Cognizant Technology Solutions Corp

NASDAQ:CTSH

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you.

I would now like to turn the conference over to Mr. Tyler Scott, Vice President of 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 the investor supplement for the company's fourth quarter and full year 2023 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 Jatin 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, and good afternoon, everyone. Today, I would like to cover three topics. Cognizant's fourth quarter and full year results, an assessment of our progress in 2023 and a look ahead to our focus and outlook for 2024. I've been in the CEO role now for a full year and have used this 12 months to dig into the company's client relationships, operations, services portfolio, market environment, finances and culture. I've met with about 400 clients and established a regular cadence of listening to and speaking with our employees across the world.

My full year immersion into everything, Cognizant has confirmed my belief in the high level of initiative and motivation of nearly 350,000 employees as well as my belief in the company's distinctive core strengths. I have confidence in our potential to increase our revenue growth, and I'll have more to say about this in a few minutes.

Let's start with the fourth quarter where we delivered on our commitments while continuing to implement our cost management program. To call out three highlights. First, we executed well, delivering revenue within our guidance range despite ongoing macroeconomic pressures and meaningfully exceeded our adjusted operating margin expectations. Second, we made further progress on our goal to increase the percentage of large deals, new clients and business in the overall mix. And third, we saw continued improvement in our voluntary attrition. Q4 revenue of $4.8 billion was in line with the guidance range we provided last quarter. Year-over-year, Q4 revenue was down 1.7% as reported or down 2.4% in constant currency. The quarter developed much as we expected as clients remain cautious and limited the discretionary spending.

Our Q4 adjusted operating margin of 16.1% was meaningfully stronger than we anticipated. Driven by savings from our next-gen cost management program and better execution on our operational efficiencies. We sustained our large deal momentum in the quarter, winning 7 deals exceeding $100 million each. Of these 7 deals, 2 were new business and 5 were a mix of renewals and expansions. I am especially pleased to see our continued decline in employee attrition, trailing 12-month voluntary attrition for our tech services business declined to 13.8%, that is down 2.4 percentage points sequentially and down 12 points year-over-year.

Turning to the full year. Revenue of $19.4 billion was down slightly from the prior year and in line with the guidance we set on our Q3 call. A strong Q4 margin performance enabled us to achieve a full year adjusted operating margin of 15.1% compared with a guidance of approximately 14.7%. We ended Q4 with a trailing 12 months booking growth of $26.3 billion, up 9% year-over-year, resulting in a book-to-bill of 1.4x. For 2023, about 30% of our TCV exceeded 50 billion-plus deals, compared with approximately 20% in the previous year. We signed 17 deals that exceeded $100 million TCV, $100 million TCV. Total TCV for deals above $100 million increased 42% year-over-year. Several factors contributed to this progress. We have reoriented our teams to large deal demand generation and execution across all service lines.

We have strengthened our ability to see, shape and sell large deals. And we have made progress in industrializing delivery with automation and productivity tools to create repeatable solutions and enable a consistent and efficient delivery operating model for large deals.

Turning to our business segments where Jatin will cover our financial performance, I want to comment on our two largest segments. In financial services, while responding to a demand environment that remains challenging. We are increasing our efforts to stimulate growth. We've installed new leaders in a number of key positions across the segment. We have invested in consulting and commercial resources and targets of industries and in partner relationships. We are also focused on expanding our service offerings and on enhancing our industry solutions powered by new technologies like Generative AI. In Health Sciences, as the healthcare industry continues to undergo major transformation, we believe Cognizant is well positioned to become the nucleus of an emerging healthcare ecosystem through our platform's data and solutions.

With these dynamics in mind, we are investing in the expansion of our TriZetto platform and our healthcare BPaaS solution capabilities. We are also capitalizing on the opportunity Gen AI presents to the healthcare market. For instance, LLM can be used to streamline payer administrative processes, automate clinical documentation and enhance clinical decision support systems. I remain confident in the value of our health sciences portfolio provides to clients. For example, Fortrea recently chose Cognizant as its technology transformation partner to deploy a modern secure digital ecosystem to help bring treatments to patients faster while strengthening its position in the life sciences industry. And Takeda, a global biopharma company with whom we have had a long relationship has selected us to help modernize their infrastructure and application management in support of the digital transformation.

Now let's turn to an assessment of how we move the company forward in 2023. To begin, we made considerable progress enhancing three core strengths that taken together, I believe, Cognizant set apart in the market. First, industry expertise. In 2023, we further deepened our expertise at the intersection of technology and industry use cases to deliver industry-specific solutions in service of business outcomes. We also enhanced our collaboration and co-creation with clients and the broader partner ecosystem to stitch together industry-leading capabilities. A good example is our strategic partnership with ServiceNow to advance the adoption of AI-driven automation across industries.

