Cognizant's Q3 2025 Earnings Call: Contradictions Emerge on Large Deals, Margins, AI Strategy, and Economic Outlook

Date of Call: October 29, 2025

Financials Results

• Revenue: $5.4B, up 6.5% YOY in constant currency
• EPS: $1.39 adjusted EPS, up ~11% YOY; GAAP EPS impacted by a one-time noncash tax charge of $0.80 per share
• Operating Margin: 16%, up 70 basis points YOY

Guidance:

• Q4 revenue expected to grow 2.5% to 3.5% YOY in constant currency (all organic)
• Full-year revenue now expected to grow 6.0% to 6.3% in constant currency (vs prior 4%–6%)
• Expect ~250 bps of full-year inorganic contribution
• Adjusted operating margin guidance increased to ~15.7% (upper end prior range)
• Free cash flow conversion ~100% of adjusted net income
• Adjusted tax rate expected 24%–25%; EPS guidance $5.22–$5.26 (10%–11% YOY); diluted shares ~489M

Business Commentary:

* Revenue Growth and AI Transformation: - Cognizant reported revenue growth of 6.5% year-over-year in constant currency for Q3 2025, reaching $5.4 billion. - This growth is driven by increased adoption of AI technologies, with the company evolving from a software implementer to an AI builder, focusing on AI-led productivity and industrializing AI.

• Operational Efficiency and Margins:
• Cognizant's adjusted operating margin improved by 70 basis points year-over-year, resulting in an operating margin of 16%.

• This improvement is attributed to disciplined expense management and increased AI-enabled delivery models, which are enabling efficiencies and cost savings.

• Large Deals and Contract Value:

• The company signed 6 large deals each with a TCV of $100 million or more in Q3, bringing the year-to-date total to 16.

• The increase in large deal value signals a shift towards AI-driven transformation and enterprise adoption, rather than just cost optimization.

• BPaaS Growth and AI Integration:

• Cognizant's BPO business revenue grew by 10% annually, with an expected $3 billion annualized revenue goal in the coming quarters.

• This growth is driven by AI-led workforce transformation and the expansion of AI capabilities within operational processes, enhancing efficiency and productivity.

• Increased Focus on Agile Organizations:

• Cognizant's workforce has more than 350,000 associates now AI-fluency, with over 1,500 agents developed across the company.
• This emphasis on AI fluency and agile capabilities is aimed at creating an AI-ready workforce, allowing for scalability and adaptability in an AI-driven market.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted industry-leading performance: "Revenue grew 6.5% year-over-year in constant currency to $5.4 billion," "Q3 adjusted operating margin improved 70 basis points year-over-year," and said they expect to "meet the high end of the adjusted operating margin range" while increasing full-year revenue and EPS guidance.

Q&A:

• Question from James Schneider (Goldman Sachs Group, Inc., Research Division): Ravi, I wonder if you could speak to the new business pipeline you're seeing for smaller deals at this stage and whether you're seeing any kind of significant uptick there or not? And then relative to larger deals, are you seeing any pull-in or extension in terms of the commencement date for those large deal new bookings?
  Response: Healthy pipeline: small AI-led discretionary projects are returning while large deals are balanced between productivity-led consolidation and AI-innovation; expect services spend to accelerate as infrastructure investments drive demand.

• Question from Tien-Tsin Huang (JPMorgan Chase & Co, Research Division): I wanted to ask on the revenue per employee. It looked like up 8%, operating income also better than that, up 10%. So just understanding the lift there and if it's sustainable and or even structural given some of the AI returns that you talked about.
  Response: Revenue and margin per employee gains reflect transition to an AI-builder model—higher mix of fixed-price/outcome work, rising AI-assisted productivity (~30% productivity improvement) and increased digital engineering, which management views as sustainable drivers of structural improvement.

• Question from Tien-Tsin Huang (JPMorgan Chase & Co, Research Division): Just thinking about near-term gross margin performance potentially given the expected deal ramps and the mega deals and what have you. Any specific callouts on gross margin in the next couple of quarters?
  Response: Gross margins have been largely maintained on an organic basis; year-over-year reduction is attributable to Belcan consolidation; management will sustain margins via AI-led productivity, improved pyramid (more freshers) and steady utilization (~85%).

• Question from Margaret Nolan (William Blair & Company L.L.C., Research Division): Can you shed some insight on how you're tracking the success of upskilling your employees with those AI-related skill sets?
  Response: Tracking via concrete adoption metrics: ~30% of internal code is AI-assisted, >250k employees trained on AI skills, GitHub Copilot leadership and large-scale initiatives (53k-person hackathon); scaling fresh-graduate hiring to accelerate skill build.

