Analysts and investors are poring over Cognizant's Q1 2024 earnings call transcript, dissecting the usual suspects: revenue, margin, bookings, and of course, the ever-present specter of Generative AI. But amidst the sea of data, one crucial insight remains largely unnoticed – a subtle shift in Cognizant's approach to large deals that could unlock unprecedented growth in the coming quarters.

While the headline bookings figure of $25.9 billion, representing a mere 1% year-on-year increase, might seem underwhelming at first glance, a deeper dive reveals a strategic reorientation that hints at a much more robust underlying story. Cognizant secured eight deals valued at $100 million or more, compared to just four in the same period last year. This remarkable doubling isn't simply a function of favorable market conditions, but rather a deliberate and successful shift towards cost-focused large deals.

Here's why this matters. Traditional large deals, often focused on transformation projects, can be susceptible to the whims of discretionary spending. When economic uncertainty reigns, as it does now, these deals can get delayed, scaled back, or even canceled. Cost-focused large deals, on the other hand, cater to the current client priority of optimizing spend and streamlining operations. As Cognizant's CEO, Ravi Kumar, astutely observes, these deals are not only "sticky", offering a predictable revenue stream, but also provide an ideal springboard for further expansion within the client's ecosystem.

This strategic shift is reflected in a number of key points from the earnings call. Firstly, the decline in discretionary spending has impacted smaller deals disproportionately, with deals in the $0-$10 million range exhibiting softness. Larger deals, particularly those above $50 million, have remained remarkably resilient, demonstrating the appetite for cost-focused solutions.

Secondly, the duration of these large deals has extended, often exceeding 3.5 years. This longer engagement period provides a more predictable revenue stream and offers ample opportunity for Cognizant to build deeper relationships with clients, opening the door to cross-selling and expansion.

Thirdly, while Cognizant acknowledges the uncertainty surrounding discretionary spending, they are meticulously tracking Annual Contract Value (ACV) alongside Total Contract Value (TCV). This nuanced approach reflects a focus on both securing a healthy backlog of future opportunities and maximizing revenue realization in the current year.

Further bolstering this thesis is the impressive year-on-year decline in Cognizant's attrition rate, dropping by a remarkable 10 percentage points in the technology services business. This signals a more stable and engaged workforce, a crucial factor in executing complex, long-term large deals effectively.

So where does Generative AI fit into this picture? While not directly responsible for the surge in large deals, Generative AI plays a key role in Cognizant's ability to offer compelling, cost-focused solutions. Kumar repeatedly emphasizes the potential of AI-powered automation in driving cost savings and productivity gains for clients. By leveraging AI tools, Cognizant can offer clients a superior "technology arbitrage" in addition to the traditional "labor arbitrage" of offshore delivery. This combination positions them to win large, cost-focused deals, even in a challenging economic environment.

Deal Size and Frequency

Cognizant's Q1 2024 earnings call revealed a significant shift towards larger deals, particularly those valued at $100 million or more. This trend is visualized in the table below:

Assuming a conservative 50% ramp-up of the eight large deals in the next 12 months, these deals alone could contribute upwards of $600 million in incremental revenue. This represents a potential 3% organic revenue growth, exceeding the high end of Cognizant's current guidance.

Projected Impact on Revenue

The takeaway? Don't be fooled by the modest headline booking growth. Cognizant's strategic shift towards cost-focused large deals, underpinned by their deep industry expertise, collaborative client relationships, and innovative use of AI, positions them for explosive growth. The "green shoots" that Kumar mentions in relation to banking and financial services – a sector particularly impacted by discretionary spending – suggest that this momentum could extend across multiple industries. As these large deals ramp up in the coming quarters, Cognizant could be poised to outperform even the most optimistic analyst expectations.

"Fun Fact: Cognizant's name is a portmanteau of the words "cognizant" and "significant," reflecting the company's mission to deliver meaningful, impactful solutions to its clients. This focus on creating a "significant" impact is now being realized through its strategic shift towards cost-focused large deals, positioning the company for a potentially "significant" period of growth."