We are also collaborating with ServiceNow to enhance Cognizant's worth next modern workplace services solution with Generative AI. WorkNEXT aims to provide more intuitive and personalized experiences for employees while helping to better quantify and improve the return on experience for enterprise customers. Its second core strength, we are collaborative partners to our clients. As mentioned on our Q3 call, our annual client Net Promoter Score survey hit a historic high for Cognizant last year. An empathy for clients as a part of our DNA, and we believe we have become even better at listening carefully to learning from and working with clients to earn their trust, solve their problems and help them succeed.

Third, we are passionate innovators. Last April, we launched Cognizant's BlueBolt grassroots innovation program, calling on all our employees to help us solve client problems, look for unmet or latent client needs and challenge this status quo. In just 9 months, our employees generated more than 100,000 ideas, 21,000 of which we have already implemented. We expect to augment our BlueBolt program through a new collaboration with Microsoft to launch the innovation assistant a Generative AI-powered tool built on Azure OpenAI service. Shortly after my arrival, we consolidated our performance objectives, the way we measure success suggest three long strategic priorities, long-term strategic priorities become the employer of choice in our industry, accelerate revenue growth and simplify our operations.

I'll touch on our progress beginning with employer of choice. Our voluntary attrition improved throughout 2023 to multiyear lows, while our employee engagement scores improved. To capitalize cognizance entrepreneur spirit, we have given greater autonomy and accountability to business unit leaders. This is helping increase our responsiveness to client needs and market conditions. We remain committed to providing our teams with continuous learning upskilling and professional development. In 2023, 90% of our global workforce spent time in learning with 270,000 of our employees acquiring at least one new skill of proficiency and 88,000 completing AI and Generative AI courses. We've also established programs to provide more opportunities for employees to advance their careers.

I'm pleased to say we promoted nearly 30,000 people across the company last year. Later this month, we'll bring together our entire employee population and gatherings physical and virtual to recognize excellence across the business with Cognizant's company-wide awards program, The Impact Awards. Late last year, we introduced an initiative called Shakti that unify our women-centric programs to further advance carriers and boost women leadership and technology. Shakti and compass Cognizant's leadership development programs for a senior level women globally and for a mid-level woman in India, along with our paid up skilling program for women returning to work after a career break.

Our second performance objective is to accelerate revenue growth. We've invested heavily in platform-centric approaches to further differentiate Cognizant and select industries. I've talked about our core platform such as TriZetto and healthcare shared investigators in Life Sciences and asset performance and smart manufacturing, to name a few. Last year, we also began industrializing solutions for the next wave of technologies with our AI portfolio. We introduced Cognizant Neuro IT operations, our AI-led platform built to reduce the complexity and cost of enterprise infrastructure. We launched Cognizant Skygrade cloud orchestration platform designed to help clients to rapidly transition to modern cloud-native architectures.

In addition, we introduced Cognizant Neuro AI developed to speed clients' adoption of Generative AI. With Neuro AI, we are able to quickly build AI enablement use cases for clients that are specific to their businesses. And just last week, we expanded our Gen AI portfolio with the introduction of Cognizant flow source, developed to help engineering teams deliver high-quality core faster with increased control and transparency.

Today, we have over 250 early engagements that incorporate the use of Generative AI. Some examples are creating a virtual code for a diabetic patient for a pharma company predicting the size of target audiences for a TV network, conducting sentiment analysis and summarization of user comments for a large bank, developing a field services expert adviser for a manufacturer, enabling conversational intelligence for an insurance call center and auto generating a sales pitch for a tech company. We have another 350 plus opportunities in our pipeline that we are planning to scale.

We aim to infuse AI not only into our core offerings, but into everything we do, including using Generative AI to create industry and functional services. It's worth mentioning that one of our integrated practices, intuitive operations and automation, which helps clients build and run modern operations crossed $2.5 billion of revenue in 2023. Our tech-driven modern BPO and automation services helps clients achieve higher levels of productivity and read benefits of Generative AI in the core processes.

We strive to stay tuned to market shifts which is why last month, we acquired Thirdera and elate ServiceNow partner that specializes in solutions for the ServiceNow platform. Adding Thirdera brings an on and near-shore global presence to own ServiceNow business group. With Thirdera, will continue to advance the efforts of our strategic partnership with ServiceNow to build a $1 billion combined business focused on AI-driven automation. Our third performance objective is to simplify our business. We executed well on our next-gen program, which is aimed at simplifying our operating model, optimizing corporate functions and consolidating and realigning workspace to reflect the post-pandemic work environment.

Our cost management enabled us to achieve a 2023 adjusted operating margin performance that exceeded our expectations from earlier in the year. Simplifying our business goes beyond structurally reducing costs. It also helps us become more agile and proactive and innovative. Last year, we further streamlined our operating model and what we -- what was a complex metric structure to focus primarily on our markets and integrated service lines. We are moving towards fewer layers in the organization, which we believe will bring us closer to our clients and associates help drive strong coordination across the company and further empower account teams to make decisions.

