Q3 2019 Earnings Call
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After the speaker's remarks, there'll be a question answer session. If you like to ask a question at that time. Please press star one on your telephone keypad and a confirmation total indicate your lines in the question Q.
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Thank you and I would now let's turn the conference over to Katy Rice Global head of Investor Relations.
Please go ahead Katie.
Thank you Rob and good afternoon, everyone. So now you should have received a copy of the earnings release for the company third quarter 2019 result.
If you have not a copy is available on our website cognizant dotcom.
He or she had on today's call or buying some threed Chief Executive officer.
Karen <unk> Chief Financial Officer before it begins I'd like to remind you.
Some of the comments made on today's call and I'm not the responses to your question 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 I think they.
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 Companys earnings release and other filings with the FCC.
With that I'd now like turn the call over to Brian Country. Please go ahead Brian .
Well, thank you Katy and good afternoon, everybody and thanks for joining us see today's call.
What about few months, we've initiated in what we expect will be a multiyear evolution of their business aimed at the turning your company to historical levels of performance.
We view this as a systematic process revitalizing the company.
I wonder pursuing that rigor and urgency.
Today I want to clarify where we are this project, where we're headed I.
I briefly covering our Q3 performance and then reviewing how we began to operationalize the conclusions are the transformation office.
You'd be to go refine strategic posture, which aligns to our clients did your drilling bridges.
And our plan for resetting our cost base to facilitate investments in growth.
That's beginning it or third quarter earnings.
Q3 revenue grew 5.1% year over year in constant currency and $4.25 billion and non-GAAP EPS was 1008 cents.
In an uncertain economic climate.
Our year over year performance in North American modestly in the third quarter.
As we've discussed in prior calls our ability to accelerate the companys topline growth depends on revitalizing our north American performance.
And in particular, I cant financial services and health care businesses.
Both of which were under new leadership.
Well, we have more work to do we now have highly engaged strategic leaders running these businesses to bring a fresh perspective and huge Klein syntricity.
Arguably even more important than the modest year over year Roche agreement. We've seen is the new energy, we haven't in North America leadership team and our clients are noticing this.
At a global level in Q3 banking and financial services was up 3% year over year in constant currency and health care was down 90 basis points year over year in constant currency.
In banking and financial services against that backdrop, a growing demand for Dev ops and some in sourcing it skills, we see cost pressure into traditional business with growth opportunities in digital.
Particularly interesting cloud digital engineering.
Analytics and interactive.
Dinner dynamics existing health care, but here revenue growth also continues to be impacted by rate reductions in volume discounts from clients in the midst of merger integration.
Our momentum continued in her other two business segments.
Products things sources, and communications media and technology, both posted double digit revenue growth in constant currency you every year.
Later in our coal cars will take you through the details of the quarter, including the business segment and markets commentary.
Let's turn to my second topic.
Rationalizing the conclusions up the transformation office.
As a reminder, on joining comparisons in April we establish a transformation office to identify prioritize and put into actually key initiatives aimed at accelerating revenue growth and unlocking the potential problems.
Only six months of engagement by 250 of our leaders we have not identified.
Amongst other things our strategic focus operating on commercial models global delivery structure under cost basically processes and tools required to enable us to be fit for growth.
As a result, we're now in execution mode.
Putting into actually key initiatives aimed at facilitating investments in growth.
Going to market, but a sharper strategic focus working more closely with her appliance continuing to evolve or skill sets and creating a leaner and simpler operating model.
Let's start with her strategy.
I continue to allocate significant time to face to face meetings with the C suite of our clients.
Find these meetings essentially because the allow me to gain insights into the key trends by industry.
For pain points and desired business outcomes.
Clients across all industries are confronted with the risk of being disrupted by next generation nimble digital natives competitors.
So they are we directing their focus and investment to digital and embracing that ops and technologies like loud digital engineering analytics AI and automation.
We spend a few months sharpening our strategic posture to align directly with clients needs to become modern data enabled customer centric and differentiated businesses.
Our strategy has two parts.
First protecting and optimizing our core portfolio, which includes efficiency choosing an automation delivery optimization.
Section of renewals.
Strengthening or industry alignment and scaling our international footprint.
And second.
Winning in four key digital battlegrounds data.
Digital engineering cloud and I O T.
These four areas enable clients to put their data at the core of their operations.
Improving to experience the offer their customers tapping into new revenue streams defending against disruptors and reducing costs.
The two parts of our strategy reinforce each other you drill core portfolio that has been to strengthen the market.
For instance, our deep relationships with clients, who beat their industries.
A reputation for responsive and reliable delivery and or historical strength of the application. There mean, we know how to help clients transition for managing their current legacy state to enabling their digital future.
We are investing aggressively and there'd be turned into winning these for digital battlegrounds and as we do so we expect to accelerate our revenue growth.
I want to offer a bit more context at these four areas, starting with data, which at the heart of our strategy because it's at the core declines competitiveness.
The mother their industry clients, it's quickly get better restoring managing reporting analyzing and we're using their data clients need to leverage enormous amounts of data to fuel AI based platforms.
It can transform customer experiences drive automation and provide management inside.
Since closing a shift from legacy to next generation data services like data modernization AI and machine learning.
We're helping our clients make the leap from systems of record two systems or the insights and engagement.
It starts with data engineering.
Including basic things like customer and prototype Rockies.
Turning to digital engineering.
Compete effectively clients' needs because software driven enterprises.
