Q4 2020 Cognizant Technology Solutions Corp Earnings Call
Ladies and gentlemen, and welcome to cognizant Technology solutions, Q4, 'twenty and 'twenty earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. Please press star.
One on your telephone keypad the confirmation tone will indicate your line is and the question queue. You May Press Star two if you would like true Love. Your question from the queue for participants using speaker equipment and may be necessary for you to pick up your handset before pressing the star keys.
Thank you I would now like to turn this conference over to MS. Katie Royce Global head of Investor Relations at Cognizant. Please go ahead.
Thank you operator, and good afternoon, everyone and now you should have received the copy of the earnings release and Investor supplement for the company's fourth quarter and full year 2020 results.
If you have not copies are available on our website cognizant dot com. The speakers we have on today's call are Brian Humphries, Chief Executive Officer, and Jan <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.
These statements are subject to the risks and uncertainties as described and the company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors.
Reconciliations of non-GAAP financial measures, where appropriate to the corresponding GAAP measures can be found and the company's earnings release and other filings with the SEC with that I'd now like to turn the call over to Brian Humphries. Please go ahead Brian.
Thank you Katie and good afternoon, everybody today I'd like to address three topics with you and namely.
Namely a brief summary of the fourth quarter and are continuing to progress executing our strategy and our confidence about the future let.
Let me start with Q4.
Fourth quarter revenue was $4 $2 billion of decline of 3% year over year of constant currency.
This included the negative 120 basis point impact from the exit of content moderation services.
And the negative 250 basis points impact related to the anticipated exit from a large financial services engagements.
This relates to of complex ambitious project that was scoped and late 2018.
And over time, both parties realize that the transformation of aspects of the project.
As initially conceived was unlikely to achieve our shared expectations.
And I'm confident that it is in everyone's interest to manage to an exit.
Yeah, and we will provide more details on the financial implications of this exit in his remarks.
However, I want to underscore that I am confident and both our client portfolio and our deal review and solution and processes, many aspects of which we've overhauled in the last year.
Excluding the impact from the anticipated the exits from this engagement, we executed well and the quarter and delivered against our expectations and our guidance.
Gross margins increased cash flow was strong and we continue to invest significantly to fuel our growth priorities.
We maintained our momentum and the quarter with full year of 2020 bookings growth and the mid teens.
With over one year of data assumption tweaks and refinements behind us for analytics have been improved and pipeline to bookings bookings growth, including renewals and new business and bookings to revenue.
We enter 2021 with growing confidence and our strategic operational and commercial progress and the strengthening of demand environments.
In fact, we're on track to bring in more new hires in Q1 than ever before as we ramp our hiring and capacity to accommodate our growth plans for 2021 and beyond.
That said the market for scaled digital talent is intensely competitive creating demand supply and balances for certain skills.
And this coupled with other factors, including our more rigorous approach to merit based promotions and salary adjustments has led to meaningful sequential increases in voluntary attrition.
We will continue to closely monitor and action this including reviewing renew Mauritian underscoring our employee value proposition and reinforcing the career path opportunities created by our growing momentum.
From the industry point of view, we believe financial services will see a gradual recovery in 2021, returning to grow with over the course of the year notwithstanding the anticipated exit of the engagement referenced earlier.
During 2020, we took a series of actions and financial services, including refreshing and more than the quarter of our commercial teams, adding more commercial coverage and strengthening our partnership ecosystem and the industry solutions.
We closed the year with the healthy book to Bill ratio in both insurance and banking.
With these actions and our enhanced portfolio at the intersection of cloud and digital.
We're now better positioned to help financial services clients with their transformation and innovation agendas.
Health care growth slowed modestly in Q4, as we lapped the zenith technologies acquisition and life Sciences.
However, the fundamentals of our payer of health care business have been improving in recent quarters.
We anticipate further growth acceleration and the first half of 2021, driven by a reinvigorated U S healthcare business, including our strategic products portfolio, and a strong outlook and life Sciences.
Products and resources continues to be impacted by COVID-19 related weakness in travel and hospitality and retail and consumer goods and Meanwhile.
Meanwhile, we see continued momentum and manufacturing logistics energy and utilities.
Communications media and technology continues to grow double digits year over year when adjusted for the effects of the exit of the non strategic content services business.
Yeah, and we'll provide more insights on the quarter in his prepared remarks.
The macro trends are largely unchanged from those I discussed and our third quarter call.
Clients are making investment decisions. They know they must be agile innovative software driven enterprises and.
We see continued focus on customer and employee experience initiatives customer 360, cloud acceleration packaged applications platform capabilities and automation.
Hyper personalization and the need for intelligent decision, making are fueling significant demand and analytics AI and ml.
Clients are embracing new ways of working including distributed agile following their successful COVID-19 and joost experienced in 2020.
Our strategy to focus on industry specific and horizontal digital workflows is resonating with clients.
The next phase of digital is about transforming processes to become agile data driven and automated and always within the eye and customer experience.
This moves digital beyond technology and into the heart of business operating models and processes.
Finally, we continue to see declines determined their strategic partners.
And that's and stands to benefit from this trend given our high levels of customer satisfaction for enhanced portfolio and our growing reputation and digital.
I am, particularly pleased by our growing client momentum, we see meaningful opportunity for cross selling and our existing accounts given our refresh client facing teams stronger portfolio and enhance the kind of planning.
