Q2 2021 Cognizant Technology Solutions Corp Earnings Call
Ladies and gentlemen, and welcome to the cognizant technology solutions second quarter 2021earnings.
And this 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 the question at any time. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May Press Star 2 if you would.
Earnings comparable good question from the queue from participants using speaker equipment, and maybe 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 Mr. Tyler Scott Vice President of Investor Relations. Please go ahead, Sir you may begin.
Thank you operator, and good afternoon, everyone by now you should.
Like jumped a copy of the earnings release and Investor supplement for the company's second quarter 2021 results.
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 beyond Siekman Chief Financial Officer.
4 we.
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 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.
[noise] 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 like to turn the call over to Brian Humphries. Please go ahead Brian.
Thank you Tyler good afternoon, everyone.
Body against the challenging labor market backdrop, and the recent humanitarian crisis, and India, we executed well and the second quarter, allowing us to deliver significant upside to our revenue guidance.
Second quarter revenue of $4.6 billion represented growth of 15% year over year or 12% and constant currency.
And grateful.
Grateful to our teams across the world for their own flagging and dedication to consistently meeting our promises to clients.
Thanks to the professionalism of older Associates with no major disruption to client service delivery from the second wave of Covid and that Nick and India.
We continue to execute against our previously announced operations see 3.
Which includes our vaccination drive across 11 cities, where cognizant has operations in India.
To date, we've administered or reimburse over 160000 and vaccines to associates for their families independents.
I am pleased with the strength of key commercial metrics book.
King's growth.
Both accelerated to 12% year over year in the second quarter and our book to Bill ratio is now 1.2, and a trailing 12 month basis.
Qualified pipeline is significantly up and our win rates are also up year to date positioning us well for continued bookings momentum.
Digital revenue growth accelerated to 20% year over year.
And the quarter.
Moving to industry segments, we posted strong double digit year over year constant currency growth and communications media and technology products and resources and health care.
We've achieved a double digit CAGR over the past 4 years and communications media and technology and remain optimistic on.
And our growth prospects.
This industry is now home to some of our largest clients.
Within products and resources, we continued to post excellent growth and manufacturing logistics energy and utilities, meaning.
Meanwhile, both retail and consumer goods and travel and hospitality posted their fourth successive quarter of sequential.
2 increases and are now close to pre pandemic revenue levels.
Our health care business had a strong quarter with double digit year over year growth in both the life Sciences, and U S payer and provider businesses.
I'm delighted with our sustained momentum and life Sciences.
Which will allow us to cross the $2 billion.
And revenue revenue thresholds later this year.
As we strengthen our relationship with existing Biopharma and medical device companies.
Our strong client references and delivery excellence are positioning us well to expand it to new logos.
For example.
We partnered with Beatrice day.
Newly formed company results.
Annualized from the merger of Mylan, and Upjohn and legacy Division of Pfizer to support their integration readiness per day 1.
Now continuing our collaboration and post merger integration services.
We will continue to invest and support our clients digital needs and the life Sciences business.
Last week, we agreed to acquire.
And U S integration.
Privately owned Arlen base global industrial data and intelligence company that will enhance our smart manufacturing offerings and build upon our successful acquisition of Xenith technologies from 2019.
And earlier this month, we announced the strategic alliance with global Health.
<unk> technology leader Philips to develop and to end health solutions that will enable healthcare organizations to improve patient care and accelerated clinical trials.
Over the past 2 years, we focused significant effort on reinvigorating the U S payer and provider businesses.
These efforts have started.
T fruit during the second quarter, we expanded our existing partnerships with large payer clients and added new logos into provider market.
It trades at a product business is highly strategic to our health care business Paul.
And some weakness posted 2014 acquisition.
We spent considerable energy soliciting feedback.
Back and refreshing the product roadmap over the last 2 years.
We are now seeing growing momentum and the business and.
Annual growth rates and the trials that are product business doubled in 2020 over 2019 and.
And are on track to double again in 2021.
Following double digit revenue growth and the first half of the year.
Turning now to financial services, which grew 5% year over year and constant currency.
Both the banking and insurance businesses grew year over year and sequentially and.
And banking, which is most of the financial services business, we have sharpened our focus on the highest potential client relationships over the past 18 months.
We've refreshed now about half of our client facing teams, bringing in seasoned industry talent with an emphasis on executive engagement and selling and delivering business outcomes and collaboration with the financial services partner ecosystem.
While we are making progress and our client engagement strategy and I've seen sustained momentum and regional banks.
Banking results continued to be hindered by ongoing revenue erosion and large global banks as.
As such and while we expect full year financial services revenues to grow modestly.
The repositioning of the business continues.
Before discussing the macro demand environment I would like to acknowledge the progress we've made and our.
Bto business, which we call digital business operations.
2 years ago, we made the decision to exit certain non strategic elements of the content moderation business that had been a meaningful contributor to growth.
And this decision impacted the growth trajectory of D B O and required us to reposition the business.
