Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 third quarter 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 Jan Siegmund, 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 like to now turn the call over to Ravi. Please go ahead..

strategic, financial, operational and cultural. He left a positive and indelible mark on our global organization and I'm especially grateful that he agreed to stay with us until early next year to ensure smooth transition to Jatin. With that, I'll turn the call over to Jan to provide additional details on this quarter..

Thank you, Ravi, for the kind words. I want to thank all of our associates around the world for welcoming me into the Cognizant family 3 years ago and for making my time here such a memorable experience. It has been a pleasure working with so many great people at Cognizant and all of you on this call.

I'm confident that I'm leaving the company in great hands with Jatin, who many of you know, is an accomplished CFO and an experienced IT services executive. Over the next several months, I look forward to working with Ravi the Jatin and the rest of the leadership team to ensure a smooth transition. With that, let's turn to our third quarter results.

We delivered revenue within our guidance range despite a soft discretionary spending environment and ongoing economic uncertainty. Adjusted operating margin exceeded our expectations, reflecting savings from our NextGen program and the timing of investments which is driving some modest upside in our guidance range that I will touch on later.

We were also pleased to deliver another quarter of solid bookings growth which continue to be driven by larger longer-duration engagements. Moving on to the details of the quarter; third quarter revenue was $4.9 billion, an increase of 0.2% sequentially. Year-over-year, revenue grew 0.8% but declined 0.2% in constant currency.

Year-over-year growth includes approximately 110 basis points of contributions from our acquisitions. Similar to last quarter, our 9% quarterly bookings growth was driven primarily by larger and longer-duration deals. On a trailing 12-month basis, duration is up over 50% from the prior year period.

At the same time, we are continuing to experience softness in the smaller short-duration contracts, driven by weak discretionary spending. This dynamic has negatively impacted our near-term revenue but we believe will put us in a better position to accelerate revenue growth in the future when discretionary spending improves.

Moving on to segment results for the third quarter where all growth rates discussed will be in year-over-year in constant currency. Within Financial Services, revenue declined 4%, reflecting the softer demand environment across regions and subindustries.

This decline was partially offset by the benefit from the resale of third-party products in connection with our integrated offering strategy that Ravi mentioned earlier in his prepared remarks.

Looking ahead, we believe the market remains challenging and we expect the macroeconomic uncertainty will again have a meaningful impact for this segment in the fourth quarter. That said, we are working hard to correct what is in our control and I believe we can make meaningful progress under the new subindustry go-to-market approach and leadership.

Health Sciences revenue declined 1%. Growth was negatively impacted by a large renewal that we signed earlier this year with a payer customer which resulted in a lower revenue run rate but meaningfully improved profitability.

In addition, several of our larger customers have been impacted by their own company-specific and end market challenges which has in turn led to softer discretionary spending.

Products and Resources revenue grew less than 1%, reflecting the benefit from recently completed acquisitions, strong performance from utility clients driven by their grid modernization investments and growth among automotive clients in Europe. Growth in these areas was partially offset by pressure in manufacturing.

Communications, Media and Technology revenue increased 7%, reflecting the benefit from recently completed acquisitions and the ramp of new contract awards.

This includes the expansion of current engagement with our largest customers in this portfolio, who are launching innovative vertical solutions and leveraging our expertise in these areas to rapidly scale globally.

Continuing with year-over-year revenue growth in constant currency from a geographic perspective in Q3, North America revenue was down less than 1%, driven by declines within our Financial Services and Health Sciences portfolios. This was partially offset by growth in CMT and Products and Resources.

Our global growth markets or GGM which include all revenue outside of North America grew approximately 1%. Growth was led by Europe which grew 3% and included strong growth within CMT, Life Sciences customers within our Health Sciences segment and Products and Resources.

Finally, the resale of third-party products contributed 120 basis points to our overall revenue growth in Q3, the majority of which was in the Financial Services segment. Now, moving on to margins. During the quarter, we incurred approximately $72 million of costs related to our NextGen program.

