Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Cognizant Technology Solutions Corp (CTSH, Financial) delivered revenue above the high end of their guidance range, achieving $4.85 billion in Q2 2024.
- The company expanded its adjusted operating margin to 15.2%, an increase of 10 basis points sequentially and 100 basis points year-over-year.
- Cognizant signed 5 large deals each with a total contract value of $100 million or more, indicating strong deal momentum.
- The acquisition of Belcan is expected to expand CTSH's ER&D capabilities and diversify into high-growth aerospace and defense sectors.
- Second quarter bookings grew 5% year-over-year, with a trailing 12-month book-to-bill ratio of 1.4x, indicating strong future revenue visibility.
Negative Points
- The demand environment remains challenging with unchanged client discretionary spending behavior.
- Products and Resources revenue declined approximately 4% year-over-year in constant currency due to ongoing discretionary spending cuts among customers.
- Despite strong execution, the company experienced a sequential decline in headcount, which could impact future project scalability.
- The acquisition of Belcan is expected to provide a 40 basis point margin headwind, indicating potential short-term profitability challenges.
- The company faces competitive pressures in talent acquisition, with higher attrition rates noted in the report.
Q & A Highlights
Q: On Generative AI, could you indicate whether any of your clients are moving beyond the proof-of-concept stage? And can you maybe quantify the amount of bookings you currently have tied to Generative AI at this stage?
A: Generative AI is diffusing into all our technology-led projects rapidly. We have 750 early client engagements, up from 450 last quarter, and 600 more in the pipeline. However, only a small number of projects are moving into production due to factors like data architecture and cloud infrastructure. We are optimistic about a sharp acceleration in production-grade projects as these inhibitors are addressed.
Q: What were some of the factors pressuring the gross margins such as project pricing and the higher startup costs on large deals? And can you comment on the prospects for expanding those gross margins over the next couple of quarters?
A: The ramp-up of large deals, which initially have lower margins, impacted gross margins despite improved utilization and reduced headcount. We expect better performance on gross margins in the coming quarters as these deals mature.
Q: Can you comment on the level of bookings that are net new work versus renewals? And any common threads across the latest deals announced?
A: Our new business is significantly higher than renewals in 2024 compared to 2023. We are also seeing new logos and expansion in bookings, contributing to our growth. The duration of deals is increasing, providing improved forward visibility.
Q: How much room do you have in utilization before it runs too hot? And how are you thinking about the pace of hiring for the remainder of the year?
A: We still have some headspace in utilization as we exit Q2. We are managing the supply chain with this visibility and are confident in managing the demand and supply equation well. The talent market remains stable, and we are seeing sufficient availability of the required skill sets.
Q: How should we think about potential stabilization around large deal project margins, especially given the elongation of the duration in these large deals?
A: Large deals have upfront costs and downstream revenue. We have developed the muscle to execute these deals well over the past 18 months. Our ability to improve overall pyramid and deploy fresh talent is better in larger programs, allowing us to push the envelope of efficiency and productivity.
Q: What are your main goals for the next phase of Cognizant's improvement process?
A: We aim to layer performance and change, making big bets like the acquisition of Thirdera and Belcan to expand our capabilities and industry reach. Our goal is to create sustained momentum and a resilient platform for our employees and clients, focusing on new industries and international expansion.
Q: Are you seeing similar trends in aerospace and automotive weakening, especially as you onboard the Belcan business?
A: Organically, we are seeing strength in automotive. Our pivot on Belcan is to digitize everything physical, focusing on services like embedded software and digital solutions. We believe there is significant headroom in these industries, and our offerings will remain contemporary and continue to flourish.
Q: What is your visibility on the financial services end market, and how has the nature of the work changed?
A: We have stabilized financial services since 2023 by focusing on industry solutions and proactively pitching for value-led work. Our business in the Americas and banking has sequentially performed well for two quarters, and we are now replicating this success in international markets.
Q: Are GenAI projects crowding out other consulting priorities?
A: Some discretionary spending is being diverted to Generative AI, but these are small prototypes. As these projects mature, they reveal bottlenecks that need to be addressed for production-grade work. We are seeing some projects go into production, particularly in healthcare and pharmaceuticals, where the business cases are very outcome-centric.
Q: Can you provide an update on the ACV versus TCV dynamic and the source of incremental bookings?
A: There is no significant change in ACV, but we are winning market share and new work, sometimes in new accounts or segments where we were not previously addressing. The focus on new logos and expansion is contributing to our growth, with new work outpacing renewals in 2024.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
