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<span style="font-weight: 400;">The IT company’s board has endured a few shake-ups in recent months. Among the changes is the appointment of CEO Ravi Kumar S, former president of Infosys and successor to Brian Humphries following his dismissal in January. Kumar has pushed for the expansion of Cognizant’s portfolio of digital services since stepping into the role. In February, Cognizant appointed former Enphase Energy CFO Eric Branderiz to its board, touting his experience in accounting, M&amp;A execution, risk management, and ESG. Maureen Breakiron-Evans, who joined the board in 2009, has said she will not stand for reelection this year. In late March, the board welcomed another new member, Abraham “Bram” Schot, who most recently served as chairman and CEO of Audi AG. </span>

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Cognizant Technology Solutions is a technology consulting and outsourcing company. Founded in 1994, it operates at numerous sites across the Americas, Europe, the Middle East, and the Asia-Pacific region. Services include AI-enabled automation, application development, engineering research and development, cloud solutions, and more.

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Cognizant Technology Solutions (CTSH): Company Profile, Stock Price, News, Rankings

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Cognizant Technology Solutions

cognizant technology solutions

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release and investor supplement for the company's second quarter twenty twenty five results. If you have not, copies are available on our website, cognizant.com. The speakers we have on today's call are Ravi Kumar, Chief Executive Officer and Jasan Dalal, 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 now like to turn the call over to Ravi. Please go ahead.

Thank you, Tyler, good afternoon, everyone. Thank you for joining us. Our momentum continued in the 2025 as we again delivered revenue growth and adjusted operating margin ahead of our expectations, while also accelerating our bookings growth. Our performance reflects the depth and strength of our portfolio supported by our continued strategic focus on AI led opportunities and disciplined execution. As you can see from today's results, we continue to make progress towards building a resilient and durable company that thrives in both slow and high velocity markets.

In the past, I have described the opportunity as a double engine transformation for our clients, both on productivity and innovation. In the second quarter, we delivered a healthy combination of wins in AI efficiency led large deals and innovation led projects, with AgenTiC AI unlocking new revenue pools and spend cycles. The three vector AI opportunity we have laid out on our strategy is resonating very well with our clients. AI projects in experimentation over the past few quarters have started to build momentum in downstream opportunities. I will expand on further when I review our strategic progress shortly.

First, I will walk through the highlights and our key drivers from the quarter. Second quarter revenue grew 7.2% year over year in constant currency to $5,200,000,000 Our results marked the fourth consecutive quarter of year over year organic growth and another solid placement in our industry's Winners Circle. Organic revenue growth was led by financial services and health sciences and benefited from the ramp of recently won large deals. Q2 bookings grew 18% year over year translating to trailing twelve months growth of 6%. During the quarter, we landed six large deals with TCV of $100,000,000 or greater, including two mega deals each valued around $1,000,000,000 As a result of these wins, the TCV of our large deals more than doubled year over year.

Adjusted operating margin of 15.6% improved by 40 basis points year over year. We are on track to achieve our 20 to 40 basis points margin expansion goal for 2025. Headcount grew about 2% sequentially led by hiring of recent college graduates, while trailing twelve months voluntary attrition for tech services declined by 60 basis points sequentially to 15.2%. The progress reported today is the is the result of the strategic actions we have taken over the past two point five years to sharpen our innovation engine and develop our capabilities through investments in AI, engineering and our platform strategy. While we are still in the early innings of capturing the AI opportunity, I believe these strategic steps are helping drive our performance.

A few data points of our progress include, first, we currently have more than 2,500 early gen AI client engagements compared to 1,400 in quarter one. Nearly 30% of our code was AI generated in quarter two, significantly improving the productivity of our developers. This compares to only approximately 20% when we first disclosed this estimate two quarters ago. And thirdly, our AI research labs is accelerating the industrialization of agent based systems backed by a robust portfolio of 59 U. S.

Patents. Our areas of research are focused on building AI platforms and tooling to help clients accelerate the embrace of AI and agentic systems in enterprise landscapes. In the current economic environment, clients are prioritizing productivity and value, what we have characterized as vector one. Our ability to proactively craft AI driven technology deployments that deliver faster execution, improved productivity and cost savings is driving several of our large deal wins, including the two mega deals we won in quarter two. We expect Vector1 to further accelerate as clients underwrite their innovation and growth projects with AI productivity led savings we are enabling.

