Q4 2019 Earnings Call
Ladies and gentlemen, welcome to the concept technology solutions fourth quarter 2019 earnings Conference call.
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After the speaker's remarks, there will be a question answer session.
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Thank you and I will now turn the conference over to Katy Rice Global head of Investor Relations. Please go ahead Katie.
Thank you Rob and good afternoon, everyone. By now you should have received a copy of the earnings release for the company's fourth quarter 2019 result.
Do you have not to copy is available on our website cognizant dot com.
We currently have on today's call are biased on three Chief Executive Officer, and Kevin Mclaughlin, Chief Financial Officer before it again I would like to remind you that some of the comments they don't today's call and some of their responses to your questions may contain forward looking statements.
These statements are subject to the risks and uncertainties as described in the Companys earnings release and other filings with the FTC.
Finally during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investor.
Non-GAAP financial measures, where appropriate to the corresponding GAAP measures can be found in the Companys earnings release and other filings with the FTC.
I'd now like the <unk> call turn the call over to Brian temporary. Please go ahead, Brian. Thank you Katy and good afternoon everybody.
As I stated in prior calls cognizant is in the mid or the multiyear project, whose aim is to reposition the company to realize its full growth potential.
Today I'd like to briefly cover Q4 performance and then turn our attention to 20 220.
After a challenging started 2019.
We're seeing higher levels of engagement from our leaders and optimism as we rally behind Cline Centricity and revenue growth.
We're making progress, but there's more work to do in the quarters ahead.
Q4 revenue grew 4.2% year over year in constant currency.
$4.28 billion non-GAAP EPS was one dollar seven we delivered strong cash flow.
Macro demand remained stable.
Challenging.
There is a distinction between traditional work versus digital.
Legacy services are subject to meaningful pricing pressure at renewals competition and indeed in sourcing.
Meanwhile, clients continue to invest in digital become modern data enabled customer centric and differentiated businesses.
These trends are set to continue swore strategic posture.
Operational financial initiatives are aligned to address these market reality.
On the geographic basis Q4 revenue in North America grew 3.1% year over year.
Well revenue in or broke markets region grew 7.4% in constant currency.
In both geographies, we're determined to accelerate growth.
But the opportunity is especially significance in our international business, where we remain under penetrated we must do better.
From an industry segment view.
In Q4 financial services Global revenue grew 1.5% year over year in constant currency.
Both banking insurance were weak throughout 2019.
Full year insurance revenue growth slowed primarily due to a modest decline in North America.
Be it's been a return into second half of the Europe will be some growth in Q3, and indeed Q4 year over year.
Banking, we continued to see particular weakness in capital markets and commercial banking offset by growth in payments in retail.
With retail having benefited from the sound like deal.
Both global accounts and local accounts declined for the full year.
North American performance, well still declining has been improving throughout the year and we see that trend continuing.
Europe remains weak with some macro uncertainty and some cognizant specific issues.
In health care, we reversed two quarters of declines.
We constant currency growth of 1.8% year over year.
I remain pleased with our performance in life Sciences, which delivered double digit growth.
However, this was offset by ongoing declines in our healthcare vertical which continues to be impacted by contract renegotiation that some of our largest clients following industry consolidation and bike in sourcing at a large client.
Our other two segments products and then sources.
Communications media and technology.
Posted high single digit revenue growth in constant currency Yorba you're.
Don front double digit in prior quarters.
Revenue growth in the technology segment slowed meaningfully in the quarter following or we see that that's going to exit a subset of this content services business over the coming quarters.
Later in our coal.
Current will take you through the details of the quarter.
Let's now turn to twentytwenty, including executing to recommendations of the transformation office as they relate to strategy operating and commercial models our cost base more.
We entered Twentytwenty would a two pronged strategy that aims to expose cognizant to faster growing market categories.
The first element is to protect and optimize our core business well scaling internationally.
The second part is to invest to compete and win in four key digital battlegrounds.
Data digital engineering cloud and I O T.
Our strategy Leverages, our technology services heritage well, it's accelerating our position in digital where our brand recognition and commercial momentum can improve.
The strategy resonates well with our clients. We've always tried that are shrinking to run an operation side, but wanted to further strengthen our digital portfolio to assist them in their innovation agenda.
We're determined to help or clients become fully digital data enabled customer centric businesses.
We will continue to use M&A to execute this strategy.
This week, we announced two acquisitions focus on extending our cloud capabilities.
On Monday, we announced the acquisition of Coke zero consulting firm that specializes in helping companies digitally transform by providing strategy implementation that migration capabilities to evolve legacy systems to cloud based configure price quote and billing systems.
An earlier today, we announced that we've entered into exclusive negotiations to acquired a French operations of <unk> technologies.
Apart space.
But if he held digital technology consulting firm.
Cloud has changed the way that I teams delivered across infrastructure applications in platforms.
Both of these acquisitions or Salesforce platinum partners and will help us build upon one of our most strategic and fastest growing practices.
In addition in Q4, we closed our previously announced acquisition of Cateno, a leading consultancy that specializes in enterprise that helps methodologies and advanced data platforms.
The transformation office also recommended changes to our operating a commercial model.
After months of detailed analysis on January 1st we implemented a series of measures to accelerate our commercial momentum as part of our sales transformation initiative.