2 years on we've now successfully completed the exit of the content moderation business and as of the third quarter revenue compares will be like for like.
And I'm pleased with the revised strategic direction of digital business operations, which focuses on automation analytics and consulting as well as platform based and core.
Business process operations.
Year to date, we've seen double digit revenue growth in digital business operations.
And we expect to sustain this growth and the coming years.
Driven by strong results in modern V. P O segments like digital natives and intelligent process automation.
And by our leadership position.
Pass within the healthcare segment.
A recent example of our client momentum is John Hopkins Health care.
And we turned to us to transition their Medicaid and commercial lines of business from legacy platforms and operations to our leading <unk> solution.
We'll be providing a modern and scalable.
And <unk> cloud based platform to enable John Hopkins health care to be a more robust flexible organization that can deliver better more affordable patient outcomes.
Let's turn now to macro demand, which is particularly robust as clients modernize their legacy environments embrace the cloud and invest in innovation.
Innovation.
We continue to believe that the next phase of digital is about transforming processes to become agile intelligent and automated and always with an eye on customer experience.
Hyper personalization is fueling significant demand and analytics AI and ml.
Given strong demand and our bullish outlook.
Caleb industry, we are committed to meaningfully scaling our head counts.
Over the coming quarters.
However, this macro demand backdrop has also created a demand and supply imbalance and key skills and has meaningfully increased industry attrition.
As we noted in last quarter's remarks, we expected attrition to go up sequentially.
In Q2 and it did.
Second quarter voluntary attrition reached 29% on an annualized basis or 18% and a trailing 12 month basis.
As a reminder, our attrition metric captures the entire company, including trainees and corporate <unk>.
Both it services and B P O.
And against this backdrop, we continued to take a series of actions to reduce attrition include.
Including compensation adjustments job rotations, reskilling and promotions and a host of associate engagement activities.
Fortunately, we meaningfully increased our recruiting capacity over the last 6 months as we anticipated a spike in attrition.
Following the V shape demand recovery and the second half of 2020.
Our human resources team have done a remarkable job, helping us mitigate the impact of elevated attrition through comprehensive hiring on boarding and skilling programs.
In fact, we now expect to hire approximately 100000 laterals and 2020.
And to try and close to 100000 associates and.
In addition, we expect to onboard approximately 30000, new graduates in 2021 and make 45000 and offers to new graduates in India for 2020.2 onboarding.
Over recent years, we've been methodically shifting our revenue.
Revenue mix to digital which now accounts for more than 44% of our revenue.
Since 2019, we've invested more than $2 billion, and mergers and acquisitions to accelerate our digital capabilities.
While the impact of recent acquisitions has reduced Q2 company margins, given diligence and integration costs.
And acquired company and margin dilution. It has nonetheless been the right thing to do.
These investments and change the growth profile and cognizant by shifting our business to higher growth categories, and reducing our exposure to non digital categories that have declined in recent years.
Today I wanted to spend a moment addressing some.
Progress against our targeted digital battlegrounds, including Iot digital engineering and cloud.
Our Iot business has scaled rapidly and revenues are now expected to exceed $600 million and 2021 almost twice the size and what it was in 2019.
Cognizant was recently ranked number 1 and the managed Iot services category and <unk> 2021 Iot services evaluation for both the U S and Europe.
Our digital engineering business is now at a $1.2 billion annual run rate growing 30%.
Making it 1 of the largest.
Digital engineering businesses in the World.
And June cognizant was named a leader and Everest group's peak matrix for software product Engineering services 2021reported.
We've also made tremendous headway and our cloud business.
7 of our acquisitions over the past 18 months have been cloud related.
As you May know Gardner and its magic quadrant for public cloud infrastructure managed services providers elevated cognizant from a niche provider player in 2018, 2 challenger in 2019, and 2 liter and 2020.
We now have 3 cloud focused business groups 1 from.
Microsoft and other for AWS and a third most recently for Google each supported by specialized class experts and solution architects.
For example, we've been recently engaged with Microsoft's industry clouds and areas like financial services healthcare and retail.
And the past 2 years, thanks to our ongoing market momentum.
And the acquisitions of new signature casino and 10th magnitude and the formation of from Microsoft Business Group, we have meaningfully changed our ranking to become 1 of Microsoft's leading global system integrator partners.
Our commitment to the partnership and focus on technical intensity, it's demonstrated by.
100 per cent year over year growth.
And Microsoft Cloud certifications.
Our success and extending our portfolio not only made us more competitive.
But has encouraged more clients to engage us to execute their transformation agendas.
This positions us to take full advantage of our client base.
By enabling us to upsell and cross sell and our existing accounts and enables us to get new logos by leading with digital.
For example, Gilead Sciences selected us to lead a body of work related to it and business transformation as well as development of and enhanced security and compliance posture.
We will utilize our deep.
Deep life science industry knowledge augmented by recent acquisitions like Zenith technologies and collaborative solutions.