In the second quarter, out of a subset of our client base of nearly three sixty key accounts, 97% of clients have adopted AI, of which 56% are scaling Gen AI and out of which 78% have demonstrated impact from the adoption and scaling. We're also actively pursuing vector two and vector three opportunities, which we have labeled as industrializing AI and agentifying the enterprise respectively. This includes proactively helping clients with their AI led innovation and agentic strategy as we quickly evolve our capabilities from experimentation to scaled production grade programs. In a scaled and structured manner, we have created cross service line cohorts, anchored by our client partner teams to deliver agentic workshops across our client base. For example, we are combining our strengths in logistics, customer service, and agentic AI to extend our relationship with Lineage, the world's largest owner and operator of temperature controlled warehouses.

Under our new agreement announced earlier this week, we will use powerful tools like agentic AI automation and predictive insights to empower Lineage customer care professionals and help deliver a differentiated experience for their customers. I will touch on a few more examples shortly. Now, I want to update you on our progress against our strategic priorities to amplify our talent, scale innovation and accelerate growth. First, with amplifying talent, we continue to prepare our workforce for an AI led future. We are deepening our talent investments in emerging technology hubs with plans to expand operations in Vishakapatnam.

This follows a new site in Gift City, Ahmedabad and plans for a new 21 acre learning center in Chennai that is expected to train freshers and experienced hires in advanced AI skills. Our talent efforts are reflected in our employee engagement survey completed during the quarter, where scores remain well above industry and best in class benchmarks for the third year in a row. Next, with scaling innovation, our engine continues to gain momentum. Earlier this month, we launched Cognizant Agent Foundry, which accelerates enterprise scale adoption of agentic AI. Agent Foundry is powered by our neuro AI suite and a strong AI partner ecosystem with hundreds of distinctive agents already available for use.

It spans industries and platforms with domain specific small language models, agent templates and a library of pre built agents supporting the full agent lifecycle. As enterprises reimagine their process and workflows, we are building a repository of reusable agents for rapid deployment into enterprise landscapes. Earlier today, we launched our first ever Wipe Coding Week for all 344,000 of our associates to evangelize an AI enabled software development cycle as the new and only way to deliver software with the help of our CodeAssist platform partners. We believe this is the world's largest initiative of its kind, but what excites me most is our opportunity for every associate to build real AI fluency and deliver continued higher productivity to all our client project work. Also today, launched Cognizant AI training data services for Global 2,000 clients who are embracing AI models in their businesses.

For many years, Cognizant has helped digital native leaders train some of the world's most advanced AI models. Working with trailblazers in tech, healthcare, automotive, media, and retail, our more than 10,000 specialists have curated, annotated, and quality checked billions of data points and millions of data labels across every major modality. This includes speech, two d, three d imagery, video, and LiDAR, often enriched with geospatial metadata for added accuracy. Our domain know how has enabled us to produce high precision specialized data sets across industries. This new strategic offering will help empower enterprises to quickly build, fine tune, validate, and deploy production grade AI models at scale.

Thirdly, with accelerated growth, let me share a few examples of our innovation in action. Last month, we introduced Cognizant Autonomous Customer Engagement, a platform built with Google Cloud that uses Agenetic AI to deliver faster, smarter and more intuitive customer service. It is a significant advancement and we have already secured clients in both health sciences and global food sectors. We have formed a strategic partnership with a major global biopharmaceutical company to outsource the management of its global IT systems and applications and transform them using Genitiv AI and AgenTeq AI. Our global collaboration is twofold, driving productivity and efficiency by modernizing IT operations, while upskilling and cross skilling technology specialists who will transfer to Cognizant.

This partnership highlights our growing leadership in AI led transformation, as well as our long term vision to empower clients through talent development and innovation. Earlier today, we announced a new partnership with Rytr, a leader in agentic AI for the enterprise. This collaboration will bring together a deep industry knowledge with the global scale of Rytr's end to end enterprise grade platform to enable organizations to build and deploy AI agents with a focus on highly regulated industries. We recently won new business to deliver third party administration services for a leading insurance closed book of annuities business. What makes me particularly excited about this strategic agreement is the next generation AI platform we will build to not only modernize the portfolio, but also the opportunity for us to scale this AI platform to other clients in the future.

And finally, we delivered key TriZetto milestones in quarter two. In May, we completed what we believe is the largest TriZetto facets cloud migration with a leading North American healthcare payer. We moved over 10,000,000 member records to a containerized cloud environment, improving scalability and stability and achieving new performance benchmarks. In parallel, TriZero has advanced its agentic AI strategy with nearly 30 agents now live or in pilot and another 10 in development. These agents are streamlining workflows across care management, claims, benefits and customer service, cutting onboarding time and improving case handling efficiency.

