Cognizant Technology Solutions Corporation

Ladies and gentlemen, welcome to the Cognizant Technology Solutions fourth quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question at that time, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you, and I will now turn the conference over to Katie Royce, Global Head Investor Relations. Please go ahead, Katie.

Thank you, Rob, and good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's fourth 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 of 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 Humphrey. Please go ahead, Brian.

Thank you, Katie, and good afternoon, everybody. As I stated on prior calls, Cognizant is in the midst of a multi-year project whose aim is to reposition the company to realize its full growth potential. And today, I'd like to briefly cover our Q4 performance and then turn our attention to 2020. After a challenging start to 2019, we're seeing higher levels of engagement from our leaders and optimism as we rally behind client centricity and revenue growth. We're making progress, but there's more work to do in the quarters ahead. Q4 revenue grew .2% -over-year in constant currency with $4.28 billion. Non-GAAP EPS was $1.07, and we delivered strong cash flow. Macro demand remains stable, but challenging. There is a distinction between traditional work versus digital. Legacy services are subject to meaningful pricing pressure at renewal, competition, and indeed, insourcing. Meanwhile, clients continue to invest in digital, become modern, data-enabled, customer centric and differentiated businesses. These trends are set to continue, so our strategic posture and operational and financial initiatives are aligned to address this market reality. On a geographic basis, Q4 revenue in North America grew .1% -over-year, while revenue in our growth markets region grew .4% in constant currency. In both geographies, we are determined to accelerate growth. So the opportunity is especially significant in our international business, where we remain under-penetrated and we must do better. From an industry segment's view, in Q4, our financial services global revenue grew .5% -over-year in constant currency. Both banking and insurance were weak throughout 2019. Full-year insurance revenue growth flowed primarily due to a modest decline in North America, albeit with a return in the second half of the year where we saw growth in Q3 and indeed Q4 -over-year. In banking, we continue to see particular weakness in capital markets and commercial banking, offset by growth in payments and retail, with retail having benefited from the Stamlin deal. Both global accounts and local accounts declined for the full year. North America performance, while still declining, has been improving throughout the year, and we see that trend continuing. Europe remains weak with some macro uncertainty and some cognizant specific issues. In healthcare, we reversed two quarters of the declines. We constant currency growth of .8% -over-year. I remain pleased with our performance in life sciences, which delivered double-digit growth. However, this was offset by ongoing declines in our healthcare vertical, which continues to be impacted by contract renegotiations at some of our largest clients following industry consolidation and by insourcing at a large client. Our other two segments, products and resources, and communications media and technology, posted high single-digit revenue growth in constant currency -over-year, down from double digits in prior quarters. Revenue growth in the technology segments has slowed meaningfully in the quarter, following our recent advancement to exit a subset of the content services business over the coming quarters. Later in our call, Karen will take you through the details of the quarter. Let's now turn to 2020, including executing the recommendations of the Transformation Office as they relate to strategy, operating and commercial models, our cost base, and more. We enter 2020 with a two-pronged strategy that aims to expose Cognizant to faster growing market categories. The first element is to protect and optimize our core business while scaling internationally. The second part is to invest to compete and win in four key digital battlegrounds, data, digital engineering, cloud, and IoT. Our strategy leverages our technology services heritage whilst accelerating our position in digital, where our brand recognition and commercial momentum can improve. The strategy resonates well with our clients. We've always valued our strengths and have run an operations side. We want us to further strengthen our digital portfolio to assist them in their innovation agenda. We're determined to help our clients become fully digital, data-enabled, customer-centric businesses. We will continue to use M&A to execute this strategy. This week, we announced two acquisitions focused on extending our cloud capabilities. On Monday, we announced the acquisition of Code Zero Consulting, a firm that specializes in helping companies digitally transform by providing strategy, implementation, and migration capabilities to evolve legacy systems to cloud-based configure price quotes and billing systems. And earlier today, we announced that we've entered into exclusive negotiations to acquire the French operations of the EI Technologies, a Paris-based, privately held digital technology consulting firm. Cloud has changed the way that IT is delivered across infrastructure applications and platforms. Both of these acquisitions are Salesforce Platinum Partners and will help us build upon one of our most strategic and fastest growing practices. In addition, in Q4, we closed our previously announced acquisition of Coutinho, a leading consultancy that specializes in enterprise DevOps methodology and advanced data platform. The Transformation Office also recommended changes to our operating and commercial model. After months of detailed analysis, on January 1st, we implemented a series of measures to accelerate our commercial momentum as part of our sales transformation initiative. These