Q1 2021 Cognizant Technology Solutions Corp Earnings Call
Ladies and gentlemen, and welcome to the cognizant Technology solutions Q1, 2021 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 at that time. Please press star one.
One on your telephone keypad, a confirmation tone will indicate your line is another question for you you May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Thank you I would now like to turn this conference over to Mr. Tyler Scott Senior director of Investor Relations. Please go ahead, Sir. Thank you you may begin.
Thank you operator, and good afternoon, everyone by now you Should've received a copy of the earnings release and the Investor supplement for the company's first quarter 2021 results. If you have not copies are available on our website cognizant dotcom.
The speakers we have on today's call are Brian Humphries, Chief Executive Officer, and Jan Siegmund 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.
These statements are subject to the risks and uncertainties as described in 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 for the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC with that I'd like to turn the call over to Brian Humphries. Please go ahead Brian.
Thank you Tyler good afternoon, everybody I would like to start today's call by addressing the humanitarian crisis in India.
Many of you know India is the hardest cognizant and home to more than 200000 the bar associated.
We'd like to express my support and solidarity for Indian Associate wherever they are in the world My sympathy for any who have suffered a loss during the pandemic.
In addition to the ongoing support of our associates, which includes homecare and hospitalization assistance vaccination cost reimbursements.
For our associates and their families and making vaccine availability easier for those with disabilities.
Cognizant is making a multimillion dollar investment to assist MBS through the crisis.
This is focused on covering operational expenses at hospitals throughout India that are caring for COVID-19 patients.
Funding the efforts of UNICEF in India to deploy oxygen generation plants, COVID-19 diagnostic testing and medical supplies.
And partnering with one of Indias, leading hospital chains to set up vaccination centers in locations across the country, including somewhat cognizant owned facilities.
The impact of the pandemic on industry attrition rates absenteeism and client delivery remains somewhat uncertain.
We monitor our situation daily and we'll continue to prioritize the health and safety of our associates, while serving our clients who have been particularly supported in recent weeks.
As the COVID-19 situation differs threats world. Our returns are often strategy remains country driven car.
Currently almost all of our associates are working from home and business travel remains on an exception only basis.
Let's turn now for the first quarter.
First quarter revenue was $4 4 billion representing growth of two 4% year over year in constant currency.
Although we executed well in the quarter and delivered against our expectations revenue upside was limited by elevated attrition, reflecting the intensely competitive market for digital talent that we spoke about in our last earnings call.
He has put some pressure on salaries as roles were filled by lateral hires for contingent workforce and in some cases commercial opportunities worked for gun due to an inability to source talent.
To address retention challenges, we've been executing a multipart plan that includes stepping up our internal engagement efforts and increasing investments in our people through training and job rotations to provide opportunities for career growth.
Shifting to a quarterly promotion cycle for billable associates, and implementing further salary increases and promotions for high demand skills and critical positions.
And ramping our hiring capacity by adding hundreds of recruiters.
And made some 28000 plus offers to new graduates in India, a new record.
Debbie resignations increased through the first quarter, peaking in March on.
On a positive note resignation slowed in April and continued to slow in May.
However, given too much notice periods in India, we anticipate further sequential increases in attrition in Q2 before a gradual recovery in the second half.
Yeah.
Notwithstanding industry attrition challenges, we remain confident in cognizant standing as a magnet for skilled talent and a great place to build a career.
In recent quarters, we've seen a meaningful increase in our brand perception in the pellets market in India for.
For example for campus acceptance rate amongst India's top engineering colleges has risen to more than 80% this year.
Up almost 10 percentage points since 2019.
[laughter] Linkedin, just ranked cognizant the top company in both the U S and India based on traits like the ability to advance skills growth and gender diversity, all of which are consistent with enabling professionals to grow their careers.
In India linked and ranked as number two among 25 leading companies.
The founder of Apollo's Forbes magazine recently named cognizant to its list for world's best employers and best employers for diversity.
Moving on I'm pleased with the health of key leading performance indicators for example, digital revenue growth accelerated to 15% year over year.
Digital now represents 44% of our revenue mix.
Bookings growth of 5%, which was strong considering outstanding December bookings and a tough prior year compare.
Year to date bookings growth has since been boosted by excellent bookings in April.
I'm confident that our sustained book to bill ratio of greater than one one times revenue provides us with the opportunity to further accelerate revenue growth.
Finally, our qualified pipeline and win rates are strong and gives us reason to be bullish.
Turning now to our industry sectors financial services declines moderated.
Leading performance indicators, including digital mix in qualified pipeline has both improved in both insurance and banking.
Our turnaround efforts are ongoing and we expect financial services to continue to recover over the course of the year.
I'm pleased with the growing momentum in our health care business, we had a strong quarter with growth across our payer and life sciences businesses and improving trends within our provider business.
Over the past 18 months, we've refreshed our product strategy and better aligned our investments with market priorities.
We recalibrated our product Roadmaps to focus our core platforms and cloud enablement customer experiences digital workflows and automation.
<unk> intends to buy digital has resonated well with both existing clients and prospects.
Enabling us to achieve double digit growth in our software product business.
Products and resources continues to be affected by the pandemic declines in retail and consumer goods and travel and hospitality were offset by continued double digit growth in manufacturing logistics energy and utilities.
