Q1 2022 Cognizant Technology Solutions Corp Earnings Call
Yeah.
Meanwhile, the labor market continues to be challenging with industry wide elevated attrition demand supply and balances and inflationary pressure.
I'd like to thank our teams across the globe for their leadership patients and engagement as we navigate these challenges and execute against our client commitments.
Today more than ever employees demand that we invest not just in total rewards, including compensation, but also in the end to end employee experience they are scaling and career advancement.
Cognizant has always been known for our investment in our people and in the last year. We built in this legacy with accelerated scaling and enhancements to our promotion framework.
First quarter voluntary attrition fell five points to 26% on an annualized basis.
Our 29% on a trailing 12 month basis.
While we made sequential progress reducing voluntary attrition for the second consecutive quarter. We anticipate attrition will remain elevated for the full year and will increase in the second quarter, reflecting seasonality.
To mitigate labor cost increases and the investments, we're making in our people we continue to execute against a series of measures, including our automation agenda pyramid of ensuring optimization and indeed pricing.
Turning to the industry segments in financial services, our ongoing recovery continue with growth of 6% year over year in constant currency, reflecting the sale of our sampling subsidiary in February .
Continue to make progress repositioning the business towards higher growth and higher value services and solutions with a more focused client set.
We expect the pace of recovery in banking and insurance to continue with strong demand for digital transformation.
One client who is digital transformation journey, we've been supporting as ABN Amro clearing bank.
We are transforming the bank site landscape into a hybrid cloud platform with a focus on security and regulatory compliance.
We'll be implementing an end to end secure scalable and compliance infrastructure as a service model in support of the banks it modernization agenda.
And health care revenue grew 9% year over year in constant currency with particularly strong growth in life Sciences.
Our investments to modernize the trades at a product portfolio, which includes the integration of AI and machine learning capabilities continued to pay off.
Our clients are responding to our commitment to deliver next generation platform solutions that help them offer patients real time insights and personalized care.
We're keeping our products cutting edge building, new solutions across the value chain and capitalizing on the opportunity at the intersection of health and digital in areas, such as virtual care and telehealth.
During the first quarter, we announced our collaboration with Microsoft to deliver a new digital health solutions designed to improve medical care.
<unk>, Microsoft Cloud for health care, our new solution is the first of several planned offerings that combine remote patient monitoring and virtual health.
Using products like smart watches blood pressure monitors in glucose meters to collect and communicate patient health data to providers.
Well, Mark Blue Cross Blue Shield, a leading health insurer with more than 2 million members is a great example of how we're partnering with AWS to drive digital transformation.
While mark aims to improve the experience of their stakeholders by accelerating cloud migration and data modernization.
While strengthening their information security.
The products and resources, we continue to see excellent growth in client success across travel and hospitality and in manufacturing logistics energy and utilities.
Automation is top of mind for clients like Pacific gas and electric which sought our help to realize their vision for a new digital productivity center of excellence that aims to reduce manual efforts simplify their automation tools and provide agile and scalable solutions for their business and it users.
To that end, our IPA team helped deploy Microsoft power platform and simplified our tool sets, we cognizant narrow our recently announced intelligent automation fabric.
<unk> is now well on its way to saving 1 million hours of work.
Through low code no code automation.
Finally in communications media and technology, we saw continued strength in technology, where we've sustained double digit growth over the last four quarters.
I'd like to briefly switch gears now to the future of work a universal topic amongst the C suite with enduring societal implications.
Organizations around the world are deliberating, how to best attract engage and retain employees.
The events of the past few years have prompted people worldwide to question their life and work choices.
Including how and where they work.
In the meantime, executive teams are determining how to best nurture our company culture and values in the face of today's labor market realities, and a hybrid work environment.
These social economic questions also intersect with business practicalities, such as real estate strategy one of the many things we are currently reviewing.
One of the prominent business themes of our time is the relationship between purpose and work.
Purpose encompasses all the values that drive people's choices actions and attitudes from wider social and environmental goals to professional and personal objectives, such as a healthy work life balance.
That's one reason, we put so much time thoughts and energy into developing and activating a compelling purpose vision and set of values for our company, which express our commitment to making a positive impact on the environment and the wider society.
We continue to advance our ESG agenda, applying our knowledge portfolio and partnerships to engineer new levels of environmental and social benefits for our company clients and communities.
In April we announced that we will source, 100% renewable energy for all our global offices and facilities by the end of 2026.
Sourcing, 100% renewable energy supports our goal announced last year to achieve net zero greenhouse gas emissions by 2030 in response to client expectations that business transition to a low carbon economy.
We also want our employees clients partners and other stakeholders to better understand today's cognizant.
Which is why during the first quarter, we modernized and reintroduced our brand to mirror the company we've become.
The services leader with World Class digital solutions and talent.
Our brand now carries the tagline intuition engineered.
This is our promise to engineered clients businesses. So they can anticipate and meet their customers' needs with the inside speed of intuition.
As a global company, we will always stands with the right people to choose a path of self determination and democracy.
<unk> humanitarian relief efforts for Ukraine, cognizant contributed $1 million in grants to several organizations that are delivering food water shelter healthcare and economic assistance.
We joined the international community and hoping to the pot to lasting peace can be found soon.
In closing I believe we are strategically well positioned to capture a large growing addressable market and drive profitable revenue growth.
A month ago I, Mark My third year anniversary, leading cognizant, while we are a company in transition our evolution has been significant across multiple dimensions.
