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

Tech Conference. And I'm Bryan Keane. I cover the IT Services sector here. We're excited to have Cognizant here, and we have Head of Americas, Surya Gummadi, who's going to help us understand what's happening in the IT services market and especially with Cognizant. So with that, Surya, thanks for being here.

Thank you. Thank you for having me here.

I guess I wanted to just kick off and think about the bigger landscape, and we're obviously in dynamic times here. So maybe you could help us characterize the IT services market from your point in the Americas, looking back the last couple of years and getting to today and how you see it going forward?

Yes. So good afternoon, everyone. The AI has disrupted almost every single value chain, every single market across the planet in the last 2 years or so. So we have seen the evolution of AI across the sectors. And currently, at Cognizant, we have characterized the AI market opportunity in three steps or 3 Vectors as we call it. The first step, the clients are leveraging AI to unlock productivity in their value chains or in their estate. And the next step after they do that is to infuse AI across their tech stack to reduce their tech debt and to start agentifying. The third step in the process is deploying agents and agentifying the value chain. As we see right now, the demand is more in the Vector 1, which is almost every single client is focused on deploying AI to unlock productivity, to drive efficiencies and to drive cost optimization. As a result, there are a number of cost optimization players or there are many cost optimization deals in the market today. But we expect this to evolve into Vector 2, which is industrialization of AI, which is infusing AI across the value chain as we progress over the next few quarters and then eventually into the agentification. And we strongly believe that the market opportunity in Vector 2, which is industrializing AI and agentification is far more than what we are seeing right now in the Vector 1. That's how I would characterize the broad market today that we are in.

Yes. So I guess before we jump to my next question, when do we get to more scale in AI where we see it visibly in the revenues or the revenue growth? Is that going to be a couple of years before we get to Vector 2 in size? Or can Vector 1 be enough?

No, no, no. Vector 1 is already in play. Almost every single client that we work with have deployed AI in some shape or the form to unlock productivity, to drive efficiencies, to drive cost optimization. Now we are already beginning to see the Vector 2 opportunities, which is industrializing AI, infusing AI across the tech stack. Let me break that down -- break that Vector 2 into two or three parts. The first step in the Vector 2 is the data layer, where we will have to get the data layer ready for the AI deployment and consumption, which includes getting the LLMs, SLMs, [indiscernible] and stuff like that. After you do that, the next steps will be the compute layer. You have to modernize your cloud and the infrastructure and things like that. Then comes the digital engineering layer, which is building the native AI applications. So right now, clients are beginning to work across all three: Data, the infrastructure and cloud, that's cloud and the digital engineering. And even at Cognizant, if you look at our internal service lines, the service lines that support data, infrastructure and cloud and digital engineering are growing faster than company average, which shows that Vector 2 opportunities are beginning to emerge.

Obviously, with Ravi's tenure and large deals has been a key focus. And I think you run a lot of the large deal stuff. I think large deals were up 29% -- in deals in 2024, and that was up from '17. The first half of '25, though, I have large deals at 10% versus 13% in the first half '24. So has some momentum stalled in the large deal based on what you're seeing in the Americas?

No, not really. So first of all, large deals has been focus area for Cognizant for the last 3 years. We have overall large deal engine. We have built surround around it. We have built a support system around it. When we also have strengthened our execution muscle for the large deals. So historically, over the last few quarters, we have been winning 4 to 6 large deals each quarter consistently. And sometimes, these large deals that tend to get lumpy. So for example, in the last quarter, we announced $2 billion deals in the same quarter. It just so happened that sales cycles panned out that way. So it might come across as if it is a bit lumpy, a few quarters, because that's the nature of the large deals. But we are very confident -- and we are of our pipeline in the large deals. And as I said, we have been winning 4 to 6 large deals consistently each quarter, these are $100 million-plus deals. And we will continue to focus on structure and go after mega deals too. When I say mega deals, these are $500 million-plus deals or $1 billion plus deals.

And then we did see a bounce back in small deals in the second quarter. Can you just talk about are we seeing that pickup in discretionary work in the Americas? Or is that too early?