In summary, 2023 was a year of strengthening our company's fundamentals. Now let's look at -- look to our focus in 2024. We have selected 6 strategic imperatives that will help further sharpen our differentiation across clients' primary needs while strengthening our ability to achieve our performance objectives. These imperatives are to grow in select industries, expand internationally, build large deal capabilities, capture the AI opportunity deliver our talent strategy and implement our IT road map. In the interest of time, I'll focus on only one of those initiatives, which is capturing the substantial AI opportunity.

Although consumer use of Generative AI is starting to explore, enterprise use cases have been ramping slowly. That said, we expect the pace of enterprise adoption to pick up soon and believe that after a slow takeoff movement up the S-curve will accelerate sharply. The results we have seen from initial Gen AI proof of concepts are very increasing. We believe system integrators like Cognizant will play a major role in managing, governing and optimizing Generative AI initiatives at scale. This includes building accuracy in output, reducing hallucinations, continued reinforced learning and testing in incorporating transparency and accountability and iteratively driving performance optimization.

Therefore, as mentioned on our prior calls, we expect to invest approximately $1 billion in our Generative AI capabilities over the next 3 years, spanning people, platforms, partnerships and M&A. We believe generative AI is becoming a driving force for the economy and society in partnership with Oxford Economics. Cognizant developed and published a new economy compacity ahead of last month's World Economic Forum that predicts Generative AI could inject up to $1 trillion into the U.S. economy over 10 years. Our research also predicts that 90% of the jobs will be disrupted in some way by this technology. From 2023 to 2032, the percent of jobs with high exposure scores, meaning the degree to which an occupation will be affected by Generative AI could increase from 8% to 52%, setting the stage for a profound shift in how we approach work productivity and economic growth.

One last topic to cover, and that's the demand environment. We see little change from the assessment we have provided in recent quarters about uncertain and weak discretionary spending in the early part of 2024. Given the clients are experiencing a period that has bought both change and uncertainty together, we expect them to continue to focus on reducing costs, consolidating vendors modernizing their data and processes and increasing the productivity so that they can apply savings to AI-led transformation.

On a closing note, we celebrated our 30th anniversary just last month. we have stood the test of time, and we are determined to sustain and extend the momentum we have created last year. As optimistic as I was about our company's future when I joined last January, I'm doubly so now. whatever the future may hold, I believe we are in a significantly strong position today than we were one year ago to seize the market opportunity ahead.

Now it's my pleasure to turn the call over to Jatin, who joined us on December 4 for his initial observations about Cognizant and additional details on the quarter.

Thank you, Ravi, and good afternoon, everyone. I'm very excited to join Cognizant and would like to thank the entire organization for such a warm welcome. I would also like to thank Jan for helping me in making the onboarding experience seamless. I have always admired Cognizant's growth mindset, client centricity and the entrepreneurial culture. While it has only been 2 months since I joined the energy and passion across the organization are apparent. I have also had the opportunity to participate in our global sales kickoff events in January. This has further strengthened my conviction in Cognizant's capability and our market opportunity.

I'm excited to partner with Ravi and the entire leadership team to build on the progress we have made in 2023 as we strive to reach our full growth potential. In doing so, I believe there is a tremendous opportunity to create long-term sustainable value for our associates, clients and shareholders.

With that, let's turn to our fourth quarter and full year revenue results. Fourth quarter revenue was $4.8 billion, representing a decline of 1.7% year-over-year or a decline of 2.4% in constant currency. Year-over-year performance includes approximately 90 basis points of growth from our acquisitions. This led to full year revenue of $19.4 billion, which declined 0.4% year-over-year or 0.3% in constant currency. Year-over-year growth includes approximately 110 basis points of growth from acquisitions. Ravi discussed Financial Services and Health Services, which declined 6.6% and 2.7% year-over-year in constant currency, respectively.

So I will quickly comment on our other 2 segments. Products and Resources revenue was roughly flat year-over-year in constant currency, which included contribution from recently completed acquisitions and the ramp of new business. This helped offset the macro-driven discretionary spending pressure. We saw relatively better performance in North America, particularly among auto, utility and travel and hospitality clients. Communication, media and technology revenue increased 2% in constant currency. The growth reflected the benefit from recently completed acquisitions and the ramp of new bookings.

Now moving on to margins. During the quarter, we incurred approximately $40 million of costs related to our NextGen program. This negatively impacted our GAAP operating margin by approximately 90 basis points. Excluding this impact, adjusted operating margin was 16.1%. Year-over-year, margin included savings from our NextGen program and tailwinds from the depreciation of the Indian rupee. This helped partially offset increased compensation costs. As a reminder, the prior year period also included a negative impact from a noncash impairment charge related to a health sciences customer. Our GAAP tax rate in the quarter was 26%, adjusted tax rate in the quarter was 25.4%. Q4 diluted GAAP EPS was 1.11, which is $1.11 and Q4 adjusted EPS was $1.18.