We're putting the company on a strong growth trajectory and I am optimistic about cognizance prospects as we bolster our portfolio judiciously.
So not only build and run clients technology foundations, but also transforms our enterprises into modern businesses.
And with that I will turn the call over to Jan who will cover the details on the quarter and our financial outlook before we take your questions over to you.
Thank you, Brian and good afternoon, everyone. Our first quarter results reflect continued momentum within our digital portfolio.
While overall uncertainty around the economic outlook has increased we continue to see a healthy demand environment across our portfolio of services offerings.
Q1 revenue was $4 8 billion.
Representing an increase of nine 7% year over year.
Or 10, 9% in constant currency.
Year over year growth includes approximately 220 basis point of growth from our recent acquisitions, partially offset by a negative 40 basis point impact from the sale of <unk> completed February one.
In Q1 digital revenue grew 20% year over year and represented approximately 50% of total revenue.
During the quarter, we reviewed the scope of our digital revenue definition to ensure alignment across digital skills growth priorities.
Our pricing initiatives.
This is the first time, we have reviewed our definition since we updated it in 2020.
Under the new definition Q4, 'twenty, one digital revenue would have been about 49% of total revenue approximately four points higher than the 45%. We previously reported.
For this quarter only we are also providing some additional information to highlight the change in our digital definition under.
Under our previous definition digital would have grown 18% in Q1 and represented approximately 47% of revenue.
As Brian mentioned Q1 bookings grew 4% year over year.
This resulted in trailing 12 months bookings of $23 4 billion.
Representing a book to Bill of approximately one two.
Unchanged from Q4.
We believe this book to Bill provides us a healthy opportunity to support our full year growth ambitions.
Moving on to segment results for the first quarter were all growth rates provided will be year over year in constant currency.
Financial services revenue increased approximately 6%.
For instance in this segment were consistent with last quarter as positive momentum within our North American banking business and improved performance in insurance were offset by softness in our global banking portfolio.
Q1 growth also included a negative 130 basis points impact from the sale of our sampling subsidiary.
We remain focused on investing in our talent and digital capabilities, while targeting growth opportunities with new and existing clients aligned to our strategy.
Healthcare revenue increased approximately 9%.
Primarily organic driven by demand for digital services among pharmaceutical companies within our life Sciences business around Digitization of clinical trial processes and modernization of manufacturing operations.
Products and resources revenue increased approximately 15% driven by a double digit growth across all subsectors within the segment segment growth also benefited from recently completed acquisitions, which contributed approximately 500 basis points to growth.
Communications media and technology revenue grew 20% primarily organic.
Reflecting growing demand for data services, and our work with leading digital native clients, which has continued to support growth in our core portfolio.
From a geographic perspective in Q1, North America revenue grew 9% year over year.
Growth continued to be led by life Sciences manufacturing logistics energy and utilities and communications and technology clients.
Our global growth markets, which include all revenue outside of North America grew approximately 17% year over year in constant currency.
Growth was led by 20 plus percent growth in the UK, where we saw strong double digit growth within financial services, including public sector clients.
Products and resources and communications media and technology segments.
Also continued to experience strong growth in Australia, and Germany, driven in part by our recent acquisitions.
Now moving on to margins.
In Q1, our GAAP and adjusted operating margins were 15% as there were no non-GAAP charges in the quarter.
On a year over year basis operating margin declined by approximately 20 basis points.
The largest headwind remains increased compensation costs, including the cost of subcontractors.
Partially offsetting these headwinds were delivery efficiencies slowing growth of SG&A and depreciation of the rupee against the dollar.
Our GAAP tax rate in the quarter was 23, 3% and the adjusted tax rate in the quarter was 22.5%, which benefited from discrete items, which we do not expect to repeat.
Q1 diluted GAAP EPS was $1 <unk>.
In Q1, adjusted EPS was $1 eight.
Now turning to the balance sheet.
We ended the quarter with cash and short term investments of $2 3 billion.
And net cash of $1 7 billion.
Free cash flow in Q1 was a $186 million representing approximately 33% of net income as a reminder, Q1 is seasonally our softest quarter for free cash flow, primarily due to the timing of bonus payments.
DSO of 72 days increased by three days sequentially and by two days year over year.
During the quarter, we repurchased 5 million shares for $444 million.
Our share repurchase program.
And returned $143 million to shareholders through our regular dividend.
Turning to guidance.
Q2, we expect revenue in the range of $4 9 billion to $4 $94 billion.
Representing year over year growth of six 8% to seven 8% or nine 3% to 10, 3% in constant currency.
Our guidance assumes currency will have a negative 250 basis points impact as well as an inorganic contribution of approximately 100 basis points.
For the full year, we are increasing the organic growth outlook assumption in our guidance.
Reflecting strong performance in our digital portfolio and a healthy demand backdrop. However, we are tightening our constant currency outlook at both ends of the range, which reflects our improved organic revenue growth.
This was partially offset by a low expectation of inorganic growth, which we now expect to contribute approximately 100 basis points to full year growth versus 200 basis points previously.
Our reported revenue outlook now assumes a negative 180 basis points impact from currency.
70 points, previously, which equates to roughly $200 million headwind and reported revenues.
This leads to a revised reported revenue guidance range of $19 8 billion to $20 2 billion.
Representing four two to nine 2% growth.
Or 10% to 11% in constant currency.
