Q4 2021 Cognizant Technology Solutions Corp Earnings Call
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Ladies and gentlemen, and welcome to the cognizant technology solutions fourth quarter 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 on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary for you to pick up your handset before pressing the star keys. Thank you I would now like to turn this conference over to Mr. Tyler Scott Vice President of Investor Relations. Please go ahead, Sir you may begin.
Yeah.
Thank you operator, and good afternoon, everyone. By now you should have received a copy of the earnings release and Investor supplement for the company's fourth quarter and full year 2021 results. If you have not copies are available on our website cognizant dot com.
Speakers, we have on today's call are Brian Humphries, Chief Executive Officer, Jan Siegmund, <unk> Chief Financial Officer.
Before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements. 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 to the corresponding GAAP measures can be found on the Companys earnings release and other filings with the SEC.
With that I'd now like to turn the call over to Brian Humphries. Please go ahead Brian .
Thank you Todd and good afternoon everybody.
Throughout 2021 clients have meaningfully accelerated spend on digital transformation initiatives accelerating into the bond pricing services <unk>.
Elevated attrition.
Key digital skills is however, a direct consequence of this creating revenue fulfillment challenges and cost pressure that need to be carefully navigate it.
I'm, therefore pleased that we had another quarter of solid execution.
Delivering against our commitments to clients and to you our shareholders.
Fourth quarter revenue was $4 $8 billion up 14, 5% year over year at constant currency above the high end of our guidance.
Growth was led by digital which grew 20% year over year.
Fourth quarter adjusted operating margin was 15, 3% and full year adjusted operating margin was 15, 4% in line with our guidance.
During the quarter, we also progressed against our key strategic initiatives.
Including scaling our digital capability.
<unk> the company.
Helping our clients be successful by leading with greater industry insights and solutions.
Repositioning to cognizant Brad.
Turning now to industry segments or recovery in financial services continued with fourth quarter growth of 19% year over year in constant currency.
This includes an approximate nine percentage point benefit for the impact of the prior year charge related to the public.
As you know we've been rebuilding our strength in financial services by refreshing our leadership in client facing teams.
Strengthening our partner engagement shifting.
Shifting our portfolio of services to more attractive market segments and sharpening our focus on priority industry solutions some clients.
We expect to build further on this progress in 2022.
As we reposition cognizant because of digital transformation provider and larger banking clients. We complemented this with sustained momentum in regional banks Keybanc, where we've just renewed our engagement. That's your primary digital partner is a great example of this.
We will further enable their digital transformation by digitizing their products to increase their digitally active customers to approximately 85%.
By driving remote self service growth by more than 40%.
By automating front to back processes.
By migrating more than half of their application portfolio to the crowd.
In insurance, we see continued demand for core modernization and digital transformation, including cloud and analytics.
<unk>, a global leader in disability insurance and group benefits.
During with us to pursue their digital transformation focus on agent and customer experiences and.
And associated analytics.
These digital solutions enhance our existing application development and maintenance services relationship with Youtube.
And for a long time client Royal London.
<unk> largest mutual life pensions and investment firm, we're now extending our partnership to re imagine their customer engagement through personalized seamless connected customer journeys enabled by cloud.
Data and customer centric principles.
And health care revenue grew eight 2% year over year in constant currency.
We've substantially increased our competitiveness and health care by investing in digital solutions domain expertise and partnerships and by modernizing our core platforms we have.
Continuing the momentum in our <unk> product business, which grew 13% in 2021.
We continue to add new footprints and in 2021 increase the number of overall member supported by our platforms.
Approximately $210 million.
We see solid commercial momentum across our healthcare payer and provider business for instance, Humana a large national payer is modernizing them moving their legacy ecosystem to the cloud and has chosen cognizant as a partner for agency marketing and clinical transformation.
These initiatives will help improve humana's customer and employee satisfaction reduce cost and enhance the delivery of integrated personalized experiences to their members.
We also have momentum with next generation health care companies like relic health technologies are rapidly growing global telemedicine firm.
Which turned to us to expand their care management capabilities.
Relic with leveraged cognizant care management services to support the deployment of their care platform.
Managed care organizations hospital networks and health insurance providers.
In life Sciences, we partnered with Abbvie, a leading global Biopharma company to help advance their digital transformation and safety at risk management, which will improve patient care and outcomes through our digital health consulting services augmented by capabilities and human centered design and digital product engineering.
We can understand the needs of patients and care providers.
And fit for purpose solutions that support the patient journey and incorporate feedback for ongoing innovation.
These improvements will help us be better support patients and care providers across a broad range of therapeutic areas and products.
We did products and resources, we continued to deliver excellent growth and client success across travel and hospitality and manufacturing logistics energy and utilities.
Drawing on our extensive experience, helping automakers streamlines, our operational tasks Volvo cars chose us to help harmonize their finance and accounting and procurement processes and.
And implement intelligent process automation to support their digital transformation.
This is a great example of our growing momentum in digital business operations, which.
Which significantly outpaced the bto industry in 2021 and is set to continue to gain share.
Top line growth is being fueled by momentum in intelligent process automation and strength in our digital native clients portfolio.
Our work at <unk>, a global leader in water technology in the world's largest pump manufacturer perfectly illustrates our growing digital credentials.
Grin post initially selected cognizant to establish an Iot based intelligent platform to gather real time pump data from the sensors and perform analytics to prevent predict and respond to issues caused by linkages.