Now we turn to the balance sheet. We ended the quarter with cash and short-term investments of $2.6 billion or net cash of $2 billion. DSO of 77 days was flat sequentially and increased 3 days year-over-year, driven by our business mix. Free cash flow in Q4 was $659 million which brings full year 2023 free cash flow to $2 billion or approximately 95% of the net income. This was slightly ahead of our expectations. During the quarter, we repurchased over 4 million shares for $313 million and returned $146 million to shareholders through our regular dividend. For the full year, we returned about $1.7 billion to shareholders, including $1.1 billion through share repurchases and $591 million through our regular dividend. As of December 31, we had $1.8 billion remaining under our share repurchase authorization.

Turning to our forward outlook. For the first quarter, we expect revenue in the range of 4.68 million to $4.76 billion, representing a year-over-year decline of 2.7% to 1.2% or a decline of 3% to 1.5% in constant currency. Our guidance assumes currency will have a positive impact of approximately 30 basis points. For the full year, we expect revenue to be in the range of $19 billion to $19.8 billion, which is a decline of 1.8% to growth of 2.2% year-over-year or a decline of 2% to growth of 2% in constant currency. Inorganic contribution is expected to be up to 100 basis points, and we anticipate approximately 20 basis points positive impact for the year from the currency. Our NextGen program remained on track this quarter, and we still expect to incur total cost of approximately $300 million. This includes $229 million incurred in 2023 and our expectation for an additional $70 million in 2024. There are no changes to our savings assumption from NextGen, and we still intend to reinvest the majority of the savings in the growth opportunity in 2024 and beyond.

Moving on to adjusted margins. We are pleased with the strong finish to 2023, which allowed us to deliver a full year adjusted operating margin of 15.1% versus our guidance of 14.7%. In 2024, we continue to expect 20 to 40 basis points of operating margin expansion. This represents an adjusted operating margin range of 15.3% to 15.5%. We remain focused on driving further efficiency in our business model through improved utilization, increased operational discipline and automation of tools and processes. We are also introducing guidance for net interest income versus our prior practice of providing gross interest income.

For the full year, we anticipate net interest income of approximately $40 million. Our expectations for the full year adjusted tax rate is 24% to 25%. For the full year, we expect free cash flow will represent about 80% of net income. This includes an anticipated negative impact of approximately $360 million because of a ruling on January 8 in India relating to a previously disclosed 2016 tax matter in connection with share repurchase transactions undertaken by our Indian subsidiary. The ruling required Cognizant to deposit the funds with India tax authorities to proceed with our appeals process. The funds deposited with tax authority were previously held in bank deposits under Lean. And as of December 31 were presented on our balance sheet under long-term investments.

The outflow will negatively impact our operating cash flow, but will not impact the cash and cash equivalent amounts on the balance sheet, and therefore, we do not anticipate any impact to our capital allocation priorities. Final amounts refunded to Cognizant or due to tax authorities will be determined at the end of the appeals process. We continue to believe that we have complied with all tax regulations applicable to this matter in accordance with the law and intend to vigorously defend our position.

Moving on to capital allocation. We expect to return over $1 billion to shareholders in 2024, including at least $400 million through share repurchases and $600 million through regular dividends. We will also continue to pursue acquisition opportunities aligned with our strategy. For the full year, we, therefore, expect to deploy more than 100% of free cash flow given the negative impact of the free cash flow from aforementioned additional deposit with the India tax authorities. Based on our anticipated share repurchases, our guidance for shares outstanding is approximately $497 million. This leads to our full year adjusted earnings per share guidance of $4.5 to $4.68. With that, we'll be open to take the questions.

[Operator Instructions] And our first question comes from the line of Ashwin Sroka with Citi.

Thank you. Ravi and Jatin, welcome. My first question is with regards to bookings, if you can provide some color as it relates to ACV versus TCV expectations, new versus renewals by sizing perhaps? I know you provided by count. And in terms of just cadence of when you expect new contracts to start kicking in and influencing growth, if you can comment on that, that would be great.

Thank you, Ashwin. I hope you're doing well. And I'm going to start. This is Ravi, I'm going to start and ask Jatin to chip in. If you look at how we shaped our 2023 bookings, we have significant upside on the category about $50 million, about $100 million and actually about $450 million TCV. Because these are large deals, managed services, cost takeout opportunities because 2023 was a lot of them. It also has a longer period, if I may, in comparison to shorter deals in the range of, say, $0 to $5 or $0 to $10 million. The $0 million to $10 million deals, actually, they kind of get consumed in the same year as the form, and it is actually, in some ways, driven by the discretionary spend. So we have more skewness. We don't comment on the ACV versus TCV.