This compares to our previous guidance of $20 to $20 5 billion.
Which represented growth of seven 8% to 10, 8% or eight 5% to 11, 5% in constant currency.
Our capital allocation framework is unchanged, while we did not complete any acquisitions in Q1, we remain active in pursuit of acquisitions aligned with our strategy.
We will stay disciplined as we analyze the acquisition pipeline and thoughtful as we assess the best use of capital.
For the full year, we expect to return at least $600 million.
Through share repurchases subject to market conditions and other factors.
Moving on to adjusted operating margin.
Adjusted operating margin outlook is unchanged and we continue to expect approximately 20 to 30 basis points of expansion versus 2021.
Our outlook for operating margin continues to assume industry supply side constraints and elevated attrition for the remainder of the year.
Headwinds to operating margin include increased compensation cost.
And returned to office costs, which we expect to offset.
To a food delivery efficiencies digital revenue mix pricing and SG&A leverage and discipline.
We currently expect to see some gradual improvement in our operating margin in Q2.
This leads to our full year adjusted EPS guidance of $4 45 to $4 55.
Compared to $4 46 to $4 60, previously, which primarily reflects the FX impact on our reported revenue outlook.
Our full year outlook assumes interest income of $25 million and average shares outstanding of approximately $522 million.
Both unchanged from our prior outlook. We also continue to expect a tax rate of 25% to 26%.
Finally, we are still targeting full year cash flow conversion of approximately 100% of net income. However, there are several moving pieces that could cause us to fall below our goal key factors impacting our conversion rates include the timing of certain payments cash taxes and higher Capex we remain.
And focused on our working capital initiatives to offset these headwinds for the remainder of the year.
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 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 in may.
Be necessary to pick up your handset before pressing the.
Keith.
In the interest of time, we ask that you limit yourself to one question and one follow up one moment, while we poll for questions.
First question comes from the line of Tien Tsin Huang with Jpmorgan you May proceed with your question.
Yes.
Thank you so much good afternoon, everyone. Just I wanted to ask on bookings up 4% you said that was in line I think the math.
I guess my simple math suggests that it's pretty solid book to bill in the quarter too.
In addition to the trailing 12 month figure that you shared is that.
Is that accurate and maybe can you give us a little bit more on why you're confident in the acceleration closer in bookings.
Hey, Tien tsin its Brian here, So look all in all we actually had an exceptional Q3 Q4 in bookings if you remember both quarters were up in excess of 20% year over year.
And so some of that there's natural behavior in our commercial team to pull in bookings in the latter part of the year to maximize their variable compensation. So the compare is what the compare is but I feel very good about where we are a book to bill of one two the book to Bill in the quarter is fine too.
Generally good momentum behind digital bookings as well so our pipeline plus the book to Bill ratio, which is very healthy at this moment of time give me confidence that we continue to do the right thing.
On the country, we don't really have what I would view a demand issue.
Industry is.
That is faced with elevated attrition the trick is always to optimize how much you want to sell or otherwise you'll end up frustrating clients. If you can't deliver against it so it's more a demand supply and balance labor cost.
Attrition dilemma than the topline dilemma at this moment in time now in the same vein I'll be the first to say that the economic backdrop is uncertain.
And therefore, we continue to monitor as you do on a daily and weekly basis toward Europe inflation or the risk of stagflation the broader economic sentiment of course, and how this may impact not just us, but our clients and therefore indirectly us.
But at this moment in time, despite an uncertain economic backdrop, I'm certainly optimistic about the it services demand picture for the foreseeable future and <unk> role within that.
Great, Yes, that's <unk>.
<unk>. So thanks for that Brian I guess my quick follow up just on the <unk>.
On the inorganic change in the outlook is that a function of maybe some deals falling out of the.
Of the pipeline or just a timing issue with what you've seen year to date.
Else to add there that'd be great. Thank you.
I'd say Jan and I are quite judicious when it comes to M&A quite disciplined very intentional and we tend to step out of certain deals. If they don't make economic sense. We are here to represent shareholders of course, where custodians of the company and in some cases, it's been us stepping out in some cases, there are deals that we werent able to get done or we werent able to get the count.
Third party to engage there is no fundamental change to our philosophy with regards to M&A. We continue to view that as a core element of our capital allocation framework, certainly a core element of us executing against our strategy and where we do M&A it will be in tune with our digital aspirations key vertical aspirations geographic.
Expansion and of course, our desire to be a little bit more advisory led in certain deals you hit multiple birds with one stone you can have an international deal that is aligned to a digital priority that is aligned to our key industry.
And so it's more of the same going forward it can be choppy.
Sometimes you get more a higher return on average, but we feel pretty good about our strategy and how M&A will play a role within that.
Thank you.
Our next question comes from the line of Bryan Bergin with Cowen You May proceed with your question.
Hi, guys. Good afternoon, and thank you. So I just wanted to follow up here on the on an outlook for US just to unpack the revised revenue outlook. So you took down the inorganic by 100 bps in the FX headwind is obviously.
A little bit more than two X what it was before so collectively about three I.
I think for $85 million of headwind versus the prior view. So I just wanted to clarify that that was really the big piece, there with obviously a little bit better organic and then just on the M&A just going forward is it more fair to assume let's say a range.
100, 200, Thats a year versus a specific target just given potential lumpiness.
Yes.
Good comment I'll start to tackle the M&A stuff.
First.
