Q4 2022 Cognizant Technology Solutions Corp Earnings Call
Ladies and gentlemen, and welcome to the cognizant technology solutions fourth quarter 2022 earnings Conference call.
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Thank you I would now like to turn the conference over to Mr. Tyler Scott Vice President Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone. By now you should have received a copy of the earnings release and Investor supplement for the company's fourth quarter and full year 2022 results. If you have not copies are available on our website cognizant dotcom.
The speakers we have on today's call are Steve Rowe leader Chair of the Cognizant Board of Directors Ravi Kumar, 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 our investors.
Reconciliations of non-GAAP financial measures, where appropriate to the corresponding GAAP measures can be found on the company's earnings release and other filings with the SEC.
With that I'd like to now turn the call over to Steve. Please go ahead.
Thank you Tyler and thank you all for joining us today.
Given the recent news I wanted to join the call for this quarter to introduce myself and explain the changes we've recently announced.
For those of you that don't know me I'm, Steve Rowe leader and I joined the board as an independent director in March of 'twenty to 'twenty two.
Last month, I became chair of cognizant board of directors.
Previously spent 35 years at Accenture.
I served as group Chief Executive of Health and public services, Chief Executive of North America.
And Chief operating officer.
Today I'd like to briefly discuss our recent CEO transition and the board changes announced this afternoon supporting our ongoing board refreshment process.
I also want to explain why we're excited for cognizant next chapter.
Ravi will then introduce himself and share his thoughts before Jan discusses our fourth quarter results in detail.
We'll then proceed to Q&A.
Regarding our CEO transition as we announced a few weeks ago. The board appointed Ravi Kumar to succeed Brian Humphries I C E O.
Brian was a resilient leader, providing a steady hand as he's steered the company through various challenges, including the global pandemic.
On behalf of the Board management and all of our associates I want to thank Brian for his contributions which have helped to position cognizant to capture a large growing market and fuel profitable revenue growth beyond our short term challenges.
We also appreciate that Brian will remain with the company as a special adviser until March to ensure a seamless transition.
As part of the board strategy to help cognizant achieve long term sustainable growth. We also announced today a new board appointments.
Eric brand as a proven financial executive and public company director with demonstrated experience supporting growth in technology.
The energy industry has been appointed to serve as an independent director on the board.
Eric brings significant experience in finance accounting, M&A execution risk management, and ESG and corporate governance to cognizant and we welcome him to the board.
And your appointment comes as our board continues to strive towards optimizing its balance of director skills in 10 years as part of its ongoing refreshment program.
With Ericsson appointment the board has appointed five new independent directors over the last four years.
Maureen break the iron ever and a member of the board. Since 2009 has also advised the board that she will not stand for reelection at cognizant 2023 annual meeting of stockholders.
On behalf of the entire board we thank her for her more than a decade of astute guidance exceptional leadership and dedicated service to cognizant.
Given these changes to the board our governance Committee, our committee chairs and myself will perform a comprehensive evaluation of committee composition with an aim toward balancing representation of board tenure and appropriate key skills and qualifications on our committee.
These were topics that I along with other members of the board had the pleasure of discussing with several of our largest investors during our annual governance roadshows in the fourth quarter.
Now before I turn the call over to Robbie let me share a little bit about our enthusiasm for his leadership.
Over the past few years cognizant has navigated a dynamic uncertain market, while strengthening its operational and financial fundamentals.
Heading into 2023, the board believes that cognizant has established a solid operational foundation.
And now needs to move toward accelerating growth.
This agenda requires a focused growth mindset driven from the C suite.
Ravi has this mindset he brings a passion for building teams and driving growth in our industry and we're confident that he's the right leader to take cognizant into our next phase with a goal of ultimately delivering significant returns to our shareholders.
Probably also brings to cognizant best in class operations transformation and leadership expertise at a global scale from a stellar 20 year track record of emphasis.
During his tenure he oversaw the company's global services organization and drove growth across its global industry segments.
Ravi is a proven strategist who secured significant I T services deals. He led international business operations in India, Latin America, Japan and China.
And he pioneered the creation of digital talent pools in the U S Europe and Australia.
Importantly, during his time at emphasis Ravi earned a reputation as a people focused leader with a deep rooted commitment to teams and associates.
Since he joined US a few weeks ago Ravi has proven out this reputation as cognizant associates have warmly welcome him to the team and are deeply enthusiastic about his leadership.
We're confident the Robbie will help us further our efforts to support engagement and trust internally and drive retention amongst our high performing leaders and associates.
As we look forward under Ravi's leadership cognizant will have a sharp focus on two key priorities.
First we'll be focused on meaningful acceleration of revenue growth.
Our second key priority will be ensuring that cognizant as the employer of choice in our industry.
Ravi is the right leader to achieve this vision and the board looks forward to partnering with him.
I'll now turn the call over to Robyn to it.
Introduce himself and to share some additional perspective.
Thank you Steve for that very warm introduction and good afternoon, everyone.