These include.
And you customer segmentation that prioritizes accounts and insurance, we get the right resources on the right accounts at the right time.
New sales compensation plans that reward overperformance.
Encourage greater upsell and cross sell in our existing accounts and increase our focus a new logos.
And the alignment of our specialist sales teams to where service lines to increase our subject matter expertise by keep practices.
Today I'm pleased with what we've seen inner Salesforce initiative.
We have renewed energy and our win rates continue to improve.
Our previously announced hiring of 500 revenue generating associates is on track.
And in line with modeled assumptions.
In addition to these 500, we plan to double the number of associates supporting our most strategic alliances.
Oh, three leading hyperscale companies and SaaS vendors.
Complementing these commercial changes.
<unk> recently appointed Chief Marketing Officer has been working diligently to better align or marketing spend to a growth priorities.
This includes strengthening our point of view by industry segments, improving targeting the account based marketing and digitizing their customer engagement strategies.
Our marketing spell will increase in Twentytwenty as we aim to support her revenue aspirations.
And better position cognizant as a leader in digital.
In parallel we've also worked to send to play the organization empowering your client partners for speed of execution, an account pinedale ownership.
And clarifying responsibilities and decision rights for old roads across the sales lifecycle.
To ensure we have to like digital skills in a supply constrained environment.
We doubled our investments in cognizant Academy in 2020.
Two weeks skill and redeploy talen towards our digital imperatives.
You accelerate or digital momentum, we believe we need to hire or we skill.
Approximately 25000 resources in Twentytwenty alone.
We started to operationalize it.
Finally, as we make these investments in automation training marketing and sales we've been diligently reducing our cost structure to ensure we couldn't be fitch for growth.
Carnival, bringing through the details of our restructuring program later in the cool.
Engagement and confidence are essential in a people business.
Therefore, we'd be in energetically communicating and contextualize into reasons for the changes we're going through.
And engaging the organization to rally everyone behind our goals.
I'm pleased to see the mood in the company continues to pick up.
Both as an executive level and throughout the broader organization.
Or annualized attrition rate fell three point sequentially to 21%.
Some of this can be accounted for by normal seasonality.
That affected voluntary attrition rates declined year over year is actually even more encouraging.
Of course, as we execute our restructuring program, we will remain diligent and stay focused on increasing employee engagement and reducing attrition.
We also recognize that we need to rally the organization behind a common purpose that goes beyond financial returns. We therefore spend a great deal of time in recent months defining a compelling company purpose statement.
Which will serve as or Northstar that guides and inspires us to make the right strategic moves into years ahead.
We've also refined our company's values and behaviors that defined what will be celebrated and tolerated.
We will unveil does to the broader organization in coming months.
We didn't turn to stay true to the heart and soul over company.
And having recently attended around annual global planning summit.
One held in Dallas the other in Dubai.
Where do you executive team and I spoke to thousands of associates or by the company strategy and expectations for Twentytwenty.
I can tell you that I came away from de summits filled with optimism about our collected the ability to move the company Ford.
Let me conclude by saying that after a challenging first quarter, we've become a more focused determined I'm confident company as we moved through 2019.
There's a great deal of urgency in cognizant these days.
It starts with me.
Any distractions, we've had are now behind us.
Our team is energized by the clarity of our strategy.
The magnitude of the market opportunity.
Renewed Klein Centricity and our increased employee value proposition focus.
While our hard work in the past year will serve us well in Twentytwenty.
There remains some important areas that require progress in the years ahead.
Pricing in our heritage business continues to pressure gross margins.
We have efforts underway to address renewal pricing strategy.
As one of their cost of delivery efficiency, including pyramid management automation.
And the other measures.
Meanwhile, there's more work shifts to project based digital engagements, we were implementing refinements in our digital pricing strategy and continuing to optimize resource planning and allocation.
The leadership team and I are fully aware that we have a multiyear project ahead of us and we are United in a result to work with rigor and tenacity to achieve our goals.
And once again be cognizant of the industry bellwether.
Before I turn the call over to Karen I want to acknowledge that cognizant co founder former CEO and longtime director Frank D'souza has let US know this plan to resign from cognizant Board of directors effective March 31st.
Along with is remarkable track record of successes cognizant CEO for a dozen years. Frank has served with distinction on Congresses Board since 2007, and Vice Chairman since June Thirtyth 2019.
On behalf of the entire board I went to extend their deep gratitude to Frank for his pioneering leadership and quarter century dedication to cognizant.
Today, we also announced that the needed valley will be joining our board of directors later this month.
I look forward to her contributions and partnership.
With that I'll turn the call over to Karen who will give you an update on our operational and financial performance as well as a view is how we see that you're ahead.
Karen.
Thank you, Brian and good afternoon, everyone.
For the full year 2019.
Revenue increased to 16.8 billion and represented growth of 4.1% year over year or 5.2% in constant currency.
Fourth quarter revenue of 4.3 billion was above the high end of our guided range and represented growth of 3.8% year over year.
4.2% in constant currency.
Revenue outperformance versus guidance with broad based across our industry.
Digital revenue continues to grow above 20% year over year.
And represented approximately 38% of total revenue for the quarter.
Moving to the industry verticals.