I think we should expect a little bit of bumping this in.
And the M&A just by the nature of it.
And so it's fair to say, we haven't really changed our capital allocation framework. So I think the general guideline is on Brian's in my mind is still a 2%.
I think in this case, we had a couple of deals that fell out of the pipeline for the reasons that Brian described them and as we outlook, we see a little bit more activity in the third and fourth quarter happening. So.
We just felt it was prudent to let you know about that no. There's no change. It's just like these are discrete items.
In one or two deals can make a little bit of a difference.
But no change.
For the medium term outlook I think we're sticking with our 2%.
Both on 50% of our free cash flow allocation to M&A.
On the on the guidance I think you got it right.
We basically took the.
So again it down by 100 beds and we increased.
The organic constant currency.
At the same rate. So we are sticking with our same.
Organic.
Currency revenue not organic but all in constant currency revenue will stick and at the same at the same level.
Okay, Okay, and then just on margin.
Is the margin progression gone as planned as it relates to maybe the timing of investments that you had budgeted for in 2022 curious if Dave just the wage inflation has shifted any things around for you.
And.
Maybe help us with the cadence of how we go forward from here on operating margin.
No I appreciate that.
Well familiar that our our margin profile throughout the year has a typical curve with the second and third quarter being stronger.
We anticipate this year to have a typical.
Corporate share so to speak on margin.
Clearly you have seen an increased pressure on compensation cost and so we have built into our forecast of course offsetting measures relative to improvement in our cost of delivery efficiencies investment into automation rehab of course pricing is rolling out throughout the four quarters and will gain momentum throughout the year.
So all of these things have to be coming together in order for us to achieve.
Two 2% to 30 basis points of margin expansion, which which is our best outlook right now that would be helpful.
Okay. Thank you.
Our next question comes from the line of Moshe <unk> with Wedbush You May proceed with your question.
Hello, Thanks for taking my questions are clear.
And we will get some more color on how contract revenues.
Michael Bloomberg.
It was one of those factors went.
Going back to the margin for the quarter mobile requirement.
<unk>.
Workload that versus percentage of revenues, where it hasn't been harmed.
On top of that maybe just some color on the weakness of the amount of term.
And the portfolio.
Hopefully that we've had government parts of Europe .
Perfect.
You broke up in the second question the weakness in.
From your bank loan portfolio.
Dakota.
The question is whether this was a weak market we've been talking about for a couple of years now.
I'll.
Ill get back okay, Okay perfect yeah. So.
We don't predict break out our subcontractor cost explicitly for you, but the biggest impact on our operating margin by far is really.
Merit an off cycle.
And then pair that with with the subcontractor hiring so it's it's just.
A bigger factor as you would expect higher attrition leads to some of that use.
I don't think we're breaking it out publicly but.
Those were the major factors on it PFS continues to be on a good path.
See steady expansion I mentioned in my call that family went out of the revenue that put a little bit of pressure in the European banking and financial services.
<unk>.
Revenue growth, but overall, we see a steady.
<unk>.
That shows that we're on the right.
Right path here is actually increased digital bookings.
Projects as Brian mentioned in this call.
Driving up so as we.
I think Brian used in this call the continued and steady improvements will BFS is kind of where we are.
We're not at the end of our work here, but we're feeling we are on solid ground.
Understood.
Our next question comes from the line of Lisa Ellis with Moffat Nathanson you May proceed with your question.
Sure. Thank you good afternoon, guys al I'll start with the inflation question and specifically I know you called out you're taking some pricing actions can you just elaborate a bit on what component of revenue will be affected mostly in your time and materials business that you'll be able to affect pricing.
And then also a bit of a more strategic question on inflation how is it affecting your clients' agendas are mixed up work at this point.
<unk>.
Yes, we have.
Clearly.
Pricing is always part of our business model and many of our clients obviously at regular price increases built into their contracts, but I think the extra ordinary situations.
Wage inflation and cost pressure that also our clients experience that has I think opened.
More opportunities for us to have to drive.
Pricing initiatives across the entire company and I think we are deploying really.
A variety of approaches each find a little bit individualized to it but.
When defining basically.
For many clients receptivity and also it will be still hard we are in the business of generating benefit and value for our clients, but the.
The discussions from what I can see.
Have been starting and have been constructive with our clients. So I am expecting pricing to build momentum and help us to contribute to the margin expansion throughout the next three quarters.
Okay, and then maybe as my follow up question just on the BPL Callout, Brian in your prepared remarks, you highlighted again now this has been a couple of quarters in a row. The strengthen bto can you just elaborate.
Service lines, specifically like which verticals is that showing up in business there.
And what we're these are leaning into that that opportunity, which.
It seems to have come out of.
Tight labor market in the back of the pandemic.
Yeah, Hi, Lisa look the team has done an extraordinary job I would say not just in this quarter or recent quarters, but in the last few years, we exited as you know content moderation that had been a large driver of growth in that business and we executed seamlessly we re pivoted the company more towards certain categories, notably.
Around intelligent process automation.
Ultimately contextualized to industry specific use cases as well as the very strong focus on the digital native clients.
But not just has that been a success story in its own right.
Also Elisa in every one of our four externally reportable segments growing our <unk> business in strong double digits. So it's broad based not just along the lines of digital natives margins have been improving and we're obviously now using this to try to get pull through to be let's say tech services portion of the company.
