Cognizant Technology Solutions Corp ($CTSH) Q4 2025 Earnings Call

Thank you, Ravi, and thank you all for joining us. Our fourth quarter and full-year results were a significant milestone in a multi-year journey marked by disciplined execution, strategic clarity, and operational excellence. We delivered fourth quarter revenue growth above the high end of our guidance range and exceeded the initial full-year guidance we provided in February last year across all metrics: revenue, adjusted operating income, EPS, and free cash flow. We expect that our calendar year 2025 constant currency revenue growth will be in the top tier among the 10 peers against which we benchmark performance, placing us definitively in the winner circle. Beyond revenue growth, we achieved each of the broader objectives we provided at our investor day. This includes sustained large deal momentum, skilling for the future through AI training for approximately 260,000 employees, adjusted operating margin expansion of 50 basis points, and 2025 adjusted EPS growth of 11%, well above revenue growth. We delivered these results in a period of significant macroeconomic complexity and technological change, further bolstering our conviction in the strategic actions we have taken to become an AI builder company. We are well positioned to sustain this growth in 2026 and confident that we can build on this momentum in the years ahead.

Now moving to the details. In Q4, revenue of $5.3 billion grew 3.8% year-over-year in constant currency and was all organic. For the full year, the revenue of $21.1 billion grew 6.4% in constant currency, including 260 basis points of growth from Belcan. With respect to demand, the environment remains complex. Traditional discretionary spending cycles continue to evolve as clients rebaseline expectations for productivity gains. However, we view this as an opportunity to capture wallet share in large deals and help clients reinvest savings into innovation. Moreover, it opens new pools of addressable spend for us to advance our AI builder strategy. Now turning to segment results. Financial services once again led with full-year constant currency revenue growth of approximately 7%. This was driven by strong performance in North America across banking, financial services, and insurance clients. We have seen a steady improvement in discretionary spending in the last several quarters and consistent large deal signings, including a new mega deal in the fourth quarter. Our pipeline is strong and we feel well positioned to carry this momentum in 2026. Health sciences performance was resilient despite ongoing industry cost pressures and policy changes. In this period of heightened uncertainty, we are helping customers reduce costs while improving patient experiences and accelerating productivity. These cost savings are funding clients' future-focused investment across core platforms, cloud modernization, and regulatory readiness. We are seeing AI projects grow in areas like claims efficiency, clinical documentation, and customer experience, and Trizetto remains a core differentiator driving growth in implementation and managed services as clients modernize their administrative cores. Products and resources performance has been stable. While tariff uncertainty continues to suppress discretionary spending, we expect large deal traction during the second half of 2025 to drive better performance in 2026. AI adoption is growing across consumer and retail sectors, leading to demand for data services and agentic-led experience transformation. In communications, media, and technology, fourth quarter year-over-year growth among our technology customers was more than offset by weakness in comms and media. Within comms and media, we have seen some impact from broader end-market softness, particularly in North America. On the technology side, clients continue to rapidly innovate and adopt Gen AI, which is driving demand for our services. Geographically, North America was again our standout region in the fourth quarter with growth of more than 4% year-over-year in constant currency, driven by financial services and healthcare. Europe grew 2% in constant currency with healthy growth in financial services and among life sciences customers. Rest of world grew in line with the total company, driven by the Middle East.

Turning to bookings, bookings growth in the fourth quarter was driven by robust large deal performance. We signed 12 deals each with TCV of more than $100 million. This includes two mega deals in the quarter, one in financial services and one in healthcare. On a trailing 12-month basis, bookings grew 5% and represented a book-to-bill of 1.3. Annual contract value declined modestly year-over-year due to the mix of longer-duration deals and softness in small deal bands. That said, our backlog visibility at year-end is similar to where it stood this time last year and underpins our confidence in our full-year guidance. Now moving on to margins. Fourth quarter adjusted operating margin of 16% increased by 30 basis points year-over-year, benefiting from NextGen program savings, increased utilization, and the Indian rupee depreciation. We delivered this result despite increased compensation costs, including our merit cycle and variable compensation, which drove a significant portion of our gross margin change year-over-year. Variable compensation for the majority of our associates is expected to be the highest since 2018, and we remain committed to investing in talent to fuel our growth. In November, the government of India implemented certain provisions of the Code on Social Security, or labor code, as part of a broader labor law consolidation initiative. These rules did not have a material impact on our P&L in the quarter but did result in a one-time increase to our defined benefit liability on our balance sheet with a corresponding increase to accumulated other comprehensive income. We anticipate a modest increase in our defined benefit costs prospectively.