include a new customer segmentation that prioritizes accounts and ensures we get the right resources on the right accounts at the right time. New sales compensation plans that reward overperformance, encourage greater upsell and cross-sell in our existing accounts, and increase our focus on new logos. And the alignment of our specialist sales teams to our service line to increase our subject matter expertise by key practices. To date, I'm pleased with what we've seen in our Salesforce initiative. We have renewed energy and our win rates continue to improve. Our previously announced hiring of 500 revenue generating associates is on track and in line with modeled assumptions. In addition to these 500, we plan to double the number of associates supporting our most strategic alliances with all three leading hyperscale companies and fast vendors. Complementing these commercial changes, a recently appointed chief marketing officer has been working diligently to better align our marketing spend to a growth priority. This includes strengthening our point of view by industry segments, improving targeting via account-based marketing and digitizing our customer engagement strategy. Our marketing spell will increase in 2020 as we aim to support our revenue aspiration and better position Cognizant as a leader in digital. In parallel, we've also worked to simplify the organization, empowering our client partners for speed of execution and account P&L ownership, and clarifying responsibilities and decision rights for all roles across the sales lifecycle. To ensure we have the right digital skills in a supply-constrained environment, we've doubled our investments in Cognizant Academy in 2020 to re-skill and redeploy talent towards our digital imperative. To accelerate our digital momentum, we believe we need to hire or re-skill approximately 25,000 resources in 2020 alone. And we've started to operationalize it. Finally, as we make these investments in automation, training, marketing, and sales, we've been diligently reducing our cost structure to ensure we can be fit for growth. Karen will bring you through the details of our restructuring program later in the call. Engagement and confidence are essential in a people business. Therefore, we've been energetically communicating and contextualizing the reasons for the changes we're going through and engaging the organization to rally everyone behind their goal. I'm pleased to see the mood in the company continue to pick up, both at an executive level and throughout the broader organization. Our annualized attrition rate fell three points sequentially to 21%. Some of this can be accounted for by normal seasonality. So the fact that voluntary attrition rates declined year over year is actually even more encouraging. Of course, as we execute our restructuring program, we will remain diligent and stay focused on increasing employee engagement and reducing attrition. We also recognize that we need to rally the organization behind a common purpose that goes beyond financial returns. We've therefore spent a great deal of time in recent months defining a compelling company purpose statement, which will serve as our north star that guides and inspires us to make the right strategic move in the years ahead. We've also refined our company's values and behaviors that define what will be celebrated and tolerated. We will unveil this to the broader organization in the coming months. We determined to stay true to the heart and soul of our company. And having recently attended our annual global planning summit, one held in Dallas, the other in Dubai, where the executive team and I spoke to thousands of associates about the company's strategy and expectations for 2020, I can tell you that I came away from these summits filled with optimism about our collective ability to move the company forward. Let me conclude by saying that after a challenging first quarter, we've become a more focused, determined, and confident company as we move through 2019. There's a great deal of urgency in Cognizant these days. It starts with me. Any distractions we've had are now behind us. Our team is energized by the clarity of our strategy, the magnitude of the market opportunity, our renewed client centricity, and our increased employee value proposition focus. While our hard work in the past year will serve us well in 2020, there remain some important areas that require progress in the years ahead. Pricing in our heritage business continues to pressure gross margins. We have efforts underway to address renewal pricing strategy as well as our cost of delivery efficiency, including pyramid management, automation, and other measures. Meanwhile, as more work shifts to project-based digital engagements, we are implementing refinements in our digital pricing strategy and continuing to optimize resource planning and allocation. The leadership team and I are fully aware that we have a multi-year project ahead of us, and we are united in a resolve to work with rigor and tenacity to achieve our goals and once again make Cognizant the industry bellwether. Before I turn the call over to Karen, I want to acknowledge that Cognizant co-founder, former CEO, and longtime director, Francis Souza, has let us know of his plan to resign from Cognizant, board of directors, effective marshals, and the board of directors of the United States Congress since June 31st. Along with his remarkable track record of success as Cognizant's CEO for a dozen years, Frank has served with distinction on Cognizant's board since 2007 and vice chairman since June 30th, 2019. On behalf of the entire board, I want to extend our deep gratitude to Frank for his pioneering leadership and quarter century of dedication to Cognizant. Today, we also announced that Benita Bali will be joining our board of directors later this month. I look forward to her contributions and partnership. With that, I'll turn the call over to Karen, who will give you an update on our operational and financial performance, as well as a view of how we see the year ahead. Karen.