Based on this success, we have since been selected to build a modern enterprise system based on SAP four Hana.
Finally in communications media and technology, we saw continued strength in technology in particular, where we sustained strong double digit growth over the past three quarters.
Turning now to bookings, which grew 22% year over year in the fourth quarter, our second consecutive quarter of 20% plus growth.
Full year 2021 bookings growth was in the mid teens.
We entered 2022 with a healthy book to Bill ratio of one to two.
Throughout Europe bookings strength, which is being fueled by digital has been broad based across industries and geographies.
Moving to the macro demand environment industry demand remains robust and I expect this to continue throughout 2022.
Clients are embracing digital operating models to become more efficient agile automated scalable innovative and indeed secure.
Whilst also responding to the expectations of their customers and employees for hyper personalized experiences.
Continuing to scale, our digital capabilities is at the heart of our company strategy.
Digital represented 45% of our revenue mix in Q4.
As we noted during our recent investor briefing, we believe digital can become 55% to 60% of revenue in the coming years.
Reflecting our strength in digital credentials during the fourth quarter, we were named an industry leader in 17, new industry analyst reports.
They highlighted the company's client partnerships scalability digital capabilities and expertise as factors and recognizing our leadership.
Celebrating digital is not only a driver of double digit revenue growth and improved margins. It also fosters greater client intimacy and higher levels of employee engagement as we partner on strategic transformation projects that leverage advanced skills.
Moving on now to an industry phenomenon youre accustomed to hearing about the unprecedented competition for talent.
Reflective of the industry wide demand supply imbalance in key digital skills.
Four quarter voluntary attrition moderated a little to 31% on an annualized basis or 28% on a trailing 12 month basis.
As a reminder, when we measure attrition, we count the entire company, including trainees and corporate across services and bto.
We've been working aggressively to mitigate attrition levels, whilst intensifying our efforts and focus on employee training promotion cycles professional development and total rewards.
During 2021, we also facilitated more than 14000 job moves across 40 countries.
Continued to revitalize our campus recruitment program in India establish new compensation measures and our revised promotion cycled to retain employees and invested heavily in Upskilling. In fact, our associates completed 23 million hours of learning and consumed 130000 courses in 2021.
Given that we compete on our knowledge and skills. We're proud to have 142 awards for excellence in learning and development from the Brandon Hall group.
Often considered the leading independent HCM research analyst firm.
We more than offset elevated attrition levels in 2021 by accelerating our hiring.
Wowing us to increase company head count by 14%.
I'm pleased to say that in recent years, we've made meaningful progress in correcting our delivery pyramid by significantly increasing the number of college graduate hires on board in India.
In 2021, we added a record 33000 college graduate hires in India up from 17000 in 2020.
2022, we plan to add approximately 50000 in India.
Digital acquisitions of Volta brought incredible talent to covenants. During 2021, we completed seven acquisitions that extend our digital leadership.
Most recent being our fourth quarter acquisition of that bridge.
The software consultancy and product development firm expands our software product engineering capabilities and global delivery footprint by adding more than 600 engineers designers and product managers in Lithuania, Poland, The U K and North America.
This extension of our global delivery network complements recent announcements in the United Kingdom, Australia and Canada.
In closing I'm proud of our execution against our strategy in 2021.
We've reestablished commercial momentum and have a healthy book to bill ratio.
Our delivery teams executed against our commitments despite challenging labor market conditions.
Our performance at our two largest industries financial services and health care are strengthened.
Growth in key international markets, such as the U K has meaningfully accelerated.
Our digital portfolio has been extended and it has never been stronger.
And we've made significant progress in our people strategy, our internal digitization agenda, and indeed, our brand repositioning.
For several quarters now have been holding our long open ended virtual sessions with small groups of employees.
I've learned from these intimate sessions as well as from our large virtual town Hall meetings.
Unemployed pride into companies building.
Employees see not only how far we've come but also a clear path to an exciting future.
Employees also recognized the consistent execution of our strategy, our commercial momentum and a commitment to our purpose vision and values.
This purpose has kept us focused on executing our ESG agenda. Despite this breadth of a prolonged COVID-19 pandemic.
Our ESG focus commitment is evident and are cognizant combat COVID-19 initiative in India.
Our intensified efforts to drive a culture of belonging throughout cognizant.
And our $250 million of philanthropic initiative to advance diversity equity and inclusion along with health and well being in communities around the world.
Many other areas covered in our 2021 ESG report.
In summary, our broad based progress allows us to approach to new fiscal year, we're confident.
Our ability to execute against the multiyear financial outlook, we presented at our November Investor briefing.
So 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.
Thank you, Brian and good afternoon, everyone. We finished the year with solid momentum driven by digital project and into 2022 with bookings momentum and strong customer demand.
For the full year revenue was $18 5 billion.
Representing an increase of 11% or 10% at constant currency.
This includes 320 basis points contribution from our acquisition.
The charge in Q4 2020 related to the proposed exit from the customer engagement of our family subsidiary contributed 70 basis points of growth.
I will refer to this as the family impact for the remainder of my remarks.
For the full year digital revenue grew over 19% and represented approximately 44% of total revenue.
Q4 revenue was $4 8 billion, representing an increase of 14% year over year or 14, 5% in constant currency.
Year over year growth includes 280 basis points of the family impact and also 280 basis points of growth from our recent acquisitions.
In Q4 digital revenue grew over 20% year over year and represented approximately 45% of total revenue.