To do so they are replacing traditional application development with digital engineering to build leading edge consumer grade experiences and infuse software into their products services and customer experiences.
Cloud a third digital bottom Grand it's just it's critical to clients digital journeys given that an estimated 50% of all workload fit and public and private clouds today.
Figures set to rise to 80% in a couple of years.
Our clients need help migrating their workloads as well as the entire spectrum of cloud management, including monitoring notification provisioning and orchestration governance and security.
We aim to significantly enhance or partnership with leading scale companies hyperscale companies and SaaS vendors.
Our 4000 grinders aiotv, an exciting space given that 75% the businesses are expected to increase their eye if he's spending in the next five years.
And 40 billion plus devices are expected to be O T connected by 2025.
The adoption of Aiotv enabled by five generation technology, it's barking, an explosion in distributed and edge computing.
Vast array of sensors and industrialize he devices institutions booklet rate across businesses cities and environments of all kinds.
Significantly changing use cases and accelerating adoption.
For clients I did he offers the ability to instrument everything.
For constant inside.
If you look back at our recent acquisitions, such as South vision, which expanded our digital engineering capabilities, and then a technologies, which expanded variety portfolio and her life sciences domain expertise.
We've been methodically deepening our expertise in areas that we believe that provides the greatest value declines.
Well generating the best return for cognizant.
Our latest step along that path is our agreement to acquire Cateno, leading consultancy that specializes in helping global 2000 clients beat their digital transformations, and leveraging enterprise Dev ops methodologies and advanced data platforms.
Pardon if its approach to cloud migration core modernization.
And cloud security is reshaping haven't surprises build their infrastructures.
These cloud capabilities will enable us to offer transfer <unk> transformed the cloud based solutions to our clients.
We expect this transaction to close later this quarter.
Refinements ever strategic posture also highlights a subset of our portfolio that is not in line with her strategic vision for the company.
And therefore, an area to exit.
We didn't digital operations, we had a content operations business that offers a wide range of business process services to clients across all industries.
Some of these projects involve ensuring proper brand and business experiences.
Such as integrating our health care patients are determining whether online maps are accurate.
But we didn't want some set up the content operations business.
Our work is largely focused on determining whether certain Clinton violates Klein standards.
And can involve objectionable materials.
We've determined that the subset of work is not in line with her strategic vision for the company.
Well, we intend to actually gets work we recognize the cleansing the rapidly jaksch nibble content is a worthy calls and one of which companies have a role to play.
For this reason, we've decided to allocate $5 million two fold research aimed at increasing the level of sophistication of algorithms and automation.
Thereby reducing users exposure to objectionable content.
Over the coming quarters, we intend to comply with her contractual obligations and the trains the best path forward.
It affected clients.
Sitting just so Ken will impact our financial performance in the coming year and also affect approximately 6000 roles.
<unk> months ahead, we expect to work that our partners to explore ways to transition grows to alternative vendors, thereby reducing the impact to our valued as issues.
As a reminder.
Other cognizant digital operations continue to work will continue.
In recent quarters I've discussed the importance of simplifying our organizational model to enhance role clarity empowerment and accountability, while ensuring we further increase or Klein syntricity and optimize our cost structure.
Over the last few months to transformation office and the decline feedback has identified a series of measures to help us progress against these goals.
And today I want to give you an update unsettled decisions we have taken.
These actions include.
Returning to our similar to me in a box model of client partner and delivery partner for a more seamless client experience and greater agility in front of the customer.
Our previously announced consolidation of the delivery organization under one delivery leader reporting to me.
Significantly increasing investments in automation into linked to an even more streamlined and efficient process is higher productivity and lower delivery costs.
Combining cognizant digital engineering capabilities, we're cognizant soft vision, thereby creating a powerful team focused on software product development and application modernization.
Extending our global brand developing greater thought leadership by industry vertical and better positioning cognizant in the market as a leader in digital why uniting all marketing under a recently hired CMO reporting to me.
Strengthening cognizant consulting capabilities in select geographies in verticals.
Complementing our targeted capabilities with greater partnerships.
We're the leader again reporting to me.
Lighting, especially the sales capabilities to the service lines, albeit we didn't industry intersection point.
To ensure the highest competencies and capabilities are available to our client partners.
And lastly, you know commercial teams the implementation of more leverage sales compensation programs and the development and deployment of a rat model or attention acquisition development.
To optimally segment or clients.
Teacher clients, thereby allowing us to better Hunt and farm.
These changes for the most part will become effective January Onest 2020.
I guess, its strategic backdrop, and a set of organizational decisions aimed at ensuring strategy execution.
Today, we are also announcing and cost reduction program.
And then he people intensive business cost reduction always involves difficult choices.
What do we didn't night to evolve their skill sets and freeing up capacity to invest in growth.
We've made the decision to remove approximately 10 to 12000 mid to senior level associates from their current roles in the coming quarters.
This gross production is expected to lead to a net reduction of approximately five to 7000 gross.
As we aim to reschedule approximately 5000 associates, thereby lessening the impact on our associates and allowing us to reduce lateral hiring.
These numbers exclude the approximately 6000 barrels impacted by our decision to exit a subset of our content operation business.
But as previously stated we expect to work with her partners to explore ways to transition these roles to alternative vendors, thereby reducing the impacted our associates and also reducing any associated charge.
Establishing a health care cost structure is but it means to an end and that's to drive revenue growth.
