Cognizant Technology Solutions Corp (CTSH) — Q1 2024 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 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. 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 the call today, we will reference certain non-GAAP financial measures that we believe provide useful information to 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 like to turn the call over to Ravi. Please go ahead.

Thank you, Tyler, and good afternoon, everyone. Thank you for joining our first quarter 2024 earnings call. I'm pleased to report that during the quarter, we continued to make progress against the strategic priorities I laid out last year while navigating a challenging demand environment. We delivered revenue growth that exceeded the high end of our guidance range and expanded our adjusted operating margin year-over-year. Voluntary attrition improved again, and we ended Q1 with trailing 12-month voluntary attrition for our technology services business at 13.1%, representing a decline of 10 percentage points year-over-year. And our NextGen program remains on track as we continue to focus on simplification and operational excellence. As we have all seen in recent earnings results for our peer companies and economic headlines, the demand environment remains uncertain and geopolitical risks continue. These dynamics are shifting near-term client spending priorities from discretionary projects towards projects that will drive near-term cost savings and fund innovation for the future. Now moving on to Q1 highlights. We delivered revenue of $4.8 billion, which was sequentially flat and represented a decline of 1% year-over-year, both as reported and in constant currency. We expanded our adjusted operating margin by 50 basis points to 15.1% as we continue to execute our cost optimization strategy and take out structural costs. First quarter bookings on a trailing 12-month basis were $25.9 billion, an increase of 1% year-over-year. While there is good sustained traction with our large deals, we saw softness in smaller deals in the range of $0 to $10 million total contract value, reflecting the tight discretionary environment. Our strong deal momentum in the quarter was evidenced by the fact we signed 8 deals, each with TCV of $100 million or more compared to only 4 in the prior year period. We've also seen early green shoots in our efforts to diversify our large deals outside of North America. In quarter 1, two of the eight greater than $100 million contracts we signed were in the APJ region. On a trailing 12-month basis, our book-to-bill ratio of 1.3x remains strong, which we believe provides a healthy backlog of opportunities to improve revenue performance over the next several quarters. We continue to grow our pipeline for larger deals and make progress against our goal of increasing the value of large deals in our bookings. From a segment perspective, demand trends were consistent with what we have seen in recent quarters. We saw sequential growth in Health Sciences and Communications, Media and Technology, offset by declines in Financial Services and Products and Resources. While Financial Services has been impacted more meaningfully than other segments by weaker discretionary spending, we did see sequential growth among our banking and financial services clients, which represents about 60% of our Financial Services segment, and are encouraged by the opportunities we are seeing in the overall pipeline, particularly within our intuitive operations and automation practice area. We see several themes that we believe are helping drive demand for our services. This includes clients' continued investments in developing a modern technology infrastructure related to AI, cloud and digital technologies, data engineering, prioritization of hyper-personalization and customer experience projects, and the need to deliver innovation. One example of infrastructure modernization this quarter was an agreement we signed with a new client, McCormick & Company, a global leader in flavor. Over the next 5 years, we will help transform and manage its global technology infrastructure, leveraging AI automated tools to enhance McCormick's employee and customer experience while improving productivity and driving financial savings for our clients. Another example of monetization hyper-personalization is our recently announced new strategic alliance with Shopify and Google Cloud. Under this alliance, we will help drive digital transformation and platform modernization, enabling global retailers and brands to