No, it is both. There are certain sectors where we are definitely seeing a pickup in the discretionary spend in large deals and case in point being the Financial Services and the Insurance segment, where we are seeing green shoots or the demand pickup in the small projects and the discretionary spend. And -- but when we look at other markets, I mean, for example, in the healthcare. Healthcare continues to be a little cautious, because it's a tale of two cities across payers, providers and biopharma medical devices. Payers and providers are cautious, watching the government spending dynamic across Medicare and Medicaid sectors. And whereas life sciences companies are a little more cautious on the broader trade and tariff situation. As a result, spending in health care is -- still continues to remain cautious. And in the Products and Resources, which includes retail, manufacturing, logistics, utilities and not utilities, the hospitality segments, they are more impacted by the trade anxiety. They have more anxiety related to the macroeconomic dynamics. So there, we see a bit of congestion in the small deals and spend. And there is no significant departure in the discretionary spend in Communications and Media and Tech to where we were 1 or 2 quarters ago. So it's not uniform across. There are certain sectors like Financial Services and Insurance where we are seeing the uptick. There are certain sectors that remain cautious. There are certain sectors that are still congested. And it's kind of it's all over the place there.

Yes. So I guess taking those two sectors, the Healthcare sector and Financial Services, both have kind of reversed their growth rates I guess, why is that? And then what's the outlook for growth in those Financial Services and Healthcare in particular?

For Cognizant you mean?

Yes, for you guys in Americas?

Yes. Exactly. I mean, both Financial Services and Healthcare have been our largest businesses for many years. And let's talk about Financial Services. This has been our largest business unit for many years. And over the past several years, I think we had -- we did not perform that well in Financial Services for two reasons. One, is the market -- there are macroeconomic issues or the macro market issues. And second was we had our own Cognizant-centric structural issues when it came to Financial Services. So over the last 2 or 3 years, we have addressed our Cognizant-inherent structural issues. So when I say that, so we have brought in the focus at subsegment level in Financial Services. Earlier Financial Services was all lumped as one unit. So we have broken that down into several units to bring in the subsegment-wise focus. We have infused the fresh leadership team into the mix. And we have aligned well with the market. So we have aligned well. Our strategy in Financial Services is now well aligned with the market in terms of solutions that we offer and things like that. As a result of all of this, we saw a good rebound in Financial Services segment after many years. Actually, for the -- if I'm not wrong, for the last 4 consecutive quarters, we have delivered year-on-year growth in Financial Services segment. And we feel good about it now that, as I said, since we feel we are seeing green shoots and discretionary spend coming back in Financial Services, I feel good about that side. Healthcare has been our strongest business, if I say, for a long time because we serve the entire continuum in Healthcare. We serve the entire nine-yards. We serve payers, we serve providers, we serve biopharma, medical devices. It's just not that. We also have our own platforms for the Healthcare market, the TriZetto suite of platforms. And it's a privilege and honor for me to say that TriZetto platforms cover 2/3 of U.S. insured population across 2/3 of U.S. roughly 2/3 of U.S. insured population. So that's a huge responsibility on us to improve the health of communities that we live in. So with this kind of deep and domain expertise in health care, we -- our solutions and our go-to-market offerings in Healthcare continue to remain strong. So I think we're going to build on our platform strength. We are expanding our platforms into our adjacencies into provider market in the health care space. So we continue to feel strong and good about our Healthcare business.

Got it. Looking back at the March Analyst Day, I know you highlighted five areas of focus for the Americas portfolio. Two of those areas, I wanted to ask about were the under-penetrated markets and then industry-leading platforms. Can you just help us understand those two levers and how there might be some upside potential?

Yes, sure. Cognizant operates in the form of four broader markets, which is Financial Services, Health, Communications, Media and Tech and Products and Resources, which includes retail, manufacturing and things like that. Underneath these broad market segments, there are certain subsegments that Cognizant have participated in or Cognizant is light. We did not -- we are under-penetrated. Some of those examples of under-penetrated segments are like Healthcare provider. While we are extremely strong and deep in Healthcare, we are little -- relatively light in provider sector, which is under-penetrated for us. Same thing with Communications and Media. While we are present, but we are not present to the extent that we want to. And there are certain market segments like aerospace and defense, oil gas, where Cognizant never participated in that market in the past. So as a strategy earlier this year, we have identified some of the subsegments within these broad markets where we would want to double down and where we would want to focus more on. So we have executed on provider and Communications and Media and Tech. So we have added more talent. We have strengthened our offerings in that segment. We have enhanced our go-to-market teams in those segments. So we are executing well on the plan that we had for both provider and Communications and Media. On Aerospace and Defense, last year, as you all know, we have made an acquisition of Belcan which directly provides us access to aerospace and defense market. It not only provides access to aerospace and defense market. It also helps us strengthen our engineering muscle. So we plan to address. So we will continue to address our under-penetrated market segments and market segments where we do not have presence today either through building solutions in-house or looking at acquisition opportunities or both.

Got it. Got it. I wanted to ask about the platform piece of that strategy, and how you guys are going to price that and if you're seeing any traction there?