Thank you, Brian, and good afternoon, everyone. For the full year 2019, revenue increased to $16.8 billion and represented growth of .1% year over year or .2% in constant currency. Fourth quarter revenue of 4.3 billion was above the high end of our guided range and represented growth of .8% year over year or .2% in constant currency. The revenue outperformance versus guidance was broad-based across our industries. Digital revenue continues to grow above 20% year over year and represented approximately 38% of total revenues for the quarter. Moving to the industry vertical, financial services rose up .5% year over year in constant currency, driven primarily by insurance. However, the project-based work that we benefited from in Q3 did not extend into Q4. We saw a modest slowdown in banking sequentially, reflecting typical year-end seasonality and furloughs. As Brian mentioned, within banking, our performance continues to be negatively impacted by a few of our global accounts, as well as some slowness in certain regional and other clients. While macro uncertainty persists, we expect budgets within banking to be broadly stable in 2020, with North America banks better positioned relative to UK and continental Europe, given continued Brexit uncertainty and our ongoing challenges with a few of our largest accounts. Against that backdrop, we continue to have a muted outlook for banking. However, we are confident in the initial steps our new head of banking has taken to reposition us for growth. We expect this client-centricity to drive deeper and more robust account planning and marketing. By partnering well with digital business to ensure we increase our relevance to banks, he has also implemented a solutions team to bring ease of repeatability, ensure we develop more compelling thought leadership, and better align with key partners. Moving on to healthcare, which returned to -over-year growth up .8% in constant currency. Life sciences, again, boost strong double digits -over-year, benefiting from demand within digital operations and the contribution of Zennis Technologies. Additionally, we see continued momentum within our industry-specific platform solutions, such as the Shared Investigator Portal for clinical trials, which has users in over 80 countries across 14,000 facilities, covering over 400 active trials. Within our healthcare vertical, revenue declined mid-single digits -over-year as performance continued to be impacted, primarily by large clients involved in mergers and the continued shift of work to a captive at a large client. We expect similar -over-year trends in healthcare in Q1 and improvement in the -over-year trends in the healthcare vertical beginning in Q2 as we left the headwinds that impacted the business in 2019. We expect continued cautious spend with healthcare payers as we approach the elections in the US later this year, and so are maintaining a cautious growth outlook for the healthcare vertical. Products and resources grew .6% -over-year in constant currency. As we mentioned on our last earnings call, we expected slower growth on a -over-year basis in products and resources in the fourth quarter as we left the ramp up of work with new logos and the contribution of acquisitions made in Q4 2018. We were pleased that the growth in the quarter continued to be broad-based growth across our industry. Results reflect demand for core modernization services of enterprise applications and for digital engineering, cloud and IoT solutions, and we expect these trends to continue in 2020. Our communications media and technology segment grew 9% -over-year in constant currency, where we saw an acceleration in the communications and media vertical driven by an increase in demand for services in core modernization and cloud transformation services. We expect continued solid performance of telecom clients as traditional telco companies look to transform into digital service providers. Additionally, we see convergence across media and communications companies driving investment in technologies and services that hyper-personalize consumption and create new and engaging experiences for consumers. In technology, growth was negatively impacted by our decision to exit certain portions of our content services business. This negatively impacted the -over-year growth of the CMT segment by approximately 200 basis points or $11 million. I'll provide more color on the expected impact from our decision to exit certain parts of the content services business with my Q1 and full year 2020 guidance. Now turning to GEOs. We were disappointed with growth in Europe, which grew .3% -over-year in constant currency, reflecting a slowdown in both the UK and continental Europe. A more cautious macro environment continues to weigh on spend across industries in the UK, while we also have some cognizant specific challenges in a few large banking clients. The rest of world grew .5% -over-year in constant currency, the strongest performance in seven quarters. While our global banking relationships continue to pressure growth in Asia Pacific, we have seen improved traction in countries such as Australia and Japan in insurance and life sciences. Moving on to margins. In Q4, our GAAP operating margin and diluted EPS were .6% and 72 cents respectively. Adjusted operating margin, which excludes restructuring charges, was 17% and our adjusted diluted EPS was $1.07. Before getting into more details on margins, I want to provide an update on the enactment of a new tax ratio for the EPS. The EPS is a tax-free system that enables domestic companies to elect to be taxed in an income tax rate of 25% compared to the current rate of 35%. A company electing into the lower rate is required to forego any tax holidays associated with a special economic zone and certain other tax incentives, including MAT credit carry forward. Our current intent is to elect into the lower rate once our existing MAT assets are substantially utilized. As a result, we recorded a one-time net income tax expense of 21 million due to the re-evaluations to the lower income tax rate of our existing India net deferred income tax assets. This had a negative 4 cent impact on GAAP EPS in the quarter. Our adjusted operating margin was flat year over year, reflecting SDNA discipline offset by continued pressure on gross margins, including a $25 million write-off of certain capitalized setup costs for a large healthcare customer. The write-off negatively impacted gross margins by 50 basis points and EPS by 4 cents. Over the last several quarters, we have taken steps to start to right-size our cost structure, primarily focused on reducing overhead in the business, with those benefits evident in the -over-year improvement in SDNA. These savings are necessary to fund the planned additional investments in areas such as sales resources, branding, talent, and lean and automation enhancements across the company. However, gross margins declined year over year as we continue to face pricing pressure in the legacy parts of our business that require us to take additional actions in 2020 around pyramid optimization and pricing levers, such as COLA and aligning bill rates with promotions. We expect our 2020 Fit for Growth plan that we announced last quarter to drive improvements in these areas. I'll provide an update on the actions taken in Q4 under the 2020 Fit for Growth plan, as well as additional details on the expected execution of this plan later in the call. Turning to our balance sheet, our cash and short-term investment balance as of December 31st, stood at 3.4 billion, up approximately $350 million from September 30th, but down 1.1 billion from the year-ago period, reflecting the over $2.2 billion of share repurchases completed in 2019, and approximately $620 million deployed on acquisitions. As a reminder, our short-term investment balance includes restricted short-term investments of $414 million related to the ongoing dispute with the India Income Tax Department. We generated $845 million of free cash flow in the quarter, as DSO of 73 days improved three days sequentially due to strong collections. On a -over-year basis, DSO improved by one day. In the fourth quarter, we made a change to our accounting policy related to DSOs to better align with industry practice and better reflect amounts due from our customers on our balance sheet. Beginning in Q4, we started to net certain amounts due to customers such as discounts and rebates with trade