Q3 2022 Cognizant Technology Solutions Corp Earnings Call

Ladies and gentlemen, welcome to the cognizant technology solutions third quarter 2022 earnings Conference call.

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Thank you and I'd now like to turn the conference over to Mr. Tyler Scott Vice President of Investor Relations. Please go ahead Sir.

Thank you operator, and good afternoon, everyone by now you Should've received a copy of the earnings release and Investor supplement for the company's third quarter 2022 results. If you have not copies are available on our website cognizant dotcom.

The speakers we have on today's call are Brian Humphries, Chief Executive Officer, Jan Siegmund, <unk> Chief Financial Officer.

Before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC.

Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors.

Reconciliations of non-GAAP financial measures, where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC.

With that I'd like to now turn the call over to Brian Humphries. Please go ahead Brian .

Yeah.

Thank you Tyler good afternoon, everyone third quarter revenue was $4 $9 billion up five 6% year over year in constant currency short of our expectations.

Adjusted operating margin grew 90 basis points sequentially, and 60 basis points year over year to 16, 4% of revenue.

While an uncertain macroeconomic backdrop impacted bookings and revenue the primary driver of the revenue shortfall relates to a reduction in U S. Onshore billable resources in recent quarters. Following a period of elevated attrition and reduction in visa travel in a COVID-19 induced shift to near and offshore delivery centers.

Actual impacted this head count reduction is magnified given this is our highest revenue and margin dollar per head population.

To reverse this trend we have already initiated a series of actions that are intended to increase U S onshore billable resources, Inc.

Including enhanced focus on lateral hires and sub contractors accelerated visa travel and targeted compensation programs.

While these actions are gaining traction and is somewhat slower than previously anticipated.

We therefore expect these headwinds to continue in the fourth quarter ahead of clear progress in Q1.

Let me now turn your attention to global third quarter voluntary attrition, which was a little higher than expected in the quarter voluntary attrition fell two points sequentially to 29% on an annualized basis and fell three points sequentially on a trailing 12 month basis.

We've taken extensive actions to increase employee engagement and reduce attrition over the past year. These.

These initiatives coupled with an uncertain macroeconomic backdrop have led to reduced daily resignations and leading indicator of voluntary attrition across the globe in the last four months.

We expect sequential reductions in voluntary attrition to be more meaningful in the fourth quarter.

To maintain positive momentum on resignations were continuing our comprehensive effort to attract retain and rally employees.

We remain focused on our people strategy, which includes a refined promotion initiatives learning and development and enhanced compensation and benefits programs.

For instance, we recently communicated to our associates that we would accelerate next year's merit cycle to the second quarter of 2023.

Meaning we will have to merit cycles in this space at six months for most of our associates.

I would like to now discuss the macroeconomic environment, which Jan will also addressing our fourth quarter guidance.

We see clients closely scrutinizing and slowing their investment decisions faced with a backdrop of uncertain economic conditions.

<unk> has been reduced a lower priority projects or those with a longer return on investment.

We're seeing some early signs of slowing in discretionary digital projects.

Industry wise, we've seen weakness in banking, especially in the mortgage segment health Sciences and retail.

In our international business. The UK remains solid the deal cycles are slowing while continental Europe is showing signs of weakness.

From a commercial point of view despite its strategy to sell solution to deliver client outcomes, we remain exposed to time and material engagements across all industries.

We've seen clients curtailing spending and we expect for those who went back to fourth quarter.

These factors contributed to a decline in bookings up 2% year over year in the third quarter, representing an in period book to Bill ratio of 1.0 times and the book to Bill ratio of one two times on a trailing 12 month basis.

Turning now to our industry segment performance.

Services grew one 6% year over year in constant currency led by growth in our insurance business.

This includes a negative impact of 180 basis points from the exit of sound like.

In insurance carriers of all lines of business or enhancing their digital capabilities driven by demand for new insurance products and improved user experience.

For example resolution life U S turned to us to execute several digital transformation initiatives that include large scale data and application core modernization and cloud migrations.

We're also helping them develop and scale advanced capabilities in data and analytics to drive significant operational efficiencies in their clothes book portfolio.

We were selected by accident, UK and Ireland as a technology partner to help consolidate modernize and manage part of their it operations.

Axa is transforming technology ecosystem to create a more digitally enabled modern and agile environment, that's data rich secure and sustainable.

Health Science's revenue grew five 5% year over year in constant currency, driven by digital services, among pharmaceutical and healthcare payer clients.

I'm pleased to note that our shared investigator platform SaaS solution for pharmaceutical companies that streamlines clinical trials to improve the speed is drug discovery has surpassed 250000 users across 100 countries worldwide.

Kieran and Japanese pharmaceutical and Biotechnology company has signed a multiyear agreement with cognizant to provide global pharmacovigilance services and help improve patient health through the analysis of adverse reactions across its products.

Products and resources revenue grew eight 2% year over year in constant currency.

Growth was driven by demand for digital services, among logistics automotive consumer goods and travel and hospitality clients.

During the quarter, we extended our long standing relationship with Centrica, the Uk's largest supplier of energy and energy services to deliver business critical services encompassing application testing cloud infrastructure supports it.