This negatively impacted our GAAP operating margin by approximately 150 basis points. Excluding this impact, adjusted operating margin was 15.5%. Similar to last quarter, our adjusted operating margin included the negative impact from increased compensation costs attributable to our 2 merit cycles over the last 12 months.

This was partially offset by savings from our NextGen program and tailwinds from the depreciation of the Indian rupee. Our GAAP tax rate in the quarter was 26.8%. Adjusted tax rate in the quarter was 25.7%. Q3 diluted GAAP EPS was $1.04 and Q3 adjusted EPS was $1.16. Now turning to the balance sheet.

We ended the quarter with cash and short-term investments of $2.4 billion, or net cash of $1.7 billion. DSO of 77 days increased 2 days sequentially and 3 days year-over-year. Free cash flow in Q3 was $755 million which brings year-to-date free cash flow to approximately $1.4 billion.

For the full year, we continue to expect free cash flow to represent approximately 90% of net income. During the quarter, we repurchased 4 million shares for $300 million under our share repurchase program and returned $147 million to shareholders through our regular dividend.

Year-to-date, we have repurchased approximately 11 million shares for about $700 million. At quarter end, we had $2.1 billion remaining under our share repurchase authorization. Turning to our forward outlook.

For the fourth quarter, we expect revenue in the range of $4.69 billion to $4.82 billion, representing a year-over-year decline of 3.1% to 0.3% or a decline of 4% to 1.2% in constant currency. Our guidance assumes currency will have a benefit of approximately 90 basis points as well as an inorganic contribution of approximately 100 basis points.

Our Q4 revenue guidance range is wider than our historical practice, reflecting a heightened level of uncertainty regarding client discretionary spending and recent pace of decision-making heading into the end of the year.

For the full year, we expect revenue will be in the range of $19.3 billion to $19.4 billion which is down approximately 0.7% to flat, both as reported and in constant currency, as we do not expect a material impact from foreign exchange rates.

This compares to our prior guidance range of $19.2 billion to $19.6 billion or negative 1% to plus 1% growth in constant currency. We still expect inorganic contribution to be approximately 100 basis points. Our NextGen program remains on track and our assumptions for cost savings are unchanged from last quarter.

I'm also pleased to share that we are further reducing our expectations for NextGen costs. We now expect to incur $300 million in total charges versus $350 million previously, with $200 million this year versus $250 million previously.

The reduction is a result of lower real estate cost as we are now -- as we now expect to incur about $100 million related to the net consolidation of office space in 2023 versus $150 million previously. This reflects lower expected third-party costs associated with the real estate exits.

As we have spoken about previously, we still intend to reinvest the majority of the NextGen savings and growth opportunities in 2024 and beyond. Moving on to adjusted operating margin; we are modestly increasing our guidance to 14.7% which is the high end of our prior range.

As a reminder, our Q4 operating margin is typically seasonally lower than Q3 levels. We still anticipate 2023 interest income of approximately $115 million and an adjusted tax rate of approximately 24% and versus the range of 23% to 24% previously provided.

In addition, we now expect to deploy approximately $1 billion on share repurchases in 2023 versus our prior expectations of approximately $800 million which assumes an additional $300 million of share repurchases in the fourth quarter.

In total, we expect to return approximately $1.6 billion to shareholders through share repurchases and dividends in 2023. Our guidance for shares outstanding is unchanged at approximately 506 million.

This leads to our full year adjusted earnings per share guidance of $4.39 in to $4.42 versus $4.25 and $4.48 previously, reflecting our updated expectations for revenue and adjusted operating margin. With that, we will open the call for your questions..

[Operator Instructions] Our first question comes from the line of Bryan Bergin with TD Cowen..

So I appreciate you offering the early commentary on the 2024 margin expansion potential. I just want to clarify first that, that's off the base of that 14.7% raised adjusted margin here. And then understanding the environment's quite dynamic.

But based on what you're seeing in bookings activity and deal duration and backlog behavior and pipeline, can you share any thoughts or guardrails for 2024 growth now as well?.

Yes. So Bryan, I'll catch the easy one first. Yes, the reaffirmation of our intent to expand our margins by 20 to 40 basis points is up midpoint of our expectation or our point of landing at 14.7%, so that's a good assumption. For the bookings momentum, Ravi might be giving you a little bit of color around what we're seeing in the markets..

