Cognizant Technology Solutions Q1 2025 Earnings Report

Thank you, Tyler, and good afternoon, everyone. Thank you for joining the quarter one twenty twenty five earnings call. We started the year strong, delivering revenue growth and adjusted operating margin ahead of expectations. Our performance reflects the breadth and the strength of the portfolio we have built in recent years, along with continued sharp focus on our strategy and disciplined operational rigor. We are building a resilient and a durable company, one that thrives in both slow and high velocity markets, as we can pursue the right opportunities to our clients as they navigate complex and uncertain times.

Let me provide a brief summary of the key drivers of quarter one results. Then I will update you on the current operating environment and our strategic progress. First quarter revenue grew by 8.2% year over year in constant currency to $5,100,000,000 Growth was driven by our Belcan acquisition and organic growth in Health Sciences and Financial Services. Organically, constant currency revenue growth accelerated 4% year over year compared to 2% in the fourth quarter. Importantly, I am pleased to say our quarter one results puts us squarely in the winner's circle, an ambition we articulated last month at our Investor Day.

While we are encouraged by our progress, it is consistency and sustained momentum that will define winning performance. Looking more closely at our revenue, Health Sciences led the way, up over 11% year over year in constant currency. Growth was again broad based across payer, provider and life sciences as recently won large deals more than offset discretionary spending pressures. Our Financial Services segment grew for the third quarter, third straight quarter, up 6.5% year over year in constant currency, an acceleration from the fourth quarter. We saw healthy discretionary spending as clients continued to invest in cloud and data modernization and in building foundations for AI led innovation.

On a trailing twelve month basis, bookings grew 3% over the prior year, providing a healthy backlog to support our outlook for this year. We had four large deals in the first quarter, including a mega deal valued at more than $500,000,000 TCV from large deals was up mid single digits year over year. Adjusted Operating Margin of 15.5% improved by 40 basis points year over year, putting us on track to achieve our full year guidance of 20 to 40 basis points of expansion. Voluntary attrition ticked down 10 basis points and headcount remained nearly flat from last quarter. Adjusted EPS grew 10% year over year, our sixth consecutive quarter of year over year growth.

We are pleased with our strong first quarter performance, but as you know, the macro environment changed sharply in early April and continues to evolve in real time. As our clients navigate this period of elevated uncertainty, they are partnering with us to re baseline the cost of technology deployment, and we continue to see opportunities related to productivity, efficiency, and cost takeout. The capabilities we have built around productivity, including our AI platform investments, puts us in a strong position to win in this environment. In fact, several recent large deals were driven by clients' desires for efficiency and savings, and the pipeline for these opportunities remain strong. Additionally, the steps we have taken in recent years aimed at developing leadership and talent, strengthening our operational discipline, rebooting our innovation engine have reinvigorated the company, positioning us ahead of the curve, while building resilience and durability.

As we highlighted at our Investor Day, we are investing heavily in AI powered software led engineering at the intersection of digital and physical worlds, making products intelligent, connected and autonomous. We are now integrating all our existing expertise in embedded software and IoT with recently acquired capabilities from our M and A in autonomous technologies, Chip to Cloud Engineering and Belcan in the aerospace industry into a world class engineering capability for our clients. The future of IT services will be powered by the double engine transformation of AI technologies, both for hyper productivity and innovation led opportunities. Consistent with our heritage, we sense these opportunities early and we have been investing in building these capabilities, training, partnerships and platforms at a pace we believe has been ahead of our peers since 2023. The scaling laws of AI continue to accelerate computing efficiency, cost reductions and accessibility, unlocking use cases at a rapid pace and making the outputs more accurate and cheaper.

Looking across Cognizant, we now have approximately 1,400 early Gen AI engagements, compared to 1,200 at the end of the fourth quarter. As I have noted in prior discussions, we see the development of AI playing out in three distinct vectors. In the near term, we see vector one, which is focused on AI led productivity, as an opportunity for enterprises to address the estimated $2,000,000,000,000 of technical debt on their balance sheets. In quarter one, AI return code increased to more than 20% for us and is a pioneering opportunity for our developer communities. Sharing this AI led hyper productivity has been among the key differentiators for us in originating large deals led productivity and lowering technology deployment costs.

Vector two involves industrializing AI. We believe every company needs unique plumbing to successfully adopt AI by localizing, customizing and integrating AI into enterprise technology landscape. In addition to our efforts with hyper scaler partners like Microsoft, AWS and Google, and enterprise software providers like ServiceNow and Salesforce among others, in the first quarter we deepened our partnership with NVIDIA. Our work together will be aimed at accelerating the cross industry adoption of AI technology in five key areas: Enterprise AI agents, industry specific large language models, digital twins for smart manufacturing, foundational infrastructure for AI, and Cognizant's neuro AI platform for integration of NVIDIA AI technology and orchestration across the enterprise technology stack. And thirdly, we expect the evolving Vector3 opportunity of Identification will be the largest, as it has the potential to unlock many new labor pools and to create a significant multiplier effect on total addressable spend.