Now to additional details on EPS, cash flow, and capital allocation. Fourth quarter adjusted diluted EPS was $1.35, up 12% year-over-year. This drove full-year EPS of $5.28, up 11% from the prior year. DSO of 81 days declined one day sequentially and increased 3 days year-over-year. Fourth quarter free cash flow was approximately $800 million and brought the full-year amount to $2.7 billion, representing more than 100% of net income. During the fourth quarter, we returned nearly $500 million of capital to shareholders through share repurchases and dividends, bringing the full-year total to approximately $2 billion. We ended the quarter with cash and short-term investments of $1.9 billion, or net cash of $1.3 billion. These amounts exclude about $730 million which was deemed restricted cash and held in escrow ahead of the closing of the Thirdeye acquisition on January 1. Our M&A pipeline is healthy and we intend to maintain an active acquisition strategy to strengthen our capabilities aligned with our AI builder strategy. We believe our robust free cash flow and strong balance sheet provide us with flexibility to invest strategically in the quarters ahead while continuing to return significant capital to shareholders.

Now turning to 2026 guidance. For the first quarter, we expect revenue to grow 2.7% to 4.2% year-over-year in constant currencies. This includes approximately 100 basis points from our recently completed acquisition of Thirdeye. The midpoint of this range implies a modest sequential decline on an organic basis due in part to lower bill days in Q1. For the full year, we expect revenue to grow 4% to 6.5% in constant currency. This includes inorganic contribution of approximately 150 basis points, of which approximately one-third is expected to come from future M&A. The midpoint of the range implies organic revenue growth of approximately 3.8%, which is consistent with our 2025 performance. This is also approximately 150 basis points above the midpoint of our initial 2025 organic growth guidance provided last year. At the midpoint, our full-year guidance implies stronger sequential growth in the second and third quarter compared to 2025. And similar to our guidance philosophy last February, the midpoint is based on our current visibility and the discretionary demand environment as we see it today. Our adjusted operating margin guidance is 15.9% to 16.1%, which represents 10 to 30 basis points of expansion and is in line with the outlook we provided at our investor day last year. Similar to 2025, we expect expansion will be driven by cost discipline and SG&A leverage. We expect free cash flow conversion of 90% to 100% of net income. Adjusted effective tax rate is expected to be in the 25% to 26% range. The midpoint implies a modest increase year-over-year, driven in part by discrete beneficial items in 2025 that we do not expect to repeat in 2026. And our expected weighted average dilutive share count is approximately 475 million. This leads to adjusted diluted EPS guidance of $5.56 to $5.70, representing 5% to 8% year-over-year growth. Expected EPS growth is being driven by anticipated revenue growth, margin expansion, and lower share count. This is being partially offset by a higher tax rate, lower interest income as a result of lower assumed interest rates, and an increase in non-operating expenses related to the India labor code changes. For 2026, we expect to return approximately $1.6 billion of capital to shareholders, including approximately $1 billion towards share repurchases and the remainder towards our regular dividend. This leaves ample expected free cash flow available for future M&A. As always, we will evaluate these plans regularly. In the absence of strategic and accretive acquisition targets, we expect to return capital to shareholders and not build cash on the balance sheet. Finally, as we mentioned last quarter, we continue to evaluate a potential primary offering and secondary listing in India. We have engaged various financial and legal advisers as well as the regulators in India to assess the idea. As always, we remain committed to acting in the best interest of our shareholders, and this process aligns with this commitment. As of today, the board and management team continue to evaluate the proposal and have not yet made a decision. In summary, 2025 was a successful year. As we look toward 2026, we are well positioned to continue our momentum. As Ravi mentioned earlier, our ambition is to lead as an AI builder and maintain our position in our industry's winner circle. With that, we will open up the call for your questions.