The recent example is a fortune five hundreds resources company.
The salt to digitally transform its workplace experience for employees, while eliminating the operational inefficiencies caused by an overreliance on multiple in country Outsourcers and contractors.
Cognizant work next digital workplace solutions suite much declines requirement for transformation through self service and automation.
This led to a 45% reduction and operating costs and higher levels of customer satisfaction, given the 70% plus the first call resolution.
While we see a huge opportunity is cross selling of our existing accounts and are naturally focused on debt.
We're also focused on extending our market coverage by leveraging the commercial investments made in 2020.
And the past year, we broke into more than 40, new global 2000 accounts, providing meaningful cross sell opportunities for or delivery and commercial teams.
One such client is the leading credit ratings agency that aims to transform into an agile Dev ops engineering led operating model, whilst consolidating its vendors and eliminating legacy systems and technologies.
We lead with digital engineering to build innovative solutions using modern cloud native and digital technologies by full stack products teams.
We are applying a lean and agile approach to drive the product development mindset and the adoption of and agile software development framework.
Moving now to strategy.
To realize our revenue growth we are now several quarters into executing the strategy focus on for priorities.
The repositioning of the cognizant brand globalizing cognizant accelerating digital and the increasing our client relevance.
Here's a quick update on each priority starting with our brand.
And the coming months, we will launch of breakthrough Global brand campaign that will increase the stature of our brands.
With the focus on scaling cognizant, Brian globally, we will execute a serious of experiential marketing initiatives and sponsorships for.
For example, we recently announced the where the title of Parker of Aston Martin and cognizant of Formula One team.
And Martin and the iconic brand is returning to the Formula one great after more than 60 years away from the sports.
This is much more than the sponsorship it's.
It's the broader strategic partnerships aligned with our automotive industry focus and one that's at the intersection of cloud and digital.
For the Aston Martin and cognizant Formula one team will be heavily focused trackside applying <unk> Iot and data analytics to support critical decision making.
For Aston Martin Lagonda, The road car company will help execute their digital transformation agenda, focusing and outcomes like hyper personalized experiences for the customers and building a direct to consumer value proposition.
We will also partner with Aston Martin to evolve its facilities into smart factories.
<unk>, five <unk> and Iot to achieve optimal performance and output.
Given the race circuit across 22 countries and the global following of Formula One and Europe Middle East and Asia. The sponsorship also aligns with our second priority debt of Globalizing our company.
We see a huge opportunity internationally, having hired a diverse group of senior country, managing directors and the U K, Ireland, Germany, The Nordics, Australia, and New Zealand and Japan and.
And a new president of our international business, we are in a stronger position than ever to drive towards the scope.
The senior leaders bring both clients networks and talent followership.
They will also lead the business transformation, we are undergoing at the local level as we pivot to helping clients realize their digital ambitions.
I am extremely excited about our ability to drive exponential growth in our international business. Once this team settles in.
We are committed to invest behind this ambition, both organically and Inorganically and.
In January we agreed to acquire Serbian and Australia based enterprise transformation consultancy that specializes in data analytics AI digital services experienced design and cloud.
Serbia and expands our integrated end to end digital transformation capabilities in both Australia and New Zealand.
This brings me to our third strategic priority accelerating digital.
Over the last 18 months, we've sharpened our ability to support clients as they transform into software driven enterprises.
Since January 2020, we've announced approximately $1 6 billion and acquisitions all focused on our strategic priorities of digital engineering data and AI cloud and Iot, which together enable clients to compete as modern digital businesses.
Earlier this week, we closed the acquisition of <unk> and 25 year old custom software development services company, which will broaden our global software product engineering network, adding hundreds of engineers and the U S and the Philippines.
The journey, because the second digital engineering acquisition and recent months, making us one of the world's largest digital engineering Stearns.
We also closed the acquisition of linear this week, which broadens our enterprise service management capabilities and complements our service that practice.
I am pleased with the growing intimacy, we share with our key partners, including the leading Hyperscale and SaaS companies.
The long established relationships with Oracle and the S&P.
Have been complemented the growing commitments for next generation companies like Workday, Salesforce Snowflake and service now and for.
We just committed to deploy workday internally is our HCM partner.
In digital business operations, we are committed to infusing intelligent automation across our operations to deliver end to end, the adoptable and responsive processes.
Our deep and long standing global partnerships with leading companies such as <unk> automation anywhere indigo and AP and enables us to enhance the automation spectrum from robotic to cognizant process.
Our fourth strategic priority is about increasing our relevance to clients to.
To support this and 2020, we've been investing in our industry and sub industry knowledge and strengthening our partnership ecosystem and refreshing our client facing teams to ensure deeper industry expertise and technology consulting skills.
We aim to be even more proactive with our clients, leading with the point of view and technology strategy architecture, and agile digital workflows, we aim to build upon our excellent reputation and build operate and further strengthen our growing reputation in transformation and innovation.
This is the multiyear journey, but one that our clients are happy to see us embrace as they look for alternatives strategic partners.
In closing we are now almost two years into our project to ensure cognizant of returns to its rightful place as an industry bellwether.
We accomplished a great deal in 2020, despite being faced with the complexities of Covid and a ransomware attack.