The underlying foundation of the Trizetto AgenTik strategy is the Trizetto AI gateway, which we are pleased to announce will launch next week. Looking ahead, as I have described today and at our Investor Day earlier this year, we are positioning Cognizant for the generative and agentic AI future. And in the process, I believe we are building a new opportunity, one defined by agentification at scale with new client spend cycles. We see this as a once in a lifetime opportunity enabled by a revolutionary technology to reimagine enterprises' work, workplaces and the workforce. We believe we have a bigger total addressable spend than ever before to partner with our clients on their AI journeys.

Our three core strategic imperatives are unchanged, but I want to shift their aperture on our lens to help you see more holistically the steps we have taken to differentiate ourselves in a rapidly changing market. I believe the AI wave is different from the prior waves. So too is the way Cognizant is responding. Historically, the most successful companies in our industry thrived by sensing technological shifts and incubating economically viable solutions and new capabilities at scale. To capture the AI opportunity, we recognized and have started building a new layer, one that's in addition to the traditional interdisciplinary capabilities.

This new layer includes translating our award winning AI labs work to differentiated AI platforms, small language models and tooling to address accuracy of the models, reasoning layers to help make the technology responsible, investments into the evolving agent development life cycles our pioneering work in context engineering, which is building layers of context, tribal knowledge, data flows and workflows to create efficient and productive agentic systems is already making waves with our clients on their agentic journeys. For now, I call this new layer IP on the Edge, a working description of the evolving transitionary phase of agentic AI. Our IP on the edge progress is very important differentiator in a fragmented and heterogeneous market of AI builders. We believe our early investments in AI led by IP on the edges are scaled interdisciplinary capability, our partnerships, our continued focus to diffuse AI efficiently into our project and client services teams have really helped us stay strategic to our clients' AI journeys, which is reflected in our financial people and client metrics. In closing, we are proud of our Q2 results.

We appreciate that long term success will be determined by our ability to deliver sustainable performance. That said, while the demand environment remains dynamic, we are encouraged by our continued ability to drive large deal momentum and win a growing number of new spend cycles in Vector two and Vector three agentic opportunities. Now I am going to turn the call over to Jatin.

Thank you, Ravi, and thank you all for joining us. Our second quarter revenue exceeded the high end of our guidance range, once again earning us a place in the winner's circle, based on peer results reported so far. Our Q2 performance was characterized by sharp operational rigor, disciplined cost management, and a productivity first mindset that helped drive year over year margin expansion and EPS growth that outpaced revenue growth. Through the 2025, on a year over year basis, we achieved top tier revenue growth, 40 basis points of adjusted operating margin expansion and 11% adjusted EPS growth. Now, let's turn to the details of the quarter.

Second quarter revenue of $5,200,000,000 grew 7.2% year over year in constant currency. Growth was led by strong organic performance in Financial Services and Health Sciences. Welchon contributed approximately 400 basis points of inorganic growth. The demand environment was largely unchanged in the quarter. While visibility is still limited, the ramp of large deals more than offset discretionary spending pressure.

Now let me provide some color by segment and region. All segment and region growth commentary represents year over year constant currency growth unless otherwise stated. Financial Services grew 6% year over year and led our organic growth with broad based demand across sub industries driven by digital engineering, legacy modernization and vendor consolidation initiatives. These have supported a healthy pace of Gen AI productivity led deals and GCC opportunities across BSSI. For example, earlier this year, we were chosen as a transformation partner by a large North American bank.

This multi year, multi $100,000,000 deal has the client partnering with Cognizant in driving talent and technology transformation across the Bank's banking and insurance units to support its go to market and talent strategies at the right cost. While our BFS business continues to build on its strong performance, our Insurance business is showing signs of improved growth, supported by strategic engagements with several key insurance clients in North America. Health Sciences grew 5% year over year, driven by organic growth across payers, providers and life sciences customers. As we noted last quarter, our clients are navigating a rapidly changing environment. We expect the recent passage of The U.

S. Budget bill and its changes to Medicaid will weigh on near term discretionary demand from payers and providers. Meanwhile, life sciences customers face heightened uncertainty related to the tariffs. Despite this uncertainty, we believe our deep domain expertise and strong client relationships position us well as a strategic partner to help healthcare organizations adapt quickly, unlocking new opportunities for innovations, efficiency and growth. As a great example, one of the mega deals we signed in Q2 was with a large healthcare client.

