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 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 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 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 of 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 risks 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 gap 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 multiyear 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 4.2% year 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 renewals, 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 3.1% year-over-year, while revenue in our growth markets region grew 7.4% 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 view, In Q4, our financial services global revenue grew 1.5% year-over-year in constant currency. Both banking and insurance were weak throughout 2019. Full-year insurance revenue growth slowed 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 year-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 Samlin 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 declines with constant currency growth of 1.8% year-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 year-over-year, down from double-digit in prior quarters. Revenue growth in the technology segment slowed meaningfully in the quarter, following our recent announcement to exit a subset of the content services business over the coming quarters. Later in our call, Karin 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 strength in the run and operation side, would 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 expanding our cloud capabilities. On Monday, we announced the acquisition of Code Zero Consulting, a firm that specializes in helping entrepreneurs companies digitally transformed 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 EI Technologies, a PARS-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 methodologies and advanced data platforms. 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 special 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 staff centers. 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 reskill and redeploy talent towards our digital imperatives. To accelerate our digital momentum, we believe we need to hire or reskill approximately 25,000 resources in 2020 alone. And we've started to operationalize this. 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 our goals. 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 moves 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're 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 Cosmos in 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 Frank D'Souza has let us know of his plan to resign from Cognizant's board of directors effective March 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 cognizance. Today, we also announced that Vinita 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.