This progress scorecard includes rally and the company behind the clear purpose and vision improving employee engagement levels to multiyear highs rift.
The refreshing our leadership team and talent.
Executing against our refined corporate strategy, including adjusting our portfolio via targeted mergers and acquisitions and the exit of non strategic businesses.
Improving our backlog win rates and bookings trajectory.
Completing our restructuring program investing in strategic ESG and DNI initiatives.
And the accelerating investments and our future growth.
And new reinvigorated cognizant is emerging having successfully completed a good deal of our transformation work.
And I'm pleased with the progress we've made and our ability to start demonstrating this in 2021.
There is of course more work to do but we are on track executing well the United as the leadership team and doing what it takes to become the preeminent technology services partner to the global 2000 and sea sweep.
With that I'll turn the call over to Jan who will take you through the details of the quarter and our fiscal year outlook before we take your questions yen over to you.
Thank you, Brian and good afternoon, everyone I'm delighted to be with you on my second earnings call and to be reporting and other good quarter. Excluding the one time impact I'll discuss more later the base.
And is performed well and modestly exceeding our expectations earlier in the quarter driven by solid performance across the board, excluding financial services and the industries, most directly impacted by Covid, notably retail consumer goods and travel and hospitality.
For the full year revenue was 16.7 billion.
Representing a decline of <unk>, 8% compared to two.
2019, and the decline of 7% and constant currency.
Compared with the prior year. This includes and negative 110 basis points impact from the exit of certain content services and negative 70 basis point impact of the anticipated exit from a large engagement and our financial services segment and a positive approx.
<unk> 210 basis points of contribution from our acquired businesses.
For the full year digital grew over 13% and represented approximately 42% of total revenue and increase of five points as a percentage of total revenue from 2019.
Our Q4 revenue was $4 2 billion.
Representing a decline of two 3% year over year or 3% and constant currency.
Compared with the prior year period. This includes a negative 250 basis points impact of the anticipated exit from the large engagement and our financial services segment and negative 120 basis points impact from the exit of certain content services and the positive 270.
Basis points of contribution from our acquisitions.
Before moving on and I will provide some additional details relating to the anticipated exit from the previously mentioned large engagement and discussions the parties agreed that the clean separation would be to our mutual benefit.
As a result of those discussions and the fourth quarter. We made an offer that includes among other term and proposed payment and the forgiveness of certain receivables.
As a result of this offer we recorded at $140 million charge and the fourth quarter, which included a reduction to Q4 revenue of one of $7 million and additional expenses of $33 million, which impacted SG&A primarily related to the impairment of.
The long lived assets.
And the charge exclusively impacts our financial services segment.
We are in active discussions and hope to have the finalized agreement and the near future.
Now moving on to segment results were all growth rates provided will be year over year and constant currency.
Financial services declined 11, 4%, including a negative 730 basis points of impact from the anticipated contract exit excluding this impact banking and insurance both declined mid single digits, and banking growth and regional and retail banking and north.
Ricker was more than offset by weakness and cards and payments clients insurance also performed below our expectations driven primarily by weakness in North America.
Health care grew three 3%, which included similar performance and both in the U S payer business and life Sciences life.
Life Sciences revenue was strong amount of all from a pharmaceutical clients.
Further enhanced by the expansion of our portfolio of services as a result of our acquisitions of <unk> technologies.
And was partially offset by the continued weakness and medical device clients, which have been impacted by reduced electric procedures volumes.
Our healthcare payer business at the best performance and seven quarters with strength and software license sales from.
The addition of several new logos.
Products and resources declined two 4% as low double digit growth and manufacturing logistics energy and utilities was offset by double digit declines and the travel and hospitality industry and the high single digit decline and retail and consumer goods.
While it's still challenged on the year over year basis, we have witnessed some stabilization and the last two quarters, particularly within retail and consumer goods, which grew modestly on a sequential basis.
Communications media and technology grew three 4%, which included a negative 790 basis points of impact from our decision to exit certain portions of our content and services business outside of this impact.
We remain very pleased with the business momentum within technology.
Communications and media growth accelerated sequentially and grew low double digit growth year over year helped in part by several of our acquisitions.
Now moving on to margins in.
And Q4, our GAAP operating margin was 11, 1%.
And adjusted operating margin, which excludes restructuring and Covid related charges was 12, 3%.
Both our GAAP and adjusted operating margin included and negative 300 basis points impact related to the anticipated contract exit which includes an approximately 160 basis points impact to gross margin.
Diluted GAAP EPS was <unk> 59.
And adjusted diluted EPS was <unk> 67 of.
Which both included and negative 25 cents per share impact from the anticipated contract exit.
Our adjusted tax rate was 32, 9% and the quarter, reflecting the change the charge related to the anticipated contract exit which generated losses that are not tax deductible.
Adjusted operating margin declined approximately 470 basis points year over year, reflecting the charge related to the anticipated contract exit and higher incentive compensation annual merit increases and investments and organic and inorganic revenue growth savings.
Savings from our fit for growth program, lower T and E and favorable movement and the rupee, partially offset this pressure.
Yeah.
During the quarter, we completed our fit for growth program, achieving $530 million and gross annualized savings through continued cost discipline, which has allowed us to accelerate our growth investments. The majority of savings achieved under this program benefits our gross margin, while the accelerated pace of <unk>.
