubling down on those deals, and that is allowing me to keep the large deal pipeline in good health. And it is an opportunity for us to even proactively go and bid for some of the business. I mean, one of the deals we announced is the Gilead Sciences deal, which is an existing customer. And we not only renewed the contract but we actually got an expansion on it. The key point there is in the past, those consolidation initiatives were run by a smaller productivity attached to technology and a bigger productivity attached to the efficiency of running your labor model, including offshoring, including a better pyramid, including a better roll ratio. I think we have a unique opportunity to switch that into a technology arbitrage which I spoke about, which is using technology to get better productivity and then sharing the benefits to your clients. And that can happen more with consolidation and I think we are trying to seize those opportunities. So I see like these two swim lanes, one which has kind of shrunk and another which is continuing to be in good shape. The idea is to double down on the one which is continuing to have traction so that you could set off against what you're losing on the other side. But discretionary spend is pretty weak. That is something I should highlight.

Ravi Kumar:

The way I see it is there is opportunity for us to increase billable utilization, and I think there is some more headroom for me to do that. And as I continue to do that, we all want to hit end of a runway on increased utilization. That's when you will see a flip on how you need more headcount to increase billable headcount. So I've said this in my last quarter as well that there was a cushion for us to increase utilization, billable utilization, that also contributed to our margin trajectory a bit. And I think we have some more headroom to increase our operational efficiency to run our business so that we can then get to a point where we then start to increase our net headcount. What also is important is we've also had a good trend of lower attrition. In fact, we ended up with 19.9% on a trailing 12 months, which is 3 percentage points lower than last quarter and almost 11 percentage points lower than Y-on-Y. And as we can keep that down, it will also help us to keep the headcount up. And then as we get to the other end of the NextGen cycle, it will kind of help. So I think we have some headroom for operational efficiency to conduct more billable work before we start to see headcount increase.

Operator:

Next question, Rayna Kumar with UBS. Please go ahead.

Ravi Kumar:

This industry has always had productivity tools. If you go back to the last 20, 25 years, productivity tools have been a way to differentiate, and it has very nicely got baked into our estimation model and then subsequently our execution model. And in addition to labor arbitrage, those productivity tools were the reason why our clients actually came to us because we had capability, we had -- we, of course, had capacity and we had productivity tooling to help them to deliver projects. I would say the advent of automation technologies in the last, I would believe, 5 years or so, including robotic process automation has been a continual embedment into our services. And I want to highlight that the universe we operate in is no longer tech spend of enterprises. The universe we operate in is operations spend of enterprises because technology is deeply embedded into operations. So these tools -- embedding these tools has been -- the industry as well as Cognizant has been very habituated to it. I mean, the ones who do it more are the ones who benefit out of it, and they then bake it into the estimation models. And the estimation models then allow you to stay more competitive than your peers to win business. And then as you win the business, you then keep working on engineering more so that you stay ahead of the curve. GenAI in a way has been a bigger inflection point. It's not different in that continuum but it's a much bigger inflection point. It is a complete game changer. So my belief is, and at least on behalf of Cognizant, I would say, we want to embrace that as much, to make it an opportunity for us for the future. If you don't embrace it, it's going to become a threat for you. If you embrace it and create that technology arbitrage I spoke about, it will allow us to get our clients to partner with us, even get our clients to partner with us at points where our -- at points where they believe that they could in-source. They would potentially outsource because they see us as a unique way to bring productivity to them. So I'm excited about the fact that this is going to be an opportunity. And it's a tectonic shift in the way our operating model will be.

James Friedman:

Hi, I'm just curious as to -- in terms of the environment for the second half, what do you see as the factors that could put you, say, towards the higher or lower end of the guidance, with furloughs contemplated potentially for the fourth quarter?

James Friedman:

Okay, thank you for that. And for my follow-up. Jan, that's a great answer. But just wondering could you double click on the assumptions by vertical? I realize you don't guide by vertical but, are at a higher level, any of these contemplated to be above or below the corporate average?

James Friedman:

Thank you.

Tien-Tsin Huang:

Hi, thanks so much for taking my questions. And Jan, congrats on the retirement news. I want to ask on the booking success, especially on the larger deals you have been talking about here. What changes are working? Is there a way to rank that for us because we get a lot of questions on pricing, of course? Where does pricing rank amongst all the factors with you winning on the larger deal side? And is there any impact here on gross margins for the second half to consider?

Ravi Kumar:

Yes. So large deals come with a very different rhythm, right? We have made sure that we have an outreach now to our -- to a chance, I mean, partners, hyperscalers, deal advisories and a whole bunch of players in the mix. The second is our ability to build institutional infrastructure because a lot of deals don't just need the heavy lifting upstream. They need the heavy lifting downstream as well. So that you price them to win but you deliver them to margins. Our ability to put all of that together, I think the company had it before. I have kind of assembled it together and then we have strengthened it further. And our entrepreneurial spirit to go and tell our clients some provocative opportunities, which could create a win-win situation for our clients and us, and therefore, create value for the process, has helped us to create a large deal mindset or a growth mindset. And I'm very confident that, that's now a part of the muscle of the company. So as we continue to invest on deal infrastructure into the market, as well as the mindset to be provocative with your clients and support that bold vision by building downstream infrastructure, organizational infrastructure including the tooling on new age AI-led productivity, that's very important. The deals could be traditional but the levers you press could be relatively new. I mean, the amount of automation infrastructure, the amount of AI infrastructure you could use to actually create straight-through processing and operations kind of work and create higher productivity run, maintain as well as build businesses for our clients, I think, is -- it's a new lever. And I think we -- I'm confident that we are ahead of the curve and therefore, we are competitive in the market to win these deals.

Operator:

We've come to the end of the Q&A session. I would like to turn the call over to management for closing remarks.

Operator:

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions First Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. I would like now to turn the conference over to Mr. Tyler Scott, Vice President and Investor Relations. Please go ahead, sir.

Ravi Kumar:

Thank you, Tyler. Good afternoon, everyone. When I spoke to you early February, I was just 3 weeks into my role. I explained my plan to move rapidly up the learning curve by embarking on a global listening and learning tour with associates, clients and partners. I also mentioned that I would meet with more than 100 clients and as many of our associates as possible. In addition, I outlined three interrelated priorities

Operator:

[Operator Instructions] Our first question comes from Lisa Ellis with MoffettNathanson. Please proceed with your question.

Ravi Kumar:

Thank you, Lisa. I’m going to – this is Ravi here. I’m going to start off and then ask Jan to add. We recorded very strong bookings, 28% year-on-year and 12-month trailing bookings of $25.6 billion. And you’re right, book-to-bill ratio is at 1.3x. I think the way to see it is it has multiple factors associated with it. First and foremost, how much of it is renewable? How much of it is new? How much of it is expansion? While we don’t give those numbers out, we had healthy expansion and new business in comparison to the past. We had four large deals more than total contract value of $100 million. Just to give you an order of magnitude. Last year, same quarter, we did not have any large deals. Large deals come with a little bit of – it comes with a runway where a lot of it is at the end of the cycle or rather at the back of the cycle. Short deals, small deals come with immediate short-fuse demand, which gives you revenue on the short run. Large deals give you revenue on the medium to long run, while in the short run, they take a little time to ramp up. So in summary, how this translates to revenue in the short and the medium and the long run is dependent on what percentage of it is large deals, what percentage of it is small deals. You would appreciate small deals are actually a little softer for us because we’ve – we know that the discretionary spend is softening in an economic environment we are in. So the large deals gives us the opportunity to accrue revenues at the back end of this year and the next year while we build the pipe for the future. Our pipeline is looking strong as well.

Lisa Ellis:

Thank you. And then maybe for my follow-up. Ravi, this one is for you. I know you mentioned you’ve been out talking to 100-plus clients and have now been at Cognizant for 3.5 months or so. Can you just articulate, when you’re talking out there with clients, how you see Cognizant, like, really uniquely differentiated in the market when you’re – with what you’re hearing back from them, what you’re hearing from associates, etcetera?

Lisa Ellis:

Thank you.

Bryan Bergin:

Hi, good afternoon. Thank you. My first one is a margin, and I guess, a NextGen program clarification. And sorry if I missed this, but can you give us a sense of what the run rate cost reduction or the net savings you expect to achieve by the end of 2024? And I’m trying to understand if the 20 to 40 bps of ‘24 operating margin is incremental to what you would normally had planned for? Or if that’s kind of the total level of operating margin expansion, which would align with prior targets?

Ravi Kumar:

Just adding one additional thing out here. I think these are two structural shifts in our cost as well. We listed costs in a hybrid environment as well as the structural shift in our personnel cost, which is a part of our SG&A., I think is an important part of this program, it’s a structural shift.

Bryan Bergin:

Okay. Okay. I appreciate that. That’s helpful. And then a follow-up, Ravi, on the large deal front, I guess, maybe the sales force. Can you talk about what you’re doing specifically in these large deal pursuits and maybe your initial assessment of the sales force and the semi structure, I am curious what you may have put in place here early on in 1Q to give you some quick wins?

Bryan Bergin:

Thank you very much.

Ravi Kumar:

Hey, Ashwin, you may be on mute.

Ravi Kumar:

Yes. I mean you see our revenue guidance for the second quarter is largely in line with our revenue guidance in the first quarter. And so we do not anticipate a really material contribution of the large deals that we signed until the third and fourth quarter of this year. So we do anticipate revenue growth acceleration throughout the fiscal year throughout the quarters. And I think we’re giving you a fair revenue guidance for the second quarter. We did still see basically pressure on some discretionary projects and smaller deals, as I mentioned in in my comments before. So I think the revenue guidance is kind of where we really solidly think we’re going to be at. The margin guidance is a very important question, Ashwin. Keep in mind, we do implement for the vast majority. We have implemented in April a merit increase. And the second quarter will, therefore, be different from our historic profile of margin that we have shown in the past year. So our second quarter, I think, warrants a good look of what happens when we implement that merit increase, which happened historically in our fourth quarter. And so think of it as a normal merit increase and the margin pressure that we will get from it. And that’s going to be some material impact for us in the second quarter. << And so think of it as a normal merit increase and the margin pressure that we will get from it. And that’s going to be some material impact for us in the second quarter. That’s why I am mentioning it. And if you do the math of our comparable merit increase in the fourth quarter and exclude the one-time components of the fourth quarter that we had, you will see that in the fourth quarter, we recorded about 100 basis points impact of that merit increase on our margins. And fair to assume that things wouldn’t be that different in the second quarter, may be actually probably slightly a little bit more pressure because the economy is changing a little bit. But that’s kind of the framework. That’s why I want to point that out, so. And then the people action of our NextGen program, we are going to start to execute in the second quarter, but given of how we are going to be executing, of course third quarter and the fourth quarter will be reflecting the impact of a big portion of them – good portion of that program.

Unidentified Analyst:

Understood. I guess the first part of that question was on revenue cadence, if you could address that. But then I also want to ask you, your headcount did go down sequentially. When do you expect that to stabilize and start to grow, I guess in anticipation of revenue growth in the future? And what part do you think increased automation? Applying AI to yourselves might play as you think of headcount in the future?

Unidentified Analyst:

Thank you very much.

Surinder Thind:

Thank you. Following up on the last question, Ravi, can you maybe talk about the level of productivity gains in terms of potentially automation and the level of disruption here? And what I am getting to here is, is there the potential for a step function change? And if there is a step function change, how does that impact the revenue model as you look over the long-term, right? I assume you won’t be able to generate the same level of revenues for a given level of service.

Surinder Thind:

Thank you. That’s it for me.

Bryan Keane:

Yes. Hi. I just had a question on the overall IT services environment. Just thinking in your conversations you had with the 100 or so clients, Ravi. Are people expecting the environment to stay similar in their IT spending budgets, or do you think people will put further pressure on budgets and IT spend as we go forward through this year?

Bryan Keane:

Okay. Great. Yes. Thanks for the color.

Tyler Scott:

Great. Thank you everyone for joining. We look forward to catching up with you next quarter.

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Fourth Quarter 2022 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, Investor Relations. Please go ahead, sir.

Steve Rohleder:

Thank you, Tyler, and thank you all for joining us today. Given the recent news, I wanted to join the call for this quarter to introduce myself and explain the changes we've recently announced. For those of you that don't know me, I'm Steve Rohleder, and I joined the Board as an Independent Director in March of 2022. Last month, I became Chair of Cognizant's Board of Directors. I previously spent 35 years at Accenture, where I served as Group Chief Executive of Health and Public Services, Chief Executive of North America and Chief Operating Officer. Today, I'd like to briefly discuss our recent CEO transition and the Board changes announced this afternoon supporting our ongoing Board refreshment process. I also want to explain why we're excited for Cognizant's next chapter. Ravi will then introduce himself and share his thoughts before Jan discusses our fourth quarter results in detail. We'll then proceed to Q&A. Regarding our CEO transition, as we announced a few weeks ago, the Board appointed Ravi Kumar to succeed Brian Humphries as CEO. Brian was a resilient leader providing a steady hand as he steered the company through various challenges, including the global pandemic. On behalf of the Board, management and all of our associates, I want to thank Brian for his contributions, which have helped to position Cognizant to capture a large growing market and fuel profitable revenue growth beyond our short-term challenges. We also appreciate that Brian will remain with the company as a special adviser until March to ensure a seamless transition. As part of the Board's strategy to help Cognizant achieve long-term sustainable growth, we also announced today a new Board appointment. Eric Branderiz, a proven financial executive and public company director with demonstrated experience supporting growth in technology and in the energy industries, has been appointed to serve as an Independent Director on the Board. Eric brings significant experience in finance, accounting, M&A execution, risk management and ESG and corporate governance to Cognizant, and we welcome him to the Board. The appointment comes as our Board continues to strive towards optimizing its balance of director skills and tenures as part of its ongoing refreshment program. With Eric's appointment, the Board has appointed five new independent directors over the last four years. Maureen Breakiron-Evans, a member of the Board since 2009, has also advised the Board that she will not stand for reelection at Cognizant's 2023 Annual Meeting of Stockholders. On behalf of the entire Board, we thank her for her more than a decade of astute guidance, exceptional leadership and dedicated service to Cognizant. Given these changes to the Board, our Governance Committee, our committee chairs and myself will perform a comprehensive evaluation of committee composition with an aim toward balancing representation of Board tenure and appropriate key skills and qualifications on our committees. These were topics that I, along with other members of the Board, had the pleasure of discussing with several of our largest investors during our annual governance road show in the fourth quarter. Now before I turn the call over to Ravi, let me share a little bit about our enthusiasm for his leadership. Over the past few years, Cognizant has navigated a dynamic uncertain market while strengthening its operational and financial fundamentals. Heading into 2023, the Board believes that Cognizant has established a solid operational foundation and now needs to move toward accelerating growth. This agenda requires a focused growth mindset driven from the C-Suite. Ravi has this mindset. He brings a passion for building teams and driving growth in our industry, and we're confident that he is the right leader to take Cognizant into our next phase with a goal of ultimately delivering significant returns to our shareholders. Ravi also brings to Cognizant best-in-class operations, transformation and leadership expertise at a global scale from a stellar 20-year track record of emphasis. During his tenure, he oversaw the company's global services organization and drove growth across its global industry segments. Ravi is a proven strategist who secured significant IT services deals. He led international business operations in India, Latin America, Japan and China, and he pioneered the creation of digital talent pools in the U.S., Europe and Australia. Importantly, during his time at Infosys, Ravi earned a reputation as a people-focused leader with a deep rooted commitment to teams and associates. Since he joined us a few weeks ago, Ravi has proven out this reputation as Cognizant associates have warmly welcomed into the team and are deeply enthusiastic about his leadership. We're confident that Ravi will help us further our efforts to support engagement and trust internally and drive retention amongst our high-performing leaders and associates. As we look forward under Ravi's leadership, Cognizant will have a sharp focus on two key priorities. First, we'll be focused on meaningful acceleration of revenue growth. Our second key priority will be ensuring that Cognizant is the employer of choice in our industry. Ravi is the right leader to achieve this vision, and the Board looks forward to partnering with him. I'll now turn the call over to Ravi to introduce himself and to share some additional perspective.