accounts receivable rather than reflecting those amounts as a liability on our balance sheet. This change does not have any impact on our operating results or cash flows. Our outstanding debt balance was $738 million at the end of the quarter, and there was no outstanding balance on the revolver. During the fourth quarter, we opportunistically repurchased approximately 2.5 million shares for approximately $150 million, and our diluted share account decreased to 548 million shares for the quarter. In 2019, we repurchased over 34 million shares for approximately 2.2 billion. Today, we are announcing a 10% increase for our quarterly cash dividends, the second increase since we initiated the dividend in 2017. Additionally, the board has approved a $2 billion increase in our share repurchase authorization. Before I turn to guidance, let me provide an update on the progress of the 2020 Fit for Growth Plan, as well as the content work that we are in the process of exiting. Our 2020 Fit for Growth Plan is expected to run for two years. This program is designed to simplify the way we work, improve our cost structure, and fund investments aimed at accelerating our revenue growth. As previously announced, we expect to remove 10,000 to 12,000 mid- to senior-level associates from their current roles. We will make every effort to identify productive roles based on client demand and continue to assume that approximately 5,000 associates will have the opportunity to re-skill for new roles within the company. In Q4, we incurred $48 million of charges, including $42 million of severance charges as part of the Fit for Growth Plan. These charges relate to approximately 550 associates, most of whom we expect will exit the company by the end of Q1, and we expect will result in a cash impact of approximately $40 million in the first quarter, with full run rate savings not achieved until Q2 for these associates. We continue to expect the majority of the remaining associates to exit the company by mid-2020. We are managing this process carefully, and any time we make decisions that impact our employees, we take it very seriously. Additionally, we continue to review our real estate portfolio as part of the Fit for Growth Plan and expect to take further actions related to real estate rationalization in 2020. These actions are expected to be substantially complete by the end of 2020 and are expected to result in 2020 in-year growth savings of over $450 million and annualized gross run rate savings of $500 to $550 million in the year 2021. Additionally, in the fourth quarter, we began the exit of a subset of our content services business. Approximately $5 million of the $48 million Fit for Growth charges in the quarter related to retention and severance for approximately 1,100 of the expected 5,000 to 6,000 total associates to be impacted by the wind down of this work. We have updated our estimate of the number of associates to be impacted by the wind down from 6,000 to a range of 5,000 to 6,000, as we expect to retain more work with these clients in other content and technology services than originally estimated. We now estimate that we may lose revenue of $225 to $255 million down from our previous estimate of $240 to $270 million on an annualized basis within our communications, media, and technology segments. We continue to anticipate revenues will ramp down over the next one to two years with an expected impact of $20 to $25 million of revenue in Q1 on a -over-year basis. This is expected to be modestly diluted to our adjusted operating margin rate, subject to the timing of the ramp down and other factors. We also continue to expect to incur wind down charges related to the transition of these associates and any related assets such as real estate and equipment. We are working with our partners to transition this work while continuing to meet our contractual obligations and providing impacted associates with a number of transition assistance programs, including retention bonuses, severance packages, and the opportunity to participate in various reskilling programs. At the time of our Q4 earnings call, we provided an estimate of $150 to $200 million in total expected charges associated with this fit for growth cost transformation plan, including the wind down of certain content work. Based on our actions to date, attrition at the senior levels of the pyramid being slightly higher than our expectations, and less impact from the exit of certain content services, we now expect to be towards the low end of that range while maintaining the annualized growth savings estimate of $500 to $550 million. Before turning to guidance, I want to comment on a potential change in the dividend distribution tax that was announced as part of the India budget a few days ago. We are currently analyzing this proposal, but believe it can, once enacted, significantly lower the cost of repatriating funds back to the US. The proposal is not yet law, but the expected date is April 1, 2020. I would now like to comment on our outlook for Q1 and the full year 2020. For the full year 2020, we expect revenue to grow in the range of 2 to 4 percent year over year, the $17.11 to $17.45 billion on a reported and constant currency basis, as based on the current exchange rates, we are not expecting a material impact from foreign exchange. This includes our estimate of a negative impact of approximately 110 basis points to year over year growth from our decision to exit certain content work within our CMT segment. This guidance continues to reflect a muted outlook for financial services and healthcare. We expect first quarter revenue growth in the range of 2.5 to 3.5 percent year over year, to 4.21 to 4.25 billion on a reported basis. Based on current exchange rates, this translates to constant currency growth in the range of 2.8, 3.8 percent year over year, or 4.23 to 4.27 billion dollars, reflecting our assumption of a negative 30 basis points for foreign exchange for the first quarter. This includes our estimate of a negative impact of approximately 60 basis points to year over year growth from our decision to exit certain work within the content services business, which will be reflected in the CMT segment. Revenue guidance for both Q1 and the full year assumes a cautious macro outlook in the UK, continued slow growth in financial services and healthcare, as well as the previously mentioned impact of exiting certain content work. For the full year 2020, we expect adjusted operating margins to be between 16 and 17 percent, which assumes incentive compensation to be at target payout. We expect Q1 margins to be slightly below the low end of the range, as we are investing in sales hiring, training, tooling and automation, and marketing and branding, while the timing of the savings from the actions taken under our Kit for Growth plan and the return on our sales investments will not have reached a full quarter run rate. As a reminder, our full year 2019 margin rate reflects lower incentive compensation payout given our underperformance versus target. Our guidance assumes that in 2020, we will perform at plan, and therefore incentive compensation will reflect target payout rate. This is a margin rate headwind of approximately 120 basis points year over year that we plan to absorb. The midpoint of our 2020 margin guidance of 16 to 17 percent therefore reflects approximately 100 basis points of improvement over the 2019 margins normalized for incentive compensation. We expect to deliver adjusted diluted EPS in the range of $3.97 to $4.13. Our EPS guidance anticipates a year over year decrease of approximately $30 million in interest income, reflecting a lower cash balance and reduced interest rates in both the US and India. This is expected to impact EPS by approximately 4 cents. This guidance anticipates a full year share account of approximately 548 million shares and a tax rate in the range of 24 to 26 percent. Guidance provided for adjusted diluted EPS excludes restructuring charges and other unusual items, if any, net non-operating foreign currency exchange gains and losses, clarification, if any, by the Indian government as to the application of the Supreme Court ruling related to the India-defined contribution obligation and the tax effects of the above adjustments. Our guidance does not account for any potential impact from events like changes such as immigration or tax policy. With that, Operator, we can open the call for questions.