Investments is primarily being captured and SG&A. These.
And these investments include an accelerated pace of acquisitions, which we believe are key to our business transformation and additional sales hiring and repositioning the cognizant and brand and hiring more senior talent and international markets to drive growth, we manage the business at the operating margin level and therefore the.
Leave it as a better metrics to judge the profitability of the business.
Now turning to the balance sheet.
We ended the quarter with cash and short term investments of $2 7 billion or 2 billion net of debt.
As a reminder, at the end of October and we fully repaid our outstanding revolving credit facility of.
One 7 billion.
Cash flow in Q4 was again strong with free cash flow of 809 million. This brought our full year free cash flow to $2 9 billion.
<unk> ended the year at 70 days, representing a year over year improvement of three days.
And 'twenty, one we expect to see our free cash flow of decline from 2020 levels. As a result of several benefits we experienced this year, which will not repeat in 2021.
These include government offered deferrals of certain tax payments and the lower cash payment related to our 2019 annual incentive compensation, which was paid in Q1 and 2020.
Our outlook for 'twenty, one and assumes free cash flow conversion will return to more normalized levels of around 100% of net income as we focus on building upon the DSO improvements achieved this year.
We opportunistically utilized our strong free cash flow and 2020 and continued to achieve capital deployment strategy utilizing over 110% of annual free cash flow.
And 2020, we spend $1 1 billion on acquisitions, representing approximately 40% of our full year free cash flow. We've returned approximately 70% of free cash flow through $1 6 billion and share repurchases and.
$480 million and dividends.
As I mentioned last quarter, we have.
The reverse our indefinite reinvestment assertion on India earnings the.
This decision allows us to more efficiently utilize 100% of free cash flow globally, giving us greater flexibility and our ongoing capital allocation program.
Over the next several years, we plan to deploy 100% of our annual free cash flow through of balanced capital allocation program, we intend to allocate 50% of free cash flow towards M&A and areas of aligned with our strategic priorities.
The remaining 50% will be allocated to dividends and share repurchases targeting of consistent dividend payout ratio of approximately 25%.
And repurchases to offset dilution annually.
While these are a set of guiding principles, we will continue to be optimistic and our allocation of capital as well as leverage our strong balance sheet.
And support of the strategy.
During the fourth quarter, the board approved of $2 billion increase and our share repurchase authorization and today, we are announcing of 9% increase and our quarterly cash dividend of <unk>.
Second consecutive year of increase since initiated the dividend in 2000 and.
17.
Turning to guidance.
For Q1, we expect revenue and the range of for three 4 billion two for $3 8 billion.
Representing 2.8 to three 8% growth or 1% to 2% and constant currency based on our expectation that currency will have a favorable 180 basis points impact.
This outlook assumes and improving yet still cautious start to the year with continued macro uncertainty.
We expect the stabilization and financial services and continued pressure across retail and consumer goods travel and hospitality and communications and media.
Q1 also still includes and approximately 85 basis points of headwind from the exit of certain content services.
For the full year, we expect revenue of $17 six to $18 1 billion.
Representing five five to eight 5% growth.
For 4% to 7% and constant currency based on our expectation that currency will have a favorable 150 basis points impact.
This outlook includes approximately 300 basis points of contribution from inorganic revenue and assumes improving revenue momentum from Q1 levels.
Our full year outlook assumes and approximately 30 basis points headwind from the exit of content services.
To put the full year guidance and better perspective, there are several factors impacting the quarterly guidance to highlight.
First.
Keep in mind, our Q2 2020 actuals included the combined impact of Covid anti ransomware attack, which will lead to easier year over year compares in Q2 2021.
And growth levels above our full year outlook.
Second.
The charge recognized in Q4 related to the anticipated exit from the customer engagement will create challenging year over year compares through Q3, and then and easy compare in Q4.
However, this does not impact <unk>.
Full year revenue comparisons.
Moving onto the margins, we expect full year adjusted operating margin and the range of 15, 2% to 16, 2%. We expect margins in Q1 to be at the low end of that range and to operate within the range each quarterly period for the full year.
This leads to our full year adjusted EPS guidance of three.
And $3 90.
Two for dollars and <unk>.
Our full year outlook assumes interest income of $20 million to $30 million versus $119 million in 2020, as a result of the $1 2 billion cash repatriation and the fourth quarter, which moved cash from India to other jurisdictions with lower yields.
Our outlook assumes average shares outstanding of approximately $530 million and the tax rate of 25% to 26%.
Our guidance does not account for any potential impact from events like changes to the immigration and tax policies.
With that we will open the call for questions.
At this time and will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Formation from will indicate your line is in the question Q.
You May press Star two if you would like some of your question from the queue.
Participants using speaker equipment or may be necessary the pick up your handset before pressing the starkey and Lee.
In terms of time, we ask that you limit yourself to one question one moment, while we poll for questions.
Our first question comes from the line of Lisa Ellis with market mapping from you May proceed with your question.
All right terrific. Thanks for taking my question, Brian in your prepared remarks, you highlighted a number of areas of progress and the cognizant of transformation, both strategic and operational.
Just can you take a step back you're now almost two years and how would you characterize where you are in the transformation journey of cognizant kind of.
Still in the beginning middle innings near the end and what aspects would you say are mostly completed versus one of the big big steps still remaining.
