Cognizant Technology Solutions Corporation

Ladies and gentlemen, welcome to Cognizant Technology Solutions second 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, please press star 1 on your telephone keypad. 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 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. Thank you. You may begin.

Thank you, Devin, and good afternoon, everyone. By now, you should have received a copy of the earnings release and investor supplement for the company's second 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 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. Today I would like to cover four topics with you, including a summary of our second quarter performance, an update on our purpose, vision, and strategy, some thoughts on the macro demand environments and evolving client needs, and an update on our efforts to ensure the highest levels of resiliency to our clients. Before I proceed with our second quarter earnings call, I would like to add some commentary to today's announcement that Karen McLaughlin has decided to retire from Cognizant after more than eight years as Chief Financial Officer and an incredibly successful career in the company spanning almost 17 years. During this time, Karen's role in helping Cognizant become one of the world's leading professional services companies cannot be overstated. It's been a privilege to work with Karen over the past 16 months, and I am forever indebted for her assistance and leadership. Karen, on behalf of the entire Cognizant family, I'd like to thank you for your many contributions to Cognizant. You've done a fantastic job and can be proud of your accomplishments. We wish you nothing but success in your future endeavors. We are excited to welcome Jan Siegmund to Cognizant. Jan is an accomplished executive with a wealth of experience in finance, strategy, and general management. Jan will join us in the CFO role on September 1st, 2020. Karen will continue in her capacity as CFO through August 31st, and then remain with us in an advisory role through December 31st, 2020, thereby ensuring a smooth CFO transition. Most recently, Jan served as Chief Financial Officer of ADP, a role which he held for seven years. It follows that many of you will recognize his name and will have experience engaging with Jan in the past. You will understand, therefore, why it's the right choice to be our next CFO and why I look forward to working alongside him. Now let's go back to our earnings. I'm pleased with our second quarter performance. Faced with the unprecedented challenges of global pandemic and a ransomware attack that impacted our operations, we executed well. We stayed true to our digital strategy and fulfilled our responsibilities to our multiple stakeholders, including our associates, our clients, our shareholders, and the communities in which we operate. Second quarter revenue was $4 billion, a decline of 2.5% year-over-year in constant currency. this included a negative 120 basis point impact from the exit of certain non-strategic content service business which we announced in q3 2019 we have now fully exited this subset of services our associates are the true heroes of the quarter not just in my eyes but also in the eyes of our clients who are at the center of everything we do associates around the world quickly adopted to work from home conditions stayed productive and helped our clients successfully navigate the initial shock of the pandemic. And when we became the victim of a ransomware attack in April, their instinctive client centricity kicked in. We intentionally ensured that we were highly visible, transparent, and cooperative with clients who recognize our perseverance and professionalism, and how hard we worked to ensure their mission critical services were uninterrupted. Therefore, I want to thank our leadership team and all our associates throughout the world for their dedication to our clients and their contribution to our performance in the quarter. We continue to prioritize the health and safety of our associates. We communicate regularly and transparently with them and have equipped them for virtual working and rewarded a large portion of our associate base with a 25% salary increase payment for the month of April to recognize their extraordinary continuity of services efforts. People are at the heart of our business, so employee engagement is therefore critical. And I'm pleased to report that our recent annual company-wide people engagement survey shows that our engagement scores are up across all major categories. Karin will bring you through the details of the quarter, but I wanted to emphasize two salient points. First, we are gaining commercial momentum. This is illustrated by our bookings trend, which grew 14% year-over-year in the first half of 2020, notwithstanding the challenges we faced in the quarter. North America, which grew 25% plus in the first half, is particularly strong. This was offset by declines in global growth markets given the signature of the Samlink Agreement in Q2 2019. Excluding the impact of Samlink, Total company booking grew 25% plus in the first half of 2020, and global growth market bookings grew in the mid-teens. Our bookings momentum is broad-based across our service lines and industries. Bookings accelerated through Q2, with June being an exceptional month. Moreover, leading indicators are strong, with qualified pipeline up