As Brian mentioned, we were pleased with our bookings performance in the quarter and for the full year.
In Q4, we have begun providing trailing 12 months bookings.
It can be found in the supplemental presentation posted on our Investor Relations website.
We took the opportunity to enhance our bookings definition.
Modifying it to exclude overlap from early renewals and to include bookings from Unintegrated acquired entities.
As of Q4 2021 trailing 12 months bookings based on our revised definition, we're at $23 1 billion.
Representing a book to bill of approximately 1.2.
Moving on to segment results for the fourth quarter were all growth rates provided will be year over year in constant currency.
Financial services revenue increased approximately 19%, which includes a positive 900 basis points.
Ambling impact.
During the quarter, we saw positive trends in our North American banking business.
Where revenue grew high single digits and internationally within insurance.
Across banking and insurance, we have continued to invest in top talent and digital capabilities.
Focusing on broadening our client base and driving improved profitable growth.
In 2022, we expect our recovery to continue.
Health care revenue increased approximately 8% driven by double digit organic growth in life Sciences or.
Our healthcare payer and provider business grew in the mid single digits, driven by our integrated software solutions.
As we discussed during our Investor briefing in November we see a large and growing market opportunity in the healthcare space and our capabilities across healthcare payer provider and life Sciences provide us a unique industry perspective, and client intimacy that we believe provides ample opportunity to support.
Sustainable growth in the years ahead.
Products and resources revenue momentum continued with revenue increasing 18%.
The third consecutive quarter of strong double digit growth.
Revenue was again driven by strong performance in manufacturing logistics energy and utilities, which grew double digits for the severance continued consecutive quarter and surpassed $2 billion in annual revenue in 2021.
Retail and consumer goods and travel and hospitality also grew double digits.
If a year with quarterly revenue now back above pre pandemic levels.
Revenue growth also included 550 basis points from our recent acquisitions.
Communications media and technology revenue grew 13%.
Of which approximately 300 basis points of growth was attributable to recent acquisitions.
Organic growth was again led by our technology business.
Our work with digital Native lines has continued to drive growth in our core portfolio.
From a geographic perspective in Q4, North American revenue grew 9% year over year.
Driven by banking life Sciences manufacturing logistics energy and utilities.
And technology.
Growth in North America also included the benefit of recently completed acquisitions across segments.
Revenue outside of North America grew approximately 33% year over year in constant currency, including 13 points of family impact.
Growth was led by the U K, while we saw strong double digit growth within financial services products and resources and communications media and technology segments.
We also continued to experience strong growth in Australia and Germany.
And in part by our acquisition of Serbian and ESG mobility, respectively.
Now moving on to margins.
In Q4, our GAAP and adjusted operating margins were 15, 3%.
No non-GAAP charges in the quarter.
On a year over year basis, adjusted operating margin improved by approximately 300 basis points.
Driven primarily by the handling charge in the prior year period.
As we discussed last quarter Merit increases for the majority of employees effective October 1st.
This negatively impacted margin in the quarter.
Supply chain constrained and our elevated attrition is kept subcontractor recruiting and other delivery costs elevated while our recently completed acquisitions have also negatively impacted our margin.
While we continue to invest in SG&A to drive and support organic revenue growth.
We have also moderated non strategic spend which has helped to partially offset the labor cost pressure.
Our GAAP and adjusted tax rate in the quarter was 22% below the low end of full year guidance range.
Fitting from discrete items, which we do not expect to repeat in the future.
Q4 diluted GAAP and adjusted EPS were both $1.10.
Now turning to the balance sheet.
We ended the quarter with cash and short term investments of $2 7 billion.
Or net cash of $2 1 billion.
Free cash flow in Q4 was $760 million, representing approximately 130% of net income. This resulted in a full year free cash flow of $2 2 billion.
And represented a cash flow conversion of over 100% of net income which was in line with our prior guidance.
DSO of 69 days declined by three days sequentially and by one day year over year DSO will remain a key lever to support strong free cash flow conversion over the medium term.
During the quarter, we repurchased 800000 shares for $66 million under our share repurchase program and returned $127 million to shareholders through our regular dividend and spend cash of $255 million on acquisitions.
In 2021, we've returned $1 3 billion to shareholders through share repurchases and dividends and spent approximately $1 billion in acquisitions.
This was consistent with our capital deployment framework introduced in Q4, 2020, and reiterated at our Nevada and <unk>.
November Investor meeting.
In support of our capital deployment framework today, we have also announced a 12% increase in our quarterly cash dividend, our third consecutive annual increase and fourth since we initiated the dividend in 2017.
We also expect to return at least $500 million.
Through share repurchases in 2022 subject to market conditions and other factors.
Turning to guidance.
Well Q1, we expect revenue in the range of $4 eight to $4 eight 4 billion representing year over year growth of 915%.
Or 10, 2% to 11, 2% in constant currency.
Our guidance assumes currency will have a negative 120 basis points impact and an inorganic contribution of approximately 200 basis points.
For the full year, we expect revenue growth to be towards the high end of our medium term financial framework, which is consistent with our expectations at the November 2021 investor briefing.
We expect full year revenue of 20 to 25 billion.
Representing seven 8% to eight point.
I apologize representing seven eight to 10, 8% growth or eight five to 11, 5% in constant currency.
Our outlook assumes currency will have a negative 70 basis points impact and includes 200 basis points contribution from inorganic revenue.
Inorganic assumption includes approximately 100 basis points from future acquisitions.
