Cognizant Technology Solutions Corporation

Ladies and gentlemen, welcome to the Cognizant Technology Solutions first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. In order to allow as many participants as possible to ask questions today, please limit yourself to one question. I will now turn the conference over to Katie Royce, Head of Investor Relations. Please go ahead, Ms. Royce.

Thank you, Rob, and good afternoon, everyone. By now you should have received a copy of the earnings release for the company's first quarter of 2019 results. If you have not, a copy is available on our website, Cognizant.com. The speakers we have on today's call are Brian Humphreys, Chief Executive Officer, and Karen McLaughlin, 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 risk 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. Before I pass it to Brian, let me address one issue. We understand that there was some inadvertent communication of our release and other materials this afternoon shortly before market close. Obviously, we are going to take a look into what happened here. We simply wanted to let you know that we are aware of the issue and we will undertake a review. With that, I'd now like to turn the call over to Brian Humphrey. Please go ahead, Brian.

Well, thank you, Katie, and good afternoon, everybody. I'm pleased to join you today on my first earnings call as Cognizant's CEO. I've long admired Cognizant from my vantage point at other leading technology companies. Since moving into the role five weeks ago, I've been busy getting into the heart of the company's operations. I've traveled across three continents to listen directly to our clients and partners. I've conducted more than two dozen deep dives into our industries, lines of service, and regions. And I've met with nearly all of our global executive leadership team and talked to hundreds of our associates in person. I can tell you that the initial reasons for my enthusiasm about Cognizant have been strongly confirmed. I'll share some observations later in the call. This is a great company and I'm excited to have the opportunity to lead the company forward. we had a disappointing first quarter performance. We have a lot of work to do to get back to what I believe this company is capable of achieving to seize the market opportunity in front of us. In Q1, our revenue grew 6.8% year-over-year in constant currency to $4.1 billion. This fell short of our guidance and resulted in an earnings shortfall. Our softness in top-line growth resulted from a weak performance in banking and financial services, which was flat year-over-year in constant currency, and slowing growth in healthcare, excluding the contribution of bolder healthcare solutions. Our revenue performance reflects both external factors, including insourcing among a few large financial services clients and the spending pullback in healthcare clients that are in the midst of merger integration, as well as cognizant specific execution issues that we need to get behind us Offsetting this weakness in financial services and healthcare, we delivered strong double-digit growth in two of our other major business segments, products and resources, and communications, media, and technology. Later in today's call, I'll let Karen take you through the details of the quarter. Beforehand, I want to offer three observations. First, notwithstanding a disappointing Q1, The foundation and capabilities of business are solid, and the market opportunity is robust. I've spent enough time reviewing the business and meeting with clients and partners over the last five weeks to note it to be true. I want to stress that our customer centricity is as strong as ever. Having met face to face with hundreds of our associates over the past five weeks, I can attest to their passion for clients, incredible resourcefulness, innovation, and desire to win. Their winning spirit derives from decades of commercial success. This kind of spirit is hard to create, but once it becomes a core cultural attribute, as it is in Cognizant, it's also hard to break. Second, we know we can and must do better. We are committed to delivering consistent financial performance that aligns with the expectations that we set and communicate. And third, We also recognize that the first quarter revenue weakness follows a loss of top line momentum over the past 18 to 24 months. One of my top priorities is to act to restore top line momentum. Restoring our momentum goes to a question I've been asked many times by associates and others about revenue versus margin tradeoffs. I've long believed that it is possible to achieve solid revenue growth and drive margin expansion simultaneously. I've seen nothing today that changes this belief. To do both, we must be fit for growth. And by this, I mean establishing a healthy cost structure that allows us to be cost competitive, whilst enabling us to make investments that create value for our clients. Investments, of course, can take many forms, including marketing, demand generation, partnerships, reskilling, increased sales coverage, or increase spend in platforms, tools, and automation. I believe cost equals growth. They are not mutually exclusive. Therefore, as we said about reviving top line momentum, we will improve our cost structure as a means to invest in growth and unlock higher levels of performance. One example is our cost of delivery. During my recent trip to India, I saw firsthand how important our delivery teams are to our strategy. Through our customer engagements, our teams in India not only deliver, but also develop solutions and drive customer innovation that bring our digital capabilities to life for clients. This is a prized asset and a valued competitive advantage, but we must also be more efficient to ensure we can accelerate growth. As we said about getting fit for growth, change management, clarity of roles and responsibilities, and communication are critical. We will ensure that all of our associates understand the connection between top-line momentum and a healthy cost structure and that everyone is clear about our go-forward priorities and their role in making this happen. For example, I want our sales and delivery teams focused on customer acquisition upselling, and cross-selling within existing clients, co-creating innovative solutions to customer pain points, and maximizing customer satisfaction. Meanwhile, Karen