Cognizant Technology Solutions Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Tyler Scott, Vice President of Investor Relations
• Ravi Kumar Singisetti, CEO & Director
• Jan Siegmund, CFO

Analysts

• Ashwin Vassant Shirvaikar, Smith Barney Citigroup
• Lisa Ann Dejong Ellis, MoffettNathanson
• Bryan C. Bergin, TD Cowen
• Rayna Kumar, UBS Group AG
• Jamie Friedman, FIG Partners
• Tandon Huang, JP Morgan Cazenove

Presentation

[Operator]

Greetings and welcome to the Cognizant Second Quarter 2023 Earnings Conference Call. [Operator Instructions].

It is now my pleasure to introduce your host, Tyler Scott, Vice President of Investor Relations. Please go ahead.

[Tyler Scott, Vice President of Investor Relations at Cognizant Technology Solutions]

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 second quarter 2023 results. If you have not copies are available on our website cognizant.com. The speakers we have on todays call are Ravi Kumar, Chief Executive Officer; and Jan Siegmund, 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 like to now turn the call over to Ravi. Please go ahead.

[Ravi Kumar Singisetti, CEO & Director at Cognizant Technology Solutions]

Thank you, Tyler. Good afternoon, everyone. I would like to discuss four topics with you today; our second quarter results, the demand environment, our comprehensive commitment to Generative AI, and an update on our long term priorities.

We have made continued progress during the quarter in what remains an uncertain global macroeconomic environment. Q2 came in at $4.9 billion at the high end of our guidance range. We were pleased to return to sequential revenue growth of more than 1%. Year-over-year Q2 revenue showed a modest decline of 40 basis points or essentially flat in constant currency. Our adjusted operating margin was 14.2% and adjusted EPS was $1.10. We recorded another quarter of strong bookings growth, 17% year-over-year. Ending quarter two with record trailing 12 months bookings of $26.4 billion. A book-to-bill of 1.4 times, approximately 30% of our in quarter Q2 bookings were large deals and five of these deals exceeded $100 million each.

Our bookings continued to be a balanced mix of renewals, expansions and new opportunities. The leadership team and I remain intensely focused on our talent. So I'm glad to see the continued reduction in our attrition with trailing 12 months voluntary attrition for our tech services business declining to 19.9%. down three percentage points sequentially and 11 percentage points year-over-year. Well, Jan, recover our performance at the business segment level, I want to offer a quick word about financial services. Our quarterly year-over-year revenue decline in this segment reflects the soft market and continuing weakness in discretionary spending and responds, we are transitioning more existing work in this sector towards managed services as many clients remain focused on driving cost takeout, vendor consolidation and productivity initiatives.

We're also stepping up our engagement with Fintech companies, which we believe offer a great opportunity for digital transformation and we are strengthening our capabilities with the goal of capturing discretionary spending on transformation work when it returns. For example, we continue to support the modernization of S&P Global's configure price quote system to enable end-to-end disposition in what we believe is the world's largest CPQ implementation on sales force and we are collaborating with Max Life Insurance to launch an innovation and development center in Chennai to help accelerate the digital transformation efforts. With our flexible client centric operating model, we can assist clients across industry sectors, takeout costs, consolidate their vendors and achieve both technology and operational efficiencies, which provide opportunities for large deals. We can also help them develop digital platforms to deliver richer and more personalized experiences to their customers. What's more, we can engineer technology into their products and services. As an example, we recently extended our partnership with Gilead Sciences. The segment includes the renewal and expansion of Cognizant Services for a total expected value of $800 million over the next five years. We'll manage Gilead's Global IT Infrastructure while leading digital transformation initiatives designed to enhance that overall client experience and enable faster time to market for the products. We will apply the [Technical Issues] AI and intelligent automation to help improve Gilead's customer service experience and assistant driving greater manufacturing efficiencies. To support clients transformational needs we have established a distinctive position across industries, using a platform centric approach designed to speed client's consumption of technology. You've seen the Emphasis we have given to this platform approach. For example, Cognizant TriZetto in healthcare share investigate -- investigator platform in life sciences, asset performance excellence and smart manufacturing, and [Indecipherable] automotive. Last quarter, we launched two new platforms with applications across industries Neuro IT operations, which enables AI led autonomous outpatients and Cognizant Skygrade designed to help clients maximize the full potential of cloud.

Turning to AI in quarter two, we expanded our platform portfolio further with Cognizant Neuro AI, it's designed to speed the adoption of Generative AI and harness its value in a flexible, secure, scalable and responsible way. With new AI, we are helping clients advance from identifying company specific use cases to operationalizing AI. I should point out that Generative AI is a natural evolution of our work across Cognitive AI Enterprise Applications and Data Analytics Services. To extract value from Gen AI, the data must be curated, trained, modernized and made production ready. You also need a deep understanding of client's data estates, data architectures, data usage patterns and business applications of the data. Our current approach to leverage third party foundational models and enhance them with our platforms and IP and then fine tune the models for our clients.