Communications media and technology posted solid growth when normalized for the exit of elements of content moderation.
Yeah, and who will provide more details on the quarter in his prepared remarks.
Let's turn now to the macro environment.
Our client conversations suggest a robust and resilient it services the Madden picture for 2021 and beyond.
This is fueled by business model innovation.
Customer experience investments technology modernization risk mitigation and efficiency initiatives, all driven by Hyperscale roadmap on commercial investments.
Creating better experiences is that the center of the digital economy. That's what clients are most interested in how to orchestrate technology data and designed to make your employee and customer experiences more productive intuitive relevant and valuable.
A good example is the work we've been doing with Papa John's International one of the largest pizza delivery chains in the United States, We helped Papa John's prints for them. Its order operations each with centralized model that enables hyper personalized offers for customers. We did so through an end to end intelligent cloud based on omni channel solution.
Powered by advanced analytics, and 750 of its stores initially before being expanded to 1500 stores given the early success.
The solution resulted in net revenue uplift of more than 15% per order cigna.
Significant productivity improvements and halting the time between order placement and delivery.
It's also improve the experience for Papa John's employees by lowering their stress for multitasking, while freeing up staff to focus on serving guests.
The shift from traditional to a software centric business requires clients to transform their business processes and their ikea architectures in parallel.
It starts with engineering, a new digital stack enabled by software and consumer great apps that sit unintelligent drawn from sophisticated datasets, all of which need to be instrumented doesn't run on cloud platforms.
Within this new stack, we see particularly strong opportunities to help clients in modernizing their applications data and infrastructure.
And as you can imagine this is driving increasing demand for digital engineering and cloud solutions portfolio.
Our over riding aim is to help clients become modern businesses that way they can innovate faster become more agile and above all stay relevant to their customers.
In that vein, we're collaborating with inscape, a U K based automotive distribution and retail leader to digitally transform and simplify their global finance and accounting infrastructure and services where.
We're applying machine learning data analytics or an advanced business process services to drive efficiencies and enable inchcape to make faster and smarter business decisions.
Moving now on to strategy.
We remain focused on executing our strategy with for related priorities building.
Building, a stronger global brand further globalizing cognizant accelerating digital and increasing our client relevance.
I've covered these priorities in prior calls so I'll just talk for a few broad observations about our execution.
We strengthened our portfolio and sharpened our focus on faster growing markets and geographic segments.
All of our offerings are aligned to the market and aimed at providing the capabilities clients want most likely accelerating cloud migration, enabling omni channel commerce unlocking value from data using AI and ml.
<unk> modern mobility experiences and more.
Cloud computing has changed the way I see it deliberate across infrastructure applications and platforms. We've continued to strengthen our relationships with the world's leading hyperscale and SaaS companies.
With our dedicated business groups for Microsoft AWS, and Google Cloud platform, we can help clients run their core applications and create more agile workflows in the cloud.
We're also maintaining our M&A pace to further expand our capabilities and our key digital focus areas of software engineering data and AI cloud and Iot.
Q1, we acquired Serbian and Australia, and enterprise transformation consultancy specializing in data analytics AI digital services experienced design and cloud.
We also acquired linear.
Good transformation consultancy group specializing into service now platform and solutions.
Ah Magennis technology custom software development services company that expands our global software product Engineering network.
During the quarter, we signed an agreement to acquire ESG mobility digital automotive engineering R&D provider for connected autonomous and electric vehicles.
She mobility complements our existing connected mobility offerings, and our automotive being the street presence.
Before closing I want to spend a moment on ESG.
Environmental social and governance.
Public health economic and societal damage wrought by COVID-19 of course, most businesses to reflect deeply on what they owe their stakeholders.
Keeping with our purpose, we strive to be a modern corporation that is responsive to the many larger context in which we operate.
Among them societal and environmental economic and technological.
And that's why the principle of sustainability is so important to us it speaks to our interdependence with local communities and global ecosystems.
During Q1, we announced the five year $250 million global philanthropic investment to advance economic mobility.
Education opportunity diversity, and inclusion and health and wellbeing and communities as they emerge from the pandemic.
We also recognize how much we must evolve to become.
For a sustainable business.
To do so we will embed ESG into our thinking decisions and actions.
This is a multi year endeavor and one of increasing importance to our clients associates and you our investors.
To Mark our progress along this journey, we're planning a series of announcements that will include the publication of cognizant Twenty-twenty ESG report later in the second quarter.
In closing, we continue to successfully execute our strategy we.
We are bullish on the industry and our prospects within it.
We're working diligently through a multiyear plan to reposition cognizant to achieve its full growth potential.
And we establish our company as an industry leader.
As we do so we are committed to make the necessary investments that will set us up for sustained momentum.
With that I will turn the call over to Jan who will cover the details of the quarter.
Our financial outlook before we take your questions yeah over to you.
Thank you, Brian and good afternoon, everyone. Our Q1 revenue was $4 4 billion representing growth of four 2% year over year or two 4% in constant currency compared with the prior year period. This includes approximately 300 basis points of growth from our.
Acquisition, and a 90 basis points of negative impact from the exit of certain content services.
Digital revenue in Q1 grew approximately 15% and represented 44% of total revenue versus 39% in the prior year period. We were pleased with this growth acceleration compared to Q4, particularly in light of the competitive hiring environment for digital talent.
