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    Cognizant Technology Solutions Corp (CTSH)

    Business Description

    Cognizant is a leading professional services company that focuses on engineering modern businesses and delivering strategic outcomes for clients. The company offers a wide range of services, including digital services and solutions, consulting, application development, systems integration, quality engineering and assurance, application maintenance, infrastructure and security, as well as business process services and automation . Cognizant's business is organized into four main segments: Financial Services, Health Sciences, Products and Resources, and Communications, Media and Technology .

    1. Health Sciences - Provides innovative solutions and services to enhance healthcare delivery and improve patient outcomes, focusing on digital transformation and data-driven insights.
    2. Financial Services - Delivers comprehensive services to banking, insurance, and capital markets clients, emphasizing digital transformation and operational efficiency.
    3. Products and Resources - Offers strategic solutions to manufacturing, logistics, energy, and retail sectors, aiming to optimize operations and drive growth through technology.
    4. Communications, Media and Technology - Supports clients in the media, entertainment, and technology industries with services that enhance digital engagement and streamline operations.

    Q2 2024 Summary

    Initial Price$72.73April 1, 2024
    Final Price$67.74July 1, 2024
    Price Change$-4.99
    % Change-6.86%

    What went well

    • Cognizant is gaining market share in a market that remains unchanged, with strong execution, fulfillment rates, and win ratios leading to increased wallet share.
    • Significant growth in Generative AI engagements, with over 750 active client engagements, up from 450 last quarter, and over 200 clients on AI-led platforms, positioning the company favorably in this high-demand area.
    • Improved performance in Financial Services, with sequential growth, stabilizing teams, capturing market share during consolidation, and strong results in the Banking and Financial Services Industries (BFSI) verticals.

    What went wrong

    • Despite having over 750 early client engagements in Generative AI, only a "small number of projects are going into production work" due to inhibitors such as data architecture, cloud infrastructure, cost of compute, and talent availability. This suggests that revenue generation from these projects may be limited in the near term.
    • The company acknowledges limited remaining capacity in utilization rates, with "some head space" but "not a significant space", indicating they may be nearing maximum capacity. This could hinder future growth unless they increase hiring, which may raise costs.
    • Market conditions remain uncertain and unchanged, which may limit growth opportunities. The company stated, "We don't see deterioration or improvement. We see the market unchanged."

    Q&A Summary

    1. Bookings and New Business
      Q: How are bookings trending, and what's driving them?
      A: Bookings have returned to growth, with new business significantly higher than renewals in 2024 versus 2023. They secured five large deals over $100 million and two deals over $90 million, all including expansion in new business. The increasing duration of larger deals adds stickiness but delays revenue realization.

    2. Gross Margin Outlook
      Q: What's affecting gross margins, and can they expand soon?
      A: Despite a 2% sequential revenue growth and reducing headcount by 8,000 sequentially and 9,000 year-over-year , gross margins remained flat between Q1 and Q2 due to the ramp-up of large deals with initial lower margins. Optimistic about Q3 and Q4, they expect better gross margin performance as these deals mature.

    3. Generative AI Impact
      Q: What's the progress with Generative AI projects and revenue impact?
      A: They increased Generative AI engagements to 750 projects this quarter from 450 last quarter, with 600 more in the pipeline. Only a small number are moving into production due to inhibitors like data architecture and cloud infrastructure. Providing dollar values for AI projects is challenging due to AI's pervasive integration into services.

    4. Belcan Acquisition
      Q: What's the expected impact of the Belcan acquisition?
      A: The acquisition is estimated to cause a 40 basis point margin dilution with over $100 million in revenue synergies over three years, to be detailed upon closing. Despite sector concerns, they see strength in automotive and believe digitizing industries like manufacturing offers significant growth potential.

    5. Financial Services Performance
      Q: How is the Financial Services segment performing and what's changed?
      A: After stabilizing teams in 2023, they're now gaining market share during consolidation. By focusing on industry solutions and expanding capabilities, their Americas banking business has performed well for two consecutive quarters, aiming to replicate this success internationally.