Sure. So, yes, the Q4 impact on gross margin was predominantly on account of higher bonus funding that we did for the full year in quarter 4, led by a strong operating margin performance for the full year that we were able to deliver. Apart from that, there was also a salary increase as you are aware which came through effective first November into the gross margin. So I would say those are the two factors that played out a bit in quarter 4. I think the right way to see our gross margin is for the full year and the full year impacts are predominantly one, the Belcan impact for the full year in 2025 gross margins, and the second is essentially the higher bonus for 2025 and as you mentioned it's a good thing to have. Looking ahead for 2026, there is a productivity pressure in the industry and therefore the expectation that for a dollar value you get a superior throughput than what you have traditionally enjoyed through traditional productivity levers in the past and that does impact the revenue but I wouldn't call it a drag on margins yet so long as you are able to execute on your internal productivity measures and keep the cost curve below the price curve continuously. And therefore you have seen we have been able to deliver revenue per employee productivity and profit per employee productivity in the previous 12 months. So far we have been able to execute well against that market momentum for productivity and therefore I would say we are entering 2026 with that confidence. Going forward, we'll have to continue to watch out for the movement in the market. We do think that we have a few levers apart from AI productivity and a couple of them are really the continued improvement in pyramid. We hired 20,000 fresh college graduates in 2025 and we'll continue to look at that and that does impact a long-term cost structure of the organization and we'll continue to look at other traditional measures like offshoring and utilization beyond AI productivity that I spoke about. So overall we have things we can work through for 2026.

Sure. So there are two factors at play there. One of course is the strong bookings that we are walking in 2026 with and the second is there is some amount of seasonality between quarters also in 2026 compared to 25 and 24. For example, in Q1 there are lower bill days in 26 compared to the number of bill days that we had in Q1 in 2025 which automatically means that the sequential number improves in quarter 2 compared to quarter 1 in 2026. So these are the two factors that give us confidence that we can execute better sequential growth in the middle of the year and that's what we have assumed in our guidance rate, including the ramp up of deals which we have closed in quarter 4.

Sure. So, you know, there are various types of fixed priced engagements but essentially they have one thing in common is that the larger component of delivery risk resides with the service providers like us and essentially we underwrite a productivity in the beginning of the contract and we deliver to that productivity to the customer irrespective of whether we are able to achieve that outcome from a cost standpoint. The history of the industry is that we always have found ways through new technological progress to be able to deliver it. Specifically in light of the whole large-scale momentum that Cognizant has been able to achieve, we have a very robust process of bid versus date that we monitor every month, the performance of the deals that we have won and how we are delivering our operating margin and revenue performance against those promises. And I'm happy to share that we deliver on aggregate of the portfolio very close to the expected margins that we had planned which means we are in aggregate not having any overrun or also not significant underrun. So overall we are tracking to the budgeted goal for our customers as we go and that we will continue to do that is crucial in times like this when technology is shifting and overall we feel we are performing well.

Yeah. So Jim, we have guided for the overall operating margin line. I don't want to guide at both the lines but our endeavor would be to strive to reach that improvement in gross margin line too. As I shared before, 2025 doesn't worry me because I know the core margins have remained protected. The dilution that you see in 2025 is coming predominantly because of Belcan which has a structurally more on-site centric work and therefore it is not about lower profitability but since you add a business which is more on-site centric it is bound to have a lower gross margin as you know. So it is just a portfolio which has a particular characteristic which got added to the larger portfolio. That's one reason and the second reason is really the higher bonus payout which I think is a good thing for our employees. So I know we have protected and sustained the margin in 2025. We will work towards of course improving them in future.

Yeah. So on ACV, we definitely saw some amount of softness in quarter 4 but I would also characterize that with the bundling of smaller deals being given out as consolidated contracts and therefore you see a significant increase in TCV of large deals which corresponds to that shrinkage at the smaller deals and that's a sort of industry dynamic that we see in times like this. So while that is definitely a data point but it is not something that is a challenge from a growth standpoint. On your second question, SG&A continues to be an area of focus for us. So while we have done a good job in 25 and 24, so two years in a row, but that has now additional opportunity in form of the deployment of AI in the corporate world that we do. So certainly we will continue to push that in 2026 too.

Yeah. So as I mentioned in the opening remarks, we continue to make progress. We are engaged with our advisers. At this juncture we are still thinking through the decision, the regulatory framework and therefore the decision around the imminent primary offering and secondary listing and at some point we should be able to come back and tell you more about this but at this juncture I think it's continued progress would be what I would suggest as an update from previous quarter to this quarter and we have had constructive discussions with the regulators. So we're continuing to do what is right for our shareholders and continue to look for more investors to be a part of our growth story. So we'll keep you updated on that. Maybe we'll take one more.