It infrastructure management.

Communications media and technology revenue grew 10, 4% year over year in constant currency driven by strength among digital native clients.

We're expanding our collaboration with Qualcomm to accelerate digital transformation through our new <unk> experience center in Atlanta.

The collaboration combines our deep expertise in <unk>, Iot cloud and data analytics with qualcomm's intelligent edge devices, AI and <unk> connectivity solutions.

We've also had our first substantial win in the legal sector, which has traditionally been a latecomer to add sourcing and digital services.

Freshfields selected us to manage their global I T operations and support their ambitious global expansion plans.

We'll be providing 24 by seven managed service of the <unk>.

<unk> it infrastructure and applications.

As well as managing and service desk.

Cognizant will also help define freshfields technology transformation roadmap.

As I mentioned in our last earnings call targeted M&A remains an important tool for enhancing our competitiveness. We have several M&A targets in the pipeline in line with our strategy and capital allocation framework.

As always we continue to focus on opportunities, which are value accretive to cognizant shareholders and aligned with our strategy.

Yesterday, we announced an agreement to acquire to professional services and application management practices of one source virtual.

Workday partner based in Dallas.

These practices will complement our existing financing <unk> advisory services under Workday cloud platform.

The acquisition is anticipated to close by year end 2022 subject to satisfaction of closing conditions at which stage, we expect to welcome nearly 400, new employees to our strategic workday practice.

Importantly, we continued to strengthen our leadership team.

Last month, we named Ravi Kumar President of cognizant, the Americas, He will join us in mid January from emphasis.

He served as president for the past six years.

Ravi brings client Centricity and a growth mindset that we believe will help improve our U S revenue trajectory.

We also announced <unk> tanker in as the new head of our software and platform engineering practices.

<unk> joined US yesterday from vein, where he was a senior vice president and the firm's enterprise technology Global practice.

Prior to that he spent 25 years in senior leadership roles with Accenture.

Both announcements speak highly of our ability to attract world class talent and support to key strategic areas for cognizant, the Americas region, and leading enterprise technology transformation.

Before passing the call to young I would like to stress that while we're in a period of economic uncertainty the entire leadership team knows we must execute better on things that we can control, including optimizing our resources globally and getting the right mix on and offshore in a dynamic demand environment.

We will continue to focus on an owner operational discipline, which is intended to enable us to adapt quickly to demand changes.

While we're in an uncertain macroeconomic environment, we remain highly optimistic on the it services market and our opportunity within it.

Finally, falling sustained progress in reducing voluntary resignation rates, we expect sequential reductions in voluntary attrition to be more meaningful in the fourth quarter.

Allowing us to repay the client conversations from fulfillment to innovation strategic transformation and growth.

And with that I'll turn the call over to Yan, who will cover the details of our quarter and our fourth quarter financial outlook before we take your questions.

Thank you, Brian and good afternoon, everyone Q3 revenue was below our guidance range, driven primarily by lower billable head count in North America.

The unexpected nutrition, coupled with strong competition for talent in North America made it challenging for us to maintain required staffing levels to meet all our revenue forecast.

The new for the quarter up two points from the prior year period.

Oh, a slower digital revenue growth reflected the expected law inorganic contribution we discussed last quarter and the lower the local head count in North America mentioned earlier.

These factors and a softening demand environment also contributed to a bookings performance below our expectations.

Two three bookings declined 2% you over a year and represented in in purely a book to bill of approximately one times.

This resulted in a trailing 12 months bookings of 23.1 billion.

The book to Bill of approximately 1.2 times unchanged from you too.

Brian has already taken us through the second performance, but I will spend a minute discussing several trends, we're seeing emerge across our two largest segments.

Within financial services.

Banking revenue growth slowed this quarter. This portfolio has a higher mix of time and material business, which we believe is more vulnerable to changes in the economic outlook of all clients.

Additionally, mortgage clients have been impacted by rising interest rates.

Which has a negative impact on our results.

These headwinds were upset by continued growth within insurance, particularly within property and casualty, where we are seeing good traction and both middle market and large global carriers.

We're continuing to invest and strengthen our banking and financial services portfolio to improve the revenue trajectory over the medium term.

Within health Science, our growth was again driven by demand for digital services among pharmaceutical companies helped.

Healthcare hair growth was consistent with last quarter, and we have seen the ramp up of integration related services. Following the software product Roth earlier this year. However.

However, the health care industry has not been immune to pressures driven by the macro uncertainty.

Cause we have seen suffered demand both across healthcare payer and life Sciences.

Signs of slowing discretionary spending as they await greater clarity on the economy and navigate an increasingly complex regulatory environment.

Continuing with the heels of year revenue growth in constant currency from a geographic perspective in Q3, North America revenue grew 4% growth was led by CMT in Health Sciences.

Our global growth markets or G. G M, which consists of all revenue outside of North America group, approximately 10%, including a negative 220 basis points impact from the sale of family.

<unk> once again led by the UK up, 19%, which had a strong double digit growth within financial services, including public sector clients.

Now moving onto margins.

In Q3.

Oh, a gap and adjusted operating margins where.

16.4% is there were no non-GAAP adjustments in the corner.

