Cognizant Technology Solutions Corporation

Ladies and gentlemen, welcome to the Cognizant Technology Solutions second 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. The confirmation tone will 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 the star keys. I would now like to turn the conference over to Katie Royce, Global Head of Investor Relations at Cognizant. Please go ahead.

Thank you, Jeremy, and good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's second quarter 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 Humphrey, 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. With that, I'd now like to turn the call over to Brian Humphreys. Please go ahead, Brian.

Thank you, Katie, and good afternoon, everybody, and thanks for joining. Earlier today, we announced results for our second quarter. Q2 revenue grew 4.7% year-over-year and constant currency to $4.14 billion, and non-GAAP EPS was 94 cents. While we are pleased that we met our revenue and margin guidance, we are not satisfied with this level of performance. Our second quarter results do not reflect what Coggeson is capable of achieving in this market environment, neither on revenue growth nor margin rate. As we set about correcting these trends, I'm convinced that a large part of what we need to do is in our own control. Softness in banking and financial services, which was up 1.7% year-over-year in constant currency, and healthcare, which was down 1.5% in constant currency, impacted second quarter revenue growth. While certain market dynamics have impacted our results, I believe that much of our weakness in banking and in the non-life sciences portion of healthcare is attributable to cognizant specific issues. My interaction with clients in both industries underline that they are committed to investing in innovation to help increase their competitiveness and growth. Specific to our banking practice, We've recently implemented a new operating model, which includes a team solely focused on new logos, a team dedicated to the Platinum accounts, which are a subset of our largest global clients, and a banking practice and solutions team to ensure we develop more compelling thought leadership and better align with key partners. In healthcare, factors such as the insourcing at a large healthcare payer client and the spending pullback by clients that are in the midst of merger integration impacted our performance in a quarter. Fundamental market changes are reshaping healthcare, requiring our clients to do more with less and get ahead of regulatory compliance and complexity while dealing with cyber threats and privacy concerns. We have a market-leading position in healthcare and a position of considerable strength upon which to build. I believe industry specialization will be more important than ever with this shift to digital and hence expect to be spending a great deal of time with our healthcare business and clients to ensure we turn around this prized asset. Over the past three months, we've changed out the leaders of both banking and healthcare to get a fresh perspective, new energy, and even greater customer focus. On a positive note, we delivered double-digit growth in products and resources, and in communications, media, and technology. I continue to be pleased with our momentum in international markets, our global growth markets region, which encompasses our non-North America operations surpassed the 1 billion run rate for the first time in our history. We intend to invest in our international business, which should continue to be a growth driver for Cognizant. Later in the call, Karen will take you through the details of the quarter, including segment commentary. As you know, I assumed the role of CEO on April 1st. Since then, I have significantly deepened my knowledge of the company whilst reviewing the market opportunity, structure, and competitive dynamics. Over the last 18 weeks, I've met with more than 100 clients and partners across three continents and conducted over 60 deep dive strategic and operational reviews of the company. I've actively solicited client input on our strategy and the strength of our commercial and delivery teams. I've also spent a great deal of time considering customer needs and buying behavior, our brand position, our business strategy, the effectiveness of our organizational structure, our operating discipline, our portfolio of solutions, and indeed our talent and culture. It is clear to me that Coggeson has a proud heritage, significant customer loyalty, a broad portfolio of offerings, and engaged and talented associates throughout the world. However, we can position ourselves better to participate in the market opportunity, and this work includes refining our strategic posture, and associated enablers to ensure we better participate in the categories that are most relevant to our clients' needs. Developing greater thought leadership and an innovation agenda by industry vertical. Accelerating investments in revenue growth, including increased sales and marketing, targeted innovation, and enhanced partnerships. Significantly lowering our cost structure to facilitate these investments in growth and to ensure we are most more cost competitive in deals, and ensuring greater operational discipline and a more performance-based culture to make certain we execute with rigor and focus. Our path to accelerated growth starts with customers, the lifeblood of every company. It is important that we ready ourselves to address the pricing demands of customers in our traditional areas of strength, whilst readying ourselves also for the changing dynamics in digital. Given advances in technology, customers, regardless