unlock business value from generative AI. We believe today's retailers must drive a modernization agenda while investing in innovation to elevate their end users and customers' experiences. Earlier this week, we signed a strategic agreement with Telstra, Australia's leading telecom and technology company, to elevate their software engineering capabilities and enhance their customers' experience. We believe this is a key strategic win in our APJ market. And we will leverage our AI tools to drive innovation, enable more efficient software engineering and IT operations, and decommission legacy systems to improve operational efficiency and support their employee experience by building them a superior engineering experience. As a fourth example, we extended our long-standing relationship with CNO Financial Group during the quarter. Under this expanded agreement, we will implement cloud and digital technologies to help CNO deliver more personalized digital and convenient solutions to their customers. We'll also leverage AI technologies to help drive efficiencies across infrastructure, applications, enterprise software and engineering services. Our clients' desire and need to drive innovation is apparent in all our client interactions, but funding for that innovation is being impacted by demand uncertainties in our clients' own end markets. The timing of a return in discretionary spending remains unknown, but our thesis remains simple. We plan to be prepared when it returns by continuing our organic investments in learning and development, people, platforms and innovation, while supporting those initiatives with inorganic capability-enhancing investments. On the client side, data from our project-level client feedback process for the first quarter of this year shows a 39% improvement in our Net Promoter Score regarding our project delivery quality over the last 2 years. We believe this is a result of a self-reinforcing cycle we created through tighter client collaboration since the beginning of 2023. As a testament to our longtime focus on helping clients innovate, during the quarter, Fortune Magazine recognized Cognizant as one of America’s Most Innovative Companies in 2024. Our focus on innovation is reflected in our Bluebolt grassroots innovation initiative, which we launched a year ago in April. Bluebolt has already generated more than 130,000 ideas from our associates, 23,000 of which have been implemented with clients. Overall, more than 220,000 Cognizant associates have been trained on Bluebolt. In addition, Google named Cognizant a Google Cloud 2024 Breakthrough Partner of the Year. This is one of our industry’s most distinguished awards. I will elaborate more on Google Cloud in a moment. And just this month, LinkedIn recognized Cognizant as #3 on its Top Companies 2024 Employer List in India, which is home to more than 250,000 of our valued associates. This repeat recognition is a reminder that our focus on becoming the employer of choice is paying off in the country that is at the heart of Cognizant's success in India. These client wins and industry recognitions demonstrate one of our core differentiators, our collaborative innovation. And nowhere else is the demand for innovation higher than in generative AI. To date, we have more than 450 early client engagements and more than 500 additional opportunities in the pipeline. We have seen increased demand for AI services across 4 key areas. First, customer and employee experience as clients seek to deliver improved interactions through hyper-personalization. Second, content summarization and insights to empower decision-making. Third, content generation. And finally, leveraging generative AI to accelerate innovation and technology development cycles. We continue to see strong interest from clients as they assess proofs of concept and the return on investment of these opportunities. These efforts are supported by our recently launched Advanced Artificial Intelligence Lab in San Francisco, where we are investing in state-of-the-art core AI research aimed to position us at the forefront of innovation in our industry. This builds upon our network of AI innovation studios in London, New York, San Francisco, Dallas, and Bengaluru. Incidentally, our Advanced Artificial Intelligence Lab has already produced 53 AI patents with applications for many more pending. This quarter alone, we had 7 new AI patents approved and granted to us. In quarter 1, we announced a series of new partnerships and co-innovations behind this strategy we announced last year to invest $1 billion