We are seeing early identification experiments from our clients in financial services, retail and healthcare. To illustrate an example, working with Google LLM models, our teams have developed more than 20 agentic solutions addressing many of healthcare's most pressing challenges. Our work touches efficiency, customer experience, clinical decisioning and regulation. It spans across prior authorization, appeals and grievances, member portals, fraud and auto adjudication among other areas. In this space, we have secured pilot engagements and are focusing on transitioning them to scaled deployments.

With the help of our AI labs, are significantly strengthening our neuro suite of platforms, which allows our clients to embrace AI on an accelerated path. As an example, just recently we achieved a groundbreaking milestone in LLM uncertainty estimation. This patent pending technology allows us to set uncertainty thresholds on LLM outputs to manage hallucinations, and on a case by case basis, fall back to rules based code for human intervention, making multi agent systems safer and more consistent. This work adds to our 50 plus existing patents in AI. Stepping back to look at Gen AI, over the long term, we see the market opportunity simultaneously powering both productivity and innovation, and the three AI vectors reinforcing one another.

As I mentioned at the start of my comments, winning requires consistency. Our consistent execution on our strategic priorities over the past two years has driven our pivot from stabilization to growth with our first quarter performance serving as a strong proof point. As we look ahead, we believe winning also demands industry depth, execution, excellence and an evolution of how we operate. As we discussed at our Investor Day, we have evolved our three strategic imperatives to the following amplifying talent, scaling innovation, and accelerating growth. Let me share some recent client wins and business developments within the context of our strategic imperatives.

First, with amplifying talent, we are strengthening our talent pipeline with skills needed for the AI era. As you heard us talk about during the Investor Day, we are upskilling our workforce at scale, leveraging AI to meet demand faster, and identifying talent pools to address new areas unlocked by AI. Last month, we announced plans to establish a 14 acre immersive learning center in Chennai, India, where we aim to train 100,000 individuals annually in advanced AI technologies. In India, we continue to expand into smaller cities, we expect to inaugurate the latest one, GiftCity, Ahmedabad shortly. And over the last eighteen months, our Synapse initiative has trained over 400,000 people across the world, putting us well on our way to a goal of training 1,000,000 individuals.

Second, we are scaling our innovation engine and expanding our domain expertise to drive transformation in key industries. For example, Blue Bolt, our flagship grassroots innovation initiative is celebrating its two year mark with 385,000 plus ideas generated to date, of which 69,000 have been implemented with our clients. During the quarter with ServiceNow, we introduced an AI powered solution tailored for mid market banks that uses Gen AI and smart automation cut manual work, speed up resolutions and boost customer satisfaction. Earlier this month, we were honored to receive several awards at Google Cloud Next twenty twenty five, including Data Analytics Global Partner of the Year for our work helping clients modernize the data ecosystems and Retail Industry Solutions Partner of the Year for our work developing a custom auto management system leveraging AI for a top North American retailer. And during the quarter, we were named to the Fortune's twenty twenty five list of America's most innovative companies for the third straight year.

Finally, to accelerate growth, we are unlocking new opportunities by pairing our talent initiatives with bold innovation, with a sharp focus on AI and embedded engineering. Let me share a few examples of our innovation in action. With pharmaceutical company, Boringa Ingelheim, we launched a cloud based system called OneMedicine platform aimed at streamlining drug development and accelerating the delivery of innovative therapies by replacing over 20 legacy systems. In Embedded Engineering, we teamed with OMRON, a Japanese electrical equipment manufacturer to engineer new products that integrate information technology and operation technology in manufacturing. We plan to take these solutions jointly to industrial and automotive clients with the goal of helping clients boost productivity, reduce operational losses and infuse AI led insights.

We also expanded our relationship with Manulife John Hancock Retirement. Our collaboration includes helping establish a new record keeping system and enhancing the digital ecosystem leveraging AI capabilities to simplify the retirement planning experience. Next, we continue to strengthen our Global Capability Centre or GCC strategy. We are undertaking more engagements to support clients on the GCC journey, establishing new centers and equipping them with strategic AI tooling and platforms needed to drive operational strength. Just two weeks ago, we announced a new GCC with Citizens Financial that will be located on our Hyderabad campus.