On a year over year basis, Yep operating margin increased by 100 basis points and adjusted operating margin increase by 60 basis points.

Oh by year Martin expansion was primarily driven by SG&A leverage while gross margin pressure from increased compensation costs, with partially offset by delivering efficiencies and disciplined pricing.

We also experienced a meaningful tailwind from the depreciation of the Indian rupee, delivering an approximate 80 basis points of benefit net of hedges year over year.

Oh, a gas tax rate in the quarter was 22.5%.

Which included the benefit from a discrete tax item in the quarter.

Just the tax rate in the quarter was 25.2%.

Q3 diluted gap, if he asks worth $1.22 and Q3 adjusted EPS was $1.17 18.

18, and 10% you over a year respectively.

Now turning to the balance sheet.

We ended the quarter with cash and short term investments of $2.7 billion on that cash of $2.1 billion.

Free cash flow in Q3 was $953 million, representing approximately 150% of net income in line with our expectation with brings you up to date free cash flow to 1.6 billion or 92% of net income.

S. O of 74 days was flat sequentially and an increase by two days you over here.

The quarter, we purchase 5 million chairs for $300 million under our share repurchase program and returned $141 million to shareholders through our regular dividend.

This springs total capital return to shareholders, who share repurchases and dividends to approximately $1.5 billion for the first nine months of 2022.

Turning to our forward outlook.

We are revising off all your guidance downward, which reflects headwinds from currency more North America, billable headcount, which we expect to take several quarters to improve.

And softer than expected bookings growth upsetting these factors, several tailwinds, including sustained reductions and resignations globally and our expectation for law attrition in the fourth quarter.

Four Q4, we expect revenue in the range of 4.72 billion to 4.77 billion representing year over year decline of 0.2% to 1.2% or growth of two to three per cent in constant currency.

Our guidance assumes currency will have a negative 320 basis points impact as well as an inorganic contribution of approximately 30 basis points.

Together these factors contribute to our revised food you know revenue guidance of approximately $19.3 billion, representing year over year growth of approximately 4.5% or 70% in constant currency.

This assumes approximately 100 basis points of inorganic contribution.

Our reported revenue outlook, not with whom a negative too and it's 60 basis points of impact some currency.

Worse is doing a 20 basis points previously.

This compares to our prior full year revenue guidance of $19.7 billion to $19.9 billion, which represented growth of 6.32734.

852945 in constant currency.

We expect all for your operating margin to be approximately 15.6%.

Low end of our prior range.

Implies Q4, adjusted operating margin of around 15.3% at the Midtown of our EPS range.

Reflecting the reduced revenue outlook and the annual merit cycle for most employees that is effective October one.

Flew your outlook assumes interest income of approximately $50 million versus $35 million previously, reflecting higher interest rates, we still expect ever shares outstanding of approximately $519 million unchanged.

Our tax guidance of 24% to 25% is unchanged <unk>.

Finally, our revised four year adjusted EPS guidance of <unk>.

$4 and 43 to $4 and 46 represents growth of approximately 7% to 8%.

This compares to prior guidance of four dollar 51 to $4.57.

Our longer term capital allocation framework remains unchanged.

We are pleased to announce our agreement to acquire the professional services and application management practices of one source virtual yesterday, and we respect our acquisition pipelines to remain active.

Oh sure repurchase assumption for the full year is unchanged at $1.2 billion.

It's always remain subject to market conditions and other factors.

In support of all balanced capital deployment strategy. The board has also approved a 2 billion dollar increase in our share repurchase authorization, which brings our total remaining also relation to over $3 billion as of today.

We are also still targeting full year free cash flow conversion of approximately 100% of net income.

Before opening the call for questions I want to reinforce that the leadership team is focused on addressing the operational challenges impacting our recent results. We also closely monitoring macroeconomic factors to help enable us to quickly respond to changes in to demand environment longer term remain.

Cents, an hour market opportunity.

With that we will open the call for your questions.

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One moment, please while he pulled for questions.

Thank you and the first question comes from the line of Lisa L. S was Moffett Nathan. Please proceed with your questions.

Hi, Good morning, good afternoon pass on us.

I'll I'll start on the attrition points that you've raised it seems too I guess b at the roots are the root cause it's kind of a challenge that you are having thoughts on revenue and I'm talking in the past you've focused a lot on the initiatives you're undertaking in India related to attrition and haven't.

Much time on the dynamics of what's going on in North America can you just elaborate a bit on what exactly is happening in North America. Just recently you know have you pinpointed like specifically, what's causing the elephant nutrition and and maybe elaborate a bit on you know the time frame and the steps you're taking to address it. Thank you.

At least that's Bryan so look at a global level.

I would say we're doing similar things in North America as we're doing in India. It clearly on a weighted basis, India had the biggest impact on our attrition historically, so we put in northern efforts in war rooms in place.

Over there and I, you know frankly in India as well as in North America, and our international business in Europe , and Asia, we have seen resignations come them pretty much for four to five months in a row now so those efforts are kicking in.

Those efforts are broad based including.

As compensation elements and as we announced we just announced her second marriage increased six months, but on top of <unk>. There's murders. There is career path progression promotion process overall learning and development initiatives et cetera.