Thank you.
Hi, Lisa.
Thanks for the question I would say, where we are in the middle and I think we still of a few years work ahead of us, but we've made huge progress and I'm very proud of the team and grateful for everything that they've helped us to do and if you go back two years ago, we talked about the transformation office that started with our strategic direction and refinements, which naturally.
Led to refinements of our company portfolio of both exiting non strategic elements, such as content moderation as well as strengthening our digital capabilities with a and intensive targeted set of M&A transactions.
We're now much more of in the strategic execution mode and there are four elements to that caused the this is globalizing and repositioning the brand <unk> seen some recent announcements we'll have more.
To go through in the coming weeks and months.
That will actually help us with our second goal debt of Globalizing cognizant, which involves really getting after underpenetrated markets internationally, which today still represents approximately a quarter of our revenue and.
As well as giving clients around the world Greater assurance that we have a robust and resilient delivering network.
The third goal will be around accelerating digital and we made good progress there and we will continue to invest behind the strategic go and and I should point out of clients are.
Very pleased that we are actually showing up with a broader portfolio, giving them optionality.
And alternatives and then the for points that Youll see us continue to invest and as part of our transformation is increasing our relevance to clients that has involved those changing out some of our commercial teams refreshing them, bringing in people with much deeper industry knowledge, and indeed sub industry knowledge and making sure we have the client facing teams.
Who can interface across the entire C suites.
Our global 2000 company. So we've accomplished a great deal.
Some would say against the odds, particularly given COVID-19 and ransomware and the last year, but the team are energized and we're in this together and we're all committed to do something incredible in the coming years.
But thats way to be very honest, we've also left room in our financial plan in the coming years to continue to invest behind the transformation because we're not done yet.
Terrific. Thank you.
Our next question comes from the line of Bryan Bergin with Cowen You May proceed with your question.
Hi, Thank you.
And I wanted to ask around bookings performance any color you can give as it relates to the overall company and digital bookings and <unk> and then as you think about your growth here over the last let's say two quarters or so can you give us a sense of whether that's been from stronger competitive wins and better positioning of cognizant due to the investments you've been making versus just the rising tide.
And the recovery of Paul overall demand and spend just curious if you can give us a sense of how you see the mix of those contributing factors to your booking performance here.
Yes, I'll jump in and the kick us off on the bookings side, because I think I mentioned and my last call I had to do some for immediate training to Jonathan and the deeper I understand the bookings.
And.
The number and.
I did so our full year bookings growth.
For this year was in the mid teens, but as I learned of course, the bookings numbers.
Of this bookings number for illustrative purposes to convey basically the distribution momentum and sales momentum and the success, we have with our clients and you should see it is that Brian mentioned in his and his notes that we continually improve for review and.
Uh huh.
And I understanding of the bookings number and we made good progress and the fourth quarter. So I am delighted that the momentum continues basically and the mid teens, we did make some adjustments to our bookings number as we shifted a little bit the bookings between the quarters, so but the full year numbers are similar to what we reported.
And the third quarter of 15 around the mid teens.
And then Brian do you want to give some more detail on digital bookings and distribution of our bookings.
Yeah. So.
I think first of all of its fair to say I believe we are more competitive and we have been I believe were more client facing day, we have been in recent years.
And that starts with the tone from the top but we've also added significant coverage and of course of the last year in some regards that's positive but it should be more positive on a go forward basis as well because these people that we brought into the company will ultimately become more productive as time goes on and some of the goodness from that which will ramp over time.
And we'll also be complemented by the fact, we've had some disruption this year because we've been upgrading our client facing teams.
Because we wanted to have a set of client facing teams who are better capable of.
Of conversing across the entire C suites.
So I think we're stronger we're more energized we're more client centric.
Frankly, we also have a stronger portfolio, we have been aggressive in our M&A stance and the past year, we've got a lot of momentum behind the assets, we've acquired and that puts us in a position where we can show up well beyond the CIO CTO organization and now engaged much more broadly at the C suite.
Similarly, I think it is fair to say that the there is growing optimism in the market of I think about client behavior clients of certainly making investment decisions. It's somewhat of an uncertain back ground because of where we are with vaccine rollout spreads the world but.
The clients are being decisive and.
And indecision and is the enemy of Ceos of services company, some happy to see the making decisions.
What are the putting their money behind ultimately gross acceleration of efficiency agility scalability and business continuity of course. These leads to investment decisions. If you will around customer 360 customer experience cloud acceleration automation and hyper personalization of course, which for.
And as you with the core and data and modernization AI analytics and machine and machine learning. So this is all happening in the periods, when we're working and a different matter and.
Clients have gotten used to working via distributed agile, which I think will fuel different ways of working going forwards.
And I believe it's also giving rise to questions around who strategic partners are.
And which is why we're really committed to continuing to invest behind industries hold leadership industry solutions partnerships technology consulting and vendor consolidation is real and I'm delighted to say cognizant can truly play across build operate and indeed into transformation of innovation with our extended Brian So.
I feel very good about our position the market is getting stronger and if anything right now what we have is a disconnect between demand and supply economics.
And I'm worried about skill of shortages across the industry.
Thank you.
Our next question comes from the line of.
Keith Bachman of beer.
You May proceed with your question.