Our proactive approach and compelling value proposition helped us extend our long standing relationship. We are helping this customer drive productivity and fund innovation by leveraging our deep industry expertise, AI skills and platform investments. In products and resources, growth was primarily attributable to Welkin. Although trade policy uncertainty has tempered discretionary spending, we are seeing demand for cost takeout and productivity led engagements, areas where our value proposition remains strong. In Retail, Consumer Goods and Travel and Hospitality, clients are actively investing in Gen AI pilots aimed at elevating the customer experience.

Communication, Media and Technology returned to organic growth this quarter led by the technology sector. We are witnessing robust demand from clients aiming to reduce costs and reallocate capital towards R and D and other CapEx investments. Our expanding expertise in Gen AI is strengthening our position as strategic partner in the CMT industry, enabling us to secure significant wins. An example of this is the mega deal we won in the communications sector in Q2. The partnership encompasses both J and AI driven productivity transformation and a good mix of new business through the contract duration.

For our client, this deal leverages all three pillars of our AI strategy accelerating growth through AI native offerings, enhancing enterprise productivity through AI driven automation and transforming customer experience with intelligent personalization. By geography, revenue grew across all major regions. North America led with eight percent growth driven by financial services and health sciences. Continued strength in large deals and disciplined execution enabled us to deliver industry leading growth again in Q2. We believe we are gaining market share in this region.

Europe grew 4%, again driven by growth among Life Sciences and Financial Services clients including Public Sector. We are pleased with our momentum in the region supported by new logos and a revamped sales strategy that have led to an improved large deal pipeline. Rest of the world increased by about 6% driven by Financial Services and Health Sciences from a segment standpoint and by Australia geographically. Now to bookings. As Ravi mentioned, mega deals drove strong bookings this quarter.

Second quarter bookings included a balanced mix of new wins and renewals. And trailing twelve month annual contract value or ACV increased high single digits year over year. This improved backlog along with our last twelve month book to bill of 1.4 times support our full year revenue outlook. Turning to margins. Second quarter operating margin of 15.6% increased by 40 basis points on an adjusted basis, benefiting from next gen program savings and operational rigor and the Indian rupee depreciation despite the dilutive impact of Belkin.

These improvements were partially offset by increased compensation costs and initial ramp up costs of large deals. Now moving to cash flow and capital allocation. DSO of eighty three days increased by two days sequentially and by three days year over year. Second quarter free cash flow was $331,000,000 compared to $183,000,000 a year ago. During the second quarter, we returned $521,000,000 of capital to shareholders through share repurchases and dividends, bringing the first half total to $885,000,000 We ended the quarter with cash and short term investments of $1,800,000,000 or net cash of $1,200,000,000 Before turning to guidance, I'll provide a brief overview of the expected impact from recent changes in US tax laws.

In July, The US passed a budget bill, which among other provisions repealed certain requirements to capitalize research and experimental costs. As a result of this change, we expect to incur a one time non cash tax expenses of approximately $400,000,000 in the third quarter related to a deferred tax asset on our Q2 balance sheet. This amount would have otherwise been available to offset future taxes related to our non U. S. Earnings.

On a cash basis, this legislation is expected to reduce our near term cash taxes and increase our operating cash flow. In 2025, we expect this improvement to be $200,000,000 therefore increasing our capital available to return to shareholders. Now, the details of our forward outlook. For the 2025, we expect revenue to grow 3.5% to 5% year over year in constant currency. As a reminder, Q3 includes only a partial year over year benefit from Belkan acquisition, which closed in August 2024.

We expect a little more than 200 basis points of inorganic contribution in the third quarter. The remaining guidance items I will discuss are for full year 2025. We are modestly increasing the midpoint of our revenue range based on our year to date performance and improved confidence in the second half. In 2025, we now expect revenue to grow four to 6% in constant currency, reflecting a 50 basis point increase at the low end of the range. Revenue details in dollars are available in our press release and supplement.

We continue to expect full year inorganic contribution of approximately two fifty basis points. Our revenue guidance is based on current visibility and considers a range of scenarios that could unfold in the second half of the year. The low end of the range continues to assume further deterioration in the demand environment. The midpoint incorporates an unchanged environment with ongoing discretionary weakness, partially offset by pipeline conversion. And the high end assumes an improved demand environment, further supported by our large deal pipeline.