• Question from Margaret Nolan (William Blair & Company L.L.C., Research Division): Should we expect large deal and mega deal signings to impact the quarterly cadence of revenue and margins in 2026? Can you help us think about the ramp over the course of the year from a modeling perspective?
  Response: Bookings TTM and TCV have increased (TCV up ~40%); management expects tail velocity into Q4 and 2026 with continued large/mega deal momentum across geographies, implying sustained contribution but timing/lumpiness will persist.

• Question from Surinder Thind (Jefferies LLC, Research Division): Can you maybe talk about the partnership strategy here and how important it is to maybe partner with each of the major providers versus maybe being a bit more selective and becoming more of a partner of choice with maybe some of the individual providers, whether it's GCS versus Anthropic or OpenAI or however you're thinking about that strategy?
  Response: Partnerships are multi‑lane: combine proprietary platforms/IP with partnerships across hyperscalers, frontier model firms (e.g., Anthropic, Google Gemini), SaaS and startups to build enterprise-grade, contextual AI—both owned and partner-led engines are strategic.

• Question from Surinder Thind (Jefferies LLC, Research Division): As a follow-up, can you maybe talk about the IP that you're building? And more specifically, you mentioned having upwards of 1,500 agents in production. How does that impact the revenue model at this point? Are you able to charge for some of that? Do you keep some of that IP? Or is it more of a core base and then you kind of custom build agents, that then [indiscernible]?
  Response: IP and platforms (e.g., Flowsource, multi-agent frameworks, pretraining patents) make AI enterprise-grade and enable production outcomes; model is platforms-plus-services—some proprietary IP is monetized, much is used to drive services, outcomes and BPaaS revenue.

• Question from Darrin Peller (Wolfe Research, LLC): Just when I look at the guide of 2.5% to 3.5% constant currency for fourth quarter, just what are the puts and takes there? Any early insights into how budgets are shaping up also into '26 would be helpful.
  Response: Q4 guide reflects customary seasonality and near-term visibility; range covers downside and upside scenarios—no major change in demand observed; management will provide 2026 commentary in January.

• Question from Darrin Peller (Wolfe Research, LLC): Maybe just discuss the competitive dynamics for some of the large deals you're seeing and what's allowing you guys to continue winning them? And then how important is price in the discussion and maybe build into that what AI can do for you on pricing, if you could pass through some of your savings into this?
  Response: Pricing is increasingly productivity-linked: consolidation/productivity deals remain price-sensitive, while innovation-led deals are less so; AI-driven productivity enables competitive pricing on savings-oriented deals and supports wins on innovation work.

• Question from Yogesh Aggarwal (HSBC Global Investment Research): Any thoughts on secondary listing in India? I mean, is it something on the table and any puts and takes for the same? Just curious to know your thoughts, please.
  Response: Board is assessing potential primary offering/secondary listing in India; process is in early, comprehensive review with advisers, no decision made and any action would be subject to market and other factors.

• Question from Rod Bourgeois (DeepDive Equity Research): Can you speak to what form that improved spending is taking in the Financial Services vertical? And in particular, are you now seeing those clients moving beyond AI for cost savings and into more AI-based reinvention at those clients?
  Response: Financial Services spend is shifting from cost-takeout to innovation—many AI projects are moving from experimentation to enterprise-grade deployments across banking, insurance and payments; FS is a top-performing industry for Cognizant.

• Question from Rod Bourgeois (DeepDive Equity Research): Can you speak a little bit about the outlook for the health care vertical in general? And in particular, with TriZetto and the -- all of the AI work that you're doing, are you seeing BPaaS as a increased opportunity there? Just any color on the health care outlook.
  Response: Health care outlook is strong for BPaaS and AI instrumentation; TriZetto (200M+ members) and BPaaS drive BPO growth (~10%); BPaaS and AI-led automation are key growth levers in healthcare.

• Question from Yu Lee (Guggenheim Securities, LLC, Research Division): You called out last quarter that you were expecting the 4Q exit rate to be just under 4% at the high end of the outlook range. Given the outperformance this quarter, can you help bridge the gap between the 3.5% at the high end of your 4Q outlook today and the 4% exit rate you pointed to last quarter?
  Response: Current Q4 view (2.5%–3.5%) reflects near-term visibility; continued momentum on large deals will determine exit rate—management is pleased with 2025 execution but is modeling conservatively for Q4.

