Cognizant Technology Solutions Corp (CTSH) — Q4 2023 Transcript

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

Thank you, Tyler, and good afternoon, everyone. Today, I would like to cover three topics: Cognizant's fourth quarter and full year results, an assessment of our progress in 2023, and a look ahead to our focus and outlook for 2024. I've been in the CEO role now for a full year and have used this year 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 exceeding 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 as we expected as clients remained cautious and limited 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-month 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. 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, 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 platforms, 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 Generative 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 sets 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 is 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 a generative AI-powered tool built on Azure OpenAI service. Shortly after my arrival, we consolidated our performance objectives, the way we measure success, into just three 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 on 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 also established programs to provide more opportunities for employees to advance their careers. 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 careers 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 platforms 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-enabled 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 a 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, generated $2.5 billion of revenue in 2023. Our tech-driven modern BPO and automation services help 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, an 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 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 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 deal 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, the momentum 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 at scale. This includes building accuracy in output, reducing hallucinations, continual reinforced learning and testing, incorporating transparency and accountability, and iteratively driving performance optimization. Therefore, 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 at the 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 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% 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 data and processes, and increasing productivity, so that they can apply 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 stronger 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.

Thank you, Ravi, and good afternoon everyone. I am very excited to join Cognizant and would like to thank the entire organization for such a warm welcome. I would also like to thank Jan for helping me make the onboarding experience so seamless. I have always admired Cognizant's growth mindset, client centricity, and the entrepreneurial culture. While it has only been two months since I joined, the energy and passion across the organization are apparent. I have also had the opportunity to participate in our global sales kickoff events in January. This has further strengthened my conviction in Cognizant's capability and our market opportunity. I'm excited to partner with Ravi and the entire leadership team to build on the progress we have made in 2023, as we strive to reach our full growth potential. In doing so, I believe there is a tremendous opportunity to create long-term sustainable value for our associates, clients, and shareholders. With that, let's turn to our fourth quarter and full year revenue results. Fourth quarter revenue was $4.8 billion, representing a decline of 1.7% year-over-year or a decline of 2.4% in constant currency. Year-over-year performance includes approximately 90 basis points of growth from our acquisitions. This led to full year revenue of $19.4 billion, which declined 0.4% year-over-year or 0.3% in constant currency. Year-over-year growth includes approximately 110 basis points of growth from acquisitions. Ravi discussed Financial Services and Health Sciences, which declined 6.6% and 2.7% year-over-year in constant currency, respectively. So I will quickly comment on our other two segments. Products and Resources revenue was roughly flat year-over-year in constant currency, which included contributions from recently completed acquisitions and the ramp of new business. This helped offset the macro-driven discretionary spending pressure. We saw relatively better performance in North America, particularly among auto, utility and travel and hospitality clients. Communication, media and technology revenue increased 2% in constant currency. The growth reflected the benefit from recently completed acquisitions and the ramp of new bookings. Now, moving on to margins. During the quarter, we incurred approximately $40 million of costs related to our NextGen program. This negatively impacted our GAAP operating margin by approximately 90 basis points. Excluding this impact, adjusted operating margin was 16.1%. Year-over-year, margin included savings from our NextGen program and tailwinds from the depreciation of the Indian rupee. This helped partially offset increased compensation costs. As a reminder, the prior year period also included a negative impact from a noncash impairment charge related to a Health Sciences customer. Our GAAP tax rate in the quarter was 26%, adjusted tax rate in the quarter was 25.4%. Q4 diluted GAAP EPS was $1.11, which is $1.11, and Q4 adjusted EPS was $1.18. Now, we turn to the balance sheet. We ended the quarter with cash and short-term investments of $2.6 billion or net cash of $2 