My appointment as CEO is one of the proudest moments of my life I'm excited and humbled by this opportunity to lead cognizant.
Company I've long admired closely watched and competed against.
As Ive Expedience cognizant has had good was highly skilled and they're fully engaged board.
I'm grateful for the Board's trust and support and for their efforts to lay the groundwork for me and the company to flattish.
I'm also very grateful to my predecessor companies, who like the evolution of cognizant business.
He is a first and broadened the strategy.
Extended the company's portfolio and drove the implementation of more vigorous systems and processes.
With a very strong foundation in place I'm, not going back to the drawing board.
I'm trying to move forward by building on.
And we're finding what already exists which will include calibrating, our thinking to a growth mindset.
I wanted to see is offer the full breadth of our industry specific solutions.
Developed organically.
All acquired through targeted acquisitions to a large installed base of clients and invest for growth.
A few days after my appointment I participated in cognizant annual sales kickoff, which was held in Abu Dhabi.
At the summit a thousand of our client facing associates came together from around the way could take stock of all of what we have and what we need to accelerate growth.
I'm, so deeply moved by the warm and the enthusiasm I was going to do it.
We set ourselves the goal to be an employer of choice, which we believe can be a pivot for good.
I plan to spend the next several months meeting with so many associates clients partners and shareholders as much as I can.
I haven't listened carefully with an open mind Big Trust.
And then all I can about how best to unlock more value for clients make progress in accelerating topline growth and drive long term shareholder value.
Because they liked to be highly visible with clients and associates. My plan is to meet the 100 kinds of 100 days rather than in person virtually and to visit with as many of our global teams as I can.
Neither this quarter I'm spending several weeks in India and visiting associates at many of our locations across the country.
Having joined cognizant just three.
Two weeks ago Odeon, My learning curve and need time to get my hands on the pulse of the business.
That said I might have already identified several areas that are tied to operating with a growth mindset.
We're focused on immediately.
Today, I will look to talk about three of those important areas.
First making cognizant and employer of choice in this industry.
Second strengthening our ability to win large deals.
Enhancing that up if anything.
Disciplined.
A quick word on each starting with employer of choice.
Spend time in the ICU services industry, and you quickly realize that sustained success and just from the quality dedication and skill of our talent.
The value we create for clients comes from the knowledge and the skills of our associates.
Because the client experience and the employee experience are tightly linked we have the opportunity to create a self reinforcing cycle.
Highly engaged client talent with a passion for clients and a growth mindset, attracting the best clients.
These clients in turn attract more of the best people and keeping the flywheel turning faster.
That's like one of our one of our goals and while my specific important rooms, as a CEO who's creating conditions for all of the associates to exceed them.
I'm committed to investing heavily in providing associates with continuous learning Upskilling and leadership development all aimed at increasing the professionals they live in.
I believe the number one factor that will define success for cognizant is to become the employer of choice in our industry.
Anything else must be based on that foundation, especially the ability to consistently deliver industry, leading growth, which is the absolute focus of the entire management team.
Let's turn to large deals.
Rich.
The top priority given how essentially.
Building commercial momentum and enhancing the speech it as it provided a business outcomes aligned by industry.
Accelerating large deal bookings that will align with our risk appetite the twice the client centricity and complicated self confidence to walk the part a dose of a things activating and mining existing relationships, while hunting for new ones.
And also it is showing up with an informed point of view.
Over the last year or so cognizant has advanced solution solution and capabilities, along with its project and program management processes.
We have become better equipped to solution and manage large deals and the plan to build on this foundation to Vietnam drags that effects.
In particular, I want to instill a greater sense of pride and empowerment, among the client partners and delivery teams.
Or is it faster more agile response to client needs.
I have a weekly standing meeting during which I just reviewed 10 large deals and do everything I can to help our teams drive these deals over the finish line.
Last week, we were pleased to announce the signing of a penny 1 billion. They no one contract with a longstanding client corelogic demonstrating our capabilities in the confidence clients place in us.
The third area of focus is ensuring operational excellence across the company, including that approach to large deals and fulfillment in general.
We are building out an organizational structure designed to bring together the continuum of activities such as industrialized anybody with high productivity rates.
Market comprehensive cost take out initiatives contract lifecycle and risk management consortium led deals and more.
As one cognizant team we had also looking on internal simplification as a team.
We've been carrying forward to help achieve the company's full potential.
Yeah.
With the market for Tech talent, showing some early signs of improvement we are working to optimize our fulfillment of existing engagements Alicia entrepreneurial spirit and rejuvenate the growth mindset.
Okay.
Switching gears for a moment.
I would like to offer a few perspectives.
On the long term demand environment for technology services I believe we are in a golden era of technology and that software is the new and can be for every business and industry.
As the world prepares for the post pandemic. These set of the daily work and live our lives, we see more organizations accelerating that embraces digital technologies.
Industry's had lower levels of digital maturity like healthcare life Sciences, and manufacturing are stepping up the tech intensity well those that are more digitally mature like financial services retail and communications are staying invested in digitizing the landscapes.
