Q3 2020 Cognizant Technology Solutions Corp Earnings Call
[music].
Greetings and welcome to the Cogs in Q3 2020 earnings Conference call.
This time, all participants are in listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded its now my pleasure to trickle over to Katy Rice.
<unk> head of Investor Relations. Please go ahead Katie.
Thank you operator, and good afternoon, everyone. By now you should have received a copy of the earnings release Investor supplement for the Companys third quarter 2020 result.
If you have not copies are available on our website cognizant dot com.
They actually have on today's call are blind Humphrey Chief Executive Officer, and yarn second <unk> Chief Financial Officer before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements.
Statements that are subject to the risks and uncertainties as described in the company's earnings release and other filings with the FTC.
Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for investors.
Believes that non-GAAP financial measures, where appropriate to the corresponding GAAP measure can be found in the company's earnings release and other filings with the FTC.
With that I'd now like to turn the call over to Brian Humphrey. Please go ahead Brian.
Thank you Katie good afternoon, everybody and a warm welcome to young who many of you know what it is its first cognizant earnings call.
Today I'd like to address four topics with you, namely a brief summary of the third quarter.
An update on our employee engagement.
Observations on the demand environment inclined to evolving needs.
Our strategic focus areas as we aim to revitalize revenue growth.
Let's start with the third quarter.
Third quarter revenue was 4.2 billion.
Decline of 70 basis points year over year in constant currency.
Excluding the negative 130 basis point impact from the exit of certain non strategic content services business revenue grew 60 basis points year over year.
We executed well in what remains a challenging environment.
For the quarter include.
Continued commercial momentum with bookings growth in excess of 25% year over year.
I'm going to I'm, not going to digital with revenue growth of 13% year over year and continued strength in digital bookings in qualified pipeline.
Gross margin and cash flow strength, enabling us to continually invest in the business.
Significantly increased and sustained financial flexibility on India earnings and cash.
Yeah, we'll provide more insights on the quarter in his prepared remarks.
Moving to our second topic I would like to briefly address our talented associates and.
I'm grateful to each of them for their professionalism and perseverance in serving their clients. During this protracted pandemic.
She has put a tremendous strain on families and compressor likes to screens and hopes.
Could not execute against our commitments in 2020 without their client centricity work ethic and engagement.
Given our financial performance and in recognition of the contribution to her assumptions.
We are creating 2020 bonuses at higher levels than 20 Nike.
We're also implementing targeted merit increases and promotions in the fourth quarter.
Both will hurt our cost structure and 2020 versus prior year.
In the central and normalize part of the cost structure in the services business.
And stressful times like these we are especially attentive to employee engagement.
A measure of how can they doesn't connect people are to our company.
A recently cognizant people engagement survey showed scores consistently above industry benchmarks.
And our overall engagement score meaningfully increase versus prior surveys.
In an external endorsement of sorts Forbes magazine, just Frank Cognizant number 19, 750 companies across 45 countries and its world's best employers list.
These high levels of employee engagement.
Coupled with the current economic environment contributors to our fifth consecutive quarter of reductions in voluntary attrition.
We anticipate some sequential increases in voluntary attrition in the coming quarters after the forthcoming Mercedes promotions.
And salary increase cycle.
We continue to prioritize the health and safety of all our associates and remain in a work from home unrestricted travel posture would only limited exceptions.
Now I'd like to turn to clients any particular trends we're seeing.
These trends fall into two categories, one cyclical once secular.
First on the cyclical side and set against a protracted pandemic clients are increasingly decisive under technology priorities.
Our focus on cost savings capex reductions resiliency and agility.
This is slowing large project deployments would extend the paybacks, what's creating other opportunities.
We are seeing accelerated vendor consolidation trend, which we stand to benefit from given our deep strategic relationships and client references and build up right.
Or enhanced portfolio and growing reputation in digital where.
Where more and more clients wants to see is challenged digital incumbent.
Quite focused on innovation and cost savings is also creating opportunities for incumbent vendor displacement and larger deals.
We plan to be disciplined and selective in our pursuit of larger deals including captives.
As these transactions, if not well conceived and brings our lead compound annual growth rates margin pressure.
And on favorable terms.
I want to focus my comments on the more consequential second or trends digital transformation.
This is our top priority.
It goes to the heart of client business model innovation transformation and experiences.
'cause it 19 has widened the digital divide between the digital natives legacy economy companies.
Which has struggled to shift to a fully digital operating model.
These industrial era companies that focus on upgrading their excess.
Infrastructure data and application layers.
They migrated their apps and data to the cloud and increase the agility of their underlying technology.
These improvements however, important fall short of delivering the full power of digital transformation.
The optimized technology foundation, rather than the business process or operating model.
I believe the industry's at an inflection point digital adoption.
We see growing quite interesting realizing more immediate customer business value.
Hi, identifying use cases to shift to agile digital workflows.
That means transforming processes to become agile data driven at all to make it.
Such work those can be industry specific such as claims and policy management.
ER pharmacovigilance.
Or horizontal section.
They should come to cash or digital marketing.
One such case, it's highly engineered an agile digital workflow for a leading apparel company that needed to return to work and to store strategy.
We offered our safe workforce solution.
Built on the Salesforce worked dotcom platform.
These comprehensive employee safety solution provides management with information about public health conditions office capacity employee health and ship schedules you can stagger arrival times to minimize contact.