So the North America efforts are somewhat similar to what we're doing globally I think in North America, you know, we've gone through pretty material visa.

I would say process in the last three years as we reduce your visa dependency, but obviously in a tough market environment, where digital skills are at a premium.

We've been suffering attrition in North America, and by definition of obviously going out as fast as we can to recruit talent simultaneously and those factors coupled with.

What's effectively happened across the industry and ours was no difference.

A shifts to Nearshoring offshore during Covid is let us to have I would say suboptimal level of onshore deliberate resources in North America and it catches up quickly with you because of the order of magnitude of the difference in terms of <unk>.

Revenue in margin dollar per head in in North America versus in India.

So it's a question of rebalancing that we have major initiatives underway operational rigor behind that we had hoped to make more progress in the quarter, it's a little slower than we anticipated.

But we're putting a lot of effort behind that to correct. It and it's all of the factors we mentioned above.

Mmm Mmm.

At a global level, we're expecting I would say significant.

Voluntary attrition reductions now going into the fourth quarter to the goodness of the last four months will kick in.

Okay. Okay, Okay, and then I know last quarter.

You had commented on kind of that relationship between the attrition challenges and and bookings and you were taking some actions to sort of address.

The booking.

Issues are kind of you know that link, which I think you are having challenges that yourself people, perhaps we're concerned I wouldn't be able to stop a project or something.

Right. So, but then I guess it persisted into this quarter. So can you just also elaborate on kind of how do you break that [laughter]. That's yeah for sure officials cycle you are having yeah mhm, Yeah look I mean, let me start with the Fox person bookings, the words out and 2% year over year or a little below what we had hoped for the quarter to be honest, we it is.

Important I'd say to recognize the tough comparison in the second half of last year, we 20 per cent plus bookings growth. So that leads to even in any quarter bookings book to Bill of 1.0, and I'm just training 12 men basis still have one too so healthy enough. Although frankly, we lost some deals in the quarter that slipped out quarters, and that's I think somewhat indicative.

Of an uncertain macroeconomic demand environment, we've seen lengthening purchase cycles, and then climbs being a little bit more judicious in there approval of expenses, but you know Lisa specific density impact of attrition by definition as people were dialoguing with clients around price inquiry.

<unk>, which is being one of our success stories, helping margin as well as addressing fulfillment challenges. It's made you know the commercial team somewhat hesitant I'd hate to go to full a mile to get the commercial momentum as strong as it needs to be in terms of increasing pipeline and accelerating bookings that the good news now is we're quite vote.

Will that our team in terms of what we're seeing from a resignation point of view and therefore, what they should be anticipating in queue for in terms of attrition levels, which as I said it will be meaningfully down from Q3 voluntary attrition levels. So I think we're starting now to get confidence in the commercial team that the effort, we put in place around nutrition and resignations that will kick in.

Of course this was happening in a period, where I was I said and Nicole were.

Literally more concerned now than we were three months ago in terms of the macro demand environment. So that's probably been a bigger impact on bookings this quarter than previously that the whole concern.

To see sweetness, there scrutinizing their spends and it's not clear to me that we will see a budget flush at the end of this year and it will certainly anticipate furloughs at the end of this year relative to last year. So it remains to be seen and we'd factor that into a guidance.

Uh-huh Uh-huh.

Okay. Thank you thanks a lot.

The next question is from the line of fraud for advice deep dive equity. Please proceed with your question.

Ah, Yes, guys, Hey, so you have 4% constant currency growth in North America, and essentially 10% outside of North America. So I wanted to ask how you feel about your progress in outlook and ramping your international revenue presence and also ask if your efforts.

And doing that are detracting from your efforts in North America or perhaps it's just that your talent challenges are more pronounced in North America, but some color on that would be really helpful.

No I'll start with the international business, which we expect you know very good things in the coming years, there we've refreshing leaderships over there we've added with the seniority of the people. We've recruited we've added M&A to complement their capabilities and examples of that include the UK, Germany, and Australia and I've spent a large part of the.

You know the last year going around the world and I'm pretty optimistic around our potential internationally.

So rather than you know optimistic but I don't think it's really taken away from the North America focus you know in North America.

[noise] leader has been a shift more to offshore and you're sure we're building our capabilities in Canada.

The a shift towards India has happened or Nethead, Kansas materially increased in India on a year over year basis, and we'd have to we get the balance right now three years ago, we were over visa dependent in North America, we've been pretty disciplined around that.

As we are trying to land out at the right level.

Candidly, what's been happening in the Covid World is that conflicts internationally are just not functioning at the same capacity as before so we've gone a little bit too far and that's that's actually a good news by the way in terms of reversing that for our attrition because that has harper attrition in the last two three years as people saw that opportunity be less available than previously but.

We're turning that top on a little bit to rebalance subject to the capacity constitutes that will not only help entree had come but actually helped morale and like I believe attrition in India as well. So I think the U S. Onshore situation is independent of the international positivity that I have and you know I'm very optimistic around our potential there in years to come.

Great and let me ask a follow up about the cloud services market, we definitely see some changes happening in that market. So I just wanted to ask about what you're seeing in that market, particularly your competitive position there and to what extent some of the recent macro challenges are having an impact and cloud.