We don't publicly say that, but we have more skewness on large deals in comparison to the smaller deals, the large deals actually, we have significantly gone up over the previous years. Also, we have new renewables -- new expansion -- I mean, renewals, new expansions and new logos in the mix, I would say, we again have a significant upside on new and expansion. Like we have commented on the numbers of deals, I think even in the TCV numbers, you will find new business and expansion being very high. In fact, we also made a point to make sure that we published some of these names in the market, for example, this quarter, the important ones we published is Fortrea is going to be one of the customers we signed a large deal with. We also published one on Takeda.

So effectively, what it does is it gives you a good backlog for the future because the large deals have a longer period, so they give you a good backlog for the future. But they also have a runway into the current year where you win, but they have a bigger runway into the future years as we go forward. When we did 2023, we didn't have that luxury from 2022 because the large deal proportion was much lower. Now that we are entering 2024, what we won in 2023 will contribute to 2024.

It did contribute to '23, but it will contribute more to '24 and if we create a backlog for the future. Now the question is, what does it do to our revenues. As much as it starts to contribute to revenues. It -- there is also a discretionary softness, which we had in 2023 which kind of -- a portion of it sets off. So the question is, in 2024, how much is the discretionary going to hold, depending on which you could see the impact. I mean, it's unknown at this point of time, early in the year, what is going to happen to discretionary in 2024. Discretionary in 2023 went down and it kind of made up -- kind of got neutralized by the extraordinary run we had on large deals. 2024, we don't know what's going to happen to discretionary, but it will -- the '23 wins will contribute to it. And the continued momentum in '24 will contribute to it as well.

So as it relates to your outlook, what are you assuming beyond 1Q in terms of discretionary? And if discretionary does not actually come back to a good extent, would you still expect things like the investment in consulting relationships, partnerships and so on to at least incrementally contribute? Or are we just in a waiting game?

So Ashwin, if you do the math, you will notice that there is some sequential growth assumed in our numbers. So if you do the math, you will get that there is sequential growth assumed in our numbers. We have good traction on cost takeout vendor consolidation -- AI-led productivity deals, those are the large deals we are winning. So we want to double down on those opportunities. We think we have a winning formula, and we will continue to run on it, which will give us the new business and which will give us the expansion on our existing clients. So discretionary today is unknown. I mean -- and that's why if you notice our guidance range is broader because we do not know what we do not know.

But our thesis is very simple. We are going to be prepared for a comeback of discretionary. We're going to be fully prepared for it. We will gear our operating engine. We'll gear our fulfillment engine and will double down as it comes so that we don't miss the opportunity. Equally, on a separate swim lane, we've got a winning formula on large deals for cost takeout, which will remain either respective of discretionary comes back or not. We're going to ride on them as well. We're going to continue on that momentum from 2023, which has contributed to new business and new logos. So we will go behind it. So we want to be prepared on one simulation, and we're going to double down on the other one. And if that comes back, we want to be seizing those opportunities.

Our next question comes from the line of Tien-Tsin Huang with JPMorgan.

The margin outlook was encouraging. So I was hoping for little more detail on the gross margin versus operating margin dynamic. It sounds like utilization rates should improve. You talk about NextGen benefits, productivity, pricing, that kind of thing. So I just want to make sure understand the callouts for the -- for margins for the year across gross margin and operating margin, if that's okay. That's all I had.

Sure, Tien-Tsin. The I think the opportunity exists on both lines, and the drivers would be clearly different. The driver for gross margin would be really the efficiency of operations kicking in. We have quite a bit of utilization upside that one can capture as the growth return. The second is really deploying the tools and processes relate around AI and automation to get some operational benefits out. So there's the opportunity on gross margin apart from the traditional opportunity around pyramid and Gen Zs and related traditional measures. On operating margin, definitely, there will be an upside on SG&A front led by some of the cost takeout [ elated ] with the tail end of NextGen program that will complete in 2024. So I would be -- I mean, we will work on both, and we'll see where we go by the individual lines. But overall, we think we have sufficient actions around the overall expansion we have spoken about.

What Jatin said, we're very pleased with our performance on the NextGen program. We do think we have an opportunity for a full year impact this year on the NextGen program. Equally, as Jatin also pointed out, in addition to the classical levers and gross margin, we do have -- I mean, classical levers being better operational efficiency, higher utilization, better pyramid, higher offshoring. I mean all of these are -- we are very [ encased ] with the progress. But we also have this unique opportunity to share the productivity benefits with our clients, which is the technology arbitrage versus the labor arbitrage driven by generative AI tooling. And I think we are ahead of the curve, which is the reason why we are winning a lot of these large deals and sharing those benefits of productivity, which will then start to contribute to growth in operating margin as we go forward.

