Q2 2022 Cognizant Technology Solutions Corp Earnings Call
Ladies and gentlemen, welcome to the cognizant technology solutions second quarter 2022 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.
Keep had a confirmation tone will indicate your line is in the question queue you might press star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Thank you I would now like to turn the conference over to Mr. Tyler Scott Vice President Investor Relations. Please go ahead, Sir you may begin.
In your presentation.
Thank you operator, and good afternoon, everyone.
Now you should have received a copy of the earnings release and the Investor supplement for the company's second quarter 2022 results. If you have not copies are available on our website cognizant dot com.
The speakers we have on today's call are Brian Humphries, Chief Executive Officer, and Jan 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 investors.
Reconciliations of non-GAAP financial measures, where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC.
With that I'd like to turn the call over to Brian Humphries. Please go ahead Brian .
Thank you Todd and good afternoon, everyone I'd like to comment on several topics today, notably our second quarter performance, the demand and pricing environment and labor market dynamics.
Let's start with our second quarter performance, which was balanced.
Second quarter revenue was $4 $9 billion up 19, 5% year over year in constant currency.
It was led by digital.
Second quarter operating margin was 15, 5% up 50 basis points sequentially in line with our expectations financial leverage driven by sequential revenue growth disciplined expense management currency benefits and the optimization of pyramid shoring and fulfillment helped offset the impact of attrition and labor cost inflation.
<unk> pressure.
Our industry segment performance remained largely consistent.
Financial services grew five 1% year over year in constant currency led by insurance growth.
Includes a negative impact of 190 basis points from the exit of sound like.
We continue to make progress strengthening client relationships and financial services.
Earlier in the second quarter I visited clients in Germany, and celebrated a new logo win with Zurich insurance, Germany.
Cognizant will help simplify modernize and manage their enterprise application landscape by establishing joint Dev ops teams working to extend the insurers AI data software engineering and cloud capabilities.
Yeah.
In insurance CCT intelligence solutions to SaaS platform powers to property and casualty insurance industry asked for or helping enabling their cloud transformation program. We.
We lead with our enterprise Dev ops, and cloud transformation consultancy and partnered with Microsoft to present, a comprehensive solution.
This prompted declines to also select us to build next generation analytics and telematics solutions that are expected to be key to their long term leadership.
In the second quarter, we combined our health care and life Sciences operating segments into a single operating segment called Health Sciences, and natural evolution, given the market convergence across these industries.
Sciences grew seven 6% year over year in constant currency with growth driven by pharmaceutical clients and sustained momentum in our <unk> product portfolio.
Commonwealth Care Alliance and integrated care system, serving over 60000 members across numerous U S states illustrates our momentum in <unk>.
Our end to end business process innovation powered by <unk> solutions and the V pass engagement is fully integrated from enrollment and billing three claims.
Through our partnership Commonwealth Care now has the tools needed to compete in the digital health ecosystem and supports value based personalized care for its members.
We've also signed a new multiyear agreement with Oregon on a global Women's health company to help improve the delivery of health care products and crucial medicinal supply chain management.
We'll have Oregon on scale, it's health care business by delivering full stack industrial technology support for its global pharmaceutical manufacturing sites in the U K, Netherlands, Belgium, and Indonesia.
We continue to see excellent growth in products and resources, where revenue grew 11, 6% year over year in constant currency.
And in part by strength, among automotive logistics retail and consumer goods clients.
As a strategic partner for digital we're hoping albertsons companies to $70 billion grocery retailer make their move to a cloud based infrastructure model, enabling innovation and improve customer experiences both in store and across last mile delivery.
Communications media and technology, we had another quarter of excellent growth.
Revenue grew 19, 5% year over year in constant currency, driven by technology clients and new client acquisition.
<unk> is an example of a new logo win they selected cognizant as a preferred partner for global customer support operations across all products and services from their flash flagship esignature product to newer contract lifecycle management products.
Dr Consigned turned to us because of the distinctive solution proposed by our and shoot is operations and automation practice <unk>.
<unk> cutting edge omnichannel customer support and outcome based commercial models.
A quick word on our recently announced organizational evolution in July we announced the combination of our practice areas with delivery practices, which simplifies our model by bringing cognizant in line with industry norms.
This enables us to have end to end accountability across four integrated practices from vision roadmap offerings and capabilities, including M&A and post merger integration.
Pre sales solutions and delivery.
I believe this will assist our industry teams to be more successful with our clients as we sell solutions and deliver client outcomes.
I also believe that our industry capabilities provide differentiation, we can unlock value for clients at the intersection of industry use cases and technology.
Moving now to the demand and pricing environment.
We are carefully monitoring the potential impact of a worsening economy and our pipeline to date, we've not seen any significant slowdown for it services demand.
That said as we serve some of the largest clients in the world. We are aware that should they see slowing earnings growth non essential projects are those with longer or why it may be paused.
I am confident that the breadth of our portfolio enables us to serve our clients' needs for higher levels of agility innovation resilience and indeed efficiency.
So regardless of what the coming quarters bring our value proposition to clients remains.
More generally digital transformation has become so essential and foundational to most companies regardless of their industry that despite some macro demand uncertainty in the short term I remain optimistic of 19th services growth prospects in the medium to long term in.
