Cognizant Technology Solutions Corporation (CTSH) Earnings

Management highlights

### Core Quarterly Performance Highlights - Delivered solid Q2 results with organic sequential growth at the high end of management expectations, and the sixth straight quarter of YoY adjusted operating margin expansion. - Trailing 12-month bookings grew 5% YoY with a book-to-bill ratio of 1.3; seven large deals with total contract value (TCV) over $100 million were signed, including three new client logos. New and expansion bookings grew 15% YoY in the first half of 2026. - AI-assisted development now makes up over 40% of total software delivery, with over 8,000 active AI engagements. Revenue and adjusted operating income per fully deployed associate increased 4.6% and 7.1% YoY respectively. - Completed the previously announced acquisition of Astria, a global IT managed services provider specializing in data center infrastructure and AI-first managed operations; momentum from the acquisition is already building. ### AI Transformation Strategic Progress Management is executing four core strategic shifts to evolve Cognizant into an AI builder, aligned with long-term market opportunity: - **Shift 1: Become an AI builder with proprietary IP and ecosystem partnerships**: Launched a dedicated AI market unit focused on converting AI investments into realized client value. Established new/expanded strategic partnerships with Google Cloud (dedicated Gemini enterprise practice, Google Cloud diamond partner status), OpenAI (joined the Debe consortium), Anthropic (global premier cloud partner), and Snowflake. Delivered early client successes including 60% manual effort reduction for a mid-sized healthcare payer, compressed AI development cycles from months to days for a leading European fashion retailer, and 50%+ manual effort reduction in a fraud dispute management pilot for a large North American bank. - **Shift 2: Rebuild the talent model for AI-augmented work**: Introduced two new certified roles: frontier certified engineers (who build and audit AI workflows) and frontier business operators (who manage blended human/digital teams to deliver outcomes). Plans to scale the Cognizant Forward team to 5,000 frontier certified engineers and 10,000 frontier business operators. Cognizant Skillspring, an AI-native skilling platform embedded in daily workflows, has doubled associate learning time and tripled AI usage, and is now available to early prospective clients. Cognizant currently has 10,000 cloud-certified architects, the largest pool of any global organization. - **Shift 3 & 4: Shift economics from labor to outcomes, and move from project delivery to underwriting results**: Established a new AI Products and Platform group to unify proprietary offerings and scale innovation. Platform strategy is split into two core pillars: (1) engineering platforms (AI tools, agent frameworks, accelerators) that compress development cycles and improve productivity, and (2) industry-specific business platforms that embed trained AI agents into critical client workflows. The TriZetto healthcare platform serves as the blueprint for this platform-led growth strategy, delivering recurring revenue and higher margins than traditional services. Management is now pursuing outcome-based, result-guaranteed engagements, including a recent major insurance brokerage engagement committed to delivering 50%+ productivity improvement over five years. ### Market Opportunity and End Market Traction - Management estimates the $1 trillion global system integration market will expand to a $5-$6 trillion enterprise operations market as AI is embedded into core business workflows, with 80% of operational labor exposed to AI transformation. Two-thirds of the Global 2000 have not yet realized measurable AI productivity gains, and one in four have paused AI deployments, creating a large market opportunity for Cognizant to help clients bridge the gap between experimental AI and productionized, value-generating AI. - Public sector business is emerging as a meaningful growth segment: Cognizant Government Solutions (built on the Belcan acquisition) secured a landmark engagement to modernize ID infrastructure for the state of Iowa. The UK public sector practice won expanded engagements with the Home Office and a $250 million+ additional contract with His Majesty's Revenue and Customs. - Launched a sovereign physical AI platform as a service to capture emerging opportunities in autonomous operations for physical infrastructure and robotics, building on Cognizant's 10 years of existing experience training AI models for large technology clients.

Guidance

- Full-year 2026 constant currency revenue guidance was revised to 4% to 5.5% YoY growth, down from the prior guidance range that assumed an improvement in the discretionary spending environment at the midpoint. The revised guidance includes 150 basis points of inorganic growth from acquisitions, unchanged from prior estimates. The guidance midpoint assumes the current pressured discretionary spending environment remains stable, while the upper end of the range assumes an improvement in short-cycle revenue in Q4 2026. - Q3 2026 constant currency revenue growth guidance is 3.8% to 5.3% YoY, including 200 basis points of growth from recently completed acquisitions. - Adjusted operating margin guidance is maintained at 16% to 16.2% YoY, representing 20 to 40 basis points of YoY expansion. There are no changes to total Project LEAP cost estimates or expected savings from the program, which will continue through the end of 2026. - Full-year free cash flow conversion guidance is maintained at 90% to 100% of net income. - The full-year 2026 effective tax rate is now expected to land toward the low end of the prior 25% to 26% guidance range. The Q3 2026 tax rate is expected to be above the high end of the full-year range. - Full-year 2026 adjusted EPS guidance was raised to $5.70 to $5.82, representing 8% to 10% YoY growth, up from the prior guidance of 7% to 9% YoY growth. The upgrade is driven by faster-than-expected share repurchases that have reduced the expected full-year weighted average diluted share count to ~460 million, below prior estimates. - Management expects a $10 million per quarter run-rate of incremental below-the-line costs for the India Defined Benefit Plan, consistent with the first half 2026 run rate and in line with initial February 2026 guidance.