Well your guidance also includes the negative impact from the sale of all our family subsidiary, which was completed on February one.
Moving on to adjusted operating margin.
With our outlook at the November 2021, Investor briefing, we expect 2022 to be towards the lower end of our medium term financial framework.
For 2022, our full year adjusted operating margin guidance of 15, 6% to 15, 7% assumes approximately 25 basis points of expansion at the midpoint from 2021.
While we are not providing quarterly margin guidance, we expect typical seasonality in 2022 which includes stronger margin performance in Q2, and Q3, while Q1 and Q4 I expect it to be below our full year guidance.
In Q1, we expect some modest sequential pressure driven by compensation costs and seasonal factors.
Our outlook for margin assumes the industry supply side constraints continue in that attrition remains elevated in 2022.
In response, we will continue to invest into our talent, including through merit increases promotions career development opportunities and training.
It will include hiring of approximately 50000 recent college graduates targeted.
Targeted lateral hires and the continued use of subcontractors similar to 2021, we will continue to moderate nonstrategic SG&A spend to help offset some of this pressure in the near term.
This leads to our full year, adjusted EPS guidance, which is $4.46 to $4 60.
Our full year outlook assumes interest income off of $25 million.
Our outlook also assumes average share outstanding of approximately $522 million and a tax rate of 25% to 26%.
Finally, we expect free cash flow will represent approximately 100% of net income for the full year.
With that we will open the call for your questions.
Thank you we will now be conducting a question and answer session.
To ask any questions. Please press star one on your telephone keypad.
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In the interest of time, we ask that you. Please limit yourself to one question and one follow up. The first question comes from the line of Brian Essex with Goldman Sachs. You May proceed with your question.
Okay.
Hi, good afternoon, and thank you for taking the question.
We could start with Brian .
No question, you've seen well exposed to demand in this environment, but on the supply side as we sit here I guess over a month into the first quarter could you share a few thoughts on attrition and level of confidence you have that we may be on the right side of a peak in attrition trends at this point and maybe share what initiatives seem to be resonating the most with employees.
Yes, Hi, Brian .
There's we're in a robust demand environment, that's not a concern for me I'm expecting that to continue in the coming year under spots of tech trends that will support that statement undoubtedly but we.
We're certainly in my perspective, and unprecedented competition for talent.
We've seen a slight moderation sequentially on an annualized basis January has been in line with that but to be very honest, it's too early to call. This a trend for the year. There was natural seasonality one expects to see in the course of the year coming up the bonus periods et cetera. So as John pointed out we're expecting elevated attrition through the course of the year and obviously, we're going to work very hard to tell.
To mitigate that and try and minimize the impact on the business.
The implications of attrition of coarser across financial commercial implications as well as employee implications and.
The levers were using against that is naturally to try and recruit as many people as we can I'm delighted we've been able to recruit 40.
To add a net 41000 head count year over year.
Compliments to our team because I think it is a core competency of cognizant in this regard, but what we're doing in terms of employees as John pointed out as I did to in my script, a lot of efforts around hearts and minds Theres a lot of effort around compensation measures, which of course is pretty critical I think it's essential for us to continue to show up and post strong double digit growth, which is helping get.
A degree of confidence and swagger and optimism back into the company and just continued to support our employees by celebrating success and giving them career paths eventual which of course growth does and on top of that we've revised the way we think about promotion cycles.
Another such things and of course of the year. So it's been a very hands on engagement for me down through the entire leadership team in the last six nine months. We spotted this early we've added more recruiters and we've really put a lot of effort in place rent of retention task force.
Be that as it may as you've seen with many of our peers attrition is elevated and we assume will stay elevated through the course of the year.
Great. That's super helpful. Thank you for that and maybe to follow up on John .
Could you maybe frame out the scenarios, where we might see upside to margins for the year and is there any rule of thumb for appreciation of the dollar versus the rupee and how that might impact margins going forward as we track FX.
Yes.
Hum.
Hum.
Don't want to up my guidance and my first question.
I would imagine so we have our work cut out to achieve.
The margin guidance that we gave we feel confident about it.
As you know we talked about compensation measures, but all the factors that are impacting our portfolio.
The negative as they are positive factors, so I want to point out some of the drivers that obviously are helping us the accelerated revenue itself is.
As a help on.
On margin so that that helps.
Our digital business continues to be slightly more profitable than our auto.
Our traditional business so accelerated digital is built into our.
Solid digital growth is built into our into our plan and we continue to too.
Make progress on our cost of delivery structure with bringing in college graduates, which will improve.
Improved the overall cost structure over time, so we rely on a on a number of.
Offsetting factors in order to achieve our guidance and obviously any overall underperformance, but yet a positive or negative outcome. So I stay balanced and we feel good about our 20 to 30 points.
Outlook.
Got it thank you very much.
Our next question comes from the line of Lisa Ellis with Moffat Nathanson you May proceed with your question.
Terrific. Thanks, guys.
I had a follow up question on attrition, but this time more related to the senior levels of cognizant.
Give a sense for how your attrition levels are running in the top tier levels of the organization and what steps you can take them to.
To retain the key leaders have been driving the transformation.
Okay.
At least it's Brian So let me address that to be very honest I am not at all concerned about that's the majority of.
Our attrition is at the junior levels in certain hot skills, and I would say at the senior levels of the organization at this moment in time were very much what I would term business as usual promotions some refreshing.