Thank you. At this time, we'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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. In the interest of time, we ask you to limit yourself to one question. Thank you. And our first question comes from the line of Brian Keene, with Deutsche Bank. Please proceed with your question.

Hi, guys. I want to ask about the cadence of revenue growth in 2020. Looks like you guided one Q20 revenue guide in 3 to 4 percent constant currency. Full year, fiscal year, 20 growth is pretty similar at 2 to 4 percent constant currency. So is Cognizant expecting kind of steady revenue growth with no fluctuations, or do you expect maybe a little bit of a drop in the middle of the year and a pick up at the fourth quarter? I guess another way to ask this is, do you see an inflection point in revenue growth on the horizon? Thanks so much.

Hey, Brian. It's Karen. The one thing I would say is nothing particularly unusual. There's no large deals. There's nothing unusual right now from a seasonality perspective. So I think it will be relatively typical seasonality as we'll start to ramp as we get into Q2 and then Q3. The one thing I would say where the back half might be a little bit stronger is because of the sales investments that we're making now. So we launched that hiring program late last year. Those folks are coming on board as we expected. And certainly while we said we would expect it to take about a year for them to start to ramp, but we should start to see a little bit of that benefit as we get into the back part of the year.

Yeah, and maybe the only addition I'd make to that, Karen, is obviously the content moderation ramps down. We'll offset that somewhat as it grows throughout the course of the year.

Thank you. Our next question comes from the line of Ashwin Shirvarkar with Citi. Please, see you with your question.

Thank you. Hi, Brian. Hi, Karen. Appreciate the detailed commentary. Brian was hoping you could give more information about the Salesforce transformation, where do you stand on hiring? You mentioned the words on track, but a little bit more color on what on track means would be great. And on the flip side, is there perhaps any heightened attrition you expect to see for the traditional Salesforce that was already there given maybe the new compensation schemes or any changes there? So Salesforce update.

Yeah, it's very interesting because as I said, we were at a global planning summit in the last month or so, and the Salesforce are actually very motivated by the compensation changes because they can actually make more money than they could in prior periods. So actually, on the contrary, I actually feel there's a great deal of optimism in the Salesforce. People are,

you know,

when a CEO visits clients every single day, it leads to a certain cultural demand on the organization. I think people are motivated to get the company back to an accelerated growth rate, so I feel good about where we are. I'm not overly concerned about attrition in the legacy sales teams. We've had great luck, I would say, fulfilling the pipeline of opportunities. We don't break out on a quarterly basis where we are versus that hiring. We're less than halfway through the 500, I will tell you that, but there's a lot of work still to do. But I track it on a monthly basis at the executive committee, and we're pretty much in line with what we anticipated in terms of costs. I've also been keeping an eye not just on the accounts that these folks are assigned to, but also the pipeline that they are building, and in some cases, I've been pleasantly surprised that the early pipeline bills have even been ahead of my expectations. So, look, more work to do to continue to review that, but there's a lot of energy and urgency in Cognizant these days, and I think we're all very clear what we're setting out to achieve. And I feel very good in terms of where we are today. The broader Salesforce update is consistent with what I said last quarter. That's not going to change. We've implemented a RAD model, which is retention, acquisition, and development. That's all about trying to get the right folks on the right accounts at the right time, aligning specialist resources, which are by practice, such as big data or cloud, with a generous client partner. The client partner is the quarterback in the account. They have decision rights. They own the P&L for the accounts. They can move with speed and accountability within a framework of authority that we have delegated to them, and they are complemented by subject matter experts, solution architects, and the like. We implemented that model on January 1st. So far, so good. And, you know, we've obviously got to continue to flesh that out in the course of the year ahead, but I feel good about where we are.

