Cognizant Technology Solutions Corporation (CTSH) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Tyler Scott, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Welcome to Cognizant's Third Quarter 2026 Earnings Call. I'm joined today by Ravi Kumar, Chief Executive Officer; and Jatin Dalal, Chief Financial Officer. By now, you should have received a copy of the earnings release and investor supplement. If you have not, copies are available on our website, cognizant.com. 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 intertrading 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, over to you, Ravi.

Thank you, Tyler. Good morning, everyone. Thank you for joining us. We delivered a solid third quarter while advancing our AI builder strategy. Revenue was in line with our expectations and adjusted operating margin reached its highest level in 4 years. reflecting continued execution in a rapidly evolving market. We maintained strong momentum in financial services, where clients are increasingly using AI to accelerate modernization and address new areas of demand powered by AI-led innovation cycles. We are building the deployment capacity and differentiated capabilities that we believe can help clients move AI into production at enterprise scale and capture more of its value and we see an opportunity to capture more of that value through platforms as well as deployment services. Looking at the quarter's highlights. Revenue grew 4.8% Y-o-Y in constant currency, led by strong performance in North America, including contribution from our recent 3 cloud and Astra acquisitions and our integrated offering strategy. Financial Services accelerated to 12% year-over-year constant currency growth, its third consecutive quarter of double-digit growth. Communications, Media & Technology also grew double digits, driven by organic contributions from Austria, and strong spending from technology clients. Trailing 12 months bookings increased 4% with the mix of new versus expanded business growing over 10 percentage points year-over-year to 60. We signed 3 large deals with TCV of more than $100 million each, while the combined trailing 12 months TCV of large deals increased 9% year-over-year and adjusted operating margin increased year-over-year to 16.3%, the seventh consecutive quarter of year-over-year expansion. We also continue to see indicators that AI is changing our operating model. Revenue and adjusted operating income per year, excluding Gens trainees, increased more than 3% and 5%, respectively. To the end of quarter 3, we estimate more than 50% of our software development was AI-assisted and we have over 8,500 AI engagements. We achieved these results in a complex demand environment. Although macroeconomic conditions were largely stable in the third quarter, we are seeing the macro uncertainty weigh more on discretionary spending in the fourth quarter, particularly in hair and consumer-facing sectors. We have reflected this factor in our updated full year guidance, which Jatin will cover in more detail. Despite these factors, we are still delivering revenue growth that ranks among the top of our peer group. Against this backdrop, our strategy and actions are aimed at building the necessary capacity to deploy AI at enterprise scale, capturing more of the value between AI intelligence and the enterprise and applying these capabilities to the areas where we see the greatest growth opportunities. Historically, major technology transitions required capacity to deploy new technology at scale. We are building the capacity across our talent engineering platforms and partner ecosystem with leading frontier AI companies, hyperscalers and entire technology providers. More than 45,000 Cognizant associates have earned more than 95,000 certifications across frontier AI platforms and another 65,000-plus are in progress. We recently expanded our Google Cloud partnership with a new Gemini Frontier capability group, bringing together more than 18,000 dedicated cognizant associates focused on legacy modernization, developer experience, autonomous business processes and frontier cyber defense. We are also proud of the strong momentum created through our Gemini partner event where more than 55,000 associates completed build with Gemini, the largest Gemini partner workshop to date. With this deployment capacity in place, we believe our larger opportunity lies in helping enterprises turn AI intelligence into differentiated business value. As AI moves into production, that value increasingly comes from reimagining our work gets done, providing the enterprise context AI needs to operate effectively and build the trust and government required to deploy it at scale. Our AI Builder strategy is designed to bridge this gap between AI capability and enterprise value through 4 connected areas. First, reimagining how work gets done. This starts with redesigning business workflows, operations and roles around what AI now makes possible in new cognizant proprietary methodology in agile parts engaged in reimagination and reinvention of business landscapes. Work 1 handled by software systems and human teams will increasingly be performed with a new combination of systems, people and AI agents. We have pioneered the discipline of context engineering to develop our associates expertise in this discipline. And we believe we are building the specialized engineering capacity needed to build a genetic systems at scale. Second, engineering enterprise-grade AI, putting reimagined work into production as Bspogentic systems requires enterprise-grade systems meaning governed, trustworthy, safe and grounded in the enterprise