The if you think about our <unk> business and fundamentally it's historically been about 80% aligned to Virtualized plays and we continue to strengthen our hand in that regard for roza looking at other grow postures, including M&A and CRM and doing that in conjunction with partners and starting to see a pipeline but.
And that as well so we have I would say very strong client references a lot of swagger in that group that are consistently beating their forecasts and budgets and thats swagger correlates to broad based momentum across geographies and indeed across all four verticals.
Thank you.
Our next question comes from the line of Ashwin <unk> with Citibank you May proceed with your question.
Thank you.
Yes.
I guess I wanted to ask with regards to any.
Indeed at the flow through impact you may have seen from the.
New order in Ukraine either.
Clients coming to you to potentially move work away from eastern European clients.
Eastern European locations.
Other vendors.
Contractor work.
That might come your way.
Even on the supply side in <unk>.
Pricing.
Wage pressure.
Yes, Hi, Ashwin.
Look generally.
We don't really have any exposures to Ukraine, and Russia, and our new significant operations there whatsoever.
And I would say at this moment in time, we've seen no material impact of the conflict on client demand either.
Of course, we'll continue to monitor that situation. One we have had clients come our way I mean, there are clearly aware of or digital.
Engineering strength and our ambition to scale further there.
I actually think if I stand back from the the here and now.
I believe that the implications will be lasting and that our scale in India, which were actually tying into our digital studios around the rest of the world.
Which are very much part of our digital and global delivery network that will ultimately help us distinguish yourself and ultimately as clients are assessing their vendors and strategic partners and in particular as digital becomes mainstream I suspect that scale players like cognizant will stand to win in the long term and India will continue.
To be an asset for us and if you just think about the last few years and the Covid period, there's been a number of points mix shift to offshore notwithstanding the industry scaling towards digital.
I think that will spend cognizant in good stead, given the tremendous strength and talent we have across India.
Understood.
With regards to just.
Talking about maintenance information and pricing trends.
I know there are many nuances.
As it relates to the ability to.
Proactively pass pricing previous declines venue can do that.
The number of times a year.
The colon definitions things like that could you sort of walk through what youre seeing.
Yes.
Yes.
I'll start and then by all means jump in if needed cash when I think first of all our pricing is extremely topical at this moment given the services companies are knowledge based organizations and therefore, our supply chain for want of a better word is our talent and as costs.
There are people who grew up by definition, we have an obligation to in one form or another either automate change the pyramid shaped changed the offshoring mix or near shoring mix.
Or find a way to pass on cost to clients.
Notwithstanding automation agenda and whatnot. So I think at this stage pricing is mainstream in terms of dialogue amongst such as cognizant, but also our peers in the industry to try to offset the compensation pressure. So the classic situation that we have grown up with historically around MSA has been signed with rate cards associated with those.
And rate cards coming up for renewal every one or two years that is not necessarily.
As as relevant anymore, because people have to intersect those natural cycles now on top of that I would just point out as well as Jan said, we have a pricing initiative underway clearly the business model evolution of cognizant, which has been quite intentional in recent years, including a much greater shift towards digital and the commitment to try.
To evolve from being a provider of resources to be a solution provider.
<unk> enables clients to address their pain points by us selling solutions and delivering client outcomes that puts us in a position where we are competing with sometimes very different competitors and we may have some margin opportunity via pricing leverage as well. So both of those factors I think are pertinent at this moment in time.
Understood. Thank you very much.
Our next question comes from the line of Rod bourgeois with deep dive equity research you May proceed with your question.
Yeah, guys, Hey, I just wanted to ask about <unk>.
Acquisitions that you've completed in the past couple of years and how you are performing against their revenue and synergy targets on those acquisitions and I would also ask if you could include any kind of update on <unk> I know that you've made some good turnaround progress in that business as growth last year and it would be helpful to hear.
Our latest thoughts also on <unk> growth trajectory.
Hey, Rod I'll take your second question first.
I had actually.
So assuming that you're asking the best product sales quarter ever in the history this quarter. So.
Modernization that we had undergone.
<unk> continues to show.
We benefit and.
So, they're doing really well and their pull through implementation services and other services to it.
Yes.
Sorry, I am coughing, and you're a little bit.
Relative to <unk>.
The M&A performance.
Oh M&A portfolio.
Forming well against our budget and we are generating actually.
And synergies as we had planned for.
Yeah.
I apologize.
And I think we have probably a little bit more work to do.
To counter the margin dilution that our M&A does but.
I'll give you one example.
Oh soft division acquisition that we did now a number of years ago is now the core basis of our digital engineering business and we are really in integrating our entire engineering practice digital engineering practice based on the software model. So I would describe our M&A program is largely successful as our portfolio now you always have.
And our portfolio of companies some that are not doing quite as well, but as a portfolio. We're very satisfied with the progress we're making on M&A.
Great Hey, you could have just said <unk> performance is so good it can make your cough.
But that's my bad analysts humor.
No I'm, sorry, I'm, a little bit under the weather with a little bit of a cough, so sorry about that.
Yes.
Good.
Hey, just on the attrition front is.
Is the attrition challenge starting to abate and what levers are being pulled that give you some encouragement about where that might be going from here, where are you getting where you're getting some some benefit on the efforts that youre, making to attract and retain talent.
Hey, Rod it's Brian So first of all we're delighted we've reduced voluntary attrition for two quarters in a row. This quarter attrition fell five point sequentially on a voluntary basis, and we are extremely comprehensive and our disclosure of attrition.