double digits year over year, and win rates continue to be solid. Second, we are making noteworthy progress in digital. In the second quarter, revenue in digital grew 14% year-over-year and now represents 42% of our company revenue mix. First half 2020 digital bookings growth of almost 50% was fueled by digital engineering, AI and analytics, interactive, and software as a service. I'm confident that our digital momentum will continue given the strengths of leading indicators. Clients are also highly receptive to Cognizant's digital capabilities, given not just our strong portfolio and strong customer satisfaction, but also their desire to see us challenge digital incumbents. Importantly, this becomes a virtual circle, as the greater our digital mix, the greater our overall company growth prospects. This takes me to my second topic, which is about purpose and vision and their connection to engagement values and our strategy. The executive leadership team and I have given a great deal of thought to how we optimize the engagement we get from our 280,000-person knowledge business, which spans multi-generational and a diverse workforce. In recent months, we set out to develop and communicate a purpose and vision statement, as well as reviewing the values that establish how we work, We believe this is an important and it's part of our long-term success. And we will be rolling out what we're calling the Cognizant agenda to the entire company in August. It's worth taking a moment to run through the key elements of this. We define Cognizant's purpose this way. We engineer modern businesses to improve everyday life. This statement explains why we're in business and serves as our inspirational North Star and driving force Our purpose also conveys that while we are a B2B company, the work we do with and for our clients helps improve the lives of billions of people. Most important, it rings true with our culture as evidenced by how well we dealt with the unprecedented challenges of recent months. To measure how well we're living our purpose and clarify what we aspire to achieve, we set out a vision to become the preeminent technology services partner to the global 2000 C-suite. This is where our strategy comes into play as we aim to execute a series of bold moves to realize our vision. And these actions call for us to accelerate digital, optimize our core business, transform our commercial model, supercharge our talent, and enhance our reputation. Accelerating digital is at the heart of our strategy. And I have two fundamental beliefs on this topic. First, we are still in the early stages of digital. And the COVID-19 pandemic is single-handedly significantly accelerating the shift to digital. And second, cognizant of the global scale portfolio and strategic-like relationships to be one of the single biggest beneficiaries of this shift in the coming years, put simply, Digital creates an enormous opportunity for cognizance, and we intend to capture this. While the industry has been talking about digital transformation for years, many companies have yet to make the transition to a fully digital operating model, instead digitizing only select operations. In a matter of months, COVID-19 has exposed the extent of the digital divide between digital natives and traditional companies. Migrating infrastructure, application, and data states to a more flexible, resilient, and cost-effective cloud architecture is a start, but in itself insufficient. Clients are increasingly shifting their focus to modernizing their core processes to be truly agile so that they can continually improve the value proposition and experience they offer to their customers and employees. And our strategy is built on our ability to leverage our strength in the applications and data management services layers to enable agile workflows so our clients can deliver customer and business value simultaneously. To fully execute this strategy, we will draw on our broad portfolio and our rich heritage of delivery excellence, partnering with our clients to deliver business outcomes with innovative solutions that leverage our internal capabilities and those of our partner ecosystem. Winning in digital requires a broad ecosystem of partners, and therefore, as cloud computing has changed the way IT is delivered across infrastructure applications and platforms, we have meaningfully increased our partnership focus and investments with all three leading hyperscale companies and our most strategic software-as-a-service partners. We have complemented organic investments with a targeted M&A strategy focused 100% on digital. Earlier in the quarter, we closed the acquisition of Collaborative Solutions, one of the world's largest Workday consultancies. With its leading position in the Workday ecosystem, Collaborative Solutions expands our opportunity in cloud by establishing a new practice in this large, fast-growing market. It also differentiates us. in particular against offshore competitors. And yesterday we announced our fifth cloud-related acquisition of the past year, New Signature, one of the world's largest independent Microsoft public cloud transformation specialists that serves all three Microsoft clouds. This will provide a foundation for a dedicated Microsoft business group within Cognizant. Underscoring our success in executing our strategy, We were recently named a 2020 Microsoft Partner of the Year for SAP and Azure, as well as a