billion. DSO of 77 days was flat sequentially and increased three days year-over-year, driven by our business mix. Free cash flow in Q4 was $659 million, which brings full year 2023 free cash flow to $2 billion or approximately 95% of the net income. This was slightly ahead of our expectations. During the quarter, we repurchased over 4 million shares for $313 million and returned $146 million to shareholders through our regular dividend. For the full year, we returned about $1.7 billion to shareholders, including $1.1 billion through share repurchases and $591 million through our regular dividend. As of December 31, we had $1.8 billion remaining under our share repurchase authorization. Turning to our forward outlook. For the first quarter, we expect revenue in the range of $4.68 billion to $4.76 billion, representing a year-over-year decline of 2.7% to 1.2% or a decline of 3% to 1.5% in constant currency. Our guidance assumes currency will have a positive impact of approximately 30 basis points. For the full year, we expect revenue to be in the range of $19 billion to $19.8 billion, which is a decline of 1.8% to growth of 2.2% year-over-year or a decline of 2% to growth of 2% in constant currency. Inorganic contribution is expected to be up to 100 basis points, and we anticipate approximately 20 basis points positive impact for the year from the currency. Our NextGen program remained on track this quarter, and we still expect to incur total costs of approximately $300 million. This includes $229 million incurred in 2023 and our expectation for an additional $70 million in 2024. There are no changes to our savings assumption from NextGen, and we still intend to reinvest the majority of the savings in growth opportunities in 2024 and beyond. Moving on to adjusted margins. We are pleased with the strong finish to 2023, which allowed us to deliver a full year adjusted operating margin of 15.1% versus our guidance of 14.7%. In 2024, we continue to expect 20 to 40 basis points of operating margin expansion. This represents an adjusted operating margin range of 15.3% to 15.5%. We remain focused on driving further efficiency in our business model through improved utilization, increased operational discipline, and automation of tools and processes. We are also introducing guidance for net interest income versus our prior practice of providing gross interest income. For the full year, we anticipate net interest income of approximately $40 million. Our expectation for the full year adjusted tax rate is 24% to 25%. For the full year, we expect free cash flow will represent about 80% of net income. This includes an anticipated negative impact of approximately $360 million because of a ruling on January 8 in India relating to a previously disclosed 2016 tax matter in connection with share repurchase transactions, undertaken by our Indian subsidiary. The ruling required Cognizant to deposit the funds with India tax authorities to proceed with our appeals process. The funds deposited with tax authorities were previously held in bank deposits under lien. And as of December 31, they were presented on our balance sheet under long-term investments. The outflow will negatively impact our operating cash flow but will not affect the cash and cash equivalent amounts on the balance sheet, and therefore, we do not anticipate any impact to our capital allocation priorities. Final amounts refunded to Cognizant or due toward tax authorities will be determined at the end of the appeals process. We continue to believe that we have complied with all tax regulations applicable to this matter in accordance with the law and intend to vigorously defend our position. Moving on to capital allocation. We expect to return over $1 billion to shareholders in 2024, including at least $400 million through share repurchases and $600 million through regular dividends. We will also continue to pursue acquisition opportunities aligned with our strategy. For the full year, we therefore expect to deploy more than 100% of free cash flow, given the negative impact of the free cash flow from the aforementioned additional deposit with the Indian tax authorities. Based on our anticipated share repurchases, our guidance for shares outstanding is approximately $497 million. This leads to our full year adjusted earnings per share guidance of $4.50 to $4.68. With that, we'll be open to take the questions.

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

Thank you, Ashwin. I hope you're doing well. This is Ravi here, and I’ll start off and ask Jatin to add his input. Looking at our 2023 bookings, we see substantial potential in the category exceeding $50 million, $100 million, and even $250 million in Total Contract Value. These larger deals primarily involve managed services and cost takeout opportunities which were prevalent in 2023. They also span longer time frames compared to smaller deals, which typically range from $0 to $5 million or $0 to $10 million. The smaller deals are generally completed within the same year they are initiated and are often dependent on discretionary spending. Consequently, we have a greater skew towards larger deals rather than smaller ones. Our large deals have significantly increased compared to previous years. Additionally, we are seeing new renewals, expansions, and new logos contributing to our growth. There is notable potential for new business and expansions, as highlighted by our deal numbers. The TCV data reflects a high level of new business and expansions. We've made a point to publicize some of our recent significant contracts, such as those with Fortrea and Takeda. These large deals not only provide a strong backlog for the future due to their longer duration but also offer immediate benefits in the current year. Moving into 2024, the successes of 2023 will have a greater impact, enhancing our backlog moving forward.