    6. IT Services Spending Outlook
      Q: Has IT services spending bottomed out?
      A: They observe an uptick with a positive growth trajectory as the year progresses. While the overall market remains uncertain and unchanged, they continue to win wallet share through strong execution and win rates.

    7. Utilization and Hiring Plans
      Q: Is there room to increase utilization, and what's the hiring outlook?
      A: There's some headspace left in utilization but not significantly so. Confident in managing demand, they see sufficient talent availability and are preparing for high demand situations.

    8. Large Deal Margins
      Q: Will margins on large deals stabilize, and how is staffing structured?
      A: Large deals have upfront costs and initially lower margins due to transitions. Over time, margins improve by optimizing the staffing pyramid with fresh talent and leveraging automation, enhancing efficiency as deals mature.

    9. Q4 Guidance Deceleration
      Q: Does guidance imply a Q4 deceleration beyond seasonality?
      A: The implied deceleration in Q4 is attributed to seasonality, with no other specific factors noted.

    10. ACV vs. TCV Dynamics
      Q: How are ACV and TCV trends, and where is new work coming from?
      A: ACV remains relatively unchanged, but longer deal durations cause slightly slower ACV growth. They're winning market share, with new work outpacing renewals in 2024, coming from new accounts and expanding services in existing ones.

    Key Metrics

    View all financials →

    Executive Team

    NamePositionStart DateShort Bio
    Ravi Kumar SChief Executive OfficerJanuary 2023Ravi Kumar S has been the Chief Executive Officer of Cognizant since January 2023. Previously, he was the President of Infosys, leading the Infosys Global Services Organization. He holds a bachelor's degree in Engineering from Shivaji University and an MBA from Xavier Institute of Management, India .
    Jatin DalalChief Financial OfficerDecember 4, 2023Jatin Dalal has been serving as the Chief Financial Officer of Cognizant since December 4, 2023. Before joining Cognizant, he was the President and CFO of Wipro Limited. He is a Chartered Accountant, Cost Accountant, Chartered Management Accountant, and Chartered Financial Analyst .
    Balu Ganesh AyyarEVP and President, Intuitive Operations and Automation and Industry SolutionsJuly 2022Balu Ganesh Ayyar has been serving as the Executive Vice President and President, Intuitive Operations and Automation and Industry Solutions at Cognizant since July 2022. He assumed additional responsibilities for Industry Solutions in April 2023. Previously, he was the CEO of Mphasis .
    Kathryn DiazEVP, Chief People OfficerSeptember 2023Kathryn Diaz has been the Executive Vice President and Chief People Officer at Cognizant since September 2023. She initially held the role on an interim basis from May 2023. Before this, she was the Head of Global Total Rewards at Cognizant .
    Surya GummadiEVP and President, AmericasJanuary 2023Surya Gummadi has been serving as the Executive Vice President and President, Americas at Cognizant since January 2023. He held the role on an interim basis from late June 2022. He has held various leadership roles during his 25-year tenure with the company .
    John KimEVP, Chief Legal Officer, Chief Administrative Officer, and Corporate SecretaryFebruary 2024John Kim has been serving as the Executive Vice President, Chief Legal Officer, Chief Administrative Officer, and Corporate Secretary at Cognizant since February 2024. Previously, he was the EVP, General Counsel, Chief Corporate Affairs Officer, and Secretary from March 2021 .
    Robert TelesmanicSVP, Controller, and Chief Accounting OfficerJanuary 2017Robert Telesmanic has been serving as the Senior Vice President, Controller, and Chief Accounting Officer at Cognizant since January 2017. He has been with the company in various roles since 2003. Before joining Cognizant, he spent over 14 years with Deloitte & Touche LLP .

    Questions to Ask Management

    1. With the acquisition of Belcan expected to expand your ER&D capabilities and diversify into the high-growth aerospace and defense sectors, how do you plan to integrate this new business, and what challenges do you foresee in achieving synergy with your existing operations? ,

    2. Given that Financial Services and Healthcare together account for 60% of your business, how are you addressing the risk of over-reliance on these two sectors, and what strategies are in place to diversify your revenue streams?