of their industry vertical, are faced with an unprecedented pace of change and risk of disruption. Against this backdrop, they are focused on modernizing their environments, extracting value from data, better understanding their own customers, and accelerating innovation and cloud migration to increase their competitiveness, security, and agility. As investments are shifted to digital, budgets in the legacy are pressured with increased focus and cost reduction during renewals. Given our traditional business mix, Cognizant has been exposed to this headwind. We partially offset this via pyramid management, automation, and other delivery efficiency levers. In addition, given our strong customer NPS, we have often been able to provide incremental savings to clients by consolidating the work of other vendors. While these strategies may be effective in the short term, we need to significantly accelerate our shift to digital as we consider our intermediate and longer-term future. The pivot to digital requires us to rethink many aspects of a company, including our brand, skills, processes, systems, and tools. Client engagements will become more project-oriented, meaning more contracts with lower TCV. Our can teams will need to build relationships with the broader C-suite as budget owners, decision makers, and influencers extend well beyond the CIO. We will need more consultative selling skills, more digital talent, more targeted sales compensation programs, and more intellectual property and thought leadership aligned by industry vertical. Delivery will be increasingly agile, with near and onshore delivery complementing offshore centers. The skills of our associates and our leadership team must further evolve. This is a multi-year transition that is essential to our future. Against this backdrop, customers are choosing their strategic partners. So, as we more readily embrace digital, We must ensure our client-facing resources and our branding represent our strategic ambition. Meanwhile, we need to be even more deliberate in our solution portfolio, which includes increasing our investment in areas that provide the greatest value to clients while generating the best return for cognizant. This requires a rigorous capital framework to accelerate our position in emerging categories whilst reducing our cost structure in mature and declining categories. We have a strong foundation to build from in some of the growth categories. One such example, and one I'm extremely excited about, is digital engineering. This is a large, attractive market with 20% plus growth rates. To accelerate our position in this market, we've recently decided to combine Cognizant's digital engineering capabilities with Cognizant SoftVision. Until now, our assets have been distributed across Cognizant, and our structure and operating model have been fragmented and inconsistent. This combined practice with over 11,000 associates and revenue of approximately $800 million will provide a powerful combination of software product development and application modernization services to clients across the globe. I believe that our focused efforts will ensure greater brand recognition in this important category and allow us to more meaningfully participate in the market opportunity. Our increased focus on digital engineering reflects the market opportunity before us and the growing needs from our clients to achieve top-line growth, improve customer engagement through superior experience, and boost productivity at an accelerated pace. With this combined practice, we will bring together current and emerging technologies, scale cross-functional teams, and innovate talent and delivery methods into a single product-centric operating model. We are building the digital culture into our operating model that influences how our clients conceive, design, engineer, and ship digital products at speed. At the same time, we are leveraging decades of experience and expertise in our clients' technology stack to produce a cloud-ready architecture. We will finalize our strategic positioning in the coming weeks, however, as we enable our customers to disrupt and innovate via modern, scalable, agile, data-enabled and future-proof architectures, it is clear that we should further accelerate our investments in digital engineering, cloud, and IoT. And we must strengthen our partnerships with industry leaders to buttress our own capabilities. That being said, this is not a strategic overhaul, but rather a refinement of the strategic positioning, our capital allocation, and the enablers critical to execute our strategy. Against this strategic backdrop, we need to determine the necessary steps to be taken to unlock Cognizant's growth potential. For this reason, we have established a transformation office, which is charged with reviewing six areas of focus as follows. Strategic choices, which include where we want to make strategic bets to better expose us to growth categories. Organizational structure, which includes our operating model, our matrix and roles and responsibilities within this. Talent, which includes attracting, developing, and retaining talent, our culture, our compensation structures, and our skills. Delivery transformation, which includes optimizing our unit cost of delivery across a global delivery model. Salesforce transformation, which includes compensation plans, customer segmentation, increased partnerships, sales coverage ratios, and consultative selling. And finally, fit for growth, which aims to ensure we have the cost structure, processes, and tools to facilitate growth. Each work stream is led by a member of our executive committee, is cross-functional in nature, and is set