Encourage hygiene to automated reminders and when connected with Io P. centers open for social distancing and occupancy limits.
As more clients implement agile digital workflows, the digital services market is evolving into a third phase base.
Phase one of digital clients sold to understand what digital we need meds their industries.
Seems to be implemented digital experiments and projects at the edge of their enterprises.
The three clients realize they must be software driven enterprises and digital to their core.
So what does the shift to agile digital workflows mean for service companies and who will be the winners.
The first and perhaps most obvious thing to say that there will be more than one winner.
That being said everything we are doing as a company.
Our strategy solution portfolio partnerships mergers.
Mergers and acquisitions branding and marketing and talent.
It's focused on being one of the biggest beneficiaries of this new phase of digital.
You become modern businesses and create business value companies need to embrace digital technology stack that consist though.
Personalized and engaging customer and employee experience.
Enabled by software engineering.
Powered by customer and operational intelligence, driven by data and run on a modern cloud business platform.
We haven't always done a great job marketing business, but we are one of the few firms in the world, but solutions and partnerships across every layer of good stuff.
Inorganic investments have strengthened our south partnerships.
Salesforce and workday complementing long standing relationships with Sep Oracle in service now to offer clients. The full suite of enterprise application services, they require to modernize their core processes and enable agile digital workflows.
The last six months, we further strengthened our partnership commitment to all three leading hyperscale providers and asking the formation of dedicated business goods for both Microsoft and they need to be Wes and investing to enhance our Google cloud credentials.
Whatever approach a client wants to take to become a modern business our portfolio last month Columbus.
Say a client wants to start at the bottom of the digital technology Sapphire accelerating cloud migration.
We can do this with them driving efficiencies that can subsequently be invested in innovation.
That's exactly what we're doing for a global automotive manufacturer that came to us for help to bring agility innovation and efficiency to their business processes.
We started by executing an agile delivery model for core modernization.
Then deployed our one Dev ops model across declines you color supply chain accessories parts and incentives.
Maybe speed flexibility and user experience.
In another example, we're engaged in partnership with Snowflake, you need digital transformation project for a leading financial services firm.
We're building a cloud based intelligent data platform that facilitates multiple analytical and machine base use cases.
Its platform unlock innovation opportunities and value added use cases.
Including real time intelligence for fraud detection, a better user experience for opening and reactivating accounts.
Actually no dispute processing time, and they probably feel the agent selling effectiveness.
More and more clients are however, starting at the top of the digital technology stuck by focusing on the customer and employee experience.
Such expenses can be continuously improve through the magic of human centric insides software product engineering automation and apply the I am.
Hi for personalization.
All of which ultimately requires claims to embark on a core can beat it modernization jure.
That's what we get for a large global insurance company that selected cognizant to design implement and run a new direct to consumer business that will provide a compelling eylea enabled interacted experience to consumers and agents.
Recognizing just needed to be integrated with existing core systems and data architectures, we didn't work, but they didnt U.S., though isn't it scalable modern digital platform.
These examples you will see the opportunity to create a flywheel effect are virtuous cycle, which cognizant and our clients stand well positioned to benefit from.
The world of vendor consolidation cognizant is one of the few firms that can capture this opportunity.
I'd now like to turn the company's future and our goal to increase our relative commercial momentum.
And we'd like to lives rather than grow.
The knowledge base business investing for growth starts with attracting developing and retaining talent.
The last six months, we have overhauled her talent management that I needed performance evaluation process.
Which allows to develop a diverse inclusive in high performance team core talent is identified and nurtured for promotions.
Meanwhile, we have invested in grows by strengthening our country leadership with senior hires in Germany, The Nordics, Australia and Asia Pacific Japan.
Earlier. This week, we also announced the completion of our Executive Committee with the announcement of our new President for global growth markets and the newly created role of executive Vice President and Chairman for Cognizant, India.
We've also got a new organization, Bonnie what we call the covenants of the agenda, which articulate our purpose vision and values are.
Our vision is to become the preeminent technology services partner to the global 2000 feet.
To achieve this we are aligned behind the series a bold moves that require investments.
First we will meaningfully increase investments in branding and marketing, including launching a breakthrough global brand campaign in the coming months.
Its campaign, where we positioned the comments and Brian will reach beyond are familiar technology audience to the entire C suites.
As well as the next generation of talent.
Second we will continue to accelerate digital our priority areas of digital engineering alien analytics cloud and I O T are more relevant than ever declines.
We aim to lead in the third phase of digital which will require continued investment in M&A or commercial and delivery capabilities offer management talent and branding.
Third we will continue to globalize cognizant by investing for growth in targeted countries strengthening our regional capabilities scaling our brand internationally and executing a global delivery network that would ensure greater resiliency in our delivery capabilities.
And fourth we will continue to make investments that increase our relevance to clients by strengthening our industry expertise and technology consulting capabilities.
That's even her talent and extending our solution integrated and designer competency.
As we invest for growth. We will also continue to leverage our balance sheet to accelerate our strategy.
Our M&A strategy continues to be focused on advancing our digital priorities across the globe.
Last month, we closed the acquisition of King roots software, a custom software and digital product development services company that axons or software product engineering footprint in the United States.
And earlier this month, we closed the acquisition of 10 magnitude one of Microsoft's longest standing and sewer century partners. These deal expenses, the Microsoft exhort expertise within our new Microsoft business.