We also interestingly see workplaces and rapidly adapt digital technologies as employees get comfortable with continuously toggling between hybrid and physical workplaces.
You didn't eat of globalization that has spanned several decades enterprises have turned to tech services companies to enable their businesses to scale and globalize.
Every industry that tech industry.
Technology will be deeply embedded into the core of every business every product in every service.
Therefore, the use of deep software engineering capabilities to transform the core of businesses will be a big player for Tech services.
Like cognizant.
So two will be the market opportunity that comes from born digital companies that outsource their technology corridor not patients.
The cloud Needless to say, we continue to demand the biggest gen purpose technologies he has seen in decades.
And being deeply embedded as a digital pillar in every business.
Cloud migration and modernization application services, we've continued to create significant market momentum.
Growth will also be driven by new cloud services like data on the cloud data exchanges, new SaaS services and cloud security services.
Clients had a bed of deep aligns us with the Hyperscale and new best in class SaaS companies as well as our ability to coordinate with these partners.
We truly believe clients win continue to turn to us to help orchestrate this cloud capabilities.
The shift to the cloud and <unk> have also accelerated Iot adoption as use cases grow with better connectivity and proliferating devices and that's core.
Last week, we further bolstered our Iot embedded software engineering capabilities with our agreement to acquire <unk>.
In Iot software engineering provider.
Maybe call. It also strengthens our nearshoring capabilities in Eastern Europe , which is home to nearly 8000 till Friday associates.
We see a strong push now to bring AI into business landscape. So the expectation that they are even reengineer enterprises as completely as enterprise software C decades ago.
Of course as clients navigated a challenging macro environment now they need to fund their investments in digital transformation by executing cost and efficiency agenda.
These same clients are now asking how we can help them achieve their cost reduction ambitions.
And underwrite savings for their digital initiatives.
Given our broad capabilities, we can help clients, whether they need to drive efficiency gains and innovation.
And then Duane transformation of the business.
I quickly wanted a ton for the moment to India is home to about three quarters of cognizant workforce.
India is likely to be the legs.
Technology talent hub for the next decade.
India's population has a demographic profile.
And digital talent pool unmatched by any other country.
And NASCAR forecast, some 2 million I do professionals will be added to India's talent pool over the next three years.
We continue to capitalize on the surge in the talent in India as we intensify our efforts to recruit from MBS tier two cities as well.
Our larger associate base in India is an ongoing source of strength and differentiation for cognizant and one in which we will continue to invest.
As confident as I am cognizant prospects I'm fully events as we have signaled with our guidance for Q1 for quarter, one, but we have a great deal of work ahead of us.
It will take time to rebuild the pipeline and go after larger opportunities.
Please know we put a lot of caught into a decision to hold off on providing full year guidance.
But before making commitments I can stand behind ideally need to spend more time digging into the business and talking to associates and clients.
Keep in mind that we are building on our strong foundation, we have a long standing client relationships and broad portfolio of industry specific solutions.
A robust and resilient global delivery network, a significant opportunity for international expansion and most important is Z energized and highly motivated team.
I intend to capitalized cognizant heritage culture of bold ambitions entrepreneurial spirit.
Emphasizes being fast agile and adaptable and of course, I've Comradery and teamwork.
I am Super energized to lead cognizant into the next era of growth of nine put everything I have into making this happen.
As I've shared with all of our associates, our mantra now is to bring back growth and be the employer of choice.
Now, it's my pleasure to turn the call over to Jan who will take you through the financial details of the quarter before you think will have a questions Jan over to you.
Thank you Ravi and good evening everyone.
Fourth quarter and full year 2022 revenue were above the high end of the guidance range. We provided on our third quarter earnings call in November and in line with our revised expectations. We provided on January 12.
Operating margin was negatively impacted by the previously disclosed noncash charge in the quarter, which I will cover in more detail later.
This charge, we were pleased with the continued progress towards our operating margin goals driven by commercial discipline, the depreciation of the Indian rupee and SG&A leverage.
During the quarter, we made progress improving fulfillment driven in part by a meaningful reduction in voluntary attrition, which declined to 19% on a quarterly annualized basis from 29% last quarter.
This has allowed us to further decrease subcontractor usage and will enable us to put greater focus on driving improved commercial momentum in the quarters ahead.
That said the macro environment remains uncertain and we continue to see pockets of weakness across several key verticals.
Yes.
Now moving onto the details for the quarter.
Fourth quarter revenue was $4 8 billion, representing an increase of one 3% year over year or four 1% in constant currency.
Year over year growth includes approximately 40 basis points of growth from our acquisitions and a negative 60 basis points impact from the sale of family completed at the beginning of 'twenty to 'twenty two.
Full year 2022 revenue was $19 $4 billion, representing an increase of 5% year over year or seven 5% in constant currency.
Year over year growth includes approximately 100 basis points of growth from acquisitions, and a negative 60 basis points impact from the sale of family.