in generative AI over 3 years. This includes our collaboration with Microsoft to infuse generative AI into healthcare administration. The TriZetto Assistant on our Facets platform will leverage Azure OpenAI Service and Semantic Kernel to provide access to generative AI within the TriZetto user interface. We are already progressing from proof of concept to the piloting phase and are seeing strong interest from some of our largest healthcare customers. And last week, we announced another element of our expanded partnership with Microsoft. We plan to leverage Microsoft Copilot and Cognizant's advisory and digital transformation services to help our employees and enterprise customers operationalize generative AI and realize strategic business transformation benefits from this technology. In addition, as a part of Cognizant's Synapse skilling program, Cognizant will train 25,000 developers on the use of GitHub Copilot, doubling the number trained on the technology. We are also collaborating with NVIDIA to leverage our deep life sciences and AI domain expertise with NVIDIA's pre-trained industry-specific generative AI models offered as a part of BioNeMo. Through this collaboration, we will provide clients access to a suite of model-making services, including pre-trained models, cutting-edge frameworks, and application programming interfaces, that offer clients an accelerated path to train and customize enterprise models using proprietary data. By leveraging generative AI-infused models, clinical researchers can rapidly sift through extensive data sets, more accurately predict interactions between drug compounds, and create new viable drug development pathways. 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. Over the next 12 months, Cognizant expects to up-skill more than 70,000 cross-functional associates on Google Cloud's AI offerings. This is another milestone in our Synapse initiative to upskill 1 million individuals globally by 2026. Additionally, Cognizant will work to integrate Gemini into its suite of automated platforms and accelerators, beginning with the recently announced Cognizant Flowsource platform for developers. As a part of our social responsibility platform, we recently announced that since 2018, we have awarded $70 million in philanthropic funds to global skilling programs for underrepresented communities. These 117 grants combined Cognizant's culture of continuous skilling, our focus on prioritizing empowering diversity through technology, and the philosophy that AI and other advanced technologies can be a great equalizer for the future of work. We intend to continue following and participating in the AI innovation cycles by investing in last-mile platform infrastructure, productivity studies, and capabilities to enable better and faster integration into enterprise landscapes. In the last 12 months, our AI platforms gained significant traction as we on-boarded clients on the Neuro, Skygrade, and Flowsource platforms to cover various phases of AI deployment cycles. By investing in productivity studies, which dissect the anatomy of skills and occupations and map the AI exposure scores to different roles, we have assisted our clients in realizing value and driving the scaled embrace of newer AI use cases. As we continue to navigate this ongoing soft demand environment, we remain focused on investing in areas to help our clients reduce total cost of ownership, boost productivity, enhance technology intensity, and enable better adoption of new age technologies like AI to capture the current demand and be prepared for the future. And we remain differentiated by investing in industry domain capabilities and platforms in select industries. We also believe inorganic opportunities remain an important element of our investment strategy. We continue to seek to expand and deepen capabilities, diversify our business, including into industries where we are underexposed, and improve our geographic mix. For example, we are pleased with the early traction of our Q1 acquisition of Thirdera, an industry-leading ServiceNow platform, which has significantly expanded our capabilities and credentials. We already see a healthy pipeline of opportunities as a direct result of this acquisition to cross-sell within our existing client base. In closing, I want to thank our 345,000 employees around the world for their dedication to our clients and Cognizant. In 2024, we will keep working to increase our revenue growth, become the employer of choice in our industry, and simplify our operations. Jatin, over to you.