Right. I mean as we spoke about our health care platforms, in the TriZetto suite. So we are trying to double down on our platform strategy in the health care market because we have the relevant platforms there. We are trying to expand into adjacent markets, leveraging our platforms. We're trying to expand TriZetto into health care provider. And we are also trying to expand TriZetto considering expanding TriZetto into insurance market, property and casualty, life insurance market. So we are exploring opportunities in both ways. And in provider, I think we have built prior authorization applications around our platform. We have connected our platform to the clearing house. So the strategy there is to wherever we have platforms, we want to expand into adjacencies in the markets that do not have platforms, we will continue to look the right asset to acquire a platform or into that market segment. And by the way, this is outside of the AI-related platforms that we talk about our Neuro suite of platforms and things like that. Those are more AI-related platforms that are broader across the markets, and the platforms like TriZetto more domain-centric plants. So we are focused on both.

Got it. So obviously, we've talked a little bit about the elephant in the room, AI. As you know, talking to everybody in the halls, there's a big debate on where is AI and what's it going to mean for IT services. The big question and pushback we always hear is, is it the IT service vendor going to have to give up productivity gains as the corporation is serving and generating? And then obviously, you serve and generate less revenue versus the old model, which was headcount-based. 30% of code is now AI generated, which you guys talk about, but the fear, obviously, that's just going to be less revenue generated from Cognizant. Can you just help us understand, that's the bear thesis that everybody is worried about and how that doesn't hold water?

Yes. So I think as I articulated earlier, we see AI opportunity in three vectors, as I said. And right now, Vector 1, which is the productivity unlocking, is where the maximum focus and attention is across in the market. When we execute projects in Vector 1, yes, clients expect the productivity back. Some of the productivity savings or most of the productivity that we unlock in the Vector 1 is passed back to the clients. But the way the Cognizant is addressing that issue is, when we unlock the productivity in an estate for a client, we backfill that we backfill that by two means: Either we go back to the client and we articulate that we could burn down more of inventory for the same cost or we can do more for the same or we can leverage the funds that are unlocked to do some of the additional projects. That is one way to backfill the productivity part of it. On top of it, when we proactively or reactively go to clients, -- we also build a broader solution around consolidation. So we make a pitch for consolidation to say that we'll not only unlock the productivity in our estate. We will also unlock the productivity in the surround, if you give us an opportunity. So that helps us A, retain our base of estate and grow on top of it. So that way, I think there is -- I strongly believe there is still certain amount of growth in the productivity vector. On top of it, when you transition to Vector 2 and Vector 3, these are -- there is a tremendous amount of opportunity there, which remains untapped. So we are broadly speaking right now at Cognizant, we started speaking about pivot from SDLC to ADLC. Software development life cycle to agent development life cycle, where -- there is a humorous opportunity across -- in the Vector 2, across data, compute and the application layer where you'll have to -- service providers or SI firms are needed or will be required to help clients build those agents across. As we pivot from SDLC to ADLC, the surface area of ADLC will be much higher than SDLC, as the agent-to-user ratio, business user ratio is much higher compared to the traditional software. So we see that there is a tremendous opportunity in Vector 2. And Vector 3 is a agentification. As I said, -- we already see some of the projects emerging in both Vector 2 and Vector 3. And we believe the growth rates of Vector 2 and Victor 3 will be far higher than what we are seeing in the Vector 1. So they will outgrow to give the breakaway growth opportunities for firms like Cognizant. And we see this is evolving right now. Market is evolving into Vector 2 and Vector 3.

How do we think about the -- as AI evolves and we get into Vectors, in 1 and then now 2 and 3. How do we think about the pricing models? Traditionally, it's been a time and material head count model, but now we're going to have to move more to productivity out based in different kind of platform-based models. How do you think about that transition?

So the pricing model will evolve over a period of time. You're right. Actually, historically, we have been consistently pricing time as a time and material or fixed spread. In some cases it's outcome-based. From there, we pivot now, we'll have to pivot now to a hybrid pricing model where you have digital workforce, digital agents and the physical workforce and then where would -- how to price for value price for outcomes with risk baked in. These pricing models will evolve. As we started doing these large deals with Vector 2 and Vector 3 components involved in it, so we are already working on some of those pricing models at Cognizant, where we pivot more towards value, outcome-driven, hybrid with digital workforce and physical workforce and things like that.

The other pushback we hear is that there's a lot of internal resources that people want to do their Gen AI in-house, and they don't want to outsource to other vendors. Are you seeing that in the marketplace that there's a little bit of a -- we don't want to commoditize our data out to others? We want it internally only.