In Q4 digital revenue grew 4% year over year or 7% in constant currency. This resulted in full year 2022, digital revenue growth of 11% or 13% in constant currency digital.
Digital mix was unchanged from last quarter at 51% up two points from the prior year period.
Q4 bookings increased 12% year over year, including the large agreement with Corelogic that we announced last week.
This opportunity is primarily a renewal of existing work with some modest increase in scope during the latter years of the contract.
For the full year, we recorded bookings of $24 $1 billion and our book to Bill of approximately one two times unchanged from the trailing 12 month book to Bill when you reported last quarter.
Outside the large renewal bookings momentum remains muted exiting this year. This has put pressure on our Q1 outlook, which I will cover shortly.
Moving on now to segment results in the fourth quarter were all growth rates provided will be year over year in constant currency.
Within financial services revenue declined 1%, reflecting a negative impact of a 180 basis points related to the previously disclosed sale of all it sounds like subsidiary.
This was partially offset by growth among public sector clients in the U K and insurance clients.
Revenue weakness is being driven by our banking and financial services practice, which we expect will remain under pressure for the next several quarters Ravi the entire team and I are laser focused on reevaluating our go to market strategy enhancing the strength of this portfolio and have initiated a series.
As of actions, including including certain leadership changes that we believe will give us the best opportunity to improve our performance.
We are seeing early signs of success with select global banking relationships, where we have successfully shifted our portfolio mix with higher growth in strategic areas.
It gives us confidence that we are moving in the right direction.
However, more meaningful improvements will take time to implement.
Health services revenue grew 5% consistent with last quarter, we experienced similar growth among both healthcare and life Sciences clients, which partially reflects some normalization of demand that had been driven by COVID-19.
As we discussed last quarter, we have.
Seen some pockets of softness within the segment driven by the macro environment and regulatory complexity. Despite these challenges we continue to view, our health sciences capability as industry, leading and remain excited about the growth opportunities over the medium term.
Products and resources revenue grew 7%.
This deceleration from last quarter.
Revenue was negatively impacted by slower growth among manufacturing retail and consumer goods customers, which we believe primarily reflected the softening of the macro environment.
This was offset by continued strength among consumer goods automotive logistics and utility customers.
Indications media and technology revenue grew 9% growth again was led by our technology business, where our work with digital Neatest lines has driven growth in our core portfolio.
Growth has moderated somewhat as growth among some of our largest clients have slowed but remains positive.
We are closely monitoring trends and developments affecting the tech industry.
Continuing with year over year growth in constant currency from a geographic perspective in Q4.
With American revenue grew 3%.
Growth was led by CMT and Health Sciences.
Global growth markets or G. G M, which includes all revenue outside of North America grew approximately 8%.
It also included a negative 220 basis points impact from the sale of family.
Both once again led by the U K, which grew 16% and included double digit growth in financial services, including public sector clients now.
Now moving on to margins.
In Q4, our GAAP and adjusted operating margins were 14, 2% as the anymore no non-GAAP adjustments in the quarter.
On a year over year basis, both GAAP and adjusted operating margins declined by 110 basis points. This includes the previously disclosed negative 120 basis point impact from a noncash impairment of capitalized cost related to a large volume based contact with health Sciences.
Uh huh.
Our operating margin benefited from SG&A leverage.
Margin pressure from increased compensation cost was partially offset by delivery efficiencies and disciplined pricing.
We also experienced a meaningful tailwind from the depreciation of the Indian rupee, which represented an approximate 110 basis point benefit net of hedges year over year.
Our GAAP tax rate in the quarter was 27% adjusted tax rate in the quarter was 26, 8%.
Q4 diluted GAAP EPS was $1.02 in Q4, adjusted EPS was $1 <unk> down.
Down, 7% and 8% respectively.
GAAP and adjusted earnings per share were each negatively impacted by eight cents in connection with the impairment of capitalized cost related to a large volume based contract with the health Sciences customer.
Now turning to the balance sheet, we ended the quarter with cash and short term investments of $2 $5 billion or a net cash of $1 $9 billion DSO of 74 days was flat sequentially and increased by five days year over year.
Free cash flow in Q4 was $612 million, representing approximately 115% of net income. This brings full year free cash flow to $2 2 billion, representing an approximately 100% of net income in line with our expectations.
We are pleased with our performance in 'twenty. Two however, a change in U S tax law that became effective last year now requires companies to capitalize rather than currently deduct R&D expenses as a result like many other covenants companies. This will impact our free cash flow in 2010.
This week.
We expect capitalization of R&D costs for tax purposes to negatively impact free cash flow by $600 million.
Which includes deferred payments for the 2022 tax here as well as increased payments for 2023.
With this change we expect our cash conversion ratio to be below our target of 100% of net income and 2023.
Moving on to capital deployment during the quarter, we repurchased approximately 5 million shares for $300 million under our share repurchase program and returned $139 million to shareholders through our regular dividend. This brings total capital returned to shareholders through share repurchases and dividend.
<unk> to $2 billion for the full year.