and I will focus on ensuring a rigorous approach to non-investment costs while prioritizing investments related to growth. Once we get the balance right in steady state, I believe we can accelerate growth and deliver margin accretion simultaneously. That aside, in the meantime, I'm doing what you would expect a new CEO to do. I will dig into every part of the business to fully understand our strategy, market structures, competitive dynamics, client buying behavior, control points, and the engagement levels and collaboration of our teams. As I aim to leave no stone unturned, I've already launched a series of work streams to review our growth and margin opportunities. These work streams focus on areas including our organizational structure to assess role clarity and decision rights among our verticals, regions, and lines of service, and to ensure a clear accountability model that drives a culture that is both empowered and performance-oriented. Our sales model, including how we segment customers, align sales coverage, and establish sales performance metrics, and more leveraged sales commission plans. The Muslim battles in our digital strategy, as well as the practical matters of ensuring our pivot to digital will be successful via structural leadership and compensation actions. And our delivery model, particularly on lowering the cost of delivery through pyramid actions, tooling and automation, and optimizing the mix amongst our delivery locations. Finally, and acknowledging people are at the heart of everything, we have work streams focused on our leadership and culture, emphasizing rigorous data-driven talent management, succession planning, and leadership attraction and development. While we're on the topic of leadership, an essential part of my role is to ensure we have the right team in place to propel Cognizant forward. Having conducted over two dozen four- to five-hour business reviews in the last five weeks, I've had a good deal of interaction with most of our senior leaders. I believe we have a highly experienced, deeply knowledgeable, and accountable team that serves our clients and shares my commitment to getting the companies back to executing the basics well. Recognize, however, that when a new CEO joins, some reshaping of the leadership team is inevitable. and this has already begun to happen. As you know, with my arrival, Frank D'Souza moved into the role of executive vice chairman and will transition to vice chairman of our board at the end of June. Raj Mehta has stepped down as president. I'm not planning to backfill this role. I want to be deeply engaged in the business and also want to flatten our organizational structure so that we can take out layers of cost, communicate quicker, and move with greater speed and agility. With a view to sharpening our focus and accelerating our growth in digital business, I've just appointed Malcolm Frank as the new president of Codeless in Digital Business. Malcolm will bring significant customer centricity, passion, a strategic mind, and a partnership mentality to this critical position. And to improve our performance in banking and financial services, which represents 35% of Collison's annual revenue, I've asked Prasad Chintamanini, our EVP and President of Global Industries and Consulting, in addition to his existing responsibilities, to also assume the direct management of the banking business on an interim basis. Earlier in his career, Prasad led our Banking and Financial Services segment. Therefore, I am confident that he will immediately make a difference as we launch a search for a new head of our banking business. Prasad will continue to maintain all of his existing responsibilities in addition to his interim role. Finally, before turning the call to Karim, I would like to touch briefly on Cognizant's significant market opportunity. One of the things that drew me to Cognizant is our large addressable market. The rates of digitization across industries create a significant opportunity for us as clients as they recognize digital as both an opportunity and a threat. We built leadership positions in many industry verticals and strong client relationships where we can upsell and cross-sell our lines of service. We have an opportunity to further diversify our client base and on a geographic basis, There's a huge opportunity outside of North America with our global growth markets currently accounting for just over a quarter of our total revenues. I believe that we have the right strategy and portfolio of services and solutions to capture the market opportunity. And we will double down on execution to ensure success. We have been focusing our investments on six advanced capabilities that our clients need to become fully digital businesses. These six capabilities, which form the core of our digital strategy, are core modernization, digital engineering, where I'm really enthusiastic about capabilities enabled by Cognizant's soft vision, AI and analytics, intelligent process automation, industry and platform solutions, and interactive customer experiences. To this list, I have added one more capability. Internet of Things. The advent of 5G will vastly expand the impact of IoT and create significant opportunities across our verticals. As we help our customers be successful in a digital world, we need to extend our IoT portfolio of offerings and build out our IoT partnership ecosystem. We see ample headroom for growth in all of these areas, which offer strong margin profiles, and a combined market opportunity that we estimate to be in the hundreds of billions of dollars. As we get after these opportunities, we will be ultra-efficient in our legacy operations, prioritizing our investments, investing in partnerships, and ensuring we digitize our own operations. In short, my mission is to ensure that Cognizant is well positioned for long-term success. My aim is to leave no stone unturned so that we can identify all opportunities for improvements in growth, efficiency, and profitability. I look forward to giving you an update on our progress in the coming quarters. We have a solid strategy, engaged associates, and incredible client centricity. And we're fully committed to executing this strategy. Okay. With that, it's my pleasure to turn it over to Karen, who will give you an update on both our operational and financial performance, as well as the view on how we see the year ahead. Karen.