Yes. So Bryan, I've been saying this for the last 2 quarters and this quarter as well. Our deal momentum and our bookings momentum is very strong. We are continuing to see good traction. I've spoken about 2 swim lanes.

There is a swim lane on transformation-led deals and I've spoken about cost efficiency, vendor consolidation, efficiency-led kind of deals. We see more in this category versus the transformation but we also see this category underwriting the savings to the transformation.

So a lot of times -- remember, one of the things I spoke on my -- in my initial remarks is this is a period of uncertainty and change coming together. So clients are navigating the 2. There is change, significant change ahead of us. And clients are wondering who funds the CapEx cycle.

So the ability to take cost out and underwrite the savings to the transformation, I think, is a great template and I think we are well positioned for that. What happens in the short run, though, is the discretionary spend has really fallen over the last 3 quarters. I mean, it's been very, very soft.

So the deals we have won in the first and the second quarter, we have to backfill that as well as you know that large deals actually come with a gestation period to get to the peak levels of their potential. So we are hopeful that the large deal momentum continues. It continues over the next year.

And of course, the deals we won this year will contribute more to the next year. What I don't know is what happens to discretionary spend. I mean, the environment is very soft.

So we'll have to wait and see how the discretionary happens but I'm very optimistic about how the large deal momentum is, especially on cost takeout, vendor consolidation efficiency-led deals that we are seeing across the spectrum. And I think we are winning well. You can see the bookings momentum this year.

So the one which is unknown is discretionary. That's the piece we are not sure of. Hopefully, as these deals -- as the cost takeouts continue, if they kind of trigger CapEx cycles for transformation, hopefully, that happens. And if that happens, we are going to catch it early on..

Okay. Understood. And then a follow-up here, just on the resale piece of the third-party products.

I think you mentioned 120 bps in the quarter, how does that compare to maybe the average over the last 4 to 6 quarters? And are you assuming resale amounts in the forward outlook?.

Yes. So Bryan, I had spoken about a strategy of large deals with all -- in all swim lanes, all the way from productivity to people takeover to software-led to efficiency-led. And I've spoken about it, that our participation is going to be in all of them.

Now sometimes what happens in these situations is you have upstream software coming in and you have downstream services coming in. And it's the timing. I mean, for software upstream, there is significant downstream services which is attached to it. So we've had 60 basis points before in the year that we have added in this quarter.

But what you really have to look at is the timing of these deals. Now in quarter 2, we announced a strategic partnership with ServiceNow for $1 billion, a joint partnership. And we have offering which actually has a bundle of software, reusable assets and services attached to it and it is a managed services model.

And that's the opportunity we are pursuing. And as the large deals come, you're always going to see the timing. In one particular quarter you could have software, in a particular quarter, you could have services downstream. So it's -- that's the process of how you see this.

Sometimes there are people takeover, sometimes there is asset takeover, sometimes there is productivity upfront and effort upfront, sometimes you have transition upfront and you have services on the downstream. So it's hard to pick which quarter you're going to see this.

But the nature of large deals gives you that flow, if I may, in terms of how they get constructed quarter-on-quarter..

Our next question comes from the line of Ashwin Shirvaikar with Citi..

I would say, just before I start, Jan, yes, if this is going to be your last earnings call, thank you for all the work and effort over the years. The question is probably since you come to Cognizant, you made a number of changes. You talked about large deal infrastructure. It seems to be in a good place.

But how would you rate Cognizant's ability to win and be competitive in the discretionary work that isn't there now but you will need to be competitive in there when it does come back because that, it seems to me, is going to be the difference next year between, say, low single digits and mid-single digits?.

Yes, I'll give a little bit of an answer but I think Ravi will be adding much more color to this. The overall position that we have in -- with our clients, I think, has really meaningfully improved over the last 3 or 4 quarters.

We have -- in the Net Promoter Scores that Ravi was reporting on is kind of really the statistical leverage of this coming in at a historic high. But we can just see from the comments and the number of escalations is another one. We haven't talked in the call about it but obviously, that has been in parallel coming down.