Thank you. Our next question is from the line of Lisa Ellis with Bonfit Nasinton. Please receive your third question.

Hi. Good afternoon, guys. Hey, Brian, one of the things you mentioned was that you're doubling the number of people supporting Cognizant's major strategic alliances, and I know that that is also somewhere you have been spending your own time as well. Can you just provide a little bit more richness on where you're focused there, where maybe Cognizant is already strong, where you think there's opportunity to improve, and how that sort of fits into the overall, you know, updated strategy and fit for growth plan? Thank you.

Yeah, I will. And look, we have, Lisa, some really strong alliance partners and partnerships by key verticals, whether that's Peminos and Financial Services, Pega, Adobe, or otherwise, but I've really spent a huge amount of time in the last nine months trying to build out and foster a business plan behind Amazon, behind Microsoft. We're now working through Google Cloud practice as the hyperscale players, and it is, you know, really selectively aligning Cognizant to some of the leading fast-type players as an example, such as Salesforce or ServiceNow, or indeed Workday, to make sure that we go to market with the companies that are growing 20%, 30%, 40% -over-year. Not to say we won't continue to obviously partner with others, but we are putting, allocating even more capital to the winners in today's environment. That invariably means for us, just to be very clear, it doesn't mean hiring more alliance partners and having a bunch of coffee drinkers sitting around feeling good about hosting meetings. This is a lot about building out business plans with solution architects and big data experts and the like, aligned to each and every one of those companies I've talked about. It involves putting an operational cadence together on a rolling four-quarter basis. So I know in a certain date, I'll be sitting in a room with the CEO of that company, reviewing not just what we're setting out to achieve as a company, which has dollar targets against it, which are intersected by country and vertical, but also looking at the pipeline shape, where we are in the funnel, and really operationalizing that strategic alliance vision into -to-day reality, which includes joint customer calls, joint in-person visits to clients with leadership of those companies, joint emails to clients or letters to clients and the like. So it's strategic, but to be very clear, it's also very operationally inclined and pragmatic with a view to successfully driving a cube of your cadence going forward with these clients and partners and making sure we show up better than we ever have in the past.

Thank you. Our next question is from the line of Tin Tien Duong with JP Morgan. Please, just give your question.

I think it's a lot. Everything looks in line a little better than what we had. It was just gross margins that was a little bit different. I know you mentioned, Karen, the 50-bit sort of $25 million healthcare write-down. Can you maybe quantify some of the pricing pressure you're seeing coming from the heritage work or anything else on delivery costs that might have surprised you? I know the fit for growth piece is coming in too, so just overall, trying to give some more color on the quarter and then maybe how the year is going to play out here in 2020 for gross margin. Thanks.

I don't think in the quarter, Tin Tien, I wouldn't say there was any real change in pricing trends, but as we talked about on the prepared comments, you certainly are continuing to see pressure on renewal in the heritage or legacy IT side of the business. Right now, that's being offset by higher pricing on the digital side of the business, and certainly, we think we can do better on pricing in digital services and really make sure that we are pricing to the market and for the value that we are providing to clients, so that is certainly an initiative we have underway, as well as do a far better job on things like COLA and getting adjusted bill rates when people are being promoted or rotating our staff to take effect of a more optimal pyramid. Certainly, the savings that we've seen so far have been primarily in the SG&A buckets as we've been focused on the top end of the pyramid, most of which is down in SG&A, but as we move into Q1 and Q2 and further into the Fit for Growth program, we would certainly expect to see improvements in the middle to upper middle of the pyramid as well and also be able to drive improvement in some of these revenue levers, which will hopefully start to stabilize the growth margin.

Our next question is from the line of Edward Queso with Wells Fargo. Please, just use your question.

Great, thanks. Brian, is your team now in place? I know you had one of your execs cycle out not that long ago, but do you have the people that you need down a level or two at this point to drive the transformation?

Look, I'm a big believer, Ed, that eight players attract eight players and that's a good thing. And the more we upscale and make sure we have the right team around me, those people in turn will make sure that they replicate that trend through the organization. I will say we have gems in cognitive and really, really strong leaders. I talked about life sciences growing double digits. That's an internal promotion that happened in the last year. So it's always going to be a combination of complementing excellent internal talent with excellent additions from the outside and putting a system of meritocracy and a performance culture in place so everybody knows what we celebrate and what we condone versus what we don't tolerate. So of course, in the years ahead, there will always be refinements. I want to drive a performance culture, but we're getting there, but of course, there will be even in the foreseeable future, ongoing refinements as we continue to attract better people from the outside to complement external talent. I will say one thing that's very pleasing to me. There's no shortage of people reaching out to cognitive and at this moment in time, feeling both from clients and otherwise that there's a new vigor in the company, a new urgency in the company and a confidence that we can get back to being the great company that we have been in the past. So it's very encouraging to me to know that we can still attract great talent from the outside. And in the same vein, with a new chief people officer, Becky Schmidt, who joined this Monday, who almost had two decades in the center and most recently had been in Walmart, we have a very strong people agenda program lined up in the coming years to attract, motivate, develop, retain, and put very sophisticated talent management programs in place internally. And I believe that that will not just make it a very appealing place to come and develop your career, but it will also have intrinsically a direct impact on our attrition rate, which as I said in the call, I'm pleased with, but we can always do better.