In the quarter. We also completed two acquisitions, often CSI and integration for a total purchase price of approximately $70 million. In addition, we announced the acquisitions of <unk> and the professional services and management practices off one Phil it's virtual.
These acquisitions are expected to improve our digital revenue mix enhance our consulting capabilities.
Our capital allocation framework remains unchanged, although the longer term, we continue to expect to deploy a balanced capital allocation policy returning to an act of good off approximately 50% of free cash flow to shareholders in form of dividends and share repurchases and allocating the remaining 50% inorganic.
Lynn.
Turning to our forward outlook as Ravi mentioned and you will see in our earnings materials, we are only providing revenue guidance for the first quarter of 2023.
Given our bookings momentum in 2022, and the uncertain macroeconomic environment.
We expect our full year 2023 performance to be below the multiyear goals. We provided in late 2021, we intend to provide an update on the full year 2023 expectations for revenue and adjusted operating margin next quarter.
For the first quarter, we expect revenue in the range of $4 71 to $4 76 billion, representing a year over year decline of minus two and a half to minus one 5% or a decline of minus 1% to flat in constant currency.
Our guidance assumes currency will have a negative 150 basis points impact as well as an inorganic contribution of approximately 100 basis points.
We look forward to sharing more as a lot of it continues to get up to speed as he discussed we remain very excited about the medium term market opportunity.
Also believe that while the current macroeconomic uncertainty has led to some pockets of slowdown. It also presents an opportunity for cognizant to help our clients operate more efficiently, while continuing to invest in new digital capabilities.
With that we will open the call for your questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad confirmation tone will indicate your line is in the question queue you.
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Our first question comes from the line of Ashwin shipwreck cargo ship a car with Citi. Please proceed with your question.
Thank you and congratulations and welcome Ravi in England's van Congratulations to you it's good to reconnect.
I think my first question is.
Growth mindset I get that what are some of the explicit steps you might need to take incremental need to return to that.
The mindset, if he can speak to.
You know what are your early view on what's needed for CMC investment capability and last man.
Just the G&A and that's been to chase large contract things like that.
Thank you Ashwin.
Question.
Good to connect with you.
You know having spent a significant time in this industry.
I would say.
To build a growth mindset.
There are a number of things we need to do.
But I.
I would probably highlight three of them as I talked through today, the most important priorities.
First and foremost.
And has to be an employer of choice.
In this industry.
You know what I mean by that is.
Spending time in the industry I just thought it was going to see what I mean by that is.
You can see it.
Ah self reinforcing cycle.
With employees and clients.
<unk> success is based on quality dedication and skilled talent.
But our client experience and employee experience are so tightly linked.
And we have the opportunity to build a self reinforcing cycle with engaged talent and the passion for clients and the growth mindset because in fact, the best clients so that tool.
Ivy Hill has to.
It'll be self reinforcing.
It means a lot of things all the way from retention to to upscaling to leadership development too.
Infusing the project and program leaders remember, we are a company of projects and are.
Proven Ams, which essentially means.
As they walked in court or Dodge Van minor declines these project leaders and equally there.
<unk> talked about associated 70, then so that is the starting point of where you where you would try to build trust with that layer and and continuing to create a self reinforcing what you will cycles or they call. It.
I think you'd talked about large deals I think large deals has investments on both sites investments on.
Dealmakers deal influences.
Ability to our ability to.
Created momentum by.
Supporting.
Find initiatives in various videos transformational.
Various transformational.
Sure It is a dance but equally.
At the back end you have to start to work on solutions capabilities.
And the ability to be in a continuum all the way up from.
Addressing cost take out initiatives to managed services initiatives to large deals will come with them.
With people people to take over.
Opportunities and of course productivity.
Improvements you know, there's a lot of tooling and infrastructure I think.
And already had some of it you have to build on it and and then go behind this opportunity.
You know, it's it's equally important that we build operational discipline, which also helps us to create the growth mindset.
All the way from fulfilling those deals too.
Two building market competitiveness on on cost take out initiatives to contracts contract lifecycle and risk management to consumption led deals and partnerships and a whole bunch of things.
But do we have all of this in place, yes, I think a lot of these teams have already been sent in.
Dave.
In the last few years at cognizant to audiences to a growth mindset and start to double down on the opportunities which have been in the market and the shorter end and some of this would be an additional investments, but in the medium to long run.
Have to eat that creates that.
Pool of a pool of investments inside by by taking out costs. So that you can you can you can then sustain that momentum for the future.
Got it.
Thank you for the obvious part do you put into that to that answer.
And second our second question is on the healthcare contract that was a problem in the quarter.
Any granularity on sort of separating out the top and bottom line impact and is it an ink fence now in other words.
The margin impact taking into account entitling for cure is that forward looking impact what's the forward looking at having it.
Yeah.
Maybe I'll take this the health Sciences declines that we have is a volume based contract based on the performance of that healthcare client and.
And so as the outlook of our clients has changed we had to adjust our revenue expectations going forward, which led then to a a charge that we had to take.