Now moving on to segment results were all growth rates provided will be year over year in constant currency.
Financial services declined one, 7%, reflecting more moderate declines in both banking and insurance in line with our expectations.
We are seeing early signs that the investments and repositioning of both businesses are resonating with our clients. This includes financial services bookings growth outpacing total company bookings growth in Q1, and a solid pipeline growth. We continue to expect a paced recovery for this segment over the net.
Several quarters and anticipate that we will see positive momentum throughout the year.
Health care growth was 7% and accelerated from last quarter driven by strong performance in both our health care payer and life Sciences businesses.
Following strong performance in last quarter in Q1, our health care business had its best year over year growth quarter. Since 2018 benefiting from increased demand for our integrated pay yourself with solutions and improving fundamentals and I'll provide a business.
Life Sciences revenue continued to benefit from strong demand for our digital services, among both pharmaceutical and medical device companies.
Products and resources increased two 4% driven by the fourth consecutive quarter of double digit growth in manufacturing.
Mystics energy and utilities.
This growth was partially offset by mid single digit declines in retail consumer goods and double digit declines in travel and hospitality.
We have seen some early signs of stabilization within these sectors most impacted by the pandemic, but it remains a fluid demand environment.
Communications media and technology grew three 1%, including a benefit from recent acquisitions, but was partially offset by a negative 600 basis points impact from our exit of certain portions of our content services business.
Outside of this impact we are very pleased with the growth of our core portfolio of the technology business and expect continued solid growth for the remainder of the year.
Segment growth was also partially offset by the demand softness attributable to the pandemic.
Now moving on to margins.
In Q1, our GAAP and adjusted operating margin were both 15, 2%.
There are no adjustments for unusual items to report.
On a year over year basis, adjusted operating margin improved approximately 10 basis points, reflecting lower travel and entertainment expenses savings from our cost initiatives in 2020 and lower immigration cough.
These benefits were mostly offset by investments impacting our SG&A, including the margin dilutive impact from our recent acquisitions investments to accelerate organic growth and corporate investments, including enhancements to our cyber security environment.
Our GAAP tax rate in the quarter was 24, 1% and our adjusted tax rate was 23, 7% aided by a discrete benefit of a tax settlement in the quarter diluted GAAP EPS was 95 and adjusted diluted EPS was <unk> 97 cents.
Now turning to the balance sheet.
We ended the quarter with cash and short term investments of $2 2 billion or one 5 billion net of data for.
Free cash flow in the first quarter, our seasonally softest quarter with 93 million and included an approximately $50 million negative impact from unique items in the quarter, including the payment of a portion of our 2020 COVID-19 tax deferrals.
Q1 also includes the payment of our annual cash incentive which was higher this year compared to the 'twenty 'twenty payment.
S. O 70 days was flat sequentially compared to the 74 days in the prior year period.
As a reminder, in 2020, one we expect free cash flow will be lower compared to 2020.
The result of several benefits from 'twenty to 'twenty negatively impacting 'twenty one include.
Including government offered deferrals of certain tax payments, which impacted Q1 and will also impact cash flow later this year.
And so higher cash incentive pay out this quarter versus Q1, 'twenty 'twenty I just mentioned.
Our outlook for 2021 is unchanged and assumes free cash flow conversion will be around 100% of net income as we focus on building upon the DSO improvements achieved last year.
During the quarter, we continued to execute our balanced capital deployment strategy repurchasing three 1 million shares for $234 million at a weighted average price of approximately $76 for sure.
At the end of March we had approximately $2 $6 billion remaining under our share repurchase authorization.
I also spent cash of approximately $300 million on acquisitions and $128 million, Paul our regular quarterly dividend.
Turning to guidance.
For Q2, we expect revenue in the range of four point.
For $2 billion to $4.46 billion, representing 10, and a half to 11, 5% growth or 8% to 9% in constant currency based on our expectation that currency will have a favorable approximately 250 basis point impact and an inorganic.
Abuse of approximately 400 basis points.
This outlook assumes some stabilization in financial services and continued pressures across retail and consumer goods travel and hospitality and communication and media.
Keep in mind that Q2 2020 included a combined impact of COVID-19 antivenin somewhere attack.
It's just leading to easier year over year compares for all segments in Q2, 2021 and growth levels above our full year outlook.
For the full year, we now expect revenue of.
17.8 to $18 $1 billion, representing seven 9% growth or five 5% to 7.5% in current currency versus our prior guidance of five and a half to eight 5% growth or for two seven in constant currency.
Reflecting the improving macro environment and strong demand fall offerings.
Our outlook assumes an unchanged expectation that currency will have a favorable approximately 150 basis points impact and includes approximately 300 basis points of contribution from inorganic revenue.
Moving onto margins.
We expect full year adjusted operating margin in the range of $15 two to 15, 7% versus 15 point to 16.3% previously.
Primarily reflecting increased investment in our people and recruiting for digital skills.
This includes rapidly accelerating our recruiting capacity implementing quarterly roll based promotions and leveraging our contractor ecosystem.
We're also using it as an opportunity to enhance our employee value proposition and keep cognizant as a top destination for talent globally.
This leads to our full year adjusted EPS guidance, which is unchanged at $3 92 for dollars and two cents.
For full year outlook.