Jan Siegmund:

Thank you, Ravi. And good evening, everyone. Fourth quarter and full year 2022 revenue were above the high end of the guidance range we provided on our third quarter earnings call in November and in line with the revised expectations we provided on January 12. Operating margin was negatively impacted by the previously disclosed noncash charge in the quarter, which I will cover in more detail later. [Indiscernible] of this charge, we were pleased with the continued progress towards our operating margin goals driven by commercial discipline, the depreciation of the Indian rupee and SG&A leverage. During the quarter, we made progress improving fulfillment, driven in part by a meaningful reduction in voluntary attrition, which declined to 19% on a quarterly annualized basis from 29% last quarter. This has allowed us to further decrease subcontracted usage and will enable us to put greater focus on driving improved commercial momentum in the quarters ahead. That said, the macro environment remains uncertain, and we continue to see pockets of weakness across several key verticals. Now moving on to the details for the quarter, fourth quarter revenue was $4.8 billion, representing an increase of 1.3% year-over-year or 4.1% in constant currency. Year-over-year growth includes approximately 40 basis points of growth from our acquisitions and a negative 60 basis points impact from the sale of Samlink completed at the beginning of 2022. Full year 2022 revenue was $19.4 billion, representing an increase of 5% year-over-year or 7.5% in constant currency. Year-over-year growth includes approximately 100 basis points of growth from acquisitions and a negative 60 basis points impact from the sale of Samlink. In Q4, digital revenue grew 4% year-over-year or 7% in constant currency. This resulted in full year 2022 digital revenue growth of 11% or 13% in constant currency. Digital mix was unchanged from last quarter at 51%, up two points from the prior year period. Q4 bookings increased 12% year-over-year, including the large agreement with CoreLogic that we announced last week. This opportunity is primarily a renewal of existing work with some modest increase in scope during the latter years of the contract. For the full year, we recorded bookings of $24.1 billion and a book-to-bill of approximately 1.2 times, unchanged from the trailing 12-month book-to-bill we reported last quarter. Outside the large renewal, bookings momentum remains muted exiting this year. This has put pressure on our Q1 outlook, which I will cover shortly. Moving on now to segment results in the fourth quarter, where all growth rates provided will be year-over-year in constant currency. Within Financial Services, revenue declined 1% reflecting a negative impact of 180 basis points related to the previously disclosed sale of our Samlink subsidiary. This was partially offset by growth among public sector clients in the UK and insurance clients. The revenue weakness is being driven by our banking and financial services practice, which we expect will remain under pressure for the next several quarters. Ravi, the entire team and I are laser-focused on reevaluating our go-to-market strategy, enhancing the strength of this portfolio and have initiated a series of actions, including certain leadership changes, that we believe will give us the best opportunity to improve our performance. We are seeing early signs of success with select global banking relationships where we have successfully shifted our portfolio mix towards higher growth in strategic areas. This gives us confidence that we are moving in the right direction. However, more meaningful improvements will take time to implement. Health Services revenue grew 5%, consistent with last quarter. We experienced similar growth among both Healthcare and Life Sciences clients, which partially reflects some normalization of demand that had been driven by COVID. As we discussed last quarter, we have seen some pockets of softness within the segment, driven by the macro environment and regulatory complexity. Despite these challenges, we continue to review our Health Sciences capability as industry-leading and remain excited about the growth opportunities over the medium term. Products and Resources revenue grew 7%, a modest deceleration from last quarter. Revenue was negatively impacted by slower growth among manufacturing, retail and consumer goods customers, which we believe primarily, reflected the softening of the macro environment. This was offset by continued strength among consumer goods, automotive, logistics and utility customers. Communications, Media and Technology revenue grew 9%. Growth again was led by our technology business, where our work with digital-native clients has driven growth in our core portfolio. Our growth has moderated somewhat as growth among some of our largest clients have slowed, but remains positive. We are closely monitoring trends and developments affecting the tech industry. Continuing with year-over-year growth in constant currency from a geographic perspective in Q4. North American revenue grew 3%. Growth was led by CMT and Health Sciences. Our global growth markets, or GGM, which includes all revenue outside of North America grew approximately 8%. It also included a negative 220 basis points impact from the sale of Samlink. Growth was again led by the UK, which grew 16% and included double-digit growth in Financial Services including public sector clients. Now moving on to margins. In Q4, our GAAP and adjusted operating margins were 14.2% as there were no non-GAAP adjustments in the quarter. On a year-over-year basis, both GAAP and adjusted operating margins declined by 110 basis points. This includes the previously disclosed negative 120 basis point impact from a noncash impairment of capitalized costs related to a large volume-based contract with a Health Sciences customer. Our operating margin benefited from SG&A leverage, while gross margin pressure from increased compensation costs was partially offset by delivery efficiencies and disciplined pricing. We also experienced a meaningful tailwind from the depreciation of the Indian rupee, which represented an approximate 110 basis point benefit net of hedges year-over-year. Our GAAP tax rate in the quarter was 27%. Adjusted tax rate in the quarter was 26.8%. Q4 diluted GAAP EPS was $1.02 and Q4 adjusted EPS was $1.01, down 7% and 8%, respectively. GAAP and adjusted earnings per share were each negatively impacted by $0.08 in connection with the impairment of capitalized costs related to a large volume-based contract with the Health Sciences customer. Now turning to the balance sheet. We ended the quarter with cash and short-term investments of $2.5 billion or net cash of $1.9 billion. DSO of 74 days was flat sequentially and increased by five days year-over-year. Free cash flow in Q4 was $612 million, representing approximately 115% of net income. This brings full year free cash flow to $2.2 billion, representing approximately 100% of net income, in line with our expectations. We are pleased with our performance in 2022. However, a change in U.S. tax law that became effective last year now requires companies to capitalize rather than currently deduct R&D expenses. As a result, like many other companies, this will impact our free cash flow in 2023. We expect capitalization of R&D costs for tax purposes to negatively impact free cash flow by $600 million, which includes deferred payments for the 2022 tax year as well as increased payments for 2023. With this change, we expect our cash conversion ratio to be below our target of 100% of net income in 2023. Moving on to capital deployment. During the quarter, we repurchased approximately 5 million shares for $300 million under our share repurchase program and returned $139 million to shareholders through our regular dividend. This brings total capital return to shareholders through share repurchases and dividends to $2 billion for the full year. In the quarter, we also completed two acquisitions

Ashwin Shirvaikar:

Thank you and congratulations and welcome Ravi and Steve as well, congratulations to you. It’s good to reconnect. I think my first question is growth mindset, I get that, what are some of the explicit steps you might need to take incrementally to return to that growth mindset, if you can speak to your early view on what’s needed for sales investments, capability investments, just the G&A investment to chase large contract, things like that?

Ashwin Shirvaikar:

Got it. Thank you for the obvious thought you put into that answer. The second question is on the health care contract that was a problem in the quarter. Any granularity on sort of separating out the top and bottom line impact? And is it link-fenced now? In other words, at least the margin impact taking into account entirely in 4Q? Or is there a forward-looking impact? What’s the forward-looking revenue impact as well?

Ashwin Shirvaikar:

Okay. Thank you.

Tien-Tsin Huang:

Hey thanks so much guys. Steve, nice to hear from you upfront. It's been a while. So I want to ask similar to Ashwin to Ravi here, just the goal of being the employer of choice and having a growth mindset makes a lot of sense. How long do you think it would take for – to change the culture to get to that level? I'm imagining it can't be a quick fix, but maybe you feel differently?

Jan Siegmund:

Maybe I'll give Ravi also a tiny breather here and talk about the improved attrition, which is certainly one. First step into the right direction of becoming a more attractive employer and seeing it reflected. So clearly the dynamic in the labor markets have shifted also, but we also believe that the investments that we have made not only in regular and competitive merit cycles. You may remember we announced in the last quarter that we had accelerated our – this year's merit cycle to the second quarter, which is also important for the modeling of you guys into the second quarter. And that we have made huge progress on internal promotions, career pathing and learning and development and education, et cetera, as we have increased the number of our college graduates into our permit. So I think we have seen now a year of this permit from a nuts and bolts piece to stabilize, and we were very pleased with this relatively steep drop in nutrition in just one quarter. So we feel we are off to a good start here and then I think Ravi is focus on management, on enthusiasm, on growth and aligning will help. And then we'll kind of continue to refine those investments as we – as we need it. But I think we have already ended the year actually on that side with a big step forward.

Tien-Tsin Huang:

Yes. Then if it's okay, if I can ask my follow-up then with – given that 10-point drop in attrition and you've still hired a little bit, the utilization rates did drop. So from a modeling perspective, not to bore people, but anything to guide us to in the short-term on some of those KPIs because they are moving quite a bit here?

Tien-Tsin Huang:

Okay. Perfect. Thank you Jan and Ravi. Appreciate that and look forward to get to the updates and safe and healthy travels. Thanks.

Operator:

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

Jan Siegmund:

Ravi will chime in after I give you a more technical thing. I think as we mostly developing these plans, so we're clearly not at the end of the job, otherwise, we would give guidance today. But when you think large deals and calculate [indiscernible] of volume, I think deal characteristics of large deals have impact us on to our margin profile. And when we think about that, we need to build kind of our culture to leverage the relative margin strength if you exclude our health care charge and our pricing discipline and our delivery discipline, so that it allows us to be competitive for these larger deals that may cause dilution initially and then ramp up their full margin potential.

Ravi Kumar:

Jan, I think you've covered it so nicely. The one thing I would probably add is, I think in the last one to two years, Cognizant has invested heavily on organizational infrastructure to take large deals on a continuum, all the way from managed services to transaction-based pricing to cost takeout initiatives to digital transformation on that continuum. Now is the time to leverage those investments and take those large deals and be competitive on those large deals. So in a way, I would say a large part of it is done. We have now strengthened it, and we have oriented to the market for the opportunity, which is going to be presented to us. So that's broadly how I see it. As I keep saying, it isn't going back to the drawing board, but I'm going to build on what we have. We're going to refine it. As we refine it, we have to make some changes. We're going to make those changes, but we'll be agile enough in the market to seize the opportunities we have.

Ravi Kumar:

Yes. That's a good question, and I'm going to leave it to Jan as well to chime in. Over the years, IT Services has gone from a homogeneous landscape to a heterogeneous landscape, they're different swim lanes. In an uncertain economic environment, if you're going to see discrete study spend being a little softer. Large digital transformation engagements will start to become moderate in nature. But equally, you're going to see cost takeout initiatives, vendor consolidation initiatives happening on the other hand, I would say that's a different swim lane. But enterprises are continuing to invest because not only are they investing on the consumer side of digital. We're also investing on the employee side of digital because employees today are interacting with their organizations on a digital platform because of the hybridness of how work and what places are. So I would say it's a duality of sorts. On one side, you would see softness. On the other side, you would see cost takeout and vendor consolidation kind of happening. Depending on the industry you look for, there are industries which have lesser tech and digital intensity and the industries which have higher tech and digital intensity. And some of them are using the digital platform to transform and deliver. In fact, I would say, digital technologies is almost like a deflationary force in an inflationary economy. So some of our clients are using digital technologies to do so. So it's a mixed bag. It's – because of the heterogeneity, I would say it's a mixed bag; each swim lane has its own characteristics. Jan, do you want to chime in?

James Faucette:

That's great. Thanks for the color of Ravi and Jan.

David Togut:

Thanks so much. Congratulations, Ravi and Steve, it's really good to hear your voice again. Could you, Jan, give us some guardrails around gross margins in 2023? Not looking for anything precise, but maybe just help us think through some of the headwinds and tailwinds. You had a number of wage increases in 2022. Obviously, attrition coming down helps a little bit, but could you help us think about, what the gross margin range might be this year?

David Togut:

Understood. Thanks so much.

Jason Kupferberg:

Hey guys thanks for taking my call. Congrats to Steve and Ravi. Ravi, maybe just to start with you. I know you obviously need time to study the organization, develop your plan. But just at a high level, is your initial sense that Cognizant has more room to improve in terms of strategy or in terms of execution?

Jason Kupferberg:

Very helpful. And just as a follow-up, this might be more for Jan. But how close are we do you think to fully remediating the fulfillment issues? And then just any at least directional commentary you can give us on first quarter operating margins? Thanks guys.

Ravi Kumar:

Yes. So just to add to what Jan said, I think my initial few weeks, one of the observations is I think our talent supply chain is grinding well or it's kind of moving very, very well. Some of the clients I've spoken to in the last few weeks have started to tell us that we can start to get some of the demand moved to Cognizant with the fulfillment starting to look good. So I'm actually very excited about the progress we've made on fulfillment. I think we are ready to take more, and we're ready to continuously sharpen the talent supply chain for the opportunity with our clients. Our clients are starting to see that traction with us.

Operator:

Ladies and gentlemen, that is all the time we have for questions. I'd like to hand the call back to management for closing remarks.

Jan Siegmund:

Thank you.

Ravi Kumar:

Thank you.

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. Thank you. I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.

Brian Humphries:

Thank you, Tyler. Good afternoon, everyone. Third quarter revenue was $4.9 billion, up 5.6% year-over-year in constant currency, short of our expectations. Adjusted operating margin grew 90 basis points sequentially and 60 basis points year-over-year to 16.4% of revenue. While a non-certain macroeconomic backdrop impacted bookings and revenue, the primary driver of the revenue shortfall relates to a reduction in U.S. onshore billable resources in recent quarters, following a period of elevated attrition, a reduction in visa travel and a COVID-induced shift in the near and offshore delivery centers. Financial impact of this headcount reduction is magnified given this is our highest revenue and margin dollar per head population. To reverse this trend, we have already initiated a series of action that are intended to increase U.S. onshore billable resources, including enhanced focus on lateral hires and subcontractors, accelerated visa travel and targeted compensation programs. While these actions are gaining traction, it is somewhat slower than previously anticipated. We, therefore, expect these headwinds to continue in the fourth quarter, ahead of clear progress in Q1. Let me now turn your attention to global third quarter voluntary attrition, which was a little higher than expected in the quarter. Voluntary attrition fell 2 points sequentially to 29% on an annualized basis and fell 3 points sequentially on a trailing 12-month basis. We've taken extensive actions to increase employee engagement and reduce attrition over the past year. These initiatives, coupled with an uncertain macroeconomic backdrop, have led to reduced daily resignations, a leading indicator of voluntary attrition across the globe in the last 4 months. We expect sequential reductions in voluntary attrition to be more meaningful in the fourth quarter. To maintain positive momentum on resignations, we are continuing our comprehensive effort to attract, retain and rally employees. We remain focused on our people strategy, which includes our refined promotion initiative, learning and development, and enhanced compensation and benefits programs. For instance, we recently communicated to our associates that we will accelerate next year's merit to the second quarter of 2023, meaning we will have 2 more cycles in the space of 6 months from most of our associates. I would like to now discuss the macroeconomic environment, which Jan will also address in our fourth quarter guidance. We see clients closely scrutinizing and slowing their investment decisions for the backdrop of uncertain economic conditions. [indiscernible] has been reduced on lower-priority projects or those with a longer return on investment. We're seeing some early signs of slowing in discretionary digital projects. Industry-wise, we've seen weakness in banking, especially in the mortgage segment, Health sciences and retail. In our international business, the U.K. remains solid, but deal cycles are slowing, while Continental Europe is showing signs of weakness. From a commercial point of view, despite a strategy to sell solution and deliver client outcomes, we remain exposed to time and material engagement across all industries. We've seen clients curtailing this spending, and we expect furloughs to impact the fourth quarter. These factors contributed to a decline in bookings of 2% year-over-year in the third quarter, representing an in-period book-to-bill ratio of 1.0x and a book-to-bill ratio of 1.2x on a trailing 12-month basis. Turning now to our industry segment performance. Financial Services grew 1.6% year-over-year in constant currency, led by growth in our insurance business. This includes a negative impact of 180 basis points from the exit of Samlink. In insurance, carriers of all lines of business are enhancing their digital capabilities driven by demand for new insurance products and improved user experience. For example, Resolution Life US turned to us to execute several digital transformation initiatives that include large-scale data and application core modernization and cloud migrations. We're also helping them develop and scale advanced capabilities in data and analytics to drive significant operational efficiencies in our closed book portfolio. We were selected by AXA U.K. in Ireland as a technology partner to help consolidate, modernize and manage partners their IT operations. AXA is transforming its technology ecosystem to create a more digitally enabled modern and agile environment that's data-rich, secure and sustainable. Health Sciences revenue grew 5.5% year-over-year in constant currency, driven by digital services among pharmaceutical and health care payer clients. I'm pleased to note that our shared investigator platform, a SaaS solution for pharmaceutical companies that streamlines clinical trials to improve the speed of drug discovery, has surpassed 250,000 users across 100 countries worldwide. [indiscernible], a Japanese pharmaceutical and biotechnology company, has signed a multiyear agreement with Cognizant to provide global [indiscernible] and help improve patient health through the analysis of adverse reactions across its products. In Products and Resources, revenue grew 8.2% year-over-year in constant currency. Growth was driven by demand for our digital services among logistics, automotive, consumer goods and travel and hospitality clients. During the quarter, we extended our long-standing relationship with Centrica, the U.K.'s largest supplier of energy and energy services, deliver business-critical services encompassing application testing, client infrastructure support and IT infrastructure management. Communications, Media and Technology revenue grew 10.4% year-over-year in constant currency, driven by strength among digital native clients. We're expanding our collaboration with Qualcomm to accelerate digital transformation through a new 5G experience center in Atlanta. The collaboration combines our deep expertise in 5G, IoT, cloud and data analytics with Qualcomm's intelligent edge devices, AI and 5G connectivity solutions. We've also had our first substantial win in the legal sector, which has traditionally been a latecomer to outsourcing and digital services. Freshfields selected us to manage their global IT operations and support their ambitious global expansion plans. We'll be providing 24/7 managed service of the firmed IT infrastructure applications as well as managing its service desk. Cognizant will also help define Freshfields technology transformation road map. As I mentioned in our last earnings call, targeted M&A remains an important tool for enhancing our competitiveness. We have several M&A targets in the pipeline in line with our strategy and capital allocation framework. As always, we continue to focus on opportunities, which are value-accretive among its shareholders and align with our strategy. Yesterday, we announced an agreement to acquire the professional services and application management practices of OneSource Virtual, a Workday partner based in Dallas. These practices will complement our existing finance and HR advisory services on the Workday Cloud Platform. The acquisition is anticipated to close by year-end 2022, subject to satisfaction of closing conditions. At which stage, we expect to welcome nearly 400 new employees to our strategic Workday practice. Importantly, we continue to strengthen our leadership team. Last month, [indiscernible] Ravi Kumar, President of Cognizant Americas. He will join us in mid-January from [indiscernible], where he served as President for the past 6 years. Ravi brings client centricity and a growth mindset that we believe will help improve our U.S. revenue trajectory. We also announced Prasad Sankaran as the new Head of our Software and Platform Engineering Practice. Prasad joined us yesterday from Bain, where he was a Senior Vice President in the firm's Enterprise Technology Global Practice. Prior to that, he spent 25 years in senior leadership roles with Accenture. Both announcements speak highly of our ability to attract world-class talent and support 2 key strategic areas for Cognizant, the Americas region and leading enterprise technology transformation. Before passing the call to Jan, I would like to stress that while we're in a period of economic uncertainty, the entire leadership team knows we must execute better on things that we can control, including optimizing our resources globally and getting the right mix on and offshore in a dynamic demand environment. We will continue to focus on and hone our operational discipline, which is intended to enable us to adapt quickly to demand changes. While we're in an uncertain macroeconomic environment, we remain highly optimistic on the key services market and our opportunity within it. Finally, following sustained progress in reducing voluntary resignation rates, we expect sequential reductions in voluntary attrition to be more meaningful in the fourth quarter, allowing us to repivot client conversations from fulfillment to innovation, strategic transformation and growth. With that, I'll turn the call over to Jan, who will cover the details of our quarter and our fourth quarter financial outlook before we take your questions.