context. This is an area where we believe our platforms will play a critical role. This allows us to embed our capabilities and IP directly into delivery, scale them across clients and increasingly bend the cost curve. Our platform opportunity rests across 2 pillars: first, engineering platforms, support the end-to-end engineering life cycle through AR engineering and modernization. Second, business platforms apply to repeatable business processes, particularly bounded workflows where AI can increasingly perform and improve the work. The third area of our AI Builder strategy is building the capacity to help clients absorb AI. Effective enterprise area adoption requires the right skills, tools and ways of working. We are putting into this practice inside Cognizant through Skilled Spring, a native AI native learning platform, which is now used by approximately 315,000 associates. We're also making the platform available to clients that are building an active pipeline of opportunities. Finally, compounding and protecting institutional intelligence. As AI is embedded in more workflows, enterprises need greater visibility into and control over how AI is used while protecting their institutional intelligence and sovereignty. We recently launched Cognizant AI Nexus, a modular multimodal operating layer that helps us manage spend, coach in real-time, compound repeatable patents and connect AI consumption to business outcomes across teams. It illustrates how we aim to help clients manage AI as an enterprise capability while learning from its use and making that institutional intelligence more valuable over time. Together, these 4 elements of our AI builder strategy is designed to help clients turn AI capabilities into enterprise value while positioning Cognizant to capture more of that value. Now let me discuss how our AI builds expands the opportunity for Cognizant in 3 areas. First, AI-led productivity and autonomous software engineering, which is increasingly becoming the baseline for how we deliver our traditional work. Second, old things in new ways, which is using AI to perform existing work in fundamentally new ways, changing the economics of modernization and enterprise workflows. And third, new things in new ways. AI creates enterprise new services, platform and operating model opportunities that were not previously possible. Together, they increase our total addressable spend and create expansive opportunities on enterprise landscapes, yield new avenues of growth for Cognizant. To capture these opportunities, we are evolving how Cognizant operates by reshaping our organization talent and commercial model for an AI-led market. Notably, we have aligned our software engineering group portfolio around AI-led software engineering and modernization. This shift the group's focus from engineering disciplines to client outcomes, industry context and frontier capabilities. We expect this shift will improve how we build and deploy AI native capabilities while giving associates clearer parts to develop frontier expertise. In parallel, we are evolving our workforce, building frontier roles around capabilities needed to design, deploy and operate AI native solutions. These roles combined engineering, AI fluency and business expertise with greater accountability for client outcomes. And they're complemented by our investments while leading frontier AI partners I discussed earlier. We're also adding capabilities through target targeted acquisitions. Last week, we announced our intent to acquire Australia-based Dyflex solutions and platinum partner to deepen our SAP expertise and strengthen our ability to help clients across Australia and New Zealand modernizing their core platforms. Our commercial model is also evolving. As human and digital labor increasingly converge in delivery, we see more opportunities for outcome-based pricing. AI-infused rate cards and platform monetization. More broadly, our mix of fixed price and transaction-based work is certainly increasing. In the third quarter, this mix was nearly 58% of our revenue, up 140 basis points year-over-year and more than 500 basis points since the third quarter of 2022. And we are expanding reach of these capabilities. This month, we announced Cognizant Activate, which is designed to bring enterprise-grade AI transformation to emerging high-growth mid-market companies aspiring to reach the Global 2000 scale with an operating model purpose built for the size. Next, as we evolve our operating model, the AI disruption has created the immediate next wave of client opportunities. And accordingly, we have identified 4 strategic growth priorities that we believe can drive disproportionate growth. Modernization identifying core business operations, secure AI and data center and workplace services. Together, we believe these represent a multibillion-dollar opportunity in the years ahead. We are focusing our investments and efforts in these areas with partnerships playing an important role. First, starting with modernization. AI is changing the speed and economics of modernizing legacy technology data and enterprise applications. For example, we expanded our decade-long relationship with Gilead Sciences through a new 5-year agreement supporting the responsible application of agent AI across selected programs, simplifying processes and improving software delivery. At Travelport, we completed the first phase of the AI transformation we announced with Entropic in May, establishing the platform's architecture and engineering practices needed to modernize its technology environment. At Odyssey Logistics, a global logistics provider, Cognizant