    3. You mentioned that clients' discretionary spending behavior remains unchanged from recent quarters and the demand environment remains challenging; how do you plan to drive growth in this environment, and what specific actions are you taking to stimulate demand?

    4. Despite strong bookings, the conversion of these bookings into revenue appears to be taking longer due to extended contract durations; how is this affecting your revenue growth expectations, and what measures are you implementing to improve the revenue conversion timing? ,

    5. With the implementation of your NextGen program and overall cost discipline, adjusted operating margin increased to 15.2%. Do you see further opportunities for margin expansion, and what potential headwinds could impact your operating margins in the coming quarters? ,

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateN/A
    End Date/DurationNo expiration date
    Total additional amountN/A
    Remaining authorization amount$1,377 million
    DetailsAllows repurchase of up to $11.5 billion of Class A common stock through open market purchases or private transactions.

    Past Guidance

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: FY 2024
    • Guidance:
      1. Revenue Growth: Flat to up 1.5% year-over-year in constant currency for Q3; full year revenue of $19.3 billion to $19.5 billion.
      2. Inorganic Contribution: Approximately 70 basis points.
      3. Adjusted Operating Margin: 15.3% to 15.5% for the full year.
      4. Net Interest Income: Approximately $80 million for the full year.
      5. Adjusted Tax Rate: 24% to 25%.
      6. Free Cash Flow: 80% of net income for the full year.
      7. Shares Outstanding: Approximately 497 million.
      8. Adjusted EPS: $4.62 to $4.70.
      9. Capital Return to Shareholders: Approximately $1 billion for the full year.
      10. Belcan Acquisition: Not included in guidance .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. Revenue Guidance: Flat to up 1.5% year-over-year in constant currency for Q3; full year revenue of $19.3 billion to $19.5 billion.
      2. Inorganic Contribution: Approximately 70 basis points.
      3. Adjusted Operating Margin: 15.3% to 15.5% for the full year.
      4. Net Interest Income: Approximately $80 million for the full year.
      5. Adjusted Tax Rate: 24% to 25%.
      6. Free Cash Flow: 80% of net income.
      7. Shares Outstanding: Approximately 497 million.
      8. Adjusted EPS: $4.62 to $4.70 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      1. Revenue Guidance: Flat to growth of 1.5% sequentially for Q2; full year revenue of $18.9 billion to $19.7 billion.
      2. Adjusted Operating Margin: 15.3% to 15.5% for the full year.
      3. Net Interest Income: Approximately $60 million for the full year.
      4. Adjusted Tax Rate: 24% to 25%.
      5. Free Cash Flow: 80% of net income.
      6. Adjusted EPS: $4.50 to $4.68.
      7. Shares Outstanding: Approximately 497 million.
      8. Shareholder Returns: Over $1 billion .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024
    • Guidance:
      1. Revenue: $4.68 billion to $4.76 billion for Q1; full year revenue of $19 billion to $19.8 billion.
      2. Operating Margin: 15.3% to 15.5% for the full year.
      3. Net Interest Income: Approximately $40 million for the full year.
      4. Adjusted Tax Rate: 24% to 25%.
      5. Free Cash Flow: 80% of net income.
      6. Capital Allocation: Over $1 billion to shareholders.
      7. Shares Outstanding: Approximately 497 million.
      8. Adjusted EPS: $4.5 to $4.68 .

    Competitors

    Competitors mentioned in the company's latest 10K filing.

    • Accenture
    • Atos
    • Capgemini
    • Deloitte Digital
    • DXC Technology
    • EPAM Systems
    • Genpact
    • HCL Technologies
    • IBM Consulting
    • Infosys Technologies
    • Tata Consultancy Services
    • Wipro

    These companies are mentioned as direct competitors in the markets for Cognizant's services, which are highly competitive and characterized by a large number of participants and subject to rapid change .