Operator:

[Operator Instructions]. And the first question comes from the line of Lisa Ellis with MoffettNathanson.

Brian Humphries:

Lisa, it's Brian. So look, at a global level, I would say we're doing similar things in North America as we're doing in India. Clearly, on a weighted basis, India had the biggest impact on our attrition historically. So we put inordinate efforts and war rooms in place over there. And frankly, in India as well as in North America and our international business in Europe and Asia, we have seen resignations come down pretty much for 4 to 5 months in a row now. So those efforts are kicking in, and those efforts are broad-based, including the obvious compensation elements. And as we announced, we just announced our second merit increase in 6 months. But on top of comp, there's merit, there is a career path progression, promotion process overall, learning and development initiatives, et cetera. And so the North America efforts are somewhat similar to what we're doing globally. I think in North America, we've gone through a pretty material visa, I would say, a process in the last 3 years as we reduce our visa dependency. But obviously, in a tough market environment where digital scales are at a premium, we've been suffering attrition in North America, and by definition, obviously going out as fast as we can to recruit talent simultaneously. And those factors, coupled with what's effectively happened across the industry and ours, was no different. A shift to nearshore and offshore during COVID has led us to have a, I would say, suboptimal level of onshore billable resources in North America, and it catches up quickly with you because of the order of magnitude of the difference in terms of revenue and margin dollar per head in North America versus in India. So it's a question of rebalancing that. We have major initiatives underway, operational rigor behind it. We had hoped to make more progress in the quarter. It's a little slower than we anticipated, but we're putting a lot of effort behind that to correct it. And it's all of the factors we mentioned above. At a global level, we're expecting, I would say, significant voluntary attrition reductions now going into the fourth quarter. The goodness of the last 4 months will kick in, in Q4.

Brian Humphries:

Yes. Look, I mean, let me start with the facts first on bookings. They were down 2% year-over-year, a little below what we had hoped for the quarter, to be honest. It is important, I'd say, to recognize the tough comparison in the second half of last year with 20% plus bookings growth. So that leads to even an in-quarter bookings book-to-bill of 1.0, and on a trailing 12-month basis, still at 1.2. So healthy enough, although, frankly, we lost some deals in the quarter that slipped out quarters. And that's, I think, somewhat indicative of an uncertain macroeconomic demand environment. We've seen lengthening purchase cycles and clients being a little bit more judicious in their approval of expenses. But Lisa, specific then to the impact of attrition, by definition, as people were dialoguing with clients around price increases, which has been one of our success stories, helping margin as well as addressing fulfillment challenges, it's made the commercial team somewhat hesitant, I think, to go to full mild to get the commercial momentum as strong as it needs to be in terms of increasing pipeline and accelerating bookings. The good news now is we're quite vocal with our team in terms of what we're seeing from a resignation point of view, and therefore, what they should be anticipating in Q4 in terms of attrition levels, which, as I said, will be meaningfully down from Q3 voluntary attrition levels. So I think we're starting now to get confidence in the commercial team that the effort we put in place around attrition and resignations will kick in. Of course, this is happening in a period where, as I said on the call, we're a little more concerned now than we were 3 months ago in terms of the macro demand environment. So that's probably been a bigger impact on bookings this quarter than previously, the whole concern amongst the C-suite as they're scrutinizing their spends, and it's not clear to me that we'll see a budget flush at the end of this year, and we'll certainly anticipate furloughs at the end of this year relative to last year. So it remains to be seen, and we factor that into our guidance.

Rod Bourgeois:

Yes, guys. So you have 4% constant currency growth in North America and essentially 10% outside of North America. So I wanted to ask how you feel about your progress and outlook in ramping your international revenue presence and also ask if your efforts in doing that are detracting from your efforts in North America or perhaps it's just that your talent challenges are more pronounced in North America, but some color on that would be really helpful.

Rod Bourgeois:

Great. And let me ask a follow-up about the cloud services market. We definitely see some changes happening in that market. So I just wanted to ask about what you're seeing in that market, particularly your competitive position there, and to what extent some of the recent macro challenges are having an impact in cloud or maybe not so much. It'd be great to hear some thoughts on the cloud market.

Operator:

Our next question is from the line of Ashwin Shirvaikar with Citi.

Brian Humphries:

So look, the first thing on a broader macroeconomic environment, I'd say it's difficult to be conclusive or dogmatic at this moment in time. It's certainly what we determine uncertain macroeconomic environment. And the outlook is a little more concerning now than it was 3 months ago if you go back to my comments back then. We are seeing spend being reduced in lower priority projects or those with longer ROI periods. And even discretionary cloud projects, as I referenced in my prepared remarks, are selectively being reduced. So we still have a lot of confidence in our digital capabilities. Our portfolio is now 51%, digital up 2 points year-over-year. But some of the challenges we talked about, the macro demand picture as well as the U.S. onshore situation are equally applicable to this. And then as you know, yesterday's announcement of acquisition -- the first acquisition we've done this year. So we haven't had the tailwind in our digital momentum that we had last year from the series of acquisitions that we did. That being said, as Jan pointed out, we are committed to our framework of extending our portfolio in line with our digital strategy, and we have a series of deals in the pipeline as we speak. So I'd expect that ultimately over time to get back in a more normal course for us. But I don't believe that all digital projects will be immune from the current economic climate.

Ashwin Shirvaikar:

Got it. Got it. And what does this lower exit growth rate for the year means in terms of achieving sort of your medium-term targets? And I completely appreciate the high level of macro uncertainty that we have, but any granular thoughts how you're planning for next year would be greatly helpful.

Operator:

The next question is from the line of Bryan Keane with Deutsche Bank.

Jan Siegmund:

Yes. Maybe I'll start with it, and then I'll let Brian jump on top of it. If we think about the mix, as Brian mentioned and as we talked on our call, had a number of factors in it in fulfillment as fairly logical. So we misjudged or we had a little bit -- a faster improvement in the third quarter of our attrition anticipated. And so about that, that miss attrition improvement made about 1/3 of our miss relative to our expectations. And then we have a number of initiatives in place to accelerate the hiring and inflow, in particular, in North America of initiatives. And that represents approximately also 1/3 of our miss to revenue guidance. And here, we obviously saw the North American challenge to grow our headcount and initiatives in place from funding our -- and ensuring we have full capacity of hiring in place to focusing on the full fledge of resources available to us, including the utilization of subcontractors and accelerating visa travel and increasing employee referral product. So we have a set of initiatives in place. These initiatives have shown initial momentum, but they were scaling slower than we anticipated. So we have now our trajectory, and we think we have appropriately risk-adjusted our new revenue guidance. So we're keenly interested to meet our own expectations in it. And so yes, we have assumed an improvement in attrition levels that we can see. But we also see now the trajectories of some of these initiatives clearer than we had in the third quarter.

Bryan Keane:

Got it. And then did the fulfillment challenges, especially in North America, will that be fixed by the time we get into the first quarter? Or could it linger into the first half of the year?

Operator:

Next question is from the line of Bryan Bergin with Cowen.

Brian Humphries:

We actually see different stories, to be honest, Brian, across different industries in terms of our evolution towards digital, even banking where we are, let's say, more heavily exposed to time and materials. We have been able to increase our digital mix, and we've got some good proof points with certain clients. But more fundamentally, the journey we've been on is to extend the portfolio, which we've been successfully doing in recent years, and yesterday's announcement is another example of that. To try to complement that portfolio then with a client-facing team that is more consultative in nature as anybody who's overseen a sales force and knows that is a multiyear journey. So we're en route, but it takes time to get there. To complement then that more consultative sales force with a more industry-aligned consulting business, and so that's the space we should continue to watch in Cognizant because we will invest behind that, and we've got strong leaders in the capacity these days and then just to make sure that there's increasing brand awareness around the capabilities we have and references and case studies that we can showcase. Last week in the Client Advisory Board was a very good example of certain clients not really been truly aware of the extent of our portfolio. So we have [Technical Difficulty] ourself. But I would say brand awareness of the company is up. Digital awareness is increasing, but it's a multiyear journey, and we're in the middle of all of that. And it starts with our client-facing teams and our delivery capabilities and our partnerships. And I certainly see in dialogue, with some of our key packaged application partners like Salesforce and SAP, growing recognition that we are getting stronger. But as ever, a few years ago, we were quite low in terms of digital mix, and we've been working our way back up to 50%, which we're pleased to cross, but there's more work to do.

Brian Humphries:

I think it's very hard to really be precise on that, Bryan. There's just so much going on in today's world. We've gone through a period of pretty significant disconnect between demand supply on key labor -- key digital skills. We're going through a hybrid work environment as a society where, arguably, people are less entrenched or engaged with companies as they work remotely. And now we've gone through a very different scenario that the economy is uncertain, slowing. And people are -- recruiters have been laid off across the globe. We're seeing in certain companies, people are being laid off. And so the market is suddenly perhaps less hot than it was previously. And that can also have an immediate impact on attrition trends and voluntary resignations in particular. So we will see where water find its own level over time. I'm encouraged by our specific actions that we've taken. Jan and I have also built that into our financial plan. So we have, notwithstanding a slowing, I would say, labor markets, we know that we want to invest on a sustainable basis in our employees in the years to come, and we factored that into our multiyear financial framework, and that will help increase our relative compensation vis-a-vis peers. And simultaneously, we're doing everything we can around training and development and career path and employee value proposition. So I'm not sure when it normalizes to a new norm. I still believe there will be a new norm, and we won't go back to historical levels. And I think as a society at large, we'll probably see attrition slow across the industry in Q4 and beyond. But time will tell.

James Faucette:

In terms of skills and looking at kind of -- as that relates to fulfillment, where are you seeing the most challenges in terms of finding the appropriate people and getting them into your fulfillment capabilities right now? And how are you thinking about the pyramid itself as it relates to solving for that? And I'm just wondering how that then impacts the you think about financial guidance? Kind of a complicated question, but hopefully, that's clear.

James Faucette:

Got it. Got it. And then I guess kind of a somewhat related question, but looking more specifically at the P&L and margin impact, can you help talk us through the impacts and mechanics of merit cycle changes? Are those accelerating? Are they going to be permanent? I guess should we expect 2 cycles a year? And just trying to make sure that we're contemplating that -- how that flows through the actual P&L appropriately.

Operator:

The next question is from the line of Tien-Tsin Huang with JPMorgan..

Jan Siegmund:

So what we -- maybe I'll talk a little bit about our overall maybe gross margin development, kind of what you're focusing on, Tien-Tsin, here is we did see, obviously, a decline, but I think the relative performance overall compared to the [indiscernible] has been relatively good. And so a few factors I want to point out. When we talk about pricing, I think we need to kind of -- in particular, now that we have been added for a little while, think about them as a regular contractual increase, pricing increases with our clients, but also a discipline to price our business appropriately in the market. And with both of these things, we have seen slow start in the fiscal year. And now we have seen steady improvement and compounding impact of those initiatives. So that has been getting better and has helped us on the relative gross margin performance. Also, the shift to the -- in our pyramid has been positive. We have been able to, to a large degree, offset the impact of comp and benefit increases by streamlining our pyramid and focusing on a slimmer permit, as mentioned, and that paired this promotion opportunities, which are positive, our associates, I think, we'll have over the next couple of years, as that is still scaling and maturing, a positive impact on how we price and how we win deals. So we're feeling, I think, good -- well, we're feeling good about the improvements we're making of how we manage the business opportunities. It's a thoughtful process. It allows us actually also to make our strategic best moving forward. I think our margin profile is in good shape, and that should offer us opportunities to make our strategic bets where we want to go and grow faster revenues on a much more solid base than we are today.

Tien-Tsin Huang:

Just quickly, if you don't mind, a quick follow-up, just on the capital allocation front. I have to ask a capital allocation question. Just with the buyback of the authorization here, just your appetite to back stock. I know you talked about the acquisition you just announced. But just thinking about buyback here at this point in the cycle.

Operator:

Next question is from the line of Darrin Peller with Wolfe Research.

Brian Humphries:

Yes. Look, it's a good question. I mean I'll start with the 2 bigger ones, Financial Services, which is about 31% of the company. It grew about 1.6 points in constant currency, but that was impacted by the exit of the Samlink business, which was previously disclosed to the tune of 180 basis points to normalize, let's say, 3.4 points of growth. And that's the low industry. We've got a lot of work to do there, as we've cited previously. . There is a slowdown in certain segments there we've touched upon in the prepared remarks, the mortgage segment in particular. I'm also seeing some of the C-suite there talking about, let's say, tightening their belts as they go into the fourth quarter and beyond. So I think that will be a tougher sector for others as well. But fundamentally, our bigger issue there that we're evolving from, it's not just the folks we have in front of those clients, but also how the clients think of us. We've very often trained them to think of us as a provider of resources. I'm pleased to say that our digital mix in Financial Services is improving, and our staff -- or time and material mix is not improving enough yet. So we have to get that balance right in the period to come. Insurance, we're doing better than banking, and that's obviously in banking area we've got to go fix. In Health Services, we feel very good about our position on a relative basis or a competitive basis in both payer provider as well as life sciences. That's one of our core franchises, I would say, as a company. The business grew about 5.5% in constant currency year-over-year. It's 29% of our business. So it's catching up on Financial Services overall. We've had good momentum in the [indiscernible] business in the last few years. So I feel pretty good about our relative position there. And then if I talk about the other 2 portions of the business where we have actually historically in the last 2 years, 3 years, been growing double digits, CMT is a good success story of ours. We've had good client acquisition there, good constant currency growth. Products and Resources, I think we have a lot of room to continue to do well there because our penetration of large accounts is lower there than it is as an example in life sciences, or indeed, the payer business where we are heavily penetrated into the major players. So that's kind of how I think about the framework. The factors we touched upon today, elevated attrition across the industry and Cognizant, within that permeated across all industry segments, and indeed, the U.S. onshore situation permeated across all as well. So nothing specific to either of those.

Jan Siegmund:

The -- well, I have to say and answer in the third quarter, we gave guidance in the fourth quarter. But I did mention that we feel our overall framework -- our multiyear framework is intact, and that didn't refer only to the revenue, but it refers also to our margin expectations. So that's kind of as far as I want to go for today. We -- when you analyze the results on the margin, I think it's important to consider a number of factors. We have driven the margin expansion by having SG&A control and discipline. So it helped us to drive and leverage that SG&A as the company grew. We had also meaningful support from the depreciation of the rupee in our business. And then I talked already about the impact that our actions had on gross margin. Gross margin was under pressure, but I think we had a lot of activity that moderated at what could have been a bigger effect on gross margin even. So you heard me in the third quarter and continue -- and second quarter and now continues in the third quarter, we feel we have a relatively -- we have a good process in place to balance that business out. So our focus is to maintain that discipline, obviously, and then really accelerate revenue growth. That is the main focus that we're driving on because that's our biggest opportunity and use this -- the margin profile as a great foundation for that.

Tyler Scott:

Great. Thank you all for joining. Look forward to catching up next quarter.

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second Quarter 2022 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. I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir. You may begin your presentation.