Financial services growth was up 1.5% year over year in constant currency driven primarily by insurance.
However, the project based work that we benefited from in Q3 did not extend into Q4.
We saw modest slowdown in banking sequentially, reflecting typical year end seasonality and furloughs.
As Brian mentioned within banking I performance continues to be negatively impacted by few of our global accounts.
As well as some slowness in certain regional and other clients.
Well macro uncertainty persists.
We expect budgets within banking to be broadly stable in 2020.
North American banks, better positioned relative to UK in Continental Europe, given continued Brexit uncertainty and our ongoing challenges with a few of our largest accounts.
Against that backdrop, we continued to have a muted outlook for banking. However, we're confident in the initial steps are new head of banking has taken to reposition us for growth.
We expect this client centric centricity to drive deeper and more robust account planning and marketing.
Hi, partnering well with digital business to ensure we increased our relevance to banks. He has also implemented it solutions team to bring ease of repeatability ensure we did a lot more compelling thought leadership and better align with key partners.
Moving on to health care, which returned to year over year growth up 1.8% in constant currency.
Life Sciences, again grew strong double digits year over year benefiting from demand within digital operations and the contribution of advanced technologies.
Additionally, we see continued momentum within our industry specific platform solutions.
Such as the shared investigator portal for clinical trials.
Which has users in over 80 countries across 14000 facilities covering over 400 aggregates trials.
Within our healthcare vertical revenue declined mid single digits year over year as performance continues to be impacted primarily by large clients involved in mergers and the continued shift work to a captive at a large clients.
We expect similar year over year trends in health care in Q1.
And improvement in the year over year trends in the healthcare vertical beginning in Q2 as we left the headwinds that impacted the business in 2019.
We expect continued cautious spend with healthcare payers as we approach the elections in the U.S. later this year and so we're maintaining a cautious growth outlook for the healthcare vertical.
Products and resources grew 8.6% year over year in constant currency.
As we mentioned on our last earnings call expected slower growth on a year over year basis in products and resources in the fourth quarter as we land lack the ramp up of work with new logos and the contribution of acquisitions made in Q4 2018.
We were pleased with the growth in the quarter continued to be broad based growth across our industries.
Results reflect demand for core modernization services of enterprise applications and for digital engineering cloud and Aiotv solutions and we expect these trends to continue in 2020.
Our communications media technology segment grew 9% year over year in constant currency.
Where we saw an acceleration in the communications and media vertical.
Driven by increasing demand for services in core modernization and cloud transformation services.
We expect continued solid performance in telecom clients as traditional telco companies look to transform into digital service providers.
Additionally, we see convergence across media and communications companies, driving investment and technologies and services and hyper personal lives consumption and create new and engaging experiences for consumers.
In technology growth was negatively impacted by our decision to exit certain portions of our content services business.
This negatively impacted the year over year growth of the C.M.T. segment.
Proximately 200 basis points or $11 million.
I'll provide more color on the expected impact from our decision to exit certain parts of the content services business with my Q1 and full year 2020 guidance.
Now turning to GE is.
We were disappointed with growth in Europe, which grew 5.3% year over year in constant currency.
I think a slowdown in the UK and Continental Europe.
And more cautious macro environment continues to weigh on spend across industries in the UK well. We also have some cognizant specific challenges in a few large banking clients.
The rest of world through 14.5% year over year in constant currency the strongest performance in seven quarters.
Well, our global banking relationships continue to pressure growth in Asia Pacific, We have seen improved traction in countries, such as Australia, and Japan in insurance and life Sciences.
Moving onto margins.
Thank you for our GAAP operating margin and diluted EPS were 14.6% and 72 cents respectively.
Adjusted operating margin, which excludes restructuring charges was 17% and our adjusted diluted EPS was $1.70 cents.
Before getting into more details on margins and want to provide an update on the enactment of a new tax regime in India that enables domestic companies to elect to be taxed and income tax rate of 25% compared to the current rate of 35%.
The company electing into the lower rate is required to forgo any tax holidays associated with a special economic zones and certain other tax incentives, including any t. credit carry forwards.
Our current intent is to elect into the lower rate once or existing that assets are substantially utilized.
As a result, we recorded a one time net income tax expense of 21 million.
Due to the revaluation to the lower income tax rate of our existing India net deferred income tax assets.
Just had a negative four cents impact on GAAP EPS in the quarter.
Our adjusted operating margin was flat year over year, reflecting S. DNA discipline offset by continued pressure on gross margin, including a $25 million write off certain capitalize setup cost for a large health care customer.
The write off negatively impacted gross margin by 50 basis points and EPS by four cents.
Over the last several quarters, we've taken steps to start to rightsize our cost structure.
Primarily focused on reducing overhead in the business with those benefits evident in the year over year improvement NSG ne.
These savings are necessary to fund the planned additional investments in areas such as sales resources.
Branding talent and lean and automation enhancements across the company.
However, gross margin declined year over year as we continue to face pricing pressure in the legacy parts of our business.
Require us to take additional actions in 2020 around pyramid optimization and pricing levers such as Cola and aligning bill rates with promotions.
We expect our 2020 fit for growth plan that we announced last quarter to drive improvements in these areas.
I'll provide an update on the actions taken in Q4 under the 2020 fit for growth plan as well as additional details on the expected execution of this plan later in the call.