Hi, Thank you very much good afternoon good evening.
Wanted to ask about guidance and thank you for the information for the 7% includes three points of M&A.
Wanted to get some additional clarification surrounding the.
The events of Q4 and.
How should we be thinking about <unk>.
Financial services within the context of that for years to 7% constant currency growth.
Given that I assume this is an ongoing headwind associated with as you said the first couple of quarters, but could you give us a little parameters on how we should be thinking about financial services and particular in the.
And the second part is there any incremental impact that we should be contemplating to the adjusted operating margin of 15, 2% of 16 two.
Is there any additional charges related to.
The what happened in Q4 with the financial services organization. Thank you.
Yes.
And I can add a little bit more color around the.
The exit from the financial services engagement and it's really contained in the fourth quarter. So we took a charge and revenues and.
On the bottom line.
And we.
And net impact on financial services in the fourth quarter ahead of growth impact of seven a little bit more than 7% I think I said, yes.
Yes and.
With that.
Our financial services performance continued to be declining and the fourth quarter and has been a weak spot and our performance. So I anticipate that well is fine and I indicated that we're going to be stabilizing financial services performance throughout the fiscal year and and.
And and.
And the stabilized the way for financial services.
Okay, and the and the margins is there incremental any incremental charges associated with that or is that all taken in Q4.
The all tech and in Q4, there should be no more impact in 'twenty one.
Okay, Keith it's Brian here that's for.
And just maybe just a little bit of flavor for quarters for young wasn't here last year.
Q1, as you know is a tougher comparator and the rest of the year because of Covid really started being talk more about it and the mainstream media and beyond in the month of March So the last month of Q1.
So the the compare and financial services and as we think about the shape of the year will still be let's say more challenging there as the turnaround efforts continue to take hold against the tougher box drop from Q2 should be and easier compare for us and frankly and the easiest compare for us and in FSA should be and Q4, given as Jan said, we've taken financial entry.
And this quarter related to the anticipated exit of this contract.
But I'm fully aligned Tms point of view, we would expect the gradual recovery in 2021 with the <unk>.
Quarterly I've, just given you against the quarters within that.
Okay, Alright, thank you Brian.
Our next question comes from the line of Rob Burgess from.
The deep dive of equity research you May proceed with your question.
Hey, guys, Hey, I just wanted to ask about the growth versus margin topic as you look forward specifically and.
In 2021 does your margin guidance leave you with enough room to invest and building digital capabilities and driving share gains and then I think even looking beyond 2021, it would be great to get a sense do you feel like your growth investments would taper after this year.
As you make further progress and the turnaround or would your growth investments be prone to continue at a similar clip and as you look beyond maybe this year. If you can give us some outlook there on the growth versus margin trajectory.
Yeah, maybe I'll jump in with the with certain of the framework. Our guidance includes the impact of acquisitions that we have announced and closed as of today and as anticipated. These acquisitions will create margin pressure for us in 2001, approximately 100 basis points of sale.
Lee and.
That is built into as well as our continued investment of building out the organic growth capabilities, our investments into marketing et cetera. So the guidance includes the.
Substantive continuation of our strategic initiatives into 'twenty, one that was very important for Brian in EMEA as we have devised our budget process.
The continued committed to executing that strategy, which is a multi year strategy future acquisitions as I indicated we're planning to continue and our M&A strategy.
Great.
Australia, and our capital allocation of outlook and plan. So if we were to spend another $1 billion and acquisitions that would be incremental margin pressure that is not built that could be incremental margin part of it that's not built into our guidance as always will be incremental but.
I think the plan as it is provides the.
Our full support of the strategic direction that.
That Brian and illustrated the earlier.
Yeah, and maybe if I could just embellish does come and say Hello Raj.
First of all yes, we feel good about our guidance for 2021, it sees us accelerate revenue show margin expansion close to ultimately investing materially into the future.
But I always want to be crystal clear on these calls that our goal is to drive shareholder value creation by positioning cognizant for medium and long term success and sustained earnings growth and I think the best way for us to get about doing that is to get after of the revenue opportunities.
Look we're in the middle of a what we're calling of multiyear project to reposition the company.
I'm genuinely pleased with how the team has come together, where United we're ambitious we're eager to proof of our potential.
In 2020, I ask the team to pull together to operationalize the transformation agenda that included strategic organizational cultural and indeed financial elements and some of it was uncomfortable for certain segments of the employee base.
We executed and aggressive M&A strategy to complement our portfolio, we executed the restructuring program the savings of which allowed us to start reinvesting in the business, including hiring those commercial resources, we referenced earlier and with bookings now up and the mid teens. The P&L can start to work again and that was the secret sauce of cognizant.
Over the years it was always a growth company fueling investments and our clients with delivery excellence, which afforded us to continue to drive that on a sustainable basis. That's the.
And the direction, we're taking the company for it.
Not so much more work to do but I think so much more optimism about the future and I definitely feel a lot better about our position.
Because a lot of the heavy lifting of the initial portion of the transformation is behind us.
We'll continue to invest and delivery excellence commercial coverage for talent, our systems and tools, which were not in my mind fit for purpose for a fortune 200 company. That's why we announced today our intent to go forward with workday and the HCM you know, we're investing heavily between 19 and security remediation and modernization.