So the service quality has been better. That's partially fueled by low attrition rates. So the overall relationships that we have with our clients have really very meaningfully improved. And I think we have embraced kind of a philosophy of meeting the client where the client has needs.

And right now, the needs are more on the structural cost improvement and productivity type, vendor consolidation type deals and discretionary spending has taken the back row. We want to be there for our clients when that discretionary spend comes and the transformative deals are popping up and going part of it.

So we're going to be having deep relationships with our clients and the high focus on client relationships and I feel we should be ready for that to do so.

Ravi?.

Yes. So thank you, Jan. I think very well said. So Ashwin, thank you for the question. You're absolutely right. This is -- the large deals muscle is consistently improved over the last 3 quarters. This is something which did not exist before. I came in, in January and built that muscle and I'm very confident that we can sustain it.

We've sustained it for 3 quarters and we're very confident we can do that for the future. And we have actually now invested on institutional infrastructure to support it all the way from productivity to automation infrastructure to the classical levers which you apply in managed services and cost takeout kind of deals.

We did have good muscle on discretionary before. I mean, the transformation infrastructure of the company is strong. As the spend comes back, I'm very confident that because we have good engagement with our clients, we are also going to naturally be the providers for discretionary spend.

You could, in some ways, use the strength of our current deal momentum to support the discretionary -- the historic discretionary muscle of the company. Now, I think Jan raised an important point which I think is very, very important. We ran the Net Promoter Score survey this year and we have historic high scores.

And there are 3 or 4 things which have come out of that. Our attrition rates have gone down. They've gone down and they're trending downwards, even into the next quarter. Our employee satisfaction scores are at an all-time high. Our client satisfaction scores are at an all-time high.

Customers are engaging with us much more over a variety of swim lanes which means when the discretionary comes back, each of these swim lanes is going to contribute back to that -- back to the strength of those relationships, so.

In fact, there's one thing which really registered with me on the Net Promoter Score survey which is about our customers saying Cognizant is back in some form. I'm paraphrasing it, Cognizant is back or the mojo is back. I think that is the momentum which will allow us to get back the discretionary spend as and when our customers start to spending it.

So, I think we have set this foundation, a very strong foundation. The 2 things which our clients have spoken about, as I said, Cognizant is back. The second is we have a much more stable leadership, good execution, agile responses and much lower -- significantly much lower turnover of employees.

And these would actually rub off on the discretionary as it comes back..

Good to hear. The second question, again, it's a good job on the margin performance. The question I have is on the deals that you are signing, you mentioned that there is now need to be flexible in terms of structuring, in terms of bringing various partners together and so on and so forth.

Does any of what you are doing today to get new deals affect how you think of future margin potential?.

Yes. So when we sign up the deals, obviously, they are in a competitive environment and we apply a disciplined approach to those deals in order to keep a balance of growth and continued margin expansion.

And it played out this quarter, Ashwin, really, to the benefit of the margin because we had anticipated some investments a little bit stronger than we actually needed in this quarter on, for example, investments into larger deals with maybe initially lower margins and we didn't meet those investments.

So I think this view that we have about very carefully layering our large deal portfolio and supporting it with disciplined approach on non-billable and administrative cost controls is playing out. And I think we're entering that year, next year with that confidence that, that balance is intact.

And I think I mentioned it in our prior call, in the large deal, expected business profile that we do have deals that we expect to exhibit lower margin profile. But we also have deals that have very meaningfully -- actually, renewals of historic deals that have very meaningfully improved our gross margin profile in the renegotiation.

So in the net profile, the impact has been actually more muted and that may not continue all into the future. But for now, it has been a very balanced outcome, I would say..

So Ashwin, we are -- the first thing we just changed is we are participating on deals across the swim lanes I just spoke about and we are competitive enough and we have built the institutional infrastructure to support execution and actually better our performance to the metrics which we commit when we win those deals.

So we have to keep strengthening that. This is always a work in progress. We have to continue to stay competitive and we have to continue to price them to win and deliver them to margins as I call it. And we continue to keep our competitiveness by strengthening our productivity tools and our automation tools and our AI tools.