used autonomous AI engineering to rebuild Odyssey's transportation management platform, resulting in 37% net savings compared with the conventional approach. The second strategic growth opportunity is identifying core business operations. We see a significant potential to reimagine workflows with agent KI and our platform strategy. As I mentioned earlier, we will prioritize bounded workflows. Mounted workflows are primarily built on 4 principles: structured inputs, measurable outcomes, high transaction volumes and short feedback loops. Our investments in this space are based on our external market study, and we are initially concentrating on key areas where we believe we have the right to win with our domain strength and thereby significantly create potential for frontier enabled platforms. These include long-term care as an adjacency to our existing health care platforms, mortgage operations, drug safety and pharmacovigilance insurance operations in the frontier finance function. We will start with these segments as we make progress, we'll continue to identify more segments for building frontier enabled platforms and services. A few early examples are as follows. First, Health care claims we recently introduced agentic workflow processing for TriZetto that allows AI agents to automatically clear eligible routine pended claims while routine exceptions to human reviewers. It is designed to reduce manual intervention while preserving human judgment where it's needed. At CIT, a global specialist in air transport technology. We are helping build a frontier finance function on a modern cloud platform, spanning finance, procurement and supply chain. Cognizant will work with SITA implement a cloud-based ERP and management platform. The goal is to move finance beyond reporting and transaction processing towards a more strategic role built around data, AI and measurable business value. Next, for the European bank for reconstruction and development, we are applying AI across a complex, highly governed technology environment, combining AI-enabled delivery and platforms, including neuro flow source and work next through outcome-led managed services and fixed capacity services models. And at Talcott, we helped modernize its corporate and bank-owned life insurance business operations or by launching a next-generation policy amination platform. We embedded governed AI across the delivery cycle from requirements and design to engineering, testing and implementation, driving 30% productivity gains. Our third strategic priority is secure AI. AI is embedded more deeply across enterprise systems and workflows, trust and security becomes prerequisites for scaled adoption. While securing agent systems unlocks new demand, we are equally excited about the ability to leverage frontier intelligence for vulnerability discovery and remediating and refactoring existing landscapes with Frontier Intelligence being a much bigger opportunity. Our cybersecurity business as is our fastest-growing service line. We are building our capabilities through our new AI trust platform and frontier cyber defense workers. As an inaugural number of the OpenAI Daybreak cyber partner program, we are combining advanced frontier AI models with our security expertise, governance and human oversight to help clients identify vulnerabilities and validate fixes faster. We are deepening our work with CrowdStrike, bringing their Falcon platform into the Cognizant AI factory and our managed cybersecurity service to help secure AI agents models and infrastructure. Finally, the fourth strategic priority is data center and workplace services, the trillions of dollars being spent on AI infrastructure build-out creates opportunities across data center operations, networks, AI environments and digital workplace services. Our Astra acquisition strengthens our ability to serve this market and show early momentum during the quarter, including an expanded engagement with Google. Beyond these 4 strategic growth priorities, we are building capabilities in the emerging area of physical AI. We recently signed an agreement with 1 of North America's largest utility companies to deploy our flagship physical AI platforms, Cognizant Intelligence spine and autonomous all-domain evenness for utilities. Together, we aim to fuse sensor vision and edge intelligence into a single real-time view to enhance wildfire prevention and grid safety and to accelerate multi-agent coordination and field response. We see a healthy pipeline of similar opportunities in asset heavy industries like manufacturing, life sciences, retail and consumer sectors. We continue to keep this flywheel running on identifying new waves of demand by sensing incubating and scaling for the next set of opportunities unlocked by AI disruption. In summary, we view agenetic AI as the most significant enterprise opportunity since digitization and clients are increasingly focused on converting their AI investments into measurable business outcomes. We believe our AIs built a strategy expands the opportunity ahead and opens multiple revenues for growth, particularly across the 4 strategic priorities I outlined today. We continue to strengthen our core business while investing in the capabilities, talent and platforms needed to deploy AI to enterprise here. We are doing this while delivering top-tier revenue growth, expanding margins and EPS growth ahead of revenue growth. and we remain focused on disciplined execution and creating durable long-term value for our shareholders. Thank you to our associates, clients, partners and shareholders for your continued support. Now I'll turn the call to Jatin.