Our adjusted operating margin guidance range remains 15.5% to 15.7% or 20 to 40 basis points of expansion. We expect margin expansion will be driven by cost discipline and SG and A leverage. In parallel, we are driving continued operational rigor through AI led automation and pyramid optimization to support gross margins over the medium As a reminder, the second half of the year will include margin investments in large deals and a merit cycle. Due to cash flow benefit from The U. S.

Budget bill I discussed earlier, we now expect free cash flow to represent approximately 100% of net income, excluding the one time non cash charge that will be recorded in the third quarter. This has also allowed us to increase our expected return of capital. For the full year, we plan to return $2,000,000,000 to shareholders, an increase of $300,000,000 from last quarter, driven by higher expected share repurchases. In total, we expect to deploy approximately $1,400,000,000 in repurchases this year. Even with this increase, we maintain flexibility to pursue opportunistic M and A this year.

Other than the one time non cash tax charge I discussed, we don't expect the budget bill to impact our effective tax rate. Therefore, our adjusted tax rate guidance, which will exclude the one time charge, is unchanged at 20 four-twenty 5%, but is trending towards the lower end of the range based on first half performance. We are increasing our EPS guidance range to $5.08 to $5.22 compared to our prior range of $4.98 to $5.14 reflecting our revised revenue guidance and favorable foreign currency rates. This represents seven to 10% year over year growth. We expect a weighted average diluted share count of about $489,000,000 versus $491,000,000 previously. With that, we'll open the call for your questions.

We will now be conducting a question and answer session. You. The first question comes from Tien Tsin Huang with JPMorgan. Please go ahead.

Thanks so much. Good afternoon. Really, really strong bookings here. So I'll ask on that if that's okay. I think I heard pretty balanced mix of renewals and new deals.

So I just wanted to clarify that. And it sounds like you're seeing early renewals with clients looking to implement AI efficiencies. So just wanted to clarify that because we're all looking ahead and thinking about the pipeline. So I'm curious if you can replenish the pipeline and what's your outlook for bookings in the second half of the year?

Yes, Tien Tsin, thank you for the question. This is Ravi here and I'll ask Chatin to add. We had a good bookings mix, I mean 18% Y on Y, 6% trading twelve months, good mix of renewals and new business, six large deals, two mega deals more than a billion dollars. I wouldn't say clients are proactively pushing and renewing earlier. There are occasional opportunities of that kind.

I would equally say that clients are looking for sharing productivity when the renewal cycles come. And if we see an opportunity where we can sole source and originate a deal, even if we are an incumbent because we can actually share the benefit and create a bigger estate for ourselves. We are actually proactively reaching out to clients wherever we can, if we have the ability to create that value for the client and for ourselves. Am also, one of the things in the last few quarters, Tien Tsin, was mostly large deals and momentum was related to productivity, consolidation and AI led productivity. Now, we are starting to see innovation led deals.

I call them vector two and vector three. We're starting to see innovation led deals, which is very encouraging because that is new spend cycles from our clients and it kind of aligns to growth imperatives of our clients. So we are, this is the first quarter where we have seen a combination of large deals, small deals, our ACV numbers are going up, which is very, very exciting because the monetization of billings to revenue will be faster. It has gone up sequentially, gone up Y on Y. Combination of renewables and new, small and big, I mean the big mega deals have, we have sustained the momentum and we are now seeing productivity and innovation both leading, layering together.

So, it's probably one of the most healthy mixes of how I see bookings shaping up and hopefully it kind of continues that way for the rest of the year.

Tien Tsin, as we look at pipeline, we continue to feel good about what we have and how we are shaping the pipeline. So yes, it's been a great quarter, but we continue to work hard to add more to our pipeline as we look at the second half of the year.

Great. That's interesting. Good color. Thank you for that. Just my and thank you for sharing the ACV comment both of you.

Just on the quickly follow-up just gross margin outlook, you've mentioned deal ramps, of course, this contract execution. So these deals are coming on. Any considerations for gross margin as we look to the second half of the year? Thank you for my time.

We will continue to execute well. If you see our utilization on for first half is approximately two percentage points higher than the 2024. We are doing some investments as we execute the second half. Saw that the headcount has actually gone up by 7,500 employees. And so that's the play that we have Tien Tsin as we execute, we'll have to constantly balance how well we use our resources, but at the same time continue to evolve our resource mix for the demand that we see in the marketplace.