Today we have more than 100 active client engagements in various stages with a focus on Cognitive and Generative AI as well as hundreds more projects using AI services within the context of delivery. We are designing generative AI offerings for industry specific solutions, cross industry use cases and productivity enablement on the teams like transforming core processes, improving the customer and employee experience, product innovation, software and coding and knowledge management to name a few. For example, one of the ways largest health-care product companies we are helping to speed-up their research process by Gen AI to auto scientific content. We develop the workbench that uses GPD models to summarize and generate content from unstructured and structured data such as laboratory information management systems, with the aim of automating the generation of regulatory content.

For a top 20 property and casualty insurance, we have helped frame its Gen AIs strategy and conduct real world -- real-world tests based on company data. For example, we built a Gen AI based digital virtual assistant that analyze loss complex claims submissions but referencing the insurance claim data, the virtual assistant was able to guide a human claims handler to gather nearly 100% of missing claims information.

This simple application is expected to produce millions of dollars in savings through improved operational efficiency and reduce claim costs. In addition, we signed a new multi-year agreement with Nuance Communications and Microsoft company to help scale the resources for Nuances Dragon Ambient Experience operations. This solutions is at the fourth front of conversational AI and Ambient Clinical Intelligence.

Let's turn to be essential role partners play in delivering our AI capabilities. We expanded our alliance with -- with Google Cloud to help enterprise clients create, migrate and modernize their AI journeys and also clients innovative industry solutions founded on the tenant of responsible AI. Our investments in developing Gen AI capabilities include launching the Cognizant Google Cloud AI University, a program designed to train 25,000 Cognizant professionals on Google Cloud AI technologies, will offer this program to our clients as well.

And earlier today, we announced that as a part of an expanded partnership with Google will be building on Google Cloud Sensitive AI Technology with Cognizant AI domain expertise to create a health large language model. This LLM is designed to simplify and improve the accuracy of complex healthcare administrative task and strengthened business outcomes for healthcare organizations. We've also expanded our relationship with Microsoft to deliver industry solutions and enable AI led transformation. This includes expanding the focus of our Microsoft Center of Excellence in AI and other Next Gen technologies to drive competencies across architecture technology leadership, value delivery tools and enablement. Cognizant and ServiceNow have announced a strategic partnership to accelerate the adoption of AI driven automation across industries. Our industry expertise and solutions integrated with ServiceNow's intelligent platform for end-to-end digital transformation will bring to market offerings that are designed to solve complex problems, automate operations and enhance employee as well as end-customer experiences through the use of AI.

Now a quick update on our three long-term performance objectives, becoming an employer of choice in our industry, accelerating revenue growth and enhancing operational discipline.

Let's start with the employer of choice. During the Q4 call, I talked about how tightly linked the client and employee experiences are. Given Cognizant the opportunity to create self-reinforcing cycles highly engaged talent with a passion for clients and the growth mindset attract the best clients. These clients in turn attract more of the best people keeping the flywheel turning faster.

Now two quarters later we are seeing the early benefits of this interdependent relationship between employees and clients. Our trailing 12 month voluntary attrition has been trending downwards for the last four quarters and just completed annual people engagements survey showed meaningfully improved engagement results. Among the many questions survey poses to associates we saw multipoint increases in three areas strongly correlated to engagement, would you recommend Cognizant as a great place to work, are you excited about Cognizant's future, and do you plan to be working at Cognizant two years from now.

On the client side, data from our project level clients feedback process through the first half of this year shows solid improvement over the previous period scores as well as best Net Promoter Scores since launching this program in 2021. I see us making real progress on creating a self-reinforcing cycle. From day one my commitment to our associates has been to cultivate a diverse organization that reflects the world which we operate. Our top priority has been to increase the diverse talent including at leadership levels. I'm delighted to say that in the past couple of months, we have appointed seven room into fill strategic roles of the Senior Vice President level. We are resolved to help all our associates bring their best selves to work and that means focusing on all aspects of the Cognizant experience. For example, we develop talent early through educational partnerships and apprenticeships, we invest heavily in upskilling and re-skilling current employees through our award-winning leadership and development ecosystem. We also employ innovative train to higher initiatives through the Cognizant skills accelerator aimed at people seeking to kick started technology carrier in the US and the Cognizant return -- Returnship program for technology professionals looking to restart their careers.

Our next priority is to accelerate revenue growth, which is the absolute focus of the entire management team, we are differentiating Cognizant and large deal opportunities by scaling our capabilities for cost takeout and optimization and focusing more on managed services and we continue to see a strong pipeline of opportunities to the cost and efficiency side. Given the groundswell of interest in Generative AI, the number of projects we have underway focused on Cognitive and Generative AI, we see this technology is generating a new wave of opportunities for us. Accordingly, we expect to invest approximately one billion dollars in our Generative AI capabilities over the next three years.

Our third long term priorities is to enhance our operational discipline, we are working to fortify our day-to day-out business execution and optimized cost of delivery by driving higher productivity powered by advances in tooling platforms and Automation Technologies and by improving our operational lever in areas like billable utilization. Our NextGen program, which we announced last quarter is on track, we are making progress on removing structural costs as we continue to simplify our operating model and realign our office space for the future of hybrid work.