<unk> interest income of $20 million to $30 million, which is unchanged from our prior guidance and reflects the $2 1 billion cash repatriation in Q4 'twenty 'twenty.
Our outlook assumes average shares outstanding of approximately $530 million and a tax rate of 25% to 626% both unchanged from our prior outlook.
Our guidance does not account for any potential impact from events like changes to immigration or tax policies.
With that we will open the call for questions.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you will lose your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing your starkey.
In the interest of time, we will ask that you limit yourself to one question one moment, while we poll for questions.
My first question comes from the line of James Faucette with Morgan Stanley You May proceed with your question.
Okay.
James You May proceed with your question.
Let's move onto the next question.
Our next question comes from the line of Bryan Bergin with Cowen You May proceed with your question.
Hi, good afternoon. Thank you.
I wanted to ask on the situation in India can you can you just frame how you're thinking about the potential impact. This may have on our business in the near term and I wanted to confirm is there there's nothing built into the outlook right now on a potential revenue disruption and on the margin front same thing kind of question is there anything built in as for.
Those incremental costs that you may.
They are framed here to support the work force in the broader population.
Hey, Brian It's Brian here. So let me just touch upon this first of all I think it's really important for us technology. It is.
A humanitarian crisis, and we've been prioritizing the health and safety of our associates and of course their dependents.
And hoping that they stay safe because they work essentially for a moment this moment in time.
And as I said in my script, we're doing.
Series of things to help in terms of medical expense support pre vaccination covering expenses in hospitals, working with UNICEF et cetera.
For the question that hand in terms of how I think about the impact on the business.
I think a bunch of humanitarian side as being relevant but candidly the business side of the hot markets is in some regard more meaningful in the sense that most of our attrition.
And the resignations, we talked about were happening in prior months, which are leading indicators of Q2 attrition and the end of Q1 attrition and all of that was happening in the period when the COVID-19 situation in India was substantially less severe than it is at this moment in time.
So we're working through obviously, our business operations working with our teams who are working remotely.
It's a challenging environment of course and it's.
Stressful and emotional time for our associates for their families the impact Brian on attrition rates and absenteeism and client delivery remains somewhat uncertain. We look at it on a daily basis, we have a crisis management teams involved.
We've created a COVID-19 delivery risk management process, which allows us to initiate remediation actions where required to review the status of our delivery portfolio project by project, where possible to shift work between offshore or nearshore.
On site teams.
But I will say.
Clients have been incredibly supportive as we go through this.
I've received a series of E mails from clients.
Who are wishing him the best of luck and certainly not putting a lot of pressure in the system at this moment in time for the financial impact of our actions is assumed in our guidance.
And that is assumed off of what we know today, which is today's rates of absenteeism and today's resignations that we've seen.
It is unclear whether attrition will actually slow because of this or whether attrition will go up or stay stable, but it will potentially go up because of <unk> because of absenteeism.
To date and our guidance.
Includes what we know today to date, we feel as though our guidance is appropriate.
Yeah.
Our next question comes from the line of Rob.
Good Good guide of what he research you May proceed with your question.
Okay, great. So Brian you're a very full two years into your leadership role at cognizant.
When you started at cognizant there were some meaningful management challenges there waiting for you.
You're now navigating a pandemic with multiple waves across regions. So it's definitely been an eventful two years in that context I'd like to ask if you can grade cognizant underlying progress the progress that you've made over the last couple of years.
And if if there's a way to to decipher between.
Internal progress market progress financial progress I'm, assuming those dimensions, maybe progressing at different stages, but overall it would be helpful to hear how how you'd grade cognizant last two years and its progress.
Okay.
Thank you Rod it's a.
Comprehensive question in nature, but yes, I would echo to work for an eventful first two years given the transformation agenda. The leadership changes required as part of that a global pandemic that ransomware attack of course and now a war on talent that is happening in the midst of the humanitarian crisis in India.
I would say first of all it's a team sport. This was about 300000 associates pulling in one direction.
I'm truly pleased with the executives I've got around me. These days, we're all eager to show what we can do and hopefully I believe can become an iconic leadership team together in the years ahead and I've also being supported by a terrific board who've been a 100% behind our vision and our strategy of the company.
As I'm answering your question I will start by saying I inherited a great company and a company a great pedigree and a company with a gross DNA and accompany with pride proud employees.
But it is clear that the company had not been hitting its stride in recent years. So I asked our organization to pull together to help me operationalize a broad transformation agenda, which included strategy structure commercial transformation delivery optimization cultural elements.
I also ask the company to help me with a restructuring program that we werent used to but it would allow us to free up capacity to make investments in growth in our systems and in our people and this is a growth company and we needed to restart the engine and of course as part of that you have to go through the corporate strategy.
Who do we want to be that leads to portfolio adjustments, both exits such as content moderation as well as meaningful M&A aligned to the corporate strategy.
Of course within that vein, we've also double down on partnerships, including hyper scaler.
And all of this was just a means to an end to set out to build a pipeline to accelerate bookings in <unk>.
Ultimately to get the company back to industry leading growth.
Because I think growth will ultimately make the P&L work again, so we're certainly in the middle of a lot of this I will say I'm more confident than ever that we can do this and I believe we're on track we've made great progress.
Internally now to go to your framework.