Along with our proprietary legacy modernization framework and robust automation capabilities to support this work.
Our aim is to accelerate the company's technology transformation and further enhance its digital.
Little capabilities.
And another example, given our advanced capabilities and digital automotive engineering, R&D, and smart and connected mobility Qualcomm technologies, 1 of the world's foremost semiconductor and connectivity solutions companies.
Turn to us to build a reliable cloud agnostic connected vehicle management solution.
The aim of this integrated platform is to connect vehicular onboard applications.
Managed car to cloud operations and work across nearly every OEM vehicle platform and its cloud infrastructure.
Lastly, <unk>.
Building exceptional digital experiences is of increasing importance to client.
And so sometimes struggled to connect the dots between the experience itself.
And the underlying business functions.
With our extended portfolio, we're now able to orchestrate software data platforms and programs to transform high value interactions into personalized experiences that drive business results.
Example of this is how we're now partnering with N B C to re imagine their customer experience.
Creating direct to consumer commerce strategies, driving attendance to their theme parks and supporting their marquee event to 2021 summer Olympic games.
In closing I'd been and to see.
Great and now for more than 2 years, and I see a new cognizant and taking shape or.
And our solution portfolio is stronger than at any time and our history.
This has changed the way clients and partners perceive us and helps us deliver differentiated business outcomes.
We are bullish and the industry and our prospects within it.
We are well positioned to capitalize.
And digital transformation market trends, which are accelerating and we have an enormous opportunity and our international markets.
Well, we are and 1 of the hottest job markets and many years and expect elevated attrition to remain a factor across the industry and the coming quarters, our recruitment and skilling programs as well as targeted.
Oh roles to offset margin headwinds stemming from the industry's talent shortage provide us confidence and our outlook for the year.
With that I'll turn the call over to Yan, who will cover the details of the quarter and our financial outlook before we take your questions.
With that over to you yet.
Thank you Brian and.
Good afternoon, everyone.
Our Q2 revenue was $4.6 billion, representing growth of approximately 15% or 12% and constant currency.
Revenue was $125 million above the high end of our guidance range.
And by continued demand for digital which grew 20.
Per cent and represented 44 per cent of total revenues.
Year over year revenue growth also includes approximately 90 basis points of growth from our recent acquisitions and benefited from an easier compare to Q2.2020.
Our revenues were impacted and the early.
The months of the pandemic and by the Ransomware attack and April 2020.
Moving on to segment results.
And we're all growth rates are provided with a year over year and constant currency.
Financial services revenue increased approximately 5% in line with our expectations.
We continue to make progress as we reposition this business and.
The strong improvement and the pipeline.
We still expect the pace of recovery through the reminder of the year.
Health care revenue increased approximately 13% again, driven by a strong performance and both our health care payer and life.
Cause businesses.
Revenue growth within our healthcare business was primarily organic.
And we continue to see strong demand for our integrated software solutions, and improving fundamentals and I'll provide a business.
As Brian mentioned, we remain very pleased with the growth and our life Sciences.
Signs.
Products and resources revenue increased approximately 18%.
Given by the fifth consecutive quarter of double digit growth and manufacturing logistics energy and utilities.
Segment growth included approximately 600 basis points from inorganic revenue.
And as Brian mentioned, we also experienced growth and retail consumer goods and travel and hospitality driven in part by the lapping of the pre pandemic compares there are early signs of stabilization within these sectors most impacted by the pandemic, but we continue to monitor closely.
Communications.
Media and technology and revenue grew 18% of which approximately half of the growth was attributable to recent acquisitions.
This growth was partially offset by a negative 190 basis points impact from our exit of certain portions to our content and services business.
Overall.
We are very pleased with the growth of our core portfolio.
Now moving onto margins and Q2, our GAAP and adjusted operating margin were both 15, 2% on a year over year basis, adjusted operating margin improved approximately 110 basis points, primarily reflecting savings from our.
Cost initiatives from 2020, and the impact from the pandemic and ransomware attack and Q2.2020.
This year over year benefit was offset in part by SG&A investments, including those intended to drive and support organic revenue growth as well as the negative impact on margin.
And our recently completed acquisitions and costs related to the monetization of our I T core and security infrastructure.
In addition, we anticipate continued cost pressure from our elevated attrition, which includes higher recruiting cost.
Lateral higher wages and subcontractor costs.
Our GAAP tax rate in the quarter was 26, 5% and our adjusted tax rate was 25, 4% in line with our expectations.
GAAP EPS was <unk> 97, and adjusted diluted EPS was <unk> 99 cents.
Now turning to the balance sheet, we ended the quarter with cash and short term investments of $1.9 billion or $1.2 billion net of debt.
Free cash flow and Q2 was $466 million. This included a payment from the settlement with 2 of the 3 customers that.
Part of the proposed customer engagement exit, we announced and our fourth quarter 2020 earnings.
Excluding this 1 time payment free cash flow would have been approximately 100% of net income.
Payments made this quarter were in line with our prior expectations.