On our last call, I talked about our plan to redistribute some of our development centers from India's largest cities to smaller cities. I am pleased to announce the first phase of the shift with the planned opening of two new centers, one in Bhubaneswar and the other in Indore, India, which offer great talent pools. Keep in mind the next generation -- NextGen program overriding aim is to generate savings to invest in our people and our growth. Jan will provide additional details in his remarks on the NextGen program.

In closing, I'm now seven months into my tenure as a CEO. I have met with more than 200 clients, dozens of our partners and through in-person and virtual town halls with most of our workforce. I've also made a point to continuously soliciting ideas and perspectives from our top 1,000 traders on strategic topics of importance to our future. Further company wide grassroots innovation movement launched earlier this year, BlueBolt, has led to such a surge of fresh ideas, with more than 32,000 generated so far. That it is now serving as our company's innovation engine. I'm convinced Cognizant Park to winning in the marketplace runs through fully embracing our heritage and DNA. We are leaning into our heritage at the intersection of industry and technology, our flexible client-centric operating model and distributed delivery network that brings together global and local capabilities.

All-in all, we have been making good progress, but recognize how much more work lies ahead. Continuing to build on our growth imperatives of the goal on which everyone in the company is focused. I especially want to express my heartfelt gratitude to all our associates for the extraordinary work they do each day.

Before I turn the call to Jan, I want to comment on its plans for the future. Jan, let me and the Board know of his intention to retire from Cognizant early next year. Jan has been a wonderful business partner to me and over the past three years he has played an instrumental role in designing and executing our strategic financial and operation operating plan, while developing superb talent with our finance organization. As we begin the search for the company's next CFO, I'm grateful for Jan's willingness to work closely with this eventual successor to ensure a smooth transition.

With that, I'll turn the call over to him to provide additional details on the quarter. Thank you.

[Jan Siegmund, CFO at Cognizant Technology Solutions]

Thank you, Ravi for the kind words. I am proud of what we've accomplished over the last three years, including our work together over the last seven months. I'm looking forward to continuing our partnership in the months ahead while the search for my successor is underway. Until then, it's business as usual. So with that, let's turn now to our second quarter results.

We delivered second quarter revenue at the high end of our guidance range and adjusted operating margin above expectations. We were pleased to deliver another strong quarter of bookings growth driven by larger and longer duration deals. Our pipeline for larger bookings also remains strong and it's up meaningfully year-over-year. Additionally, our NextGen program is on track and yielding early savings through our efforts to structurally reduce our cost base and fund investments for growth.

Moving on to the details of the quarter. Second quarter revenue was $4.9 billion, representing an increase of over 1% sequentially and a decline of 40 basis points year-over-year while roughly flat in constant currency. Year-over-year growth includes approximately 130 basis points of contribution from our recent acquisitions. Bookings growth in the quarter was again driven by a mix shift towards larger deals which had in-turn led to longer average duration of our bookings. We are pleased with our bookings performance in the quarter and our focus on building momentum in the quarters ahead. Consistent with the first quarter, we have continued to experience softness in smaller shorter duration contracts, which we attribute to a weaker discretionary spending. The translation of bookings to revenue growth is impacted by this change in deal mix as duration has increased the conversion to revenue will be longer, but helps to improve our forward visibility.

Moving on to segment results for the second quarter where all growth rates provided will be year-over-year in constant currency. Within Financial Services revenues declined 5% which reflects a softer overall demand environment and weak discretionary spending as we navigate this environment we have continued to strengthen our leadership team and sharpen our client engagement. While our pipeline for work-related to cost takeout and productivity led initiatives remains healthy and meaningfully higher than prior year period. We expect the uncertainties of the macro-environment to continue to impact the pace of client spending over the next several quarters.

Health Sciences revenue grew 2%, growth was again driven by strong demand from health-care clients for our integrated software solutions, which increased mid teens year-over-year. While the Life Sciences was down year-over-year and impacted by softer discretionary spending we experienced strong sequential growth driven by increased volumes with existing customers. Products and Resources revenue grew 4% reflecting the benefit from recently completed acquisitions, ramp of recent wins and demand from automotive and travel and hospitality clients. This was partially offset by softer discretionary spending across industries. Communications, Media and Technology revenue declined 40 basis points, reflecting softness among both technology and our communications and media clients. We expect growth to improve in Q3 as recent new bookings have already begun to ramp.

Continuing with year-over-year revenue growth in constant currency from a geographic perspective in Q2, North America revenue declined 2% reflecting softness within our financial services and CMT portfolio. This was partially offset by growth in Health Sciences and Products and Resources. Our growth -- our global growth markets or GGM, which includes all revenue outside North America grew approximately 5%. Growth was led by Europe, which grew 6% and included strong growth within CMT and Products and Resources, particularly within automotive.

Now moving on to margins. During the quarter, we incurred approximately $117 million cost related to our previously announced NextGen program. This negatively impacted our GAAP operating margin by approximately 240 basis points. Excluding this impact, adjusted operating margin was 14.2%. Operating margin included the negative impact from an increase in compensation cost, primarily the result of our two merit cycles since October 2022. This has impacted both gross margin and SG&A. This was partially offset by tailwinds from the depreciation of the Indian rupee and higher utilization. It also included an approximate 60 basis points benefit from an insurance recovery related to our previously disclosed 2020 cyber incident.