We free up cost we've identified a series of investments that require funding.
Including the previously announced hiring of approximately 500 revenue generating associates over the coming year, a combination of customer facing and sales support professionals.
We will help and see expand existing accounts and generate new ones.
Significant investments in cognizant Academy or internal learning center and in technical skills as we aim to we skill and redeploy our talent towards digital imperatives.
Et cetera rated investments in tooling and automation.
And increased investments in marketing and branding as we aim to strengthen our international operations under Dieter Digital brand.
And we'll provide more detail on or 2020 fit for growth plan.
Including the expected completion date and run rate savings along with the charges we expected incur.
We will take great care to treat her associated with the dignity in respect to deserve and to minimize any internal distraction caused by our actions as we get the company back to achieving its full potential.
We didn't see your role that for a full seven months, which has given me the opportunity to considerably deepened my knowledge of our operations.
Our market opportunity and are clients.
Three things are presenting appear to me.
First we built an enviable position in a large an attractive market that's expected to contain continue growing at a steady rate.
Most of our clients we serve are still in the early stages of their transformation.
We need or expertise in a distinct that digital technologies, coupled with her intimate knowledge of their technology environments to fully digitize their businesses.
Second.
The significant time at being able to spend would or top accounts convinces me that our clients love working with us and actually wants us to succeed in fact, he wants to step up and do even more for that.
My observation to cognizant is one of those rare beat to be organizations that is a so called love Brian .
The reservoir applying trust we built over the years is one of our most distinctive assets.
And third the company's brimming with talented and engaged associates around the world.
Our associates are driven to grow and develop new capabilities and de schools in our portfolio of solutions and in how to apply them to help our clients thrive in a digital economy.
In summary.
The leadership team and I are fully aware that we have the multiyear project ahead of us.
My optimism about cognizance futures pragmatic in comes from the winning spirit ever associates around the world. We're passionate about contributing to the long term success or clients.
Notwithstanding a backdrop of knocked the demand uncertainty that gives us close for prudence I'm convinced that much of what we need to do to increase cognizance competitiveness is within our own control.
A relentless focus on growth has defined cognizance performance since its founding a quarter century and.
That's a termination and focus our as strong as ever.
We're determined to unlock the organization's growth potential and return cognizant to its historical position of being the bell weather in the IP services industry.
With that it's my pleasure to turn call over time, he will give you an update both in their operational and financial performance as well as of U.S. to how we will see the fourth quarter guard. Thank you, Brian and good afternoon, everyone.
Third quarter revenue of 4.25 billion was above the high end of our guided range and represented growth of 4.2% year over year or 5.1% in constant currency.
Digital revenue growth within the mid 20% range and represented over 35% if total revenue.
Moving to the industry verticals, where overall company performance continues to be impacted by financial services and health care.
The natural services growth was up 3% in constant currency driven by the ramp up of several projects and insurance and banking with performance, which was consistent with last quarter.
Well then banking our performance continues to be impacted by a few of our largest customers.
Consistent with the last quarter two of our top five accounts continued to grow well three remain under pressure a trend we expect to continue through the remainder of the year.
As we had expected when we get her last earnings call insurance in Q3 benefited from a ramp up and project based work.
However in Q4, we anticipate a continuation of trends seen over the course of this year, where executive transitions underway at several of our clients showing the slowing the decision making process, particularly around larger deals in the pipeline.
Moving on to health care, which declined 0.9% year over year in constant currency.
Within our healthcare vertical performance continues to be primarily impacted by large clients involved in mergers.
The continued shift of work to a captive at a large client and the continued year over year impact from the completed it ramped down of an account in which we are the subcontractor to a third party.
Additionally, in the quarter, we were impacted by a charge related to an ongoing contract dispute with a large client.
Discharge impacted both revenue and margin.
Life Sciences, again grew double digits year over year benefiting from continued demand within digital operations.
Large enterprise transformation deals migrating from on premise to cloud based environments.
And momentum within our industry specific platform solutions, such as our shared investigator platform and smart trials.
That is also contributed to growth in the quarter and we're pleased with the early success, we have seen this acquisition.
We expect similar year over year trends in health care in the fourth quarter.
Products in the resources grew 13.4% year over year in constant currency.
The seventh consecutive quarter of double digit constant currency growth.
Growth was broad based across verticals as results continued to benefit from strong growth within our digital business and demand for digital engineering cloud infrastructure, Aiotv and analytic solutions.
Do you expect to see slower growth on a year over year basis, and the products and resources segment in the fourth quarter.
As we lap the ramp up of work with new logos and the contribution of acquisitions made in Q4 2018.
Our communications media and technology segment grew 10.6% year over year in constant currency.
In technology growth was driven by revenue from recent acquisitions and demand for our digital engineering services.
Partly offset by slowing demand for content services.
As Brian mentioned, we have decided to exit certain types of content work within our digital operations practice, but does not inline with our long term strategic vision for the company.
I will provide some more color on the impact of this to our communications media in tech practice as well as the overall company and a few minutes.
Turning to Geos.
Europe grew 8.8% year over year in constant currency, reflecting weakness in the UK from macroeconomic uncertainty.
In Continental Europe , we saw strength in life Sciences, driven impart by or is enough acquisition.
Well a few of our larger banking relationships in Europe remained under pressure, we did see good growth in several of our newer logos, including the partnership with three finished financial institutions.