Thank you, Ravi, and thank you all for joining us. We are positioning Cognizant for a rapidly changing market by deepening our technology partnerships, building new relationships across the frontier ecosystem and evolving our go-to-market commercial and delivery models. We are also pursuing targeted M&A to add capabilities to advance our AI builder strategy. Together, these actions strengthen our ability to help clients generate measurable business value from AI. We believe our financial performance gives us the capacity to keep investing while remaining disciplined with capital allocation and capital returns to shareholders. We are delivering results today while strengthening the business for the future. Now moving on to the details of the quarter. In Q3, revenue grew 4.8% year-over-year in constant currency to $5.7 billion. Organic growth was again led by financial services, supported by continued ramp of large deals. Year-over-year growth also benefited from our investments in 3 cloud in Austria as well as higher third-party product revenue associated with our integrated offering strategy. BC integrated offering is an increasingly important opportunity as clients seek partners, tech and combine services, software, infrastructure and security to deliver outcomes. As AI moves further into production, we expect these models to evolve, including how insurance and AI consumption are incorporated into our solution delivery. As Ravi discussed, we are concentrating investment and go-to-market activity in areas where we believe AI can expand the scope of work we address. We are already seeing encouraging growth in several of these businesses like BPO, infrastructure, cybersecurity and industry solutions. Year-to-date, we estimate that service lines that are benefiting from AI tailwinds account for approximately 40% of our business and are growing at roughly 2 to 3 the rate of our total organic services revenue. Next, geographically, North America again led growth and U.K. So strength in public sector, while Rest of World improved sequentially. By segment, Financial Services led again with heavy growth across banking and capital markets, recent new logos in insurance and U.K. public sector growth I just mentioned. Legacy modernization programs continue to gain momentum as clients advance their AI journeys to tackle significant technology debt. In Health Sciences, uncertainty caused by regulatory and funding changes continues to constrain discretionary spending. During the quarter, we unified our payer and provider businesses to better align with our health care ecosystem that is increasingly integrated across traditional payers and providers. We believe our health care expertise end-to-end ecosystem relationships and experience with mission-critical health care workflows, position us well to better serve our clients across these boundaries. Our TriZetto business demonstrates the value of combining software services and deep domain expertise, and we see opportunities to apply that model more broadly across the health care value chain. Next, products and resources remain pressured as clients in retail, consumer goods and travel and hospitality continue to contend with geopolitical uncertainty, supply chain disruption and elevated oil prices. However, we see good momentum in manufacturing, logistics, energy and utilities, where physical AI, smart manufacturing and cost reduction initiatives particularly among auto companies are creating new opportunities for us. We also delivered strong sequential growth in Belcan, driven by the ramp of recent large deals. In Communications, Media and Technology, clients in consent Media continue to face significant cost pressures and intensifying competition. Demand from technology clients remained strong, driven by AI engineering, digital operations, data and cloud services for our top clients. Atria continues to show momentum and contributed to 1 of the 3 large deals we signed in the quarter. Turning to bookings. On a trailing 12-month basis, bookings grew 4% and represented a book-to-bill of 1.3. We saw double-digit growth in our medium-sized deal band, and we are pleased that new and expansion bookings are up 16% year-to-date. We are also encouraged by momentum we see in Europe, which contributed 1 of the large deals during the quarter. Annual contract value decreased modestly on a trailing 12-month basis, reflecting longer contract terms. Moving to margins. During the quarter, we incurred approximately $51 million in costs related to Project Leap program we initiated in the second quarter. Excluding this impact, third quarter adjusted operating margin was 16.3%, up 30 basis