Our next question comes from the line of Moshe Katri with Wedbush Securities.

And Jatin, welcome. It will be great to work with you again. So a couple of questions. If we are looking at revenue growth and we're looking at the deal flow that you've been winning since you came on board, Ravi, when do you think we could see that inflection point in revenue growth, especially as you start seeing some of the deals ramping on top of what you won last year and obviously factoring the fact that it takes some time for these deals to ramp. That's my first question.

Thank you, Moshe. Good to hear from you again. the wins in 2023 started to ramp in 2023. Of course, they have a partial benefit in the first year and they start to get to more benefits in the second and the third year. Equally, the momentum as we got into the back end of last year, we actually had more new business, more new logos in the percentage mix of our large deals, which means it will have higher impact in the future years. So what this really does to us is it makes our business sticky.

It increases our backlog for the future. And therefore, you're entering the year with tail velocity. The only unknown in the mix is the $0 to $5 million deals, which are discretionary in nature. And they kind of neutralize if they fall off, they kind of neutralize what you win on the large deals. I think part of that happened in 2023 because discretionary was pretty soft in 2023. 2024, we do not know what's going to happen to discretionary. Otherwise, I would say the flow of those deals, the large deals is continuing and it will strengthen in '24 and '25 when it will actually be fully realized.

What it does though is -- I mean, the unknown in the mix is how much does that get neutralized by soft discretionary. If the discretionary is not soft, it comes back, we want to be prepared it then starts to show the momentum. So it's an interesting thought because it's not about the large deals, it's also about the small deals because if the small deals start to neutralize even if the plateau, then the large deals will start to show revenue momentum. That's how I see it. So we are executing to these deals pretty well. And you know this, Moshe, that in the first year, they always start with transition, they start with a slower trajectory.

And then once they take off, they get to a steady state of revenue. So that I'm not as worried about. I continue to believe that we are in good shape on that. what certainly I do not know is discretionary.

Okay. Okay. That makes sense. And then the second one is more related to strategy. I've always been intrigued in terms of what Cognizant does with TriZetto. And that used to be a pretty big part of your healthcare practice. And I think you've indicated during our first introduction when you came on board that you will be taking a second look at TriZetto and trying to kind of maybe revive the business? Are there any actions that you're doing there to -- for us to see more of that reflected in the numbers in the healthcare vertical?

Moshe, I have to say this, the healthcare ecosystem for Cognizant is the strongest in the market. It's an industry which will go through a significant transformation. So we are in a pole position in healthcare -- in the healthcare economy, all the way from payer provider pharma benefits management to life sciences. We have an extraordinary strength of platforms plus services. Just look at the order of magnitude of what we do on TriZetto. 250 million-plus claims on an annual basis approximately 100 million plus enrollments on an annual basis. We do 3 billion electronic data interchange transactions. So we have an extraordinary story of TriZetto, 60-plus percent of the U.S. insured population goes through our platforms. It's the fulcrum and the nucleus of healthcare ecosystem.

So we're going to invest and double down on it and seize the opportunities which come on this transformational journey for our clients. This is going to be a sector which will significantly transform and we have an exciting clientile base across the spectrum. We've invested on generative AI. We have done multiple announcements last year of embedding generative AI including our partnership with Microsoft on the open AI piece, which we have embedded into the entire stack. So we are very excited about TriZetto. I am actually doubly sure that, that is going to be an integral part of our healthcare strategy for the future.

Our next question comes from the line of Surinder Thind with Jefferies.

On the AI component and the potential acceleration that you may see as the year progresses, when you roll out these new products and services, is there a pricing conversation that you have with clients? Is there a way to price this differently? Can you command more? Or is it just that the expectation is you'll get a lot more in consulting services down the road? Can you maybe provide some color on that?

Sure, that's a great question. Thank you for that. I would say three swim lanes Surinder. The first is the last -- the last mile holding. The ability to take foundational models, which are available in the market and create a funnel to make them enterprise-grade which is the work you have to do on the last mile, all the way from managing, governing and orchestrating large language models or foundation models. And that's a variety of things. It starts from accuracy of the models to reducing hallucinations to doing performance cost optimization to reinforced learning unlike software, generative AI goes through reinforced learning even after you implement it because it learns through the process. So there is a lot of heavy lift needed to take the foundation models and make it production-grade enterprise grade.

And I think we have a unique opportunity, and I'm excited about what I have actually seen with the platforms we have built, the platforms we announced to the market and how we are helping our clients to get there. We have 250-plus prototypes running. We have 350-plus in the pipeline. Whenever those CapEx cycles trigger off, I think we are in a good position to monetize on that. That's the first swim land. So it's -- you could call it consulting in your language the way you put it, but it is actually a bunch of things we want to work on.

