Cognizant Technology Solutions Corporation (CTSH) Earnings Call Transcript & Summary

Yes.

I know the attrition has been an issue for Cognizant. It's improved. In the first quarter, we saw some nice improvement. It sounds like you expect it might be able -- tick up a little bit in the second quarter and then trail off from there. How much visibility do you have in that, Ravi? I know it's -- the culture drives a lot of that and leadership within India. You put in some wage increases in the past. But do you feel like you're in a good trajectory to sort of manage this labor situation?

I think we'll not be an outlier. We will gradually get to a point where we are -- remember, I'm carrying the load of my previous quarters. So when you do a trailing 12 months, you're always going to have quarters behind, which were heavy. I'm very encouraged by what's happened in quarter 1. I'm excited about everything else we're doing in the company, including the pay hike we did in April. This was the third pay hike in the last 18 months we've actually done. We did one in October. We did one in April. I'm excited about the investments we're making on learning infrastructure, making our global mobility more predictable. Cognizant is a phenomenal platform for global mobility for our associates. How do I make it? We have actually created some extraordinary energy in India. I've personally been there, and we are now adding leadership there. With the NextGen program, which we just launched, we are now going to have infrastructure in Tier 2 cities in India. I don't know whether you know this, 35% to 40% of the Indian IT workforce, not just Cognizant, is actually in Tier 2 cities. They haven't come back to Tier 1 cities. It's at the bottom of the pyramid. The social fabric of India is all these employees, during the pandemic, went and stayed with their families or parents, I would say, and they never come back. So we are recalibrating our real estate, getting some savings in, but equally repurposing some of it to Tier 2 cities. So that will give me a chance to build social capital. We're now creating an internal marketplace so that you could traverse that value chain of capability inside the company and don't need to go out. So there are a ton of things we have kickstarted to make this a vibrant place. So not only is it compensation, but equally all the other things, which we can. I'm excited about the purpose of Cognizant. In fact, if you go to any center in India, just the outreach program into the communities is a stickiness -- at least I didn't see it in the past. It's a stickiness for my associates. We're going to energize that program. So there's quite a bit happening on the employee side. And it's as much a priority for me as much as clients are. I've said this, this industry is all about creating self-reinforcing virtuous cycles between employees and clients. If you get that right, it's an easy industry. If you don't get that right, it's very hard because these clients will walk away and employees will walk away. I think that reinforcing -- that self-reinforcing virtuous cycle is something I'm always wanting a pulse on. If my employees stay with me, my clients will stay with me. If my clients stay with me, my employees will stay with me.

It's a people-based business.

100%.

And so very similar to what we do in our business, right? The people and the satisfaction part is very high. So just one follow-up to this, Ravi. I know you had talk about this with Cognizant. With the heavy attrition, attacking that with a lot of lower and/or new joiners is a way to approach that. But the challenge of that is, as you're going with clients, going back to clients, your ability to reprice against higher inflation is challenged if you're moving down the pyramid. So I'm curious, are we beyond that at this point in terms of addressing quality of work? I think Tier 2, you'll get better retention. I agree with all of that. But I'm just curious from a client reaction standpoint, the need to re-skill, the ability to reprice, are you in a good place with that today?

The least resistance path in this industry is to get the most experienced person on the project. Managers love it, clients love it, everybody loves it.

It doesn't scale, though.

So if you have short-fuse demand and you have smaller projects, the ability to put a pyramid is going to be harder. So in some ways, the odds of having more Gen Zs or freshers or school graduates was harder because Cognizant didn't do large deals in the last few years. Where you can actually put the pyramid is on large deals. Because on large deals, you have big teams. On big teams, you have -- it comes in managed services. In managed services, you have control of what you can do and then you put the pyramid in, and then you share the benefits of the pyramid with your clients. And therefore, it's a win-win. It's a win-win for us, win-win for the clients, win-win for the employees. Because you build heritage of the company at the bottom because that's how Cognizant built heritage. Cognizant heritage was built from schools and colleges across the world, not just in India. It had the right confluence of local talent and global talent in India. And now I would say, local, global and near-shoring talent in the centers. So I think it's now going to be easier because you're going to have large deals, which is my focus. And you're going to have the pyramid -- the chance that the pyramid will fit in well is higher for a large deal versus a smaller set of deals. So I think I have a better shot. The odds of crossing the bridge on that is much higher now. And if I do that well, I think it could be good for our margins, good for capability building, good for heritage, good for our clients. So I kind of think the quality of demand is equally important to bring the school graduates into the mix and do it in a sizable way.