Our next question comes from the line of Keith Bachman with Bank of Montreal. Please just hear the question. Hi, excuse me, hi,

thank you very much. Karen, just for clarification, could you tease out the guidance from a revenue perspective in terms of isolating what M&A contribution is expected to be, and particularly the M&A contribution, does that include some of the recent, very, very recent deals? And then Brian, for you, if you could just revisit on healthcare and how we should be thinking about healthcare cadence, both this year and frankly exiting this year, as the deals anniversary in earnest in the June quarter in particular, has the price activities of the M&A clients, has that already played out or will that continue to play out for the year? But just more broadly talk a little bit about healthcare both this year and kind of exiting the year, how you see the opportunity there for cognizant. Thank you. Well, I'll

start with the healthcare question, Keith, because actually ironically I've been on the phone with the leadership team of, as it happens, both of those combined companies as recently as this morning. So I'm pretty current in terms of where we are on the accounts and indeed the opportunity. And I will say, I continue to be pleased that we show up a little bit better than we have, and both executives and companies reassured me that the merger integration work is still there. And as they think about consolidating to preferred vendors, we're firmly and squarely in the go forward strategy as well. So I do feel there's lots of opportunity for us, even in those larger accounts where we've seen consolidation from four to two in the last year, and we have seen some pressure on rates as part of that, but we do want to get back once the anniversary of that into a stronger growth trajectory in healthcare. In the same vein, I just wanna caution the amount of work that needs to be done. We've also had our healthcare team today here in New York, about 20 people in a room reviewing last year, reviewing revenue pipeline, win rate, margin trends, a very strong call to action in terms of what we need to do in the coming year. So we're not out the other side on that yet, but I choose to be glass half full here in terms of, a lot of the actions we are doing are not specific to one vertical. Better aligning marketing spend, making sure we have the right customer segmentation strategy in place, upscaling our client partners, making sure we have the best specialists in the world to compliment them, going to market with some of the hyperscale players in financial services or healthcare, et cetera, et cetera. That will bear fruits in each and every one of our industries, healthcare included. We do expect still some, I would say modest, we still have modest expectations for healthcare in the coming year, but as we go through the course of the year, I'd like to think that we'll start to make some progress.

And Keith, it's Karen, let me just comment on the guidance. So for the first quarter, there's about 120 basis points of inorganic revenue vacant to the guidance. That includes only the transactions that have already been completed. So that would include code zero, but not the EI technology of transactions, as that has not closed yet. And then on a full year basis, the guidance similarly only for deals closed is about 100 basis points of revenue growth year over year. And that's down from, if you recall in 2019, the impact is about 200 basis points.

Thank you. Our next question is from the line of Rod Bourjot with Deep Dive Equity. Please, just use the question.

Yes, hey there. So on the last earnings call, you talked about a set of growth investments that would cost you about 150 basis points on margin. So I'm just looking at the further needs to build into the digital era. And besides the growth investments you've already articulated, are there additional growth related investments that you'd like to start making in 2020, such that if you had more room in your margin plan, are there additional investments that you would like to make besides the ones you've talked about?

Hey Rod, it's Brian. But listen, the way I think about this, this year, if you normalize for let's say target bonuses as Karen has articulated in this call and prior calls, margins would have been roughly mid-15. We've got it 16 to 17 for next year. So call the mid point 16.5. And we're assuming by the way next year that our bonus structure is a normalized part of our cost space. So hence organically, if you will, 100 basis points of margin improvement year over year. Now to your point, we've made reference before of 250 million plus of investment back into the business. A lot of that, we call that explicitly like 500 accounts related to this revenue generation. We're doing more on sales and marketing. We're doing more on training, et cetera. That's approximately a point and a half. So had we not done that, margins naturally would have been higher. But I'm not here to try to operationalize Cognizant from $17 billion to $20 billion. We're trying to make this a 25, 30, $35 billion company in the years ahead. And as part of that, I think it's always wrong to look at one element in a continuum and shine a spotlight there and think, well, Brian, had you not made those investments, could you deliver higher margin rates? And Rod, knowing your investment pieces on the stock, I certainly know that's not your intent either behind your question. What I wanna do is continue to reinvest into the business. So if we can prove a strong return in these investments we're making, including the Salesforce hiring, we get win rates higher. If we get a good pipeline that we convert to TCVN revenue, my inclination will be to continue to deliver and apply more of the upside back into the business and get us back into the Cognizant that was tried and tested for many, many years that made this company a great success story over the years. So that's the intention that we're setting out to deliver here in the next five to 10 years. I'm confident we're doing the right thing. I will tell you, I'm really pleased and I spend a lot of my time with clients and partners. Our strategy is resonating. They see the renewed energy in the company. We have lots of work to do, but I'm very pleased and optimistic with the progress we're making and know nonetheless that we still have more work to do in the U.S.