points year-over-year. Project LEAP savings and favorable currency more than offset higher compensation costs and investments we are making across our AI partnerships, integrated offering strategy and M&A. Now to details on EPS, cash flow and capital allocation. Third quarter adjusted EPS was $1.49, up 7% year-over-year, driven by revenue growth margin expansion and lower share count. Growth was partially offset by higher interest and tax expenses. ESA was 89 days, up 5 days year-over-year, primarily driven by a change in business mix. Third quarter free cash flow was $925 million, bringing year-to-date free cash flow to $1.6 billion. During the third quarter, we deployed over $250 million on share repurchases and bought back 4.9 million shares at an average price of approximately $53 per share. Year-to-date, we have deployed $2.3 billion to shareholders through share repurchases and dividends and remain on pace to deploy about $2.6 billion for the full year. Finally, we ended the quarter with cash and short-term investments of $1.6 billion. Turning to our forward outlook. While demand was largely steady through the third quarter, the macro uncertainty has impacted health care and consumer-facing sectors more than we had previously assumed. Financial Services and North America MLU performed better than our expectations, but it was not enough to offset the incremental areas of softness. These macro factors have led to additional pressure on discretionary spending. Our fourth quarter and revised full year guidance reflect these market dynamics. The guidance now assumes slightly lower contribution from third-party resales associated with our integrated offering strategy and higher impact from furloughs in the fourth quarter than previously expected. For the fourth quarter, we expect revenue to grow 3.2% to 4.7% year-over-year in constant currency. This includes approximately 200 basis points from our recently completed acquisitions. Our full year guidance is now 4% to 4.4% growth in constant currency compared to 4% to 5.5% previously. This updated range is within the initial guidance we issued in February, and we expect it will represent top-tier revenue growth this calendar year. Our revenue guidance includes approximately 150 basis points of inorganic growth, which is unchanged. Our M&A pipeline remains active. The Dilex acquisition we announced last week is expected to close in the first quarter of 2027. We have also revisited our Project LEAP estimates. We now expect total cost of $180 million to $250 million, down from our previous estimate of $230 million to $320 million. This is driven by lower employee severance and other personnel-related costs. We now expect to generate in-year savings of around $200 million in 2026, consistent with the lower end of our prior range. These updates reflect changes in the program's time line, which is now expected to run through the first quarter of 2027. They also include a modest reduction in scope enabled by our success in reskilling and redeploying our workforce. We are narrowing our adjusted operating margin guidance to approximately 16.1%, which is midpoint of our prior range and represents 30 basis points of year-over-year expansion. We continue to expect free cash flow conversion to be 90% to 100% of net income for the full year. Our full year tax rate guidance is around 25% compared to prior range of 25% to 26%. We expect our fourth quarter rate will be modestly above the full year that. Our full year weighted average diluted share count guidance of approximately 460 million is unchanged. We are narrowing our full year EPS guidance range to $5.72 to $5.79, representing 8% to 10% growth. Now I will take a moment to address the Department of Labor's recently announced suspension of new perm or permanent labor certification application for some companies, including Cognizant. Today, we have approximately 32,000 employees in the U.S., and we have invested significantly to scale our local talent base over the last several years. We do not expect the pound suspension to have a material impact on our talent strategy or operations. Finally, regarding our evaluation of a potential primary offering and secondary listing in India, we continue to work closely with all stakeholders. We are monitoring for proposed updates to the regulatory framework, which we understand may be made public in coming months as part of a required comment period. Once that is available, we are prepared to complete our evaluation expediously and make a decision. Overall, we remain pleased with the progress and will provide updates as appropriate. With that, we will open the call for your questions.