Okay. So thinking about how it translates into some of the numbers, you mentioned margin just now. So you did lay out the 20 to 40 basis points for next year. Talk to -- I know you put a lot of thought into arriving at the 20 to 40 basis points. What are the main drivers that gives you that confidence that, that's the right level? Why not more? Why not less?

The fact that I only said that for 2014 -- I'm sorry, 2024 is that it's almost 8 or 9 months before I'm giving a heads up on it. Now here is what I'm doing on the NextGen program. We mentioned 3,500 people. It's 1% of my workforce. It is non-billable roles. So it's a structural shift. I'm reshoring a part of it, and I'm eliminating overlaps and I'm simplifying business operations. So that cost is not going to -- hopefully not going to come back, because it's a structural shift with my cost. On real estate, we quantified the number. I didn't quantify it on the people because it's -- any sell-side analyst will get the model. On the real estate, it's hard, and therefore, I quantified it. We are letting go 80,000 seats. We are modernizing our offices. The thesis is -- the hypothesis is not everybody is going to come back to physical work, and that's a reality. We're going to make flexibility an important part of our value proposition for employees. So I can knock down 80,000 seats, repurpose a part of it to Tier 2 cities and still pushing $100 million of structural savings. Again, structural because it's a permanent shift into my bottom line. So effectively, I have a kitty and I've given a moderate pushback into margins for 2024. And the balance, I want to use it for my growth. Now how much would I need? I really don't know if it is -- if the economy remains this way, I would use part of it for my deals and cost takeout where I would need it on the upfront. If the economy improves, I may not need that much. So I should have the flexibility to play with it so that I could optimize growth. That's how I saw it. So a part of it, I am contributing to the margins, a part of it, I'm keeping it for investing into growth and investing into the future.

Yes. No, it's very clear. It does feel like it affords you a lot of flexibility, Ravi. I 100% agree with that. So when we pulled investors -- sticking with this margin-cost productivity people side, when I pulled investors to ask, what should I be asking, Ravi? Of course, there's questions about large deals, bookings and people and margins and everything we just talked about. Generative AI, of course, was the top subject I've heard Cognizant mentioned in a lot of podcasts as well as a company to watch with what they do and how they embrace, generative AI. So can you comment on that? There's so many things to talk about it, whether it be improving productivity. I know there's a lot of backlog to work as well. So -- but longer term, both from a productivity standpoint and how it might impact Cognizant, but also from a revenue perspective and how it might impact use cases on scope of work for your clients? What do you see as CEO, how do you embrace it?

Yes. So everybody is talking about it.

Five minutes to talk about generative AI. How you like...

Everybody is talking about it. So I think it is an inflection point. We never spoke about it in 2022. We spoke about Web 3.0 technologies, and nobody is talking about the 3.0. They're all talking about generative AI now. It was an inflection point. I'll keep it very short. I think it could potentially be a threat. It could potentially be a huge opportunity. It has 2 swim lanes. You could apply it to ourselves. And when we apply to ourselves, the most work, which is done at the bottom of the pyramid, might go away, if we really look at it. I think the smart engineers in any firm will -- any which ways they do this. They don't need the instrumentation of the tooling of a company. They will figure it out and they will do it themselves. This game is all about how do I create the instrumentation, the workbenches embedded into the rhythms of work, so that an average engineer at Cognizant can leverage it and become more productive. And let me make a statement. I might overstate it.

Please.