The rest of World grew 11.1% year over year in constant currency driven by strong growth in products and resources insurance and CMT. It was partially offset by softness in banking driven by the weakness with several of our large clients.
Over the coming years, there's significant opportunity to gain further market share within Europe as well as the rest of world and we intend to increase investments in these markets in the coming quarters.
Turning to margins.
Our GAAP operating margin and diluted EPS, yes were 15.7% and 90 cents respectfully.
Adjusted operating margin, which excludes realignment charges was 17.3% and our adjusted diluted EPS was one dollar an eight cents in the third quarter.
Well 120 basis points from Q2, our adjusted operating margin was down 120 basis points year over year.
Lower expectations, primarily due to employee compensation and benefit costs outpacing revenue growth and the ongoing dispute with a large healthcare client, which negatively impacted operating margins by 40 basis points.
These headwinds were partially offset by the impact of lower incentive based compensation and cost savings realized as result of the targeted actions at the senior levels of our pyramid to simplify our work structure that we took in Q2 and kids rate.
The cumulative savings from actions taken in Q2, and Q3 are now expected to resolve the annualized savings of over $100 million with approximately $50 million realized in 2019.
However, we have more work to do to rightsize, our cost structure and are not satisfied with the amount of cost reduction achieved in the quarter as we did not achieve our full potential around pricing levers aligning bill rates with promotions and chairman optimization.
Also we experienced a longer than previously anticipated timeline to align revenue and head count growth as we continue to higher every school, our workforce to be better position to capture digital demand in the market.
Attracting and retaining our talent is a key factor to our long term success.
Well reduction of our attrition rate currently running at 24% annualized remains a long term goal.
We expect this rates remain elevated for the next few quarters as we undergo this transformation.
Turning to our balance sheet.
Our cash and short term investment balance as of September Thirtyth stood at 3.1 billion up approximately 75 million through June Thirtyth. It down 1.4 billion from December 31st reflecting the over $2 billion of share repurchases completed year to date.
Approximately 380 million deployed on acquisitions.
As a reminder, our short term investment balance includes restricted short term investments a 419 million related to the ongoing dispute with the India income tax Department.
We generated 620 million of free cash flow in the quarter DSL 78 days was down slightly sequentially, but up two days year over year, which negatively impacted free cash flow by approximately $100 million.
This is primarily due to the customer dispute I referenced earlier.
Our outstanding debt balance the 747 million at the ended the quarter and there was no outstanding balance on the revolver.
During the third quarter, we opportunistically repurchased approximately 3.6 million shares for approximately $219 million and our diluted share count decreased to 551 million shares for the quarter.
On a year to date basis, we have repurchased over 31 million shares for approximately $2 billion.
As of September Thirtyth, He has 519 million remaining under our existing share repurchase authorization.
Through our cash generated from operations remaining cash on the balance sheet and our revolving credit facility. We continue to have access to plenty of liquidity to fund both our existing capital return program.
Well its future acquisition.
Before I turn to guidance, let me provide an update on the outcomes of our transformation office, including the 2020 fit for growth plan that we announced this afternoon as well if the contact work that we intend to exit.
As Brian highlighted we're moving rapidly to implement the key initiatives identified by the transformation office aimed at accelerating our revenue growth.
Our 2020 fit for growth plan is expected to run for two years.
This program is designed to simplify the way we work reduce our cost structure and to fund investments in the business, which will enable growth.
As part of this plan, we expect to remove 10 to 12000 unit to senior level associates from their current role.
We will make every effort to identify productive rules based on client demand.
Our model assumes that approximately 5000 associates will have the opportunity to read skills for new sales or delivery roles within the company.
We expect the remaining five to 7000 associates to exit the company by mid 2020, either through attrition for roll along the nation.
As Brian said anytime we make decisions that impact our employees, we take it very seriously.
We believe these actions are critical for the long term health and competitiveness of the company.
Well if that's the charges will also include charges related to optimizing our real estate portfolio.
These actions are expected to be substantially complete by the end of 2020 annual results on an annualized run rate savings of $500 million to $550 million in your 2021.
Well, we'll begin the execution at the plant in Q4, we do not expect a material savings impact in the fourth quarter.
He's cost reduction activities will be occurring at the same times that we accelerate investments in sales resources.
Branding.
Talent.
We scaling.
And lean and automation enhancements across the company and further investments in our four key digital battlegrounds, including M&A.
These actions are an important step to building a strong foundation to support our future growth ambitions and success in our chosen digital battlegrounds.
Our commitment to all associates. During this time of transition is to ensure that we preserve the qualities value then culture that may cognizant, a great company for employees and clients alike.
Additionally, as Brian mentioned, we have determined that certain contract work within our digital operations practice is not in line with our long term strategic vision for the company.
And we intend to exit this work over the course at the next one is two years.
This transition is expected to impact approximately 6000 associates around the world.
In addition to continuing to meet our contractual obligations during this period.
We will ensure that our associates are treated fairly and with respect to that they deserve.
In the month ahead, we will work with our partners to explore ways to transition to work and roll to alternative vendors.
And we'll provide the impact that associates with a number of transition assistance programs, including retention bonuses.
Severance packages and the opportunity to participate in various reskilling programs.
Well the exact timing for the completion of this transition it's uncertain.
We do expect there to be a small impact to revenue within the C.M.T. practice in the fourth quarter.
And as a result of this decision we estimate that we may lose revenues of between $240 million to $270 million on an annualized basis.