And resulted in no impact to our earnings and Q2.
Overall, we were pleased with the outcome of the settlement, which includes a continued commercial relationship with both customers.
Negotiations with a third clients are ongoing and constructive.
DSO of 71 days increased by 1 day sequentially.
<unk> and has improved from 77 days and the prior year period.
During the quarter, we repurchased 4 million shares for $296 million at a weighted average price of approximately $74 per share.
At the end of June we had 2 points.
<unk>.
Meaning under our share repurchase authorization.
We also spend cash of approximately $350 million on acquisitions.
And a $127 million.
Our regular quarterly dividend.
Turning to guidance for.
For Q3, we expect revenue.
We built and the range of $4.6 9 to 4.7 and $4 billion representing year over year growth of 10, 6% to 11, 6% or 10% to 11% and constant currency.
Our guidance assumes currency will have a favorable 60 basis points impact.
<unk> and inorganic contribution of approximately 3 and and 20 basis points.
For the full year, we now expect revenue of $18.4 to $18.5 billion, representing 10, 2 to 10, and 11, 2% growth or 9% to 10% and.
New and currency.
This compares to our prior guidance of 7% to 9% growth as reported or 5.5% to 7.5% and constant currency.
Our outlook assumes currency will have a favorable 120 basis points impact and includes approximately 3 and a 20 basis points.
And constant infusion from inorganic revenue.
Our outlook assumes continued momentum across health care, CMT and products and resources, while we continue to expect that pace of recovery and financial services over the next couple of quarters.
Moving onto margins we.
<unk> full year adjusted operating margin to be approximately 15, 4% the midpoint of our prior guidance of 15, 2 to 15, 7% as.
And as I mentioned earlier elevated attrition is leading to increased costs and certain areas. We are also continuing to fund.
We experiment and our people, including compensation and quarterly promotions and retention and training. We expect these costs will weigh on our results for the next several quarters as management remains keenly focused on addressing our high attrition levels through the compressive through a comprehensive set of initiatives.
We continue.
And Vtech SG&A growth for the remainder of the year driven in part by the impact from our M&A activity.
However, we are slowing the pace of growth and some areas not directly related to our strategic initiatives to mitigate some of this cost pressure.
This leads to our full.
Q2, adjusted EPS guidance, which is $4 to $4.06 compared to $3.90 to $4 and <unk> previously.
Our full year outlook assumes interest income of $25 million to $30 million compared to 22.30.
Paul.
Previously.
Our outlook assumes average shares outstanding of approximately $528 million compared to $530 million previously and a tax rate of 25% to 26%, which is unchanged from our prior outlook.
Finally, we continue to expect free cash.
30 mill will represent approximately 100% of net income for the full year, we remain committed to our balanced capital deployment strategy and returning at least 50 per cent of fresh and free cash flow to shareholders through dividends and share repurchases.
Before opening the call for questions.
Cash flow and to let you know that we are planning to hold and investor briefing and the fall during which Brian and I will provide a review of our strategy and an update on our progress over the last 2 years. We will also provide our multiyear financial framework. Please keep an eye out and save the date.
And I'm wanting weeks.
With that we will open the call for your questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone keypad.
Information somewhere and you kept your line is another question queue.
You May press Star 2 if you would like Joe will be a question from the queue.
Disciplined using speaker equipment, and maybe not the same thing to pick up your handset before pressing the psyche and Dan.
And just a time, we ask that you limit yourself to 1 question 1 moment, while we poll for questions.
Our first question comes from the line.
And then Lisa Ellis with Moffett Nathanson and you May proceed with your question.
Good afternoon, and thanks, Thanks for taking my questions and good stuff here a follow up question as I'm sure, you'll get plenty of them related to be attrition and and head count dynamics.
1 maybe Jan can you just elaborate.
Barry on what gives you confidence and your ability to.
Expand margins and the second half of the year, why you're still sort of battling through this attrition environment look.
Like so for example are you given the high demand environment are you able to take price et cetera, just a little bit more color there and then I'll just ask.
And second 1 kind of related is just around employee health and I'm, just wondering like how employee satisfaction and and staring at cognizant I know that's something that you watch pretty closely so what's your confidence level and being able to bring attrition down over the next couple of quarters. Thank you.
Yeah, Thank you Lisa and somehow I anticipated.
Stated the question around.
Around our margin guidance being of interest.
[laughter] complex situation Lisa and.
And that we have actually quite a few dynamics going on that impact the margin dynamic for the second half and so you rightly.
Rajeev <unk>.
<unk> debt for the second half we are expecting really on average our margin development around 15.
<unk>, 15.6% to meet our mid point of our guidance and as you're also aware, we have a little bit of a quarterly dynamic towards the year and so.
Margins in the third quarter, we're thinking we're going to be slightly higher than towards the fourth quarter and due to typical end of season dynamics, including the merit increase that will fully filter in AR and the fourth quarter when we administer.
Administer and implement the merit of things so that's kind of from the general and margin.