Our next question is from the line of Jason Kupferberg with Bank of America. Please receive your question.

Hey, thanks guys. Just a two prong question on M&A. First, I know that ELL Technologies, you just said is not in the guide at this point, but assuming that that closes in line with the timing you're expecting, roughly how much revenue would that add this year? And then can you just comment more broadly on your M&A strategy? It feels like the frequency and intensity of M&A is picking up a little bit, Brian, under your watch over the past year. Is that an accurate assessment in terms of where you intend to take that strategy as well? Obviously, these tuck-in size digital assets really stand out.

Yeah, so listen, a good question. I wouldn't say to date that the frequency has picked up that much. February 6th last year, I was announced as the new CEO. So I started in April 1st, and since then we've done until this week two acquisitions, Cotino and then prior to that, Zena Technologies. It just so happens that we were diligently working to review our strategy and finalize that. And only with that behind us did we absolutely go, now let's go and put our balance sheet behind us to make sure we position ourselves strongly behind our strategic intent. And as I said earlier, that's a lot about protecting and optimizing the core, including scaling internationally, but it's also about winning in e-digital battlegrounds. And both acquisitions we made this week are firmly behind the cloud ambition that we have, and you'll see more of the same on a go-forward basis behind each and every one of those digital battlegrounds. To be very clear, I view M&A as a means to an end to achieve a strategy. And while I'm pleased with the 2.2 billion we spent on share repurchases last year, you will see an absolute conviction to return capital to shareholders in the form of periodic dividend increases, as well as share repurchases with a particular eye to offset dilution, but also potentially opportunistic. I will say that you will see us are more towards accelerating M&A on a go-forward basis, as long as it is supportive of the overall company strategy. Share repurchases while having value do not reposition the company against the strategic intent. M&A can enable us to do that. So with almost a year behind me, under my belt here in Cognizant, getting my head around the company, the industry better, the operational rigor and control we have with the team around me, we're absolutely inclined to accelerate M&A a little more in the years ahead and make sure we use that as a means to accomplish our overall company strategy. With regards to the details of the EI technologies, look, we've entered into exclusive negotiations, deals not closed. It is material for France, but it is absolutely immaterial from a company perspective in terms of the dollar addition. So it's basis points in terms of growth as opposed to anything else. But as I said, that was code zero. It's firmly behind our Salesforce ambition. And we've been spending a lot of time, I personally have met with Salesforce CEO, I think probably now five times in nine months. And these are very symbolic moves to make sure that we strengthen our capabilities behind the Salesforce practice that we're building out. Thank you.

We have time for one final question today, which will be coming from the line of Moshe Katri with WebBush Securities.

Hey, thanks for taking my question. Brian, you spoke about the need to potentially accelerate growth and international where you feel that the company's on the penetrated. Can you talk a bit about what sort of actions you're taking to kind of get there, maybe some color there, that'll be helpful, thanks.

Yeah, it ultimately takes three portions. One is organic investments, one is partnership, and another one is M&A. To be very clear, Zena Technologies, which was at the intersection point of life sciences as one of our really strategic verticals, as well as IOT was a perfect illustration of hitting many birds with one stone, geographic expansion strengthening European footprint aligning to our IOT digital priority and aligning to one of our strategic verticals. We also announced and closed Cotino, which has got a very strong international footprint in the form of DevOps and data in Q4. So those are good illustrations, and of course, EI technologies that we announced earlier today will be another good illustration of strengthening our footprint in Europe, in this case in France. Organically, of course, we're strengthening our capabilities by building out more footprints and supporting that footprint with better allocation of resources globally. As an example, we will modify our marketing mix this year to shift much more towards our international expansion. In prior years, our marketing spend was actually less in our international business than the actual current revenue mix, notwithstanding the fact that our growth opportunity was bigger there. So that seems to have been something that we wanted to rectify and to go forward basis. And of course, part of the 500 revenue generating headcount that we've approved, a good chunk of that is in Europe, and we wanna continue to go scale that to make sure we have a bigger footprint in those geographies. And then on the partnership side, whether it's with AWS or Salesforce or otherwise, we've been building out those linkages throughout the world and Europe is no different, would have you to go to market in a digital ecosystem aligned country by country. I firmly view partners, Lisa asked the question earlier, as an extension of our Salesforce. We're working on some core banking deals at this moment in time where the CEO of Temenos has actually actively engaged and brought us into deals and been a huge proponent of Cognizant given our world-class capabilities behind Temenos. So it's wonderful when a client here is not just from the CEO of Cognizant, but also the CEO in this case of Temenos as to our capabilities and our referenceability in that regard. So we're full speed on board, full speed ahead to go scale our international capabilities. It was a little bit disappointing this last quarter, some of itself inflicted, we gotta get that right going forward and it's certainly an area of focus for me in the coming years.

Okay, with that, I think we will conclude today's call. Thank you all for your questions.

Thank you. This concludes today's Cognizant Technology Solutions fourth quarter 2019 earnings conference call. You may now disconnect.