Thank you, Ravi, and thank you all for joining us. As I enter my sixth month as Cognizant's CFO, I remain deeply impressed by the culture, passion, and client centricity across the organization. I am pleased with our execution in the first quarter in what remains a tough economic environment. Revenue exited the high end of our guidance range, supported by our Communications, Media, and Technology segments. The sequential growth of our healthcare segment was also heartening. Strong execution on our NextGen program and disciplined cost optimization actions allowed us to deliver a 15.1% adjusted operating margin, representing 50 basis points of expansion year-on-year. Looking ahead, I am focused on several objectives in support of our broader strategic priorities. First, continue to strengthen our partnerships and collaborations across the organization to improve revenue growth. Second, improve our margin profile through our NextGen cost programs and process enhancements, driven in part by leveraging AI tools. Next, continue to invest in our people with a focus on supporting our company-wide employee skilling programs designed to train our employees on the latest technology, including generative AI. And finally, drive disciplined execution with a focus on maximizing value creation from our M&A investments and improving our large deals risk management framework. First quarter revenue was $4.8 billion, representing a decline of 1.1% year-over-year or a decline of 1.2% in constant currency. Year-over-year performance includes approximately 70 basis points of growth from recent acquisitions. On a sequential basis, revenue was flat from the prior quarter. Across global industry segments and geographies, we have seen the uncertain economic outlook and volatile geopolitical environment weigh on our client spending priorities, which has kept their discretionary spend muted. These headwinds are more pronounced in Financial Services, which is more susceptible to higher interest rates. Health Sciences customers are also being impacted by the inflationary environment and industry-specific headwinds. At the same time, clients continue to prioritize spending that can deliver cost savings quickly and continue to fund investments in transformation and innovation. For example, within our Products and Resources segment, we have seen resiliency among utility customers where grid modernization remains a critical priority. This has been further supported by our 2022 acquisitions of Utegration, which helps drive SAP S/4 cloud opportunities with the utilities customers. In addition, we have seen positive trends amongst automotive customers in areas like software-defined vehicles and in our Products and Resources segment, where the convergence of IT and operational technology is driving transformation and digitization priorities. Finally, we were pleased with the performance of our Communications, Media, and Technology segment, which grew year-over-year, driven by contributions from recently completed acquisitions and wins with the communications and media customers. This has helped offset discretionary spending pressure among our technology customers, which we believe have been impacted by clients focused on reducing costs. Now moving on to margins. Our NextGen optimization program has progressed well in helping us drive structural cost savings and simplification of our operations. During the quarter, we incurred approximately $23 million of costs related to this program. This negatively impacted our GAAP operating margin by approximately 50 basis points. Excluding this impact, adjusted operating margin was 15.1%, which benefited from savings related to our NextGen program and the depreciation of the Indian rupee. Both our GAAP and adjusted tax rate in the quarter were 24.8%. Q1 diluted GAAP EPS was $1.10 and Q1 adjusted EPS was $1.12. Now turning to cash flow and the balance sheet. DSO of 78 days was up 1 day sequentially and increased 5 days year-over-year, primarily driven by our business mix. Free cash flow in Q1 was $16 million and included the impact of previously disclosed $360 million payments made to Indian tax authorities, as well as the payout of bonuses that were accrued last year. As a reminder, the tax payment to the Indian tax authority was required to proceed with the appeals process relating to our 2016 tax matter. The appeal is ongoing, and the final amounts refunded to Cognizant or due to tax authorities will be determined at the end of the process. We also returned $284 million to shareholders, including $133 million through share repurchases and $151 million through our regular remit. In addition, we completed our acquisition of Thirdera in January for a total consideration, net of cash acquired, of approximately $420 million. These factors drove quarter-end cash and short-term investments of $2.2 billion or net cash of $1.6 billion. In 2024, we continue to expect to return over $1 billion to our shareholders, including at least $400 million through share repurchases and $600 million through regular dividends. We will also continue to evaluate inorganic strategic investment opportunities to help accelerate our growth profile, expand our capabilities, and diversify our portfolio. Now let me speak about the forward outlook. For the second quarter, we expect revenue to be flat to growth of 1.5% sequentially, in constant currency. Year-over-year, this implies a decline of 2.5% to a decline of 1% in constant currency. On a reported basis, this translates to revenue of $4.75 billion to $4.82 billion, representing a year-over-year decline of 2.9% to a decline of 1.4%. For the full year, we continue to expect a revenue decline of 2% to a growth of 2% in constant currency. On a reported basis, this translates to revenue in the range of $18.9 billion to $19.7 billion and a decline of 2.2% to a growth of 1.8%, reflecting our latest exchange assumptions. The guidance we are providing as of today assumes up to 100 basis points of inorganic contribution. We see an active pipeline of acquisition opportunities, and we continue to evaluate assets for the right capabilities to support our strategic priorities. Our NextGen program remains on track, and there are no changes to our assumptions regarding the program. We still intend to reinvest the majority of NextGen savings in our growth opportunities in 2024 and beyond. Moving on to adjusted operating margin. We are pleased with our Q1 performance, and we continue to expect the full year to be in the range of 15.3% to 15.5%. For Q2, we expect adjusted operating margin will be in a narrow range around Q1's number, with NextGen cost savings and improved utilization being offset by an initial negative impact from the ramp of large deals and the revenue mix. I am pleased with our sequential improvement in utilization during the quarter, and we are sharply focused on driving further improvements to support margins next quarter. For the full year, we anticipate net interest income of approximately $60 million, which compares to $40 million previously, primarily reflecting updated interest rate and cash balance assumptions. Our adjusted tax rate guidance of 24% to 25% remains unchanged. Our full-year free cash flow guidance is also unchanged, and we continue to expect it will represent 80% of our net income. This includes the previously discussed negative impact of the $360 million payment made to Indian tax authorities in relation to our ongoing appeal of our 2016 tax matter. Our guidance for shares outstanding is unchanged at approximately 497 million. This leads to our full-year adjusted earnings per share guidance of $4.50 to $4.68, unchanged from our previous guidance. With that, we'll open the call for your questions.