In fact, the bigger challenges, we're faced with as an industry are the demand supply and balance in key digital skills elevated attrition and labor cost inflationary pressure.
I'd like to thank our associates around the world, who have been working hard to navigate these challenges all whilst trying to optimize fulfillment in pricing.
Achieving the perfect balance is not always easy and in the second quarter, while I'm pleased that we drove both year over year and sequential margin expansion.
Expect that our focus on fulfillment optimization on pricing marginally impacted top line performance and hurt bookings momentum.
Second quarter bookings declined 3% year over year below our assumptions entering the quarter.
While we continue to have a robust book to bill ratio of approximately $1 two times revenue.
Trailing 12 month basis.
Better balancing the factors just mentioned, we aim to accelerate bookings growth in outer quarters, what's nonetheless, achieving our committed margin expansion.
Just a word now on pricing.
Pricing dynamics remain consistent clients through their vendor exposure and their internal teams are privy to demand supply and balances across key digital skills and labor cost inflationary pressure.
This coupled with the pent up demand for digital transformation means clients are more predisposed to engage in price increase discussions.
Clients are willing to pay for skills and innovation with efficiencies, including automation and optimize delivery mix are expected to mitigate cost increases.
We continue to execute against our pricing initiatives to offset labor cost inflationary pressure with benefits starting to be felt but greater impact expected in the coming quarters, recognizing that pricing power stemming from talent shortages will lag behind talent related cost increases.
Let's move now to labor market dynamics, including attrition and inflationary pressure.
Second quarter voluntary attrition rose five points to 31% on an annualized basis or 32% on a trailing 12 month basis.
This increase was slightly above the seasonal uptick we anticipated entering the quarter impacting second quarter revenue performance.
While we have seen some signs of improvements in July resignation rates, we continue to expect elevated attrition for the remainder of the year.
As I've mentioned on prior calls and track.
<unk>, retaining and rally and our talented employees is one of our top priorities.
In the past year, we've invested record levels and compensation overhauled our promotion process invested heavily in our learning and development initiatives and introduced a series of other measures, including educational programs and returned ships.
Our internal job news program, which facilitates ongoing upward mobility and the company is one factor that enables us to mitigate the need for and indeed, the cost pressure of lateral hires all whilst improving morale.
We will also recognize how important flexibilities to our associates and have therefore communicated a hybrid model will define our approach to work.
Our priority is to be a welcoming inclusive equitable company for everyone no matter their work locations.
Our client and associate centric company aims to strike a balance between how clients want to interact with us and the flexibility we seek.
While maintaining a focus on employee engagement collaboration our values and our culture of continuous learning.
I'm pleased to see that our efforts on employee engagement are working in recent weeks. We completed our annual engagement survey that showed significant increases in our engagement scores positioning us above industry benchmarks.
In closing as we execute our strategy, we were operating with three clear priorities.
First execute our vision to become the preeminent technology services partner to the global 2000 and C suite.
Rally and engage our associates around the world and third drive profitable growth.
Despite some near term macro demand uncertainty and the challenges of navigating todays labor markets, let's not forget that we are in the early stages, what we expect to be a massive digital build out.
Thanks to our portfolio and our talented employees around the world. We believe that we will be a strategic beneficiary as companies embrace digital operating models.
Finally, as we reposition cognizant towards selling solutions and delivering industry aligned solutions enabled by targeted advisory capabilities, our margin potential will be strengthened in line with our brand repositioning to higher value services.
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.
<unk> over to you.
Thank you, Brian and good afternoon, everyone while.
While our Q2 revenue growth was slightly below the midpoint of our guidance range. We delivered sequential margin expansion in line with our expectations, while continuing to invest into our talented people.
We remain focused on profitable revenue growth.
Moving onto results Q2 revenue was $4 9 billion.
If anything an increase of 7% year over year or nine 5% at constant currency.
Year over year growth includes approximately 110 basis points of growth from our recent acquisitions and a negative 60 basis points impact from the sale of family.
Completed February 1st.
In Q2 digital revenue as reported grew 13% year over year.
And included FX headwinds of approximately 250 basis points consistent with the total company.
At quarter end digital represented approximately 50% of total revenue up three points from the prior year period in.
In addition to the FX headwinds slowing of digital growth reflected lower inorganic contribution and elevated attrition in particular in North America.
Despite these headwinds we were pleased with the growth across our digital battlegrounds, which outpaced the total digital growth.
As Brian mentioned Q2 bookings declined 3% year over year.
This resulted in trailing 12 months bookings of $23 2 billion.
Which represented a book to bill of approximately $1 two unchanged from Q1.
Despite the softer than expected growth. We continue to believe this book to Bill provides us a healthy opportunity to support our revenue growth outlook for 2022.
We expect to improve bookings growth in the quarters ahead.
Moving on to segment results for the second quarter were all growth rates provided will be year over year in constant currency.
Financial services revenue increased approximately 5% Q2 growth included a negative 190 basis points impact from the sale of our same link subsidiary.
Our recovery within financial services remains largely in line with our expectation driven by continued strength in our North America regional banking portfolio growth in the U K and steady performance within insurance globally.
Health Sciences revenue increased approximately 8%.
Given by demand for digital services among pharmaceutical companies.
<unk> among healthcare clients was consistent with last quarter momentum continued in our integrated software solutions.