Turning to our balance sheet.
Our cash and short term investment balance as of December 31st stood at 3.4 billion up approximately $350 million from September Thirtyth.
But down 1.1 billion from a year ago period.
Shifting the over $2.2 billion of share repurchases completed in 2019, and approximately $620 million deployed on acquisitions.
As a reminder, our short term investment balance includes restricted short term investments for $414 million related to the ongoing dispute with the India income tax Department.
We generated $845 million, a free cash flow in the quarter.
Dsos were 73 days improved three days sequentially due to strong collections on a year over year basis CFO improved by one day.
In the fourth quarter, we made a change to our accounting policy related to dsos to better align with industry practice.
Better reflect amounts due from our customers on our balance sheet.
Beginning in Q4, we started to net certain amounts due to customers such as discounts and rebates with trade accounts receivable, rather than reflecting those amounts as a liability on our balance sheet.
The change does not have any impact on our operating results for cash flows.
Our outstanding debt balance the 738 million at the ended the quarter and there was no outstanding balance on the revolver.
During the fourth quarter, we opportunistically repurchased approximately 2.5 million shares for approximately $150 million and our diluted share count decreased to 548 million shares for the quarter.
In 2019, we repurchased over 34 million shares for approximately 2.2 billion.
Today, we are announcing a 10% increase to our quarterly cash dividend. The second increase since we initiated the dividend in 2017.
Additionally, the board they proved a 2 billion dollar increase in our share repurchase authorization.
Before I turn to guidance, let me provide an update on the progress of the 2020 fit for growth plan as well as the content works that we were in the process of exiting.
Our 2020 fit for growth plan is expected to run for two years.
This program is designed to simplify the way we work improve our cost structure and fund investments aimed at accelerating our revenue growth.
As previously announced we expect to remove 10 to 12000 admit to senior level associates from their current role.
We will make every effort to identify productive role based on client demand and continue to assume that approximately 5000 associates will have the opportunity to re skill for new role within the company.
In Q4, we incurred $48 million of charges, including $42 million, a severance charges as part of the fit for growth plan.
These charges relate to approximately 550 associates, most of whom we expect to exit the company by the end of Q1 I.
And we expect will result in a cash impact of approximately $40 million in the first quarter with full run rate savings not achieved until Q2 for these associates.
We continue to expect the majority of the remaining associates to exit the company by mid 2020.
We are managing this process carefully at any time, we make decisions that impact our employees you take it very seriously.
Additionally, we continue to review our real estate portfolio as part of the fit for growth plan and expect to take further action related to real estate rationalization in 2020.
These actions are expected to be substantially complete by the end of 2020.
And are expected to result in 2020 in your gross savings of over 450 million.
An annualized gross run rate savings of 500 to 550 million in the year 2021.
Additionally, in the fourth quarter, we began the exit of a subset of our content services business.
Approximately $5 million of the 48 million fit for growth charges in the quarter.
Related to retention and severance for approximately 1100 of the expected 5000 to 6000 total associates to be impacted by the wind down of this work.
We have updated our estimate of the number of associates to be impacted by the wind down from 6000 to a range of five to 6000 as we expect to retain more work with these clients and other content and technology services than originally estimated.
We now estimate that we may lose revenues of $225 million to $255 million.
Down from our previous estimate of 240 $270 million on an annualized basis.
And our communications media and technology segment.
We continue to anticipate revenues will ramp down over the next once two years.
An expected impact of $20 million to $25 million of revenue in Q1 on a year over year basis.
Yes, it is expected to be modestly dilutive to our adjusted operating margin rate subject to the timing of the ramp down and other factors.
We also continue to expect to incur wind down charges related to the transition of these associates and any related assets, such as real estate and equipment.
We are working with our partners to transition this work, while continuing to meet our contractual obligations and providing impacted associates with a number of transition assistance programs, including retention bonuses severance packages and the opportunity to participate in various recycling program.
At the time of our Q4 earnings call. We provided an estimate of $150 million to $200 million in total expected charges associated with this fit for growth cost transformation plan, including the wind down a certain content work.
Based on our actions to date.
Attrition at the senior levels of the pyramid being slightly higher than our expectations and less impact from the exit certain content services.
We now expect to be towards the low end of that range, while maintaining the annualized gross savings estimate a $500 million to $550 million.
Before turning to guidance I want to comment on potential change in the dividend distribution tax that was announced as part of the India budget a few days ago.
We're currently analyzing this proposal, but believe it can once they've acted significantly lower the cost of repatriating funds back to the U.S.
The proposal is not yet law, but the expected date is April 1st 2020.
I would now like to comment on our outlook for Q1, and the full year 2020.
For the full year 2020, we expect revenue to grow in the range of 2% to 4% year over year to 17.11 to 17.4 or 5 billion on a reported and constant currency basis based on the current exchange rates, we're not expecting immaterial impact from foreign exchange.
This concludes our estimate of a negative impact of approximately 110 basis points to year over year growth from our decision to exit certain contact work.
Within our CMT segment.
This guidance continues to reflect a muted outlook for financial services and health care.
We expect first quarter revenue growth in the range of 2.5% to 3.5% year over year to 4.21 to 4.25 billion on a reported basis.