Look we've got a clear purpose vision and set of values. We've got a clear strategy. We got a more competitive portfolio that is aligned to our strategy, you've got a better talent philosophy, including DNI, which is critical in a knowledge based business, we progress on important things like sustainability cyber security.
We're getting out of the lease back.
And test them for that is the notion of employee engagement hit multiyear highs in 2020.
Although we are fully aware that we got more work to do on our employee value proposition and indeed of course on attrition.
Commercially.
And what I'm answering your question on markets I'm, not talking about Wall Street, I'm going to talk about commercial markets and our clients we've overhauled our commercial team.
We've increased the sophistication of the team I think we went back to our tuna box model, where we got tight alignment between commercial and delivery.
Refined our customer segmentation strategy. So we know who we're declines that we need to.
<unk> partnered with deeply we've implemented a more refined variable compensation program with <unk>.
Refresh for talent to ensure we can represent the entire portfolio and address client pain points beyond the CTO our CIO.
And I am excited as to how we're now being seen by clients Rob to be honest, where we're no longer necessarily just being viewed and to build or operate space. We've got growing reputation and recognition in digital and cloud following our M&A strategy and that is now showing up in sustained book to bill ratios in excess of $1 one which.
I feel is critical to drive the revenue growth rate that I'm aspiring to drive and our qualified pipeline and win rates are as healthy as day I've ever been.
Now all of that leads ultimately to financial outcomes and I don't think the true benefits of this are yet visible we have seen the margin dilution of the investments commercial hiring security modernization M&A dilution some brand investments we're making.
Of course, we continue to review the tradeoffs between revenue growth and margin expansion, but I will say, we expect to see revenue benefits on the back of the bookings momentum and margin should improve each year for the foreseeable future, albeit with a balanced approach to trade offs between revenue growth and further investments to drive sustained.
Outperformance versus the competition so in short.
A lot of work and I look forward to great years ahead.
Great and just just a quick follow up that is that kind of dovetails with some of the things you've mentioned it seems that attrition is a top of the list of things to address at this stage.
Can you just speak to what you see as the route factors, causing the attrition and your confidence in being able to fix that.
So look it's a two edged sword, we've seen a V shape recovery as an industry and cognizant certainly has opt for a weak March April of last year, we snapped back immediately and that leads with a skill shortage. So it's an industry problem I think you've seen that in the earnings cycle to date.
Of course, I caution people to compare attrition rates between various competitors. We include bto and our calculation as current quarter annualized which was the worst.
Of all worlds at this moment in time versus some peers exclude bto and look at attrition on a rolling or in the last 12 months, which include some lower levels of attrition because of COVID-19.
But rod I think about our attrition, which went up 200 basis points sequentially against two parameters one is macro considerations.
The market is extremely competitive at this moment in time, there are supply demand imbalances across cloud across digital engineering across data.
I sense that the work from home environment has.
Given people.
Let's say less sense of community.
And I also see obviously, the buildout of captives, which tend to pressurize salaries.
And then on top of that macro backdrop, I think we have some cognizant considerations as we continued to transform the company, we're driving towards a culture of meritocracy and a performance culture, we're evolving more towards the global or sometimes the local workforce, which is in line with client expectations, but also in line with regulatory policy around the world and then some rigs.
<unk>, we're late to some of those elements and so we're dealing with some of the pain that others have dealt with previously I will say I'm, a 100% confident we're actively managing attrition as best we can.
I'm pleased to say that attrition peaked in March slowed in April and continues to slow in may, albeit early days in may.
We got a lot of work streams around employee engagement training job rotations.
We've taken the decision to invest more in targeted salary increases and promotions in shifting to quarterly promotion cycles for billable associates and we've added hundreds of recruiters and the last for months.
And we're making a record number of 28000 offers to new graduates in India, which was up from 17000 higher than 2020, and I think in 2018, we may have actually not even hired any gen. C graduated to cognizant. So we're doing the right thing to address attrition.
In the meantime, we are working to manage the salary inflationary elements of this as Jan pointed out teeny expectations in the second half for the year are lower than previously anticipated. So that will temper some of the downsides, but in the same vein. You know these are investments that I think will help stem attrition, which will get us more productive hours and our employees.
And in the same vein of course, we got other levers at our disposal to manage salary inflation be that.
Offshore or nearshore mix pyramid optimization delivery industrialization, including automation methodologies templates and the like.
Procurement leverage for subcontractors.
Got a new chief procurement officer coming on board soon and of course everything else, we're doing as we evolve the company.
Against the line of work that we actually sell and deliver as we shift from staff augmentation towards managed services and project based delivery transformation that brings different considerations as well. So we know what we need to do and we're on it.
As I said I think we will see sequential increases in attrition based on the resignations in the last few months because there was a two months notice period in India. So we we have a strong understanding as to what attrition will be in Q2, but that's been factored into our model and into our guidance and in the meantime, we've been hiring.
At record pace, given the extra recruiters, we put to work.
Good stuff. Thank you.
Our next question comes from the line of Ashwin <unk> with Citi. You May proceed with your question.
Thank you.
Hi, Brian Hi, Ann.
So a couple of things I guess.
I might have missed this but can you quantify the revenue growth you were not able to get solely because of the talent shortage and then when I think of head count growth in spite of the.
Hiring head.