Brian Humphries:

Thank you, Tyler. Good afternoon, everyone. I'd like to comment on several topics today, notably our second quarter performance, the demand and pricing environment and labor market dynamics. Let's start with our second quarter performance, which was balanced. Second quarter revenue was $4.9 billion, up 9.5% year-over-year in constant currency. Growth was led by digital. Second quarter operating margin was 15.5%, up 50 basis points sequentially, in line with our expectations. Financial leverage driven by sequential revenue growth, disciplined expense management, currency benefits and the optimization of pyramid, shoring and fulfillment helped offset the impact of attrition and labor cost inflationary pressure. Our industry segment performance remained largely consistent. Financial Services grew 5.1% year-over-year in constant currency, led by insurance growth. This includes a negative impact of 190 basis points from the exit of Samlink. We continue to make progress strengthening client relationships in Financial Services. Earlier in the second quarter, I visited clients in Germany and celebrated a new logo win with Zurich Insurance Germany. Cognizant will help them simplify, modernize and manage their enterprise application landscape by establishing joint DevOps teams and working to extend the insurers' AI, data, software engineering and cloud capabilities. In insurance, CCC Intelligent Solutions whose SaaS platform powers the property and casualty insurance industry, asked for our help in enabling their cloud transformation program. We led with our enterprise DevOps and cloud transformation consultancy and partnered with Microsoft to present a comprehensive solution. This prompted the client to also select us to build next-generation analytics and telematics solutions that are expected to be key to their long-term leadership. In the second quarter, we combined our Healthcare and Life Sciences operating segments into a single operating segment called Health Sciences and naturally dilution, given the market conversions across these industries. Health Sciences grew 7.6% year-over-year in constant currency, with growth driven by pharmaceutical clients and sustained momentum in our TriZetto product portfolio. Commonwealth Care Alliance, an integrated care system serving over 60,000 members across numerous U.S. states, illustrates our momentum in TriZetto. Our end-to-end business process innovation powered by TriZetto solutions and a BPaaS engagement is fully integrated from enrollment and billing through claims. Through our partnership, Commonwealth Care now has the tools needed to compete in the digital health ecosystem and support value-based personalized care for its members. We've also signed a new multiyear agreement with Organon, a global women's health company to help improve the delivery of healthcare products and crucial medicinal supply chain management. We'll help Organon scale its healthcare business by delivering full stack industrial technology support for its global pharmaceutical manufacturing sites in the UK, Netherlands, Belgium and Indonesia. We continue to see excellent growth in Products and Resources, where revenue grew 11.6% year-over-year in constant currency, driven in part by strength among automotive, logistics, retail and consumer goods clients. As a strategic partner for digital, we're helping Albertsons Companies, a $70 billion grocery retailer, make their move to a cloud-based infrastructure model, enabling innovation and improved customer experiences, both in-store and across last-mile delivery. In Communications, Media and Technology, we had another quarter of excellent growth. Revenue grew 19.5% year-over-year in constant currency driven by technology clients and new client acquisition. DocuSign is an example of a new logo win. They selected Cognizant as the preferred partner for global customer support operations across all products and services from their flagship e-signature product to newer contract life cycle management products. DocuSign turned to us because of the distinctive solution proposed by our intuitive operations and automation practice, including cutting-edge omnichannel customer support and outcome-based commercial models. A quick word on our recently announced organizational evolution. In July, we announced the combination of our practice areas with delivery practices, which simplifies our model by bringing Cognizant in line with industry norms. This enables us to have end-to-end accountability across 4 integrated practices from vision, road map offerings and capabilities, including M&A and post-merger integration through to presale solutioning and delivery. I believe this will assist our industry teams to be more successful with our clients as we sell solution and deliver client outcomes. I also believe that our industry capabilities provide differentiation that we can unlock value for clients at the intersection of industry use cases and technology. Moving now to the demand and pricing environment. While we are carefully monitoring the potential impact of a worsening economy in our pipeline, to date, we've not seen any significant slowdown for IT services demand. That said, as we serve some of the largest clients in the world, we are aware that should they see slowing earnings growth, nonessential projects or those with longer ROI may be paused. I am confident that the breadth of our portfolio enables us to serve our clients' needs for higher levels of agility, innovation, resilience and indeed, efficiency. So regardless of what the coming quarters bring, our value proposition to clients remains. More generally, digital transformation has become so essential and foundational to most companies, regardless of their industry, that despite some macro demand uncertainty in the short term, I remain optimistic on IT services' growth prospects in the medium to long term. In fact, the bigger challenges we are faced with as an industry are the demand supply and balance on key digital skills, elevated attrition and labor cost inflationary pressure. I would like to thank our associates around the world who've been working hard to navigate these challenges, all whilst trying to optimize fulfillment and pricing. Achieving the perfect balance is not always easy. And in the second quarter, while I'm pleased that we drove both year-over-year and sequential margin expansion, I suspect that our focus on fulfillment optimization and pricing marginally impacted top line performance and hurt bookings momentum. Second quarter bookings declined 3% year-over-year, below our assumptions entering the quarter. While we continue to have a robust book-to-bill ratio of approximately 1.2x revenue on a trailing 12-month basis, by better balancing the factors just mentioned, we aim to accelerate bookings growth in other quarters, whilst nonetheless achieving our committed margin expansion. Just a word now on pricing. Market pricing dynamics remain consistent. Clients, through their vendor exposure and their internal teams, are privy to demand supply and balances across key digital skills and labor cost inflationary pressure. This, coupled with the pent-up demand for digital transformation, means clients are more predisposed to engage in price increase discussions. Clients are willing to pay for skills and innovation, with efficiencies, including automation and optimized delivery mix, are expected to mitigate cost increases. We continue to execute against a pricing initiative to offset labor cost inflationary pressure, with benefits starting to be felt, but greater impact expected in the coming quarters, recognizing that pricing power stemming from talent shortages will lag behind talent-related cost increases. Let's move now to labor market dynamics, including attrition and inflationary pressure. Second quarter voluntary attrition rose 5 points to 31% on an annualized basis or 32% on a trailing 12-month basis. This increase was slightly above the seasonal uptick we anticipated entering the quarter, impacting second quarter revenue performance. While we have seen some signs of improvement in July resignation rates, we continue to expect elevated attrition for the remainder of the year. As I've mentioned on prior calls, attracting, retaining and rallying our talented employees is one of our top priorities. In the past year, we've invested record levels in compensation, overhauled our promotion process, invested heavily in our learning and development initiatives and introduced a series of other measures, including educational programs and returnships. Our internal job moves program, which facilitates ongoing upward mobility in the company, is one factor that enables us to mitigate the need for and deep the cost pressure of lateral hires, all whilst improving morale. We've also recognized how important flexibility is to our associates and have, therefore, communicated a hybrid model will define our approach to work. Our priority is to be a welcoming inclusive, equitable company for everyone in no matter their work location. Our clients and associate-centric company aims to strike a balance between how clients want to interact with us and the flexibility we seek, all while maintaining a focus on employee engagement, collaboration, our values and a culture of continuous learning. I'm pleased to see that our efforts on employee engagement are working. In recent weeks, we completed our annual engagement survey that showed significant increases in our engagement scores, positioning us above industry benchmarks. In closing, as we execute our strategy, we were operating with 3 clear priorities

Operator:

Our first question comes from the line of Rod Bourgeois with DeepDive Equity Research.

Brian Humphries :

Rod, it's Brian here. Thanks for the question. Look, it's very much related to more towards the demand supply and balance that we see in the market. We gave guidance in November around the revenue target range of 8 to 11 over the coming years with about 2 points from M&A. Today, we reported 9.5 points of growth, so within that range. And even the guidance we gave is within that range. But my hope obviously, is that with better demand supply situation Cognizant would have better headcount and be better able to get after the revenue opportunity, whilst also I feel pretty good about where we are on margin these days. So really for us now is about getting -- continuing to evolve the business portfolio, if you will, to higher growth categories, making sure we get the headcount right, both in terms of increasing retention and making sure we even get better throughput in terms of our recruitment. And then, of course, targeted M&A, which tends to be accretive to our revenue CAGR, some targeted larger deals that may or may not come ultimately, in years to come. But we'll be selective on those, as I've always said. And in some regards, today's margin profile, I think, is also indicative of the fact that in recent years, we haven't made big bets that may have been wrong in terms of attrition assumptions or margin or cost assumptions. So it's really about those things, Rod. Macro, we've seen some impact in terms of pipeline progression but it's been more modest. We haven't seen anything meaningful in terms of slowdown in demand, and I'm still certainly of the opinion that's while we'll have to keep an eye on the earnings cycle of our major clients and understand how they think about larger projects or ERP rollouts or projects with ROI time lines. At the end of the day, I'm very optimistic about IT services growth prospects in the medium to long term, and we'll continue to shape the portfolio to make sure we were able to show up and add value to clients.

Jan Siegmund :

Yes. Rod, I'll jump in. The pricing environment, we would still overall characterize as consistent, and we feel we do have pricing opportunities for us that we are realizing and working hard to achieve. We see better opportunities in our digital opportunities where the demand is really difficult to supply and value is high, our new digital type services as we see better opportunities we talked in last quarter about our initiatives to drive pricing across our entire client portfolio. And we're making progress. We always anticipated that this would be a multi-quarter endeavor. Some of these negotiations are ongoing, but we do see early results, and that's why I mentioned in my commentary that we do see some modest contribution from pricing, not only to margin, but obviously, to our overall margin development.

Jason Kupferberg :

Just wanted to switch over to bookings. I know you mentioned they were below your expectations for the quarter. Wondering if you can quantify the shortfall there? And maybe just talk about what you think some of the root causes might have been. Obviously, they can be lumpy quarter-to-quarter, but I'm guessing that the bookings are kind of less affected by the supply-demand imbalances that you just talked about as it relates to revenue. So I would just like to get a little bit more color there? And do we start to see improvement in the bookings growth trajectory in Q3?

Jason Kupferberg :

And then just on the supply side, is attrition or is hiring the bigger challenge right now? And do you think Q2 will, more or less, be the peak on attrition? I know you said you expect it to remain elevated, but just wondering what other actions the company might take to improve that metric?

Operator:

Our next question comes from the line of Tien-Tsin Huang with JPMorgan.

Jan Siegmund :

Yes. Maybe just as a quick reminder, our second quarter is typically a higher attrition quarter that has to do with some of the bonus payments that we issue in the end of March. So we knew that we would have increased attrition that we don't expect to continue throughout the year. So that's number one. It does -- it did turn out to be a little bit higher, maybe also for the revenue impact that we identified, it had -- it did tick up a little bit higher and a little bit more impact in North America than the core of our operation in India. So from a medium-term perspective, I would think we still have elevated attrition levels, although not at the level that we have seen in the second quarter.

Tien-Tsin Huang :

Just quickly on -- for my follow-up, the 1.2 book-to-bill being stable. I heard that. But is there a way to look at annualized backlog as well or some other metric thinking about that trend, assuming that there's some short-term project work and maybe some of the bookings have converted? Just on duration or ACV is another metric. I know you don't give it, but any interesting calculations there.

Operator:

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

Brian Humphries :

Yes, I'll start. Jan, by all means, jump in if you want to embellish this as well. I think at the end of the day, James, we go back to the multiyear framework we laid out in November, not that long ago at the Analyst Day, when we talked about a revenue CAGR aspiration coupled with margin expansion over multiple years. And I would argue that's still the right way to think about Cognizant. Nothing has fundamentally changed. The results we announced this quarter, 9.5% constant currency growth with significant margin expansion year-over-year and quarter-over-quarter, unlike the rest of the industry, I think fits within that mode and so too does our guidance. Clearly, the more resources we have, the more we'll be able to go on the attack more from a top line perspective. But what we've been really focused on is making sure we put a good operational discipline in place in terms of how we think about pricing, how we think about mix, delivery pyramid, et cetera, that's been a multiyear effort. We've also made investments, by the way, in the company that are starting to the bear fruit now. And of course, we get financial leverage the more we grow sequentially. So it's no -- not really fundamentally different from what we outlined back in November, and that's how you should think about us going forward as well. As we are better able to make progress on our retention trends, we'll have the luxury to be able to hopefully accelerate growth and get the balance a little bit better than this quarter.

James Faucette :

And then can I just ask a follow-up, as you've formulated the outlook, obviously, a lot of moving parts between pricing, attrition, wage inflation as well as the macro itself. Can you give a little bit of color in terms of -- as you formulated that outlook, what of those key components are you expecting to improve as we go through the second half of the year versus steady versus any that -- versus steady that -- or versus any that may you -- you may be looking to do for deterioration?

Operator:

Our next question comes from the line of David Togut with Evercore ISI.

Brian Humphries :

Yes. David, it's Brian. Look, I would say no major concerns in terms of demand curves in the financial services sector generally and within banking. We certainly had a good quarter, I would say, in commercial banking, which was stronger than retail and cards and payments and indeed, stronger than capital markets. So what we see there is, frankly, some more of a selective approach from Cognizant as we have repositioned ourselves with some of the larger banks, a shift away from staff augmentation with their transformation programs and really their innovation agenda. So it's been an evolution of how we -- the teams we have in front of clients and what they are about to sell and hopefully solution and deliver, but also educating clients to think about Cognizant differently. But I don't see any fundamental issues in terms of macro concerns in the banking space. Insurance, we seem to have done well in the quarter as well. Generally, most of the vast majority is in the United States. And we had a, I would say, a reasonably strong quarter there, too. And no major concerns either from a macro perspective there.

David Togut :

Appreciate that. And just as a follow-up, what action steps do you need to take to win more transformation business from the bigger banks? Do you need to add more in the way of management consulting capability? What are the key pieces you're focused on?

Operator:

Our next question comes from the line of Lisa Ellis with MoffetNathanson.

Jan Siegmund :

Yes, Lisa, I'll jump in. Thank you for that question because it's important for us to reiterate that really, our overall strategic framework of capital allocation is unchanged. We still believe M&A is an important tool that we have to enhance the competitiveness of our company to add and augment for us. So what we see here is really purely an operational and time delay basic -- a timing delay of M&A that happens when you develop pipelines and when you pursue deals to do so. It's also a little bit a consequence of a disciplined approach, which we're trying to signal in our prepared remarks. We are thoughtful about how we want to allocate that that capital in this uncertain environment, coming off very lofty valuation expectations, I think it is fairly typical that you have sellers having higher expectations than buyers are willing to do as we see the world through different lenses. And so we observed that a little bit as we also think about how do we justify the expense of M&A in a rational way. We are optimistic overall that we will continue with some M&A in the second half of the year. So we have an active pipeline, but there are always the vagaries of closing those transactions coming out to a mutual agreement. But the -- it would be really purely due to the, I think, the practical situation that we are faced with at this point in time of economy and buyer expectations, outlooks, et cetera.

Jan Siegmund :

Yes, Lisa, it is -- keep in mind that number one, for clarification, our revenue performance was really to a very small amount of our expectations. So we are now in the fine-tuning of the sausage-making a little bit around what happened in the quarter. And observation is correct that we have a consistent utilization performance over the last couple of quarters. But we have overlapping impact. For example, our utilization is negatively impacted by our increased intake of college grads. They tend to have warm up times till they become fully productive, and it weighs on our utilization metrics in a simplified way were where we have other tight skill sets that have led to high utilization and lost revenue opportunities. This is in particular the case in North America, where we had higher revenue carrying gaps in our capacity for delivery. And so this localized effect basically, is balancing out and created basically some missed revenue opportunities.

Bryan Bergin :

First one I got is on bookings. So I'm just trying to understand, are you experiencing pricing pushback and resourcing challenges that are causing more so delays or missed opportunities entirely? So I'm trying to get out really whether this is deal cycle extension or competitive loss and cancellation entirely there? And just how are you expecting fiscal '22 bookings growth to land now?

Bryan Bergin :

Okay. And then just on margin. Maybe can you quantify or just talk about some of the larger underlying swing factors in the second half assumptions that you have? And I see in 2Q absolute dollar level of SG&A spend was roughly flat year-over-year despite the higher revenue base. So maybe can you talk about where exactly you're leveraging this? And to the tune of are you cutting more so around corporate? Or are you also throttling sales and marketing-related spend as well?

Brian Humphries :

I just want to touch upon the other question around the commercial team. Now we're absolutely committed to the commercial team. The multiyear guidance that we gave in our November Analyst Day, that became part of the 2022 revenue guidance is really about participating in growth markets, orienting the portfolio to our higher-growth categories and making sure we have world-class client-facing teams that are consultative in nature and that are productive in nature. And as many of you know, we've really built out a strong sales operations function here in recent years. We started showcasing to you the bookings position we have. We changed our variable compensation program for our commercial team and with a few years of data that we continue to hone in on opportunities around commercial productivity. But I would say the sales roster or the commercial roster is fundamentally similar to where it was in recent months and quarters, and we continue to want to invest in our commercial team and will invest in our commercial team in the years to come.

Jan Siegmund :

I don't think we really give much detail on this. But as Brian mentioned on the bookings performance, where we saw the softness in bookings was disproportionate on what we call shorter-term deals, which makes exactly sense, as Brian had explained. So that portion was affected. But again, our variation from expectation is really a relatively small percentage numbers. So -- but we did see a little bit more pressure on the shorter-end deals compared to the longer-term deals.

Rayna Kumar :

I just want to dig in a little more to your 3Q revenue guide. So it assumes a slowdown, right, in revenue growth from 2Q to 3Q. Are there any specific verticals or geography that you would call out that would cause that deceleration? And then second, your CMT revenue was very strong at 20% in the quarter. Any onetime items there? And how should we think of that growth going forward for the remainder of the year?

Rayna Kumar :

Understood. And just on the growth in CMT in the quarter, any call out on...

Brian Humphries :

Yes. Look, it's -- as you'll see in the SEC filings, the Communications, Media and Technology business for us is actually our most profitable industry segment externally. We have tremendous momentum there, a strong team who've been driving good momentum with digital native companies, fully leveraging our intuitive operations and automation business group as well. But we have strong client relationships. We've been executing well. Delivery excellence is very strong. I know a lot of these clients personally, they speak to our differentiated offerings and differentiated delivery. So this has been a business we've been investing in for many years as we've made the portfolio a little bit more diverse beyond healthcare and FSI. Products and Resources and CMT have been growing double digits for many, many years. And CMT is one of the showcases, I think, of our success in that regard, both in the United States as well as internationally. So nothing fundamentally that concerns me in terms of underlying currents there. We just have good momentum and a strong team.

Operator:

This concludes today's Cognizant Technology Solutions Q2 2022 Earnings Conference Call. You may now disconnect your lines at this time.

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Q1 2022 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. I would now like to turn this conference over to Mr. Tyler Scott, Vice President Investor Relations. Please go ahead, sir, you may begin the presentation.