There is a second swim lane, I would say, which is about how do you apply it to your productivity. And that kind of switches on to two things. How -- what does it do to developer productivity? What does it do to technology life cycles all the way from design to testing to writing code to all of it. And I call them to subsegments because one is to cannibalize the business you do and share the benefits with your clients. The second is to go and cannibalize or rather go and propose something provocative on the work. We don't do as an incumbent, but we could actually create better productivity to our clients. And one of the reasons why we are winning those large deals is that a pivot on our large deal story. We actually go and disrupt client landscapes with -- which is where we are not incumbent with not just labor arbitrage, but arbitrage powered by AI.

So I would say there are opportunities all through, all the way from applying it to the landscapes to -- applying productivity to the technology life cycle meet our business, we do or be it where we are not an incumbent. And I would say this is a pervasive opportunity. It will be a short -- it will be a slow takeoff, but it will be a short cycle of a slow takeoff and it will then get into a sharp S-curve, as I mentioned on my primary comments. So it's a very pervasive technology. It diffuses very fast, and it has a very good distribution network. So I'm excited about the prospects, excited about the investments we're making, excited about how we're staying relevant with our clients. We also embedded it into our platforms like Trizetto. So we are equipped to seize these opportunities as the CapEx cycles of generative AI trigger to enterprise-grade work.

That's helpful. And then as a follow-up, just to kind of tease out what you're seeing in the discretionary spend environment. I guess the question I would ask is how much more can clients really pull back on that spectrum of spend? And then I guess the counterquestion here would be, given the relative economic resiliency, why aren't clients spending more at this point? Like what's holding them back? Like what do they need to see? Or what are they signaling to you of when they're willing to perhaps take some risk?

So let me start and I'll ask Jatin to chip in. I would say the discretionary spend. If you take an industry view is the most in banking, financial services and insurance. That's a sector which is burdened with high interest rates. And because of the high interest rates, there is a wait and watch and a kind of a pause on discretionary work. Remember, these are financial services is one of those sectors, which also has strong technology retail organization. So what they outsource is dependent on how much is the discretionary. Let's see how the interest rates shape up in the year. And normally, what I have seen based on my experience is if there are 1 or 2 repeatable cycles of interest rate adjustments downwards, we will start to see the spend to come back. Discretionary is also tied to transformational work. That means transformational work normally takes off when there is a period of certainty. I've said this before in my remarks that we see this as a period of uncertainty and a period of change. I mean the changes -- the change ahead of ours is such a positive catalyst. So if the uncertainty starts to go away, I think the change will trigger discretionary to come back.

It's also a year where at the back end of the year, we -- in many parts of the world, there are elections, so I don't know what impact it does to discretionary. But the AI cycle can trigger the discretionary back. The interest rates drop can trigger the discretionary back financial services is the biggest one. So we are hoping that the stability in that sector based on interest rate cuts can drive that discretionary back. So it's a little bit of -- I'm waiting for how the interest rates shape up in this year to really say whether it's going to come back or not.

Yes. So Surinder, this is Jatin. I will just add to say that there is this -- if you see the history of IT services industries and shops and shop recoveries is always some event led. And as we all know, the current situation is not a shock. It's not an event. It is an overall high interest cost across the across the spectrum of the yield curve, which is weighing down on minds of decision-maker. It is difficult to call when the discretionary comes back, it's very sector-specific. And it is a little novel from what the world has seen in the last 20 years, where there was one big event and then you actually saw interest rates go down very, very sharply, very quickly, and there was a bounce back of the demand. This time, it is a new slowdown that we are -- and I'm sure all our customers are coping -- to in terms of how they react to it.

Also, one other, I would say, one other event in the mix is during the COVID either there was a heavy discretionary in many sectors. And that's going to -- that went through -- that's kind of gone through a course correction, if I may, including the fact that there was uncertainty. So it's going to be an interesting year to watch on discretionary and that's probably -- as we go through the year, we'll probably get more visibility on it.

Our next question comes from the line of James Faucette with Morgan Stanley.

Great. Thank you very much and really appreciate all the color and detail you're giving today. I'm wondering just in terms of the larger deals that you've talked about, can you talk about the action there of win rates for Cognizant? It sounds like you're pretty confident et cetera. But just wanted to get a sense for how you're perceiving your competitiveness right now in the market.

Yes. So you would have noticed that these large deals we are doing, we're doing based on a differentiated value proposition, and we are holding our pricing. I mean, that's one of the reasons why our margins were good enough -- good in 2023. And we gave 20 to 40 basis points improvement this year. Our strength on our large deals is the following: we are able to unify the company together with the velocity, which is in line with what our clients are looking for. I mean the velocity of these deals is very high because these are cost takeout vendor consolidation kind of deals. So you need the velocity, you need the unification of -- to come together. It's in our DNA. So I have kind of energized the DNA, if I may, in 2023, and that has helped us significantly.