Head count for that still at relatively low sequential levels is it a is it a question of these folks have not yet.
Joined or is that the net number because of the attrition in and could you separate it out what is digital head count growth.
Overall head count.
Yeah.
Well Heiko grew about 5000 people year over year, but ashwin that exclude subcontractors and contingent labor day have increased sequentially and year over year materially.
Not a number we disclose but we have turned to obviously external sources, both lateral hires on subcontractors and contingent labor as we've been working through the attrition switched.
Situation internally, nor do we breakout digital versus non digital head count I mean to be very clear you can have somebody working in a test with testing capabilities. They can work on what could be viewed as legacy projects, but in the same vein as part of.
And Nigel squad they can be working on something around something as familiar is a frequent flyer website, which some of the work we do around experience in software product engineering. There is not viewed as legacy certainly viewed as digital so it's very hard to classify work force between legacy and digital with regards to the opportunity costs look we're not.
To find out, but certainly it's material enough that <unk> talked about.
When I review countries and others.
Hundreds of basis points of growth in some cases that we could've had in other cases less.
It's been 18 point is forest threats quarter, we talked about attrition being a worry in our last quarter, because we could see resignation rates and we can see what's happening in the industry as people are doing their best to putting counter offers to stop resignation.
And I'm glad we anticipated instead appropriate guidance and we're doing the same this time around.
Could you could you comment also on the potential for greater use of technology to decouple revenue net head count growth.
Well, that's the Holy Grail of course in some regards but a lot depends on the way you're running your business and the businesses you are winning whether you're in a bto type business or a.
A tech services centric projects, we have a huge effort underway around automation not just in delivery, but also some very exciting IP that we have been developing but hopefully we'd be able to talk about in the next quarter or so.
That I think will completely set us apart in the industry. So it is a holy Grail of course, you've also got to think about the pyramid.
Talked earlier about adding 28000 offers for pressures into the bottom of the pyramid. This year. The bill rates of those will be very different than bill rates of onshore delivery. So it's very difficult.
In a sustained way to decouple revenue growth from headcount growth because for so many factors at play, but rest assured that the industrialization of delivery, including automation is top of mind for us.
Got it thank you.
Our next question comes from the line of.
Keith Bachman with BMO you May proceed with your question.
Yeah.
Hi, guys, Brian I wanted to direct this to you if I could.
To understand how you're thinking about growth.
<unk> given guidance for the year, but I wanted to see if you could put some context maybe you.
Even some philosophical views on longer term youre guiding to basically 3% to 4%.
Organic constant currency growth, maybe a little bit closer to before if we take out or normalize for the Facebook Cosmos.
How should investors be thinking about that growth potential.
Longer term in a if you could talk a little bit about how the pipeline growth.
It looks now.
What are some metrics that you can provide us.
Also in terms of be the capacity that you see for incremental M&A from here, whether it's the ability to but the financial resources <unk> the management resources to keep driving.
M&A and then finally see was hoping you could touch on financial it's still candidly serving as an anchor to your growth rate I'm not in a positive way, but the limiting your your consolidated growth.
So if you could just touch on how youre thinking about growth pipeline M&A.
M&A capacity and then financial thank you.
Yeah.
Okay. So M&A first of all I think let's go back to the capital framework, we set forth in recent quarters. We the plant we plan to deploy approximately 100% of Brian you were free cash flow to a balanced capital allocation program I will say these are guiding principles and we will continue to be opportunistic approximately.
50% towards M&A in areas wholly aligned to our strategic priorities and of course, if the remaining 50% towards dividends and share repurchases targeting a consistent dividend payout ratio in the range of.
Sorry, 25%.
That and the rest for repurchases. So M&A will continue to be a priority for us and as I said earlier, we announced three acquisitions in the first quarter and indeed signs an agreement to acquire ESG mobility.
It's not that it's not the M&A is something we wake up every morning, Peter we have to do is just it's an enabler for us to achieve our strategy.
No.
Strategy is built around accelerating digital which are our higher growth categories and our strategy has also built around globalizing. The company rose from a global delivery network, but also getting after exponential growth overseas.
And digital as well as our overseas opportunity I think puts us in a position.
To have ambitions.
Well in excess of the 3% to 4% organic growth for a piece that you mentioned, however, I will refrain from getting into long term financial statements here, but.
But I would be very very disappointed in the years ahead, we do not.
Significantly exceed those growth rates.
And I would say we have been doing what was needed in the last year to start replenishing, our backlogs to consistently drive a book to bill ratio in excess of 1.1.
Puts us in a position that organically.
Coupled with the accretive nature of the acquisitions. We've done we should have continued upward pressure on revenue on a go forward basis now that being said I will caution everybody. We're in somewhat of an unpredictable world. It is not a good time with the humanitarian crisis in India. So that's how I think about.
For organic possibilities as well as the fact that we have and M&A lever that is exposing us to a higher growth categories. In all of this of course is against the context, where for my perspective, we are substantially more operationally inclined and more sophisticated in terms of how we think about delivery and commercial level.
Levers going forward.
On financial services look it is critical we turnaround financial services I'm proud with the progress we've made in health care, which is catching up on financial services almost being.
Our single biggest industry sector with financial services is one third of our revenue and in dollar terms. It modestly grew but in constant currency terms a declined one 7%.
And keep it in that we ultimately have two groups we have.