For the expected lower volumes off of incoming business to us in essence, and so the revenue impact is really going to be baked into our.
Until a natural revenue guidance and forecast.
So the charge that we have been taking as a discrete charge of $660 million and and that is a noncash charge off prior capitalized implementation costs that we are now taken out of the contract are some future volume changes of this client could impact our our calculation on these catheter.
Life implementation cost as well so they're still outlook, we obviously work very hard with our clients to.
Drive a great revenue growth as our interest and the clients interest, but there is still a possibility of a pending on the revenue development in the market performance.
All of that line.
Could be impacted in the future as well.
Okay. Thank you.
Our next question comes from the line of charging Wang with Jpmorgan. Please proceed with your question.
Hey, thanks, so much and kind of say, Steve nice to hear from you upfront and it's been a while so I wanted to ask a somewhat ashwin <unk>.
Ravi here, just the goal of being the employer of choice and having a growth mindset because a lot of sense. How long do you think it would take.
For to change the culture to get to that.
To that level I'm imagining you can't be a quick fix but maybe you feel differently.
Yeah, that's a good question.
I'm just three weeks into the job.
So I'm continuing to assess what we have what we need to do.
You know it.
He said, which was self reinforcing cycle as I said as.
As much as it looks easy it's a.
You've got an entrance easy if you're not on it is not.
You know I'm going to be on a listening tour for the next few.
A few weeks and months meeting clients meeting associates being partners.
They'll come back with assessment I think we have a we have built enough both our client and employee infrastructure, although maybe isn't infrastructure.
I have to find it.
And as he set it for growth that's how I see it I would build on it and we don't want to go back to the drawing board we want to build on what we have defined it and as we define it if you could make some changes and get that.
With related to employees.
One of.
Two thirds of our employees.
Our work on India. So India is an integral part of our strategy to differentiate and.
And I'm going to spend the next few weeks in India as well later part of February .
And I'm meeting 100 clients in 100 this.
And this is a goal we have set for my own cells. So that you get to know the pulse you'll get still focused on large deals.
I'm doing the monitoring of 10 large deals.
Every week.
Do we need to keep the focus on commercial momentum.
So it can fly to transformation as I call it.
Continue to do this but.
You continue to look for the medium to long term.
Sustained momentum all you can see it.
That's how I see it.
It's still a question.
And then probably later I haven't said once I.
And a few movies are going through the listening tour, maybe I'll give a robbie also a tiny brito here and talk about the improved attrition, which is certainly a first step into the right direction of becoming a more attractive employer and seeing it reflected so clearly the dynamic of the labor markets have shifted also but.
We also believe that the investments that we have made not all me and and are in regular and competitive merit cycles. You may remember, we announced in the last quarter that we had accelerated our this year's merit cycle through the second quarter, which is also important for the modeling of you guys are into the second quarter.
And that we have made huge progress on internal promotions, because we are passing and learning and development and education et cetera, as we have increased the number of our.
College graduates into our pyramid. So I think we have seen now a year of this pyramid from a nuts and bolts piece to stabilize and we were very pleased with our with this oh, but relatively steep drop.
And in nutrition in just one quarter. So we feel we are off to a good start here and then I think while we focus on more on Oh management on our enthusiasm on growth and aligning will help and then we'll kind of continue to refine those investments as we as we see needed them, but I think we have.
Already ended the year actually on that side with a with a big step forward.
So the talent the talent supply chain, we have been able to.
Streamline its trend in it and be ready for a relief of symptoms and opportunities, which outlines and looking forward to it.
Then if it's okay. If I can ask that as my follow up then with given that 10 point drop in attrition.
And you've hired a little bit the utilization rates did drop so.
From a modeling perspective, not to bore people, but anything to guide us to in the short term on some of those kpis because they are quite a bit here.
Well, obviously I'm this utilization metric also a very detailed answer it in this quarter.
<unk> decrease in utilization is actually more driven by by the relative higher percentage of Gen Z hires into our pyramid, which not as utilized in the young age and and actually a return to normalized vacation, taking compared to the Covid years, where we had abnormally low.
Vacation periods. So those were the biggest factor so I wouldn't model it too much into the utilization, obviously, we need to drive growth and as we now have better fulfillment opportunities, but in this quarter actually.
The utilization those are the two biggest factor attingent, okay perfect. Thank you Jan and Ravi I appreciate it.
I look forward to the updates and safe and healthy travels thanks.
Thank you.
Our next question comes from the line of James Fawcett with Morgan Stanley . Please proceed with your question.
Great. Thank you so much I wanted to follow up a little bit on on Tien <unk> question is was young and Ravi's comments as you know.
If we look at Ravi your initial stages of evaluating and listening to customers and what you're seeing in the business and if I put that together with John's comments around investment that seems to be helping in and attrition et cetera, I'm wondering if if.
The two of you can give some perspective on if there's anything that stands out right. Now is maybe points are places where there could have been underinvestment that you'd like to direct resources and how does that impact the way that you're thinking about you and the board are thinking about the right objectives from a cost and profitability standpoint.
