Cognizant Technology Solutions Corporation

Ladies and gentlemen, welcome to Cognizant Technology Solutions' first quarter 2020 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 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. In the interest of time, we ask that you limit yourself to one question. Thank you, and I will now turn the conference over to Katie Royce, Global Head of Investor Relations at Cognizant. Please go ahead.

Thank you, and good afternoon, everyone. By now, you should have received a copy of the earnings release and investor supplement for the company's first quarter 2020 results. If you have not, copies are 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 risks and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, We will reference certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures, where appropriate, to the corresponding GAAP measures can be found 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 Humphries. Please go ahead, Brian.

Thank you, Katie, and good afternoon, everybody. Today we have several topics to discuss with you as a follow on to our 8.9 business update. These include a review of our first quarter 2020 results, an update on COVID-19, a discussion on the mains ransomware attack, and an update on the strength of our balance sheet and liquidity and how we will react to the new demand environment. Let's start with first quarter results. Revenue grew 3.5% year-over-year in constant currency to $4.2 billion. This includes a 50 basis points impact from the exit of certain content services business. Non-GAAP EPS was 96 cents, up 5% year-over-year. Karen will bring you through the details of the quarter. While today's call had a full agenda given COVID-19 and ransomware updates, I do want to start with some perspective on the commercial transformation program that we have been executing over the past year. I'm pleased to state that we've been making solid progress against this initiative. And I want to illustrate this progress with some data that we do not normally share. On a training 12-month basis, our win rate is up hundreds of basis points. First quarter total contracts awarded grew 30% plus year over year. with broad-based strength across all service lines, industries, and geographies. This represents our best quarterly performance since 2017. Qualified pipeline growth was strong in Q1 and especially robust in larger deals, where we had solid double-digit qualified pipeline growth versus the prior year period. This momentum speaks to how well clients have embraced our strategy and have responded to our renewed sense of client centricity. It also speaks to how our teams have embraced our focus on growth. Notwithstanding a quarterly earnings backdrop that includes COVID-19 and ransomware, I do not want us to lose sight of these leading indicators that reflect Cognizant's growing competitiveness. Turning now to COVID-19, which, as you know, is having a severe humanitarian and economic impact on society across the world. As we navigate this pandemic, our top priority remains the health and safety of our own associates, whilst maintaining continuity of service for our clients. Our perspective is that COVID-19 is affecting the IT services industry on two dimensions, fulfillment and demand. Let's start with fulfillment. After a strong start to the first quarter, our revenues flowed meaningfully in March. Reflecting the fulfillment challenges of shifting rapidly to a work-from-home environment across our delivery centers. These challenges include people, IT, security, and client considerations. Thanks to the professionalism and diligence of our associates and the execution of our crisis management and business continuity plans, we were able to ensure a continuity of service for the vast majority of our clients in March and early April. As a testament to this, I have received numerous notion clients recognizing the work of our teams. While this was a gargantuan task, and there were some speed bumps along the way, I want to acknowledge our teams around the world who went the extra mile in testing circumstances to make this happen. I will return to fulfillment efforts in a moment when I cover the ransomware attack on our internal IT systems, and in particular its impact on our work-from-home enablement. The impact of COVID-19 pandemic on demand is more multidimensional. While we are in a period of great uncertainty, as a company, we expect the economic and human impact will be felt by companies across the globe. While certain industries will be hit hardest, all industries will suffer. Smaller businesses and those with weak balance sheets and liquidity will be particularly impacted. The demand impact will be felt throughout 2020. And when a recovery materializes, certain markets, such as the U.S., will rebound quicker. As indicated on our April 9th update, we've seen some delays and cancellations of projects and discretionary spending and select requests for furloughs, rate concessions, and extended payment terms from our clients. While our outlook for 2020 has been meaningfully altered, we are nevertheless confident that we will weather this storm given our business stakes. For example, since more than 60% of our business is in financial services and healthcare, we are less exposed to some of the hardest hit industries, including travel, hospitality, retail, and automotive. International markets, which tend to rebound more slowly, represent just 25% of our business. And, We are primarily exposed to global 2,000 clients, which we believe will be more resilient than smaller companies. We also have great confidence in the strength of our balance sheet and liquidity. While we will be prudent in this uncertain economic backdrop, this