Products and resources revenue increased approximately 12% driven by growth across all segments and included approximately 260 basis points contribution from recently completed acquisitions.
This compares to the approximately 500 basis points contribution will be reported in Q1 of this year.
Based on the current portfolio of closed acquisitions, we expect the inorganic contribution to be immaterial to segment performance beginning in Q3.
Communications media and technology or CMT revenue grew approximately 20% primarily organically including growth from new clients. This reflects growing demand for data services and our work with leading digital native clients. We also continue to experience strong demand.
For our intuitive operations and automation services, which includes all our PPO business.
From a geographic perspective in Q2, North America revenue grew 9% year over year.
Growth was led by CMT and life Sciences clients.
Our global growth markets, which includes all revenue outside of North America grew approximately 12% year over year in constant currency, which included a negative 240 basis points impact from the sale of family.
Growth was led again by the U K, which grew 25% and included strong double digit growth within financial services, including public sector clients.
Products and resources and CMT.
We continue to see significant opportunities for growth and our G. M. G. G M business and do not believe that we are hitting our full potential yet.
Now moving on to margins.
In Q2, our GAAP and adjusted operating margins were 15, 5% as there were no non-GAAP adjustments in the quarter.
On a year over year basis operating margin increased by approximately 30 basis points in line with our expectations.
This included improvement in gross margin driven in part by a balanced execution and our focus on profitable revenue growth.
We also experienced a benefit from the depreciation of the rupee against the dollar and a modest benefit from our recent pricing initiatives.
Additionally, we were pleased with the SG&A leverage we drove in the quarter.
Our GAAP tax rate in the quarter was 24, 2% and adjusted tax rate in the quarter was 22, 2%.
Which benefited from a discrete tax benefit related to our Anhui patriate it accumulated foreign earnings driven by the depreciation of the rupee.
Q2 diluted GAAP EPS was $1 11, and Q2 adjusted EPS was $1.14.
Up, 14% and 18% year over year, respectively.
Now turning to the balance sheet.
We ended the quarter with cash and short term investments of $2 3 billion.
Net cash of one $7 billion.
Free cash flow in Q2 was $485 million, representing approximately 84% of net income in line with our expectation. This brings year to date free cash flow to $671 million.
DSO of 74 days increased by two days sequentially driven in part by seasonality and by three days year over year.
We expect to improve DSO in the second half of the year.
During the quarter, we repurchased 4 million shares for $300 million I'm not all of our share repurchase program and returned $141 million to shareholders through our regular dividend. This brings total capital returned to shareholders through share repurchases and dividends to over $1 billion through the first half of 'twenty.
'twenty two.
Turning to guidance.
Our outlook for the remainder of the year assumes that we will continue to balance margin performance and revenue growth.
For Q3, we expect revenue in the range of $4.98 billion to $5.3 billion, representing year over year growth of 5% to 6% or seven and a half to eight 5% in constant currency.
Our guidance assumes currency will have a negative 250 basis points impact as well as an inorganic contribution of approximately 50 basis points, which reflects the lower than anticipated M&A activity compared with our assumptions and prior full year guidance.
For the full year, we are lowering the midpoint of our constant currency revenue growth guidance by about one point, which reflects in part the impact we have had while navigating the current industry supply demand imbalances elevated attrition and softer than expected hiring particularly.
In North America.
However, we are maintaining our margin expansion guidance, which reflects prioritization of profitable growth pricing initiatives and the rigor that we have put around SG&A.
While our full year revenue, we still expect inorganic growth to contribute approximately 100 basis points to growth unchanged from prior guidance.
This assumes an immaterial contribution from future unannounced acquisitions.
Q4.
Our reported revenue outlook now assumes a negative 220 basis points impact from currency versus 180 basis points previously.
This leads to a revised reported revenue guidance in the range of $19 seven to $19 $9 billion.
Representing $6 three to seven 3% growth.
Or eight and a half to nine 5% growth in constant currency.
This compares to our prior guidance of $19 $8 billion to $22 billion, which represented growth of 722924.
Sure.
9% to 11% in constant currency.
Our longer term capital allocation framework is unchanged.
Today's uncertain macroeconomic backdrop has the potential to create a mismatch of valuation expectations between buyers and sellers as well as challenging synergy assumptions. Despite these dynamics our pipeline remains active and we expect to announce deals towards the end of this year. However, these factors have led us to do.
Deploy less capital than anticipated on M&A.
Therefore, we are revising our capital allocation plans for the remainder of 2022, we now expect to return at least $1 2 billion through share repurchases for the full year up from our commitment of at least $600 million.
Last quarter as always this remains subject to market conditions and other factors.
Given the strength of our balance sheet and expected free cash flow generation, we do not expect liquidity will restrict our ability to execute against our M&A pipeline for the remainder of the year.
As I mentioned earlier, our 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 costs TNT.
T N E and we turned to office costs, which we expect to offset food delivery efficiencies digital revenue mix pricing and SG&A leverage and discipline.
Our guidance assumes continued sequential margin expansion in Q3 before the impact of our annual merit cycle in Q4.
Our full year outlook assumes interest income of approximately $35 million versus $25 million previously, reflecting higher interest rates.
Based on our increased share repurchase activity. We now expect average shares outstanding of approximately $519 million versus 522 million shares previously.