Dynamic.
What we have seen and I want to point out a few other elements.
Of the margin dynamic.
We had seen in this quarter, a fairly healthy a margin dynamic on the gross margin side, and we reported a shift and our digital.
And the mix, which comes actually with higher gross margin than our traditional business, which is part of the strategic rationale of why we all of course engaging and the transformation of the business and and that margin effect was accelerated actually be shifted share, but we also improve that relative.
Revenue margin and our second quarter. So we anticipate to continue to have some benefit from that mix shift also and the second half and.
And then of course would see pressure from the compensation.
<unk> are coming into our P&L.
And.
Relative setting that by controlling the growth of certain SG&A components.
That has been growing.
Kind of lively I would say to and bring that more to a and <unk>.
And controlled or flattish outcome and towards the end of the year and so.
So it's a number of factors that we have to keenly execute in order to keep of course, the overall structure of our P&L and place, but that's the principal dynamic that we are following and I hand over the employee engagement and question to Brian.
Actually I'm highly safe.
Look it's very much top of mind and you can imagine.
We are voluntary attrition and the quarter was 29, but on a trailing 12 month basis, which was more heavy industry tends to look at it it was 18 and.
And we've seen primarily the attrition and the more junior levels of the organization are mid levels and India, but it's also a global phenomenon and it's really 1 of the hottest markets. We've seen our team has seen over the last 10 plus years. So.
Oh dealing with it as it happens in the last month, we had the results of our annual engagement survey and we're actually very pleased with our results there at or above in many cases industry benchmarks and we.
And I'm pleased to see the delivery organizations engagement scores are actually above the company average.
And they're very much as a total company.
And in the same range as where we've been from 2016 and beyond last year, we actually had a particularly strong year as many companies day because of the dependent make when people were pleased when we had secured jobs and whatnot.
So from 1 from 1 perspective, I feel very very good about it but and the same day and of course I don't feel very good about the attrition and.
And so that's top of mind and it's got a lot of management focus and.
Pleased that we executed well and the quarter, we exceeded our revenue guidance. Despite elevated attrition, but my great hope is over time, we can reduce attrition and yet continue to hire at the pace. We have been hiring up which is something we're very pleased with the throughput of our.
Equipment team is really.
<unk> been terrific. So what are we doing to reduce attrition and to continue to drive employee engagement is the next obvious question.
Well look.
Annual Merit based increases have been announced here and in the last few weeks there effective October 1st that's on top of a whole host of AD hoc measures, we play through and of course.
With last year out of cycle increases promotion and retention dollars.
We've announced a shift in the last few months to quarterly promotion cycles per billable resources, we've really fast tracked job rotations and reskilling initiatives across the company and a whole.
And so things were cognizant Academy, which is our training capabilities.
Italy, as well as higher education programs for select employees as well and we've put an enormous effort behind our employee value proposition celebrating delivery success big wins et cetera, So more work to be done, but I'm confident we're doing the right things and as I said, well I'm pleased we executed through it this quarter.
But the reality is 15% revenue growth. This quarter also gives the organization a little bit of energy that locate growths coming back and withdraws comes good things in terms of career path opportunities rotations and promotions and whatnot. So I'm sure. Today's top line story will help brought our employees feel better and.
And we'll keep you and all the other things we're doing.
The growth of T. P R revenue and furnish and thank them.
Our next question comes from the line of Ashwin <unk> with Citi.
Thank you you May proceed with your question.
The reaction you May proceed with your question.
Hi.
And even now.
Yeah, Yeah yeah.
Good quarter guys I wanted to follow up also on attrition.
Could you talk a little bit more about what do you expect from TQ for competition and what's been.
And the client feedback and the pace of Densification.
So look from my perspective, the first thing I would think about our associates and our clients and you can't be client centric unless your associate centric.
And so as we start thinking about this of course it gets into how we engage our clients and how do we think about the demand signals that will help.
US facilitate the right resources at the right time communication is important at a time like this setting appropriate expectations regarding resource availability timelines and the prioritization ashwin as you can imagine getting the right resources and our most strategic accounts is very much top of mind and part of our execution rigor, we do now and a day and day out basis.
This.
Regrettably, we just despite growing 15% and a quarter, where yet unable to meet the full expectations over of our own potential and what is out there and the market. So we're working through that as best we can and do my best as I've said to minimize attrition whilst at the same time to maximize employee engagement and to maximize.
And on boarding and as I said in my remarks, we'll bring on about 100000 lateral hires this year alone. We'll train about 100000 people and we will onboard about 30000 and pressures and we make offers to 45000 and pressures regardless of our attrition rate. We will still go through with those numbers because there is enough market demand for us.
To.
To get after that opportunity and that's why we're quite excited about I think the portfolio is more compelling than ever before and we've made huge progress and in the last year to get after that market opportunity. So we're feeling pretty good about that.
And but you know, it's a hot market and I think you've heard that through the earnings cycle. So we're all dealing with the same problem.