against a comprehensive change management and communications framework. We've made significant progress in a short period of time. I'm personally excited about the findings of the transformation office, which underlines to me that we can meaningfully change our competitiveness in this market. We've identified opportunities to sharpen our strategic focus, simplify the organization, clarify roles and responsibilities, empower our teams closer to the customer and free up investments in growth by significantly reducing our cost structure. We have more work to do in the weeks ahead. including internal change management and communications to maximize associate engagement. We expect to outline the details of this program, including the execution plan and associated restructuring charges on the third quarter earnings call. Happy customers feed the first line of the income statement. So as we aim to accelerate our revenue growth, I want to lead by example by striving to be in front of customers every single day. I've asked for greater innovation and growth focus from our executives, hence I've made some changes in the leadership team, both external hires and indeed internal promotions. Meanwhile, to ensure our senior leaders get closer to our customers and our frontline operations, we've initiated a process to optimize our spans and layers. This has the added benefit of speeding up decision-making, improving communication, and reducing cost. Growth also requires investments in sales coverage, targeted M&A, and a competitive cost structure. Therefore, even ahead of the execution of the conclusions of the Transformation Office, we have moved on a number of things, including the acquisition of Zenith Technologies, which expands Cognizant's IoT portfolio and extends our life sciences domain expertise by enabling us to become a single source provider of end-to-end smart factory capabilities, a key growth driver in Industry 4.0. The separation of digital systems and technology, one of our three service lines, from our delivery organization to increase focus on that service line. The establishment under one leader of an end-to-end delivery organization aimed at dramatically reducing our unit cost of delivery whilst optimizing delivery KPIs. And the approval to hire 500-plus revenue-generating associates over the coming quarters to A combination of customer-facing and sales support professionals will help us expand existing accounts as we generate new ones. Finally, we need to drive more of a performance culture in our client teams. Therefore, we will overhaul our sales commission plans for the new fiscal year, ensuring that we can better attract, retain, and reward top performers. The new plans will have a greater mix of variable compensation, ensuring greater meritocracy and better align our overall incentives with the company's strategic direction. The growth mandate is now starting to permeate the entire company, informing our big decisions and investments, and beginning to reshape the critical behaviors of our employees. As we focus on growth, we've also made some operational and cost structure decisions that Karin will address later in the call. This will help our cost structure in the second half, even ahead of the full conclusions of the transformation office. Cognizant is a vast organization brimming with talent. In a time of change, we must engage the winning spirit of our 290,000 associates to get back to the basics that resulted in our long record of success. Leaders are key in transitions. For our most talented leaders who are at the director level and above, we recently implemented a retention program to let them know how valued they are and how committed we are to their continued career growth with us. Communication is more important than ever right now, so in recent months we've also greatly increased communication to our associates. We've stressed that growth is our number one priority and provided context on what is needed for us to return to growth. I personally am spending a lot of time meeting with associates, reminding them of our tremendous assets and great heritage that we're building on and the substantial market opportunity in front of us. Let me wrap up by saying that I now have a much clearer understanding of the market opportunity, which is meaningful, and Cognizant's opportunities and challenges against this backdrop. While we've taken some tactical decisions in the last three months on cost and growth, the true potential of Cognizant and the extent of the work to be done on costs and transformation in the quarters ahead is becoming apparent via the Transformation Office. The opportunity keyed up from the output of these work streams gives me reason to be optimistic. I see plenty of opportunities to take costs out of the business, to invest in growth, and to improve our working capital. We will spend more time on this in the third quarter earnings call. I've covered a lot of ground, so let me quickly underscore the five focal points of our work. Refining our strategic posture, developing greater thought leadership and an innovation agenda by industry sector, accelerating investments and growth, significantly lowering our cost structure and ensuring greater operational discipline and a more performance-based culture. While there is a lot of work to be done to ensure Cognizant returns to its historical levels of performance, I can assure you that our team is up for the challenge and looking forward to winning again. With that, it's my pleasure to turn the call over to Karen, who will give you an update on both our operational and financial performance, as well as a view on how we see the balance of the year. Karen.