Brian Humphries :

Thank you, Tyler. Good afternoon, everyone. Thanks to our talented employees, we delivered on our first quarter commitments in what continues to be an intensely competitive global labor market. First quarter revenue was $4.8 billion, up 10.9% year-over-year in constant currency, above the midpoint of our first quarter guidance of 10.2% to 11.2% growth. Growth was led by digital, which grew 20% year-over-year and now represents 50% of our revenue. We had another exceptional quarter in digital business operations, which continues to meaningfully outgrow the BPO market reflecting momentum in intelligent process automation and digital native clients. First quarter operating margin was 15%, down slightly sequentially as expected, reflecting seasonality. First quarter bookings growth of 4% was in line with our expectations following exceptional bookings growth in the fourth quarter. On a trailing 12-month basis, we have a robust book-to-bill ratio of greater than 1.2x revenue reflecting bookings of over $23 billion. Given a healthy pipeline, we anticipate bookings growth acceleration in the second quarter and for the full year. Over the last 3 months, I've met employees, partners and clients across 4 continents. While the global economic environment is uncertain, based on these interactions, I remain optimistic about IT services industry demand for the foreseeable future. Clients are making the shift to digital operating models to become more agile, automated and innovative. They know that it is the only way to deliver customer-centric user experience and hyper personalization, to simplify complex workflows and to build a modern operating infrastructure that's Our strategic repositioning enables us to engage more deeply with clients, helping them to succeed and supports our growth trajectory. Our capabilities are in strong demand as digital becomes mainstream. Ultimately, I believe that our scale in India, complemented by our growing global delivery network, will differentiate us as clients seek talent and business stability. Meanwhile, the labor market continues to be attrition, demand supply imbalances and inflationary pressure. I'd like to thank our teams across the globe for their leadership, patience and engagement as we navigate these challenges and execute against our client commitments. Today, more than ever, employees demand that we invest not just in total rewards, including compensation, but also in the end-to-end employee experience, their skilling and career advancement. Cognizant has always been known for our investment in our people. And in the last year, we built in this legacy with accelerated skilling and enhancements to our promotion framework. First quarter voluntary attrition fell 5 points to 26% on an annualized basis or 29% on a trailing 12-month basis. While we made sequential progress reducing voluntary attrition for the second consecutive quarter, we anticipate attrition will remain elevated for the full year and will increase in the second quarter, reflecting seasonality. To mitigate labor cost increases and the investments we are making in our people, we continue to execute against a series of measures including our automation agenda, pyramid and shoring optimization and a deep pricing. Turning to the industry segments. In Financial Services, our ongoing recovery continue with growth of 6% year-over-year in constant currency reflecting the sale of our Samlink subsidiary in February, continue to make progress repositioning the business towards higher growth and higher value services and solutions with a more focused client set. We expect to pace recovery in banking and insurance to continue with strong demand for digital transformation. One client whose digital transformation journey we've been supporting is ABN AMRO Clearing Bank. We are transforming the bank's IT landscape into a hybrid cloud platform with a focus on security and regulatory compliance. We'll be implementing an end-to-end secure, scalable and compliant infrastructure as a service model in support of the bank's IT modernization agenda. In health care, revenue grew 9% year-over-year in constant currency, with particularly strong growth in Life Sciences. Our investments to modernize the TriZetto product portfolio, which includes the integration of AI and machine learning capabilities continued to pay off. Our clients are responding to our commitment to deliver next-generation platform solutions that help them offer patients real-time insights and personalized care. We're keeping our products cutting edge, building new solutions across the value chain and capitalizing on the opportunity at the intersection of health and digital in areas such as virtual care and telehealth. During the first quarter, we announced our collaboration with Microsoft to deliver a new digital health solution designed to improve medical care. Leveraging Microsoft Cloud for Healthcare, our new solution is the first of several planned offerings that combine remote patient monitoring and virtual health using products like smart watches, blood pressure monitors and glucose meters to collect and communicate patient health data to providers. Wellmark Blue Cross and Blue Shield, a leading health insurer with more than 2 million members is a great example of how we're partnering with AWS to drive digital transformation. Wellmark aims to improve the experience of their stakeholders by accelerating cloud migration and data modernization, all while strengthening their information security. In Products and Resources, we continue to see excellent growth in client success across travel and hospitality and in manufacturing, logistics, energy and utilities. Automation is top of mind for clients like Pacific Gas and Electric, which sought our help to realize their vision for a new digital productivity center of excellence that aims to reduce manual efforts, simplify their automation tools and provide agile and scalable solutions for their business and IT users. To that end, our IPA team helped deploy Microsoft Power platform and simplified our tool sets with Cognizant Neuro, our recently announced intelligent automation fabric. PG&E is now well on its way to saving 1 million hours of work through low code, no code automation. Finally, in Communications, Media and Technology, we saw continued strength in technology, where we've sustained double-digit growth over the last 4 quarters. I'd like to briefly switch gears now to the future of work, a universal topic amongst the C-Suite with enduring societal implications. Organizations around the world are deliberating how to best attract, engage and retain employees. The events of the past few years have prompted people worldwide to question their life and work choices, including how and where they work. In the meantime, executive teams are determining how to best nurture company culture and values in the face of today's labor market realities and a hybrid work environment. These socioeconomic questions also intersect with business practicalities such as real estate strategy, one of the many things we are currently reviewing. One of the prominent business themes of our time is the relationship between purpose and work. Purpose encompasses all the values that drive people's choices, actions and attitudes from wider social and environmental goals to professional and personal objectives such as a healthy work-life balance. That's 1 reason we put so much time, thought and energy into developing and activating a compelling purpose, vision and set of values for our company, which express our commitment to making a positive impact on the environment and the wider society. We continue to advance our ESG agenda, applying our knowledge, portfolio and partnerships to engineer new levels of environmental and social benefits for our company, clients and communities. In April, we announced that we will source 100% renewable energy for all our global offices and facilities by the end of 2026. Sourcing 100% renewable energy supports our goal, and as last year, to achieve net zero greenhouse gas emissions by 2030 and responds to client expectations that business transition to a low-carbon economy. We also want our employees, clients, partners and other stakeholders to better understand today's Cognizant, which is why during the first quarter, we modernized and reintroduced our brand to mirror the company we've become, the services leader with world-class digital solutions and talent. Our brand now carries the tagline, Intuition Engineered. This is our promise to engineer clients' businesses so they can anticipate and meet their customers' needs with the insight and speed of intuition. As a global company, we will always stand with the right of people to choose a path of self-determination and democracy. Wave humanitarian relief efforts for Ukraine, Cognizant contributed $1 million in grants to several organizations that are delivering food, water, shelter, health care and economic assistance. We joined the international community in hoping that a path to lasting peace can be found soon. In closing, I believe we’re strategically well positioned to capture a large growing addressable market and drive profitable revenue growth. A month ago, I marked my third year anniversary leading Cognizant. While we are a company in transition, our evolution has been significant across multiple dimensions. We're putting the company on a strong growth trajectory, and I'm optimistic about Cognizant's prospects as we bolster our portfolio judiciously, to not only build and run clients' technology foundations but also transform their enterprises into modern businesses. And with that, I'll turn the call over to Jan, who will cover the details of the quarter and our financial outlook before we take your questions. Jan, over to you.

Operator:

. First question comes from the line of Tien-Tsin Huang with JPMorgan.

Brian Humphries:

Tien-Tsin, it's Brian here. So look, all in all, we actually had an exceptional Q3, Q4 in bookings, if you remember, both quarters were up in excess of 20% year-over-year. And so some of that, there's natural behavior in a commercial team to pull in bookings in the latter part of the year to maximize their variable compensation. So the compares what the compare is. But I feel very good about where we are, a book-to-bill of 1.2, the book-to-bill in the quarter is fine too and generally good momentum behind digital bookings as well. So our pipeline plus the book-to-bill ratio, which is very healthy at this moment in time, give me confidence that we continue to do the right thing. On the contrary, we don't really have what I would view a demand issue as an industry that is faced with elevated attrition. The trick is always to optimize how much you want to sell, otherwise, you end up frustrating clients if you can't deliver against it. So it's more a demand supply and balance labor cost and attrition dilemma than a top line dilemma at this moment in time. Now in the same vein, I'll be the first to say that the economic backdrop is uncertain. And therefore, we continue to monitor, as you do on a daily and weekly basis the war in Europe, the inflation or the risk of stagflation, to broader economic sentiment, of course, and how this may impact not just us, but our clients and therefore, indirectly us. But at this moment in time, despite an uncertain backdrop, I'm certainly optimistic about the IT services demand picture for the foreseeable future and our role within that.

Brian Humphries:

I would say, Jan and I are quite judicious when it comes to M&A, quite disciplined, very intentional, and we tend to step out of certain deals. If they don't make economic sense, we're here to represent shareholders. Of course, we're custodians of the company. And in some cases, it's been us stepping out. In some cases, there are deals that we weren't able to get done or we weren't able to get the counterparty to engage. There's no fundamental change to our We continue to view that as a core element of our capital allocation framework, certainly a core element of us executing against our strategy. And where we do M&A, we'll be in tune with our digital aspirations, key vertical aspirations, geographic expansion and of course, our desire to be a little bit more advisory led. In certain deals, you hit multiple birds with the 1 stone. You can have an international deal that is aligned to a digital priority that is aligned to a key industry. And so it's more of the same going forward. It can be choppy. Sometimes you get more higher return average, but we feel pretty good about our strategy and how M&A will play a role within that.

Bryan Bergin:

So I just wanted to follow up here on an outlook. First, just to unpack the revised revenue outlook. So you took down the inorganic by 100 bps and the FX headwind was obviously a little bit more than 2x what it was before. So collectively about $385 million of headwind versus the prior view. So I just wanted to clarify that, that was really the big piece there with obviously a little bit better organic. And then just on the M&A, just going forward, is it more fair to assume, let's say, a range, 100 bps to 200 bps a year versus a specific target, just given potential lumpiness?

Bryan Bergin:

Okay. Okay. And then just on margin, has the margin progression gone as planned as it relates to maybe the timing of investments that you had budgeted for in 2022? Curious if just the wage inflation has shifted anything around for you? And maybe help us with the cadence of how we go forward from here on operating margin.

Operator:

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

Jan Siegmund:

You broke up in the second question, the weakness in...

Jan Siegmund:

Oh, BFS. Okay. Okay. Perfect. Yes. So we don't really break out our subcontractor cost explicitly for you. But the biggest impact on our operating margin by far is really a merit in off-cycle and then pair that with the subcontractor hiring. So it's just a bigger factor as you would expect, higher attrition leads to some of that use. But I don't think we're breaking it out publicly, but those were the major factors on BFS continues to be on a good path. We see steady expansion. I mentioned in my call that Samlink went out of the revenue that put a little bit of pressure in the European banking and financial services revenue growth. But overall, we see a steady improvement that shows that we are on the right path here. There's actually increased digital bookings. There are core projects, as Brian mentioned in his call that are driving up. So as we -- I think Brian used on this call, the continued and steady improvement for BFS is kind of where we are. We're not at the end of our work here, but we're feeling we are on solid ground.

Lisa Ellis:

Sure. I'll start with the inflation question. And specifically, I know you called out you're taking some pricing actions. Can you just elaborate a bit on what components of revenue will be affected? Is this mostly in your kind of materials business that you'll be able to affect through pricing? And then also a bit of a more strategic question on inflation, how is it affecting your clients' agendas or mix of work at this point?

Lisa Ellis:

Okay. And then maybe as my follow-up question just on the BPO call out. Brian, in your prepared remarks, you highlighted again now this been a couple of quarters in a row, the strengthened BPO. Can you just elaborate what service line specifically, like which verticals is that showing are you sort of leaning into that opportunity, which seems to have come out of the tight labor market in the back of the pandemic.

Operator:

Our next question comes from the line of Ashwin Shirvaikar with Citibank.

Brian Humphries:

Yes. Ashwin, look, generally, we don't really have any exposures to Ukraine or Russia and are now significant operations there whatsoever. And I would say, at this moment in time, we've seen no material impact of the conflict on client demand either. Of course, we'll continue to monitor that situation. One, we have had clients come our way. I mean we're clearly aware of our digital engineering strength and our ambition to scale further there. I actually think if I stand back from the here and now, I believe that the implications will be lasting and that our scale in India, which we're actually tying into our digital studios around the rest of the world, which are very much part of our digital and global delivery network, they'll ultimately help us distinguish ourselves. And ultimately, as clients are assessing their vendors and strategic partners, and in particular, as digital becomes mainstream, I suspect that scaled players like Cognizant will stand to win in the long term. And India will continue to be an asset for us. And if you just think about the last few years in the COVID period, there's been a number of points mix shift to offshore, notwithstanding the industry scaling towards digital. And I think that will stand Cognizant in good stead given the tremendous strength and talent we have across India.

Brian Humphries:

Yes. I'll start and Jan, why don't you jump in if needed. Ashwin, I think, first of all, pricing is extremely topical at this moment time, given the services companies are knowledge-based organizations and therefore, our supply chain for wanted a better word is our talent. And as costs of our people go up, by definition, we have an obligation to, in one form or another, either automate, change the pyramid, change the offshoring mix or near-shoring mix and/or find a way to pass on cost to clients, notwithstanding automation agendas or whatnot. So I think at this stage, pricing is mainstream in terms of dialogue amongst not just Cognizant, but also our peers in the industry to try to offset the compensation pressure. So the classic situation that we have grown up with historically around MSAs being signed with rate cards associated with those and rate cards coming up for renewal every 1 or 2 years, that is not necessarily as relevant anymore because people have to intersect those natural cycles. Now on top of that, I'd just point out that well, as Jan said, we have a pricing initiative underway. Clearly, the business model evolution of Cognizant, which has been quite intentional in recent years, including a much greater shift towards digital and the commitment to try to evolve from being a provider of resources to be a solution provider that enables clients to address their pain points by a selling solutioning and delivering client outcomes, that puts us in a position where we are competing with sometimes very different competitors and we may have some margin opportunity via pricing leverage as well. So both of those factors, I think, are pertinent at this moment in time.

Rod Bourgeois :

I just want to ask about acquisitions that you've completed in the past couple of years and how you're performing against the revenue and synergy targets on those acquisitions. And I would also ask if you could include any kind of update on TriZetto. I know that you made some good turnaround progress in that business' growth last year. And it would be helpful to hear your latest thoughts also on TriZetto's growth trajectory.

Rod Bourgeois:

Great. You could have just said TriZetto's performance is so good, it can make you cough, but that's my bad analyst humor.

Rod Bourgeois:

Understood. Hey, just on the attrition front, is the attrition challenge starting to abate? And what levers are being pulled that give you some encouragement about where that might be going from here? Where are you getting some benefit on the efforts that you're making to attract and retain talent?

Operator:

Our next question comes from the line of Brian Essex with Goldman Sachs.

Brian Humphries:

Yes. Well, the holy grail of course, in a services company is somehow to decouple headcount growth and revenue growth, but there are multiple factors at play, including accelerators and the mix of their headcount onshore versus offshore and indeed within the pyramid. Clearly, if I start with the pyramid, at the bottom of the pyramid, I felt 3 years ago, we were light. We hadn't been as aggressive on campus hiring, et cetera. And in the last few years, we have really, I would say, materially changed our hiring practices, 17,000 a few years ago, 33,000 freshers onboarded and infused in the last year. And then we're aiming for 45,000, 50,000 this coming year. And I'm assuming that will continue to grow. So that by definition, adds headcount at lower levels from a billing perspective. And clearly, as you go through rightsize that, then you bring people on board, you get them trained for a few months, you infuse them into accounts and ultimately get them into more billable type roles. So that's been 1 factor where you've seen us materially add headcount. And I think it's fundamentally so core to our success in the years ahead because with those people being skilled and with this internal job moves program that creates upward mobility in our organization, we are therefore able to promote from within more often, particularly when we have fixed bid or managed services type deals versus a more traditional deal staff augmentation or interview-based role. The second factor I'd say is our mix has shifted like many in the industry, about 2 points towards offshore in the last year, and that has different dynamics in terms of average bill rate per employee or margin dollars per employee but also margin rate per employee can be higher in offshore. But the attrition that we're experiencing, I think, as an industry and within Cognizant is broad-based. It's not just in India, it's not just in the junior levels of the organization. It's also across Western Europe and North America. So we are continuing to complement the programs we put in place with incremental campus programs in North America, nearshore programs in Mexico and Canada, which are ramping nicely for us, and of course, the need for subcontractors and laterals. Subcontractors actually fell sequentially in mid-single digits, and that's something we'd obviously like to continue to optimize in the years ahead by getting more campus programs, more upward mobility and better demand visibility such that we can avoid as much subcontractors. And then last but not least, one of our core competencies, I would argue, has been our talent acquisition group, we've done remarkable work in the last year or so. Certainly, the offer to join a ratio has eroded in the industry and Cognizant is no different. But nonetheless, we have an incredible capability to bring in tens of thousands of employees per quarter. And I'm firmly of the opinion we're not yet hitting our stride in terms of our revenue potential. So we want to continue to scale our operations to get after the market possibilities that are out there.

Jan Siegmund:

Actually the rupee movement going forward, which is largely affecting basically, of course, our cost base is, as you know, moderated by our hedging program. So we really don't make an assumption around this. In the quarter, I think I mentioned in the script that the rupee did contribute about 50 basis points in a set of ups and downs to our margin. But that may help you a little bit to extrapolate for what it is. So this is largely driven by our revenue forecast that's going to be the euro and the pound are going to be the most impactful one in that.

Keith Bachman :

I'll ask my 2 questions concurrently since they're related. Brian, first for you. When you last -- since you last gave guidance, based on our discussions with folks in India, in particular, it seems like wage rates have actually moved against you. In other words, wage rates have gotten more expensive even over the last 90 days. And assuming that supposition is true, I'm just -- what is going right that allows you to maintain the margin guidance even with perhaps wage rates getting more onerous. So perhaps you assumed in the previous continue to move against you. But is it as simple as pricing? Because when we do our calcs on the rupee exchange rate, it's not enough to offset the change in waste rates even over the last 90 days. So, a, what is going right that helped you maintain the guidance? And are you comfortable that, in fact, with the current wage rate structure, you're leaving enough room as you said, to strengthen your hand or invest appropriately for the longer term?

Keith Bachman:

Right. In other words, those pricing discussions, even since the beginning of the year, those are perhaps a bit more favorable where clients are willing to listen or it's a more equitable discussion at least it sound.

Keith Bachman:

Okay. Fair enough. And then, Brian, just to clarify, you did say that you've had a really nice move in quarter attrition over 2 quarters. You said it would go back up in June due to some seasonal factors. But do you think it flattens out there, even declines as you look at the back half of the calendar year? Or do you think it kind of stays at these elevated levels? Can you make progress in attrition, if you look over the horizon from the June quarter?

Operator:

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

Jan Siegmund:

I think I don't want to go into all the details of the pricing opportunity, but you're pointing out, I think, a key element of -- that is playing a little bit in our favor. The shift towards digital is on its own helping because we have a higher gross margin in our digital business. We're focusing, obviously, also on the pricing of these high-end demand resources. And so that gives a little bit more pricing opportunities. Also these projects tend to be a little bit shorter term compared to other long-term contractual things. So in that area, we're going to expect to make some progress, and I think our clients have also shown more receptivity in the area of these set of digital skills to discuss pricing with us. So I think that's helping. So you have a double effect of driving higher share using our acquisitions and pricing levels that have been established by our acquisitions as a guide to establish better pricing levels for the entire enterprise. So I think you're intuitively pointing out 1 area that gives us -- is definitely part of our overall thinking relative to revenue generation. There's also an element, if I come back to the question is really the overall margin discussion and pricing has been a focus on this call. But we do have, with our shift towards hiring of Gen Zs dramatically shifted our cost pyramid development and the internal promotions not only help, of course, generating better group happening for our associates, but also help us to mitigate the cost of lateral hires. And we hope that as we execute on our strategy of increased Gen Z hiring that -- and we plan on cost efficiencies and in our delivery model, helping in a similar way to offset the compensation pressure that we're good seeing just on wages, basically.

