Operator: Our next question comes from the line of Tien-Tsin Huang with JPMorgan.
Tien-Tsin Huang: 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?
Jan Siegmund: 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.
Ravi Kumar: 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.
Operator: Our next question comes from the line of Keith Bachman with BMO Capital Markets.
Keith Bachman: 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.
Ravi Kumar: 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.
Keith Bachman: 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.
Jan Siegmund: 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.
Ravi Kumar: 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.