Refreshing of talents if deemed necessary based on financial results and other leadership attributes.
What is essentially a normal in a company of our size some retirements et cetera. So sometimes we intervene based on performance, but this is more classic business as usual operations at this stage.
Very good about the motivation of the team collectively we're all in this together certainly teams for it as we say internally and I feel as though we're all on the same page to leaders I've brought in have certainly refresh their team strengthened their teams I will tell you right now I feel I have better instrumentation in terms of how to run the company than at any time since I've been here in terms of the analytic.
Rigor that John and his team has put in place.
Hatred team have done some tremendous work in terms of where we stand there et cetera. So we just feel are I certainly feel a lot more comfortable that we're on top of our game and we know how things are going so not a concern.
Okay. Okay, and then a follow up for you as well Brian just on the demand environment can you just talk a little bit as you're engaging with clients going into 2022, what do you anticipate or you feel is sort of different about the demand environment looking forward as your clients are emerging from the pandemic and they've been trying to get a little bit.
Business as usual.
Yeah look I mean, I think to be very honest clients are well past by now the initial spend hesitancy of COVID-19 for a CEO or for anybody in our sales organization and certainly the enemy is indecision and we don't have any decision far from it. These days people have really.
Moved well beyond where we were approximately two years ago at this stage and you know people are extremely focus of course.
Driving digital transformation agenda is evolving their business models.
Which is good for us because our portfolio is stronger now than it's ever been before and it allows us to work in the high.
Impact work for clients as they are really driving.
Some of the Big innovation journey, so that they have now of course that leads to discussions around AI and analytics.
Consumer centric if you will user experiences built on enterprise class applications, obviously cyber security.
Digital engineering cloud migrations and throughout the world as they deal with clients. It's always surprising to see a different clients are in terms of where they are on client migrations.
The one thing that continues to go from strength to strength is of course to growing scale hyper scaler providers. They are from my perspective, certainly shortening innovation cycles, throwing a lot of commercial muscle and financial muscle to accommodate or insurer et cetera added cloud migrations and at <unk>.
Course in more recent times, they really evolve towards industry clouds, not just the hyperscale guys, but also the major SaaS vendors, which allow more integrated vertical workflows and cognizant strength. Therefore in areas like health care and financial services is of interest to them.
But it's very consistent with what we've seen before lease it to be very honest a huge push towards.
Classic modernization initiatives towards data analytics cloud digital engineering, and really what I find.
Clients are certainly willing to spend.
For skills and innovation, but certainly expect more efficiencies in the more traditional non digital work and we see that under pricing dynamics.
Certainly see that in terms of client strategic intentions in the years ahead.
Mhm mhm.
Terrific.
Our next question comes from the line of Darrin Peller with Wolfe Research you May proceed with your question.
Thanks, guys when looking at your outlook your confidence level around your revenue growth, but obviously, coupled with margins in the right direction, a little more than we had initially modeled for the year ahead.
I mean, it really does give us more conviction that the pricing power you have is able to offset wage inflation. So.
I'd love to hear more color on that if you don't mind in terms of the environment, you're in and whether or not you are able to really pass through whatever you need to on the price point side and then maybe just as a follow up to that is there are there other have there been any like advances in decoupling.
Linearity on the on the business model at all in a greater way over the past quarter into this next couple of quarters.
Yeah, I'll start John by all means jump in at any stage. So darn first of all pricing remains somewhat stable and as I've just mentioned two Liza based on her question, we see differences between the digital work in the non digital side clients will pay up for skills and innovation and frankly availability for resources in digital of course that.
Happens to be in an industry, where people tend to have msas and rate cards that have been agreed in advance. So it requires us to interrupt those rate cards.
But certain clients seeking their own workforce as well as other vendors a desire for companies like cognizant to ultimately drive some pricing power.
Given the labor trends that we see but of course price increases can have lagged talent related cost increases.
Put a lot of effort around pricing.
Rate card intelligence big deal pricing.
It is certainly one of the factors that's inherent in our guidance for the coming year and as I said earlier as well as the fact that we have scaled our digital portfolio to approximately 45% of the business puts us into more strategic land projects puts us against different competitors.
Arguably provides us with a pricing opportunity as long as we get the gross margin rate on digital skills versus the classic non digital skills.
The last thing I'll say just around pricing of course, because it's inherent in your question. It's a margin question and our margins can also naturally be held for the type of work, we sell solutions and deliver so we continue to focus on evolving to compete towards selling and delivering client outcomes that allows us to own more of our pyramid to industrialize delivery to better leverage automation and optimized our.
Mix as well as our pyramid spin.
Specific to your other question around decoupling of I.
I guess, the Holy Grail in the services company to decouple, a revenue growth from.
From a headcount growth look there are many factors that play there as well, including the shift to more offshore delivery in the course of the last year offshore delivery has increased for us about two points year over year about a point sequentially and that can help margin but of course. It can hurt you in terms of head count growth versus revenue growth or to so cold.
Average.
Rate per employee and it can also change dollar margins as well as dollar revenue per employee so for multiple things at play here. We are a services company, we're committed to being a services company. We will certainly try to optimize an industrialized delivery, where we can leveraging automation type authorization AI et cetera, but at the end of the day we.
We're in the head count business and as we scale our head count.
Scale of revenue and you guys are more than familiar with that model.
Yes, maybe a bond you covered it I think on the pricing thing, but a little bit of color on the <unk>.