Brian Humphries :

I'm very proud of our delivery organization. At the end of the day, Cognizant is a delivery company, whatever we sell a little more than a commitment to actually go and deliver against that. And come what may in the last few years, humanitarian crisis, a cyber attack and of course, in today's elevated industry attrition. Our delivery team have gone the extra mile time and time again to satisfy client demand and juggle various balls. So I'd like to complement them. We, of course, are complementing India as well by bolstering that with a global delivery network in Europe, in North America, onshore as well as nearshore locations. So they've done a really nice job for us. As we evolve the way we show up the clients and lead with advisory capabilities to sell solutions and deliver outcomes by industry, addressing client pain points, of course, there is an evolution that's happening in our delivery organization. And that includes how we solution and project and program management, and of course, the degree of efficiencies and accelerators we're able to use within our portfolio. And that's something we're making good progress on. And at some stage in the future, we'll talk more about that externally. But our delivery organization is the heart of Cognizant. I, frankly, was in India probably 4, 5 weeks ago, I'll be back there in the coming month or 2 as well. A lot of my team have been there in more recent weeks. I actually characterized the morale and the vibe amongst the delivery organization to be perhaps the highest it's been in the last 3 years. I really feel very good about where we are, notwithstanding the pressure everybody has been under given these either self-imposed or exogenous events.

Bryan Keane:

Thanks for fitting me in. I'll keep it short here. I guess, I know focus of the company has been to do larger deals, just get an update on how that pipeline looks and if you're being able to close some of the larger deals? And then kind of the secondly, is there a bookings about? I know we started at 4%, you're talking about an acceleration. I know we've done mid-teens the last couple of years, just trying to get our models set up correctly.

Bryan Keane :

And what about larger deals, Brian?

Brian Humphries :

Okay. With that, thank you very much for joining us today, and we look

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions’ Fourth Quarter 2021 Earnings Conference Call. Thank you. I would now like to turn this conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir. You may begin.

Brian Humphries:

Thank you, Tyler. Good afternoon, everybody. Throughout 2021, clients have meaningfully accelerated spend on digital transformation initiatives, accelerating the demand for IT services. Elevated attrition in key digital skills is however a direct consequence of this, creating revenue fulfillment challenges and cost pressure that need to be carefully navigated. I am therefore pleased that we had another quarter of solid execution, delivering against our commitments to clients and to you, our shareholders. Fourth quarter revenue was $4.8 billion, up 14.5% year-over-year in constant currency, above the high end of our guidance. Growth was led by digital, which grew 20% year-over-year. Fourth quarter adjusted operating margin was 15.3% and full year adjusted operating margin was 15.4% in line with our guidance. During the quarter, we also progressed against our key strategic initiatives, including scaling our digital capabilities, globalizing the company, helping our clients be successful by leading with greater industry insights and solutions and repositioning the Cognizant brand. Turning now to industry segments, our recovery in Financial Services continued with fourth quarter growth of 19% year-over-year in constant currency. This includes an approximate 9 percentage point benefit from the impact of the prior year charge related to Samlink. As you know, we have been rebuilding our strength in Financial Services by refreshing our leadership in client-facing teams, strengthening our partner engagement, shifting our portfolio of services to more attractive market segments, and sharpening our focus on priority industry solutions and clients. We expect to build further on this progress in 2022. As we reposition Cognizant as a digital transformation provider in larger banking clients, we have complemented this with sustained momentum in regional banks. KeyBank, where we have just renewed our engagement as their primary digital partner, is a great example of this. We will further enable their digital transformation by digitizing their products to increase their digitally active customers to approximately 85%, by driving remote self-service growth by more than 40%, by automating front-to-back processes, and by migrating more than half of their application portfolio to the cloud. In insurance, we see continued demand for core modernization and digital transformation, including cloud and analytics. Unum, a global leader in disability insurance and group benefits, is partnering with us to pursue their digital transformation focus on agent and customer experiences and associated analytics. These digital solutions enhance our existing application development and maintenance services relationship with Unum. And for a long-time client, Royal London, the UK’s largest mutual life, pensions and investment firm, we are now extending our partnership to reimagine their customer engagement through personalized seamless connected customer journeys enabled by cloud, data and customer-centric principles. In healthcare, revenue grew 8.2% year-over-year in constant currency. We have substantially increased our competitiveness in healthcare by investing in digital solutions, domain expertise and partnerships, and by modernizing our core platforms. We have seen continuing momentum in our TriZetto product business, which grew 13% in 2021. We continue to add new footprints and in 2021, increased the number of overall members supported by our platforms to approximately 210 million. We see solid commercial momentum across our healthcare payer and provider business. For instance, Humana, a large national payer is modernizing and moving their legacy ecosystem to the cloud and has chosen Cognizant as a partner for agency, marketing and clinical transformation. These initiatives will help improve Humana’s customer and employee satisfaction, reduce cost, and enhance the delivery of integrated personalized experiences to their members. We also have momentum with next-generation healthcare companies like Reliq Health Technologies, a rapidly growing global telemedicine firm, which turned to us to expand their care management capabilities. Reliq will leverage Cognizant care management services to support the deployment of their care platform across managed care organizations, hospital networks and health insurance providers. In life sciences, we partnered with AbbVie, a leading global biopharma company, to help advance their digital transformation in safety and risk management, which will improve patient care and outcomes. Through our digital health consulting services augmented by capabilities in human-centered design and digital product engineering, AbbVie can understand the needs of patients and care providers, design fit-for-purpose solutions that support the patient journey, and incorporate feedback for ongoing innovation. These improvements will help AbbVie better support patients and care providers across a broad range of therapeutic areas and products. Within products and resources, we continued to deliver excellent growth in client success across travel and hospitality and in manufacturing, logistics, energy and utilities. Drawing on our extensive experience helping automakers streamlined their operational tasks, Volvo Cars chose us to help harmonize their finance and accounting and procurement processes and implement intelligent process automation to support their digital transformation. This is a great example of our growing momentum in digital business operations, which significantly outpaced the BPO industry in 2021 and is set to continue to gain share. Top line growth has been fueled by momentum in intelligent process automation and strength in our digital-native client portfolio. Our work at Grundfos, a global leader in water technology and the world’s largest pump manufacturer, perfectly illustrates our growing digital credentials. Grundfos initially selected Cognizant to establish an IoT-based intelligent platform to gather real-time pump data from the sensors and perform analytics to prevent, predict and respond to issues caused by leakages. Based on this success, we have since been selected to build a modern enterprise system based on SAP S/4HANA. Finally, in communications, media and technology, we saw continued strength in technology, in particular, where we have sustained strong double-digit growth over the past three quarters. Turning now to bookings, which grew 22% year-over-year in the fourth quarter our second consecutive quarter of 20% plus growth. Full year 2021 bookings growth was in the mid-teens. We entered 2022 with a healthy book-to-bill ratio of 1.2. Throughout the year, our bookings strength, which has been fueled by digital, has been broad-based across industries and geographies. Moving to the macro demand environment, industry demand remains robust and I expect it to continue throughout 2022. Clients are embracing digital operating models to become more efficient, agile, automated, scalable, innovative, and indeed, secure, whilst also responding to the expectations of their customers and employees for hyper personalized experiences. Continuing to scale our digital capabilities is at the heart of our company strategy. Digital represented 45% of our revenue mix in Q4. As we noted during our recent investor briefing, we believe digital can become 55% to 60% of revenue in the coming years. Reflecting our strength in digital credentials, during the fourth quarter, we were named an industry leader in 70 new industry analyst reports. They highlighted the company’s client partnerships, scalability, digital capabilities and expertise as factors in recognizing our leadership. Accelerating digital is not only a driver of double-digit revenue growth and improved margins it also fosters greater client intimacy and higher levels of employee engagement as we partner on strategic transformation projects that leverage advanced skills. Moving on now to an industry phenomenon you are accustomed to hearing about, the unprecedented competition for talent, reflective of the industry-wide demand/supply imbalance in key digital skills. Fourth quarter voluntary attrition moderated a little to 31% on an annualized basis or 28% on a trailing 12-month basis. As a reminder, when we measure attrition, we count the entire company, including trainees and corporate across IT services and BPO. We have been working aggressively to mitigate attrition levels, whilst intensifying our efforts and focus on employee training, promotion cycles, professional development and total rewards. During 2021, we also facilitated more than 14,000 job moves across 40 countries, continue to revitalize our campus recruitment program in India, establish new compensation measures and a revised promotion cycle to retain employees and invested heavily in upskilling. In fact, our associates completed 23 million hours of learning and consumed 130,000 courses in 2021. Given that we compete on our knowledge and skills, we are proud to have won 42 awards for excellence in learning and development from the Brandon Hall Group, often considered the leading independent HCM research analyst firm. We more than offset elevated attrition levels in 2021 by accelerating our hiring allowing us to increase company headcount by 14%. I am pleased to say that in recent years we have made meaningful progress in correcting our delivery pyramid by significantly increasing the number of college graduate hires onboarded in India. In 2021, we added a record 33,000 college graduate hires in India, up from 17,000 in 2020. In 2022, we plan to add approximately 50,000 in India. Digital acquisitions have also brought incredible talent to Cognizant. During 2021, we completed 7 acquisitions that extend our digital leadership, the most recent being our fourth quarter acquisition of Devbridge. This software consultancy and product development firm expands our software product engineering capabilities and global delivery footprint by adding more than 600 engineers, designers and product managers in Lithuania, Poland, the UK and North America. This extension of our global delivery network complements recent announcements in the United Kingdom, Australia, and indeed, Canada. In closing, I am proud of our execution against our strategy in 2021. We have reestablished commercial momentum and have a healthy book-to-bill ratio. Our delivery teams executed against our commitments despite challenging labor market conditions. Our performance in our two largest industries, Financial Services and Healthcare, has strengthened. Growth in key international markets such as the UK has meaningfully accelerated. Our digital portfolio has been extended and has never been stronger and we have made significant progress in our people strategy, our internal digitization agenda, and indeed, our brand repositioning. For several quarters now, I have been holding our long open-ended virtual sessions with small groups of employees. What I have learned from these intimate sessions as well as from our large virtual townhall meetings is that employee pride in the company is building. Employees see not only how far we have come, but also a clear path to an exciting future. Our employees also recognize the consistent execution of our strategy, our commercial momentum and a commitment to our purpose, vision and values. This purpose has kept us focused on executing our ESG agenda despite distress of a prolonged COVID-19 pandemic. Our ESG-focused commitment is evident in our Cognizant Combat COVID-19 initiative in India, in our intensified efforts to drive a culture of belonging throughout Cognizant, in our $250 million philanthropic initiative to advance diversity, equity and inclusion, along with health and well-being in communities around the world and in many other areas covered in our 2021 ESG report. In summary, our broad-based progress allows us to approach the new fiscal year with confidence in our ability to execute against the multiyear financial outlook we presented at our November investor briefing. So with that, I will turn the call over to Jan, who will cover the details of the quarter and our financial outlook before we take your questions.

Operator:

Thank you. Our first question comes from the line of Brian Essex with Goldman Sachs. You may proceed with your question.

Brian Humphries:

Hi, Brian. Yes, what I’d add there is – we are in a robust demand environment. That’s not a concern for me. I am expecting that to continue in the coming year and there is lots of mix trends that will support that statement undoubtedly, but we are circling in, my perspective an unprecedented competition for talent. We’ve seen a slight moderation sequentially on an annualized basis. January has been in line with that. But to be very honest, it’s too early to call this a trend for the year. There is natural seasonality one expects to see in the course of the year coming up to bonus periods, etcetera. So as Jan pointed out, we’re expecting elevated attrition through the course of the year. And obviously, we’re going to work very hard to try to mitigate that and try and minimize the impact on the business, the implications of attrition in our quarter across financial, commercial implications as well as employee implications. And the levers we’re using against that is naturally to try and recruit as many people as we can. I’m delighted we’ve been able to recruit 40 – to add a net 41,000 headcount year-over-year, and compliments to our team because I think it is a core competency of Cognizant in this regard. But what we’re doing in terms of employees, as Jan pointed out, as I did too in my script, a lot of efforts around hearts and minds. There is a lot of effort around compensation measures, which of course, is pretty critical. I think it’s essential for us to continue to show up and post strong double-digit growth, which is helping get a degree of confidence and swagger and optimism back into the company and just continue to support our employees by celebrating success and giving them career path potential, which, of course, growth does. And on top of that, we’ve revised the way we think about promotion cycles and other such things in the course of the year. So it’s been a very hands-on engagement for me down through the entire leadership team. In the last 6, 9 months, we spotted this early. We’ve added more recruiters, and we’ve really put a lot of efforts in place to run a retention task force. But be that as it may, as you’ve seen with many of our peers, attrition is elevated and we assume will stay elevated through the course of the year.

Jan Siegmund:

Yes. The – I don’t want to up my guidance in my first question for the call, as you might imagine, so we have our work cut out to achieve the margin guidance that we give. We feel confident about it. But as you know, we talked about compensation measures, but other factors that are impacting our portfolio in a negative as they are positive factors. So I want to point out some of the drivers that obviously are helping us, the accelerated revenue itself is a help on margin so that helps. Our digital business continues to be slightly more profitable than our traditional business. So accelerated digital is built into our – solid digital growth is built into our plan. And we continue to make progress on our cost of delivery structure with bringing in college graduates, which will improve the overall cost structure over time. So we rely on a number of offsetting factors in order to achieve our guidance. And obviously, any over or underperformance could yield positive or negative outcomes. So I say balanced, we feel good about our 20 to 30-point outlook.

Operator:

Our next question comes from the line of Lisa Ellis with MoffettNathanson. You may proceed with your question.

Brian Humphries:

Hi, Lisa, it’s Brian. So let me address that. To be very honest, I’m not at all concerned about that. The majority of our attrition is at the junior levels and certain skills. And I would say at the senior levels of the organization at this moment in time, we’re very much with our return business as usual. Promotions, some refreshing of talent, if deemed necessarily, based on financial results and other leadership attributes, what is essentially normal in a company of our size, some retirements, etcetera. So sometimes we intervene based on performance but this is more classic business as usual operations at this stage. We feel very good about the motivation of the team collectively. We’re all in this together is certainly teams forward as we say internally, and I feel that that we’re all on the same page. The leaders I brought in have certainly refreshed their teams, strengthened their teams. I will tell you right now, I feel I have better instrumentation in terms of how to run the company than at any time since I’ve been here in terms of the analytical rigor that Jan and his team has put in place. The HR team have done some tremendous work in terms of where we stand there, etcetera. So we just feel or I certainly feel a lot more comfortable that we’re on top of our game and we know how things are going, so not a concern.

Brian Humphries:

Yes. Look, I mean, I think to be very honest, clients are well passed, by now, the initial send hesitancy of COVID for a CEO or for anybody in a sales organization, certainly the enemy is indecision and we don’t have indecision, far from it these days. People have really moved well beyond where we were approximately 2 years ago at this stage. And people are extremely focused, of course, on driving digital transformation agendas, evolving their business models, which is good for us because our portfolio is stronger than it’s ever been before, and it allows us to work on a high-impact work for clients as are really driving some of the big innovation journeys that they have. Now of course, that leads to discussions around AI and analytics, consumer-centric, if you will, user experiences built on enterprise class applications, obviously, cybersecurity, digital engineering, cloud migrations. And throughout the world, as I deal with clients, it’s always surprising to see how different clients are in terms of where they are on client migrations. I think the one thing that continues to go from strength to strength is, of course, the growing scale, hyperscaler cloud providers. They are, from my perspective, certainly shortening innovation cycles, throwing a lot of commercial muscle and financial muscle to accommodate or ensure accelerated cloud migrations. And of course, in more recent times, they really evolved towards industry clouds, not just the hyperscalers, but also the major SaaS vendors, which allow more integrated vertical workflows, and Cognizant strength, therefore, in areas like Healthcare and Financial Services is of interest to them. But it’s very consistent with what we’ve seen before, Lisa, to be very honest, a huge push towards classic modernization initiatives towards data, analytics, cloud, digital engineering. And really, what I find, clients are certainly willing to spend for skills and innovation but certainly expect more efficiencies and a more traditional non-digital work. And we see that in our pricing dynamics, and I certainly see that in terms of client strategic intentions in the years ahead.

Operator:

Our next question comes from the line of Darrin Peller with Wolfe Research. You may proceed with your question.