Based on current exchange rates this translates to constant currency growth in the range of 2.8% to 3.8% year over year or 4.23 and $4.7 billion.
Reflecting our assumption of a negative 30 basis points for foreign exchange for the first quarter.
This concludes our estimate the negative impact of approximately 60 basis points to year over year growth.
Our decision to exit certain work within the content services business, which will be reflected in the CMC segment.
Revenue guidance for both Q1 and the full year assumes a cautious macro outlook in the UK continued slow growth in financial services and health care as well as previously mentioned impact of exiting certain contract work.
For the full year 2020, we expect adjusted operating margins to be between 16 and 17%.
Which assumes incentive compensation to be at target payout.
We expect Q1 margins to be slightly below the low end of the range as we're investing in sales hiring training tooling and automation and marketing and branding while the timing of the savings from the actions taken under our for growth plan and the return on our sales investments will not have reached a full quarter run rate.
As a reminder, our full year 2019 margin rate reflects lower incentive compensation payouts, given our underperformance versus target.
Our guidance assumes that in 2020 will perform at plan and therefore incentive compensation will reflect target payout rate.
This is a margin rate headwind of approximately 120 basis points year over year that we plan to absorb.
The midpoint of our 2020 margin guidance at 16% to 17%.
Therefore reflects approximately 100 basis points of improvement over the 2019 margin normalized for incentive compensation.
We expect to deliver adjusted diluted EPS in the range of $3.97 to $4 in 13 cents.
Our EPS guidance anticipates, a year over year decrease of approximately $30 million, an interest income, reflecting a lower cash balance and reduced interest rates in both the U.S. and India.
This is expected to impact EPS by approximately four cents.
This guidance anticipates, the full year share count of approximately 548 million shares and the tax rate in the range of 24% to 26%.
Guidance provided for adjusted diluted EPS.
Foods restructuring charges and other unusual items if any.
Net nonoperating foreign currency exchange gains and losses.
Clarification, if anybody Indian government as to the application of the Supreme Court ruling related to the India defined contribution obligation and the tax effect of the above adjustment.
Our guidance does not account for any potential impact from events like changes such as immigration or tax policies.
With that operator, we can open the call for questions.
Thank you at this time will now be conducting a question and answer session.
If you like to ask a question. Please press star one on your telephone keypad and a confirmation total indicate your line is in the question Q.
You mean first start to feel they try to move your question from the Q.
Just one shooting secret equipment, maybe necessary to pick up your handset before pressing the star keys.
Any issues or time, we actually you limit yourself to one question.
Thank you and our first question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
Hi, guys want to ask about the cadence of revenue revenue growth and 2020.
Looks like you guided one Q 20 revenue guidance, 3% to 4% constant currency full year fiscal year 20 growth is pretty similar at 2% to 4% constant currency. So always cognizant expecting kind of steady revenue growth with no fluctuations or do you expect a maybe a little bit of a drop in the middle of the year in a pick up.
Fourth quarter.
Said another way to ask this is do you see an inflection point in revenue growth on the horizon. Thanks, so much.
Hey, Brian its Karen.
Well I think I'd say, nothing, particularly unusual there's no large deals is no nothing unusual right now from a seasonality perspective.
So I think it'll be relatively a typical seasonality is so we'll start to ramp as we get into Q2, and then Q3. The one thing I would say where the back half might be a little bit stronger because of the sales investments that we're making now I said, we launched that stuff that hiring program late last year those folks are coming onboard as we expected a and certainly while we certainly would expire.
I can take about a year for them to start to ramp that we should start to see a little bit of that benefit as we get into the back part of the year.
Yeah, maybe do you any addition, I'd make today car and.
He is obviously to content moderation from down will offset that somewhat as it grows throughout the course of the year.
Thank you.
Next question comes from the line of Ashwin Shirvaikar with Citi. Please she was your question.
Hi, Thank you Hi, Brian I can.
Appreciate the detailed commentary.
Brian I was hoping you could give more information about the salesforce transformation, where you stand a hiring a you mentioned the words on track but.
In a bit more color on one on tech means.
Would we would be great then on the flip side is there perhaps any heightened attrition you expect to see before the traditional salesforce. It was already there given maybe they knew compensation schemes that any any changes there.
So sales force update.
You know, it's very interesting because as I said, we were at a global planning summits in in the last month or so on the Salesforce are actually very motivated by the compensation changes because they can actually make more money than they could in prior periods.
So actually on the country actually feel there is a great deal of optimism. The sales force people are you know when when the CEO visits clients every single day. It leads to a certain cultural demands of the organization I think people are motivated to get the company back to an accelerated growth rate. So I feel good about where we are I'm not overly concerned about attrition.
And in the legacy sales teams.
We've had great look I would say fulfilling the pipeline of opportunities we don't break out on a quarterly basis, where we are persons that hiring.
Well less than half way through the 500 I will tell you that so there's lot of work still to do but I track. It on a monthly basis that executive Committee and we're pretty much in line with what we anticipated in terms of cost.
I've also been keeping an eye and not just a new kinds that these folks are assigned to but also the pipeline that they are building and in some cases I'd be pleasantly surprised that the early pipeline fills up you can be that the by expectation so.