And that will shape our gross margin. There is an overlay the investments that we make as we ramp up our large deals and we have won two of them in quarter two. So that overlay also will play out in the second half of the year. We have done so far well in terms of a stable gross margin year over year. We have done slight improvement sequentially.

So we'll continue to work on this path as we move forward.

And those two mega deals have sizable new component, new business component.

Thank you. Our next question comes from James Faucette with Morgan Stanley. Please go ahead.

Great. Thank you so much. Appreciate all the details here. I want to probably touch on kind of the work that you've been doing. And I'm intrigued by, as you characterize it, vector one, vector two, vector three.

We've noticed a number of patents that you've been awarded. You talked about on today's call about having 100 agents or so available. Can you just talk about how you're pricing those and incorporating those into deals and putting together that structure. That's a question we get a lot from investors is how to think about some of the site P Cognizant's developing this unique kid and how to think about its impact on the business, both from a pricing as well as business opportunity standpoint?

Yes, that's a great question. Well, think for the first time we have an opportunity to really make it mainstream you know, outcome based. This is an evolving space. I think the differentiation for the IT services sector, and I've mentioned this in my remarks, is no longer about just building capability. It's actually about interdisciplinary capability layered with IP on the edge as I call it.

IP on the edge because this is last mile infrastructure needed to get enterprise grade AI or agentic. We have invested heavily on sensing them and converting them into platforms, tools, reusable agent components in our foundry. It certainly gives us the opportunity to make it sticky as well as to create some premium attached to it. Early days, but I would, I'm very optimistic, I'm very pleased and I'm very optimistic about the fact that we have created a real differentiation for ourselves. The real opportunity now is to continue building on it, mean we are starting to think about small language models.

We're starting to think about areas where when you hit the finishing line, you need things which are not going to be available either by software companies or by the companies which are establishing the plumbing, which is like, how does an application, how does the agent development cycle look like? We are investing into it. We are investing into, you know, the first time there is a revolutionary technology which is now going to disrupt every process, every workflow, every data flow in a company. How do we create the ontology around it and package it into the things we can hand over to our project team so that that becomes real. So this is fast evolving.

I'm excited about how we could price it, how we could bundle it and this is very different to productivity. Productivity you share it with clients, while innovation capital you can monetize in a non linear way. So, will continue to invest and continue to shape this narrative and I think this is going to be our single biggest differentiator as take our customers into agentic journeys. What's also happening, I did mention this in my remarks, this is not about agentifying a process or a function in a company. In addition to that, it's also an opportunity to run that process on behalf of the company, which then means there is a new spend area which we are going to capture.

And that's why I said the total addressable spend is higher than before. I mean, there are things we just applied technology and allowed our clients to run, but now clients are saying, wait a minute, if there is digital labor and human labor and they want to come together, say for a customer care function, are you better suited to run the customer care function, which means the pie is going to increase because it's not just a technology, but we have to run the process, we have to run that function on behalf of the company. So we are starting to think about how do we go and pitch to clients on process functions, which are available for a partner to come and run it on their behalf with digital and human labor. So, higher addressable spend, elasticity to pricing and the ability to capture new talent pools, new spend pools that of course the talent we need is going to be interdisciplinary between domain and technology. So, we're seeing some good exciting examples with partnerships with our clients.

That's great. And then I wanted to touch on capital allocation. Back at the analyst meeting earlier this year, you talked about spending up to half of free cash flow on acquisitions. Just wondering if you can give an update on progress on pipeline there and what you're seeing from a valuation perspective, etcetera?

Sure. James, we covered two aspects at the Investor Day and I will cover them again. The first is the capital allocation that we have spoken about for 2025 and second is the long term capital allocation plan. So for 2025 we have spoken about returning $1,700,000,000 to our shareholders at the Investor Day, which we have further increased to $2,000,000,000 as I covered in my opening remarks. And of that $2,000,000,000 $1,400,000,000 is for share repurchases and $600,000,000 is towards dividend.

And that leaves us approximately with about $500,000,000 for M and A for this year and we have a decent pipeline to think about it in the second half of the year. Now let me touch about the overall long term capital allocation policy that remains fifty-twenty five-twenty 5 which is 50 for M and A, 25 for share buyback and 25,000,000 for dividends.

That's great. Thanks very much guys. Have a good day.

Thank you. Our next question comes from the line of Jonathan Lee from Guggenheim Partners. Please go ahead.