Our GAAP tax rate in the quarter was 21.1%, adjusted tax rate in the quarter was 21.7%, our effective tax rate included a discrete benefit from a settlement related to US Sate Income Taxes. Q2 diluted GAAP EPS was $0.91 and adjusted EPS was a $1.10.

Now turning to the balance sheet. We ended the quarter with cash and short-term investments of $2.1 billion or net cash of $1.4 billion. DSO of 75 days increased two days sequentially and one day year-over-year. Free cash flow in Q2 was a negative $32 million which reflects the previously disclosed impact from the change in the US law that we discussed earlier this year. This change negatively impacted Q2 free cash flow by approximately $420 million, which included tax payments of approximately $300 million related to 2022. This impact was largely in-line with our expectations and we continue to expect free cash flow to represent approximately 90% of net income this year.

During the quarter, we repurchased about three million shares for $200 million under our share repurchase program and returned $148 million to shareholders through our regular dividend. Year-to-date, we have repurchased approximately six million shares for about $400 million. At quarter end we had $2.4 billion remaining under our share repurchase authorization.

Turning to our forward outlook. For the third quarter, we expect revenue in the range of $4.89 billion to $4.94 billion representing a year-over-year increase of 0.6% to 1.6% or a decline of 50 basis points to an increase of 50 basis points in current constant currency. Our guidance assumes currency will have a positive impact of 110 basis points as well as an inorganic contribution of approximately 100 basis points. For the full year, we are reiterating our constant currency revenue growth guidance. Our range is slightly wider than our historical practice reflecting -- reflecting a heightened level of uncertainty and the recent pace of client decision-making.

But 2023, we expect revenue of $19.2 billion to $19.6 billion representing a decline of 0.9% to a growth of 1.1%, where a decline of 1% to growth of 1% in constant currency. Inorganic contribution is still expected to be approximately 100 basis points. The midpoint of our guidance suggests a softer fourth quarter relative to historic norms as we anticipate softer demand and more volatile discretionary spending patterns driven by macroeconomic uncertainty to continue throughout the end of the year.

As I mentioned earlier, the NextGen program is on track and our assumptions for cost savings are unchanged. However, we now expect to incur $350 million in total charges versus $400 million previously. This reflects our assumption for lower employee separation costs as a result of voluntary attrition trend. We now expect to incur approximately $250 million of NextGen costs in 2023, including approximately $100 million relating to employee severance and an unchanged $150 million related to net consolidation of office space.

Moving on to adjusted operating margin, our guidance is unchanged at 14.2% to 14.7%. Our margin outlook is impacted by several factors, but primarily the negative impact from recent merit cycles. It also reflects our assumption for NextGen savings and growth investments, including the dilutive early impact associate with large deal. We anticipate 2023 interest income of approximately $115 million versus $85 million previously reflecting the higher interest rate environment. Adjusted tax-rate is expected to be in the range of 23% to 24% versus 24% to 26% previously due to several discrete items in the first half of the year. In 2023, we continue to expect to return approximately $1.4 billion to shareholders through share repurchases and our regular quarterly dividend. We continue to expect full year average shares outstanding of approximately $506 million. This leads to our full year adjusted earnings per share guidance of $4.25 to $4.48 versus $4.11 to $4.34 cents previously.

With that, we will open the call for your questions.

Questions and Answers

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions].

Your first question comes from Ashwin Shirvaikar with Citi. Please go ahead.

[Ashwin Vassant Shirvaikar, MD & Lead Analyst at Cognizant Technology Solutions]

Thank you, and good execution in the quarter. Think of my first question is just with regards to the bookings, if you can provide maybe a little bit more color with -- to the -- with the method of booking, instead of -- of discussion with -- with client and maybe even [Indecipherable] versus ATV wing that [Indecipherable] can maybe talk about. Because I think the bigger issue here is not the bookings, but the conversions.

[Ravi Kumar Singisetti, CEO & Director at Cognizant Technology Solutions]

Thank you, Ashwin, this is Ravi here. We had another good quarter of bookings growth 17% worldwide. We are excited about -- I've spoken about this before, the two swim lanes on large deals, one is related to transformation, one is related to efficiencies, productivity, cost takeout. I think the -- It's fair to say that we are at this point of time the deals we are seeing in the market are over indexed to efficiency, cost takeout, consolidation kind of deals. We are excited about the fact that we are starting to win them and translate that into -- into revenues for the future and you also -- you would -- you would understand that these deals come with a gestation period which is longer than the smaller deals or the transformational deals because of the nature of them. We had five deals, more than $100 million TCV in the bookings. Two of them were renewals, one of them had renewals plus expansion, two of them are net-new so very healthy mix If I may of our bookings. The interesting part of doing large deals is, you build that rhythm so that even if the period is long enough as you keep building the rhythm, it will start to contribute to the next year in the next year. I wish I had a big pipe the year before, so that -- that would have contributed this year. So that's how you see it, I mean, you have to create that rhythm. Financial Services of course is less on small deals. I mean Financial Services and for that matter most of the sectors are muted on -- on discretionary spend on small deals. So that's the color of what we have seen. We continue to be excited about our ability to win, our ability to also build the organizational infrastructure to execute them, including the productivity gains, which we have -- which we have baked into those deals as we -- as we've -- as we factor them to win and execute. Jan, you want to add into gear.