And our communications media and technology segment.
We anticipate revenues will ramp down over the next once two years and therefore the impact on 2020 revenues, maybe lower than the expected annualized run rate.
This is expected to be modestly dilutive to our adjusted operating margin subject to the timing of the ramp down and other factors.
We expect to incur a wind down charge related to then transition that these associates and any related assets, such as real estate and equipment.
The total expected charges associated with this fit for growth cost transformation plan, including the wind down if certain content work is expected to be in the range of approximately $150 million to $200 million.
We will provide a more detailed update regarding the phasing of the impact when they provide our 2020 guidance on our Q4 call.
I would now like to comment on our outlook for Q4, and the full year 2019.
For the full year 2019, we expect revenue to grow in the range of 4.6% to 4.9% year over year to $16.75 billion to $16.9 billion in constant currency.
Based on current exchange rates this translates to growth of in the range of 3.5% to 3.8%.
$16.7 billion to $16.74 billion on a reported basis.
Selecting our assumption of a negative country can can basis points for foreign exchange for the full year.
This guidance continues to reflect the muted outlook for banking and health care.
This implies fourth quarter revenue growth in the range of 2.1% to 3.1% year over year to 4.21 to 4.25 billion in constant currency.
On current exchange rates this translates to growth in the range of 1.7% to 2.7% year over year to 4.2 to 4.24 billion on a reported basis, reflecting our assumption of a negative 40 basis points for foreign exchange in the fourth quarter.
This outlook reflects our expectation for slower organic revenue growth in Q4, as a result of them more cautious macro outlook in the UK. Some continued headwinds in financial services in health care and the impact of exiting certain content work.
For the full year 2019, we now expect adjusted operating margins to be between 16.56, and 17%, reflecting Q3 actuals and the longer than previously anticipated timeline to normalize the revenue growth and headcount trajectory and additional cost from recent acquisitions.
Expected deliver adjusted diluted EPS in the range of $3.95 to $3 than 98 cents.
This guidance anticipates, a full year share count of approximately 560 million shares and a tax rate and the range of 24% to 26%.
So I just provided for adjusted diluted EPS excludes realignment charges charges under our 2020 fit for growth plan and other unusual items if any.
Net nonoperating foreign currency exchange gains and losses.
Clarification, if anybody Indian government as to the application at the Supreme Court really related to the India defined contribution obligation and the tax effects of the above adjustments.
In the context of the fit for growth plan, we announced today.
We are targeting adjusted operating margins in 2020 to be in the range of 16% to 17%.
While the cost program outlined today, coupled with annualized savings from Q2, and Q3 will increase margin rates. This increase is being mitigated in the near future by two major things.
First our full year fiscal 19 margin rate reflects lower incentive compensation payouts, given our underperformance versus target.
Our goal in 2020 is to perform at plan and therefore have target payout to be a normalized part of our cost structure in line with company performance.
This is a margin had rate margin rate headwind of 120 basis points year over year, we plan to absorb.
We are investing meaningfully and a number of areas, including revenue generating resources Cognizant Academy.
Tooling and automation and marketing and branding.
These important investments will help us accelerate growth rates. However, in the short term say negatively impact margins by approximately 850 basis points.
With that we can open the call for questions operator.
Thank you well that'd be conducting a question and answer session.
If you like to ask a question. Please press star one on your telephone keypad confirmation tell indicate your line is another question Q.
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Just consider using speaker equipment, maybe necessary to pick up your handset before pursuing sharkey.
In the interest of time, we ask you limit yourself to one question.
Thank you and our first question comes from the line of Lisa Ellis with Moffettnathanson.
Hi, good afternoon and.
Thanks controls the Soc fantastic, Brian I'd like to double click on one of the investment areas a in sales and marketing clearly one of the most critical areas to re accelerating topline growth you mentioned, a few things to 500, new salespeople to return to the tune a box model can you provide maybe a more holistic view of the.
Major changes you're planning to make to cognizant sales strategy and sales coverage and overall go to market model. Thank you.
Yeah, Hi, Lisa So I'll give you for examples first of all its important to clarify the role of decline partner and returning to tune a box I think really simplifies cognizance go to market team in front of the customer.
So we traditionally used to have a tuna bucks to decline partner and delivery partner a few years ago, we move to screen a box and we returning to what we traditionally I've had with greater clarity roles and responsibilities. Therefore between decline partner and the new role that we will terminate engagement delivery partner.
Second point, we will actually add more headcount in sales were the commercial function them before I've referenced visit our prior call we were adding approximately 500 headcount.
Not all those are quota carrying but some friends who will be a business finance people are indeed commercial lawyers, but it's all with a view to helping us show up to more clients in of greater agility in for declines from greater responsibility.
The third major thing relates to how we want to compensate our commercial teams as of January 1st we will move to a more leverage sales compensation plan with a at least 70% of the based fix or at most and then 30% variable and we didn't is variable portion of their compensation there will be strict parameters in terms.
So what they are required to sell that will enable us to ensure that people do not follow the path of lease resistance, which is what they sold yesterday, but more readily embraced the things that we need them to sell which was part of our digital strategy.
And then the fourth thing, we will deploy and something we spend a lot of time working on the last four months, what I call a rat model that is a term to.
Address how you think about sales segmentation in the purest form how you do your customers tier one two and three based not just on what you sell them today, but more readily on what you have the potential for seldom on so she potential versus current and then your tier customers between an existing customer or that you want to retain books and.