And that development and managed services hubs throughout the United States.
Last week, we agreed to acquire Bleichwehl and technology services provider that specializes in custom industrial solutions for Fortune 1000 companies.
Which will expand our smart products and industry 4.0, it expertise.
In short we are committed to growth and we continue to make meaningful investments to ensure we increase our relevance to clients and enhance our competitiveness.
While the macro and political backdrop remain uncertain.
Come what May our goal is to ensure we outgrow the market just like we did in the third quarter.
What's remaining commercially disciplined.
In closing I would remind you that 18 months ago, when we set cognisance transformation emotion aimed at returning the company to be the ice and services industry bellwether we.
We knew this would be a multi year endeavor.
And our view has not changed.
Well, we continue to have a lot of work ahead of US we are encouraged by our progress on.
Employees are energized the United fire shared purpose and vision.
We're excited about our strengthening competitive position.
The opportunity to expand internationally and the opportunity presented by the third phase of digital.
There will be several big winners in this attractive market.
We aim to be one of the.
With that I'll turn the call over to Yaniv will take you through the details of the third quarter and our fiscal year outlook before we take your questions yeah.
Over to you.
Thank you, Brian and good afternoon, everyone.
I'm very happy to be part of the cognizant team and look forward to connecting with all of you going forward.
From the onset I was intrigued by cognizant meaningful growth opportunity and my first weeks on the job I have more than confirmed my initial assessment I.
I will work hard to fill Karen truth and wanted to say a big Thank you to her for making my onboard so smooth and seamless.
Moving onto Q3 results.
Third quarter revenue of $4.2 billion was flat year over year or a decline of 70 basis points at constant currency.
Paired to the prior year period. This includes a positive 250 basis points contribution from inorganic growth and a negative 130 basis points impact from the in the exit of certain content related services.
Sequentially, we saw broad based improvement in the business, particularly in areas such as cloud and enterprise application services I O T and software engineering.
Moving to the industry vertical well all off the growth rates provided will be year over year in constant currency.
Financial services declined 2.2% with similar performance in both banking and insurance.
Retail banking improved in the quarter driven by regional banks, while capital markets returned to growth after several quarters of softness.
However, we continue to see weakness across global banking account and with price and the payment sector.
We continue to expect below company average performance in the financial services segment for the next several quarters.
Health care grew 4.2% led by double digit growth in life Sciences, driven by strong growth in the Biopharma clients and included the contribution of the Senate acquisition, which we lapped mid quarter.
Growth was partially offset by continued weakness in the medical device Cline well.
Within our health care vertical revenues saw modest growth after.
After six quarters of decline, we're pleased with early signs of improvement in the health care business.
We see improvement in the payer segment across key accounts, which is offsetting the decline in the provider market that continues to be negatively impacted by cove. It.
Products and resources declined 4.6% with double digit growth in manufacturing logistics energy and utilities offset by double digit declines in travel and hospitality and high single digit declines in retail and consumer goods.
Well, we saw strength in booking in retail and consumer goods. We expect continued pressure in 2021 as a result of the ongoing endemic.
Communications media and technology, what flat, including the approximately negative $57 million year over year impact to technology from our decision to exit 50 portions of our content services business.
Excluding this negative 920 basis point impact growth in communications media and technology was approximately 9%.
Communications and media grew mid single digits as growth in communication and education clients offset continued weakness in media and entertainment.
We expect pressure in media and entertainment into Twentytwenty one.
Well overall, we saw improved momentum across the business the demand environment remains uncertain, but.
But we believe we are gaining traction across industry as reflected in the strong bookings and pipeline number it's fine referenced earlier.
Moving on to margin in Q3, our GAAP operating margin and diluted EPS were 14.2% and 64 cents respectively.
If you ask me if flex at $140 million or 20 cents or 26 cents per share income tax expense related to the reversal of our indefinite reinvestment assertion on accumulated in your earnings.
I'll comment more on that decision later in my prepared remarks.
Adjusted operating margin, which excludes restructuring and covert related charges was 15.9% and our adjusted diluted EPS was 97 cents.
Adjusted operating margin was down 140 basis points year over year.
Yeah, really driven by higher incentive based compensation and the dilutive impact of our recently completed acquisition, which more than offset savings from our fit for growth program lower <unk> expenses and the favorable movement in the rupee.
Additionally, during the quarter, we incurred $43 million of charges related to the fit for growth plan.
The actions drove continued cost discipline, which allowed us to further invest into our growth initiatives.
George you up the actions under fit for growth are complete and we have achieved our savings targets.
We expect charges to be approximately 200 million dollar and annualized ROE run rate savings of 500 to $20 million to $550 million.
2021.
Well, we don't anticipate charges under fit for growth to continue in 2021.
We will continue to invest savings achieved to help accelerate growth aligned behind the fourth and teaching areas Brian outlined.
Repositioning the cognizant Brian.
Accelerating digital.
Localizing the company, increasing our relevance with clients.
Now turning to the balance sheet.
Our cash and short term investments balance as of September thirtyth stood at $4.6 billion or net cash of $2.1 billion.
Oh outstanding net debt balances include the approximate 1.7 billion drawn on our revolving credit facilities in the first quarter 2020.
We had a strong cash flow quarter generating 821 million of free cash flow largely driven by improved collections of our receivables dsos improved by five days year over year to 72 days.