The continued to invest and our portfolio and the <unk> brand and we're feeling pretty comfortable in terms of where we are.
Thank you.
Our next question comes from the line of Ashwin <unk>.
<unk> with Citi. You May proceed with your question.
Thank you.
Hey, Thanks, Brian.
So I guess the question for me is with regards to the underlying sort of economic and operating assumptions for the.
Lower and upper part of about the <unk>.
The revenue and margin outlook and given the confidence the implied and post <unk>.
Acceleration I guess the follow on to that is the supply side question.
Because when I look at high utilization and sequentially the higher attrition can.
Can you provide some comfort and the ability to meet the annuity objectives.
And of that implied acceleration of demand.
So let me start a little bit with some higher order of questions Jan feel free to jump in at any moment here as well.
So first of all with regards to the delivery organization of where we stand on that.
Look we have the demand and supply imbalance, if you will and.
The market has snapped back aggressively as evidenced in our strong bookings momentum.
I would say that the competition for digital talent is extremely competitive.
All major digital domain skills are in high demand across cloud and digital engineering data and AI ml.
We are therefore very much focus on recruitment and attrition and for those of you who track media you will you'll see us be much more aggressive in terms of.
Social platforms for hiring we're doing a lot of work with our employee base around making sure. They see the potential of the company and making sure. They understand the growth ambitions of the company their career opportunities and so we look forward to trying to optimize that as best we can but you guys know is which as we do that and the high demand environment, where you have an.
It can lead to certain of the outcomes now we got to understand what that means in terms of pricing environment as well to be very very clear with regards to utilization.
And there's a few things happening simultaneously from my perspective first of all clients are engaged are embracing new ways of working including distributed agile and that has been somewhat forced upon them and in 2020, but actually I think it's worked well and now many clients are looking at real estate consolidation policies and understanding and we can work for the near shore.
Sure onshore or indeed offshore the.
Hardy offshore mix can actually help margin rates, but it is not necessarily helpful to margin dollars or indeed revenue dollars. So we're seeing a trend certainly towards offshore leverage which is pushing and the short term offshore utilization of higher as we consume the bench, but I don't know that thats likely to be sustained over the longer term because we plan to.
The increase our hiring rebuild our benches and though we are as I said earlier and the high demand environment at this moment in time.
We're also doing some tactical things internally, we've recently moved to India based workforce onto of nine hour Workday, which is in line I should add with industry practice, which will result in a reduction of utilization and India in theory, and the next quarter or so by one to two points.
But we will continue to look at utilization and track it and understand how these dynamics play in.
Got it thank.
Thank you.
Our next question comes from the line of Jeff.
And then one with Jpmorgan you May proceed with your question.
Hey, Thanks, so much I know you've covered a lot already but I wanted to ask about the the.
Customer engagement again and.
And what makes this unique.
In terms of what happened and why the exit of Kurt I'm, just trying to get a better sense of if this was one off or are there. Some other accounts that you are tracking as well.
Yeah, Let me, let me tee it off and then the Jan if you of any of the financial elements of the please embellish just as well. So first of all we have of delivery excellence organization and that insurers were aligned to a.
A sophisticated set of delivery methods for want of a better words, you can think about these as methodologies principles programs tools.
As of Globals.
200, Fortune 200 company at anytime, we probably at between 20, and 25000 projects or programs underway and our delivery organization and these projects are constantly reviewed and maps.
And it goes without saying for cognizant and it would be the every other services company out there and the world that of.
And any one time.
For a company of our size there are certain projects that are classified amber some read these.
These projects are monitored constantly actions and frankly senior management right up to me to get involved and client discussions as needed.
And I will say we are on top of this.
I have reviewed our entire portfolio over the last few years I know, where we stand we have enhanced rigor and our deal review and solutions and processes. Many of those aspects by the way have been changed and the past year and just as a reminder, we the new CFO who's pretty hands on we have a new global delivery leader, who came in the last year, we the new Chief Admin officer Who's charged amongst other things.
The contract management and pricing each of these executives bring their own experience and value and complex deal pursuit steel solutions and pricing, which puts me in a position where I feel confident with where we stand.
First of trust the rigors of there and I think for that.
Yeah.
Yeah.
Our next question comes from the line of Matt O'neill with Goldman Sachs. You May proceed with your question.
Yes, Hi, gentlemen, and good evening. Thanks for taking my question a lot of good questions asked and answered already.
I was hoping.
Good at.
A little bit more around the sort of hiring dynamics and.
And.
And as well as the kind of international dynamics as well as far as.
Brian you mentioned, a hiring a lot of Mds internationally, and what is the kind of sort.
Sort of expected ramp or lag from kind of higher too.
Accelerating the actual business and some of the international markets as well as going back to the broader discussion around hiring as far as the the relative scarcity of talent and.
The challenges there as far as.
Finding the right people with the right skill sets. Thank you.
Yeah.
Look from the international perspective, we call the its global growth markets.
Which is about 25 percentage of our business.
We were.
And we're quite intentional and the last year that as we're globalizing the company so to the we want to localize the company to a certain extent so that means as an example, we've recently changed at her head of Japan, We've hired a Japanese local previously was the head of Microsoft Japan Prior experience and Oracle HP.
IBM, Japan, so somebody with followership amongst clients somebody would followership.
And with talent and of.