So this is an ongoing process and you have to keep changing the baseline because as you want to be competitive, you have to continue to keep working on the productivity levers. Unlike in the past, where these productivity levers were labor-oriented or, I would say, they were classical, now they are technology oriented.

And hence, we have a unique opportunity to create some nonlinearity. In the past, we did not participate in those deals. Now we are participating and winning them, so the confidence has been really high..

Our next question comes from the line of Jason Kupferberg with Bank of America..

This is Tyler DuPont on for Jason. I wanted to ask about the demand environment you're seeing as we start -- as we look into the end of 2023 and as we start to look into even the beginning of 2024.

When looking at the updated revenue guidance being narrowed, I'm just curious what incremental trends you've seen over the past couple of months, whether that's changes in win rates, ramp times or softness, whether that's a particular service offering, vertical, geography, anything like that, that may be driving the additional cautious stance..

I think the cautiousness is related to the uncertainty around the discretionary spend. I think everybody in the market is facing it, including us. What we are certain is our deal momentum and our large deals and our bookings continues to be very vibrant.

What we do not know, especially in a seasonally slow quarter, quarter 4 is always a seasonally slow quarter because of furloughs as well. What we are unable to predict is how much of the discretionary gets impacted and how much of our large deal momentum will get neutralized by this.

And to that extent, we felt it was only fair that we keep a risk -- we keep the risk adjusted to what we believe could be soft in quarter 4..

Okay, that's very helpful. And then, I guess, just to kind of go even just a little bit deeper into visibility into 2024 budgeting decisions. I know it's still early and you don't give guidance on '24 or anything yet.

But just given the current rather choppy macro environment that we're seeing and have seen, can you just speak to sort of the conversations you're having with clients regarding '24 budgets, sort of how does that visibility compare with this time last year? And is there more certainty in certain verticals than others? Or just any clarity there would be very appreciated..

Yes, I'll jump in for -- number one, I think we actually kind of gave a lot of -- half of the P&L we already disclosed because we're really committing to our 40 to 20 basis points of margin expansion. And so now the revenue range, going forward, will be subject to our guidance call in 3 months.

But if you -- what we know today is, as Ravi said, that I think, gradually, the economic uncertainty has increased and discretionary spending has softened throughout the last 3 quarters. So we have seen that trend not stopping yet.

And part of our lack of knowledge, if it's stopping in the fourth quarter, or if it's going to turn around early in the year or later in the year is really not known to us to be quite honest as well. And clients will be forming their budgets and their IT budget at the same time as we are developing our own budget.

So this is kind of always a simultaneous process. What has improved for us is obviously the visibility of the longer-term deals that are now in our portfolio and that they will be contributing and scaling in '24, so that gives us a little bit of a planning safety.

And then we have to just kind of really make assumptions on -- and you can do that for your own self. It's like, are you bullish on the discretionary spend and economic development on next year, or are you the same, or more bearish. And I think that will then determine the revenue outcome for next year to do so.

I think that's really what we will go under. We haven't finished that process and -- but in February, beginning of February, we'll commit to that..

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

I just want to drill in, maybe for Jan, the TCV versus ACV and how to consider that in the short term the next couple of quarters. I know the book-to-bill is quite high at 1.4.

But in terms of translation, with this mix shift toward larger deal, how would you guide us there between ACV and TCV?.

Thank you, Tien-Tsin, for that. The -- I gave, in my remarks, this duration comment. And I think we had, in previous calls and historically, disclosed that our average duration was roughly around 2 years and now our duration in the bookings is about 3 years, so it's a meaningful increase.

And obviously, then ACV, the annual revenue expectations for this is down. And that's actually -- on top, you have also that mix shift. The larger deals need some scaling.

So they have -- the ACV is not completely symmetrical because in the first year, you're building up the infrastructure and you're starting transferring assets and do your thing, what you need to do to get ready. So some of the ACV of the larger deals is delayed and will come in '24.