• Question from Yu Lee (Guggenheim Securities, LLC, Research Division): Can you help us also better understand your pyramid initiatives and how you're balancing the needs of clients while managing margins, particularly as you move into higher-value AI-related work in Vectors 2 and 3 that may require higher skilled talent beyond that of freshers?
  Response: Freshers and AI are complementary: company doubled fresher hiring to expand the pyramid, control costs and accelerate AI readiness while also hiring/retaining higher-skilled talent for advanced Vectors 2/3 work; aim is a shorter path to expertise.

Contradiction Point 1

Large Deal Bookings and Pipeline Momentum

It involves differing perspectives on the momentum of large deal bookings and pipeline health, which are crucial indicators of future revenue growth.

Will large/mega deal signings affect quarterly revenue and margin trends in 2026? How should we model the annual revenue growth trajectory? - Margaret Nolan(William Blair & Company L.L.C., Research Division)

2025Q3: We have tailwind from large and mega deals with a 40% increase in TCV value and consistent annual contract value growth. - Ravi Kumar S(CEO)

Can you comment on bookings growth and pipeline replenishment for the second half of the year? - Tien-Tsin Huang(JPMorgan Chase & Co, Research Division)

2025Q2: Bookings grew by 18% Y-o-Y with a 6% T-12 growth. We saw a good mix of renewals and new business, including 6 large deals with 2 mega deals. - Ravi Kumar S(CEO)

Contradiction Point 2

Gross Margin Outlook and Management

It involves changes in financial forecasts, specifically regarding gross margin expectations and management strategies, which are critical indicators for investors.

How will the expected deal ramps and mega deals impact short-term gross margin performance? - Tien-Tsin Huang(JPMorgan Chase & Co, Research Division)

2025Q3: We have maintained gross margins organically, though the reduction is due to the Belcan consolidation. Future margins will be managed through AI-led productivity, pyramid expansion, and utilization rates. - Jatin Dalal(CFO)

What factors are driving the gross margin outlook for H2? - James Eugene Faucette(Morgan Stanley)

2025Q2: Utilization is slightly higher than the first half of 2024. We will balance resource use with evolving resource mix. There are investments being made as we ramp up large deals. Despite these investments, we've maintained stable gross margins year-over-year and expect to continue this trend. - Ravi Kumar Singisetti(CEO)

Contradiction Point 3

AI-led Productivity and Pricing Strategy

It involves the strategic impact of AI productivity on pricing and competitive positioning, which directly affects financial performance and market perception.

Can you explain the increase in revenue per employee and operating income, and whether these increases are sustainable or structural based on the AI-related returns mentioned? - Tien-Tsin Huang (JPMorgan)

2025Q3: AI-driven productivity is a significant driver of competitive pricing. - Ravi Kumar(CEO)

How is the shift from growth projects to cost-cutting initiatives impacting deal closure speeds and pricing in the current economic climate? - Tien-Tsin Huang (JPMorgan)

2025Q1: Pricing is not determined by rate cards but by the quality of solutions and AI-led productivity capabilities, which may affect initial margins but are manageable within a broader portfolio. - Jatin Dalal(CFO)

Contradiction Point 4

Economic Uncertainty and Industry Demand

It reflects differing perspectives on the impact of economic uncertainty and industry demand, which are critical factors for business strategy and investor confidence.

Can you discuss near-term gross margin performance considering expected deal ramps and mega deals? - Tien-Tsin Huang (JPMorgan)

2025Q3: We have maintained gross margins organically, though the reduction is due to the Belcan consolidation. Future margins will be managed through AI-led productivity, pyramid expansion, and utilization rates. - Jatin Dalal(CFO)

Was the Q2 decision-making slowdown specific to certain clients/geographies or broader? - Ramsey El-Assal (Barclays)

2025Q1: We see more stability in demand from Financial Services. We continue to see stable demand in Communication and Media and Technology. We see some stability in Healthcare, but we do acknowledge that the overall demand continues to be a little bit cautious. - Jatin Dalal(CFO)

Contradiction Point 5

Small Deals and Discretionary Spending

It involves varying statements about the return of small deals and discretionary spending, which are key indicators of market conditions and client sentiment.

Can you update us on the new business pipeline for smaller deals and any noted increase in them? Are there any delays or accelerations in new large deal commencements? - James Schneider (Goldman Sachs Group, Inc., Research Division)

2025Q3: Discretionary small projects are coming back in financial services and health care due to AI-led spend. - Ravi Kumar S(CEO)

Are you seeing signs of increased budget flexibility or notable discretionary spending? - James Faucette (Morgan Stanley)

2024Q4: We do think we'll see some recovery there in 2025, but I think we haven't seen that momentum yet. - Ravi Kumar S(CEO)