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

Just maybe my first question is just ask on bookings and how that came in versus plan and how the backlog and the pipeline looks now given what you had last year at the same time? Any additional color there?

Thank you, Tien-Tsin, for the call -- for that question. Look, bookings has always been -- you would always look at it trailing 12 months just because of the bumpy nature of how bookings are. Our trailing 12 months is 4% for more than $100 million deals. We actually did 9% trailing 12 months. And one of the things I've noticed now in 2026, earlier last quarter, Jatin mentioned how renewals on productivity almost on the tail end, if I may, because last time we said 50% of portfolio is rebaselined on productivity. So renewals are actually lower and the new bookings are higher now. So our renewal percentage was roughly in the range of 4 -- our new bookings was roughly in the range of 48%, and now it's actually 60%. So the good news is new bookings will quickly translate to revenue. So the book-to-bill still remains at 1.3, but the translation to revenue will be faster because new bookings are now 12% higher in TTM basis over the last quarter. So in summary, the large deals continue new bookings -- I mean, new wind expansion is 12% more. Europe has been significant momentum. And I feel like as discretionary comes back, the smaller deals will also come back. Health care specifically, normally in quarter 4, we expect enrollments on Medicare and Medicare One of the reasons why our Q4 numbers are a little bit softer than what we thought is because there is regulatory uncertainty on Medicaid and Medicare. That is getting rebaselined as we get into 2027. So 2027 will start to feel like health care is an news part. In fact, health care will also start getting funding from states. There will be new lease of funding from states to cover that up. And hopefully, the regulatory pressure will go away on health care. On Financial Services, we have done 12-plus percent growth over the last 3 quarters, and our bookings has been on a historic high in financial services. It's 1 of our best -- so I'm pretty optimistic about how bookings is going to look like for the future because we now have more proportion of new business and as discretionary comes back, that will fill up the fill up these smaller deals.

That's great. That's good detail. Just my quick follow-up then just maybe can you elaborate on the 40% of business that's seeing the AI tailwinds? And I think you mentioned 2, 3x faster organic growth of services there. So can you just confirm that? And then just what it implies for what we can infer for the remaining 60%?

Sure. So I'll take the question. Effectively, we have spoken about 4 services, which are which we can see are beginning to see some AI tailwind services and pickup. And they are BPO infrastructure cybersecurity and industry solutions, combined this account for 40% of our portfolio, and they are growing faster. And that, of course, assumes that the rest of the 60% is not growing as fast. But if you see it as a brick in the wall, there is 1 that is looking different than the rest of the business. So that's the update that we shared.

Our next question comes from the line of Jason Kupferberg with Wells Fargo.

I wanted to start with the updated guidance, and I guess its implications as we move through the rest of this year into understanding that you guys won't provide any '27 targets until the February call. But as we're trying to sort of unpack the expected organic constant currency growth it looks like there was going to be some detail potentially into 4Q versus how do we think about that relative to 2027? Should we use 4Q exit as a reasonable proxy for that metric into 2017? Just how are you thinking about return to accelerating growth as we move through the balance of this year and into next year?

Sure. So if you see our the guidance range for quarter 4, it is 3.2% to 4.7%. At midpoint, it is approximately 4%. For the full year, even at midpoint of 4.2%, we would be both on total growth basis as well on the organic basis, would be delivering our top-tier performance vis-a-vis rest of the players. So the first point I want to make is that this year, even with the reduction in guidance, we still firmly believe we are delivering a robust performance for 2026. Now to your question on the outlook for -- as you can imagine, it is a little early for us to comment for 2027. Of course, the most recent data point that you have for 2027 is the exit total and organic of Q4, which is at 2% and 4%. And even a 2% organic, that is the number is higher than most other large companies and their exit 2026 number. So overall, we feel good that in a tough environment, Cognizant continues to perform well, its preferred choice for our customers. And we will see how we further accelerate when we go to '27, but this is the most latest data points that we are sharing.