We also now expect a tax rate of 24% to 25% versus $25 to 26%, reflecting lower year to date performance.
This leads to our full year adjusted EPS guidance of $4 51 to $4 57 up.
Approximately 9% to 11% year over year. This compares to $4 45 to $4 and 55 previously.
Finally, we are still targeting full year free cash flow conversion of approximately 100% of net income.
With that we will open the call for your questions.
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First question comes from the line of Rod bourgeois with deep dive equity research you May proceed with your question.
Okay, guys, Hey, so thank you for the update on the revenue progress and outlook you've provided some updates here for us how much of the revenue challenge versus the plan that you had.
Three months ago, and even earlier this year, how much of that is due to supply challenges. It sounds like a lot of it is supply versus macro challenges that are being faced.
Within your client base and a potential that the macro challenges are starting to ramp up.
Hey, Ross, it's Brian here. Thanks for the question look it's very much related to more towards the demand supply imbalance that we see in the markets. You know we gave guidance in November around the revenue target range of eight to 11 over the coming years with about two points from M&A.
Today, we reported nine five points of growth so within that range and even the guidance. We gave is within that range, but my hope obviously is that with better demand supply.
Situations cognizant would have better head count and be better able to get after the revenue opportunity whilst also.
Well I feel pretty good about where we are on margin. These days. So it really for US now it's about getting continuing to evolve the business portfolio. If you will to a higher growing categories, making sure we get the head count.
Both in terms of increasing retention.
And making sure we even get better throughput in terms of our recruitment and.
And then of course targeted M&A, which tends to be accretive to our revenue CAGR. Some targeted larger deals that may or may not come ultimately in years to come but we'll be selective on those as I've always said and in some regards today's margin profile. I think is also indicative of the fact that in recent years, we havent made big bets that may have been wrong in terms of.
Attrition assumptions or margin or cost assumptions.
It's really about those things Rob macro yes, we've seen some impact in terms of pipeline progression.
But it's been more modest we haven't seen anything meaningful in terms of the slowdown in demand and I am still certainly of the opinion that while we'll have to keep an eye on the earnings cycle of our major clients and understand how they think about larger projects or ERP rollouts of projects with our wide timelines at the end of the day I'm very optimistic about it.
Services growth prospects in the medium to long term and will continue to shape the portfolio to make sure we were able to show up in that value to clients.
Okay, well that's helpful that demand is not being.
Significantly impacted it sounds like by macro.
On pricing you made some comments on pricing and just just to follow up on that are you feeling that your pricing progress is consistent with the expectations that you had.
Three and six months ago or is the macro factors also.
Creating more challenges in getting prices realized.
Yeah, Rod I'll jump in.
The pricing environment, we would still overall characterize as consistent and we feel we do have pricing opportunities for us that we are realizing and working hard to achieve.
We see better opportunities in our digital opportunities, where the demand is really difficult.
Difficult to to supply and value as high as our newer digital type services.
We see better opportunities, we talked last quarter about our initiatives to drive our pricing across.
Our entire client portfolio, and we're making progress we always anticipated that this would be a multi quarter.
And Denver and some of these negotiations are ongoing but we do see early results and that's why I mentioned in my commentary that we do see some modest contribution from from pricing.
Not only to gross margin, but obviously to our overall margin development.
Great. Thank you guys.
Our next question comes from the line of Jason Kupferberg with Bank of America. You May proceed with your question.
Hey, guys just wanted to switch over to bookings I know you mentioned they were below your expectations for the quarter.
I'm wondering if you can quantify the shortfall there and maybe just talk about what you think some of the root causes might've been obviously, they can be lumpy quarter to quarter, but I'm guessing that the bookings are kind of less affected by the supply demand imbalances that you just talked about as it relates to revenue. So I would just like to get a little bit more color, there and and do we see.
Starting to see improvement in the bookings growth trajectory in Q3.
Yeah, Hey, Jason It's Brian . So you know you said it right bookings can be choppy, which is why I've always been enough a good up looking at bookings on a rolling 12 month basis. So on a trailing 12 month basis, our bookings are still quite strong with a book to bill of one two but within any given quarter, you'll have dynamics at play and this was a quarter, where we knew we had to go.
Focus on resource fulfillment, given where we were from an attrition then.
Resource point of view, but also we want to do make sure given labor inflationary trends, we were able to address pricing discussions with clients.
And that May have had even a psychological impact on our commercial team as they are.
On fulfillment and focus on pricing discussions.
<unk> concerned about selling the next thing if they're worried about being able to fulfill against it. So it's not quite as clean as you suggested but look fundamentally we'd expect this to pick up in Q3 and Q4.
Demand is there to the question to Rob asked earlier.
We feel pretty good about our portfolio of these days, we are repositioning the brand and repositioning cognizant shows up the clients and the kind of work we want to engage in.
So.
Maybe a question of balance that's perhaps the word of this quarter's earnings were very proud that we're in.
Nice lawyer in the industry in the sense that we were able to drive margin expansion year over year and quarter over quarter, we obviously want to accompany that with revenue growth and bookings momentum and that's what we're setting out to achieve obviously on a go forward basis.
And then just on the supply side is is attrition or is hiring the bigger challenge right now and do you think Q2 will more or less be the peak on nutrition.