Can you comment on which areas performed better than your expectations regarding growth in the first quarter compared to your guidance? Also, as we anticipate a sequential improvement in the coming quarters, particularly at the midpoint, how should we interpret that alongside the commentary about the uncertain timing of discretionary recovery? I'm interested to know if this improvement is primarily due to the increase in large deals and easier comparisons or if you expect an actual improvement in the discretionary decision-making environment as well.

Thank you, Bryan, for your question. This is Ravi. I'll start, and then I'll ask Jatin to contribute. Our guidance range is determined by the visibility we have into the middle of the range, and we then assess the potential for any upside. The available upside comes from the momentum of large deals. There is also 30 to 40 basis points from mergers and acquisitions that we have not yet completed, as our guidance includes 100 basis points from M&A. Additionally, some upside may arise from increased spending commitments from our clients if we execute effectively. We chose a broad guidance range at this time, typically giving a 200 basis point range, but we are working with a 400 basis points range due to the sluggish market. While we performed well in the first quarter, the overall market remains slow, so we opted for a wider range. Regarding discretionary spending, we haven't observed any changes since our last update to you. It remains consistent. Looking at our first-quarter performance, the most significant drop in discretionary spending has been within the Financial Services sector, which has affected us, as well as the wider industry. If you've noticed, the sequential drop from quarter 4 to quarter 1 for us is only $10 million in banking, financial services, and insurance. We are seeing positive signs in BFS, which makes up 60% of BFSI. Healthcare is performing well. We have maintained a strong portfolio with sequential growth. Communications and CMT have been exceptional for us, displaying both year-on-year and sequential growth driven by significant deals we've secured in the past year. This quarter, we have closed 8 large deals, compared to 4 large deals in quarter 1 of last year. Out of these 8, 5 were expansions plus renewals, which boosts my confidence about our ongoing expansion in large deals. The momentum for large deals remains strong, although there is softness in the smaller deals ranging from $0 to $10 million and $0 to $20 million, which are discretionary in the market. This is broadly how I perceive the situation. Regarding manufacturing and products, they are relatively stable. This outlines how we have arrived at our guidance range and reflects our performance in quarter 1. We have also seen our deal expansion extend beyond the Americas to Asia Pacific, with 2 out of the 8 deals originating from that region. You have seen our announcement with Telstra, which is part of our release. Jatin, do you have anything to add?

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

No, that was very detailed. I appreciate that. My thoughts on margin, so just kind of unpacking the margin attribution with the gross margin contraction year-over-year but a strong SG&A reduction. Is that a trend we should expect to continue as you move through '24, just given the large deal ramping? And just maybe, Jatin, talk about your comfort level in reducing the SG&A profile in NextGen still?

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 completion 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.

I would say the only thing I would add to what Jatin said is SG&A also has leverage with growth. So if growth comes back, you will see leverage on SG&A.

Just following on Bryan's question there. Just thinking about bookings ahead in the second quarter, maybe second half as well. Any call-outs there around expectations, new deals or logos versus renewals, short versus large? What do you see on the horizon there?

Thank you for that question, Tien-Tsin. We are experiencing strong momentum with large deals throughout 2023. Our efforts this year are aiding us in our ramp-ups, and we plan to continue building on that for the remainder of the year. This quarter has been positive, and the announcements we've made with clients in our earnings release highlight an increase in those announcements. I'm very happy with our progress and the expansion into Europe and Asia Pacific. However, the trend for smaller deals in the $0 to $10 million and $0 to $15 million or $20 million range remains largely unchanged since our last discussion, making it difficult to predict how that will evolve for the coming months. I do see some improvements and positive signs in our Financial Services BFSI results, but we are closely monitoring this segment. Most of the large deals focus on cost reduction, vendor consolidation, and enhancing productivity and efficiency, and we are excited about maintaining this momentum. These cost-driven large deals have longer durations, which means revenue realization will take time, yet they are sticky and offer opportunities for better fulfillment through managed services. Internally, we are also keeping track of annual contract value alongside total contract value to understand its impact this year. We are looking forward to a solid trajectory from 2023 into 2024, and into 2025 as well.