As we develop subject to your share of wallet.
Or a customer that you want to acquire an according to where a customer sits in the nine Bucks then the degree of sales coverage that they get.
Or visits from somebody like myself changes.
So those are four examples of what we're doing to try to ramp or commercial momentum. Obviously in addition to that I've talked previously about greater alignment with strategic partners I referenced in today's script the notion of going to more can more readily with hyper scale players. We have some tremendous partners in industry verticals like terminals guide.
Wire Adobe under like that we want to embrace further and make sure. We you go to market with together.
Thank you.
Question comes from the line of Edward Caso with Wells Fargo.
Hi, Good evening. Thank you for all the detail can you flush out a little bit more of the commentary around it sounded like an inability to get pricing and it is just that kind of takes time for the sales organization together going and.
The workforce to be very very subtle calibrated here I've been sort of one do you think you can get this yeah start to get some of the pricing for the value that your problem, you're hoping to gifts.
It's inherently a complex topic, because we have a series of activities that we have from time to material staff augmentation through to managed services or more fixed price type bids, but let me do you can pose your question down in current perhaps you can comment as well on this.
With regards to the sales teams their ability to ramp ultimately also depends on where did come from before and if they know declines itself or if they know the industry. Our intent is of course to hire people, who were able to sell business outcomes, who have the gravitas into wherewithal to speak with the C suites understanding industry pinpoints and seller business had.
So you need to expect nonetheless, however, as we deploy de salespeople and for the clients as they build relationships subsequently build a pipeline. The pipeline is old supposedly progress and eventually turns into TCV, which later turns into revenue is for that reason that we spoken previously around the impact of these 500 taken that we've agreed to our it's more.
And negative impact in terms of our cost structure into short term. However, I don't view it as a cost I viewed as a investment that will have an appropriate return over time in the form of sales force gearing. So opex to gross margin dollars or indeed, opex to revenue dollars and we were anticipating to revenue return from that Threeq again more in Q4.
Our next year or indeed, the first half of that by 21.
But the pricing dynamics are important Kern can current can come within those I just wanted to add 1.8.
If the Cline partner is the quarter back on a deal they need to be surrounded with world class experts that are in line to key practices and have competencies in those areas, whether that is artificial intelligence around analytics or digital engineering or cloud or otherwise we spend a great deal of time in recent months honing in on the model that we think will give us greater comp.
But it's even greater technical capability to support a generalist Klein partner in front of declined we do want to allocate more pricing power back to decline partner, but they will have to operate within certain bonds.
Or parameters as the builder pricing on a quarterly basis, we will review those who will be some notion of of checks and balances.
So when we talk about a couple of things in pricing one is what I would call a market bill rates and pricing for new deals and renewals and so forth.
If you look at the digital business pricing continues to be very strong. There. Obviously you have a high demand in that business in the short supply of Cowen. So by definition Bill rates continued to be strong there where you do continue to see pressure on.
Deals and particularly with renewals and vendor consolidations and so forth. It's in the core part of the business. The heritage application maintenance et cetera, part of the business, where we do continue to see pricing pressure on those transactions on the other piece, which we were referring to in the script is also around whatever coal car.
Attract hygiene, so the ability to get Cola increases to get rolling changes when be promote people as you know force for several years that was something that just was not.
Certainly done a in the industry and it's something that many firms have started to oh, we initiate into their their portfolio over the last few years. We've made some progress this year, where we have automated pull adjustments and so forth I think we still have a lot of opportunity to continue to get better at that enforcing contract terms and in particular when we promote.
People to either rotate them into new opportunities that are appropriate for their new new level or to get a rate adjustments within their existing clients. So both of those are opportunities that we continue to see as we move forward.
Thank you.
Next question is from T.N. funk with JP Morgan.
Hi, Thanks, so much.
He should all that detail here I just wanted to get your thoughts on the.
On the cost this off cost the hard cost to attain to 500 to 550 million savings from from fit for growth.
Much disruption.
There would be on both culture and then also on the revenues aside from the 250 that you called out from.
From getting out of the a the content work.
I would say the majority of that people were targeting through this exercise our senior to mid level executives they tend to be not decline partners and some declines but some degree of middle management that has crept into the system over the years of course, you know we're spending a huge amount of time, bringing our team through.
These changes.
And making sure that their contextualize enough people know, we're investing in growth, it's gonna she and I I feel as though there's a degree of swagger coming back in cognizant. These days Klein partners in my opinion will be delighted with the news today that we're returning to a two in a box model I do appreciate the fact that we're spending hundreds of millions of dollars to reinvest back into the business, including more.
Coverage and giving them.
Sales folks an opportunity to earn more than ever before via having a more leverage sales compensation, but of course that is not for everybody and there will be some degree of disruption, but we aim to to mitigate that as best we can and as I said not only we adding more people in deploying segmentation, but we're also homing in on optimization of skills via email.
Competency model that will be measured on a more thorough basis going forward. So lucky it's very hard to control is it's a people business. We're spending a huge amount of time communicating contextualizing, but we feel it's the right thing to do.
Thank you next questions coming from the line of Keith Bachman Bachman. Please proceed with your question.
Hi, Thanks, very much I wanted to ask a clarification. The question Karen the clarification just to be clear on the content ops is whatever we think the normalized run rate for cognizant in 2020.
We should go ahead and taken additional amount out from our revenue expectations of I don't know 150 million or something.
