Q2 2024 Earnings Summary
- 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.
- 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."
-
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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. -
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.