confidence allows us nonetheless to invest in M&A to accelerate our strategy and bolster our capabilities. More on that later. More broadly, the pandemic shockwaves have spurred clients to accelerate their digital transformations. Clients are looking for ways to modernize their business, accelerate innovation, become more elastic and agile in the face of business uncertainty, and generally reimagine their businesses for the new normal. More major IT trends, such as core modernization, data modernization, and cloud adoption will accelerate. These secular trends play to our refined strategy and make it more relevant than ever. In short, while 2020 will be a challenging year given COVID-19, we are confident that our industry, geographic and customer segment mix, a balance sheet, our momentum in our digital imperatives and our growing competitiveness will allow us to compete well on a relative basis, regardless of the macro environment. Let's turn now to the May's ransomware attack, which we announced in April. We responded immediately by mobilizing our entire leadership team, drawing on the expertise of our IT and security teams, and bringing in leading cybersecurity experts to help us investigate and respond to the attack. We also contacted appropriate law enforcement agencies. From the start, we decided to communicate forthrightly and transparently with our clients. In addition to hundreds of individual client calls conducted by our security organization, cybersecurity experts, and our executive team, we held two client conference calls in April. Retaining client trust is of paramount importance, so we erred on the side of over-communicating the details of what we knew and how we were working to contain and mitigate this incident. We proactively provided clients with indicators of compromise, or so-called IOCs, namely forensic data a company can use to identify potentially malicious activity and defend against attacks from external actors. Earlier this week, in our third conference call with clients, we confirmed the containment of the ransomware attack. While we are pleased to have reached this important milestone, the ransomware attack will nevertheless negatively impact our Q2 results for two reasons. First, the attack encrypted some of our internal systems, effectively disabling them, and we proactively took other systems offline. This disruption included both select systems supporting our work-from-home enablements, such as VDI, and the provisioning of laptops that have been expected to further increase our work-from-home capabilities in April. Second, in the wake of the ransomware attack, some clients opted to suspend their access to their networks. Billing was therefore impacted for a period of time, yet the cost of staffing these projects remained on our books. With the ransomware attack now contained, we've restored BDI and automated laptop provisioning. Further, with previously ordered equipment now physically in India and distribution constraints less restrictive per the latest state directives, we are now substantially work-from-home enabled. In addition, following the containment of the ransomware attack, we have meaningfully progressed in addressing the concerns of clients that have suspended our access to their networks. We expect to substantially complete this by the end of the month. We expect the vast majority of revenue and margin impact from the ransomware attack to be in the second quarter. However, ongoing remediation costs will ensue through subsequent quarters. We will disclose this financial impact to you on a quarterly basis to ensure appropriate visibility. Ransomware attacks are becoming all too frequent across industries. We're using this experience as an opportunity to refresh and strengthen our approach to security. We're already applying what we've learned to further harden and strengthen our security environments. We are further leveraging our external security experts to help inform and guide our long-term security strategy. Cybersecurity will continue to be a top priority for us in the years ahead. As you recall, During our COVID-19 business update on April 9th, we withdrew guidance for 2020. Before I pass the call to Karen, I want to draw your attention to the fact that we entered the year with cost assumptions built to support revenue growth acceleration. These assumptions no longer hold true in light of the fact that nobody can predict how long the current macro environment will persist. We're faced with a great deal of uncertainty on many levels, including our own cost structure. Having come through a challenging 2019, when promotions and salary increases were delayed, as a leadership team, we've decided to take a nuanced approach to 2020. We aim to invest in the business by protecting and developing digital skills, continuing to build out our commercial team, and continuing to correct the employee pyramid by onboarding approximately 20,000 entry-level hires. Meanwhile, we aim to significantly decrease other costs, including corporate overhead, travel, marketing, relocations, and non-commercial lateral hires. Services companies habitually rely on so-called bench policies to right-size their associate base to reflect market demand. Against today's COVID-19 backdrop, we feel that traditional industry bench policies do not adequately address the interests of impacted employees. Consequently, any employees impacted by demand, supply and balances may benefit from extended medical coverage and exit packages through the end of the third quarter. Karen will now take you through the details of the quarter and provide updates on our balance sheet, liquidity and cost initiatives. After that, I'll return to provide some closing remarks before we take Q&A.