Ravi will well chime in after I give you the more technical thing I think as we mostly.
Developing these plans and also we are clearly not at the end of the job otherwise you won't give guidance today, but when you think large deals on calculated certain must be a volume I think the characteristics of large deals have impact.
Onto our margin profile.
And when we think about that when you can build kind of all culture too.
To leverage the relative margin strength, if you exclude our healthcare charge.
And our pricing discipline in an hour.
Delivery discipline, so that it allows us to be competitive for these larger deals that may cause dilution initially and then ramp up to through their full margin potential. So I think the.
Biggest impact practically would be to figure out for us.
Assuming the success in our I lost you will focus on what that might mean for the overall P&L structure I think that's going to be the biggest one they're going to be other investments had Ravi is gonna be proposing but I think we're going to be managing those a little bit more within the framework of an SBA volume that we have already.
And up to two.
Thank you Ravi, but I think liana I think you've covered it so nicely.
The one thing I would I would probably add is I think in the last one to two years cognizant has invested heavily.
On organizational infrastructure to take large deals on a continuum all the way it sort of managed services too.
You know transaction based pricing to our cost takeout initiatives to digital transformation on that continuum.
Now why is that now is the time to leverage those investments and it goes.
Take those large deals and be competitive on those large deals.
And in a way I would say a large part of it is done we have now.
I was trained in it and.
We have already entered into the market for the opportunity, which is going to be presented to us.
So that's broadly how I see it as a.
As I keep saying it isn't going back to the drawing board but.
I wanted to build on what we have defined it as.
As we define it we have to make some changes you're going to make those changes, but we'll be agile enough to the market to seize the opportunities we have.
I appreciate that and then just as a follow up Ravi how are you thinking about and what's your perception of the current economic environment, obviously as you.
Go to listen and engage with customers et cetera.
It seems like a big part of the challenge for you will be to parse out feedback that is specific to cognizant and it has impact on how you.
Should move the business going forward on a sustained basis versus maybe some things that are happening near term. So I just wanted to hear how you're thinking about the current economic environment and the length of your.
Looking at some of these comments or listening to these some of these comments through.
Yeah, that's a good question and I'm needing to be added as well to chime in.
You know over the years <unk> services has gone from a homogeneous landscape to a heterogeneous landscape.
That different swim lanes.
In an uncertain economic.
And if you're going to see discretionary spend.
Being a little softer.
Large digital transformation engagements.
Talk to become modern nature.
But equally.
You're going to see cost takeout initiatives, a vendor consolidation initiatives happening on the other day and I would say that's a different swim lanes.
But enterprises are continuing to invest because not only are they investing on the consumer side of digital they're also investing on the employee side of digital because in place today.
Interacting with.
So that all litigations on a digital platform because of the hybrid <unk>.
Our work in workplaces.
So I would say.
It's a duality of socks on one side you would see softness on the other side you would see.
You would see cost take out and vendor consolidation kind of happening.
Depending on the industry you look for that is there are industries, which have misheard that.
That can digitally density in the industries, which have higher technical intensity.
And some of them are using the digital platform to transform and deliver in fact, I would say digital technologies is almost like a deflationary force in our inflationary economy. So some of some of our clients are using digital technologies to do so it's a mixed bag and it's a it's a.
Because of the heterogeneity I would say, it's a mixed bag each from the name has its own characteristics and you want to chime yeah like I'll give you a little bit more background, maybe about our bookings performance and one where we have seen the softness.
And.
Geographically and by digital we actually did have a relatively solid bookings growth in digital this last year and I'm, giving you full year numbers, it's about I'm dealing with a total of 16, 18% or something a growth in the digital bookings our world and then we are we saw actually the weakness by sector are really concentrated as you would.
We expect in our financial services group.
We saw the biggest decline in bookings.
Volume for Us and adds lobbied illustrated in his comments.
It's kind of almost in every industry, where we're trying to fill it out I'll be having some industry stronger than others, but we do have success stories by industry sector, and we have declines in industry. So it seems to be a little bit client specific of what we need to watch out Oh, you've talked obviously are now looking forward.
We entered the year with one of our largest pipeline ever.
Basically you know a lot of work, which is for Ravi and the market teams to achieve is to convert that pipeline into qualifications and into our bookings numbers and that seems to be a lot of opportunity.
Still out in the thing obviously that makes up that business is shifting a little bit we hope we want to drive a higher participation and higher bookings number for larger deals, which once we haven't had in the past and that's the true revenue and incremental revenue opportunity.
We're aiming to capture.
And but there.
There is still a very solid market out there, even though the demand on a sequential basis has gotten a little bit softer that makes some sense. So we're gonna be.
Laser focused obviously on converting this opportunity into bookings and then to revenues.
But the underlying market remains attractive from that perspective.
That's great. Thanks for the color Ravi and John .
Our next question comes from the line of David talked about with Evercore. Please proceed with your question.
Thanks, so much congratulations.