Our roster of C suite networks and the country. That's important to me, but we also need the people who can fit in with the cognizant of culture are extremely energetic and really want to do something incredible in the years ahead.
I've got to say, it's been an absolute pleasure, we've been able to attract incredible talent and cognizant of.
At Cros upgrades, we've made and the U K, Ireland and the Nordics in Germany.
And in Australia, New Zealand in Japan, and indeed, as the new head of global growth markets earthly who joined us in.
In the month of December as well and I'm very optimistic that they will ramp rapidly because they were a.
The class eight type of personalities very senior of quick studies, we've held some already with multi year business plans to see how we can drive exponential growth in these geographies of course I want to give them time to settle in but they know that they've been hard with great expectations.
And of course, they are charged from not just with delivering commercially and.
And from a delivery point of view locally and spending for the principles of the company, but also we are pivoting.
Transforming the company the classic.
Very heavy leverage of application outsourcing labor arbitrage in the model is being complemented of course with much more local selling solutions and delivery as we're driving across the entire C suite to sell.
The projects, so I'm very optimistic.
And very excited about the potential we have overseas and I think it's an area that we havent the adequately.
Mind internationally, and it's an area of that frankly should enable us to drive nice growth.
The broader talent question ultimately goes back to the market dynamics, which are stronger if you look at the industry analysts. These days many of them are thinking about growth rate into 3% to 6% pretty.
For the entire industry going forward.
Digital skills are particularly in demand.
And that's something I think the entire industry is facing into we can control. What we will so we were at 100% focus of the management team around recruitment and around the attrition and making sure we can fulfill against the bookings momentum in.
And the same day and I'm proud to say, we promote of tens of thousands of associates recently and rewarded the majority of our employees with the merit based salary increase and indeed this year, we accrued and we will pay bonuses of higher levels than last year, notwithstanding COVID-19, and the ransomware attack. So we have.
And more rigorous approach the talent.
You will see that process continue we will probably be faced with still sequential pressure.
And in involuntary attrition simply because we're going through and of your cycles and after bonuses or are paid we will see what happens, but we're 100% focused on attrition and recruiting and of 100% focus on ensuring that our employee value proposition and employee brand is world class.
Got it thank you very much.
We have time for one more question. Our next question comes from the line of Maggie Nolan with William Blair. You May proceed with your question.
Thank you Brian you spoke positively about the building strength of the portfolio and your positioning in light of substantial M&A activity can you comment on the competitive environment and the digital engineering space.
Hope kit pickup of market share with new or existing clients and do you have to disrupt the competitors to do that.
Yeah.
This was one of the hidden jewels, Meg and the entire corporation.
We have of rich heritage and application development and application maintenance, but that gives us a tremendous opportunity then to move which for us and much more forward leveraging the the.
The strong skill sets and the talent that we acquired with soft vision back in 2018, and fact, we've done two digital engineering acquisitions, and the last probably for months tin roofs.
In the United States as well as Majestic and now most recently as well and this week that we closed.
And Youll see us continue to complement those.
And the globe, we already have a very strong footprint across North America, and Youll see us continue to embellish western Europe with that skill set as well.
And of course, we think we're entering a new phase of digital and this brings with it different dynamics clients aren't thinking of digital necessarily anymore simply as the classic Tech stack at the bottom where they think about applications of our infrastructure of data. Our vision is ultimately that clients were recognized at the power of digital is unlocked not in.
And those silos investments, but more across business processes and operating models and that ultimately involves selling value delivering value. It involves intelligence in consumer grade applications from a <unk> point of view with security grade features ultimately driven by the intelligence that's fuel.
By our math.
Of data modern architecture sitting on cloud platforms and.
And our digital engineering play truly Boyd of interactive and the experience capabilities makes us one of the only companies in the world that can scale from the bottom of the tech stack right up to the top there is certain pure play digital companies that play in certain of arenas or certain IP piece of the play more at the bottom of the stack, but we're one of I think the two companies and the world's going.
Truly scale top to bottom in that regard and.
And and core to this belief as well by the way is the notion that yep.
Processes will ultimately become more agile data driven and automated with a huge focus on CX. We've got some great examples already by the way and the portfolio of both vertically as well as horizontally atg and as a company. We acquired in 2018, it's the leader in advisory implementation and managed services and quote to cash and that's one example of our love and.
And the other Salesforce platinum partners that we acquired in 2020 helps business is simplify and modernize marketing campaigns, leveraging salesforce marketing cloud and that really helps them provide data insight and personalization across the customer journey. This in my mind is where digital is going it's not about the silo tech stacks.
Personally have collapsed the organization to really get at the intersection point of cloud and digital this is happening when certain other companies are actually the doubling down and cloud silos, but I actually think the true values at the intersection point and I feel we can truly get after new customers, but we're also dislodging certain companies.
From a constant they've long held some of these companies are private companies. Some are public but we feel we got one of the biggest digital engineering companies and the world and you'll see us continue to double down and Duckworth part.
Thank you.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn the floor back over to management for closing comments.
This is Katie and I just like to thank you all for taking the time and joining the call and we look forward to speaking with you and in the coming day. Thanks.
This concludes today's cognizant technology solutions Q for 2020 earnings Conference call. You May all disconnect. Your lines at this time and enjoy the rest of your evening.
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