Before turning to guidance I will provide additional detail on our decision to reverse our indefinite reinvestment assertion on cumulated, India earnings totaling $5.2 billion.
The decision was made based on our strategic priorities.
Accelerate growth in international markets.
And to expand our global delivery footprint.
And just to the India budget enacted in April and changes to the U.S. tax regulation that became effective in September this.
This reversal resulted in a one time gap only tax costs of approximately $140 million.
And make those earnings available globally.
In October we distributed $2.1 billion from our subsidiary in India, which resulted in a net $2 billion cash transfer from India after payment of India withholding tax.
Importantly on a go forward basis, we can now more efficiently utilize 100% of free cash flow globally.
Which gives us greater flexibility and no ongoing capital allocation program.
While we are reviewing all capital allocation program, we initiated our share repurchase program and intend to repay our credit facilities by the end of this month.
The share repurchase activity will offset a portion of the EPS impact from the lost interest income historically generated from cash balances held in India.
While interest rates in India have steadily declined in the last several quarters year to date that cash had earned roughly 5%.
<unk> generated approximately $95 million of interest income was 13 cents per share.
In September we have deployed over $700 million on share buybacks repurchasing approximately 10 million shares.
Now turning to guidance.
The macroeconomic environment remains uncertain and the pace of recovery complicated by the evolving nature of the Corona virus pandemic.
While we are pleased with the solid bookings and pipeline off the business here today, how that pipeline converts to revenue will likely be impacted by the pace of economic recovery and das client confidence in spend we are reaffirming revenue guidance at the high end of our previously guided range.
Typically for the full year 2020, we expect revenue to decline approximately 8.4% year over year in constant currency.
Based on current exchange rate this translates to a decline of 8.5%.
Up to approximately $16.7 billion on a reported basis.
Oh revenue guidance includes our estimate of the negative impact of approximately 110 basis points to the full year revenue from our decision to exit certain work within our content services business that will be reflected in our C.M.T. segment and the positive contribution of apart.
From a 200 basis points from closed acquisitions.
This guidance continues to reflect a muted outlook for financial services, and the retail and consumer goods and travel and hospitality portions of our product resources segment.
For the full year 2020, we expect adjusted operating margin to be approximately 15%, which assumes incremental costs associated with the remediation of ransomware attack wage increases and promotions for certain of our associates effective October one.
Incentive compensation above 2019 level.
Our current guidance also assumes that Q4 revenue would be negatively impacted by lower bill days versus Q3, and a typical cycle of furloughs.
We expect to deliver adjusted diluted EPS in the range of $3 63 to three Dollarssixty seven.
They see the non-GAAP reconciliations in the 8-K, we filed today.
A full definition.
This guidance anticipates, a full year share count of approximately 541 million share and GAAP tax rate of approximately 32%.
What's implied Q4 tax rate of approximately 27%.
Our guidance does not account for any potential impact from events like changes for the immigration and tax policies.
With that operator, we can open the call for questions.
Thank you well now be conducting a question and answer session. If you like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is it a question queue. You May press star two if he'd like to every question from the Q.
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Our first question today is coming from Jason Kupferberg from Bank of America. Your line is alive.
Hey, Thanks, Good afternoon, guys that congratulations on the quarter, maybe I'll just ask two quick ones upfront in the in the interest of time I'm first off in light of what's happened recently with S&P, we've been getting a lot of questions just around the size.
The the practice that you guys may still have in that area. So many sizing you can give us there would be helpful. And then can you just comment on with the digital bookings growth being as strong as it has been I think you're up 40% year to date when does that start translating to faster digital revenue growth I know we've been hard.
Bring in kind of the almost the mid teens range here. The last couple of quarters, and then that kind of dovetails with a related question. How do you think revenue growth could actually turn positive and in Q1 I know previously you said that we may still see negative growth through the first quarter of next year, but obviously you're on a better trajectory now thank you.
Hey, Jason its Brian So let me take a shot at somebody's in young by all means feel free to jump in if you keep.
Incremental details to add so Sep has a practice, it's mostly 100 millions of dollars for us at sub 1 billion. It is actually a very healthy business for us.
I have been in touch with Yankee leadership team in recent periods. It see what we can do to accelerate our momentum there, it's pretty intuitive what they're doing but in the same in its also interesting for us given our ambition to scale much more internationally and given the installed base of Sep. So it's it's a partner that really strategic to us and we will continue to work closely with.
Digital bookings look a more broadly if I stand by for this bookings are strong overall and its broad based by geography by industry by new and expansion versus renewals and digital but keys are continuing to be strong as well. So what's been very pleasing to me is in the course of the last.
Sure. When you have consistently shown strong bookings growth year over year that has enabled us to actually build a stronger backlog sort of your and now we're in a very healthy position healthier than we've seen before and of course the pipeline as young suggested I remember is strong as well not just strong overall, but also strong individual Undertaker and.
Strong indeed strategic accounts that we focused on as part of our customer segmentation exercise in Nebraska model. So I feel really good about our momentum there the timing of all of this to revenue can vary by quarter of course and in the face of economic environment, which is on something to say, the very least including announcements made tonight across Europe.
We're pleased with what we've done and if this continues yeah older. It's very well for a future we're not least commentary around Q1 or indeed, Cisco. Your 21 at this moment in time. So anything I will say is we will continue to try to outgrow the industry. That's what we did this quarter, we seek were more competitive than we'd be before.