Brian Humphries:

I’ll start, Jan. By all means, jump in at any stage. So Darrin, first of all, pricing remains somewhat stable. And as I’ve just mentioned to Lisa, based on her question, we see differences between the digital work and the non-digital side. Clients will pay up for skills and innovation and, frankly, availability for resources in digital. Of course, that happens to be in an industry where people tend to have MSAs and rate cards that have been agreed in advance. So it requires us to interrupt those rate cards, but certain clients see, in their own workforce as well as other vendors, a desire for companies like Cognizant to ultimately drive some pricing power, given the labor trends that we see. But of course, price increases can and have lagged talent-related cost increases. We put a lot of effort around pricing, both rate card, intelligence, big deal, pricing, and it is certainly one of the factors that’s inherent in our guidance for the coming year. And as I’ve said earlier as well, the fact that we have scaled our digital portfolio to approximately 45% of the business pits us into more strategic client projects, pits us against different competitors and then arguably provides us with a pricing opportunity as long as we get the gross margin right on digital skills versus the classic non-digital skills. The last thing I’ll say just around pricing, of course, because it’s inherent in your question, it’s a margin question, and our margins can also naturally be helped by the type of work we sell solution and deliver. So we continue to focus on evolving the company towards selling and delivering client outcomes. That allows us to own more of our pyramid, to industrialize delivery, to better leverage automation and optimize our mix as well as our pyramid. Specific to your other question around decoupling of, I guess, the Holy Grail in a services company, to decouple revenue growth from headcount growth. Look, there are many factors at play there as well, including the shift to more offshore delivery. In the course of the last year, our offshore delivery has increased for us about 2 points year-over-year, about 1 point sequentially, and that can help margin, but of course, it can hurt you in terms of headcount growth versus revenue growth or the so-called average rate per employee, and it can also change dollar margins as well as dollar revenue per employee. So there are multiple things at play here. We are a services company. We’re committed to being a services company. We will certainly try to optimize and industrialize delivery where we can, leveraging automation, templatization, AI, et cetera. But at the end of the day, we are in the headcount business. And as we scale our headcount, we will scale our revenue and you guys are more than familiar with that model.

Darrin Peller:

Okay, alright. I mean, I have other questions, but just in interest of time, I’ll let you guys turn back in the queue and thank you.

Operator:

Our next question comes from the line of Keith Bachman with BMO. You may proceed with your question.

Brian Humphries:

Yes. Look, it’s certainly our ambition to accelerate healthcare growth. In the November Analyst Meeting, we talked about market growth. But of course, within our healthcare business, we have the U.S. healthcare vertical, which is payer provider, the payer being the vast majority and then a product business, of course, coupled within that and then the less than 50% of our healthcare business is our life sciences business, which continues to grow double digits. I feel really great about that, both the nature of our capabilities, the nature of our client intimacy, the global nature of those clients and our bookings momentum in life sciences through the course of the year has been, frankly, outstanding and was very strong in Q4 as well. So candidly, as we are getting after the life sciences opportunity, it’s all about continuing to scale biopharma. And then in this year, we have accelerated a little bit on medical device momentum there as well. We have also seen do some targeted acquisitions in the life sciences vertical in the last few years, including Zenith as well as TQS more recently. In the U.S. healthcare business, a lot of it is about getting the TriZetto business back on track. I think I mentioned in the November briefing, our growth rate in 2020 was twice that of 2019. And we have approximately doubled growth rate again in 2021 over 2020. And that’s good in terms of client intimacy and relevance, in terms of margins and the pull-through opportunity or the stickiness of Cognizant in those accounts. So, getting payer and provider back into a higher growth trajectory, but making sure that the product-driven side of that scales as well is pretty essential to us. And then I have got to be honest, I am very motivated about where we are with TriZetto. I think it’s a fantastic gem within the company. Now that we got growth back, we continue to explore possibilities in terms of where we can scale a healthcare franchise, both in terms of the market within the U.S., in terms of different applications within the ecosystem or different control points as well as exploring how we can scale our healthcare business into Canada and indeed into select international markets. I think if we do all of that right, we will drive market growth, if not more than market growth, and that’s what the team is focused on.

Jan Siegmund:

The – no, I can give you a little bit the background of our thinking around the free cash flow conversion, which I think I mentioned in my script to be around 100%. We did a little bit better this year, had a very good quarter in free. I think with all these, now let’s say it’s basically maybe a slight increase in capital expenditures in the next year that we could see that is related to some more strategic investments internally. But nothing major. We continue to be laser focused on our sources of cash from our clients. So, we made good progress on DSO this year and that focus will remain. And to be quite honest, I am drawing a blank on cash. I think cash is going to be – on taxes. I think tax is going to be fairly similar to this year, so no major variation on the tax side. So, that’s kind of how I expect the cash flow situation to evolve for us. So, nothing specific comes to mind, maybe a slight increase on capital expenditures that could drive it.

Operator:

Our next question comes from the line of Tien-tsin Huang with JPMorgan. You may proceed with your question.

Brian Humphries:

Look, from my perspective, we have been working on recovering in financial services for quite a time. There has been a pace of recovery candidly through the course of the year, but the 10% constant currency growth, if I exclude the 9 points benefit we got from the year-over-year compare from the accounting charge in Q4 last year’s results is probably the highest level of constant currency growth we have had in quite a few years. And this has ultimately been on the back of a series of things we have been doing, sharpening our focus on our top clients, refreshing some of the commercial team as well as, by the way, some of the leadership team, both in delivery as well as in the business. And back to a question I had earlier, that’s part and parcel of running a world-class company. Sometimes, you have to refresh leaders if you are not getting the results you want. We have added a lot of talent with a focus on executive engagement at a client-facing level while the collaboration with the hyperscalers committed to their industry cloud or financial cloud and of course, a partner ecosystem. And all of that has now started to bear fruit. I am cautiously optimistic around our growing competitiveness there. We are leading more with digital. We are leading more with what I would call less interviews or staff augmentation type work. We are getting better margins for that. And I think our competitiveness will continue to increase in the course of the year. Of course, with the decision that we took last year, which was closed ultimately yesterday, I believe around the Samlink sale, we have a compare sequentially and year-over-year in the first quarter and beyond, which we will have an anomaly that we can talk to in subsequent calls. But generally, I feel that the team have done great work. We expect continued improvements in 2022, will be a paced recovery. I am not suggesting we are back to our full strength yet. But we are working both well across the regional banks, but I am also optimistic around the progress that the refreshed leadership team are making with some of the larger global banks. And if we are able to crack some of those, of course, that will show up in the numbers as well. So generally, I feel as though we are on the right track and team have worked hard and deserve growing momentum in the business.

Operator:

Our next question comes from the line of Rayna Kumar with UBS. You may proceed with your question.

Jan Siegmund:

Yes. We had that 22% bookings growth, mid-teens for the full year, and it’s driven, obviously, by the strong demand that we see in the market. It’s supported by the investments that we made into our market organization with incremental sales capabilities and solution capabilities. And it’s aided by a broadening solution set that we are developing ourselves as well as our M&A that is contributing to this. So, we are optimistic about maintaining a book-to-bill ratio that is similar to where we are as we saw our mindset, and we have seen really a very consistent execution, very consistent pipeline development. And the bookings momentum itself has been broad-based, has been good geographically split, and it has been, in general, of course, there are ups and downs by smaller business units, but it has been, when you lean back, fairly broad-based, which is all good news basically to assume that we are going to continue on that path.

Operator:

Our next question comes from the line of Jason Kupferberg with Bank of America. You may proceed with your question.

Jan Siegmund:

Yes. We don’t really disclose details of the bookings number. It is a mix but the mix has been stable, and it is really not contributing one way or the other to the overall composition of the bookings number stayed basically stable, but we are not disclosing components of it.

Brian Humphries:

Yes, we have a very capable development team and M&A team, of course, proven over the last 2 years to execute a steady stream of these strategic acquisitions, small and medium size in nature. And we continue to see great opportunities for us to align our strategic goals with that. So, we are bringing already, approximately, as you can see from our guidance in the first quarter, we are bringing already some momentum with the acquisition of Devbridge into the momentum. So yes, we feel confident about the 100 basis points to be executing within this year.

Operator:

Our next question comes from the line of David Togut with Evercore ISI. You may proceed with your question.

Jan Siegmund:

Yes. You are right in the observation. There is some impact in the chart by our switch to a nine-hour bill week that has lowered our utilization, so that is in the last few quarters in there. But the overall dynamic is largely driven by the acceleration of on-boarding new associates that have some utilization lack in the beginning of their tenure. So, that was really the biggest driver of a downtick in utilization that we are seeing basically. And so we are kind of happy to have a little bit bigger bench to fulfill client needs. So for us, utilization levels are really at the desired level of where we want to see it.

Brian Humphries:

Yes. Look, we have obviously embraced automation. We have taken out double-digit thousands of people from our fixed price contracts in the last few years, so we continue to automate our agenda. I will say, the other thing you have seen is our digital mix hasn’t scaled as much as we assumed previously because we have been quite successful in the non-digital part of our portfolio, arguably more successful than others scaling that and mitigating the downside. So, it’s a street combat every single time you are coming up for renewal. You want to be clever as well in some of the classic areas to make sure you try and up-sell to modernization or beyond and try to get a renewal plus an expansion. But I feel as though we have handled ourselves well in that regard and we have a lot of effort underway, as I said earlier, to try to continue to evolve the company to an area where we are better able to industrialize delivery, which will help ultimately our margins and indeed, the quality of our delivery. So, I feel pretty good about where we are in that regard. Our biggest focus naturally is to scale digital, while we protect the non-digital business and mitigate the downside. And for the guidance we gave in November, we assume that will grow low to mid-single digits. Our real focus as a company, and that’s core to our strategy, is our momentum in digital, which is growing 20% plus or minus.

Brian Humphries:

Yes.

Bryan Bergin:

Hi. Good afternoon. Thank you. Within the 2022 growth outlook, can you talk about some of your expectations across the industry segments this year? And anything to be mindful about around the cadence of growth as you built the plan?

Bryan Bergin:

Yes, sure. So, the expectations across the industry segments for growth this year within the context of the consolidated plan. And then just anything around cadence we should be aware of.

Bryan Bergin:

Okay. And then just the international opportunity, I know this has been a big focus for you, but investments to drive more traction there. Can you talk about your expectations for growth in markets outside of the U.S. in 2022? Which ones you are most excited about and some of the initiatives that you continue to drive?

Bryan Bergin:

It sounds very good. Thank you.

Operator:

Our last question comes from the line of James Faucette with Morgan Stanley. You may proceed with your question.

Brian Humphries:

We have been investing behind our recruitment engine in the course of the last six months, nine months as we have spotted attrition to be a likely industry problem, we got out in front of perhaps others and we moved fast. And you have seen a net headcount expansion of 41,000 year-over-year since Q4 prior year period and another 12,000 sequentially. Of course, within a given year, subject to when we bring in our college graduates and onboard them, you will see different peaks country-by-country. But I am more than confident that we have an engine that is a core competency. The team has done an outstanding job for us. We have processes, tools, capabilities in place. Our brand standing is stronger increasingly not just in India, but overseas and some of the brand work we have done, both externally as well as our internal branding has given us more and more confidence that we have brand ambassadors in the company to make that happen. So, we are absolutely in the mode of accelerating headcount as best we can. The lower we can keep attrition, of course, is the most productive way to do that. And in the meantime, as Jan pointed out, we have done the heavy lifting. We have made significant progress around the delivery pyramid, this year, 33,000, up from 17,000 in the prior year period and next year, we are assuming 50,000. And if needed, we will try and scale beyond that. So for me, it’s about retention and it’s about recruitment and getting the balance right between those. But I am certainly bullish on the industry, bullish on our position within the industry, and I would like to have more headcount in Cognizant. So, if you know people, send them our way.

James Faucette:

That’s great. Thanks Brian. Thanks Jan.

Operator:

This concludes today’s Cognizant Technology Solutions Q4 2021 earnings conference call. You may now disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. . Thank you. I would now like to turn this conference over to Mr. Tyler Scott, Vice President of Investor Relations. Please go ahead, sir. You may begin your presentation.

Brian Humphries :

Thank you, Tyler. Good afternoon, everyone. We executed well in the third quarter, delivering revenue of $4.7 billion up 11.8% year-over-year or 11% in constant currency. Bookings growth, a key leading indicator, accelerated to 24% year-over-year growth in the third quarter. Our book-to-bill ratio of 1.2 times revenue and a trailing 12-month basis underscores our commercial momentum. I'm grateful to our teams around the world for their resourcefulness in meeting our client commitments despite a challenging labor market. We delivered solid sequential adjusted operating margin expansion in the third quarter as we offset the cost of increased hiring with cost discipline elsewhere. I'm also pleased with our progress against our key strategic initiatives. For example, third quarter digital revenue grew 18% year-over-year. Digital represents 44% of our overall revenue mix. We expect this percentage to grow in future periods, positioning Cognizant for both top-line momentum and margin expansion. Moreover, the intimacy of our C-suite engagement increases as we serve clients in their digital transformations. Better-than-expected growth in our non-digital business impacted our digital mix progression, but is nonetheless a welcome outcome. During the third quarter, we saw continued strong top-line momentum in our digital business operations practice, reflecting our differentiated offerings for digital natives, our BPaaS leadership position in healthcare, and our strength in intelligence process automation solutions. We recently announced Cognizant Neuro, a simpler and more effective way for clients to achieve the full potential of intelligent process automation and speed time to results. Everest Group, a leading industry analyst firm, recently recognized Cognizant Neuro as an exciting development to enable automation at scale. Moving to industry segments. Financial services ongoing recovery continued, with growth of 4.3% year-over-year in constant currency in line with our expectations. We posted strong double-digit growth year-over-year in constant currency in products and resources and in communications, media, and technology. Within products and resources, we continued to deliver excellent growth in manufacturing, logistics, energy, and utilities, as well as across retail, consumer goods, and travel and hospitality, which have recovered to pre -pandemic levels. In communications, media, and technology, we continue to lead with our digital engineering capability to win transformation deals, while leveraging our alliances to be a premier cloud transformation partner. In healthcare, we had another solid quarter, achieving 9.8% constant-currency growth. Momentum in life sciences continued, demand across payers remain strong, and we're beginning to see an uptick in demand across providers as they look to digital technologies to help reduce operating costs and strengthened new channels for delivering care. Our products business saw a continued double-digit growth in Q3. We're expanding our footprint in the healthcare market and adding new growth members on our platforms. We're also well underway with our digital transformation of our products, including the launch of our connected interoperability solutions to help clients provide secure, real-time data access, and meet compliance deadlines. We're proud of the work we're doing in partnership with clients like Parkland Community Health Plan. Parkland was looking for better ways to meet the growing needs of its medically underserved populations in Texas. As a better managers health insurance claims, member transactions, and network of physicians and hospitals, our TriZetto QNXT Core Administration platform, delivered in a BPaaS model is enabling delivery of care management, claims processing, member services, provider services, and quality on a single platform, thereby enhancing care coordination and member experiences. Our healthcare business is a hugely strategic asset. I'm pleased with the progress we've made accelerating growth in healthcare, and I'm optimistic in our future prospects as healthcare companies modernize their business to address the need for enhanced client experiences, including virtual care solutions. Let's turn now to Strategy, including our digital ambitions. I remain bullish on both the macro demand environment and Cognizant's growing momentum in Digital. Clients continue to accelerate their investment in digital operating models to improve their customer and employee experiences, and modernize their operations through data automation and cloud. While most companies have launched digital initiatives, few have made the shift to a fully-digital operating model. Cognizant is now one of the few global firms that can serve clients across all stages of their digital transformation, from modernizing their technology foundation to implementing agile workflows. This is in part a result of investing approximately $3 billion in mergers and acquisitions over the past few years to broaden our portfolio, while strengthening our relationships with hyperscalers and key partners. Good client example is Cabot Corporation, a global leader in specialty chemicals and performance materials, who recently engaged us to help transform their digital operating model. We'll be providing application development and maintenance, as well as infrastructure and operation services. And enabling Cabot to create an enhanced digital experience that drives value for its customers and employees. Gaining our international operations is another strategic priority. And during the Third Quarter, we grew bookings and revenue solidly in both Europe and rest of world, with the highlight being 19% constant-currency revenue growth in the United Kingdom. We remain optimistic on our international market prospects and aim to accelerate growth as we invest in our talents, brand, partnerships, and operations. Global Biopharma leader Sanofi has selected Cognizant as a strategic partner to deploy an omnichannel customer engagement model; the solution will enable their customer-facing teams to engage with healthcare professionals for the new digital channels, provide them more personalized content, and also suggest next best actions. Cognizant deployed the cloud-based CRN, integrated marketing automation and Intelligent Data Platform to the first 18 markets in just eight months. And for Her Majesties revenue and customs, the UK government's tax authority, we're providing broad technology expertise across its Pega technology SPAC, and enabling Pega application development and operational support that will facilitate case management and customer service applications. Moving on now to the intensifying competition for talent across multiple industries. The demand-supply imbalance in our ore industry remains particularly acute. Third quarter voluntary attrition reached 33% on an annualized basis, or 24% on a trailing 12-month basis. As a reminder, when we measure attrition, we count the entire Company, including trainees and corporate across IT services and BPO. Despite elevated attrition, we increased our net headcount in Q3 by over 17,000 sequentially, which speaks to the tremendous work and effectiveness of our recruitment team. Given our focus in recent years on accelerating pressure hiring in India, we've made meaningful progress on addressing our pyramid. In the fourth quarter, we expect to make offers to 45,000 new graduates in India for on-boarding and 2022. Retention and recruitment have our leadership’s full attention. We are continuing our comprehensive program to support our associates career growth and engagement to a range of initiatives that include

Operator:

Thank you. We will now be conducting a question-and-answer session. In the interest of time, we ask that you limit yourself to one question and one follow-up. One moment while we poll for questions. Our first question comes from the line of Tien - Tsin Huang with JP Morgan. You may proceed with your question.

Brian Humphries :

Hi, Tien - Tsin. It's Brian. And I'll possibly Jan maybe directly after this. Look, first of all, attrition is elevated when you're going into the quarter, it would remain elevated. We expect going into the fourth quarter it will also remain elevated. However, we do expect some modest declines in attrition rate and that is healthy, we look naturally at resignations on a daily basis. We think as we hopefully shown in the course of the year, we understand what's going on, what to expect from an attrition point of view. Clearly while the headline number is high, when you apply the rate of attrition to more industry standard definitions, such as a 12-month basis, but we think we are more in line with the industry in the low twenties. As I think about this, we spent a tremendous amount of effort to try to address that both hearts and minds as well as compensation hearts and minds has less of an impact on margin compensation does. So just -- and when we think about hearts and minds, we're thinking about a sense of belonging, newness, celebrating success, career path discussions, training and development. And making sure that we have processes in place for people can actually get promoted more readily internally and so we've made a serious of adjustments to internal processes to facilitate that. We've also really embraced the bottom of the pyramid after a few slower years at between 2017 and 19 or what we call GenC or fresher intake has increased meaningfully and that is also helping our pyramid and our ability to have good promotion capabilities this year. As we said in our prepared remarks, we'll add 45,000 offers. So I feel pretty good about what we're doing from an attrition point-of-view. The reality is however, we're in an industry that is facing unprecedented competition for talent. And we continue to see attrition in the same areas as we told. I previously, name we have skills as well as the bottom of the pyramid. On pricing and on margin implications, I will pass through to Jan.