Margin expansion, because we really have taken a balanced view about the sources of the margin expansion here and pricing is a factor, but it's not the dominating factor we have other elements like the natural shift of business towards higher margin business. We have a scaling up you saw this in the fourth quarter, we we.
Slowed the growth of SG&A in a meaningful way and its now contributing to margin actually slower than revenue growth rate, we expect that to contribute next year as well.
We have.
Hope to see impact from our initiatives to refresh our deliberate permit and Brian talked about the success that we had.
Bringing college graduate.
You mentioned this.
Planning to onboard 50000.
College graduates this year that will help to streamline our cost a bit of a permit and.
There's also so there's a variety of factors that drive it.
So pricing is a factor, but only one among many.
Okay, Alright, I mean I have other questions, but just in interest of time I'll, let you guys turn it back to the queue and thank you. Thank.
Thank you.
Our next question comes from the line of Keith Bachman with BMO. You May proceed with your question.
Hi, Thank you I had two if I could Brian if you could talk a little bit about health care.
And the potential for growth during 'twenty, two and beyond you mentioned the <unk> 13.
But just what are some of the factors that.
Would lead to health care.
Continuing its not getting improving its growth rate to contributing presumably the cognizant being able to breakthrough on a.
Consolidated basis, with 10% kind of organic growth, we think health care would be one of the key drivers. If you could just talk about a little bit about that won't have a margin question on Africa.
Yeah look it's certainly our ambition to accelerate health care growth in the November analyst meeting, we talked about market growth, but of course within our healthcare business. We have the U S health care vertical which is payer provider the payer being the vast majority.
And then a product business of course, coupled within that and then the less than 50% of our health care business is our life Sciences business, which continues to grow double digits I feel really great about that both the nature of our capabilities the nature of our client intimacy the global nature of those clients and our bookings momentum in life Sciences <unk>.
The year has been frankly outstanding and it was very strong in Q4 as well so.
Yes, we're getting after the life sciences opportunity, it's all about continuing to scale Biopharma and then in this year, we've accelerated a little bit of a medical device.
Mentum there as well you've also seen a peak do some targeted acquisitions in the life sciences vertical in the last few years, including zenith as well as <unk> more recently.
In the U S health care business.
Lot of it is about getting to try is that our business back on track I think I mentioned into November briefing our growth rate in 2020 was twice that of 2000.
Of 2020 was twice that of 2019.
Approximately doubled growth rate again in 2021 over 2020, and that's good in terms of client intimacy and relevance in terms of margins and the pull through opportunity or the stickiness of cognizant.
<unk> accounts so.
Getting payer and provider pack into a higher growth trajectory, but making sure that the product driven side of that scales as well as pretty essential tourism I've got to be honest I'm very motivated about where we are with <unk> I think it's a.
Fantastic Jim within the company right now that we've got growth back we continue to explore possibilities in terms of where we can scale our health care franchise. Both in terms of the market within the U S. In terms of different applications within the ecosystem or different control points as well as exploring how we can scale, our health care business into Canada, and indeed into <unk>.
International markets I think we do all of that right, we will drive market growth, if not more than market growth and that's what the team is focused on.
Okay perfect for you. Thank.
Thank you Brian .
The free cash flow margins I think you said $4 22, you want to do kind of onex.
Net income.
Just do some back of the envelope that would suggest that the free cash flow margin.
Which is free cash flow divided by the revenue will be down again. This year I think perhaps not meaningfully but are there. Other forces at work you think free cash flow in 'twenty, two that we should be aware of that.
That might either positively or negatively impact whether working capital taxes Capex anything else you want to call out.
For our free cash flow models.
The.
No I can give you a little bit the background of our thinking around.
Yes.
Our free cash flow conversion, which I think I mentioned in my script to be around 100%, we did a little bit better this year.
Good quarter and.
I think with all these ins and outs.
Basically.
Maybe a slight increase in capital expenditures in the next year that we could see.
That is related to some of the most strategic investments internally.
Nothing major.
Continue to be laser focused on.
Our sources of cash from our clients. So we made good progress on DSO this year and that focus will remain.
To be quite honest I'm, drawing a blank on cash I think cash is going to be on taxes, I think taxes can be fairly similar to this year. So no major a variation on the tax side. So that's kind of how I expect the cash flow situation.
Well for us.
Nothing specific comes to mind, maybe a slight increase in capital expenditures that could drive it.
Okay, alright, thanks very much.
Our next question comes from the line of.
With Jpmorgan you May proceed with your question.
Alright, great. Thanks Hope you can hear me guys I think I wanted to ask on financial services.
Safe to say that some of the money Center bank headwinds that we've been seeing you have been seeing are behind the company I know, there's a lot of pressure to spend.
In general amongst the banking side, but just curious how youre feeling there.
But from a competitive standpoint and from a cyclical standpoint.
But from my perspective, we've been working on recovering in financial services for quite a time theres been the pace of recovery kind of at least through the course of the year, but.
10% constant currency growth excludes a nine point benefit we got from the year over year compare from the accounting charge in Q4 of last year's results is probably the highest level of constant currency growth. We've had in quite a few years and this is ultimately being on the back of a series of things we've been doing sharking sharpening our focus on our top clients.
Refreshing some of the commercial team as well as by the way some of the leadership team both in delivery as well as in the business back to a question I had earlier, that's part and parcel of running a world class company, sometimes you have to.
Refresh leaders, if youre not getting the results you want.
<unk> added a lot of talent.