It was we assume that content gets at least partially taken out next year.
And then my question is directed to Brian .
Brian .
You talked about swagger in the last comment and and and on the last conference call. I think you said when rates had gone up but I was hoping you could just talk a little bit about what you see is the economic backdrop, a number of companies. The I.T. services side of called out some incremental weakness, but juxtapose that against what you've seen in your time there.
I think frankly, putting a lot more initiative into the sales side. If you could talk about a little bit out your win rates and how those might bound so thanks very much.
Oh, so Keith its current let me just cover off on the the content situation first you're right as you think about the model for next year. It is appropriate to take some portion of our estimate of the 240 to 70.
As we said it it will not we do not don't expect it at this point to all go away at the beginning of the year, we think that will phase in throughout the year, Although I would say it would be more heavily weighted to the first part of the year. The also the other thing I would also like to find out with that range is that it does assume that in certain of the client situations that they may exit more.
Other than just the specific digital operations work on that they may choose to transition more work. So this is our best estimate at this time of what we think the annualized impact would be and obviously, we'll provide as much color as we can as me understand further the transition plans.
Hi, Keith with regard to the second question Yeah. It of course didn't go a notice with us as well, but we're delighted to have beaten consensus and indeed or guidance for this quarter, but bear in mind, we had said cut ins prudently and.
We're also walking into the coming quarter, having read the dynamics in the industry. So we remain somewhat.
I would say prudent going into this quarter as well the backdrop is uncertain.
However, I would say if I look at the micro element within called medicines.
First of all growth is permeating the company, we're going back to our roots is back to basics.
And I think people are actually delighted with that.
We found depreciation of focus again on growth as opposed to margin rate.
We have very deliberately.
Insisted on a significant uptick in executive presence, we customers I'm, leading by example, myself and that permeates the organization as well and then of course card and I have been working on what we announced today for a number of months now and so we've been trying to start looking at deals not with today's cost structure, but envisages <unk> economic value.
You have deals overtime with tomorrow's cost structure, which as you know we're aiming to reduce.
We know in cognizant that once we got her foot in the door with clients because we have confidence in our teams and confidence in our delivery we tend to London expend headsets also the reason we're deploying to ride model going forward to make sure we accelerate new logos and cross selling upsell.
So those are the positives, but it but again the backdrop is uncertain.
Certainly I'm in the UK its ups uncertain I would say in North America. What we found is there is continued compression in legacy businesses and pricing pressure under the new continues at a steady rate, but the digital imperatives remain key.
I've been pleasantly surprised as I've dealt with C suite executives throughout the world that digital it's certainly not viewed as a cost center expense. It is very much viewed as a critical enabler. Both on the defense is what does on the offense for these companies to disrupt or indeed to avoid being disrupted by more nimble next generation companies.
And that is an area where on a country I do not see demand constraints I see more supply constraints given the nature of the the teams we need to fulfill those demands.
Our next question comes from the line of Ashwin Shirvaikar with Citigroup.
Hi, Brian Hi, Karen a it's a good to see the velocity and fit for growth initiatives.
I want to start by asking you or if you could go wide, maybe a framework for how investors should think or the.
Trajectory or growth over the next couple of years as these initiatives on forward I mean, when we see perhaps a.
Flattish type pace.
Core.
Before hire those kicks in and that's I guess, a including the impact of CMT or do you need be content tops.
And then in the meantime.
You know what are your Cox until lighting metrics to the investor community that the tempered that you out on that I attack.
So ashland in terms of growth I think obviously, we you know it's early to give guidance for next year. Although certainly we would expect that we will start to see some acceleration over versus constant currency organic growth this year.
Got you know Q4, as it's obviously a little bit like a and Q1 does tend to be a slower quarter for us. So when we give guidance in February well have a little bit more color on how we see the rest of the you're playing out in terms of incremental revenue from the sales hires and so forth. We I think as we had talked about this.
For Yeah, we do not anticipate any significant revenue next year from that investment I really takes about 12 months for for sales teams to ramp up and actually generate.
Revenue, that's that becomes incremental too. So I think you know that would be more back end of the certainly into a into 2021 and now all of that obviously it excludes the impact of the talk at moderate content work in the digital operations practice.
But excluding that that's how we would expect to play out.
Thank you. So next questions from the line of Bryan Keane with Deutsche Bank.
Thanks on the 500, a 550 million of gross annualized savings, what's the net savings there because it sounds like there's a drag from investments and adjusted operating margins fiscal year 20.
We expect a positive impact to margins thereafter in fiscal year 21, just wondering if there might be some one time investment into square a 20 that go away. So that just 21 and beyond we'll see some that dropped to the bottom line. Thanks.
Yes, I think Arctic Brian is as you said and as you heard on the call, but we were assuming a target range of 16% to 17% next year roughly in line with ER with 2019 or as we talked about on the call. There was about 120 basis points that we had to make up given the lower incentive based compensation. This year and then on top of that being.
Investments in sales and training and so forth Oh, I think it's premature obviously to give guidance beyond 2020, but certainly a you know we think the investments will make in sales will start to pay off in 2021, I would anticipate that certainly the investments that we're making in branding and training and re skilling and so forth supposed will continue on for quite.
Sometime a you know I think we think that perhaps those are areas that we've under invested in recently and so those will become part of the core of the organization going forward, but certainly as you know this is still a relatively linear business. So as they look to accelerate revenue growth in the future that should certainly help to.