Great. Thanks for taking my question. You laid out the range of assumptions embedded in your full year outlook, but can you help frame how we should think about that as it relates to your 4Q exit rate? Are you assuming any sort of change in velocity in the business given some of the embedded deceleration in that back half?

So thank you for that question. How where we land in quarter four is a factor of quarter three performance and quarter four performance and nearly half of the year to go. Really as a range given the current uncertainty is a wide range today. At the lowest end it's a negative number. At midpoint, we see that exit number around 1% and at the upper end that is just under 4%.

So we have flexibility within the range to execute and we believe we'll continue to execute within that range in the way we have done so far. But it's a wide range and we are not, I mean, we always mentioned that we are anchored around the midpoint of our guidance, but we always endeavor of course to do our best as we execute during the course of the year.

Appreciate that insight. And given some of the demand related puts and takes you laid out in your prepared remarks, can you help unpack which verticals and geographies you'd expect to maybe decelerate versus accelerate for the remainder of the calendar year, especially considering some of the large deal ramps you're anticipating?

Yes. So look, we've had financial services doing pretty well. This is the fourth consecutive quarter we have, we've been able to do Y on Y growth and almost the whole year we have, actually three quarters now sequentially we've been growing in financial services. That sector I'm very excited about, it's unlocking innovation dollars, not just dollars related to productivity and whenever you unlock innovation dollars, know, it's related to revenue, to growth, so it's always exciting. I see healthcare as an opportunity, I mean, as we talk there is a, there is just a part out of the press, make American healthcare technology great again and that opportunity is all about applying technology to reduce the operational overhead, overhang on that sector.

It's been a sector which hasn't as much embraced technology and it has been fragmented all the way from payer providers and pharmacies. So we see that as a sector where we have strength as well. So we're going to see that. I mean this is also the first time over the last few quarters our comms and technology sector has gone into a positive zone and we are starting to improve in products and resources. So effectively, you see the performance of this quarter, it's been all around performance, including a geo based, if double click on a geo, even if you take the PELCAD numbers out, all three geographies, Asia Pacific, Europe and The U.

S, U. S. On a big base. I mean amongst our peers, if you look at it, we are doing significantly well in The U. S.

So it is reflective of all round performance, all weather company, durable and a more sustainable momentum for us. So I'm optimistic about all round, continued all round performance as we go forward into the second half.

Thank you. Our next question comes from the line of Jamie Friedman with SIG. Please go ahead.

Thank you for taking the questions. Ravi, if you go back to the three vector approach that you've articulated enabling hyper productivity was one industrializing AI was two identifying the enterprise is three. And I know you just recently made these out at the Analyst Day, but I'd just be curious if you could update us your perspective as to which of those because the chronology that you described was that it's now for all of them. Are any of those ahead of the others?

Great question. Of course, the vector one is significantly ahead of the other two. It is timed in a way that we are in an uncertain market, slow market, clients are looking for value and some clients are underwriting those savings for innovation. So Vector1 has been, I mean, look, we did 29 large deals last year, we did 17 in 2023. We've been on this journey for a while and we've been doing very well on it.

On productivity, which we commit to our clients, we have been able to deliver as well as keep the savings what we can for ourselves. I mean, I'm doing very well on bid versus data and productivity. We have today, just today, we ran this huge event in Cognizant to get everybody on to CodeAssist platform. So productivity is probably ahead of the other two. On the second and third, they are interlinked.

I mean, they are interlinked because you do the second to lay the foundation for the third. But I am actually surprised that the third is catching so much momentum. I couldn't I wouldn't have said this a quarter ago, but so much momentum, customer care, FNA, financial services as an industry, healthcare, now our healthcare TriZero platform has agents which clients are trying to embrace. So, identification of an enterprise, not looking at identification as the purpose, but looking at reducing, you know, elapsed times or increasing throughput or straight through processing or completely new experience, clients are experimenting and you just see the numbers, 1,400 projects we had last quarter, that number was incrementally moving and this quarter we had 2,500 projects. So it's suddenly almost close to double.

So, I would say stable on a runway, vector one and vector two and vector three is trying to catch up like a hockey stick down. I mean, that's the right, I always expected it that way, more spend will happen, more unlock of dollars will happen and when that happens, the excitement of using AI for growth, using AI creating new products and new services will drive additional spend cycles, we want to capture, additional labor pools and additional spend cycles. So, the runway on productivity will start to slow down and the runway on innovation will start to take off.