The GCC will serve as an innovation hub enhancing Citizens enterprise technology data and analytical capabilities. We will support the center with our neuro and flow source AI platforms delivering advanced services in cloud computing, data management and cyber security. As we discussed at our Investor Day, we view GCCs as a growth opportunity for both clients and ourselves. Our differentiators in the GCC space include deep domain expertise in the industries we serve, our technology prowess, and our capability strength in India and The United States. These partnerships reinforce our position as a trusted transformation partner and mark new growth opportunities.

Finally, Belcan opened an aerospace and defense hub in Toulouse to better support global demand and local OEMs. I am also thrilled that Belcan was recently named GE Aerospace Supplier of the Year. In closing, amidst near term uncertainty, we are proud of our strong all round performance and momentum. We believe our early bets on AI, combined with investments in practical tooling and distinctive strengths at the crossroads of design, technology led engineering and operations positions us to lead in today's dynamic market. Employee and client metrics remain at a historic high and our operational rigor, cost discipline and productivity first mindset are helping expand our profitability while fueling continued investments into our future.

We are confident the portfolio we have built will drive sustained progress towards the growth targets we outlined at the Investor Day, including top tier revenue growth, consistent margin expansion and EPS growth outpacing revenue growth. And now, I would like to turn the call over to Jatin.

Thank you, Tien Tsin. I'm gonna this is Ravi here. I'm gonna start and I'll jump in to chip in. Clearly, you know, the productivity gain of leveraging AI and sharing the benefits of lower cost of deployment, I think we seem to be leading that swim lane. Are not only winning in the marketplace, but we are also originating new deals.

And when we originate, we have the opportunity to sole source it. These are deals where you could consolidate, if you have the wallet share and the trusted, trust of our clients. So that is going well, that's what is making a large deals stand out. Now in specific industries like financial services, there is also discretionary growth work coming back. I mean, is, it was expected that financial services will go through a level of deregulation, it will pull back discretionary, I mean, it will rather accelerate discretionary.

So that is coming back. I mean, look at where we are at financial services, quarter one of last year, 2024, we were minus 6.5% Y on Y, quarter one this year, all organic, we had 6.5% Y on Y positive. So I would say the growth vector is already starting to apply in financial services and it is slowly inching back more innovation led projects. The 1,400 AI projects I spoke about, those are starting to see, especially in financial services, we're starting to see more innovation led growth led. Healthcare in commercial healthcare, would say commercial healthcare, large enterprises, we are seeing a lot of innovation led work.

And finally, this quarter we announced a mega deal and we're very happy about the mega deal we announced. In fact, the TCV of all our large deals is higher than the TCV we had last year. And we have a couple of mega deals in the pipeline in quarter two. I'm very hopeful if we happen to cross the finishing line on that, it will help us on our growth journey. And these are mega deals.

I mean, I'm not talking about large deals, 500,000,000 and above. So we're kind of starting to feel excited about a nice pipeline of mega deals lining up.

And if I

may just add one other differentiator, the AI productivity, we are the only one, I mean, in my peer group, which has actually called it out and we are continuing to monitor it inside and we are bold enough to tell our clients that this is productivity we can benefit with with our client work. So, I mean, that's a you know, that's an evolving flywheel, which we believe we are fiercely competitive in the market.

Yeah. So to tell you, it's a it's an interesting question. Look, We went from 82% utilization last year, same quarter, to 85% utilization. So it's a huge lift. Now when you do good fulfillment, you also need to build capacity for the future.

This year, we are gonna hire freshers a lot more because we wanna size a pyramid. And when you get managed services work, our fixed price work over the last two years has gone up, managed services work has gone up, so we can at least have pyramid. But it also comes equally with overhead of carrying higher bench at a lower cost and actually offshore. So I'm a big fan of intertwining this with AI productivity, utilization, and right sizing the pyramid. So that's the next big step we are gonna take.

AI productivity utilization, I mean, of of experienced talent, you know, there is a little bit of room, but once you feed freshers in, you need you need some room for utilization to tick up. So we're kind of playing on all three and, you know, we're add freshers into the mix this year. So that's broadly how we are approaching, you know, our cost of human capital.

So a large part of if you have seen the industry vertical split, a large part of our organic growth has actually come from healthcare, and healthcare has been comprehensive all the way from provider to life sciences and financial services, which has gone through, I mean, both these sectors have gone through significant upside for us and we've been look at our deals in the last two years, we did $900,002,000 deals last year. We did $1,700,000,000 deals the year before. And the third year, at the end of the second year and the start of the third year are the ones where you start to see the ramp in a big way. So certainly that's where we are seeing traction. This is also a quarter where all three geographies have five cylinders.

I mean, we've had some great traction in Europe. We've had if you remember the deal we did with Telstra in Australia, that has had the traction that is already into the second year. So large deals and discretionary small deals coming back in financial services. I would say I would put these two as the mix. In fact, this quarter, one of the things we don't tell the street, we kind of monitor internally is ACV.