A focus on executive engagement of the client facing level, while the collaboration with the Hyperscale.
Committed to their industry cloud or financial class and of course, our partner ecosystem and all of that has now started to bear fruit.
Im cautiously optimistic around our growing competitiveness. There we are leading more with digital with leading more with what I would call less into use our staff augmentation type work and were getting better margins for that and I think our competitiveness. We will continue to increase in the course of the year of course with the decision.
That we took last year, which was close ultimately yesterday I believe.
Randy assembling sale, we have a compare sequentially and year over year in the first quarter and beyond which will have.
An anomaly that we can talk to in subsequent calls, but generally I feel the team have done great work week.
We expect continued improvements in 2022 will be at peaks recovery I'm, not suggesting we're back to full strength, yet, but we're working both well across the two regional banks, but I'm also optimistic around the progress that the refreshed leadership team are making with some of the larger global banks and if we're able to track some of those of course that.
Will show up in the numbers well, so generally I feel I feel as though we're on the right track and the team have worked hard and deserve.
The growing momentum of the business.
Understood. Thank you for that.
Our next question comes from the line of Irina Kumar with UBS. You May proceed with your question.
Any known Brian Thanks.
For taking my question. So Mark is now home to come.
Back to the quarter with a 20% plus bookings can you talk about the sustainability of that as well.
Now above one.
Yes, we had that 22% bookings growth mid teens for the full year end.
It's driven obviously by the strong demand that we see in the market.
Supported by the investments that we made into our market organization.
With incremental sales capabilities and solution capabilities and is aided by bye.
Broadening solution set.
Developing ourselves as well as our M&A that is contributing to this so we are optimistic about maintaining a book to bill ratio as it is similar to where we are as I said, we saw a mindset and.
<unk>.
We have seen really a very consistent execution very consistent pipeline development and the bookings momentum itself has been broad based has been good and geographically split.
And it has been in general of course, there are ups and downs by by smaller business units, but it hadn't been when you lean back a fairly broad base, which is all.
Good news basically to assume that.
We're going to continue down that path.
Great. Thank you.
Our next question comes from the line of Jason Kupferberg with Bank of America. You May proceed with your question.
Okay. Thanks, guys nice results here I just wanted to ask a follow up on bookings to start anything you can tell us about the mix of new work versus renewals in that $23 billion of trailing 12 month bookings.
Yes, we don't really disclose the details of the bookings number it is a mix, but the mix has been stable and.
It is really.
<unk>.
Not contributing one way or the other two are.
Two two.
The overall comps.
Composition of the bookings number stayed basically stable, but we're not disclosing components of it.
Okay, just as a follow up I know you are including a 100 basis points of <unk>.
<unk> revenue contribution in the 2022 guide.
For deals that you havent yet.
Now can.
Can you just talk about the line of sight to executing on enough deals to drive that I guess $185 million or so of.
Revenue that you would need.
Yes, we have a very capable development team in M&A team of course proven over the last two years to execute a steady stream of strategic acquisitions mid to small and medium sized in nature, and we continue to see great opportunities for us to align our <unk>.
Strategic goals with that.
So we're bringing already approximately as you can see from our guidance into Q4.
First quarter, we're bringing already some momentum with the acquisition of that bridge into the momentum so we.
We feel confident about the 100 basis points.
To be executing within this year.
Okay. Thanks, Tom.
Our next question comes from the line of David <unk> with Evercore ISI. You May proceed with your question.
Hi, Thank you very much I'm looking at slide 13.
Onsite employee utilization fell to the lowest level in three years, which is really the history of this chart and it looks like offshore employee utilization fell to about a six quarter low can you just talk through the utilization dynamics clearly they were tied to the attrition numbers.
And what are your expectations for.
Both offshore and on site utilization in your 2022 guidance. Thank you.
Yes.
Youre right in the observation.
There is some impact.
In the chart by our switch to a nine hour.
<unk> week that has lowered our utilization so that is in the last few quarters in there, but the overall dynamic.
Is largely driven by the acceleration of.
On boarding new associates that have.
Some utilization lack in the beginning of that 10 years. So that was really the biggest driver.
Off of.
A down tick.
In the utilization.
We've seen basically and so we are kind of happy to have a little bit bigger bench.
To fulfill client needs so for us.
Utilization levels, so really at the desired level, where we wanted to see it.
Understood just as a quick follow up Brian could you expand upon your comment that you're seeing more clients asked for price efficiency in the in the legacy work you know what how much price efficiency.
Will are they looking for and are you able to offset that through lower costs.
Yes look we have obviously embraced automation we've taken out.
Double digit thousands of people from fixed price contracts in the last few years. So we continue to automate our agenda I will say you know the other thing you've seen is our digital mix hasnt scaled as much as we assumed previously because we've been quite successful in the non digital part of our portfolio.
Arguably more successful than others scaling that and mitigating the downside. So it's street combat every single time, you are coming up for renewal, we want to be clever as well and some of the classic areas to make sure you try and up sell to half modernization or beyond and trying to get a renewal and expansion.
I feel as though we have handled ourselves well in that regard and we have a lot of effort underway as I said earlier to try to continue to evolve the company to an area, where we are better able to industrialize delivery, which will help us with our margins.
And indeed, the quality of our delivery so I feel I feel pretty good about where we are in that regard.
Our biggest focus naturally scaled digital while we protect the non digital business and mitigate the downside for the guidance. We gave in November we assumed that will grow low to mid single digits, our real focus as a company and that's core to our strategy is our momentum in digital which is growing 20% plus or minus.