More work to do to continue to review that but there's a lot of energy and urgency in cognizant. These days and I think we're all very clear what we're sitting out to achieve.
And I feel very very good in terms of where we are today.
The broader Salesforce update is consistent with what I said last quarter does not going to change.
We've implemented a ride model, which is retention acquisition and development. That's all about trying to get to write folks on the right accounts at the right time aligning specialists resources, which are by practice, such as big data or cloud with a generals Klein partner decline partners the quarterback and the accounts they have decision rights they own the piano for the.
Account, they can move with speed and accountability within the framework of authority that we have delegated to them. They are complemented by subject matter experts solution architects and the like we implemented up model on January Onest, so far so good.
And with obviously got to continue to push that in the course of the year ahead, but I feel good about where we are.
Thank you.
Our next questions from the line of Lisa Ellis with Moffettnathanson. Please proceed with your question.
Hi, good afternoon guys.
Brand one of the things you mentioned was that you're doubling the number of people supporting cognisance, a major strategic alliances and I know that that is also somewhere you where you have been spending your own time as well.
Can you just provide a little bit more richness on where your focus there where may be cognizant is already strong where you think theres opportunity to improve.
And how that and how that sort of fits into the overall.
Updated strategy and fit for growth plan. Thank you.
I will then look we have Lisa some really strong lines partners and partnerships by key verticals, what her that's timing awesome financial services, Pega, Adobe or otherwise, but I I've really spent a huge amount of time and lost nine months trying to build out and foster a business plan behind the Amazon behind Microsoft.
Off the now working through Google Cloud practice as the hyper scale players and indeed, you know really selectively aligning cognitively to some of the leading SaaS type players as an example, such as sales force or service that were indeed workday to make sure that we go to market with the companies that are growing 2030, 40% year over year not to say we won't.
Continued 12 and see partner with others, but we are putting.
But allocating even more capital to the winners in today's environment that invariably means for us just to be very clear. It doesn't mean hiring more aligns partners and having a bunch of coffee drinker sitting around feeling good about hosting meetings. This is lot about building a business funds with solution architects and a big data experts and alike.
A line to each and every one of those companies I've talked about it involves putting an operational cadence together on a rolling four quarter basis, I know in a certain data all be sitting in a room with the CEO of that company review and not just what we're setting out to two achieved as a company, which has the or targets against that which are intersected by country in vertical but also looking at the pipeline.
In shape, where we are in the funnel and really operationalizing that strategic aligns vision into day to day reality, which includes joint customer colds joint in person visits declines with leadership of those companies.
Emails to clients or letters going into the like so it's it's it's strategic but to be very clear. It's also very operationally and client and pragmatic what did you to successfully driving a cubiware cadence going forward with these clients and partners and making sure we show up better than we ever happened the Pos.
Thank you. Our next question listen line of Tim Jen Wong with JP Morgan. Please proceed with your question.
Hi, Thanks, a lot of everything looks in mind, a little better than when we had.
It was just gross margins that was little bit different I know you mentioned Karen.
50 bed sort of 25 million dollar health care write down can you maybe quantify some of the pricing pressure, you're seeing coming from the heritage work or anything else on not delivery cost that might have surprised to another fit for growth pieces coming into so just overall trying to give some more color on the quarter and then maybe how they're a big there's going to play out here in 2020 for gross margin.
Thanks.
I don't think in the quarter, James and I wouldn't say there was any real change in pricing trends, but you know as we talked about on the.
Paired comments certainly are continuing to see pressure on renewals in the the heritage or legacy I T side of the business right now that's being offset by higher pricing on the digital side of the business.
And yes, but certainly we think we can do better on pricing and digital services and and really make sure that we're pricing to the market and the for the value that we are providing to clients. So that is certainly an initiative, we have underway as well as do a far better job.
On a things like coal and getting adjusted Bill rates when people are being promoted or rotating our staff.
To take effect of a more optimal pyramid, a you know certainly the savings that we've seen so far has been primarily in yesterday buckets as we've been focused on the top end of the pyramid most of which has done an S. You need but as we move into Q1 and Q2 and further into the fit for growth program. It's certainly.
Back to see improvements in the middle to upper middle of the pyramid as well.
And also be able to drive a improvement some of these revenue levers, which will hopefully start to add to stabilize and gross margin.
Our next questions from the line of Edward case with Wells Fargo. Please proceed with your question.
Great. Thanks.
Brian is short team now in place I know you had one of your execs cycle out not long ago, but do you have the people that you need down a level or to it at this 0.2 up [noise].
Drive the transformation.
[noise] look I'm, a big believer adds that you players are tracked a players and the more we upscale and make sure. We at the right team around me those people in turn we'll make sure that they replicate that trend through the organization I will say, we have gems in cognizant really really strong leaders I talked about life sciences growing double digits, that's an enter.
No promotion that happened in the last year. So it's always going to be a combination of complement the excellent internal columns with excellent additions from the outside I'm, putting a system of meritocracy and the performance culture in place so everybody knows what we celebrate or what we condone versus what we don't tolerate so of course in the years Adir will.
As be refinements I want to drive the performance culture, but we're getting there but of course, there will be even into perceivable future ongoing refinements as we continue to attract a better people from the outside to complement the extra internal talent.