Maybe or maybe not so much it'd be great to help to hear some thoughts on the cloud market.

Well first of all I'll actually call that precise sanker and if you joined US yesterday, you've got a very strong background in cloud as well so.

Spent a great deal of time talking about where the market is going and ironically in a client advisory Board last week. It was a great topic of discussion amongst us inclines too.

I I would say our position with some of the packaged application players like Salesforce workday is stronger than it has been for many many years and so we feel good about the progress there and yesterday's announcements of one source virtual will continue to strengthen our workday practice.

Visa visa Hyperscalers, you know, it's kind of interesting I'm seeing clients clearly accelerate trips or pasta to cloud within the same vein rod I see growing dialogue amongst clients.

Ryan how to optimize your position in the cloud as in lifting and shifting your current suite of applications with every factoring in or or another way transforming ahead of the transition doesn't necessarily always give them the efficiencies that they would have anticipated. So there's more dialogue around how to optimize your.

Your cloud journey.

And so what you'll see us do and continue to do is stand up capabilities and resources behind that both in the cloud practice as well as in her consulting business. As we anticipate you know clubs modernization journeys or take him out more generally you'll see is that more advisory capabilities there as well.

Excellent. Thank you.

Ah next questions from the line of Ashwin Chevre car with city. Please proceed with your questions.

Thank you.

Talk about what you're seeing in digital, especially since you mentioned smelling discretionary spend is that is that more of a company specific positional thing because it's other companies have spoken to have not yet.

Uhm mentioned anything specific with regards to digital specific can be slowing down.

Hey, aspirin so the first thing on the broader macroeconomic environmental I'd say, it's difficult to be conclusive or dogmatic at this moment in time, it's certainly we would terminal uncertain macroeconomic environment.

[noise] outlook is a little more concerning that and it was three months ago. If you go back to my comments back then yeah. We are seeing spending reduce the lower priority projects are those with longer or white periods, and even discretionary cloud projects as a as a reference in my prepared remarks are selectively been reduced so if you still have a lot of confidence in in our digit.

[noise] capabilities are portfolios and that 51% digital up two points year over year, but some of the challenges we talked about you know the macro demand picture as well as the U S. Onshore situations are equally applicable to this and then as you as you know yesterday's announcement of a acquisitions. The first acquisition. We've done this year. So we haven't had the tailwind in our digit.

Momentum that we had last year from the series of acquisitions that we did that being said is Jan pointed out we are committed to our framework of extending our portfolio of in line with her digital strategy.

We have a series of deals in the pipeline as we speak so I would expect that ultimately over time to get back in and more normal course for us, but you know I.

I don't believe that all digital projects will be immune immune from the current economic climate and maybe an addition, I just wanted to give you a little bit more.

Framework on the Internet site.

Your guidance assumes approximately 100 basis points off contribution from him in a approximately half of what we typically see so if you multiply that types of sharing with digital revenues, you'll see that has an impact on just the lemmatically on the lack of I'm in a a fueling digital growth and then a side.

From the.

Demand market demand that Brian mentioned, obviously in North America. We are also affected by our fulfillment challenges that we experienced in the quarter, which proportionally affected.

Digital business as well that little digital business. So it's a combination of all these factors together.

Got it got it and.

And what does this lower exit grilled trick for the year Mmm in terms of achieving sort of medium term targets.

Yeah, and I, you know I completely appreciate the high level of macro uncertainty that we have but any Daniel Hawk have you're planning for next year would be they can be helpful.

Yeah, so that somehow and popped the question would come up.

So number one if we feel our growth framework that we discussed with you and basically pretty much a year ago, a little bit more than a year ago is still intact overall, maybe a few pointers.

The Gulf War framework seized all revenue growth, which you're referring to really in light of a keg or over the three year time horizon. So it's a compounding growth and obviously, we didn't quite anticipate at that point the economic.

Uncertainty facing today, but we think the framework for awhile perspective is intact and then we would give guidance obviously for next year and our fourth quarter earnings call in in January .

Thank you.

My next question is from the line of Frankie Deutsche Bank. This issue with your question.

Hi, guys just on that fulfillment challenges I know that kind of was an issue last quarter and it it it seems like it it got pushed into this quarter and.

And then it's caused you to miss the guidance that and maybe the economy, a little bit just trying to figure out you know it's the fourth quarter is how comfortable are you with those numbers or can we still have some of this fulfillment issues lingering that could push us.

Lowering expectations again.

Yeah, maybe I'll I'll I'll I'll start with it and then unlimited with Brian jumped on top of it. If we think about the myths is Brian mentioned and as we're talking about will call and had a had a number of factors in it and fulfillment is fairly logical. So we we miss a judge or we had a little bit.

But ah faster improvement in the third quarter of an electrician anticipated and so about that.

Miss an attrition improvement made about a third of our myth relative to our expectations and then we have a number of initiatives in place to accelerate the hiring an inflow in particular in North America of initiative and that represents approximately also a third of our.

Myth two revenue guidance in here, we obviously saw as in North America and challenged to grow a head count and the initiatives and plays from funding hour and ensuring we have full capacity of hiring in place to to focusing on that.