[Jan Siegmund, CFO at Cognizant Technology Solutions]

Yeah. So Ashwin, to your question of translating of those bookings into revenue. I think intuitively you had already your finger on one of the components of the characteristics of our bookings this quarter and that's basically on average the duration of the deals that we signed up in the quarter has very meaningfully. lengthen basically. So we have been signing up for longer term deals on average with the higher deal value. We actually saw an absolute decline on smaller deals below $5 million in -- in our pipeline and that softness in discretionary spending and smaller type of deals was just up -- offset by the really excellent performance that we had on the larger deal volume and so that led to the 17% overall bookings growth, but with respect to translating into revenue the actual contribution of this bookings volume just to give you an example for the rest of year revenue is actually lower than it was in the comparable quarter. So we really have built a pipeline for longer type of revenue streams in the future, which obviously gives us good comfort into the quality of revenue stream going forward but it also explains why we're not seeing an immediate uptick on our revenues as these bookings will take time to translate into revenues.

[Ashwin Vassant Shirvaikar, MD & Lead Analyst at Cognizant Technology Solutions]

Thank you. That's very useful. Just second question on margins, pretty solid performance here and the question with regards to why you might not increase -- increase the full year range. I think Jan you answered part of that question in your prepared remarks when you said that there is a ramp cost. I just wanted to make sure, are there other things investments you're making from our R&D perspective perhaps into -- into Gen AI capabilities or things like that, investment in talent, other non-deal related factors, also included in your decision to leave margins unchanged.

[Jan Siegmund, CFO at Cognizant Technology Solutions]

I think the -- the starting point for the margin discussion is for the rest of the year the one thing that's different compared to prior period is that we won't have an October -- fourth quarter merit cycle in in our -- in this year because as you know we move forward our merit recycle into April. So that's going to be important as you build a quarterly model to consider. Secondly, I use this moment maybe to talk a little bit about the progress we've been making on our NexGen initiative. We have been recording severance cost in the quarter as well as costs related to the restructuring our real-estate portfolio and we're going to start seeing increased impact of the NextGen action relative to our people in the third and fourth quarter, which gives us basically the room to offset some of the pressures that we're seeing, namely some some -- some of expected pressure on the large deal rollout, and letting those larger deals season in and I think the general expectation of given the higher uncertainty in our business environment that will create -- I think could create some kind of unspecified yet to be seen pressures in our portfolio. We do have seen a number of clients kind of reacting to their own economic pressures reaching out to us, so we do see economic environment in which there is pressure and so I think it turns out that I think NextGen is well timed to help us through this, but not it would be too early to -- to celebrate basically full success of that, but what kind of really moving along in the execution of that program gave us confidence to just reaffirmed basically that operating margin outlook.

[Ashwin Vassant Shirvaikar, MD & Lead Analyst at Cognizant Technology Solutions]

Makes sense. Thank you both.

[Operator]

Next question, Lisa Ellis with MoffettNathanson. Please go-ahead.

[Lisa Ann Dejong Ellis, Partner & Senior Research Analyst at Cognizant Technology Solutions]

Hi, good afternoon, thanks for taking my question. Follow-up maybe first on the the Gen AI thread. I know, Ravi, you commented extensively on what that Cognizant, you're doing on Gen AI. Externally with partners and to help clients transform their businesses. Can you comment maybe a little bit more detail on how you are deploying Gen AI in generally at Cognizant and how you see it over time being able to transform your business operations and maybe give you more the competitive edge relative to peers. Thank you.

[Ravi Kumar Singisetti, CEO & Director at Cognizant Technology Solutions]

Thank you for that question. I did extensively speak about it because it is in the middle of everything we do in the company today. I see this as three -- the Gen AI embrace is going to be in three parts. The first part is how do we apply to business to run our business which is like eating our own dog food. The second is how do we make sure that we build our operating model, how would by Gen AI, how do we make the average developer productivity increase multifold, how do we -- how do we make sure that we build the platform to the instrumentation the technology that needed. I also call it the ability to arbitrage on technology. I mean over the last 40 or 50 years, tech services companies did labor arbitrage and capability arbitrage I would say. This is a time to actually do an arbitrage and technology, the more the instrumentation we create the more we can make cut model efficient enough with productivity gains. The question is how much of the productivity has to be shared with our clients, so that we stay competitive to win as well as keep the part of it for us for ourselves. So I'm not -- I'm not as concerned about a smart developer, I'm concerned about an average developer, how do they -- how do I lift the productivity, so that the productivity of the organization goes up. So that's my that's the second part of Gen AI, we have extensively worked on building those platforms and -- and we've also started to partner with -- with our clients with big tech companies, I would say our ability to train in fact we made an announcement with Google to train 25,000 people. We made great progress on it. We ran an initiative with Microsoft on -- on Gen AI and the co-pilot initiative.