Absolutely committed to growth and to make investments to grow if that means compromising some margins in the short term to achieve that we will absolutely do that.
But I'm expecting performance to improve.
21, but we'll share more details of that of course, you know Q4 earnings but the big caveat around this is what we're going through some of the time, which is a very uncertain macroeconomic environment.
Thank you. Our next question is coming from Lisa Ellis from Moffettnathanson. Your line is that a lot.
Good afternoon, Thanks, guys and congratulations all right so with the election inevitably causes and trigger some discussions in questions related to H. One b. He says an l. When he says can you just remind us on what fraction of cognisance U.S. Labor force.
First is currently on B. says you know what sort of your level of.
Dependence and focuses on that program and maybe kind of the little bit of the movie of how your labor force structure has evolved over the last few years and how that's evolving going forward, maybe I'll just dovetail that into.
My other kind of observation was just that you actually had head count increase sequentially quarter to quarter and utilization is way up attrition its way down or you know are you kind of where you want to be with your labor force at this point going forward. Thank you.
Hi, Andy said, Brian here, So let's start first with the HEYCO situation I think our utilization levels are not quite high we tighten their belt there during the year as I think every company in the World did.
But we've seen somewhat of a V shape recovery, particularly in the digital side of our business and.
No such we're at the stage now that are a benches lights and we're committed as a leadership team.
To build that out and we've already started that over the.
Last month, or so, but it takes time of course to get that build that obviously, we want to continue to drive more operational rigor around forecasting, which triggers an enterprise resource management and all of that make sure. We have the right resources in the right place right time. So you will see us continue to build out our capabilities with the evergreen skills or hubs.
So as we would call them and build a bummer capabilities such that we can.
Reduce utilization, which is a little bit high at this moment in time.
I am pleased with the employee engagement I am pleased that voluntary attrition is down for the quarter in a row.
Notwithstanding that we're we're really pushing meritocracy in a performance culture. These days. So you have seen a big bifurcation between voluntary versus involuntary attrition and we do expect voluntary attrition to pick up a little bit in the coming quarters. As we go through the merits based promotion and salary a cycle, we're going through and I underscore the word myrisk.
Yes.
With regards to each one b visas, but.
But today its quite topical, but perhaps I could just come back to hear a little bit and talk because the administrated rule changes with regards to skilled integration visas that have been quite topical in recent weeks. Some of those have been enjoying through litigation already in for other elements. There are challenges are pending at this moment in time, so what are the rules.
Survive or not remains to be seen all that being said I actually think old Roes are leading this directionally anyway. So we will always intend to comply with the letter of the law for use these applications on any extensions. We we intend to pursue we are 88 from DVS, Oh, I would say dependent organ.
Jason you used the word evolution and I think that's the right words over the years, we have reduced our dependency on visa.
We've also acquired companies that enable us to be more global in nature, but in the same vein some of the strategic decisions, we took which were the right decisions, including exiting a portion of comp in moderation, that's put us back a little bit.
That being said.
The Sony triggered by new applications, and extensions and he's going to be pieces or Caribbean, a three year visa. So digital rolling gradually and I would say I don't want to reassure everybody. Our intention is to globalize cognizance and so you'll see us still that much more of a global base workforce to meet client expectations well of course, they focus on quality of the live.
And that will include a whole host of things that we will do including U.S. College campus recruiting upscaling and.
No just a broader effort around the local employee base in the U.S. and to be globally.
Thank goodness question today is coming from Austin Chalk car from Citi. Your line is I was.
Thank you hi, Brian I'm about them in a good to speak with you again.
My My question is on the health care.
Worked to call and it's good to see the improvement question is with regards to the sustainability of that and the investments that you're making in radius health care capabilities, including but not limited to trizetto and on the topic of Trizetto with the hate us.
Settlement was that included in the cash forecast fits you had what does it mean from an operational perspective in terms of your client relationships. If you could address those questions.
So yeah and I'll touch on the health care business. If you want to touch fund and then B, the cash and cash flow into cash balances. The Syntel settlement, which we were pleased to see yesterday. So ashwin first of all healthcare is really important to us it's almost 30% of the total company and it consists of two major portions.
One is life Sciences, we do really well there we have been for a long time, it's highly strategic to us.
We're seeing that the lapping and then a technology, which happens in Q3 of 2020. So you know that will impact growth rates, a little bit, but I'm very optimistic around the opportunities in life sciences at the intersection point of bio pharma medical devices right trees to be industry, 4.0, healthcare retail and health.
Hi Tech and I spent a number of hours about where the team over the weekend. So we're really pumped around what we can do there and you will see us continue to invest in it.
The majority of the businesses. However, the U.S. health care business, which just slip between payer and provider the payer business accelerated meaningfully this quarter, which strengthened services and indeed in products, we have a new leader who took over the health care business earlier. This year, an internal promotion, who has done a fantastic job and this entire.
Team are doing great first bookings are very strong product growth is strong were getting new logos margins are improving and were just generally feeling very good about our payer business or the provider business, which is much smaller than earlier business saw significant erosion in Europe.
A year in the third quarter and the industry as you know the provider business is suffering from transaction volumes that are decreasing because it depends I mean, because obviously, reducing elective procedures and I would say that's an area that we would expect to come back but more holistically. The momentum we're seeing in pairs, which is three quarters of the business.