You said you expect it to remain elevated.
But just wondering what other actions the company might take to improve.
Improve that that metric.
Well, we've taken significant actions from an attrition point of view both in terms of compensation are significant investments in career paths and overhauled our promotion process significant investments in learning and development than in a whole host of other activities around education return ships and whatnot I will say theres some opportunities here that we have.
This is seasonally in line with I guess expectations, although it was a little above what we had assumed going into the quarter, but you know we are somewhat confident that the actions. We're taking are really kicking in employee engagement as I suggested in my prepared remarks shows increases year over year across all eight categories that we measure it we're above industry benchmarks.
<unk> by the way.
We have seen progress in terms of the actions we've been taking in the last 18 months. It has really improved our relative compensation position across key markets, including India and well, it's only one month of the quarter. The resignation trends we've seen in July which isn't just about Q3 is also about <unk>.
Four have been improving.
And we have good success in this internal job news program, which is creating a much more dynamic promotion process. So those are good leading indicators I'd say in terms of retention and recruitment side I think it's fair to say the industry has been faced with.
Almost its musical chairs situations, where people show up with local job offers.
The macro dynamics may actually start becoming more favorable early indications are that offered to join our ratios have recovered a little bit in recent weeks and I dare say for for us perhaps for others as well.
So we're looking forward to hopefully being able to build right head count more aggressively in a go forward basis, and therefore be able to achieve or true topline potential on the back of increased operational rigor and margin discipline that we've evidenced this quarter.
Okay. Thank you I appreciate it.
Yes.
Our next question comes from the line of <unk> St. Huang with Jpmorgan. You May proceed with your question.
Hey, Thank you so much and adjacent to ask about your.
Do you have confidence or visibility on bookings, improving but just thinking about it.
Our head count changes a little bit here, just slowed down quite a bit sequentially. After a period of strength. So just just trying to read into that is are you I'm, assuming you're just going to focus a little bit more on.
Utilization here at this point of the cycle just trying to reconcile those two things.
Yes, maybe just as a quick reminder, our.
Second quarter is typically a higher attrition.
Quarter that has to do with some of the and bonus payments that we issue in the end of March. So we knew that we would have increased attrition that we don't expect to continue throughout the year. So so that's number one it does well.
It did turn out to be a little bit higher maybe also for the revenue impact that we identified it had it.
Did pick up a little bit higher and had a little bit more impact in North America than the core of our operation in India.
And from a from a medium term perspective, I would think we'd still have elevated attrition levels, although not at the levels that we have seen in the second quarter.
The other thing I'd, just add to that as well as of course, you know Oh head count is not the same we've seen a shift of ore delivery to offshore in the last few years.
And I think where we have to put a little bit more efforts in places to continue to build our onshore head count, particularly in North America, we've gone through a pretty extensive efforts in the last three years to reduce visa dependency in North America, but in the glove with that we have to continued scale.
Campus hiring lateral hires.
And obviously the head counts in North America, well, maybe having a lower margin rate can actually give us more dollars poor per ads on both revenue and gross margin. So that's an important factor as well, but yeah. We're all over this and you can imagine it's got our full attention both in terms of the recruitment throughput offered.
Join our ratios that we track as well as what we're doing from a retention point of view.
No I'm sure.
Dan.
Employee satisfaction and employee engagement survey results were very pleasing to see.
So it's good to see the progress we're making.
Thank you for that just quickly.
For my follow up the one two book to Bill being stable.
I heard that but is there a way to look at annualized backlog as well or some other metric thinking about that trend assuming that there's some short term project work and maybe some of the bookings have converted.
Duration or ECB is another metric I know you don't give it but any interesting we do have issues there.
We don't really get into those details, but you know our average contract duration actually increased quarter over quarter and year over year. Some of that is because we had a little bit more momentum in larger deals and some of it is because of the situations that in a resource constrained environment. We were quite selective in terms of the deals that we could after with a view to ultimately aligning our resources in line with our business.
Model evolution and that business model evolution is around aligning resources to our targeted customer segments align to selling solutions and delivering client outcomes as opposed to simply being a provider of resources for clients.
And you know if you're simply a provider of resources for clients you can skew to lower end deals and being in the motive staff augmentation. So our our strategy informs our actions and this quarter, obviously with the cards, we had which was a resource constrained environment. We obviously had the luxury of being able to make choice points that were both beneficial.
Two our strategic direction as well as beneficial to our margins.
Understood. Thank you Brian .
Okay.
Our next question comes from the line of James Fawcett with Morgan Stanley You May proceed with your question.
Thank you very much I wanted to ask quickly on the competitive environment. It seems like your your strategy that you've characterized as balance seems different or at least to diverge from what we've seen from some of your peers in our early reporting, especially as it relates to share and margin.
Amex can you just give a little bit more color on on how you're thinking about that balanced strategy. What's driving that is what how you view that to be or why do you view that to be the appropriate wanted and how you think it plays out from here.
Yeah, I'll start and then by all means jump in if he wants to embellish as well.
I think at the end of the day James We'd go back to the multi year framework, we laid out in November not that long ago at the analyst day, when we talked about.
A revenue CAGR aspiration, coupled with margin expansion over multiple years and I would argue that's still the right way to think about cognizant nothing has fundamentally changed the results we announced this quarter, a nine 5% constant currency growth with them.