Today along with the earnings we also timed a large language model in partnership with Google. I think that's a step up, I mean Generative AI can -- we could use the curation of data, the ability to use, use the model to contextualize to a business, I would say that's the last mile on Generative AI, but -- but leveraging our healthcare expertise, leveraging the assets we have in healthcare at the installed base we have in healthcare, we -- we potentially thought it's a -- it's a good bold move to actually build a large language model with Google.

Now the third part often may -- and before I go to the third part. Equally, we are starting to think about how do we actually build cognitive skills in the company, which are different to the past. I mean if Generative AI is going to coexist with humans in tech services, the reality is you did a very different cognitive diversity, we could potentially needs people who don't have the same background, because there are people who -- who have a same background engineered this platform to the people who come with a cognitive diversity of say Human Sciences can actually apply Generative AI to -- to a client landscapes. Now coming to the third part Generative AI story is how do we actually embrace with our clients. I've actually spoken about a couple of examples in my -- in my earnings script, which is starting with a client at financial services we have one on -- one on healthcare, all of those need frontend consultative skills to start with and back-end platforms to support it.

So our clients, we almost have 100 plus early engagements either on a proof-of-concept or on prototype model that we are experimenting on how do we -- how do we embrace Generative AI with our clients. These 100 early engagements are in different areas of the most I would say is in customer service and the most I would say is related to efficiency, productivity and better experience. So I'm excited about all of what we have done, we've also committed a billion dollars in the next three years to continue our investments in the space and we want to stay ahead of the curve and be the cutting edge partner, which our clients are looking for.

[Lisa Ann Dejong Ellis, Partner & Senior Research Analyst at Cognizant Technology Solutions]

Terrific, thank you. And then maybe for my question -- my follow-up, I guess, thinking about it as being sad about Jan's departure but Ravi maybe back and you know that you've been at Cognizant I guess coming up on a year or so, how are you thinking about kind of shaping the senior executive team at Cognizant. Are there some other senior leaders you would point to you that you're bringing in unless you are thinking about finding a replacement for Jan sir, what's the profile and folks that you're looking at and bringing in given the priority you highlighted about making that the Cognizant a top place an employer of choice. Thank you.

[Ravi Kumar Singisetti, CEO & Director at Cognizant Technology Solutions]

Lisa thank you for that question. Jan is going to be with us till we -- till we identify a new CFO and we'll have some overlap period -- period to it and he been kind enough to partner with me in the last seven months have not spent a year yet, but in the last seven months but I'm very hopeful as we as we finish the transition I will continue to have a support for the next few quarters. On leadership per se, we have a very healthy bench as I -- as I put my structure in place, I I'm excited about promoting and progressing people inside the company and giving them the opportunities. In fact we have a sizable sizable workforce, which has spent more than -- more than seven to eight years at Cognizant and I'm actually leading on to build that leadership from inside. We've also, I'm excited about Cognizant employees coming back to Cognizant, I mean, some of the leadership which left us in the last few years, which we believe are worthwhile and they call Cognizant their home, we have got them back. I have -- I have one leader who has come back to do my industry solutions group. I have one leader who has come back on my Infrastructure sales. I have -- I have also excited about other external hires we have done. We have hired a leader for our telecom business. So you know the -- the excitement of being a part of this journey allows me to straddle between the three 49:59 49:59 the three look for people inside the company who can be on that and I think we have a very good bench of people who have been in the company for a long time and I'm excited about -- about grooming them to the future leadership. The second is bringing some of the -- some of the -- some of the people who want to come back and we believe that they will add significant value to our future and of course, the external hiring we can do. In fact I hired a senior leader running my partner and alliances organization. So we have -- we have made some good progress on putting a leadership team to support us for the future.

[Operator]

Next question, Bryan Bergin with TD Cowen. Please go ahead.

[Bryan C. Bergin, MD & Analyst at Cognizant Technology Solutions]

Hi, good afternoon. Thank you. So, Ravi, I wanted to pop with -- with the demand question here. Just, did you get a sense of any real changes in demand for APIs over the past three months or would you say it's been largely consistent as it relates to the level of macro and spending uncertainty that you have been conveying here over the course of 2023 and I guess based on these current client conversations are you getting any sense of how long you anticipate discretionary spending to remain under pressure.

[Ravi Kumar Singisetti, CEO & Director at Cognizant Technology Solutions]

That's a great question actually. I mean the demand profile has certainly been very volatile, I mean, if you're capturing opportunities related to discretionary spend, capturing opportunities related to future transformation of enterprise landscapes. It's either -- either been uncertain or it's been kind of in some places it has -- it has fallen off and that's one of the reasons why Jan mentioned that smaller deals have -- we have lesser volume of smaller deals and which is true for what the market situation is, of course, financial services is the most impacted, but we do see that in other sectors as well. I equally believe it also opens up an opportunity in places to consolidate. It opens up an opportunity to proactively go to our clients who are paranoid about the costs and give them a value proposition which appeals to them where the total cost of -- the total cost of ownership goes down, but we've been in the process, it's a win-win value proposition. So I'm seeing more of those deals and I'm I'm doubling down on those deals and that is allowing me to keep the large deal pipeline -- in pipeline and good health and -- and it is an opportunity for us to even proactively go and -- and bid for some of the business. I mean one of the -- one of the deals we announced is the Gilead -- Gilead Sciences deal, which is an existing customer and we not only renewed the contract, but we actually go to expansion on it. The key -- the key point that is In the past those consolidation initiatives were run by a smaller productivity attached to technology and a bigger productivity attached to the efficiency of running your labor model Including offshoring, including a better pyramid, including a better roll ratio. I think we have a unique opportunity to switch that into a technology arbitrage we just spoke about which is using technology to get better productivity and then sharing the benefits with your clients and that can happen more with consolidation and I think we are trying to seize those opportunities. So I see like this two swim lanes, one which is kind of shrunk and another which is - which is continuing to be in good shape. The idea is to double down on the one which is -- which is continuing to have traction so that you could set-off against what you're losing on the other side, but discretionary spend is pretty weak that is something I should highlight.