And life Sciences will give us confidence that we can continue to post strong health care results going forward for improving yeah. I know do you. Let me add a few comments to the Scinto lawsuit or you may have seen this morning that we won a jury verdict $854 million.
Lawsuit has a long history for cognizant and it at the core is our claim that Syntel misappropriated trade is that shows intellectual property related to some fault software product products during that time and while.
Syntel was that trades at a subcontractor and the jury verdict, which I don't know love Villa people are trying to plateau or cognizant or basically speaks for itself. We're gratified with the result, but at eight told US the owner of Syntel has already indicated that they're planning to appeal the Verde.
So it will be quite a bit out I think until we have the final results of of this trial coming too so way too early to to take that cash into account for any actions. Nevertheless, I think it it was satisfying to see that.
To I see the jury to side with Congress and position relative to the cash repatriation it might be worthwhile just scanning an extra minute on it to it. So we had about a cash balance in India.
Oh, a $2.1 billion and Oh, we are at the end of September reversed, our our indefinite reinvestment assertion and decided to repatriate that cash from India and ER as part of that decision. We could we could make that decision for two reasons. The most important one is strategically drug.
And actually because we are executing well on our strategy to globalize, the enterprise and well continue to invest into international markets and for that capital will be needed, but number two also that 21 fiscal year 21, India budget enacted in April and some changes and.
Tax regulations allowed us to repatriate this cash on a cost effective basis, and we did so actually in October or the cash balances in India. Historically have earned some interest on the cash balances on the cash that we have there and approximately I think as I said in a in this.
It's about 5% and the we offsetting we use that some of the cash that we returned from India and cash on hand to repurchase shares during the month of September and October and the accrete.
Accretion created through the share buy backs is actually approximately offsetting the contribution that our interest income would have generated in India. So the outlook is quite balanced a in a starting point and obviously we are excited about the go forward benefit of this this transaction because we going forward have no.
The flexibility and full access to a free cash flow on a global basis.
Thank you. Our next question is coming from Bryan Bergin from Cowen and company. Your line is now alive.
Hey, Thank you good afternoon, I'm just thing about your largest verticals here. So you've turned the corner on health care I want to ask on financial services can you hear the commentary on lower than average growth for the next few quarters I'm curious what you're seeing in the areas of the clients and whether it's still limited to only a handful of the former law.
Banking accounts really got how close are you to the end of the tunnel on on stabilizing those and what do you think you need to do in those areas to really turn the corner and not financial services too.
Hey, Brian I'm sorry.
So I would say I remain challenged.
First of all just like healthcare financial services saw the greatest impact from running somewhere.
But the financial services results I'd almost cut them into two portions of discussion first of all insurance and as you know the insurance industry.
It's really been pressured to say to be released in the last year, both at a pandemic level.
Insurance rebates and automobiles SMB businesses interrupted failures.
That's impacting the property and casualty insurance industry and of course mortality rates of life carriers, and then on top of that to make matters worse catastrophic events and low interest rates. So that sector is under pressure. Our business is let's say, 80% of our insurance businesses in North America, so little bit more than the average of the company. It's one of our stronger.
Franchises, but it will decline in this year in Twentytwenty, So we need to turn it around.
We need to improve the pipelines to be very honest bookings have been strong, but the pipeline is a strong enough or leader has retired in the last month or so so we have some new energy in there and hopefully we can get that back on track.
Banking like a if I paint the macro picture first as Weve been played in the prepared remarks capital markets from retail and commercial banking grew year over your cards or payments were down with regards to some of the larger global.
Thanks, and clients that you've referenced it's more of a hunt so some of that to be very honest relates to rents of where we were turning some around some is self inflicted wounds laid it to a lack of appropriate senior arguing the client partners we had a.
And some of it relates to the secular pressure towards enforcing that we're seeking those thanks.
What do we do to turn all around this entire situation.
I'm confident we'll get insurance back on track I think we'll also continue to make progress to date North America regional banks.
And we even brought some accounts into platinum the kind of status this quarter I eat a surpassed $100 million, but in the same vein. We have a lot of work to do in her current accounts and that includes scaling more into digital in those banks. The good news is our digital bookings in those banks are up in excess of 50%. So we are starting to get our foot.
On the door, we continue to upgrade our client partners a work continue to try to do a much more sophisticated job in terms of the kind of planning.
In the same vein right up to the Executive Committee me included we are trying to break into some of the other large banks.
And I think we're making progress actually on two in particular, so hopefully we'll have some good use of that into the foreseeable future European banking just remains weak and we lost a an account there in the last year. I mean, you have some transformation project issues and one large account over there. It is fixable, but I just don't see the momentum turning around there as quickly in banking.
Overall as I have seen in health care.
Thank you. My next question today is coming from Rod bourgeois from deep dive equity research. Your line is now a lot.
Okay, Great Hey, nice progress by cognizant and these results I'm going to ask a high level question.
Recognizing that the cobot pandemic is continuing here do you see cognisant as still somewhat in a crisis response and basic blocking and tackling mode.
Or have you transition now into a more forward moving strategic attack mode. I guess the main part of the question here is it assuming you are in that transition.
What are the next set of metrics, you're most focused on to gauge cognisance progress moving forward here.
Thanks, Rod I'm, Brian here so.