<unk> in the industry.
That being said I actually anticipate attrition will pick up in the second quarter. In fact, I know attrition will pick up because we look at resignations on a daily basis, and we anticipate it will be elevated for the course of the year, we have done a tremendous amount in the last year. We call. This early we substantially overspend or Alan.
Allocated budget last year for compensation promotions, because we wanted to invest in our in our talent tried to mitigate attrition and make sure we capture market opportunity, but this is above and beyond.
Simply financial measures its total rewards vacation policy for one key policy stock purchase price policy et cetera within total awards and on top of that then there is a significant amount that we've been doing around investing in our employees and whether that is scaling or indeed.
Enabling career path advancements cognizant as you know very well is always been a company that invested heavily in our people attracted smart people put them onto accounts and really enabled ourselves to ingratiate yourself at accounts.
<unk>.
Further that into last year by doing what I would view as clever things with regards to our promotion process.
Really trying to make this a little bit more self service and constant through the course of the year by tying in which greater to skilling as opposed to longevity of tenure and making sure that we try to correlate that with bill rate increases as well and then there is a broader notion of both getting back on the front foot growing double digits, which creates career path opportunities for people and upward.
Mobility, and just et cetera, <unk> sense of winning bigger deals winning in digital and delivering with success now all of that comes against the backdrop of this also in the course of the last few years, taking some pain by really balancing our visa dependency in North America, given the regulatory backdrop as well, but the heavy lifting of that is now essentially.
Should be behind us. So we've been working very hard to mitigate attrition, but the reality is the market is red hot behind certain skills.
As we might we track the data when we promote people are when we get some salary increases we know how long it mitigates attrition before it picks up again. So I just think this industry is perhaps at a different curve than it was in the last 15 to 20 years, perhaps the return to office are much more of a hybrid work.
Will help mitigate what we've seen in the last year, but I'm still somewhat pessimistic about the industry attrition trends.
Got it thank you.
Our next question comes from the line of Brian Essex with Goldman Sachs. You May proceed with your question.
Hi, good afternoon, and thank you for taking the question Brian I'm wondering if you could address head count growth number of quarters here nice strong double digit head count growth in.
In spite of attrition, although attrition has been improving can you, maybe unpack that growth a little bit and give us a little bit insight around.
Have you been able to improve lateral hiring are you, making some digital ads in this primary primarily pressures that youre, bringing on board and how that might translate into.
Revenue related.
I guess head count related revenue growth going forward.
Yes, well the Holy Grail of course in a service company is somehow to decouple headcount growth and revenue growth, but there are multiple factors at play, including accelerators and the mix of the head count onshore versus offshore and indeed within the pyramid clear.
Clearly if I start with the pyramid at the bottom of the pyramid I felt three years ago. We were light we hadn't been as aggressive on campus hiring et cetera, and in the last few years, we have really I would say materially changed our hiring practices 17000, a few years ago 33000, freshers on boarded and infused in the last year and then we are.
Aiming for $45 50000, this coming year and I'm, assuming that will continue to grow so that by definition as head count at lower levels from a billing perspective, and clearly as you go through rightsize that then you bring people on board you get them trained for a few months you infuse them into accounts and ultimately get them into more billable type roles. So that's been <unk>.
Where you've seen us materially add head count and I think it's fundamentally.
So core to our success in the years ahead, because with those people being skills and with this internal job moves program that creates upward mobility in our organization. We were therefore able to promote from within more often particularly when we have.
Fixed bid or managed services type deals versus a.
More traditional if you will staff augmentation or interview base ROE. The second factor I would say is our mix has shifted like many in the industry about two points towards offshore in the last year and that has different dynamics in terms of average bill rate per employee or margin dollars per employee, but also in margin rate per employee can be high.
And offshore.
But the attrition that we're experiencing I think as an industry and within cognizant is broad basis, not just in India. It's not just in the junior levels of the organization. It's also across Western Europe , and North America. So we are continuing to complement the programs we put in place with incremental accomplished programs in North America.
Nearshore programs in Mexico, and Canada, which are ramping nicely for us and of course, the need for subcontractors and laterals subcontractors actually fell sequentially in mid single digits and Thats something we would obviously like to.
<unk> to optimize into years ahead by getting more accomplished programs more upward mobility and better demand visibility such that we can avoid as much subcontractors and then last but not least one of our core competencies I would argue has been our talent acquisition group have done remarkable work in the last year or so.
Certainly the offer to join our ratio has eroded in the industry and cognizant is no different but nonetheless, we have an incredible capability to bring in tens of thousands of employees per quarter and I'm firmly of the opinion, we're not yet hitting our stride in terms of our revenue potential. So we want to continue to scale our operations to get after it.
Market possibilities that are out there.
Got it very helpful. I appreciate that and maybe just a quick follow up for you.
On an FX maybe.
Any way to quantify the contribution from rupee depreciation versus the dollar and how you might be thinking about that going forward.
Given the given the margin guidance you've given.
Yes, actually the rupee movement going forward, which is largely affecting basically of course, our cost base.
As you know moderated by our hedging program. So we really don't make an assumption around this in.
In the quarter I think I mentioned in.
Grip debt.
<unk> did contribute about 50 basis points.
And a set of ups and downs.
Margin, but.
That may help you a little bit to extrapolate.
For what it is.
So this is largely driven by our revenue forecast that's going to be.
And the pound are going to be the most impactful longer than that.