[Bryan C. Bergin, MD & Analyst at Cognizant Technology Solutions]

Okay, okay, understood. I appreciate all the color and then just shifting to the workforce. So understanding headcount down quarter over quarter, a bit more I think in the second quarter, but you do have NextGen flowing through there. Just thinking forward in the second half, is it fair to assume this workforce level remained relatively flat-to-down just given the optimization and workforce and utilization.

[Ravi Kumar Singisetti, CEO & Director at Cognizant Technology Solutions]

The way I see it is there is opportunity for us to increase billable utilization and I think there is some more headroom for me to do that and as I continue to do that we all going to hit end of a [Indecipherable] increased utilization, that's when you will see a flip on how you need more headcount to increase billable -- billable headcount. So I've said this in my last quarter as well that there was cushion for us to increase utilization --billable utilization, that also contributed to our margin, margin trajectory a bit and I think we have some more -- some more headroom to increase our operational efficiency to run our business so that we can then get to a point where we then start to increase our net headcount, what also is important is, we also had a good trend of lower attrition, in fact, we ended up with 19.9 on a trailing 12 months which is three percentage points lower than last quarter and almost 11 percentage points lower than worldwide, and as we can keep that down it will also help us to keep the headcount up and then as we get to the other end of the NextGen cycle, it will kind of help. So I think we have some headroom for operational efficiency to conduct more billable work before we start to see headcount increase.

[Bryan C. Bergin, MD & Analyst at Cognizant Technology Solutions]

Understood. Thank you.

[Operator]

Next question. Rayna Kumar with UBS. Please go ahead.

[Rayna Kumar, Stock Analyst at Cognizant Technology Solutions]

Hi, good afternoon. My name is Karan Singhania [Indecipherable] for Rayna. I had a question on Gen AI. So the benefits of Gen AI have been widely discussed, but we haven't heard as much about the potential risks given that Gen AI can potentially improve the internal productivity, do you think as the rest a bit offline over the medium term from like short and contract lens or pricing pressures.

[Ravi Kumar Singisetti, CEO & Director at Cognizant Technology Solutions]

This industry has always had productivity tools. If you go back to the last 20 to 25 years productivity tools has been a way to differentiate and it -- it has very nicely got baked into our estimation model and then subsequently our execution model and in addition to labor arbitrage those productivity tools were the reason why our clients actually came to us because we had capability, we had -- we of course had capacity and we had productivity -- productivity tooling to help them to deliver projects. I would say the advent of automation technologies in the last -- I would -- I would believe five years or so Including the Robotic Process Automation has been a continual embedment into our services and I want to highlight that the universe we operate in is no longer tech spend of enterprises. The universe we operate in is operations spend of enterprises because technology is deeply embedded into operations. So these tools -- embedding these tools have been -- we have been on the industry as well as Cognizant has been very habituated to it, I mean, the ones who do it more are the ones who benefit out of it and they then bake it into the estimation models and the estimation models then allow you to stay more competitive than your -- than your peers to win business and then as you win the business, you then keep working on -- working on engineering, more so that you will stay ahead of the curve. Gen AI in a way has been a bigger inflection point, it's not different in that continuum but it's a much bigger inflection point, it is a complete game-changer. So my belief is and at least on behalf of Cognizant I would say, we want to embrace that as much to make it an opportunity for us for the future. If you don't embrace it it's going to become a threat for you, if you embrace it and create that -- that technology arbitrage I spoke about it will allow us to get our clients to partner with us. Even get our clients to partner with us at points where our -- our -- at points where they believe that they could insource that would potentially outsource because they see us as unique way to bring productivity to them. So I'm excited about the fact that this is going to be an opportunity and it's -- it's a -- it's a tectonic shift in the way our operating model would be.

[Operator]

Thank you. Next question, Jamie Friedman with FIG. Please go ahead.

[Jamie Friedman, Analyst at FIG Partners]

All right. I'm just curious as to in terms of the environment for the second half, what do you see as the factors that could put you say towards the higher or lower end of the guidance with furloughs contemplated potentially for the fourth quarter.