Significant margin expansion year over year and quarter over quarter. Unlike the rest of the industry I think fits within that mode and so too does your guidance clearly the more resources, we have the more we'd be able to go on the attack more from a top line perspective, but what we've been really focused on is making sure. We put a good operational discipline in place in terms of how we think about pricing and how we think about.
Delivery pyramid et cetera, that's been a multiyear effort. We've also made investments by the way in the company that are starting to bear fruit now and of course, we get financial leverage the more we grow sequentially.
So it's no not really fundamentally different from what we outlined back in November and that's how you should think about it going forward as well.
As we are better able to make progress on our <unk>.
Retention trends will have the luxury to be able to hopefully accelerate growth and get the balance a little bit better than this quarter.
Yes, and maybe I'll add the component of the business mix, if we have been adding in our growth.
We had gotten these questions in the past calls.
We have been absent from large and mega deals.
In the past in the last couple of years and arguably that had a slowdown in revenue growth.
<unk> us to a much better control our balanced portfolio of the revenue growth within the corridor, we outlined plus the margin expansion, which is just our fundamental belief.
We'll build the combined compounding the malls.
Most.
Quality type business over time.
And then can I just ask a follow up as you've formulated the outlook, obviously, a lot of moving parts between pricing our attrition wage inflation.
As long as the macro itself can you give a little bit of color in terms of as you formulate at that outlook.
Lot of those key components are you expecting to improve as we go through the second half of the year versus 30 versus any of that.
Steady that.
Or versus any of that May you may be looking to do for deterioration.
Yeah.
I think we.
We are really two.
Our year to date are quite close to the path that we had anticipated for the year.
So I would point out the trajectory that we definitely look forward to improve as our bookings growth and obviously on a relative basis also.
Employee attrition because of that combination will allow us to drive our revenue growth acceleration basically within the framework that we have outlined and and deliver against our bottom line commitments. So the.
I think those would be the two factors that will be working hard.
Slide two I'll outline that the the opportunity that we see.
Is it is not.
Enterprise wide.
And focus that we can with focused actions drive improvements for example in my script I mentioned, the North American situation I think we've got to pay extra attention to drive our north American staffing that we'll have good revenue impact that will strengthen us and that would be good action will be.
Very careful encouraging our overall.
Enough for revenue growth and bookings.
Throughout our distribution and sales capabilities.
And then the.
It feels to me is in relatively good shape, we have our SG&A now as we had committed to and are good and controlled environment and we're able to drive that margin balance through this combination and it is a number of factors that come to buy shifting towards our digital mix, which is accretive.
Two our overall gross margin by making continued progress on our pricing action.
That will help to drive topline.
Topline growth and the sustainability of our modern profile. So it's kind of a balance of we have kind of the foundation and I looked at from my perspective in good shape. So that we're now addressing selected areas of improvement for the rest of the year.
I appreciate that color John .
Thank you.
Our next question comes from the line of David <unk> with Evercore ISI. You May proceed with your question.
Thank you very much with financial services being your largest vertical could.
Could you drill down into demand trends in financial services in the second quarter.
You know across your range of services digital versus legacy and how you expect demand to evolve in this industry segment and the balance of the year.
Yeah, Hey, David It's Brian look I would say no major concerns in terms of demand curves and in the financial services sector generally and within banking, we certainly had a good quarter I would say in commercial banking, which was stronger than retail and cards and payments.
And indeed stronger in capital markets. So.
What we see there is frankly, some more of a selective approach from cognizant, because we have repositioned yourself with some of the larger banks are shipped.
A shift away from staff augmentation and a shift towards <unk>.
Trying to show up and help them with your transformation program.
And really their innovation agenda. So it's a it's been a evolution of how we.
The teams we have in terms of clients and what they are about to sell and hopefully solution and deliver but also educating clients think about cognizant differently, but I don't see any fundamental issues in terms of macro concerns in the in the banking space insurance, we seem to have done well in the quarter as well generally most of our insurance.
Business. The vast majority is in the United States and we had a I would say a reasonably strong quarter, there too and no major concerns either from a macro perspective there.
Maybe I'll just add some obvious things keep in mind that our reported results still reflect the impact of our disposition of family that has about a 200 basis points impact on the growth rate.
And substantiation of Brian's comments, we do see for example, digital revenue and revenue share is catching up to our company average and making progress on that mix.
Ryan gave you is a cut by a sectors. We have also regional successful regional banking portfolio. For example continues to perform Indian and nice growth rates.
Uh huh.
From that perspective.
See that continued.
What we call it moderated.
<unk> throughout.
Throughout the year could continue.
I appreciate that and just as a follow up on what action steps you need to take to win more transformation business from the bigger banks do you need to add more in the way of management consulting capability. You know what are the key pieces you're focused on.
Yeah, we've definitely been strengthening our consultancy business, but also I would say more more broadly than cognizant consulting we've been trying to make sure that our client facing teams holistically are more consultative and that's a separate point, but nonetheless similar in terms of the end product.
And in parallel I personally have been spending a lot of time on the road in the last three months.
In front of the C suite of some of the larger banks, many of whom we haven't been able to serve in recent years and trying to make sure. We have the opportunity to show up and be on their preferred vendor lists and evidenced to them that the progress we've made with our portfolio and our strategic direction and how we think we can help them be successful in their own right. So a little bit of.