A 10x engineer was a myth. We found occasionally a 10x engineer. We loved -- we aspire that everybody is a 10x engineer. It didn't happen. A 100x AI-enabled engineer is close to reality. Now again, the good ones will get it. My desire is an average engineer in Cognizant uses it and uplifts it. If everybody does it, there is a short runway where there will be an arbitrage. Everybody cannot -- if everybody does it, you have to stay ahead of the curve. In fact, a lot of my clients actually told me one of the biggest difference for Cognizant was, our associates always walk the corridors and told them about new things coming and how it will apply to their industry. Most of my clients told me that. They want me to keep reinforcing that, which is our strength. Now coming back to what it does to our employees. So we launched a Neuro platform, and we want all our employees to embrace it. The Two-In-a-Box model, which we have, we hope every client -- the delivery partner takes it and leverages that. What it does to our clients is what enterprise software did 30 or 40 years ago. When enterprise software came, the same question was asked, what does the system integrator do? It's out-of-the-box functionality. But a dollar of enterprise software sold, there are $3 of system integration to be made today. What does this do? It gives us an opportunity to create the use cases. There are millions of use cases being created now. It will sell down to a smaller number. It will help us to curate those large data models with customized data sets, curate those experiences so that we can make it production-grade, and finally, make them ethically responsible so that it can amplify a human at work or replace a human at work. So I actually think we have a bigger role to play as a system integrator to apply it and deploy it to businesses because these large data models, which are available are not production-grade. They are actually available to be leveraged and exploited. And the opportunity to exploit actually is with us. Even if the hyperscalers do it, the hyperscalers on their own will not do the heavy lift. They have that instrumentation, the AI algorithms on their stack, but they will expect a system integrator or the retained organizations of our clients to exploit it. I think we have a unique opportunity to do that. So I believe, I will continue to believe it's a bigger opportunity than a threat, and any revolution has only created jobs of the future and taken over jobs of the past. The smarter ones will pivot to the jobs of the future.

Yes. No. I agree. And I remember with ERP, cloud, SaaS, more recently, RPA, there's a lot of threats, but they all turned out to be big opportunities. So it feels like that's the case here. So I'll leave you with this, and I wish we had more time. We're crazy out of time already. Beyond the cycle, and we just talked about generative AI, do you feel like there's enough secular opportunity for Cognizant in the industry from an IT services perspective? Thinking about generative AI, where we are with cloud and data security, you pick it, engineering services with Softvision, I know you have a play there as well. So looking beyond the cycle, do you feel like there's more opportunity ahead from a secular perspective?

The fact that tech services was used as an enabler in the last 50 years, to globalize enterprises, when enterprises went global, they use technology to enable it and to create efficiencies and scale. I think, we're going to switch to a second swim lane where technology is going to be deeply embedded into products and services in every industry. Every industry is going to be a tech industry. That transition we can do the heavy lift with good engineering capability. If I go to a car company, I could be building CRM supply chain, HR systems, now have an opportunity to be a part of the connected car initiative, just as an example. So it's a secular shift that the tech spend is not to enable a business but be the business. In fact, some industries will transition from one to the other using technology as a lever, right? A retail company, which has a network more than a healthcare company, could be closer to you than your primary healthcare center, can get into healthcare with technology as a platform. I'm just giving you an example. So technologies -- the embrace of technology into core products and services, tech providers can use classical technologies to enable it, use deep technologies to embed themselves into products and services. That's a secular trend. The second is, I'm going to say this provocatively, if technology is so core to businesses, there is a unique opportunity to create muscle within those companies, leave alone outsourcing it. And we could enable -- build that maturity. There is a NASSCOM report, NASSCOM is the IT Services India body, that in the next 3 years, 300 global capability centers are going to be established in India. So with our flexibility, our operating model, which is very flexible, our operating model, which is very client-centric, and we think we are more suited for co-creation. We could help companies build their own muscle counterintuitively to support them on the journey of being those tech companies. I think that's a secular trend. Embedding technology into core products, building the muscle in those companies means I don't just lend my human capital, I lend the value chain of capability building to those companies. That's a trend, I think I'm very excited about because I think we are suited -- the culture suits us to seize that opportunity.

Good. Great. Well, I'm at end of the time. I'm getting the end of time here. We're 3 minutes over, actually, so forgive me. So yes, hopefully, Ravi can stick around if there are any questions. Enjoy the conversation. Thank you for being here.

Thank you so much. Thank you.