Full fledged resources available to us, including the utilization of sub contractors.

And ask.

Accelerating visa travel and increasing employee referral program. So we have a set of initiatives in place. These initiatives have shown initial.

Mentum, but they were scaling slower than we anticipated. So we have in our trajectory and we I think we have appropriately risk adjust that all the new revenue guidance, so where can be interesting to you know own expectations and it's and so yes, we have assumed an improvement in nutrition level of February .

Can see but we will also see now the trajectories of some of these initiatives clearer than we have in the third quarter.

Yeah, and just to build on that you know the resignations visibility we have of course differs in India vs. North America, because the the.

The notice notification period in India slightly different but I mentioned on last quarter's earnings call have July resignations that come down and through August and September It was a different plateau for those three months visa visa prior six months certainly if you look at India, and indeed in North America, and Europe and.

And the first month of this quarter, it's continued to be low in fact lower than the prior three months. So we feel Brian at this stage it very very confident about that and those young rightly pointed that we wanted a good guidance that we.

Want to make sure we can hit so you know we were in the right zone.

Got it and then did the fulfillment challenges, especially in North America will that be fixed by the time, we get into the first quarter or court could it linger into into the first half of the year.

But we're we're aiming as I sat on the in my prepared remarks, where we're working through that as quickly as we can I mean, we aim to make progress in queue for but I think it will still be a headwind in queue for we hope by the time, we come out of Q for him. It's clear to give you an update on that in the next quarter's earnings call. We hope to walk into Q1 with clear progress by the time, we got through coupon.

Okay, alright, thanks, so much.

The next question is from the line of Prion Bergen County Police just use your questions.

Hi, Thanks. This is zachary offer Brian another one on the fulfillment issues could you give us.

Some real time insight into the nature of conversations that you're having with clients here in Congress thinking about all the rebranding and repositioning that the company has done in recent years. What are you doing to reassure clients that you are digital transformation partner of choice.

We actually see.

Different stories to be honest, Brian across different industries in terms of our evolution towards digital even banking, where we are let's say more heavily exposed to time and materials. We have been able to increase our digital makes them. We've got some good proof points with certain clients.

More fundamentally you know the the journey, we'd be known as to extend the portfolio.

Which we've been successfully doing in recent years in yesterday's announcement is another example of that to try to complement that portfolio and then with a client facing team that is more consultative in nature as anybody who has overseen a sales force and knows that is a multi year journey. So we're we're on routes, but it it takes time to get there.

To complement then that's more consultative salesforce with Ah more industry of lines consulting business and so that's the space. We should continue to watch and cognizant, because we will invest behind that and we got strong leaders in that capacity. These days and then just to make sure that there is increasing brand awareness around the capabilities we have.

And references and and.

Case studies that we can showcase last week and declined Advisory Board was a very good example of certain clients not really being truly aware of the extent of our portfolio. So we have to do a better job marketing that ourself, but I would say brand awareness of the company is up digital awareness is increasing but it's a it's a multi year journey and we're in the middle of all of that.

And it starts with a client facing teams in our delivery capabilities in our partnerships.

And I certainly see you know in dialogue with some of our key packaged application Parker's like Salesforce and S. P. Growing recognition that we are getting stronger, but but as ever you know a few years ago. We were quite low in terms of digital makes and we've been working on a way back up to 50%, which we're pleased to cross which is more work to do.

God. That's helpful. Just to follow up the forward looking patrician commentaries encouraging you've been vocal about a new normal for attrition being higher than pre COVID-19 levels. Perhaps you can share update of us here at the timeline for when Thompson is more in a steady state mode as it relates to attrition.

I think it's very hard to really be precise him that Brian . There's just so much going on in today's world, We've gone through a period of.

Pretty significant disconnect between demand supply.

On key labor key digital skills.

We're going through a hybrid work environment as a society, where arguably people are less entrenched or engage with companies as they work remotely.

And now we've gone through a very different scenario that the economy is.

On certain slowing and people are recruiters are being laid off across the globe. We're seeing in certain companies people are being laid off and so the market is suddenly perhaps less hot than it was previously and I can also have an immediate impact on nutrition trends in voluntary resignations in particular, so you know we we.

We'll see where water finds its own level over time.

I'm encouraged by our specific actions that we've taken on and I have also built that into our financial plans. So well we have notwithstanding slowing I would say labor markets. We know that we want to invest on a sustainable basis, you know our employees in the years to come in we factor that into a multi or financial framework and that will help increase our relative compensation.

Visa peers and simultaneously, we're doing everything we can around training and development and career path unemployed value proposition. So you know I I'm not sure when.

Normalizes to a new norm I still believe there will be a new normal we won't go back to historical levels and I think as a society at large will probably see attrition.

Slow across the industry in Q4 and beyond but time will tell.

Helpful. Thanks.

[noise]. The next question is from the line of James.

Stanley. Please proceed with your questions.

Hey, good afternoon and thank.

Thanks, a lot for for all the color in in time. This afternoon in terms of of skills and looking at kind of.