Understood.

The question is, what does it do to our revenues? As much as they start to contribute to revenues, there is also a discretionary softness which we had in 2023, which kind of offsets. 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 in time, early in the year, what is going to happen to discretionary in 2024. Discretionary in 2023 went down, and it kind of absorbed the extraordinary run we had on large deals. In 2024, we don't know what's going to happen to discretionary, but the '23 wins will contribute, and the continued momentum in '24 will contribute as well.

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

So Ashwin, if you calculate the numbers, you'll see that we have factored in some sequential growth. We are seeing good progress with cost reduction, vendor consolidation, and AI-driven productivity projects, which are the major contracts we are securing. We aim to focus more on these opportunities. We believe we have a successful strategy and will continue to implement it, which will attract new clients and expand our relationships with existing ones. The current state of discretionary spending is uncertain, and that's why our guidance range is wider; we are aware that there are unknowns. Our approach is straightforward. We are preparing for a resurgence in discretionary spending and will ensure our operations and fulfillment are ready to capitalize on it, so we don't miss any opportunities. Additionally, we have a solid approach for large deals focused on cost reduction, which will remain beneficial whether discretionary spending rebounds or not. We plan to maintain momentum from 2023, which has helped us gain new business and clients. We will focus on both aspects—being ready for any increase in discretionary spending while continuing to build on our success with large deals. When opportunities arise, we want to be positioned to take advantage of them.

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

Sure, Tien-Tsin. There are opportunities for improvement in both gross and operating margins, and the factors driving them will be quite different. For gross margin, the primary factor will be the increased efficiency in operations. We have significant potential for higher utilization as growth returns. Additionally, we plan to implement AI and automation tools, which will provide operational benefits. This presents opportunities for gross margin beyond the usual considerations related to the pyramid structure and Generation Z. Regarding operating margin, there will likely be improvements in SG&A, driven by cost reductions associated with the completion of the NextGen program in 2024. We are committed to working on both areas and will evaluate our progress on an individual basis. Overall, we believe we have adequate strategies in place to support the expansion we have discussed.

Just to add to what Jatin said, we are very pleased with our performance on the NextGen program. We believe there is an opportunity for a full year impact this year on the NextGen program. Additionally, as Jatin pointed out, in addition to the traditional levers in gross margin such as better operational efficiency, higher utilization, improved organizational structure, and increased offshoring, we are encouraged by our progress. We also have a unique opportunity to share the productivity benefits with our clients, which involves technology arbitrage as opposed to labor arbitrage driven by generative AI tools. I believe we are ahead of the curve, which is why we are securing many large deals and sharing those productivity benefits that will contribute to growth and operating margin in the future.

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

Thank you, Moshe. It's nice to hear from you again. The wins in 2023 began to increase throughout the year, and they provide some benefit initially, with greater advantages in the second and third years. Additionally, as we approached the end of last year, we saw an increase in new business and new clients within our larger deals, which will positively impact future years. This dynamic makes our business more resilient, boosts our future backlog, and means we're starting the year with positive momentum. The only uncertain factor is the $0 million to $5 million deals, as they are discretionary and can offset the gains from larger deals. We likely experienced some of this in 2023 due to weaker discretionary spending. Looking ahead to 2024, it's unclear how discretionary spending will perform. However, I believe that the flow of large deals will continue and become stronger in 2024 and 2025, when the benefits will be fully realized. The challenge is determining how discretionary spending may counterbalance this. If discretionary spending rebounds, we need to be ready, as it could enhance our momentum. It's an interesting situation because it's not only about large deals; the smaller deals also play a role. If smaller deals stabilize or plateau, it could help generate revenue momentum from larger deals. We are managing these opportunities effectively. Initially, new deals typically start off slow as they transition, but once they gain traction, they reach a steady revenue growth stage. I'm not overly concerned about this process. However, I remain uncertain about discretionary spending.