Our next question comes from the line of Brian Bergan with Cowen You May proceed with your question.
Hi, good afternoon, and thank you.
And just as the upfront here so as it relates to bookings and growing commercial momentum you called out can you comment on how well distributed the bookings contribution has been.
And then across the sales force so how much of your sales force would you say, it and optimize and converting versus those that are still building pipeline.
And we will convert over the balance of this year into next and then just to clarify on attrition have you continued to see the trend of declining resignations month to month.
Well deal with that first look we look at the net resignations.
And it went through and actually at the end of last quarter, we thought we'd hit ER and apex and then it went up modestly, but it's what we're expecting and it's inherent in our guidance elevated attrition to remain in the coming quarter and we'll see what happens thereafter, it's it's a very.
As you can imagine a hot market out there and so it's very difficult to call I think we're doing the right things to mitigate that but rest assured that day.
These levels of attrition and slightly beyond their inner guidance.
With regards to bookings look and feel really good about our bookings to be very honest, it's important to look at bookings not just on a weekly.
Or a quarterly basis, but really on a trailing 12 month basis and now we have rounded.
That 1 year period. So we have a good book to bill ratio over the last 12 months of 1.2 times, which I think is very very healthy we look at it in terms of geographic and we look at it and in terms of business mix, we look at it and in terms of new and expansion versus renewals.
And it's pretty solid across the board and the pipeline is solid across the board as well so I feel good about the market opportunity candidly I don't think demand is the problem for this industry and I think it's a great time to be and services. It's more of a supply constraints at this moment in time with regard to those sales our commercial teams we brought on board.
And what they were ramping I don't think we're at full productivity at this stage, we got a lot of exercises underway to make sure we get a true gearing ratios.
But in the same vein and I feel as though we got a client facing team that is better able to walk the corridors, if and when we get back from Covid and virtual.
And for now and to cross sell the entire portfolio and if you think about our installed base, it's a huge asset for us.
And the opportunity is real about 4 of 10 or 40% of our clients. We only sell 1 of our practices into those and we have 10 plus practices. So think.
Think about cross sell is a huge opportunity for us and of course, the emanate and we have conducted and the last 2 years, which is 100 per cent of lines were digital strategy enables that cross sell more than ever before and indeed cross sell is core to the business case of those acquisitions. So.
So we're pretty excited about what we can do there both in terms of our installed base which of course.
This is a big priority force.
But we also have opportunity through this extended portfolio to go after new logos and the Qualcomm example, I cited in my script is a good example of that where we're leading with digital and accordingly, we will try and cross sell day non digital business as well.
Alright, thank you.
Our next question comes from the mind of rock.
Rod.
We're deep dive equity research you May proceed with your question.
Okay. Thank you.
Hey, Brian So when you consider your pipeline and your inorganic growth plan going forward.
Are you in a position to further substantially increase your digital mix over the next year.
I'd love any color to help dimension the remaining mix shift potential over the next year or so that that would be really helpful. Thanks.
Yeah, Hey, Rob and so you know as you know.
Very well.
1 of our biggest priorities when I joined the company was to accelerate our digital mix. It was 28 per cent or less than 30 per cent certainly at the end of 2018 for the year.
And it's been very much part and parcel and what we're setting out to achieve.
It's 44 per cent of our mix today candidly a numerator denominator. It comes into play we actually had very.
Good success, this quarter and driving growth as well and our non digital business, which has declined in 2019 and 2020 so candidly.
Candidly that has slowed the digital mix ramping further share growth of non digital this quarter, but overall the the digital business will continue to grow I'd like to think as we.
Get to the latter part of the share would be up closer to 50% and and it will start becoming a bigger portion of our overall business over time.
And that's important for us because a it helps us be exposed to higher growth categories, but be it increases our intimacy with a broader C suite and our installed base of accounts.
And and that enables us to.
So beyond the CTO organization into the CMO and to the line of service leader et cetera, and.
All of the accounts that we have added and the first half of this year.
First as the first half of last year. The vast majority of the bookings is actually and what we would term digital so rod that mixed shift to digital will continue.
<unk>.
And I'm pretty optimistic that we'll continue to see a nice ramp there that is not just good for revenue or client intimacy is actually also very good for our margin rate as a company as well so we feel as though we're doing the right things our M&A strategy is 100% behind this and it puts us in a position to actually get after our installed.
And to sell to cross selling upsell and actually get new logos and and really become a challenger in the digital arena.
Maybe I'm wrong.
And my add 1 comment on the dynamic of the digital organic revenue growth.
We are very carefully monitor the organic growth.
And that our M&A is generating within itself, but also of course as a cross sell into our client base and we have seen a very robust organic growth.
And from that portfolio that is kind of and in most cases meeting our business case assumptions. So we're very pleased that actually the shift is not.
Basi of M&A, it's not from the adding the incremental acquired revenues to the portfolio, but that portfolio also.