How does that relate to fulfill man where are you seeing the most challenges in terms of finding the appropriate people and and and getting them into your fulfillment capabilities right now and and how are you thinking about the pyramid itself as it relates to solving for that and I'm. Just wondering you know how that impacts the way that you can.

[noise] about financial guidance on kind of a complicated question, but hopefully that's clear.

Yeah, I mean, there's it's it's actually quite nuance because first of all her head count as materially increased year over year, but most of the increase has been in India. So by definition, then you have a different bill rates within India, the lower levels of a pyramid or actually fought her for want of a better word than they were in the last few years and that's because you know if you go back this year.

Bringing in about 40000 graduates 45 last year 33, the year before about 17 year before less than 10, we had been too narrow as a period previously we've done a good job I think addressing that and thus afforded us the opportunity to have more upward momentum in the company, which is one of the many factors that has helped us.

Actually drive margin expansion year over year on sequentially and vote Q2 and Q3.

But Brian James the the fundamental elements in terms of the demand supply economic imbalance then he digital skills was heavily related to skills related to you all the hyperscalers.

Things like Salesforce angler full tech engineers, I mean, they've been probably the hottest parts of the market and just being very irrational behavior I would argue over the last 18 months in terms of pump increases that went hand in glove with that that's where we've seen the hottest challenges in terms of the absolute attrition, it's fundamentally being an N.

<unk>.

And at the lower levels of the period.

Got it got it and then I guess, it's kind of a somewhat related question isn't it but looking more specifically at the piano and margin impact.

Can you help <unk>.

Talk us through the the impacts and mechanics of merits cycle changes are those accelerating how's it going to be permanent I guess should we expect two cycles, a year and and and just trying to make sure that we're contemplating that how that flows through the the actual piano appropriately yeah. That's me.

Abby that's maybe for me to answer so effectively hour acceleration of our typical marriage cycle that will just experiencing in the fourth quarter and moving up to.

To the second quarter has really main reason for it is to add a line.

<unk> H R processes about evaluation processes and reward processes together. So it is a benefit from a talent management perspective to have our merit increase in the second quarter. So that's really a very important driver of it and second driver is obviously because we accelerating.

This marriage cycle by two quarters, we will incur Ah one time shift of compensation by two are married increased by two quarters forward and that's gonna be a one time effects only because smith staying with an annual merit increase process. So in 2024.

Or the normal cycle will be four quarters later again in the second quarter of of.

The year, so we Ah capturing basically I think he had an opportunity to improve our talent management.

Processes.

It also allows which are the also allows us to drive fast the compensation increase to our associates, which we think is timely because we really do want to be focused on nutrition and and we anticipate that that will have a positive impact on nutrition, even though hard to measure, but we think of those things.

Positive signals, our commitment to our associates to.

Be competitive compensation.

Compensation and benefits.

Thank you.

On.

One line of tension huh with J P. Morgan.

With your questions.

Thanks, So much I was always just just thinking about the knock on effects of a fatter Paramount plus nutrition <unk> is there an impact there and your ability to.

To capture price or even be competitive on.

Pursuing new work bookings that sort of thing just trying to understand sort of.

The call will impact could be seeing some of that.

So what we maybe I'll talk a little bit about our overall, maybe gross margin development and of what you're focusing on tension here is we did we did see you obviously have declined but I think the relative performance overall the industry has been.

The.

Good and so a few factors I want to point out when we talk about pricing I think we need to kind of in particular now that we have been added for for a little while think about them as the regular contractually increased pricing increases with our clients, but also a disciplined to price our business.

Properly and the market and with both of these things we have seen slow start in the fiscal year and now we have seen steady improvement in compounding impact of those initiatives. So that hasn't been getting better and has helped us on the relative.

Gross margin performance also the shift to the.

Pyramid has been positive we haven't been able to log on to a large degree offset the impact of pumping benefit increases by streamlining our permit and focusing on a a slim a permit that might've mentioned that paired with this promotion opportunities which.

Positive our associates I think we'll have over the next couple of years as that is still scaling and maturing a positive impact on how we how we.

How we price and how we win deals. So we're feeling I think good we're feeling good about the improvements we're making of how we manage the business opportunities. So thoughtful process. It allows us actually also to make our strategic basketball and forward I think modern profile is in good shape.

And that should offer us opportunities to make our strategic that's where we Wanna go and go past the revenues on a much more solid base that'd be all today.

Yeah, the only thing I would add their chins and it's you know I I don't think we were doing anything except correcting what wasn't overly narrow pyramid back in the day and other country. I think you know because we had somewhat cancel the college intake in prior years. It let us having folks further up the government doing work at lower billable race then.

And were optimal so I think what we've done in India is appropriate and it's more in line with industry rates based on dialogue I have with those from other companies.

Where we have to do a better job on campus in college graduates I think is both onshore in Europe and Asia as well as in North America, where we are not adequately getting after the market opportunity. There. It's obviously there is a war on talent still so we have to look at vocational colleges and not just the classic places as well in that scenario focus will have.

Fortunately would Ravi coming on board in North America. He has run a play their previously which we will obviously need to replicate over here and that can help our our pyramid, but you know generally I feel good about our skills and our pyramid I think we correction something that was miscued and and I don't want anybody to get off the call worried about or skill set in her.

