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

Yes. For longest time, I think IT services was less differentiated, if I can say that way. Because if you see between, let's say, 2002, 2026, all the new opportunities in the sector was offering [ land ]. You were selling X, you could sell &, you could sell Z, you could sell something new. It was not as transformational as AI has been, which is not only selling new things but also changing the way you do your business, they're changing the way you perform your client obligations. You are now imagining almost 2 different industry or different stream lanes -- swim lanes of delivery, the one that was deterministic system and second is the probabilistic system. And we envision that all of our large customers in next 3 years will have 70%, 75% of the classic deterministic system because they will be still relevant, and another 20%, 25%, 30% of that are probabilistic system that they deploy. Now this is a big shift, and we believe we have been able to differentiate because we invested before anybody. We remain almost very focused or very, very watchful of the fact that we are not only changing the front end and offering, but also we are changing the organization of Cognizant. And that's why in AI forum that we hosted, we had one conversation on our offering, but we had 6 conversations on how we are delivering that and what our customers are seeing. So I think this is the first opportunity for one of the industry players to truly differentiate itself, by not only changing the offerings, which has happened for last 20 years in various scenarios, but changing itself. And that's what we believe is future. And that's what I think is also resonating with our customers. And therefore, you see the sense of differentiation that we are able to create with our customers.

Got it. So looking at bookings, you're up 5% over the trailing 12 months, led by growth in those large deals that you were referencing. Why is Cognizant able to -- I mean we're talking about this, I mean, obviously, it's AI led. But why is Cognizant gaining in the large deal wins? And is volume still growing double digits for you guys?

So I would say volumes is growing in the new work definitely double digit. But it is definitely -- in the existing piece of work, you definitely have what I would say productivity-led shrinkage. And therefore, on net, you are still growing. You are not growing double digits, but volume is still growing. If I look at quarter 2 of 2026 over quarter 2 of 2025, there is a volume expansion. But it is a net effect. It is not a gross effect. Gross effect is double digit for new work, but it is definitely a shrinkage for something like software engineering where we have ourselves said that 40% of the work is now AI assisted on software engineering side, so where there is a shrinkage in the human effort of work.

Got it. How much revenue today -- Cognizant has outlined the Vector 1, Vector 2 and Vector 3 services. Just curious on -- because I feel like we're still heavily in Vector 1. But how much are we seeing in Vector 2 and Vector 3? And how much has that changed yet '25 to '26, or is that more a '27 to '28 phenomenon that we see vector2, Vector 3, maybe have a bigger impact?

You're right. We would see more impact of it in '27 and '28. On '26, we still see a similar pattern as we saw in '25, where the revenue is still dominated by Vector 1 largely as proportion of revenue. But we do see a differing and more visible impact in bookings, which is an early indication that Vector 2, Vector 3 should eventually start contributing to a relatively larger share of the total revenue.

So in some of the signings that you're doing, you're seeing Vector 2, Vector 3. And it takes how long before that converts into revenue typically?

Yes, it essentially converts within next 6 to 8 months. But there are still smaller deals. The pendulum of larger deals is still tilted largely on the Vector 1 opportunity. So while they will start translating into revenue, by the time they start making an impact on proportion of revenue, it would be '27, '28. And hence, my comment that it's a little more out in the future opportunity for that revenue mix to shift. But we are already seeing visible clear wins which are no longer POCs, or $2 million, $3 million contracts, they are sizably larger contracts, but they are still not a $300 million contract. So we have greater visibility into booking. They are a more prominent features of our bookings now. But it is not yet shifting a percentage of bookings or a percentage of revenue yet.

Okay. Got it. Revenue per head increased 5% for Cognizant. Where can this figure kind of go to when we think about the revenue per head?

I think as we move more and more effort from -- towards inference and virtual effort, that number will continue to grow. I think this 5% to 7% to 8%, the range that we have spoken about in the last few quarters, is a good benchmark to have. Because it's not going to be an overnight large shift. It's going to be a gradual shift as we generate more and more revenue through insurance compared to the traditional efforts.

One of the conversations you and I have had is talking about the rate cards. And rate cards, obviously, in the beginning, we're under pressure due to just the productivity gains that we talked about in Vector 1. But there was a transition maybe in the beginning of this year where you started to see some supplement to the rate card on AI, getting a little bit of boost there and that obviously being a positive sign. Can you talk a little bit about the rate card, kind of where it was in '25 and maybe '26, and then how that might evolve with AI on top?