Banking and financial services business that is more than half of the business and we ex insurance, which is kind of less than for the house and it's a tale of two cities in insurance North America was weaker than the international business with North American insurance is the vast majority of the insurance business, so that weakness persists in bank.
In financial services.
Actually North America was.
Modestly up but our international business was down.
Within banking and financial services, there are relatively consistent trends with what we've talked about previously a couple of markets declined retail banking grew modestly, but it was offset by declines in commercial banks and cards and payments.
If I think about things differently.
Global banks as we call them.
We have continued to in source and that business continues to decline for us offset somewhat by good momentum we have with some of the regional banks.
Now all of this comes back for what are we doing about it.
I would say we have a plan of attack. We had have have had healthy bookings throughout financial services, both banking and insurance in 2020, we've added extra commercial coverage, we've actually changed out a refreshed a significant amount of our commercial teams we've been embracing digital and we've had strong digital bookings.
And those areas in 2020.
And we've been working more with our partners who are very interested in our strength in health care and indeed financial services. So as you pointed out.
It is a.
A business that is under repair and we expect to see gradual recovery in 2021, we should see strong.
Stronger growth in Q2, obviously for easy compare reasons as well as COVID-19 has on the ransomware attack, but I'd like to think of the course of the year. We can get this thing shaped up to be in better shape than it is today.
Okay.
And any comments on pipeline Brian.
But pipeline and this is very healthy overall it's.
As healthy as I have seen it in pipeline candidly for financial services is also healthy so for my perspective, Keith we don't have a demand issue in an industry I'm actually quite bullish on the industry for 2020, and indeed for 2021.
Its based on client conversations and I speak with clients every day as well as obviously, we keep an eye on what the industry analysts are saying.
I think talent shortages in nutrition are of greater concern for the entire industry, but clients are making investments they are.
Decisive and indecision is the enemy of people like myself, so clients being decisive as goods.
Talking about more strategic partners, we are in the mix more than ever in that vendor consolidation. So I'm quite excited about that and fundamentally the things we see driving the pipeline.
A lot around business model innovation and customer experience technology modernization risk mitigation and efficiency initiatives and candidly one of the reasons I was so adamant and doubling down with the Hyperscale. There's two years ago is because these companies.
Don't think you should underestimate the sheer power and scale of Hyperscale companies.
They are investing massively volume commercial teams commercial terms of lending the companies like cognizant around industries massively accelerating cloud migrations and.
And if you believe in platform economics.
Which opens up the possibilities of micro services and a P is I think this is.
Is.
Going to be the future. So we stood up to.
Business groups business groups on the Hyperscale orders in the last few years and I think we're reaping the benefits of that net.
Many thanks, Brian.
Our next question comes from the line of.
Jason Kupferberg.
With Bank of America, you May proceed with your question.
Hey, guys. This is Kathy on for Jason So I mean, the spring timeframe as one enterprises typically make decisions on on ramping up and moving forward with for some of the discretionary projects can you just talk a little bit about what you're seeing on that side.
Husbands hesitancy or you know.
Are there any challenges.
In terms of meeting the men in that regard.
But it's very consistent with my last answer Kathy to be honest.
<unk> a robust environment.
Clients are being decisive discretionary projects are being funded I think we've all grown used to the new world.
And candidly, we were getting at bats, more often than than ever before.
Beyond Bill run in more in the innovation and transformation agenda. So I feel very good and optimistic about the macro demand picture.
As I've said earlier talent shortages in nutrition are a much bigger concern for me at this moment in time than macro demand.
Okay got it thanks.
Our next question comes from the line of.
Lisa Ellis with most of it Nathan you May proceed with your question.
Terrific. Thanks for taking my question. The first one just on M&A just to follow up there you know you're cognizant paid for M&A has increased quite a bit in the last few quarters can you just comment a bit on how you're building that muscle so that it.
It becomes more of a strategic differentiator for cognizant like what changes have you made to how youre doing sourcing or integration of these companies. Thank you.
Yeah, do you want to address that.
Yeah look at it.
The M&A activity had been healthy in the first quarter. So we spend approximately $300 million announced for acquisitions, but I wouldn't read too much to it as an accelerated pace I think we're executing against the plan and trying to spend and the framework for capital that would be.
Strategically want to allocate towards M&A and executing that the team has done really a fantastic job in.
Aligning our deal sourcing across industries and across the globe. So you see this for example, we've talked in the last quarter about a slight shift towards.
Geographic expansion and we have two deals this in Australia and deal and of course very close to my heart of German deal also a part.
Part of the transactions.
Transactions that we could announce and some of them closed.
So we're executing really in a classic manner that team is very focused partnering with our markets and with our service lines on identifying the strategic areas of growth that we want to do and it's been very diligent and creative of identifying acquisition opportunities. It has really worked really well and.
I think the natural spacing out for these things will will lead us to kind of execute against our allocated capital against that and all of this will be a bit lumpy in.
In and out but.
Distant way to do so.
The focus in the company is clearly on integration because of the synergies that these companies deliver are at the heart of the viability of all M&A strategy.
And we are pleased with the ability to generate synergies.
Our business plans are generally pretty close too.
The reality on the revenue synergies and as we now have a larger portfolio of companies that we have acquired we have increased or.