Our ACV on a year on year basis has gone up as well. The size of the large deals have gone up and the ACV has gone up year over year. So that is, I mean, that's an important metric. I mean, book to bill is at 1.3 trailing twelve months, but our ACV has gone up and our net new proportion on our large deals has also gone up this this quarter, which which kind of gives us incremental push. So that's that's how I've that's how we're seeing it.

So it's a, you know, the two big industries for us are actually fighting cylinders, which is helping us helping us in the process, and and these two sectors in in some ways also don't have an indirect impact related to the geopolitical, mean related to the larger economic situation around tariffs and everything else.

Yeah. We we see stability on on attrition. As as you can see, it's been it's actually down slightly, and and we don't see any undue pressure of attrition and therefore either impact on wage, which can raise up any impact on our ability to deliver our projects to our customers. I think we are in a good spot, in a healthy spot, and between quarter four and quarter one there is a continued stability on that.

Sure, Jim. So on the commentary on the way we look at the guidance for the year is really at the lower end the environment has to further worsen for that to come true at the lower end. The midpoint of the guidance really factors the impact that we have seen so far, which is offset by the pipeline that we see and which is offset by the deal wins that we have had in quarter one. And at the higher end of the guidance, you know, we are assuming that the environment has to become better from where we are in quarter three and quarter four. So that's the sort of spectrum of possibilities that we see for the rest of the year.

We do feel good for what we have as our backlog as Ravi also spoke about it. Couple of points there is that for on a trailing twelve month basis, our book to bill ratio is 1.3 X, which is quite healthy. We have seen a higher net new or expansion deals, more than 50% of total bookings that we have seen in quarter one, which is another healthy aspect of the bookings. So that provides the coverage that we see for the rest of the year as we anchor ourselves around the midpoint of the guidance. Your question around if I cover the gross margin question, I think our context of that comment was more around the fact that the pricing ability to get a superior pricing in an environment like this, as you can imagine, is low.

And therefore, it's really the cost discipline that will drive the outcomes on the operating margin for the rest of the year. Ravi spoke about earlier our on gross margin, there are clearly three levers. One is the utilization. Second is is the productivity that we can drive through Gen AI. And third is the pyramid correction through infusion of of of, you know, recent college graduates into into into the into the workforce.

And this is this will continue to be the driver for for us to improve the gross margin. Of course, environment like this also offers opportunity for you to correct your look at all the cost aspects which go in your G and A line and continue to find opportunities there. So that also remains as an option that we'll continue to pursue. So that's the context of what we have baked in for our operating margin guidance for 2025.

Thank you.

Good question. In fact, this is an interesting one. Every time a client has come to me saying the environment is uncertain, I actually felt there'll be more paranoia to close cost takeout deals. So there has been in some pockets, I mean, you know, the mega deals that I mentioned I'm chasing, they were were in this quarter. They rolled over to the next quarter.

But the paranoia about cost and productivity, the timing can never be better than now. I mean, when you're in a slowdown, there is one point one way to look at cost takeout deals. When there is a, you know, high velocity market is another way to look at it. This is not a slow or a high market. This is an uncertain market.

So when in an uncertain market, you really want to get the best value. In a slow market, you might still not take a risk, but in an uncertain market, you want to get the best value. So I think there could be some movement lumpiness of these deals, but when can be a better time than a than an uncertain complex environment to do cost takeout, and cost takeout not through labor, cost takeout through technology. I mean the labor cycles have gone through multiple times, there's very little left on the runway, it's actually technology led arbitrage, therefore I do believe this rebellion will be active till, I mean this is a double engine transformation, the AITs. The moment the markets take a little high velocity, we can swing to innovation.

I mean, that's what's happening in financial services today. Financial services is a little, know, it's a little running on its own because they've had a lull for two years of spend and now that that spend is coming back and that spend is also getting the sentiment about deregulation, which is helping us. So I would say in a very optimistic way that, I mean, there cannot be a better time to win in terms and cost takeout deals is, I mean, time for them is now when the when the market is uncertain. Will there be some lumpiness and deals moving between quarters? I think it would be, but it is gonna be a rebaselining of the cost of technology deployment, and we wanna lead the way.

Well, it's a it's a it's a intense intensity is certainly there on the pricing for large deals, but it is more led by your ability to reduce the total cost of ownership of owning owning a project or owning a technology for customer as against negotiations around outright rate cards. So so it's the better you are at Vector1 capabilities of deploying GenAI into your solution and overall architecture of the deal, superior your pricing would be. And that's what is playing out in the marketplace. And as you can imagine, there are differing scales of technologies of capabilities out there and we believe that we do have an early mover advantage there as Ravi summarized in the beginning of the call.