And then for my follow-up, this time last year, used to talk about the swim lane of cost takeout and that was and may remain the theme. This time though you mentioned the word innovation more. I'm just trying to reconcile that with short duration discretionary. When you say innovation, does that mean short duration discretionary because it doesn't seem like your guidance contemplates much cadence there, but your commentary does.

Part of it also gets to cost in the second cycle, vector two and three even if it's innovation led. I mean productivity the way I defined it was software development cycles. That's how I defined it. We went from 20% to 30%, written by machines. The way I define innovation is even if you are doing it to reduce the cycle time, you are doing it to reduce operational cost, but you are doing it in an innovative way.

I will give you examples. Say if you go to a bank and say, you know, I can reduce your know your customer cycle to two days or one day versus four or five days using AgenTek. You could arguably say better experience, higher throughput, faster velocity, which is also reduced cost. So clients are looking at some of that, which is self serve, if I may. I mean, announced a deal on customer care, which is for a logistics company called Lineage.

I mean, was a combination of things, experience, cost, everything put together, but it's agentic. So, there is still runway on productivity, because productivity has only got to 30%. I mean 30% is average. I have myself said that writing code from machines could be 50% in one year. I've said this before in some of my podcasts and that is true.

That is catching up. So I think there is headroom there, there is non linearity there, but my excitement is more about the innovation side of it because as enterprises start to see the value, they will flip to newer products, newer services, growth and using agentic to get there.

Thank you. The next question comes from Brian Bergen with TD Cowen. Please go ahead.

Hi, guys. Thanks for taking the question. Wanted to ask on the healthcare headwinds versus potential offsets here. So is there any way to frame how much the BBB may be incrementally weighing on growth in that segment versus what you thought ninety days ago. Any commentary on how you see healthcare moving through the second half of this year?

And then where are the offsets in the business if there are incremental headwinds?

You know, I don't see, I mean, the way I see this is our exposure to Medicaid and Medicare is not a lot, right? We have a lot of commercial healthcare, a lot of payer business and provider business and of course we also have a fairly big exposure to life sciences. Life sciences is actually spending more than before, They will the productivity money and move it to innovation because innovation cycles are going to be run by technology and life sciences. In healthcare, United States is predominantly The United States. Almost all the problems you can talk about are related to productivity, related to outcomes, and you know, based on what I know, technology is the only way you can come out of it.

So I would categorize healthcare as an opportunity of winning in the turns, more productivity led because that is the need of the hour. It will not be as much innovation like I spoke in my previous thing, but I would be, I would, I would categorize that opportunity as, I mean one of the deals we did, one of the billion dollars deals we did was a, was a healthcare company and they did it because they wanted to, you know, unlock the productivity from AI led transformation and we've been able to create a win win situation. So I'm going to see more, more of those opportunities in healthcare versus financial services which will be more innovation led.

Okay, understood. Then Ravi, just a question for you as it relates to kind of the convergence of IT service services and BPM. There's obviously a deal announced here recently in the space. How are you thinking about that dynamic from the standpoint of organic capabilities you have in Cognizant now versus inorganic targets to ensure you have that deep domain expertise and broader process depth as you talk about digitizing and gentrifying client operations and then running them?

Great question again. I mean, originally everybody thought applying technology, applying AI to operations will be the first thing to do, but sequentially the way this shaped up is we first applied it to software development cycles. Now the lens is on operations and I would actually believe that operations, data, AI, AgenTech, they all want to come together and the companies which have technology progress can go and disrupt existing portfolios. So the convergence of all of them and the application of AgenTeq to operations of companies is unique, is a unique opportunity. The way to go about that opportunity is can you actually grow faster than what it cannibalizes.

If you look at our BPO portfolio, a large part of it is also related to what we cater to digital natives. In fact, today we announced a service called Cognizant, know, AI data training services. This is AI algorithms and machine learning algorithms. We were training for years. We have 10,000 people doing that.

Now, look at the unique opportunity, I can actually flip it around and take it to Fortune 500 and the Global 2,000, who are now building AI models and we could create a unique differentiation because we are one of the largest players in that space. So there are opportunities, you could almost argue that there are some things in BPO which will completely get commoditized and completely get automated. It will lead to a new set of things which you can attack, which is new labor pools. So, I actually see BPO as a headless transformation opportunity with agentic and AI in the middle and we are anchoring a lot of our deals using this as a key strength.

Thank you. Our next question comes from the line of Amit Daryanani with Evercore ISI. Please go ahead.

Cognizant Technology Solutions (CTSH) Q2 2025 Earnings Call Transcript

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