<unk> has been hunting and then for those that we currently have it's obviously been farming and making sure. We we have the right engagement teams more advisory capacity to your point and then obviously educating clients, who think of us differently as well.
We're making progress I think it's the pes recovery, it's ongoing and.
We've continued to articulate that this business will likely grow slower than the company average duration.
But again, we're confident we're doing the right things to get it in the REIT space.
Understood. Thanks, so much.
Our next question comes from the line of Lisa Ellis with Moffett Nathanson you May proceed with your question.
Terrific. Thank you good afternoon guys.
First one I was just hoping that you could elaborate a little bit on what's going on in the M&A environment.
That's caused the slowdown in your pipeline now that you've seen sort of throw out throughout this year, given you know given the tightening macro environment and.
You know the private market is tightening up a little but I would've thought it might get a little bit more first of all actually so can you just give a sense for sort of what you're seeing out there and why that is so that's why I tried to have a lot of it. Thank you yeah, Lisa I'll try I'll jump in.
And thank you for that question because it's important for us to reiterate that's really our overall strategic framework of capital allocation is unchanged. We still believe M&A is an important tool that we have to enhance the competitiveness of our company to add.
And augment our skill sets and industry focus.
And geographic focus for us and so what we see here is really a purely <unk>.
Operational and.
And time to delayed basic timing delay of M&A that happens when you develop pipelines and when you pursue deals to do so it's also a little bit of a consequence of a disciplined approach, which we're trying to take them now.
Our prepared remarks, and we are thoughtful about how we want to allocate that.
And that capital land.
And then in this uncertain environment coming off.
Very lofty valuation expectations I think it is fairly typical that you have sellers, having higher expectations and buyers are willing to do as we see the world through different lenses and so we observed that a little bit.
As we also think about how do we justify the expense of <unk>.
M&A in a rational way.
We are optimistic overall are that we will continue with some M&A in the second half of the year. So we have an active pipeline, but there are always the bakery. So for closing those transactions coming out to a mutual agreement.
But.
It would be really purely due to the I think the practical situation that we're faced with at this point in time off U K economy, and buyer seller expectations outlooks et cetera.
Got it Okay and then.
Well my follow up.
Apologize for asking another question about this topic, but just a clarification on the supply fulfillment challenges that you mentioned the fact that.
Your revenue outlook for the year.
Okay.
Okay.
Like what was the number.
Or could be running fairly that'd be I guess not so hot.
So can you just clarify like is this like a skill issue.
You can go a little bit more elaboration on what causes that.
Demand in balance.
Patient numbers are still kind of running at more normal levels.
Yeah Yeah.
Yeah, Lisa it is keep.
Keep in mind number.
Number one for clarification our.
Revenue.
<unk>.
Really.
Two a very small amount of our expectations. So we're now in the fine tuning of the sausage, making a little bit around what happened in the quarter and your.
Observation is correct that we have oh.
System utilization.
Four months over the last couple of quarters.
But we have overlapping impact for example, all the utilization is.
Negatively impacted by our increased intake off.
Of college grads are they tend to have warm oftentimes until they become fully productive and it weighs on our utilization metrics in a simplified way, whereas where we have other tight skill sets.
That has led to high utilization and lost revenue opportunities. This is particularly the case in North America, where we had higher revenue caring are gaps in our <unk>.
And our capacity for delivery and so this localized the fac basically balancing out and created basically some missed revenue opportunities.
Yeah.
Perfect Super helpful. Thank you.
Our next question comes from the line of Bryan Bergin with Cowen You May proceed with your question.
Hi, good afternoon. Thank you.
First one I've got is on bookings. So I'm just trying to understand are you experiencing pricing pushback and resourcing challenges that are that are causing more sort of delays or missed opportunities entirely. So I'm trying to get out really whether this deal cycle extension or competitive loss and cancellation entirely there and just how are you expecting fiscal 'twenty two book.
<unk> growth to land now.
So hey, Brian it's Brian .
We would expect an acceleration in the second half of the year. The book to Bill ratio remains healthy as I said at one point to really on the back of Q3, and Q4 last year, where we bookings growth of 20% plus in both quarters look some of this is frankly in a resource constrained environment, given our head count.
Opted out of certain lower end or less strategic opportunities and so that's a business that we decided not to be taken because we chose to prioritize our resources for elements of our portfolio that are more strategic to our future direction and.
Clients that are more strategic from our customer segmentation point of view.
So that's the first 0.2nd point I would say is.
We did see during the course of the quarter I would say pipeline progression and be a little slower than prior quarters and some push outs.
The outer quarter periods higher levels than traditional I don't think it's enough to signify by any means.
Any concerns from a macro demand point of view because bluntly.
The biggest single factor, we have is just making sure we get.
Fulfillment right as opposed to worrying about the macro environment, we see plenty of opportunity from the clients I see and frankly, I probably visited a few hundred clients in the last quarter alone.
So it's much more around or fulfillment capabilities and about to choice points, we are faced with and that we take in a resource constrained environment.
As I said earlier the average contract duration is a little bigger because we stepped away from some lower end staff augmentation deals and we've had a little bit more success in 50 million plus category. So thats the dynamics I would.