Got it that's helpful. Thank you very much.
Our next question comes from the line of.
Keith Bachman with BMO you May proceed with your question.
Hi, Thank you very much I'll ask my two questions concurrently since they're related Brian first for you.
When you left since you last gave guidance.
Based on our discussions with folks in India in particular, it seems like wage rates have actually moved against you in other words wage rates have gotten more expensive even over the last 90 days.
And assuming that supposition is true I'm, just what what is going right that allows you to maintain the margin guidance, even with perhaps wage rates getting more onerous, perhaps you assumed in the previous guidance that wage rates were going to continue to move against you, but is it as simple as pricing because when we do our calc.
The rupee exchange rate, it's not enough to offset the change in waste rates, even over the last 90 days so.
What is going right that helps you maintain the guidance and are you comfortable that in fact with the current wage rate structure, you're leaving enough room as you said to strengthen your hand or invest appropriately for the longer term.
Well, we have continued to invest in the company as you know over the last few years, our SG&A has outgrown revenue and margin dollars substantially on a year over year basis.
And for a whole host of initiatives from security to marketing to re invigorating. The commercial momentum story that is now a few in the growth that we're seeing Keith by definition, it's not an easy environment by definition. When we look at forward guidance, we anticipate much of the here and now but potentially.
Trends that we with every passing month and quarter, we have more lateral hires that we're bringing in from the outside which are coming in at rates, but I still feel in the same vein the negatives of labor cost increases the attrition impact on utilization the increased costs associated with travel and entertainment and return to office.
We still have possibilities to offset that with moderated SG&A growth with revenue growth leverage pyramid optimization, shoring optimization automation and real estate and of course pricing and arguably pricing is the big one.
We are seeing some nice green shoots there.
Programmatic approach that Jan and I are heavily vested in with our pricing team globally and with the markets to make sure that we have the courage to talk to clients around the importance of investing in our people, which will help mitigate attrition on their accounts.
The various other actions we're taking so pricing is ultimately the factor that gives us.
And ability to maintain margin growth of 20% to 30 basis points for the year.
In other words those pricing discussions.
Even since the beginning of the year those are perhaps a bit more favorable where clients are willing to listen or so.
It's a more equitable discussion at least yes look let's face it I mean in every C suite conversation that I have as I go around the world.
We all end up talking about multiple things.
<unk> returned to offers hybrid work culture, and also by the labor and supply chain disruption.
Many clients over the years as you know have brought certain skills in house and they're all dealing with the same trends we are dealing with ourselves in terms of elevated attrition and labor cost increases. So it is quite topical it's quite known greater client base and we're not the only company in the world approaching clients outside of standard renewal.
Dates to intersect the classic rate card work.
It's heavy lifting it's not easy I want to call out my team globally. We've worked very hard in the last nine months to mitigate this to navigate our way through certain icebergs and we know we've got some heavy lifting ahead of us as well, but the team are committed to do so and we'll keep obviously everybody concurrence on a quarter by quarter basis.
And see how much progress we can make in this regard.
Okay Fair enough and then Brian just to clarify you did say that you have had a really nice move in quarter of nutrition over two quarters.
You said it would go back up in June due to some seasonal factors, but what do you think it flattens out there even declines as you look at the back half of the calendar year or do you think it kind of stays at these elevated labels. So you can make progress in attrition. If you look over the horizon from the June quarter.
We just don't know, it's very hard to call Keith.
The reality is that attrition slows based on a series of financial measures. We've made serious promotion measures. We've made but obviously there is an element of seasonality at play here as bonuses are paid which triggered an increase in attrition.
In the last few months.
And so therefore, I know that attrition will go up in Q2, and that's factored into our guidance.
Once we get pass Q2, we're just going to have to keep a close eye on this and see.
How we're able to continue to engage employees.
I actually believe that the environment. We're in these days, which I think we've hit a watershed moment of people no longer necessarily wanting to work in an office environment like in the past can be detrimental to employee engagement and cultural affinity and indeed can enable people to work more remotely and then in countries like India the notion of move.
<unk> from a large urban center to our rural environment frankly.
Try to encourage people back to an urban environment can have meaningful consequences for their disposable income at the end of the month. So there's not just a philosophical debate in terms of whether you can still get your work done remotely leveraging technology, but it was very much a financial debate as well notwithstanding the broader inflationary pressure in the urban center.
Or indeed in rural so.
I'm somewhat of the opinion that we're at a new norm the labor market is reset.
And with that new approach to work industry attrition may pick up in a more sustainable basis, particularly in today's.
Demand environment, where I still feel that digital transformation is purely to add multiple industries and theres a lot more legs.
In the years ahead.
Okay. Many thanks team.
Our next question comes from the line of James Faucette with Morgan Stanley You May proceed with your question.
Great. Thank you very much just on.
Kind of a follow up question on pricing.
Can you talk a little bit about.
Well historically, you've talked about there being a gap between your current pricing and the price of your command and some of your acquisitions.
Where are we in terms of closing that gap and how much incremental benefit do you think can come from that this year.
I think I don't want to go into all the details of the pricing opportunity, but you're pointing out I think a key element of.
That is playing a little bit in our favor the shift towards digital.
On its own helping because we have a higher gross margin in our digital business focusing obviously also on the pricing of these high in demand.