So I would say there is no specific pressure on rate card, as you rightly indicated, in 2026. It is more on the total cost of ownership. And as you look at total cost of ownership and fixed price still, it's very easy to compute saying, you took all the risk and you delivered something at $100, now you can deliver at $80. I don't know and I don't care how much effort you put, both the classical effort and virtual effort, to get to that throughput. So there is no negotiation around individual's rate card in that sense on fixed price. On time and materials side, we are increasingly going towards an A0 to A4 model where on A0, we give price for a classical time and material rate card. And let's say, A1 is the primary doer is an AI and it's been initiated and reviewed by a human agent. Let's say A2 is something where primary doer is AI and only reviewed once before its submission by AI. So there is a whole spectrum of A0 to A3 or A4, where A4 is a fully agentic system. And depending upon the work that you perform, for example, application maintenance can go to A3 very quickly, whereas systems engineering or embedded engineering will be -- will probably never go to A3, it will always remain at A1 or A0. That's how the model is emerging on rate cards, not just for small deals, but very, very large commercial construct. So we are already embedding influence as part of our pricing. So on one hand, you could worry that the human effort is coming down and, therefore, [indiscernible] the Q is shrinking. But now you have Q1 and Q2 where Q1 is the effort, which is classic human effort, and you have Q2, which is different, and you are pricing both in your [ P&M ] offering. So you have, of course, a Q1 deflated, but Q2 which you never priced. So there is an opportunity for growth.

Yes. No, it's interesting how it's evolving. I wanted to ask about Cognizant's expectations for organic revenue growth. I think if I remember correctly, this third quarter is supposed to be a similar kind of organic growth as the second, or thereabouts. And then there is an implied kind of acceleration in the fourth quarter. Can you talk a little bit about the third quarter guide comparatively to the second? And then what's driving that acceleration in revenue growth for the fourth quarter?

Yes. So there are a couple of things. One, there is a slightly different days impact this year compared to -- working days impact this year compared to last year. So we do see a slightly higher number of build days in the second half versus first half. Two, and more importantly for us, is there have been a host of projects which have been on a transition phase during the first half, which we won in the last part of -- I mean, in Q4 of last year, Q1 of this year. That translates into the revenue addition in second half, which we have visibility to. I think so these are the, I would say, 2 reasons why we see the Q3 and Q4 guide numbers the way we have given.

Got it. And then can you talk a little bit about Project LEAP and the impact to gross margins and the second half operating margin outlook as a result of that? And then as we get into fiscal year '27, how do we think about gross and operating margins?

Yes. So as we have called out, gross margin will slowly continue to improve as we go. But what we really guide on is operating margin. And we have guided as a result of LEAP is 10 basis points higher operating margin at the midpoint of the guidance range for 2026. We are investing -- I mean, LEAP is an exercise whereby we are creating a bucket of savings, and we are reinvesting a large bucket of that savings into employee training infrastructure, AI infrastructure for delivery, investing in things like hardness that we have built and so on and so forth. So to that extent, the savings of the LEAP will be reinvested for an accelerated growth or staying ahead than others in the growth cycle. And we will make a decision of '27 as it comes. But for this year, we have articulated [indiscernible] how that LEAP flows into the operating margin cycle.

Okay. How about capital allocation? We've seen some more aggressive buybacks in the industry since the whole industry is down. Are you guys thinking about more aggressive capital return for buybacks, versus what does the M&A pipeline look like?

I think we will always remain opportunistic on M&A space. This is also the time of transformation and time to invest in right assets. Of course, but one would be thoughtful about the fact that time -- this is also time to invest back in your own stock through buyback and other initiatives. So we have accelerated that in the beginning of this year. We also had an additional $1 billion that we announced and executed in the month of May. Going forward, we will stick with our classic 50-25-25, 50% for M&A, 25% for dividend and 25% of buyback. And probably some of the future, the way to see it is that we will maintain this over a period of time, which means some of the future buybacks we have pulled forward in the current year, because the timing and the price at which the shares was trading that time, it was very opportunistic to do so.

Okay. We got a couple of minutes left. I have to ask about the latest on the Indian listing, how the mechanics of the listing will work. I know there's a lot of different things you guys are working with the regulators. So for example, how the IDR is classified. It's currently a derivative and limited to institutional investment, the limits on the use of proceeds, the tax ambiguity and the materiality of disclosure requirements. So all those things, can you give us an update on those conversations with the regulators and where we are on that potential listing?

Yes, absolutely. So I think there are various aspects around this. I wouldn't comment on one versus the other because, finally, it's a package of a regulatory framework that one would receive. And our expectation is that we should have some draft regulation on this being offered for players like us by the end of the year by the regulator. Once the draft regulation is available, Board will make a decision on whether the regulation is amenable from keeping an interest of our existing shareholders, keeping an interest of other stakeholders from a Cognizant standpoint, whether it makes sense. Assuming it makes sense, then we go ahead and we tell the shareholders about it. If we decide not to, then we share accordingly with the shareholders. So I think we will have some decision on it by end of this year, is what our current anticipation is.

And my guess is there's some give or take, like some of the things that you would want, you definitely want to get in there or want in there, you're not going to exactly get, and then the regulator is going to have to change some things that maybe they want to change. How are those dialogue going between -- I assume both sides want to try to get something done, but is it even feasible given some of the complications?

Yes. I think the dialogue has been very constructive, and we are very grateful for the conversations that we have had with regulator, and one hopes that finally we are able to find a ground, which is a great product for, not just Cognizant, but any other company which wants to pursue that -- there is a great product out there for everybody to pursue. But right now, that's all I can say because we will have to wait for what comes out in the final regulation.

Yes. Okay. With that, team, we're going to have to keep it there. Thanks so much for being here.

Thank you very much, Bryan. Thank you.