Lets there's a short answer and there was a long answer so I'm going to give you something in between first of all I really feel good about the progress we made in the last 18 months, we've actually done a lot probably more than people realize star fighter strategy, we executed nonstrategic portion of the business, we executed the restructuring program.
We use some of the proceeds from that to reinvest back into the business, we meaningfully improves or digital portfolio competencies and partnerships, we build a strong professional mature client centric leadership team.
We've begun a pretty significant commercial transformation that is showing positive leading indicators and pipeline when rates bookings.
And we but I would say a better business management system in place to ensure optimal financial or operational rigor and we did all of that to be very honest in a period I wasn't expecting we managed through a global pandemics that impacted both demand as well as fulfillments, we navigated a ransomware attack well and I want to say that humbly.
Ah, but we did it as best as we could and we've actually received good client feedback on that we've improved employee engagement to levels not seen for a few years and not reduce voluntary attrition that five quarters in a row.
We've managed to put ourselves in a position that we built a multiyear plan that incorporates sustained investments.
So I'd characterize all of that is pleased but not satisfied to be very honest lots and finished product yes.
We're in the middle of a multiyear project and we must continue to of course, as we said repositioned the brand execute our strategy globalize the company take advantage of the opportunity overseas global after delivery.
Builds on our growing momentum in health care, and six financial services and of course et cetera, better position in digital which.
Just simply exposes us to hire categories of growth and makes us more relevant to clients. We do all of this our.
Our bookings momentum will continue and ultimately this will translate to revenue growth and so Rob everything else at some stage becomes a leading indicator pipeline when rates are the leadership team. The bookings are our goal here is to invest in the business to get back to growth. If we do that growth accelerates and we will show margin expansion, but.
In a very calculated manner that allows us to sustainably reinvest back into the business I see all this with a great deal of.
Copy us given the uncertain macroeconomic situation, we're in if something.
That being said I'll, just wrap up by saying I'm really proud of our team members. So if its round the world I'm confident of the unity ever leadership team be absolute sport, our board of directors, who been tremendously supportive of what we're doing and are growing execution rigor and honestly I think we're on track, we're increasingly competitive and you've seen that hopefully in this call.
As a result.
Thank you. Our next question today is coming from Keith Bachman from BMO. Your line is now live.
Hi, Brian I wanted to actually try to get to and I'll ask them concurrently. The first is I wanted to return to bookings and your bookings growth has been really strong. It sounds like you know, 15% year to date and it sounded like it was 25 for the quarter, so accelerating bookings growth.
And I'm trying to understand the translation of revenue broadly speaking for cognizant My bookings. It's been strong is there something else that we should be thinking about on the other side to an attrition specifically of revenues outside of Facebook and so normally you would expect that they'll start to show up next year, but just want to make sure we understand the other side.
There have been a greater level of attrition again outside of Facebook that would cause revenue growth to perhaps not show up as quickly as we might think over the course of the next year or so.
And then the second question, Brian as I wanted to see if you could just touch on.
Philosophical margins and what I mean by that you outlined your four investment areas.
And also the benefit associated with how the savings plan, that's going to manifest itself. During 21, but just philosophically is there any words that you can get without providing specific guidance on how investors should be thinking about margins.
Given those puts and takes of social with 21, that's it for me. Thank you.
So look let me starts on the revenue question or the bookings question. There's there's no big story here to be honest outside of the exit of the non strategic portion of the content moderation business, which was interrupt relations business.
Equally I think we're executing well both in or most of our verticals like we've got more work to do in financial services, but even in products resources, we're doing well.
In the areas that are not yeah, consumer goods and Charlotte Travelocity reality and.
So.
I just feel we have growing momentum keys, but I'm very cautious to commit anything because of the macro environments. The bookings is real well when I look at bookings by renewal versus expansion versus new.
Just feels as though we had in the last year and a half two years maybe lost.
A buildup of our backlog and we had a road that at an I. Weve started replenishing what I would call the late and and though we're in a position where I'm feeling better about the future. So there is no major story, there and the more we can keep up this bookings momentum the better because it's inevitable that it will show up in revenue.
So you.
You know, we just need to keep executing.
With regards to our margins and in some ways.
Revenue versus margin Tradeoffs I guess comes at the mine I look I.
I see but it's always in two ways first of all it.
It's important to differentiate between the cost and an investment.
And secondly, gross investments will be prioritized versus short term margin optimization and our goal is ultimately to increase from Belgium, commercial momentum and to be bike analyze revenue growth.
We will make some short term margin tradeoffs to achieve this we are investing meaningfully in the business, probably even more than anticipated a year ago, because the more I'm here the more I see opportunities talent overall in your management talent management system were accruing bonuses at higher levels were getting back to America, Greg's promotions and raises.
He did just a little more attracting talent, which is a constrained basket and therefore and expenses that we're upgrading our client partners to be better able to represent cognizant beyond the traditional CIO CTO organization.
Targeted M&A that we're doing but I'm very pleased with comes with integration costs as well gross margins are reasonable Oh, we do have some margin dilution on the operating income level because of the nature intensive nature of those businesses that were scaling.
And then of course, we're continuing to build our commercial hiring rebuilding or bench, which were later delivery cost basket automation branding marketing, we've got over all our internal systems and tools remediate and burn I was writing and security and Globalizer delivery network.
So I've got plenty on my mind.