Resources, and so that gives a little bit more pricing opportunities also these projects tend to be a little bit shorter term compared to other long term contractual things. So in that area, we're going to expect to make some progress and I think our clients have also shown more receptivity.
In the area of the set of digital skills to discuss pricing with us. So I think that's helping so you'll have a double effect of driving higher share using our acquisitions and pricing levels that have been established by our acquisitions as a guide to establish better pricing levels for the entire end.
The price so I think you intuitively pointing out one area that gives us.
It's definitely part of our overall thinking relative to revenue generation there.
There's also an element.
I come back to the question is really the overall margin discussion and pricing has been a focus on this call, but we do have with our shift towards hiring.
GNC is dramatically shifted out.
Our cost per admit development and.
And the internal promotions not only help of course generating better career pathing Pall associates, but also help us to mitigate the cost of lateral hires and we hope that as we execute on our strategy of increase.
GNC hiring.
We plan on cost efficiencies.
And now a delivery model, helping in a similar way.
To offset compensation pressure that <unk> seen just on wages basically.
Got it got it and then.
How would you talk about it and maybe just for you Ron how do you feel about the current state of your delivery organization.
And even outside of attrition, obviously attrition and hiring is always going to be a challenge for delivery, but.
How are you feeling about that structurally and skill skill wise et cetera.
Any unique challenges outside of hiring and attrition that you want to make sure you tried to address as we go through the rest of this year.
I'm very proud of our delivery organization at the end of the day covenants and visit delivery company whenever we sell a little more than a commitment to actually go and deliver against that and come what may in the last few years humanitarian crisis as cyber attacks and of course in today's elevated industry attrition.
Our delivery team have gone the extra mile time, and time again to satisfy client demand and juggle various balls, so I'd like to compliment them.
We of course are complementing, India as well by bolstering that with a global delivery network.
In Europe in North America onshore as well as near shore locations. So they.
On a really nice job for us.
We evolved the way, we show up to clients and lead with advisory capabilities to sell solutions and deliver outcomes by industry addressing client pain points of course, there is an evolution that's happening in our delivery organization and that includes how we solution in project and program management.
Of course, the degree of efficiencies and accelerators, we're able to use within our portfolio.
And that's something we're making good progress on and at some stage in the future, we'll talk more about that externally, but our delivery organization is the heart of cognizant.
Frankly was in India, probably four or five weeks ago.
I'll be back there in the <unk>.
Month, or two as well a lot of my team have been there in more recent weeks actually characterize the the morale and the vibe amongst a delivery organization to be perhaps the highest it's been in the last three years I really feel very good about where we are notwithstanding the pressure everybody has been under given these are self imposed or exogenous events.
Great. Thank you guys.
We have time for one more question. Our last question comes from the line of Bryan Keane with Deutsche Bank. You May proceed with your question.
Hey, guys. Thanks for fitting me in I'll keep it short here I guess.
I know a focus of the company has been to do larger deals just get an update on how that pipeline looks and if you are being able to close some of the larger deals and then kind of.
Secondly is there a bookings target for the year that we should think about I know we started at 4% you are talking about an acceleration I know we've done mid teens. The last couple of years, just trying to get our models set up correctly. Thanks.
Yeah look I think fundamentally given the revenue guidance, yet and I gave in November last year, and the multi year outlook as well as the current guidance for 2022.
We've got to maintain a book to bill ratio at one one or above that certainly directionally, what's going to be needed for us to achieve those goals.
We think it's very important to underscore the importance of thinking about bookings across a trailing 12 month basis and to your point Brian .
We've had some very strong years now the last two and from my perspective, we are in a much better position than we've been at any stage as I came here a few years ago.
And I feel good about our win rate and I feel good about our pipeline within that so that's kind of my perspective in terms of bookings and.
Our readiness to get after the market opportunity in the years ahead, the demand picture less concerned than the attrition and labor cost concerns.
And what about larger deals Brian .
Larger deals.
Trailing 12 month basis, we've got $23 $4 billion of bookings.
Our substantial large deals within that and I view that as a positive because our digital momentum has really picked up but certainly with I would say strong delivery capabilities strengthening project and program management strengthening solution mean discipline within cognizant, we are continuing to review the opportunity to get into some larger.
Yields and hopefully we'll have some good news for you on that in the next few quarters. Some of those will be aligned to really strategic industries for us like <unk>, where we've done some good work in recent years, we've cleaned up our portfolio we cleaned.
Our refreshed or our client facing teams both in delivery as well as in commercial and we got a very strong industry solutions group that needs to continue to get stronger.
And we've been spending a lot of time with clients that we haven't sold to in recent years and I think we have the opportunity to get into some of those larger accounts as well so hopefully youll see something in the coming quarters in that regard but.
Our momentum is ultimately being carried by digital momentum.
The reinvigoration of our commercial sales team and client Centricity at our core clearly a broader portfolio, that's more compelling than ever before which has been intentionally built to exposure to higher growth categories.
Our international expansion I'll call out the U K, our second largest country. After the U S. Growing consistently now 20% plus is a really strong success story and then of course, if we get post merger integration opportunity to scale into our accounts. If we can complement all of that with a few larger deals per year that will be done opportunistically judiciously.
There's a lot of potential left in this company and I really feel good about that.
Okay with that thank you very much for joining us today, and we look forward to speaking with you soon.
This concludes today's cognizant technology solutions Q1, 2022 earnings Conference call. You May now disconnect. Your lines at this time. Thank you for your participation during the rest of your day.
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