And at the same time, we have a decline of deals below $5 million of TCV which are typically deals that always translate in here to revenue. So those things together are basically a 90% explanation of what you see in our revenue trend actuals in the last few quarters.

And I'm anticipating unless the discretionary spend is coming back, roaring that, that won't change. Now, so the -- we're entering the year with all these moving parts, probably in a position that is not too different from last year in terms of visibility of revenue going forward, so.

And mysteriously, it balances out because some of our larger deals now maturing and scaling, having a little bit better contribution to next year. And then, we'll -- as I said in my prior answer, we'll have our estimate to make on how short-term demand is going to be developing.

So the net of it is that factors within the setup have changed compared to the beginning of '23 but in '24, we are kind of approximately in a similar position to stock..

Just to add to that, what Jan said, because we didn't have large deals in the previous year, what -- the slope it had of this year in terms of realizing this year did not happen. What's going to happen for next year, though, is you're going to have tail velocity of deals we won this year which will accrue revenues next year.

And then -- and that's a change because we have consistently done it from quarter 1, quarter 2, now quarter 3. We have done -- the percentage of our large deals has gone up. And the percentage of new in these large deals has also gone up, so that's a positive change. The question -- the unknown piece is the discretionary spend..

Our next question comes from the line of Keith Bachman with BMO Capital Markets..

I wanted to follow up on that set of comments. And as you think about next year, you've talked a lot about the large deal program ramping and contributing to revenue growth and mentioned that discretionary is still a headwind.

Can you give us a sense of proportionality of how much discretionary is of either revenues, bookings, any kind of metric and how that's changed today from what it is at the beginning year? Because it seems to me, as we start to think about growth, that percentage of low duration deals, if you will, or discretionary spend is at a level such it would be less of a headwind next year as you anniversary the March quarter when it first impacted Cognizant and many others..

It's a difficult question to answer now on how it's going to be next year. I mean, the swim lane of large deals we are doing and then that is 30% of bookings.

The swim lane of large deals we're doing, always the savings of those large deals, some of the smarter clients are not necessarily taking it to savings but they are actually underwriting it for transformation which means if some of them can trigger the CapEx cycles, then you're going to see some of that discretionary coming back because the savings you do on productivity will allow you to trigger the CapEx cycle.

I mean, I spoke about 150-plus AI -- preliminary early AI engagements. The reality is if they have to scale up, you need the CapEx.

The CapEx will either come because our clients have, themselves, navigated the uncertainty and got the CapEx covered, or they would use some of the savings from the cost cutting and the cost takeout they have done related to technology to leverage it into discretionary. I mean, many of my clients today, I've met 270 of them this year.

They're not saying they want to take their IT budgets down. What they're really saying is, can you do more for less. And can you actually divert the savings to the transformation they're looking forward to and they're very, very anxious about the transformation because we are all living in this period of change.

The issue is -- what I do not know is whether the economic and the overall environment which is really a headwind, is that going to change significantly next year? That's something that's hard to predict now. But if that uncertainty continues, you're obviously not going to see the discretionary spend coming back.

But if you see that triggering positively, then you're going to see the savings of these cost takeout initiatives to move into transformation and that will trigger another cycle of spend which in turn, hopefully, will trigger revenue cycles for our clients which will then hopefully create a virtuous positive cycle. So it's a tricky one to answer.

You need a trigger for the CapEx cycles of discretionary. And all the discretionary spend, as Jan mentioned, these are all deals between $0 to $10 million. They all get they all get realized within the same year because these are small deals. So it's a very unusual time, a time of uncertainty and a time of change coming simultaneously.

So the cost takeout deals potentially can fund them and that's the point I'm making. And if they don't, then there are other triggers of CapEx cycles which have to fund them..

Okay. Okay. Jan, I wanted to also thank you for all the work you've done over the last couple of years. And then direct to question, as you think about the 20 to 40 basis point range for margin improvement next year.

I know you don't want to give metrics associated with revenue but just, how do you think about the upper end versus the lower end? In other words, is it as simple as discretionary comes back and that has greater OpEx leverage? Or is there anything else, puts and takes that we should be thinking about? And particularly, you did mention that the large deal ramps can and indeed, in many cases, have lower margin profiles.