The second I would say is there are sectors where we have strong capabilities. And in those sectors, we are a formidable force. We can be provocative in those sectors. We don't need to wait for a request for a consolidation or request for productivity. We can actually work with our clients. We are very sticky. I mean we are also a company over the 30 years of Cognizant's heritage,we are very sticky to our client. So we could be provocative with bold ideas. I see that as trade and an integral part of the DNA. And as a CEO of the company, I've been able to lead those provocative conversations with our clients. That has helped us significantly. We have an extraordinary front-end team, if I may. The third, I would say, is our execution muscle, which we built in the last 1 year. I'm very proud about it. And that has helped us to not just deliver these deals well, but also hold our margins as we execute these deals.

The last one, I would say, in the mix is we also have, I would say, uniquely a differentiated value proposition related to productivity led by automation and AI, which can actually help to build provocative board thinking to support construction of these deals and share the benefits about the extraordinary opportunity AI provides to us. So I would say these are the 3 or 4 things which have helped us to win deals. And I would like to continue on that momentum in 2024.

That's great. And then wanted to ask is -- it's interesting in each of the last couple of quarters, you've increased net head count slightly. I think usually, that's taken as a positive indicator. Can you just talk about as you're maintaining head count even in the face of potentially being down as much as 2% at the bottom end of your guided range this year, how you're thinking about managing that? And is the nature of the people you're adding and retaining just to serve kind of these larger deals that you've already booked? And how much of it is just in anticipation that more discretionary and smaller deals could come back? Just trying to get a sense for how you're thinking about managing head count and what we should take from that?

Yes. So James, this is really a combination of both retaining sufficient flexibility for the growth to come. If the growth comes back, you should have sufficient flexibility on the bench. That's one. And two is really some plant addition that we do systematically to certain skill sets and certain part of our pyramid that has both contributed to this small addition that you are seeing on the total headcount.

Also, just to add to what Jatin said, you should remember, we have an extraordinary story on how well we have done on attrition. I mean we are now really a top-notch player with industry-leading retention plan. I mean we have -- look at where we were at the start of quarter 1 and 2023 to now, our attrition has significantly improved. That is also helping us to be ready for the discretionary at any point in time, it comes back because it gives you the cast and capacity to fulfill.

Our next question comes from the line of Ramsey El-Assal with Barclays.

I wanted to ask you if you could comment on how much visibility or maybe relative visibility that you have right now into fiscal '24 and I guess I mean relative to a more settled normal environment. And I guess the underlying question is, are you having to bake in more conservatism into your guidance this year to account for environmental, external factors that are difficult to kind of see through at this point?

Sure, Ramsey, this is a typical beginning of the year where we don't know what we don't know. If you really see mathematically, if you dissect our guidance, you would see that there is a certain growth -- sequential growth that we have assumed during the course of the year. So there is a certain growth assumption that we are walking in with -- but environment remains uncertain, and it's certainly a slower start to the year, as Ravi indicated in his opening remarks.

Got it. Okay. And then a quick follow-up for me. Could you also give us your view on the extent to which clients are prepared to embrace generative AI? How much work still needs to be done on sort of underlying technologies at this point for enterprises to start taking advantage of the new technology?

I would say, in some areas, we are seeing more confidence. The two big areas I want to highlight is employee productivity. And the second is customer service. We see them getting faster to production grade. Employee productivity is amplifying human potential, as we call it. Customer service always had uniquely opportunities here because remember, when robotic process automation, which is down the chain and the continuum of AI and generative AI, we also had the most adoption there. These are the two areas where they're ready. I think the things they're grappling with is as I mentioned, and the need of a system integrator like Cognizant plays an important role.

The things they're grappling with is the accuracy of the models, the explainability of the models, the traceability of the data sets so that the explainability could be judged. I mean, remember, this is output, which is coming out from computer, which is building logic, which means you need to have explainability behind it to make it responsible enough. And I think the other thing they're grappling with is -- I mean, we call that hallucinations, but that's what it means in different ways. The other thing we are grappling with is performance versus cost so that they can make it production grade. But we will -- it will disrupt one of the studies we did with Oxford economics is it will disrupt 90% of the jobs, some jobs will get disrupted more, some jobs will get disrupted less. The tasks within jobs will get disrupted. And we created something called an exposure of score and jobs which gives us the opportunity to figure out which jobs will actually go through more disruption.

But at a high level, I would say, these are the two broad areas where customers are probably going to be more prepared to cross the bridge on embracing generative AI into enterprises. Needless to say, this is going to be one of the most pervasive technologies in our times. So I'm excited about the prospects, but I'm -- I'm equally getting prepared to what it means for the system integrator.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the call back to management.

Great. Thank you all for your interest in Cognizant and for joining our call. We look forward to catching up next quarter. Thank you.

This concludes today's conference. You may now disconnect. Enjoy the rest of your evening.