Ravi and Steve It's really good to hear your voice again.
Could you give us some.
Guardrails around gross margins in 2023, not looking for anything precise, but maybe just help us think through.
Some of the headwinds and tailwind you've had a number of wage increases in 2022.
Obviously attrition coming down helps a little bit, but could you help us think about.
You know what the gross margin range might be this year.
Well that I had that I cannot do but I think I can give you a few David.
Good to hear your voice as well.
I give you a few pointers that I think are kind of important for the modeling that we had prior disclosed so the usual merit increase that puts negative pressure on our gross margin in the fourth quarter will now occur in the second quarter, So that will.
Disturb a little bit our pattern of a regular margin development through out the year you know if if anything I think you.
You know that second and third quarter traditionally our strongest margin patterns and then we have the fourth quarter due to the marathon, that's what shifted a little bit.
But other than that we are not really thinking that the general dynamic of our pattern of the year is going to shift in a very meaningful way. So I think it's I guess, even though past performance is no guarantee for future performance, but like when I think about our year I think that the principal dynamics.
Remain unchanged.
We have seen maybe at one point I'm getting into trouble, yes, I'll look at Tyler, but we have seen actually moderate to good success with our pricing initiatives and so the contribution of our.
Pricing initiatives to gross margin in the fourth quarter was.
The highest so we have really build quarter after quarter momentum and I was 50% higher than all other quarters together and so we are entering with a with with a little bit of pricing momentum and then we have that's going to be partially offset or offset by our wage increases in the second quarter and then.
As you said are coming up with some sort of metric, which.
Awful, how how attrition is going to help us in revenue or fulfillment and and some efficiencies.
Gonna be then for the modeling that's what we also undergo right. Nowadays so I really don't have those numbers yet for you and.
Turning to do the update in the second quarter then.
Understood. Thanks, so much.
Our next question comes from the line of chasing Kupferberg with Bank of America. Please proceed with your question.
Hey, guys. Thanks for taking my call congrats to Steve and Robby Robin maybe just to start with you I know you obviously need time to study the organization develop your plan, but just at a high level is your initial sense that cognizant has more room to improve in terms of strategy or in terms of execution.
Uh huh.
It is now.
I will see it and of course I need more time to.
More time to assess and whereas I said, you know listening tour.
With both clients and my associates.
But you know the way the way I see it as the opportunity ahead of us.
I think.
We have an extraordinary set of client relationships extraordinary talent pool.
Looking from outside Ive always been impressed by the entrepreneurs pay that the board of ambitions.
Very good teamwork.
Cognizant.
The one trend I wanted to just being excited about cognizant is the confluence of industry vertical experience with technology expertise.
<unk> all I can say very very unique spot.
So.
I almost see this as a <unk>.
The forward trends and look for.
Look for the opportunities, which will fit the bill and and I do believe that.
We have the necessary.
Organizational infrastructure to attract employees retain employees attract clients, we didn't clients and also win large deals.
That is how I see it the opportunity in front of US is one I am I'm kind of configuring and calibrating the fun too.
Uh huh.
Instead of actually looking back I'm looking forward and trying to.
I'm trying to get.
Get upfront that opportunity with what we have and what we need to be in.
So that's probably what I can say I'm actually trying to approach a might be a forward direction.
Very helpful and just as a follow up this might be more for you on but how closer we do you think to fully remediated. The fulfillment issues and then just any at least directional commentary you can give us on our first quarter operating margins. Thanks guys.
Yeah.
For women.
In the fourth quarter really improve fairly meaningfully and it gives us part I think it's part of the optimism we have that we can go to clients and.
You can fulfill their needs are which as.
As we have talked in the third and fourth quarter in the third quarter was hampered at times violent resource constrained. So I think the improvement in fulfillment will translate into into accelerated and enhanced sales activity. That's at this part of our thesis that we have and it should obviously lower our newfield recruiting and have it.
<unk> sees in the support for all of this will make clients happier and so forth. So are the underwriting engine running a smoother, it's really a shift compared to where we were throughout last fiscal year. So I think that's really that gives us hope and gives us optimism for it yes, we are.
Not giving a first quarter margins. Unfortunately, that's all I can help you.
With a with a with any direction there, yes, so just to add to what Jack said.
I think my initial my initial few weeks one of the observations as I think our talent supply chain.
Is as.
<unk> got a lot of it just kind of moving very very well.
Some of the clients I've spoken to in the last few weeks have.
I started to tell us that.
We can we can start to we can start to get some of the demand move to cognizant.
With your fulfillment starting to.
Look good so I'm actually very excited about the progress we've made on fulfillment I think we are we are ready to take more.
And our ability to continuously shopping because the talent supply chain for the opportunity with our clients. Our clients are starting to see the traction with us.
Thanks for the comments.
Ladies and gentlemen that is all the time, we have for questions I'd like to hand, the call back to management for closing remarks.
Great. Thank you all for joining us we look forward to catching up with you on a couple of months on our first our first quarter earnings call. Thank you. Thank you. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.