To find a way to continue to show margin expansion.
And as I've said Twinkie 20 was in my perspective, a very challenging or from a margin perspective, because of ransomware because coal but.
I'd like to think that as we go through a restructuring program as we got more operational rigor as we continue to work on pricing on renewals Upselling and cross selling into our existing accounts optimizing or pyramid or near and offshore makes purchases on our automation agenda I'd like to think we can do.
What's needed investments and yet continue to show margin expansion at a pace that is appropriate for us to continue to invest in the business and for investors who are interested in that story I think theres very few more compelling investments in cognizant that there was no did not.
Thank you and the interest of time, we have time for one more question from the line of James Friedman from Susquehanna. Your line is now live.
Hi, Thank you I was wondering Brian do you have any view at this point 21 budgets and if if that's too hard just more generally how important do you think your client budgets are in terms of impacting cognizance for it.
And.
Well, it's a it's an interesting question James because there's many moving parts I would say, Mike written mountain unclaimed buying behavior. So on one hand, I really feel good about our momentum today bookings momentum up 15% year to date, a bond every one of those bookings either renewal or expansion or new logos a client.
So the first thing I'll say is macro demand is better maybe even the most pessimistic analyst suggested back in April which is good for the buyers.
But of course in a world of vendor consolidation some like cognizant will do better than others second thing is maybe against this protracted and any claims to become increasingly decisively their technology priorities on the beat or spend decisions, which is also good because uncertainty is the real enemy.
Third.
We are less exposed to some troubles schools customer segments that others travel and hospitality retail and consumer goods is less than 60% of our mix, we really focus on the global 2000 customer segmentation, so SMB issues or less concern for us.
Fourth we have momentum in digital we've strengthened our portfolio and we can be a winner and terming. The next phase of digital and I think that inflection point is really by the way.
How do you get around this.
This week scrolling COVID-19 numbers on the latest restrictions, including lock on separate announced of course Europe today.
Major cause for concern for us and it's unclear whether this will really impact the decision, making and indeed budget. So what has looked more promising in recent months and he turned against us and so that leaves us in a situation that is challenging or going into the months ahead.
Because we have to figure out how to optimize for bench in how to reduce utilization of this whole and make sure. We continue to get the right skills into cognisance, but at the same time watch demand signals and customer buying behavior like a hole.
With regard to customer buying behavior.
Look I would say.
They're more decisive as I said, they are speaking more strategic or trusted partners to help them true endemic there's some very short term or cyclical priorities. They would include all the things you would expect remote working and Edelman E Commerce.
And on the lakes would have you to do hyper personalization activity. There's a whole set of initiatives clients are looking to provide cost relief capex reductions and I see more and more claims look towards enhanced resiliency security agility scalability. So the whole notion of cloud acceleration will continue.
The implications of this.
For sure there's some freed up opportunities in a short term around E commerce and working really quickly.
Certainly some of the larger I would call longer payback projects like keep your slower, but there are some larger opportunities that I'd be freed up including cost items that we will look out.
Carefully.
Because unlike the book of business, we've been acquiring through M&A captives can be read and you take your nooses. There are lots of vendor consolidation opportunities, which is good for us and latency and by the way I would say increasingly good for us and the schools because I'm seeing some but he certain suppliers or the so called digital the combined.
Who are perhaps less available or flexible than cognizance on TV.
T's and C's and pricing.
Unless there is other things happening in parallel did it depend them it's truly foreseeing.
Companies to look at virtual agile and perhaps a greater consideration as to when the partner versus brick work in house.
So those things are real and I think that's impacting budget for the coming year as long as the situation doesn't get materially worse. The most important thing is clients are making decisions faster and are more decisive leading into a budget cycle, if things get worse than I think we may end up as an industry not just in services, but beyond Bakken and willing to pay.
And again.
The real trends that I'm, 100% focused on.
And we will put all over north isn't effort behind this relates to digital that's the secular trends, it's strong or bookings are stronger pipeline is strong we've got an improving brands. We see strength in digital engineering, you were showing up very well. These days software as a service alien analytics interactive.
I'm going to say claims I think are now hitting a point, where they almost reached an epiphany that they've upgraded their take stacked but at the same time, there wondering if they're getting adequate returns from this base and everything they spent and so if you think about phase three of digital and think of it as premier the lupines that exposes everything before do you.
Thomas a tsunami wave comes in as follows we're seeing clients realize that or platforms or E commerce capabilities or corn, Peter inadequate their marketing is actually more analog and digital they kind of hyper personal lines because of poor data hierarchies for engineering their processes are so people intensive that they're on scalable and so in essence.
Even though weve gone through multiple phases of digital what we've really been doing around the edges been upgrading the tech stack and the infrastructure data and application layer for non they non digital native companies and.
That's fundamentally doesn't solve all their problems and clients I think going to this budget cycle and beyond in the years ahead will become much more savvy and the fact that they need to become much more software and data driven they must embrace user experiences and they ultimately must shift use cases on children who've worked close that's what we're focused on that's where.
We're pointing or guns and.
Participate elsewhere, but we will definitely focus on digital and we're committed to that.
Thank you Weve reached end of our question answer session I, let's turn the floor back over for any further or closing comments.
This is Katie thank you all for joining and for your question and most thinking again later in next quarter. Thank you.
Thank you that does conclude today's teleconference. You may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.