I just wanted to ask about pricing in the environment right now since demand is low. Wondering if you're seeing pressure on the rate card in the industry right now. And any kind of bottom insight for that?

Yes. Bryan, thanks for your question. This is Jatin. Fundamentally, the current environment is that of consolidation of spend, cost management, improvement in productivity, and so on and so forth. So this is the characteristic 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 the 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.

Got it. And then as my follow-up, you mentioned that normally, you guys would narrow the range for the revenue guide, but you've kept it due to some of the uncertainties. What would need to happen for you guys to get towards the high end of the range? Would you need some of that short-term demand work to come back? And would it even come back fast enough to hit the P&L to impact this fiscal year to get up towards the, I think, 2% constant currency revenue range?

Overall, the reason for a larger range is as follows. We start with the midpoint and assess the expected outcomes. We then evaluate the range of possibilities. There has been an improvement in our guidance for the second quarter compared to the first quarter, indicating sequential growth. While we are making good progress, the demand environment remains challenging, similar to what we discussed at the beginning of the year. We are taking this uncertainty into account as we assess our performance and the surrounding environment. Several factors could push us toward the higher end of the range. One would be an increase in discretionary spending in the latter part of the year. Additionally, winning significant deals can lead to committed business and opportunities to pursue additional business, provided we deliver effectively. We also have the potential for 30 to 40 basis points from inorganic growth, which could positively impact our performance in the second half of the year since we have completed only one acquisition so far. Finally, sometimes there are deals that ramp up quickly, contributing substantial revenue faster than usual. Any combination of these factors could influence our results. Currently, we are staying true to our original guidance and plan to narrow the range in our next meeting. However, considering the current circumstances, we decided to maintain the range as it was at the start of the year.

Ravi, given your call-out in your prepared remarks to your commentary, can you talk through any sort of deal leakage or cancellations or delays you may have seen in recent months? And if so, across which types of projects or verticals are you seeing this in?

Yes. Let me start and let Jatin add in. Discretionary has to be earned each year, so it doesn't just return on its own. You might refer to it as structural leakage, but it's not quite that significant. It's not that someone else is taking that away. Discretionary aspects are always somewhat unpredictable. At the beginning of 2023, we experienced some leakages due to consolidation where others were gaining, but that is no longer the case. We have become very stable with our clients, and they continue to invest in their customer base. There are no specific challenges with any clients that have resulted in leakage, nor do we foresee any potential for it. We consider our position to be very stable. In fact, my Net Promoter Scores with clients have been consistently increasing every quarter since 2023. Our attrition rates have decreased significantly, with a drop of 10 percentage points year-on-year this quarter. This is crucial as it reflects clients' trust in providers like us. Therefore, we do not see any structural leakage. The behavior of discretionary spending can sometimes lead to it not returning, returning in shorter bursts, or being delayed. These are the aspects to be cautious about. Overall, in the managed services sector, we are achieving success with both existing clients and new business, including several proactive bids. We have been largely successful over the past 15 months or so.

Yes. And if I just add a perspective of the deals that we have won in the last, let's say, 18 months. Typically, you would see that compared to what you expected at the time when you won the deal, typically, you will go sometimes faster because you are fulfilling better, you are executing better than what you initially thought and the customer thought. And sometimes, it would be slower because there are more change management issues they need to deal with, et cetera. So I think we are evenly placed regarding the pace versus expectation. I don't see anything out of the ordinary. There will always be one of the deals that is taking a little longer time to ramp up because there is some change in the client organization, but nothing that is out of the ordinary on a win versus execution of the deal.