Brian Humphries :

Actually you've largely touch upon what I was going to say. I think the implications of digital is of course important from our pricing point of view, but also the competitors against which we're going up, enables us to be a very strong challenger brand; and so we have pricing, I would say, accretion as opposed to dilution. And then just one other important point. Over the last few years, many people have asked me how I think about structured deals or captive takeout’s. We've naturally, heavily embraced Digital, and our growth rate in Digital has been twice that of the industry over the last two years. One of the benefit of Digital is, of course, the smaller contract durations you get, given the nature of the work you're performing, which ensures we haven't actually been locked into multiyear pricing dimensions as part of a 5 or an 8-year contract. That's actually, in a strange way, or that's to be quite favorable for us going forward. But all of this is heavy lifting. We have to get right in the quarters ahead, but we feel that we're on the right track.

Operator:

Our next question comes from the line of Keith Bachman with Bank of Montreal. You may proceed with your question.

Brian Humphries :

Hey, Keith. Let me start with the second question, given it's fresh in mind. Look we've already started making some of those trade-offs, some growth versus margins. I think the reality is, I'm delighted with our team and our recruitment engine was really executing extremely well in the last few quarters and we'll continue to execute well going forward and hence, we've had a headcount increase sequentially of 17,000 by the way, which excludes subcontractors, which also grew. But the reality is we don't have enough headcount to fulfill our potential. And therefore we've been faced with choice points, which clients to serve, which deals to chase, where we walk away, where we're willing to make pricing stances that may put a deal at risk, but it's the appropriate thing to do given to the demand, supply and balance. So that is already underway, Keith. I will say in the same vein, we're really delighted with the commercial momentum, we have bookings growth of 24% in the quarter, which brings year-to-date up to mid-teens -- on the back of mid-teens bookings growth last year, tells me that we have actually really turned a corner in terms of commercial momentum. So those trade-offs are underway. I'd like nothing more to accelerate hiring from current levels so that we can really fulfill against our true potential, but it is time despite all the net ads and they were record levels in the quarter, we have enough attrition as does the rest of the industry to mitigate that. With regards to the first question around the industry forces that will alleviate attrition. Look, it's a very difficult question to answer it. The reality is, I don't see immediate line-of-sight to this. I foresee elevated attrition in the industry in the coming quarters. I think the only winner in times like this is actual individual employee because companies like us don't win from this, clients don't win from this. And as such, hopefully, this will right itself over time. And hence, our focus both much on a compensation were extreme. We stood up a war room from a retention point of view, about 9 months ago at this stage, and we spent an extraordinary amount of time on the hearts and minds angle. And I personally now spend 1 hour per day with 5 -- groups of 5 or 6 employees that are deep into the organization to make sure we're hearing demand, understanding what's on your mind, validating that they understand what we're up to. I will say I like the fact that we're back to double-digit growth more sustainably, because that helps us get a little bit more swagger back in Cognizant. And, obviously, it demonstrates ability for us to benefit our clients as much of our clients are employees, and talk about the fact that they will have career advancement opportunities and we will have gross margin opportunities to invest in their careers and training and development, et cetera. So time will tell what's going to happen overtime, but we've really -- we're doing what we can do. And core to that is also via, let's say, the re-invigoration of our fresher program, which had stalled, but I think at this stage we're starting to get our pyramid back into the right shape after a few years of being off kilter.

Operator:

Our next question comes from the line of Rod Bourgeois with DeepDive Equity Research. You may proceed with your question.

Brian Humphries :

It's a great question, Rod, because we're very often spend a lot of time on one of our other strategic postures, which is around accelerating our digital footprint, which isn't relevant, just on a total corporation level, but also internationally. So scaling our international capabilities is something I'm 100% focused on. Today is just 26% of our revenue. And so if you think about our footprint internationally, our brand internationally, and our operations, they are in need of scaling. And it's not just revenue scaling, but it's also our delivery capabilities overseas, both in terms of near-shore and onshore, that will enable our shift to digital, but also, I would say its very core to our desire to build a global delivery network where we can provide greater business continuity capabilities for clients as well. We're executing well against those initiatives, we've hired largely refreshed a lot of the international leadership team. Very senior hires in the U.K., Australia, New Zealand, Germany, Japan, the Nordics; the people we've targeted are well-connected into local industry, they understand the local markets. And I would say the impact of that is now becoming more and more evident, not just in strong revenue growth in the third quarter, but also in year-to-date this year, across Australia, U.K., Germany in particular. But also as I think about the bookings momentum we have internationally, the year-to-date in Q3 bookings on our international businesses is well above the Company average. Now those people are bringing followership both from a client point-of-view, as well as from an employee point-of-view, our ability to attract talent is relevant there, but they also give me confidence that I'm investing M&A dollars behind senior leaders, who will take post-merger integration activities seriously. And as you've seen in the last -- earlier part of this year, we acquired Serbian in Australia, New Zealand, and ESG mobility in Germany. So it goes back to having confidence in the team and having a team who take their responsibility seriously, and a team that's fundamentally connected into partnership ecosystem as well as the client network. While we are different internationally, but Rod, I expect we will continue to double down in that arena too. In the notion of industry alignment, we're very strong from an industry perspective in North America. Healthcare is obviously a great example of that in the payer provider space. But as we scale into Europe and Asia, our largest countries, the UK where we are aligned by industry. But actually some of the country leaders that we've hired now are embracing more of an industry alignment in those countries as well, perhaps not across all industries in every country. But there are major industries that we are aligning behind. And I think that is the way to go to get after these market opportunities internationally. So not just my expecting, Rod, to maintain this level of growth, my hope is to accelerate our growth internationally in the years ahead. And we'll certainly talk more about that on November 18th at the Investor Summit.

Brian Humphries :

Look, I've made no qualms about the fact that my priority was to expose Cognizant to higher-growth categories, notably digital and international markets. So if I focus on digital, the nature of the work we do ends up positioning us against smaller contract . And from my perspective, I agree with the inference in your question, this is a resource constrained environment and putting valuable resources against digital is much more interesting for me than putting them against captive or structured deals where you may have an compare for one year or two, but thereafter you're in a book of business that you have to work very hard to grow. I will say, when I think about our booking, our win rates on our pipelines, I have nothing but good thoughts. Bookings were balanced by industry, by geography. If I think about even within the digital work we are doing, we have actually seen a little more momentum in the 50 million plus category on a year-over-year basis, and I expect that to continue into fourth quarter as well. And that's different from $500 million or $1 billion deals, but these are very healthy digital type deals for us. And all of this has led us to be in a position now with bookings 24% year-over-year in Q3 to have a book-to-bill ratio that has now solidly in the 1.2 range. So I feel good about that, I will say the CEO, the enemy is when you have clients that are indecisive, and that is not the case at this moment in time. Pipeline velocity is strong, it's fast. That's why I feel very good about our position. I think the strategic choices we made a number of years ago were the right choices we're executing against that. I think will bear the fruit of that labor in the coming years.

Lisa Ellis:

Terrific. Thanks a lot, guys. Good stuff here. Brian, I can really break from talking and ask Jan a one-year in kind of question, you've been in your seat as CFO now, at Cognizant for a little over a year. Can you just give a quick look back from the CFO seat, what you feel like has been going well in the last year and then what your personal priorities are for the CFO organization going forward? Thanks.

Lisa Ellis:

Well I can go back to asking about attrition if you'd like.

Lisa Ellis:

Okay. And then my follow-up is on the technology partnerships side. I think Brian; you've mentioned the Hyperscalers as a priority a number of times. Can you just give us sense for some of the other priority areas that you guys are focused on in terms of building technology partnerships?

Operator:

Our next question comes from the line of Bryan Bergin with Cowen. You may proceed with your question.

Brian Humphries :

I want to be careful in giving you too much detail that it was going to be hard to interpret over time. But off the margin pressure that we have seen to the growth in the SG&A approximately 50% or so, is due to M&A activity. This could be upfront deal costs, this could be deal-related expenses, and the higher SG &A load that some of the M&A transactions carry with them. So that has been a meaningful pressure for us, let's say maybe in the range of a 100 -- around 100 basis points or so. And then the rest of the pressure that we have seen is kind of split evenly between three major areas, I would say. Area number one is our IT modernization. That's clear it's starting to stabilize and that has put pressure on it. We had investments into our HR and recruiting organization in order to scale our hiring activity. And thirdly, our investments into our sales force and marketing capabilities. Those would be roughly in even , I think it's a fair amount to say, and some of those are now starting to , that's kind of what we are starting to anticipate and plateau. We do not want to reduce those expenses obviously because they are important to us; but we have found, I think levels that are allowing us to have a more moderated SG&A development going forward. You will see more detail around that, obviously in our November meeting. But the third quarter is a little bit of an indication on what's happening here basically. Because we had still growth in these strategic investment areas, but we have started to curtail that growth in more traditional SG&A areas to offset that. And you can see that the has started to bend a little bit, more work to be done. But it really developed as I would have expected in the third quarter.

Jan Siegmund:

Bryan, there are multiple elements at play there. One of the bigger ones from a weighted impact is actually our business operation -- digital business operations business, which has been growing into strong teams within that we have elements that we classify as digital and are in our digital mix and there are elements that we don't classify digital. We have tended to be quite disciplined. We changed the definition of digital over two years ago at this stage and we've maintained that ever since. But there are other areas including a non-digital element of our AI and analytics portfolio. Again, we're being disciplined. They're elements that we view as digital, and elements that we view as more traditional business intelligence, etc. And then on top of that, we have elements within some of our enterprise applications business, and CIS business that have grown as well. Our goal, to be very honest, in a multiyear basis, is to mitigate the risk of declines in the non-digital business and hopefully maintain some growth in the non-digital business. If we manage to do that, which requires us to be very disciplined from a pricing, from a renewal point-of-view; that will frankly complement what we expect to be very strong growth in digital, and therefore its goodness for the entire corporation. But at this moment in time, that is something that I think you've seen in competitive earnings as well. If you extrapolate the digital growth they have versus the total Company growth, particularly for those who suggest have a very large portion of their revenue that is digital, you will be able to truly extrapolate that they are seeing declines in their legacy businesses.

Operator:

Our next question comes from the line of James Faucette with Morgan Stanley. You may proceed with your question.

Jan Siegmund:

Look, I think Brian explained it earlier in the call and we iterate it. We keenly focus on accelerating our growth rate. So we see momentum organically as we see -- we want to continue with our capital allocation program as we have announced it. So the acceleration of revenue growth is front and center in our view. We have ample of opportunity. And as such, we have made decisions to; of course, support the opportunities that we promised to our clients with staffing. So HR will be funded as needed and we're actually very proud about the amount of scaling that we achieved and the amount of change in policy of accelerating the hiring of fresher’s, optimizing our permit, scaling training programs; at our size it's a really important and complicated effort that that team executed well, and I will of course, or the Company will provide the funding for that as it's part of our growth engine. But there are other elements that need themselves more natural to scale in certain IT components, certain marketing components, certain finance and classic support functions in the SG&A to themselves for scaling. And we're going to continue to fund obviously, our sales force in the distribution area, I'm actually pretty pleased we have a good combination of growth and resources, but also of improvement in productivity in those sales forces. And we have been busy at work to optimize our go-to market strategies, and I think we have more opportunities in that space, but also we will be funding organic growth appropriately to capture those opportunities. So I'm not too religious here relative to what the exact percentage growth of SG&A is, but you get the philosophy enough in my answer.

Jan Siegmund:

Yeah. I'd be excited about talking about the next year in the next quarter and -- but -- and I'm not expecting any meaningful increase in my travel expense for this quarter, but to be a little bit more forthcoming. Obviously, the decisions of the return to work are going to be affected by really a myriad of factors

Operator:

Our next question comes from the line of Moshe Katri with Wedbush Securities. You may proceed with your question.

Brian Humphries :

Listen, I think we've got a great senior leadership team these days. Most of the senior changes are , as I would view as to be very much in business as usual these days, retirements, internal promotions, some performance orientation, but this is kind of classic Fortune 200 Company land at this stage. I got to say, I'm delighted with the Leadership team we have around us these days. We're getting back into a growth trajectory after a few years where our backlog and our pipeline haven’t been -- on bookings hasn't been as strong as it needed to be. And I think you've seen united leadership team here orienting the Company towards a evolve business model, both geographically as well as the offerings that we ultimately solutions and deliver. So that's not a concern to mind anymore. And of course, we'll always be press article at the individuals with a Company with 320,000 employees. Please don't get distracted by that on not. And with regards to digital, of course, it all depends on the portion of the portfolio you would look at, our digital growth with 18% within our portfolio. If I look at our digital engineering business, our growth rate is equivalent to the pure plays that are announcing their results. If I look at our IoT business, the digital growth is as fast as the pure plays out there, same for our cloud business or digital experience business. So as I said, we tried to be extremely disciplined in the definition of digital, and in many ways we penalized ourselves. But as a broader Company within the categories we look at, and I'll talk a little bit of this in the November 18th Investor Summit, we have some gems in our portfolio that are growing at significant rates, and ultimately that will continue to drive the growth rate of the Company forward. A little bit that the mix shift this last few quarters, that has been hanging around in the mid-40s is somewhat reflective of numerator -denominator, where the non-digital business has actually had some better growth than anticipated.

Operator:

Our last question comes from the line of Ashwin Shirvaikar with Citi. You may proceed with your question.

Brian Humphries :

Well, I just think, again, it goes back to the definitions that companies have for digital. We've been quite intentional on being restrictive on what is digital, including our digital businesses, our TriZetto platform business, which is growing at a very healthy double-digit pace these days, significantly up from prior years. But it's not growing at the rate of maybe a digital engineering Company pure-play because it's not at all the same business or business models. So it's important to recognize that everybody's definition of digital and what is within that differs. I would say I'm very pleased with our momentum in digital, we can always do better. We strive to do better. But our exposure to Digital exposes us to higher growth categories as a corporation, ultimately, higher margin categories as a corporation. It puts us up against a different set of competitors where we have pricing dynamics that will be favorable for Cognizant's pricing. And ultimately most importantly for me, it makes us much more relevant to clients because we are becoming much more intimate with them as we become part of their transformation journey. And as I go around and speak to clients around the world when we articulate our strategy and what we're doing, and start sharing some of the references we have, clients are very open to proceeding with the next meeting to better understand what we have, today have optionality versus some of the incumbent. So I feel ultimately that we're in the right spaces. We will continue to double down, of course, there are certain industry where digital is a higher portion of our mix than others. And there are certain geographies where I want to accelerate our digital capabilities, not just back to Rod's question earlier, the international markets where our digital mix is lower than it needs to be, because historically we spent a lot more of our focus on structured deals in those geographies, but also the delivery capabilities both near shore and onshore to fulfill any demand that we create in our commercial teams internationally, we need to further extend our capabilities there. And we're working on a number of things that hopefully we can announce in the foreseeable future that will hopefully give you confidence that we're doing the right thing in that regard as well.

Ashwin Shirvaikar:

Very good to know, maybe a little bit of a symmetrical end to the call. Attrition question. Any details you could provide, I think in the past you have indicated for example the geographic lit was high in India, Eastern Europe is fine, any details by either level or vertical or geography that you could provide to kind of help understand attrition? Thank you.

Ashwin Shirvaikar:

Okay. Thank you very much. Thanks. Look forward to connecting with everyone on November 18th.

Operator:

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second Quarter 2021 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. . Thank you. I would now like to turn this conference over to Mr. Tyler Scott, Vice President of Investor Relations. Please go ahead, sir. You may begin.

Brian Humphries:

Thank you, Tyler. Good afternoon, everybody. Against a challenging labor market backdrop and the recent humanitarian crisis in India, we executed well in the second quarter, allowing us to deliver significant upside to our revenue guidance. Second quarter revenue of $4.6 billion represented growth of 15% year-over-year or 12% in constant currency. I'm grateful to our teams across the world for their unflagging dedication to consistently meeting our promises to clients. Thanks to the professionalism of all our associates with no major disruption to client service delivery from the second wave of the pandemic in India. We continue to execute against our previously announced Operation C3, which includes our vaccination drive across the 11 cities where Cognizant has operations in India. To date, we've administered or re-endorsed over 160,000 vaccines to associates or their families and dependents. I'm pleased with the strength of key commercial metrics. Bookings growth accelerated to 12% year-over-year in the second quarter, and our book-to-bill ratio is now 1.2 on a trailing 12-month basis. Qualified pipeline is significantly up, and our win rates are also up year-to-date, positioning us well for continued bookings momentum. Digital revenue growth accelerated to 20% year-over-year in the quarter. Moving to industry segments. We posted strong double-digit year-over-year constant currency growth in Communications, Media and Technology, Products and Resources and Healthcare. We've achieved a double-digit CAGR over the past 4 years in Communications, Media and Technology and remain optimistic on our growth prospects. This industry is now home to some of our largest clients. Within Products and Resources we continue to post excellent growth in manufacturing, logistics, energy and utilities. Meanwhile, both retail and consumer goods and travel and hospitality posted their 4th successive quarter of sequential revenue increases and are now close to prepandemic revenue levels.

Operator:

. Our first question comes from the line of Lisa Ellis with MoffettNathanson.