Segment performance

Total Q2 2026 revenue grew 4.1% year-over-year (YoY) in constant currency to $5.5 billion, with 16% adjusted operating margin (excluding Project LEAP and India Labor Code one-time impacts), a 40 basis point YoY expansion. Adjusted EPS was $1.37, up 5% YoY. Free cash flow for Q2 was $459 million, with year-to-date free cash flow reaching $652 million. - **Financial Services**: Grew nearly 12% YoY in constant currency, marking the second consecutive quarter of 10%+ growth, with healthy growth across banking, capital markets, and insurance segments. It is the fastest-growing vertical, driven by strong AI adoption and large deal momentum. - **Health Sciences**: Performance was stable. Demand remains cost-focused, with clients prioritizing vendor consolidation, legacy modernization, and compliance, while discretionary spend requires clear ROI to be approved. The TriZetto healthcare platform segment outperformed the overall company, growing faster and delivering substantially higher margins, with over $1.1 billion in annual revenue. - **Products and Resources (including Belcan acquisition assets)**: Performance was steady. Retail, consumer goods, travel and hospitality clients continue to face pressure from geopolitical uncertainty, supply chain disruptions, and elevated oil prices. However, manufacturing, logistics, energy, and utilities sub-segments are seeing growing momentum from physical AI and smart manufacturing opportunities, and the segment is targeted for increased future investment to drive portfolio diversification. - **Communications, Media, and Technology**: Demand from communications and media customers remains muted (consistent with Q1 2026). Demand from technology customers remains strong, driven by AI-native engineering, digital operations, data, and cloud services.

Risks & headwinds

- Persistent elevated macroeconomic uncertainty has kept discretionary client spending pressured, with clients requiring clear proof of ROI for new projects and in some cases pausing AI deployments to optimize existing AI spending before expanding further. - Clients are pausing AI investments due to unmet productivity and value expectations, driven by the high cost of token consumption and the lack of integration of AI with existing enterprise context, workflows, and tribal knowledge, creating near-term demand uncertainty even as it creates long-term service opportunities for Cognizant. - Geopolitical uncertainty, supply chain disruptions, and elevated energy prices continue to pressure demand in the retail, consumer goods, and travel and hospitality end markets. - Demand for communications and media services remains muted, consistent with prior quarters. - Cognizant is still in the early stages of embedding AI into business operations, with token economics and outcome-based pricing models still evolving over the next 12 months.

Analyst Q&A

• Q: Maggie Nolan (William Blair) asked for more detail on bookings momentum, and what is driving the strong performance of the BPO business, and what Cognizant is doing to sustain this growth. /

  A: Management noted that while trailing 12-month bookings grew 5% YoY, this reflects tough comparables from two mega-deals signed in Q2 2025; excluding those, deals in the $25-$50 million and $50-$100 million TCV ranges saw substantial year-over-year growth, and new business as a percentage of total bookings increased 10% YoY in H1 2026. For BPO, growth is driven by AI embedding into core client business operations, expanding the total addressable market from $1 trillion to $5-$6 trillion. Cognizant is building out AI-led, outcome-based BPO blueprints for key functions like F&A and customer operations, and leverages its 10,000-associate AI model training service (historically for large tech firms, now offered to enterprise clients) as a new growth driver within the BPO segment.

• Q: Jim Schneider (Goldman Sachs) asked what actions clients that have paused AI deployments are taking, and how long management expects it will take to see a significant uptick in AI-driven revenue from these clients. /

  A: Management explained that the first phase of AI adoption was broad experimental spend, but clients are now in a second phase where they are optimizing token costs and focusing on productionizing AI to deliver measurable value, rather than pausing permanently. Most clients have not yet integrated AI with enterprise-specific context, tribal knowledge, and existing workflows, creating significant opportunity for Cognizant to help clients bridge this gap. While software engineering productivity engagements are already mature, business operations AI adoption is just beginning to accelerate, and physical AI will emerge as the next growth phase after that.

• Q: Jamie Friedman (Susquehanna) asked about the sequential organic growth assumptions for Q4 2026, and how the Products and Resources segment is performing relative to expectations after the Belcan acquisition. /

  A: Management stated Q4 2026 assumes a slightly better sequential performance than the historical seasonal Q4 slowdown, driven by a larger share of new/expansion bookings, the upcoming ramp of recently signed large deals, and lower expected furloughs in the financial services sector. For Products and Resources, management is very pleased with performance to date; the Belcan acquisition has already driven strong new public sector wins, and management expects the segment to be a major investment area going forward, as physical AI creates large productivity opportunities for industrial and resource clients that will drive strong future growth.

• Q: Darren Peller (Wolf Research) asked about competitive dynamics for large deals, how important pricing is currently, and how Cognizant plans to scale its frontier workforce and differentiate from competitors. /

  A: Management noted that AI-driven productivity creates nonlinear margin gains that allow Cognizant to pass productivity savings to clients to remain competitive, while still maintaining healthy margins for the firm. For the frontier workforce, Cognizant is scaling certified talent via both new entry-level hires and upskilling existing associates at scale, building on the company's existing strength as the global leader in cloud-certified architects. The combination of large-scale, low-cost upskilling, deep enterprise context expertise, and experience reinventing workflows to integrate AI agentic work gives Cognizant a sustainable competitive advantage.