I wouldn't say one thing that's very pleasing to me, there's no shortage of people reaching out to cognizant that this month in time feeding both from clients and otherwise that there's a new vigor in the company a new urgency that company and the confidence that we can get back to being the great company that we have been in the past. So it's very encouraging to me that know that weakness.
Will attract great talent from the outside and in the same thing with a new Chief people Officer, Vicki Schmidt, who joined this Monday, who almost two decades in a century and most recently had been in Walmart we have a very strong people agenda program lined up in the coming years to attract motivate develop retain and put very sophisticated.
Management programs in place internally and I believe that that will not just make is a very appealing place to come and develop your career, but it will also have intrinsically a direct impact on our attrition rates, which as I said on the call I'm pleased with what we can always do better.
Our next question comes from the line of Keith Bachman with Bank of Montreal. Please proceed with your question.
Hi, excuse me high. Thank you very much Karen just for clarification could you tease out the guidance from a revenue perspective.
In terms of isolating what M&A contribution is expected to be and particularly the M&A contribution does that include some of the recent.
Very very recent deals and then Brian for you. If you could just revisit on health care and how we should be thinking about health care cadence both.
This year and frankly exiting this year as the deals the anniversary in earnest in the June quarter in particular.
Has the price activities of the M&A clients, what will that has that already played out or will that continue to play out for the year, but just more broadly talk a little bit about health care. Both this year in kind of exiting the year, how you see the opportunity there for Congress and thank you.
Well I'll start with the health care question, Keith because actually Ironically I've been on the phone with the leadership team of as it happens both of those combined companies as recently as this morning, So I'm pretty current in terms of where we R&D accounts wouldn't be the opportunity and I will say I continue to be pleased that we show up a little bit better than we had.
Yeah.
On both executives in companies, we assured me that the merger integration work is still there and as they think about consolidating two preferred vendors. We're firmly in squarely in the go forward strategy as well so I do feel there's lots of opportunity for us even in those larger accounts, where we've seen consolidation from four to two in.
The last year, and we have seen some pressure on rates as part of that but we do want to get back once we anniversary that into a stronger growth trajectory and elsewhere in the same vein I just want to caution the amount of work that needs to be done. We've also had or health care team today here in New York about 20 people in a room reviewing last year.
Reviewing the revenue pipeline when rates are margin trends are very strong call to action in terms of what we need to do in the coming years. So we're not out theaters, so I don't know yet.
But I choose to be glass half full here in terms of.
A lot of the actions we are doing are not specific to one vertical better aligning marketing spend making sure we have to write a customer segmentation strategy in place Upskilling, our client partners, making sure we have the best specialists in the world to complement them going to market with some of the Hyperscale players in financial services or health care.
Et cetera, et cetera that will bear fruits in each and every one of our industry's health care included.
We do expect still some I would say modest we instead of modest expectations for health care in the coming year, but as we go through the course of the year I'd like to think that you'll start to make some progress.
And Keith as Karen Let me just comment on the the guidance. So for the first quarter, there's about a 120 basis points of inorganic revenue baked into the guidance that includes only the transactions that have already been completed so that would include coke zero, but not the I technology transaction and that has not closed yet and then on.
Full year basis, the guidance Finley only for deals closed its about 100 basis points revenue growth year over year.
And that's down from if you recall in 2019, the impact of about 200 basis points.
Thank you our next questions from the line of Rod push out with deep dive equity. Please proceed with your question.
Yes, Hey, there so on the last earnings call you talked about a set of growth investments that would cost you about a 150 basis points on margin.
So I'm just looking at the further needs to build into the digital era and besides the growth investments you've already articulated are there additional growth related investments that you'd like to start making in 2020, such that if you had more room and your margin plan are there additional.
Investments that you would like to make that besides the ones you you've talked about.
Hey, Rod, it's Brian so listen the way I think about this you know this year if you normalize for let's say target bonuses as current as articulated in this call on prior calls.
Margins would've been up roughly mid fifteens, we've got at 16 to 17 for next year. So called the midpoint 16, five so and we're assuming by the way next year that our bonus structure is a normalize part of our cost base. So hence organically. If you will 100 basis points of margin improvement year over year. That's your point, we've made reference before.
Of 250 million plus of investment back into the business a lot of that we call that explicitly like 500 headcount related just revenue generation, we're doing more on sales and marketing, we're doing more and training et cetera. That's approximately you pointed out off so had we not done that margins naturally would've been higher but I'm not here to try to operate.
<unk> cognizant from $17 billion to 20 billion, we're trying to make this a 20 530 35 billion dollar company in years ahead, and as part of that it's I think it's always wrong to look at one element to the continuum and trying to spotlight, there and think well Brian had you not made those investments could you deliver a higher margin rates right I'd known.
Your your investment pieces on the stock I certainly know that's not your intent died are behind your question what I want to do is continued to reinvest into the business. So we can prove the strong return and its investments, we're making including the salesforce hiring if we get when rates higher if we get a good pipeline that we convert to TCV in revenue my inclination will be.
Continued to deliver imply more of the upside back into the business and get us back into the cognizant that was tried and tested for many many years that made this company a great success story over the years. So that's the intention that we're sitting out to deliver here in the next five to 10 years I'm confident we're doing the right thing I will tell you I'm really pleased when I.