[Jan Siegmund, CFO at Cognizant Technology Solutions]

Yeah, we are well -- we tried to give guidance that reflects at the midpoint, our true expectations of what we achieve and also that's really our core belief the -- the elements that we are watching carefully in the next couple of quarters are the scaling of and the implementation of a couple of our large contracts that we signed. Those are complex deals that need to be rolled-out in partnership with our clients and that can be just the practicalities of a complex project can give delays or can give you positive news so that's something that I'm very carefully watching and certainly there could be a theoretical past that some of these projects scale a little faster than we -- than we anticipated and that would give us some upside, but also in the quarter we have observed this economic uncertainty hitting us and always get also some unanticipated bad news that happens, some deals get either canceled or down or less less visible on smaller deals that just dissipate into nothing. So, the general economic environment and climate of our clients and probably just gave you the assessment we kind of feel that -- that pressure will continue in the second quarter on discretionary spend that puts the pressure on it and so in a sense it's really a balanced outlook that I have, we are -- we are lucky that we are able to add the revenue stream of large deals into our revenue mix compared to our competitors in our market. We didn't have that last year and so this is a truly incremental opportunity for us but as everybody we are facing also with downward pressure in the rest of our portfolio, so I think the outlook that I gave gives is a fair and balanced view of the expectations that we have.

[Jamie Friedman, Analyst at FIG Partners]

Okay, thank you for that information, that's a great answer, just wondering could you double click on the assumptions by vertical. I realize you don't guide by vertical, but are at a higher level any of these contemplated to be above or below the corporate average.

[Jan Siegmund, CFO at Cognizant Technology Solutions]

Yeah I think the one that -- that we're trying to signal and my comments also is that we feel that for the next couple of quarters, we're going to continue to see the pressure in financial services performing below our own hopes basically by the reality of of the sector that has shown weakness really I think across in our industry. I don't anticipate that to change in and there is -- there is some strength as you saw in the quarter and our up strength on a relative basis and health-care and that reflects our strong market position that we have with our clients and healthcare. So those will be the two big factors that those trends are relatively consistent I think with what we have seen an in the first two quarters of the year.

[Jamie Friedman, Analyst at FIG Partners]

Thank you.

[Operator]

Next question Tandon Huang with JP Morgan. Please go ahead.

[Tandon Huang, Analyst at JP Morgan Cazenove]

Thanks so much for taking my questions and Jan congrats on the on the retirement news. I wanted to ask on the bookings success especially on the larger deals you've been talking about here what -- what changes are working is there a way to rank that for us because we get a lot of questions on pricing, of course, where this pricing rank amongst all the factors with you winning on the larger deals side and is there any impact here on gross margins for the second half to consider.

[Jan Siegmund, CFO at Cognizant Technology Solutions]

I think from my perspective pricing is definitely a very important factor of all of these deals or vast, vast majority of these deals is competitive and into just have to be in the range of expectations and meet the clients and -- and that is kind of table sticks. The commitment that the company brings to the table as we now compete for these large deals from Ravi at the top to the entire team from our markets to our integrated service lines is really different than I think has made it -- has made a difference in winning the deals, our clients have seen the commitments that we're making and the importance that we are giving to their specific deals, just by the -- I think pure exposure and access to our teams and then obviously the strength of our solutions that we have brought to the table, so it's that whole package that plays Into it. I would say these deals that you've seen here in the quarter and really starting in the year a little bit stronger focus on traditional deals focusing on cost takeout and some on consolidation are more classic deals, the bread-and-butter type deals, large in nature but that have made the portfolio of those wins, maybe Ravi, you add a little.

[Ravi Kumar Singisetti, CEO & Director at Cognizant Technology Solutions]

Yeah. So you don't -- large deals come with very different rhythm, right. We have made sure that we have an outreach now to our channels I mean partners, hyperscalers, deal advisories and a whole bunch of -- a whole bunch of players in the mix. The second is our ability to build institutional infrastructure because large deals don't just need the heavy lifting upstream they need the heavy lifting downstream as well so that you price them to win, but you've deliver them to margins. Our ability to put all of that together, I think, the company had it before I have kind of assembled it together and then we have strengthened it further and our entrepreneur spirit to go and tell our clients some provocative opportunities, which could create a win-win situation for our clients and us and therefore create value for the process has helped us to create a large deal mindset or a growth mindset and I'm very confident that -- that's now a part of the muscle of the company. So as we continue to invest on data infrastructure into the market as well as the mindset to be provocative with your clients and support that bold vision by building downstream -- downstream infrastructure, organizational infrastructure including the tooling on New Edge AI, AI led productivity and that's very important and deals could be traditional but the levers you press could be relatively new. I mean, the amount of automation infrastructure, the amount of AI infrastructure you could use to actually create straight-through processing and operations kind of work and create higher productivity for run maintain as well as build businesses for our clients, I think is -- it's a new lever and I think we -- I am confident that we are ahead of the curve. and therefore we are competitive in the market to win these deals.

[Jamie Friedman, Analyst at FIG Partners]

Terrific, thank you both for the thoughts.

[Operator]

This come to the end of the Q&A session, I would like to turn the call over to management for closing remarks.

[Tyler Scott, Vice President of Investor Relations at Cognizant Technology Solutions]

Great, thank you very much, Stacy, and thank you all for joining us tonight. We look forward to catching up with you on our next earnings call.

[Operator]

[Operator Closing Remarks].