Focus quite naturally on integration and efficiencies so that the.
These companies can fit into the fabric of cognizant and benefit from the scale that we can bring to the table you see we have still dilution.
Acquisitions, putting pressure on our margin.
So you'll see us continuing working on driving integration and draping also some of the cost efficiencies that might be available to us in the future.
Terrific. Thank you and then just a quick follow up I know, Brian you mentioned that now you've had a one one or greater book to Bill for yeah.
Yeah, I think more than a year now under very sustained basis can you just kind of comment on how you're feeling about the backlog at this point your confidence level, whether it's improved and in kind of your visibility into the to the sales pipeline and sales forecasting. Thanks.
Yeah actually I should thank Yang for for this when he came in and did a tremendous job really decomposing down prior bookings and tracing them to follow the bread crumbs into revenue.
So at this moment in time, we have much better visibility into that than we had this time last year I really feel good about our bookings momentum to your point really since the last.
If you think about it throughout 2020, we had an exceptionally strong Q1, and then through the course of the year, we had strength with mid teens for the course of the year, but really in 2019. It starts you don't get bookings until you start building a pipeline. So we really put a lot of efforts in the second half of 2020 to pipeline build that started showing up in terms of bookings momentum.
In 'twenty 'twenty.
And then of course into 2021, we don't have to say easy compares now as we had last year.
That's why I wanted to really contextualize Q1 bookings growth of 5%.
I actually I'm delighted with that because our December was really outstanding. It was an excellent month for us in April as being the next couple of months. So the Q1 period as being sandwiched between that and it's really important to me that people think about bookings on a on a rolling four quarter basis, because you know something slipping from a Friday to a monday or vice versa.
Could take a deal from Q1 for Q2 or Q1 for Q4, so it's important to contextualize that.
So book to Bill is the right way to also think about it I think once you're north of one one times.
<unk> backlog of opportunity to go execute against them and hopefully etc revenue on from here. So we're confident.
In our numbers and we're also confident we will have a very strong Q.
Two bookings number on the back not just of excellent April results, but also let's face it the compare wasn't exactly stellar in.
This time last year for for many other reasons.
Thanks, Thanks, Timna, thanks for everything you're doing in India.
Thank you.
My last question comes from the line of zinc one.
With J P. Morgan you May proceed with your question.
Yes.
Okay. Thanks, so much I know you're at the bottom of the hour here I just wanted to get a clarification here on the on the margin side and just ask it at a high level. If just the cost of doing business is going up I mean, I see your gross margin in the first quarter was pretty good but I know you're moving to a lower than the margins. How you set for Lisa that some of the M&A integration.
All of us are going up I understand that but is the rest of it just just people and again, it's the cost of doing business overall just.
Maybe going higher than you had expected 90 days ago.
And thank you for the question I was wondering if it wouldn't come actually so I appreciate it because there's a lot of momentum and movement in our margins that I think is an important to put our our eyes on when you compare our margins overall operating margin.
We kind of roughly flat slightly improved year over year and on the gross margin side, you see the benefits of our fit for growth.
And you can see also the benefits of the lower tier knee that helped us to expand the gross margins.
Elevation helped a little bit and and also we had obviously a little bit help in the rupee at all helped on the on the margin side, but then we had on the SG&A side, you see an accelerated growth, but we are really laser focused on directing that SG&A growth.
Our strategic initiatives that we think will yield and we view them as investments will yield accelerating our revenue growth rates and you pointed out the two biggest items.
M&A is.
It's dilutive element in this initial years as well as our investments into sales and.
Account management and growth in essence, those are two two offsetting factors that we have seen in the past quarters, but also this quarter. When we know the outlook you're pointing out we are basically down ticking a margin guidance.
Tiny bit.
That is reflective of a balance that we're trying to strike here, reflecting what we anticipate could be some increase in our compensation cost due to the measures in order to.
And lower attrition and attract and retain our talent.
And we're planning to offset that partially with some change in assumptions I think the prices in India illustrates that maybe TNT, it's not coming back as fast as we had anticipated and we're also carefully and surgically monitoring all future SG&A growth to Tyler it so that would keep the overall margin equation.
Together for the full year.
But the second quarter will be kind of in line or similar to our first quarter margin expectation in particular since we're anticipating the SG&A moderation.
To accelerate basically in the third and fourth quarter, but some of the compensation measures. So it would be probably visible already in the second quarter.
Yeah.
Thank you for going through that and that was very clear yards. So maybe it's a quick follow up.
You Didnt mentioned contract execution and performance. So I'm, assuming things are going well there any update on contract execution and risk management has identified any changes.
Since last quarter on in the portfolio.
Yeah like I presume you are.
Refer to our management of.
Of Escalations deals etcetera, I think we havent had very usual quarter we.
Made progress on our implementation of improvements for deal reviews until acceptance on pricing as we rolled out those initiatives are gaining are gaining.
Gaining momentum and on the.
The delivery side I think the issues that we're hearing them Allison Brian mentioned it is obviously our ability to fulfill and to have talent available is a primary concern of our clients are but overall I would say it was a very solid quarter relative to execution.
Great. Thank you for the complete answers thanks.
Alright, I think with that we'll end today's call. Thank you all for the questions and we look forward to speaking with you next quarter.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your evening.
Okay.
Yeah.
Yeah.
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