Spend a lot of my time with clients and partners. Our strategy is resonating they see the renewed energy in the company. We have lots of work to do but I'm very pleased and often optimistic with the progress we're making a no. Nonetheless that we still have more work to do in into your Ed.
Our next question from the line of Jason Kupferberg with Bank of America. Please proceed with your question.
Hey, Thanks, Thanks, guys just a two pronged question on on M&A I'm first I know that L. technologies. You. Just said is not in the guide at this point, but I'm assuming that that closes.
In line with timing, you're expecting roughly how much revenue would that add this year and then can you just comment more broadly on your M&A strategy. It feels like the the frequency and intensity of M&A is picking up a little bit Brian under your watch over the past years that an accurate assessment in terms of.
Are you intend to to take that strategy as well, obviously these kind of tuck in size digital.
Assets really stand out.
Yeah, So listen a good question Oh, I wouldn't say today to the frequency has picked up that much February six last year I was announced as the new CEO. So I started in April 1st and since then we've done until this week two acquisitions Cateno.
And then prior to that then a technologies. It just so happens that we were diligently working to reviewer strategy and finalize that Andone would that bond is do we absolutely to go now, let's go and put our balance sheet behind just to make sure. We we've positioned ourselves strongly behind or strategic intent and as I said earlier adopts a lot about protecting enough.
Device into core including scaling internationally, but it's also about winning key digital buffer grounds and both acquisitions. We made this weaker firmly behind the cloud ambition that we have and you'll see more of the same on a go forward basis behind each and every one of those digital Buffalo grants.
To be very clear I view M&A as a means to an end to achieve the strategy a while I'm pleased with the 2.2 billion. We spent on share repurchases last year, you will see an absolute conviction to return capital to shareholders in the form of periodic dividend increases as well as share repurchases would are particularly to offset dilution, but also.
Potentially opportunistic I will say that you will see us or more towards accelerating M&A on a go forward basis as long as it is supportive of the I'm of the overall company strategy a share repurchases, while laughing value do not repositioned. The company gets the strategic intent M&A can enable us to do that.
So.
With almost a year behind me under my belt hearing cognizant getting my head around the company the industry better the operational rigor and control we have with the team around me, we're absolutely inclined to accelerate M&A a little more in the years ahead and make sure we use that as a means to accomplish or overall company strategy.
With regards to the details will be technologies like we've entered into exclusive negotiations deals not closed.
It is material for fronts, but is absolutely the immaterial from a company perspective in terms of the dollar additions. So it's a it's a basis points in terms of growth as opposed to anything else but.
As I said that those coke zero is firmly behind our sales force ambition.
And we've been spending a lot of time I personally I've met with Salesforce.
CEO I think probably no five times in nine months.
And these are very symbolic moves to make sure that we strengthened our capabilities behind the sales force Brexit that we're building up.
Thank you.
One final question today should be coming from the line of Moshe Katri with Wedbush Securities.
Hey, Thanks for taking my question, Brian you spoke about the need to potentially accelerate growth in <unk> and international where you feel that the company's under penetrated can you talk a bit about what sort of actions you're taking to kind of get there maybe some color there there will be helpful. Thanks.
Yeah. It ultimately takes a three portions one is organic investments one is partnership in another one is M&A to be very clear Zenit technologies, which was at the intersection point of.
Life Sciences as whatever we these strategic verticals as well as I O T was a perfect illustration of hitting many birds with one stone <unk>.
Graphic expansion strengthening European footprint, a lending to were Io d. digital priority and aligning to whatever strategic verticals.
We also announced and close Cateno, which has got a very strong international footprint in the in the form of Dev ops and data in Q4.
So those are good illustrations and of course technologies that we announced earlier today will be another good illustration of strengthening our footprint in Europe, and just case in France.
Organically of course, we're strengthening our capabilities by building got more footprints and supporting that footprint with better allocation of resources globally. As an example, we will modify or marketing.
Mix this year or two shifts much more towards or international expansion into in prior years or marketing spend was actually less in our international business than the actual current revenue mix notwithstanding the fact that our growth opportunity was bigger there. So that seems to have been something that we want to direct to find a go forward basis and of course part.
The 500 revenue generating head count that we've approved a good chunk of that is in Europe, and we want to continue to go scaled out to make sure we have a bigger footprint in those geographies.
And then on the partnership side, you know, whether it's with data, we westar salesforce or otherwise we've been building out those linkages throughout the world in Europe is no different would have you to go into markets in a digital ecosystem aligns country by country.
I firmly view partners lease asked the question earlier it as an extension ever Salesforce, we were working on some core banking deals at this moment in time for the CEO of timing also is actually actively in they in engaged and brought hooks into deals and been acute proponent of cognizant, given our world class capabilities behind telling us.
So it's wonderful when a client here is not just from the CEO of covenants and but also the CEO in this case of 10 minutes I swear capabilities on our Referenceability in that regard so.
Were full speed onboard full speed ahead to go scalar international capabilities. It was a little bit disappointing just last quarter, some but self inflicted to begin to get that right going forward and it's certainly an area of focus for me in the coming years.
Okay with that I think this will conclude today's call. Thank you all for your question.
Thank you. This concludes today's cognizant technology solutions fourth quarter 2019 earnings Conference call you may now disconnect.