Celebrating and growing faster than the average and its growth trajectory and wrote them into 2 you explicitly asked around the pipeline look the the digital pipeline has grown at multiples.
Not only 1.
Of the non digital pipeline and actually our win rates and digital are higher than our win rates and non digital so theres a lot of good leading indicators.
Great and John you kind of read my mind my follow up was related to the acquisitions and <unk>.
Looking for an update on your progress.
Being able to cross sell the newly acquired offerings into your existing accounts, that's a muscle that tends to take <unk>.
<unk> to develop so maybe just give us or give us some thinking on where you are and that journey are you are you well into that journey or is there still some some juice left on the cross selling.
<unk> and the existing accounts with these newly acquired capabilities that you have.
I would say we're still in the early and mid part of our journey. We we've made really good outcomes happen for acquisitions that Ive examples where we haven't even closed the acquisition and we started.
And do you think about cross selling the products already prior to the close so there's plenty of excitement and our sales force to bring these solutions to our clients and.
And as.
As we now focus to fully integrate this acquired portfolio of digital capabilities.
Into the fold.
Of cognizant and many other benefits of pipeline management book become easier the learning for the acquired companies will grow so I'm optimistic that we will continue to reap really good benefits.
Out of the M&A regarding to the organic growth and Theyre generally.
Generating which is what I'm really keenly focused on.
Great. Thank you guys.
Our next question comes from the line of Keith Bachman with BMO capital markets. You May proceed with your question.
Hi, This is Brian Clark on for Keith. Thank you for taking my question.
I would like to ask if there was any way to quantify either the impact or size of the planned wage increases for employees and then secondly, given ongoing employee and market pressure on margin throughout the remainder of the year.
How do you view future M&A strategy compared to the past 12.18 months is the pace of M&A sustainable what are your views on that going forward. Thank you.
Yeah, Yeah. Thank you for your question and we don't disclose really are the elements of our competition.
And moves externally so I can help you with that.
It is clearly reflecting the market dynamics, we are oral.
<unk> oriented our compensation and obviously on market data and reflect all compensation moves really reflect and assessment about.
And keeping Congress and competitive.
And so your and recruiter in the marketplace and we are very pleased actually with that and the ability to attract.
Associates into the cognizant family is great and we have been ranked and a variety of applications is really employer of choice in particular and the critical.
Market of India for Us and so it.
And Florida through.
Country specific and market oriented based on wage developments in those countries.
On the M&A program and we just.
<unk> talked about I think at the end of last year.
About a capital allocation framework for the company, which about.
And dedicated 50% of our cash flow to M&A.
A reminder, about a 25% are used to offset the dilution of our equity compensation and 25 per cent for dividends and we use this framework not to not to the 2.
Precision, but as and really good framework for us to execute our strategy. So going forward I'm anticipating to spend within the range of that capital allocation framework to support the execution of our strategy, we remain focused and that M&A program on our strategic.
<unk> and focus on our digital battlegrounds.
<unk> seen and some of the acquisitions and the beginning of this year that we may have and.
With fewer transactions and hard to describe the trend, but there is a keen focus on executing and using this strategy also to help the globalization of cognizant and so.
We have seen with Serbia and earlier in the year and acquisition and the Australia and marketplace, We acquired ESG mobility, and the Fatherland My home and home country, which I was very happy about really leading provider on on the internet of things Iot.
And with key leadership positions and the automotive sector.
Sector. So there is more geographic diversion still need it for us and so we'll adapt as we make progress on the positioning of our practices and our industry groups.
And the needs of the strategy and so this is a long answer for you, but yes, we anticipate to continue.
Acquisition driven strategy.
Execution.
Our next question comes from the line of Tien Tsin Huang with Jpmorgan. You May proceed with your question.
Okay. Thanks, so much.
Is it up and ask about Charles there, though I think I heard that you're repositioning is.
And it's driving better growth double digits.
Little surprised by that and I am curious can you elaborate on that what are you. What are you doing differently and could this kind of change.
The extended or apply it to other areas as well.
So our product business and health care trends and is.
Something that we inherited through to try and set of acquisition at the end of 2.
2014 to be very honest I think.
We didn't execute the integration of that optimally and and the last few years, we've really tried to get after that opportunity because I think it's a it's a CRO crown jewels.
I felt we could do a better job on and so starting with that and we got after the.
And our roadmap that we had tried to understand and solicit customer feedback and make sure we had something that and the odds of clients was in line with their needs that the user interface and the COVID-19 was appropriate and fit for purpose and in the meantime, we had some competitors that have emerged that frankly I didn't think at the right to beat us given.
And our heritage in this space. Fortunately now we've had 3 quarters in a row of double digit growth in the south in the products business and as I said, our growth and 2020 versus 2019 doubled and we're on track to double growth rate year over year again, and we're getting some fantastic logos and and this is a great business and itself itself.
Software centric higher margins, but of course, the stickiness of that enables us to pull through.
Rich services suite thereafter, so the team has done a fantastic job I viewed as highly strategic for us and.