Articulate.
Okay. Okay, and then just on margin maybe can you quantify or just talk about some of the larger underlying swing factors in the second half assumptions that you have and I see in <unk> absolute dollar level of SG&A spend was roughly flat year over year. Despite the higher revenue base. So maybe can you talk about where exactly you are.
Leveraging this in.
To the tune of are you cutting more so around corporate or even throttling.
Throttling sales and marketing related spend as well.
Yeah, that's I guess that comes to.
To me the.
The the margin performance in the first half has been driven by.
Multi multi factors by a balanced set of contributors and I'm anticipating that to continue throughout the year. So pricing had a modest contribution and we expect our pricing initiatives to build on this and we will.
The increase in a slightly increase in importance for it we had a we have really seen good contributions from the strategic measures that Bryan talked about.
The pyramid optimization.
All of these factors are of a higher intake of college grads.
Careful use of subcontractors.
The shifting towards offshore.
Hum.
Delivery et cetera, all contribute to that.
The delivery organization stemmed actually and.
Could offset a large chunk of the compensation pressure that we're still facing and we anticipate to face throughout the year.
So and.
I would say, we had actually slight growth I think like 3% SBA growth.
Quarter over quarter. So there is.
We will be funding the growth that we need for our company that is a priority. So SGA will not be in and the way our cost controls on this shape wont wont be limiting our our investments into growth, but we are seeing also good progress.
Other corporate functions to drive efficiencies.
And simplify operation I think said you would expect us to do so it's the multitude of these factors and well, it's kind of a little bit of an art of how how would react to actual results and the within the quarter and emphasize one more than the other two to drive the result, maybe.
On the.
Reminders.
The third quarter is traditionally our highest margin quarter. So we expect actually a sequential increase in margin in the third quarter and then as you know in the fourth quarter Oh a large.
Compensation a measure for the broth.
Organization takes place so we <unk>.
Some pressure in the fourth quarter, and then deliver our guidance.
Guidance.
For the full year I just wanted to touch upon theater a question around the commercial team that we're absolutely committed to the commercial team and the multi year guidance that we gave in our November analyst day that became part of the 2022 revenue guidance is really about.
Participating in growth.
Markets are orienting the portfolio to a higher growth categories, and making sure we have world class client facing teams that are consultative in nature.
And that are productive in nature and as many of you know we've really built out a strong sales operations function here in recent years, we started showcasing to you the bookings position, we have we changed our variable compensation program for our commercial team and with a few years of data and that we continue to hone in on opportunities around commercial productivity, but I would say.
The sales roster to commercial roster is fundamentally.
Similar to where it was in recent months and quarters and we continue to want to invest in our commercial team are willing to invest in our commercial team in the years to come.
Okay.
One follow up apologies here just how much of the business mix is typically comprised of shorter term deals or maybe project based work that would've experienced the missed opportunities where the choices you made due to the supply tightness.
I don't think we really give as much detail on this but as Brian mentioned on the bookings performance, where we saw the softness in bookings was with.
It was disproportionate.
The what we call short shorter shorter term deals which.
It makes exactly sense as Brian had explained so that portion was affected but.
Again, our variation from expectation is really.
A relatively small percentage numbers sooner so that we do.
You see a little bit more pressure on the shorter end deals compared to the longer term deals.
Okay. Thank you.
Our last question comes from the line of Arena Kumar with UBS. You May proceed with your question.
Good evening, Thanks for taking my question.
Oh marquee, our three key revenue right.
I'll slow down right in revenue.
Are there any specific verticals or geographies that you recall out sadly.
Cause that deceleration and then secondly, we're seeing key revenue was very strong up 20% in that corridor.
Any one time items housekeeping.
Backlog going forward.
Thank you.
Yeah.
Yeah, I would not really.
Narrow in on.
The pic drivers by industry some of our industry groups have a little bit more difficult compare year over year.
Can kind of see that when you look at your tables, but.
Overall I think the.
In the short term for the for the third quarter revenue guidance is impacted by our year to date bookings performance to some degree and then a gradual improvement of all attrition rates kind of.
You need us to.
To a certain revenue forecast that we've given you and in our guidance.
Yeah.
Understood. Thank you and just on that now.
Qualcomm lung colon rough quarter on the call I wanted to leave that to Brian because it's a great story and so Brian again.
I can take it yeah, we look it's as you'll see in the SEC filings the communications media and technology business for US is actually our most profitable industry segments externally, we have tremendous momentum there a strong team who've been driving good momentum with digital native companies fully leveraging our.
Intuitive operations and automation business group as well, but we have strong client relationships, we've been executing well delivery excellence is very strong I know a lot of these clients personally they speak to our differentiated offerings and differentiated delivery. So this has been a business we've been investing in for many years as we've made the portfolio a little bit more.
First beyond the health care, and <unk> products and resources and CMT have been growing double digits for many many years and CMT is one of the showcases I think of our success in that regard both in the United States as well as internationally. So nothing fundamentally that concerns me in terms of.
Underlying currency or we just have good momentum and a strong team.
Great. Thank you.
Alright with that thank you everybody for joining our call and look forward to catching up next quarter.
This concludes today's cognizant technology solutions Q2, 2022 earnings Conference call. You May now disconnect your lines at this time.
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