Pyramid, where we got very talented employees and I feel good about that.

Great. Thank you both for the for the complete answer it there just quickly if you don't mind a quick follow up just on the [noise].

Capital allocation front have to ask how 'bout kitchen question is just what the buyback the authorization here just appetite to buy back stock I know you you talked about the acquisition you just <unk>.

Just announced but just thinking about buyback here at this point in the cycle.

Thanks, Yeah for for this fiscal year, we gave you basically all anticipated number off of $1.2 billion in.

In D C and over the last few quarters as we have been lacking M&A activities. So that we basically redirected access cash to return to our shareholders. That's a general philosophy that we've been following this no intent to build up cash on our balance sheet and so that flexibility as in the model. We are seeing a good pipeline though.

All M&A activities. So it's it's.

What's the deal but from compared to last quarter. We really have have moved the needle forward in our business development activity with a baritone with a team and was he also I think a little bit more realistic behavior in the market relative to acquisition opportunities. So I think for us the goal would be to get back to normal to the capital allocation frame.

[noise] work that we have been talking about for a long time, that's kind of be the mindset for us going forward.

Thank you.

Thank you.

The next question is in the line of Darren Keller was supposed to research this issue with your questions.

Hey, Thanks, guys can we maybe go into a little bit more detail on the vertical specifically and just help us understand maybe starting with financial services, but any other one you think makes sense.

What you believe is the driving force on the change in outlook.

Whether it's number one macro and just pure simple demand in bookings number two you know head count <unk> County available and number three is there anything else, that's maybe like either tax backwards capability or competitive dynamics I'm, just really trying to parse out what's driving the story and what can be improved on your own doing versus macro.

Yeah. It's a good question I mean, I'll start with the two bigger ones financial services, which is about 31% of the company. It grew by 1.6 points in constant currency, but that was impacted by the exit of the sound like a business, which was previously disclosed to the tune of 180 basis points of normalized let's.

3.4 points of growth and that's below industry. We've got a lot of work to do there is we excited previously there was a slowdown in certain segments. There we've touched upon in the prepared remarks to mortgage segment in particular I'm also seeing some of the seats, we'd they're talking about you know, let's say tightening their belts is to go into the fourth quarter and beyond so I think.

That will be a tougher sector for others as well, but fundamentally are bigger issue. There that were evolving promise not just the the folks we have in front of those clients, but also how to clients think of US we very often trained them to think of us as a provider of resources.

I'm pleased to say that our digital mix in financial services is improving and our staff our time of material mix is not improving enough. Yet so we have to get that balance right in in the period to come insurance, we're doing better than than banking and that's obviously in the back of your area. We Gotta go fix it.

Health services, we feel very good a better position on a relative basis or a competitive competitive basis and invoke pair provider as well as life Sciences. That's one of our core franchises I would say as a as a company. The business grew about 5.5% in constant currency year over year, It's 29 per cent of our business. So it's catching up on.

Financial services overall, we've had good momentum to trust that our business in the last few years, so I feel pretty good about a relative position there and then if I talk about the other two portions of the business, where we have actually historically in the last two years three years being growing double digits. CMT is a good success story of ours, we've had good client acquisition.

They're good constant currency growth products and resources I think we have a lot of room to continue to do well there because our penetration of larger counts as lower there than it is as an example in life Sciences, you could think of.

Or indeed, the pay our business, where we are heavily penetrated into the major players. So that's kind of how I think about the framework that the the.

Factors, we touched upon today elevated attrition across the industry and cognizant within that permeated across all industry segments and a D. D. U S onshore situation permeated across all those wall, so nothing specific to either of those.

Alright. Thanks, just one quick follow up on the margins side. It did come in well and I'm in your guidance is relatively unchanged also for margins. So just thinking about that in terms of you know going forward a little more than just the fourth quarter.

See it would seem that if wage inflation calmed down a bit you should be able to maintain that level is that is that a fair assumption.

The well.

I'd have to say the standard answer in the third quarter, we give guidance in the fourth quarter, but I did mention that we feel our overall framework of multimedia framework is intact in that didn't refer only to the revenue, but first of all sorts of.

Margin expectations right. So that's kind of as far as I don't Wanna go for today B.

When you analyze the results are on the margin I think is important to consider a number of factors we have driven the margin expansion.

Bye bye.

By having SG&A control and discipline. So it helped us to five five and leverage that SG&A as the company grew we had also meaningful support from the depreciation of the rupee in our business and then I talked already about the impact that our actions.

On gross margin gross margin goes under pressure, but I think we had a lot of activity that moderate it could've been a bigger effect on gross margin even so.

You heard me in the third quarter and this continue in second quarter and now continues in the third quarter. We feel we have a relatively we have a good process in place to to balance that business out you know so our focus is.

To maintain that discipline, obviously, and then really accelerated revenue growth that is the main focus that would drive it now because that's our biggest opportunity.

And use this <unk> profile is a great foundation for that Okay. That's helpful. Thanks, Brian Thanks him.

Thank you.

I'll conclude today's Q&A portion of the call.

Great. Thank you all for joining look forward to catching up next quarter.

This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.