Thank you very much.
Yes.
Our next question comes from the line of Bryan Bergin with Cowen You May proceed with your question.
Hi, good afternoon. Thank you within the 2022 growth outlook can you talk about some of your expectations across the industry segments. This year and anything to be mindful about around the cadence of growth as we built the plan.
Can you repeat that you broke up in the beginning of your question.
Yes sure so the.
<unk> expectations across the industry segments for growth this year within the context of the consolidated plan and then just anything around cadence we should be aware of.
And.
On the cadence of the growth I think we have a typical revenue number we gave you basically our outlook for the first quarter and there's nothing really that I have to specify more I think on the revenue quarterly cadence relative to the industry growth I would just point out that we had.
A one time impact from gambling in the in the financial services sector, but we despite that.
By.
Does that grow over a onetime impact we expect continued moderate.
Growth in the <unk>.
Financial services group.
Group and all other groups.
Should continue with the momentum so I think it's a.
First thing if you just build a momentum case four hour.
Industry groups.
Got a good forecast.
Okay, and then just the international opportunity I know this has been a big focus for you putting your investments to drive more traction. There can you talk about your expectations for growth in markets outside of the U S. In 2022, which ones you're most excited about in some of the initiatives that you continue to drive.
Yes. So look this is something I'm, particularly passionate about.
<unk> brand internationally, certainly wasn't known as much as in key industries in North America and naturally in our offshore areas.
We put a coordinated effort in place to reposition the brand we have refreshed a lot of our interest our country leaders across Europe , and the middle East and I think we're seeing the fruits of that labor right. Now you saw 28% growth in the UK This quarter, our U K momentum has been building through the course of the year, it's nicely profitable for us as well in terms of relative.
Profitability vis vis other European countries.
And we also had a lot of momentum in areas like Australia, New Zealand. So this seniority in the.
The capability of the team we built allows us to have confidence to deploy M&A to support their growth ambitions as well that's what we did in Australia and that's what we're doing in Germany, you've seen the ESG acquisition. We did in the last year. So generally I feel very optimistic about our potential there it is.
A year, where we had strong bookings we have to just continue to build on that in the years ahead, but.
Ultimately if we're here three four years from now looking back I'd like to thank just wind up being a really big success story for US now, it's not only about capturing the revenue opportunity that revenue opportunity, which will be fueled more with digital type work more than historical levels also requires more local and <unk>.
Our global delivery network and that's also an area where I'm pleased to see the momentum we've had we announced most recently to build out in Canada in Nova Scotia, but in the last few months, we announced thousands of extra roles across Adelaide in Australia, as well as the U K in Northern England, Northern Ireland. So we're doing what what is needed in.
Terms of partnership.
<unk> delivery capabilities to get after the market opportunity internationally in the fruits is very visibility into our second largest country. The U K, which grew 28% this quarter.
Okay very good thank you.
Hi, Laura I think we have time for one more question.
Our last question comes from the line of James Fawcett with Morgan Stanley You May proceed with your question.
Thank you very much and I appreciate all the detail and color that you've provided.
Back on the on the hiring side.
How should we think about what you are feeling as the appropriate level of of pace of hiring in the current environment.
And I guess as part of that.
And I'm looking for a kind of number of net head count additions et cetera, going forward and I guess, maybe more importantly, how are you feeling about your capacity your infrastructure that you have in place to be able to address that or is that an area of potential investments.
Well, we've been investing behind our recruitment engine in the course of the last six nine months as we spud a nutrition to be a likely industry problem. We got out in front of perhaps others and we move fast and you've seen a net headcount expansion of 41000 year over year since Q4 of prior year period, and another 12000 sequentially.
Of course within a given year subject to when we bring in for college graduates and onboard them youll see different peaks country by country, but I am more than confident that we have an engine that is a core competency. The team has done an outstanding job for us we have processes tools capabilities in place our brand standing as stronger increase.
Bingley, not just in India, but it overseas and some of the brand work we've done both externally as well as our internal branding has given us more and more confidence that we have brands in basket ores in the company to make that happen. So we are absolutely in the mode of accelerating head count as best we can.
The lower we can keep attrition of course is the most productive way to do that.
And in the meantime, as Jan pointed out we've done the heavy lifting we've made significant progress around the delivery pyramid.
<unk> 33000 up from 70 in the prior year period and next year, we're assuming 50000.
If needed we will try and scale beyond that so for me, it's about retention and its about recruitment and getting the balance right between dose, but im certainly bullish on the industry bullish and our position within the industry.
I'd like to have more headcount in cognizant.
Send them our way.
Regarding our capacity.
As you know we are still operating in a largely virtual environment and depending on.
Development of the.
Pandemic would make obviously decisions in the future, but I think a working model that we're going to settle in a hybrid model so relative to capacity in the sense of bricks and mortar I think we feel very well equipped to handle the growth and that shouldnt be anything unusual.
We igniting off.
The non virtual component will bring some cost pressures in it and but that is reflected in our in all margin guidance.
That's great. Thanks, Brian Thanks, Sean.
Great. Thanks, James and thank you everyone for joining we appreciate your interest in cognizant and look forward to catching up next quarter.
Thank you.
This concludes today's cognizant technology solutions Q4, 2021 earnings Conference call. You May now disconnect. Your lines at this time. Thank you for your participation during the rest of your day.
Yeah.
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Yes.
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