And we're 100% committed to that business and you'll see a scale of that overtime.
Okay, no that's encouraging to hear.
And I'll.
If you don't mind just on the on the supply.
Supply side, just with more lateral hires.
Can we just infer that's indicative of more.
And you don't work so you need to go out there and grab some of the lateral hires or is it just purely out of necessity given what you said about demand and the timing of university of hiring or from maybe more work needs to be.
Good training side to.
And to meet the type of work that needs to be done I'm trying to.
And what structural versus.
Hello.
Do you think about the lateral hires it's really and with a view to doing 2 things 1 is addressing the attrition that we have and also getting after the market potential that we see.
And so you go back to where as attrition.
Sure and greatest it's at the junior and that holds up the pyramid, particularly in India Ah.
But it's also and hot skills and you know if you think about hot skills and think about hyperscale or thinking about leading SaaS players thinking about digital engineering full stack engineers or across data AI and ml and so you know you find yourself and a situational.
And I'm sure you've got a demand and supply are in balance.
And that scenario as well, where we're also going after lateral skills and trying to get to me and as quickly as we can whilst also trying to train and promote our internal employees.
As well so it's it's a race for talent and and Red Hot market and.
And I anticipate.
Given our bullish I have and the market and my sense is we'd have a resilient and services demand and picture for the foreseeable future I anticipate elevated attrition across the industry.
Yeah.
Makes sense. Thank you Brian.
Our next question comes from the line of James Friedman with Sig You May proceed with your question.
And where do you guys. This is Michael on for Jamie and Thanks for taking my question. So my first 1 can you guys talk a little bit about your updated perspective on 5 G and this quarter I'm with CMT growing so well as far as the offered any tailwind there.
But from my perspective <unk>.
And when it's very early days, both in terms of Hearts and handset proliferation and indeed, the use cases that probably given the need for latency security and other considerations will be more b to b or b to b to b rather than be to see I don't think b to C is a huge inflection point for the telco industry, albeit many people.
He is still about at to justify Capex outlays.
With regards to our CMT industry vertical and it is not being a major driver of the business to date, we're very intrigued around autonomous driving as Jan said, we acquired.
And ESG mobility in Germany, and we got a big emphasis on the automotive vertical and indeed, and the CMT vertical but.
Pfizer has not been a net muscle factor to date, I think Iot will be unlocked by the benefits of <unk> and different cellular technologies, but it's it's premature at this stage.
Our next question comes from the line of James Fawcett with Morgan Stanley You May proceed with your rush.
Great. Thanks.
And we'll tell them I wanted to ask on on pricing I mean, you touched a bit on that earlier, but how has pricing trended and a quarter, particularly given some of the pure commentary around pricing stability and I guess, what we're really trying to get at is are you able to pass on some of the wage cost and and how are clients responding to that.
Yeah, we have a we have observed a pricing trends by segment and I implied and my comments that we have been expanding our gross margins on the digital business and we have seen and the ability to to the tight.
Labor market, allowing us.
To get it.
Good pricing for our services, but we see also continued pricing pressure and the more traditional services that we have from talking about in past quarters.
And where clients.
And that's seeking additional cost benefit and and that pricing pressure and those more traditional type of service.
And Havent changed at this point and time.
Thanks for that and then just on digital quickly, we're big believers and your acquisition strategy and I. Appreciate the early color around digital battle battlegrounds, but.
Are there any digital battle Battlegrounds, where you're currently under index relative to the demand that you're seeing that.
If you take a better advantage of.
Hey, James It's Brian I'll address that look day digital arena more holistically for us It goes well beyond the 4 digital battlegrounds that I've focused on 1 and I'll be joined which were notably around cloud around digital engineering around the applications and.
Iot.
And data and analytics shredder.
If you think about other areas that are not included in those so called battleground and things like digital experience continues.
Continued to grow rapidly for us and I'm very optimistic that that becomes a core parts.
All of the sale and the whole user experience I should think about digital workflows.
And then its broad based and digital engineering and something we prioritize it's growing rapidly as I said, it's 1 of our biggest.
Growth.
Potential units and the years ahead, and something that has scaled meaningfully and the last 2 years and we're not 1 of the largest digital engineering companies and the world, we've complemented or capabilities.
And with the acquisitions of selfish and in 2018, and and a more recent years magennis contain roof.
And I just feel very good about our potential there, but more broadly and theres just a lot of demand.
In this arena and I just feel good about our potential because we're scaling its still a smaller portion of our mix the more we scale.
Higher than company average CAGR and as young as implying it's good for our margin rate as well. So we're full speed ahead after and a digital opportunity.
Thanks for that color, Brian and John.
Yeah.
Alright, and I think with that we'll wrap it up and thank you everybody for joining and I look forward to speaking with everyone next quarter.
Thank you. This concludes today's cognizant technology solutions second quarter 2021 earnings Conference call. You may disconnect. Your lines at this time. Thank you for your participation and during the rest of your day.
Okay.
[music].