Just any puts and takes that you want us to think about as it relates to the 20 to 40 basis points range..

Look, we're entering the year with the NextGen initiative executing well and according to our plans. And we're going to have what were -- some impact in the third quarter but really not full run rate impact yet. And so we will have a lot of momentum on NextGen next year.

So we offered the savings opportunity for '24 to -- for '25 to REIT, in real estate, $100 million savings. And you all have your own assumptions on our head count reduction program, easy to be calculated and that's a lot of efficiency that we can book on our side. I anticipate the revenue momentum is obviously the mix factor for us that will shift.

And in that revenue growth factor that determines the scale of our SG&A development and other elements, it's kind of probably a big factor. And the second one I would give to you is the style and the execution of our large deal scaling. With larger deals, there is a little bit of risk factor just by the nature of their scope involved.

And if we are executing well and the deals don't develop problems, that will help us to be very solid in our margin expectation. And if we run into some problems, maybe we'll need to invest a little bit more cost.

So those will be the 2 major factors, I think, that we're going to be considering as we give our margin range and the substantiation of it..

Yes. So also just to add to what Jan said, the NextGen program really kicked off at the end of quarter 1. We had impact in quarter 2 and quarter 3. It will have a full year impact next year. I mean, the savings will accrue next year. And of course, the real estate savings come at the back end as well.

So we have -- now we have -- we are going to look at incorporating that into our workings as we work out the next year next year margins. And that's one of the reasons why we reiterated that the 20 to 40 basis points we set early in this year.

We probably have -- we wanted to reinforce that message that we can get that margin expansion which we earlier committed in the year..

Our final question of the night will come from the line of Jamie Friedman with Susquehanna..

I was wondering if you could share some high-level observations, really, about in-sourcing trends.

Is that any different than usual? Do you see acceleration or deceleration? And do you see that as friend or foe?.

That's great question. I see that as a friend. In fact, I stated that if you carefully observe my initial comments, even before you asked this question, I had stated that if technology is strategic to our clients. And remember, technology was an enabler for our clients. Now it is strategic to them because is deeply embedded into their products.

It is integral to the differentiation in the market. Every industry is a tech industry. We have to help our clients build their own technology muscle. And to help our clients build their own technology muscle, I think Cognizant is probably best suited to do so.

Our entrepreneurial spirit, our flexible operating model, our co-creation attitude and our co-creation culture.

We think, as companies build their own technology muscle, we will lend our human capital and I stated this in my remarks, that we would even lend this value chain of human capital which is not just the people to support their transformation but potentially lending our training infrastructure, our learning infrastructure, our ability to actually help them build their own captives if they want to, or global capability centers.

And I think that is sticky because once you do so, you can even lend your automation infrastructure, AI infrastructure and actually take them through that maturity curve. So it's much more sticky than before. So I see this as an unique opportunity for Cognizant and we want to double down on this offering..

And then, you emphasized in your prepared remarks and it did not go unnoticed the sequential increase in the head count. And you're one of the few companies, at least that I'm aware of, that's growing their head count.

So my question about that is are you anticipating, I would assume increased utilization and realization from that head count? Because the commitment to the head count is what we think of as a leading indicator -- so -- but where are you planning to deploy those people? And what gives you the confidence to be growing them right now?.

After very many quarters, we had sequential positive head count growth. Of course, it is a tiny number but it is reflective of the momentum of -- the commercial momentum of large deals and bookings. It is reflective of the needs for the future and it is reflective of the needs of the near future.

So I'm very, very -- I'm very confident that if we continue on the deal booking momentum, we will have to increase our head count to fulfill and satisfy those programs. So it's encouraging -- it's a very encouraging indicator about how well our commercial momentum is shaping up..

We have reached the end of our question-and-answer session. And I would like to turn the floor back over to management for closing comments..

Great. Thank you all very much for joining. We look forward to catching up next quarter..

Thank you. This concludes today's Cognizant Technology Solutions third quarter 2023 earnings conference call. You may now disconnect your lines. Thank you for your participation..