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

Moshe, I have to say this, the healthcare ecosystem for Cognizant is the strongest in the market. It's an industry which will go through a significant transformation. So we are in a pole position 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: over 250 million claims on an annual basis approximately, over 100 million enrollments on an annual basis. We do 3 billion electronic data interchange transactions. So we have an extraordinary story of TriZetto, where over 60% of the U.S. insured population goes through our platforms. It's the fulcrum and the nucleus of the 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 in 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.

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

That's a great question, Surinder, thank you for bringing it up. I see three key areas of focus. The first area involves last mile improvements. This means taking existing foundational models available in the market and enhancing them to be enterprise-ready. This work involves managing and governing large language models, ensuring their accuracy, minimizing errors, optimizing performance costs, and utilizing reinforced learning, which continues even after implementation. Making these foundational models production-ready requires significant effort. We have a unique opportunity here, and I'm enthusiastic about the developments with our platforms and how we are assisting our clients. Currently, we have over 250 prototypes in operation, with more than 350 in the pipeline. Once these capital expenditure cycles begin, we’re well-positioned to capitalize on that. The first area of focus could be viewed as consulting, but it encompasses various tasks. The second focus area pertains to enhancing productivity. This involves two main aspects: the impact on developer productivity and the technology lifecycle, from design to testing to coding. In this area, we can disrupt our current business while sharing the benefits with our clients, or we can suggest innovative approaches to improve productivity, which is gaining us significant deals. We're challenging existing structures and not just relying on labor cost advantages, but rather using AI-driven advantages. There are opportunities in applying AI to both our business and areas where we are not yet established. While this will take time to gain momentum, I anticipate a rapid phase of growth following an initial slow takeoff, leading to a significant upward curve in adoption as I mentioned earlier. This technology spreads quickly and has a robust distribution network. I'm excited about the future, the investments we're making, and how we are aligning with our clients' needs. We've integrated this technology into platforms like TriZetto, equipping us to take advantage of these opportunities as capital expenditure cycles related to generative AI evolve toward enterprise-grade solutions.

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

So let me start and ask Jatin to chip in. I would say, the discretion or the spend, if you take an 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, which is one of the sectors that also has a strong technology retained organization. So what they outsource is dependent on how much is discretionary. Let's see how the industry shapes up in the year. And normally what I have seen based on experience is, if there are one or two repeatable cycles of interest rate adjustments downwards, we will start to see the spend come back. Discretionary is also tied to transformational work, which normally 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. The change ahead of us 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, there are elections in many parts of the world, so I don't know what impact those have on discretionary. But, the AI cycle can trigger the discretionary back, the interest rates dropping can trigger 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. It's a little bit of waiting to see how the interest rates shape up for this year to really say whether it is going to come back or not.

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

Also, one other event in the mix is, during the COVID era, there was a heavy discretionary spending in many sectors. That's gone through 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.

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

Yes. So you would have noticed that these large deals we are doing, we're doing based on a differentiated value proposition, and we are holding our pricing. I mean that's one of the reasons why our margins were good enough 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 to come together. It's in our DNA, so I have 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 with our clients. So we could be provocative with bold ideas. I see that as a trade and an integral part of the DNA. And as 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've built in the last year, I'm very proud of it. And that has helped us not just to 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 win deals. I would like to continue on that momentum in 2024.

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

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

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

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

Sure, Ramsey. 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 with. But the environment remains uncertain, and it's certainly a slower start to the year, as Ravi indicated in his opening remarks.

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

I would say, in some areas, we are seeing more confidence. The two big areas I want to highlight are employee productivity and 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 they're grappling with is, as I mentioned, and the need for a system integrator like Cognizant plays an important role. The things they're grappling with are the accuracy of the models, the explainability of the models, and the traceability of the datasets. So that the explainability could be judged; this is output, which is coming from a computer that is building logic, which means you need to have explainability behind it to make it responsible enough. And I think the other thing that they are 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 is 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 exposure of core on jobs, which gives us the opportunity to figure out with jobs which 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 at times. So, I'm excited about the prospects but I'm equally ready for what it means for a system integrator.

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