I want to add just 1 thing here. Look, Financial Services Three quarters in a row, we are double-digit growth. Even quarter 4 of last year, we had 9-plus percent growth. So it's literally 4 quarters back to back financial services will go into 2027 in a good spot. It is 37%, 38% of our business. Health care will have more stability it -- as you have seen, we didn't grow in health care, it will have more stability because Medicaid and Medicare funding will stabilize, rather, it has started to get stabilized. So health care will pick some momentum. And then we are dependent on macro consumer goods because how the global macro works out on consumer goods, which is dependent on it. business in industrial manufacturing, energy, oil and gas in the U.S. is starting to be 1 of our fastest-growing businesses. So we think that will shape well. This is a new muscle we have built technology has done very well. Comms as an industry is still coping up with a lot of cost pressure. So I think there are a lot of variables, but -- if you look at it, a large part of it is you have to start to think about financial services as the pioneering industry, which has pivoted from productivity to new growth imperatives using AI. I'm certain that the other industries will start to open that up as discretionary comes up. And here we are now talking about 2027, no longer about whether AI is a tailwind or not, I mean, that question is already answered. He's a tailwind. There is no doubt in my mind. Now it is up to how are we going to get discretionary climbing back in every industry so that, that money translates back to technology spend.

I appreciate all the detail there. That's very helpful for us. I guess just as a follow-up, changing topics a bit. It was interesting to see the rescoping of Project LEAP in the quarter. Can you maybe just unpack the components there? I know severance was lowered. So presumably, you're keeping more people than originally expected. What's going on with that [indiscernible]?

Sure. So you are right. I think the overall scope of lower number has a reduction in personnel costs. And that is because we are investments, training keenness and ability to transform ourselves is beginning to take effect. And therefore, we can repurpose and redeploy a lot more than what we originally anticipated. Ravi spoke about 25,000 employees who have gone through and advanced AI certification in Cognizant. So all of that has helped.

This is an external certification from the frontier labs.

Yes. So this has really helped. And therefore, we have taken a lower goal on the restructuring costs from $180 million to $250 million and of which roughly $160 million will be spent in 26 and the rest will -- on the personnel side will come to in 2027. We shared the 2026 savings goal of $200 million that we have achieved. And that doesn't mean the program hasn't given its full benefit. It only means when you are able to repurpose and redeploy you are actually getting the benefit in a revenue line versus in cost line. So to that extent, we are very pleased with the way the program has been executed. And lastly, to your question on 2027, we haven't spoken about it. We will bring that as part of our outlook for 2027. Just as we see the benefits coming through from the program. there are different priorities in AI ecosystem where we need to invest those dollars. So we will think through on that pluses and investments and come back to you in the beginning of '27.

What you would have also noticed is our gross margin has improved significantly. In fact, we will keep the gross margin expansion continue into quarter 4. That's our confidence. And this is the seventh consecutive quarter where we have done an expansion of our margins since since I've come on board. So it's like -- we are excited about the fact that it's an expansive margin opportunity as well as we go through this change.

Our next question comes from the line of Jim Schneider with Goldman Sachs.

I was wondering if you could maybe comment on as we head beyond the current quarter, what do you think -- I mean, you cited some of the headwinds clearly to discretionary spending. What do you think is required for those headwinds to get released? In other words, there's clearance on either the geopolitical front or the [indiscernible]. Do you think those kind of temporary headwinds get released heading into the beginning of 2027? Or do you think it might take a little bit longer for clients to sort of reramp that discretionary spending?