I just wanted to start on generative AI. I kind of had a 2-part question there because I know, Ravi, you mentioned generative AI and accelerating software development a couple of times. Just curious what your longer-term views are on the role of a human software developer and how it will change as generative AI tools potentially do more of the actual coding. And then just you mentioned 450 active generative AI client engagements. Can you give us a sense of the average project size there?

Thank you, Jason. Regarding the 450 client engagements, we've made significant progress. In the second quarter of 2023, we mentioned having around 100, and now we have about 400 early client engagements. These are primarily short-term, rapid prototype deals. We also have over 500 more opportunities in the pipeline. The key to focus on now is how many of these will transition into scaled execution for our clients, as that’s where we see monetizable opportunities. We are actively working on a few key areas: first, keeping pace with innovation cycles in AI; second, developing the infrastructure necessary to ensure that the raw capabilities of AI can be transformed into production and enterprise-grade solutions for our clients. This involves infrastructure for managing AI platforms and orchestration. In the context of AI and other disruptive changes, we're focused on improving model accuracy, providing explainability to counter the black box nature of AI, and enhancing observability. We've built and announced several platforms to support this last-mile infrastructure, which is essential for making our solutions production-ready. The second thing we're investing in is productivity studies. I mean, what does AI do to different roles and different operations of different industries? And how do we make embracing AI much faster on larger cohorts? And we partnered with Oxford Economics, and we created templates for every industry, every role, so that we can do an anatomy of tasks, as I call it. And then we start to figure out how to create a much faster and a much broader embrace in enterprises. So this is preparing for the future where we believe enterprises are going to be a people-plus-machine endeavor. Now what does it do to our operating model? Our tech for tech, as I call it. It, of course, changes the productivity of a developer. When the cloud came into the picture a couple of years ago, it flipped the productivity where, as a developer, you spend very little time on the plumbing, but you spend a lot of time on innovation. This is our second shot at improving developer productivity and not actually spending time on repetitive tasks, not actually spending time on things which a machine can write, but you could actually pivot the developer productivity on innovation. So I believe this is probably more disruptive than what the cloud did. And we think what will happen is this will lead to reducing backlog, improving the throughput to our clients, increasing the tech intensity at a lower cost. So I always believe that this is going to be an opportunity rather than a threat if we can pivot ourselves well. And the opportunity is about creating the tech intensity. Every industry doesn't have that intensity, so we have this unique opportunity to create that intensity at a lower cost and a lower entry barrier. I mean, you don't need to be a developer to embrace software code, which means the entry barrier goes down. So we think we have a bigger opportunity than before as long as we can embrace this into our own landscape and equally build the use cases for our clients to embrace it. So I see this as a uniquely big opportunity for companies like Cognizant.

That's good color. And then just a quick follow-up. You mentioned 8 large deals you won in the quarter, $100 million-plus TCV, I think. Are those expected to contribute materially to 2024 revenue? And if so, were they already contemplated in your original revenue guidance?

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 more because large deals now come on a cost-takeout model, unlike transformation-related large deals. But once we start to execute and get the bid versus bid in a good shape, then the committed spend will then flip over to new spend because you're already in the groove. So that's what we are betting on as well. I mean, once you start to perform well, you have the license to take more from our clients.

Wanted to ask a couple of follow-up questions. You kind of laid out what needed to happen, particularly in the return of discretionary deals in order to get to the high end of your guidance range. Conversely, what would be the scenario in your mind that would end up with you towards the lower end of that guided range? I mean, are we looking at incremental pushouts and delays of starting of deals? Or I'm just trying to get a gauge there on the bottom end.

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 the 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 tank and our performance didn't show any positive progress.

Got it. Got it. Okay. And then there's been a lot of talk about the transformational or discretionary deals and more focus on transformation. And it seems like that that's directly impacting your bookings and the types of things that you're able to put into the pipeline right now. But is that having any impact on what you're doing from a hiring or skilling perspective? And how should we think about that as we go into next year if this kind of environment persists? Are there other considerations we should be taking into account in terms of how you'll be hiring and what impact that could have on profitability, et cetera?