To stabilizing and provide some margin opportunity depending year to year on the investments that we want to making the business.
Our next question is from the line of fraud, <unk> with deep dive equity.
Oh, Hey, guys, Hey, a lot of work done here and seven months, if I go back over cognizance history, It's had a distinctive ability to mine its large clients for additional revenues.
Clearly that client mining performance has flowed in recent years and so my question here is whether you're seeing ways to rejuvenate cognizance client mining ability our their corrective measures being made or new initiatives, specifically on the front I'm for client mining the right.
I'd model makes it kind of sense here, but I'm also wondering if there are practical changes beyond the rat model to better connect with the large clients.
Yeah, So hi, rather it's a it's a good question then look if I look back over the last four years and the data will tell you that we have been growing new logos, but not really accelerating new logo revenue and read the pipeline into TCV into last 18 months or so stop this you're performing where we needed to be.
But the bigger issue was to your point the installed base accounts and we had stopped.
Mining or upselling and on the country because of pricing erosion at the time of renewals that became a little bit of a drag on the business. So very much of the core of the Red mud was of course peering customers.
Take some potential not based on where we are today and of course segmenting customers then between acquisition customers versus the customer that you already existing that you want to develop or where you already exist that you're simply trying to retain.
So the roadmap is key to achieving this.
Sales compensation is also key because in or existing accounts, what we want to get much. We're leveraging the sales compensation program and put parameters into portion of People's compensation such that they are not just in time, but they're also obligated from an earnings point of view to cross sell the portfolio into digital and beyond as opposed to simply selling what these.
So as of yesterday, which has traditionally been a path of lease resistance and then the third thing of course, you know as we're thinking about.
Upselling and cross selling a lot about leads to different decision makers is more project base, it's more pod cultures and digital engineering. Its line of service. So you know distinctively changing and some client partners. We've done a good drove a math in some of that kind of I've seen prisons in the last few months. These recline partners that joint cognizant than the last few.
Year, or so or 18 months a different.
A different backgrounds, a different compensation model, but again I don't think about the salary of a sales person at a cost I think about it has an investment and therefore I think about it in terms of sales gearing both on a gross margin level versus opex, or indeed, and revenue basis versus all fixed and then last but not least we were really trying to segment our own capabilities.
Into four Bucks, great sellers, who understand the industry and understand the technology isn't a top right hand quadrant. You also have a bunch of people who are very confident with technology cannot really sellers. Some of those you can migrate across to more commercial skills. Some of the Mississippi remain presales types oriented presales oriented people. Some people are frankly, great sellers, but.
Don't really understand the industry well enough for the customer pain points, we obviously have to educate them and then the people in the bottom left that are the worst a both worlds not particularly good commercial skills in terms of getting a appeals signed but certainly not technical either those are the people that most likely you'll you'll see exit two company going forward, particularly in a sales complan where.
With a higher variable portion of compensation, they will not be earning as much as they have previously.
And then one of the final actions, we've taken to ensure cross selling is to put all of the so called C. S ease fees or more specialist salespeople aligned into the practice and service lines to ensure a great deal of focus on competency assessment certifications and indeed alignment with our partners that.
Intersect Nonetheless with verticals to make sure we have to write skill sets and to be the right go to market partnerships to do cubic yard with more of our partners and they make sure. We end up with asymmetrical accounts were claims can or partners could bring us into their accounts and vice versa, we can bring them into ours and leverage the best or before us.
Thank you.
Our next question is Fineline, Bryan Bergin with Cowen and company.
Hi, Thank you the first I just wanted to clarify on a content ops is there an opportunity to sell this practice or is this more so a wind down and transfer and then within a banking in health care can you just give us a sense on on these large clients. How close you may be and be to seeing any inflection in the trajectory there.
Or at what point or they just not among the top clients.
So I think in banking and health care, we have some tremendous examples actually and I've seen some of these myself public kinda that we had really turned around in the last two years I'm through different accounts. He was much more focused on digital.
But that's a that's a blueprint or a qualification that we need to bring more broadly across the company.
You will see some inflection point, particularly in health care as we get into F. way 20, because we will be rounding the tougher compares as you know many of our health care clients for particular emerged into two and end up with a very different rate dynamic for cognizant and we will be running that once we get to Q1.
The next year.
In banking, it's less obvious in the sense there wasn't a single inflection points are ongoing trends some captives. So the in sourcing, particularly in a world of Dev ops, but as I said earlier, well the legacy business or traditional areas of the business have been under some pressure a price renewals I do see opportunity for us to better participate in the digital spend at these banks.
I have at their disposal and have been prioritizing and that's what we're setting out to achieve in into coming years of course, so no major inflection point, but I will say I'm pleased with the.
Revised energy I'm seeing in the North America team there in particular and the new banking either in a new health care leader they seem to be good then we'll declines and that's always a good positive leading indicator with regards to the content moderation business got something we're working with our partners on right now to understand how to best transition to work.
Whether it is one of the options reference or another we will determine that in the coming periods for now we've taken a restructuring charge against it but our intention is to work very aggressively with partners to make sure that we can transition or employees with minimal disruption and of course financial consequences that is of course minimal charges as well.
Okay and this is Katie I think out with that that will lead todays call. Thank you all for your questions I mean, not for just beginning next quarter.
Thank you [laughter] assays cognizant technology solutions third quarter 2019 earnings Conference call you may now disconnect.