Yes. Discretionary projects are typically smaller in scale, and they tend to have a different structure compared to larger deals, which can support a more robust framework. When we engage in discretionary work, we often bring in more experienced lateral hires. In contrast, with managed services, we hire according to that framework, which aligns better with those projects. If you've seen, we increased utilization from the fourth quarter to the first quarter, providing us with additional capacity, and we aim to keep improving our utilization. This will allow us to continue expanding and maintain enough flexibility to hire the senior talent we require while also transitioning team members into new projects as needed. I believe we now have the adaptability in our fulfillment processes. I'm pleased not only with how we've addressed the current demand environment, but also with our improvements in utilization and our ability to fulfill the contracts we've secured, as well as our readiness for when discretionary spending returns. Our system is poised to handle both the current demand trends and any potential spikes in demand. We feel well-equipped to take advantage of these opportunities.

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 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?

Moshe, good to hear from you. So we do have that visibility. We have not published that externally. What we track is multiple things. We track the total contract value, the size of the deals, the duration of the deals, how much of that translates to ACV for this year and ACV for the next year, so for the first 12 months or the next 12 months. And we also track the pyramid attached to it and the capability set needed. So I pretty much have that information to rely on so that we can get our fulfillment engine intact as well as forecast better. So it is something we have. We have not published that externally, but I'm keeping a constant track on it. And in the book-to-bill ratios, Moshe, you know this, it also depends on what are the durations of the deals. I'm sure you asked this question because of that. The duration of the deals, when you take large deals, they go up. When you take small deals, it goes down. So the book-to-bill has a meaningful impact between the two. So one of the other metrics we are internally tracking is ACV because then that gives us what is the incremental revenue we'll get for the current calendar year.

Okay. And then is there a way to get that mix of new logos to renewals? Or that's also kind of internal and you don't disclose that?

We have had a very successful new logo program. Since I started, we implemented a specific program for acquiring new logos, as well as a program to develop these new clients to the level of a $50 million or $100 million annual spend. While acquiring new logos is important, increasing their value to a $50 million account is a different challenge. We have established separate paths for both processes and are actively progressing in our efforts. We also have a targeted list of new logos based on geography, which is distinct from our mining efforts, as the acquisition side is currently performing very well. There is a shift to the mining process as the size of these accounts evolves. However, we have not communicated externally how many new logos we are acquiring, nor have we provided that information to the market. Internally, we are very satisfied with our progress on new logos and their development.

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 Q3. Does that sound about right to you?

I don't have the math in front of me, but I would agree that we need to have a strong third quarter and a flat fourth quarter to reach the higher end of our range.

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 in years. Can you elaborate on that?

Yes. The context is that when examining the sequential drop in BFS over the last few quarters, the decrease between quarter 4 and quarter 1 is notably smaller. Something significant has occurred during this period. Over the past year, we have focused on reorganizing our BFSI vertical and have revitalized our teams with new hires. We now have an impressive range of offerings for banking, financial services, and insurance. We have ventured into fintech and utilized AI to create small discretionary spending opportunities. For instance, in the insurance sector, we have several AI projects underway. One example is mainframe modernization, which is a crucial initiative, and in property and casualty insurance, we are digitizing the distribution network that involves agents and platforms. Additionally, the group benefits and policy administration platforms are undergoing substantial changes. In banking and financial services, we are experiencing a major transformation in customer service, supported by an AI-enhanced offering. We also have a significant opportunity in fraud detection and prevention, particularly as regional banks face considerable cost-cutting measures. Overall, we have recognized the market realities in BFSI and possess the organizational capability to address these challenges. We are a stable entity with comprehensive offerings and skilled teams, and we are striving to navigate this challenging market effectively.

Yes. Sorry, Jamie. I want to reiterate my previous point. Our expected outcome aligns with the midpoint of our guidance, and we are aware of the potential outcomes at both ends of the range. When you specifically asked, I was addressing the potential on the upper end. I just wanted to clarify this to ensure I responded to your question fully.