leader in Gartner's 2020 Magic Quadrant for public cloud infrastructure, professional and managed services worldwide. Let's turn now to the demand environment, and I'll start with some positive news. First, macro demand, although still uncertain, is better than we anticipated in April. Second, revenue growth and bookings momentum improved through the second quarter. Third, we remain confident that our digital, client, industry, and geographic revenue mix positions us favorably. And fourth, clients are consolidating vendors as they seek more strategic partners to help them through the implications of COVID-19. This is favorable for Cognizant in that we are increasingly seen as a strategic partner, not just in run-operate, but also in digital. We are nonetheless cautious about the macro demand environment. While the fiscal stimulus has helped, high unemployment rates remain a concern. COVID-19 cases are on the rise in many states and countries, and many of the C-suite executives I speak with are bracing for a period of prolonged economic disruption. Therefore, the Putin path forward may be one of continued caution. This means continued rigor on discretionary spending, the protection of key skills, and targeted investments for growth. What does the future hold? We believe the implications of the pandemic will be broad and lasting. The nature of work and of society will change across many dimensions, including how we interact, communicate, embrace technology, and think about risk. The practical implications of business are consequential and go well beyond the return to office timelines. business continuity planning, the question of the shift to virtual agile, or questions about the future of business travel or commercial real estate policies, both of which I believe will be changed forever. I speak with clients and prospects every single day, and many seem to be moving through three broad stages. First, a commitment to keep their employees safe and their businesses running without interruption. Second, an adoption phase to the new normal, which includes the considerable technological and human implications of working from anywhere. And third, the need to truly embrace digital to stay competitive. This requires them to fully modernize their businesses across infrastructure, data, and applications. There's an increasing recognition that we are in a mobile, virtual, and personal era where clients and employees expect always-on and ubiquitous consumer-grade software experiences, with rich visualization tools, data integration, and data protection. These needs are reflected in changing client needs and buying behavior. We see clients embrace agile development and platforms and microservices that foster innovation, unlock the power of data, and offer efficiency, security, scalability, and agility. This requirement aligns directly with our strategy to win in digital, including cloud, AI and analytics, digital engineering, and IoT. To help clients grapple with the changes wrought by COVID-19, we've also developed capabilities to help them prosper in the post-COVID world. These offerings, which span our portfolio, include the following. Virtual workplace, an enterprise-level solution that helps companies achieve resilience and maintain productivity even amid massive disruption. Data modernization, which helps clients fix how they source, interpret, and consume information through flexible data structures and a modern data and analytics platform. And Cognizant Safe Buildings, which combines layered prevention controls with instrumentation, data analytics, and digital technologies to help make buildings safer for occupants by providing robust monitoring and visualization capabilities. Recognize too that COVID-19 coincided with a period of societal turmoil amid significant questions about racial justice, globalization, and corporate social responsibility. Not only are clients, businesses, and technological requirements changing, but so too are the demands of their vendors. I'm pleased to underscore our intensified commitment to social responsibility. Cognizant and its foundations have a long history of contributing to the health, well-being, education, and progress of the communities in which we live and work. In April, for example, we announced an initial $10 million philanthropic commitment to support communities around the world in addressing COVID-19's immediate and long-term impacts. In June, the Cognizant U.S. Foundation announced a $5 million commitment to communities of color, the continuation of its longstanding work to advance education, training, and career pathways for underrepresented populations across the U.S. And in late 2019, as we announced our decision to exit a subset of content moderation, we allocated $5 million to fund research aimed at reducing users' exposure to objectionable content. We're also proud to support global work to remediate COVID-19. More than 100,000 researchers and clinicians are now using our shared investigator platform, a life sciences software as a service solution. And some of their work is focused on accelerating the development of COVID-19 therapies through virtual clinical trial processes. We're also providing a team of our life sciences experts to support Verily, the health and life sciences company of Alphabet. with its baseline COVID-19 testing program to increase individuals' access to test scheduling. In the wake of the unprecedented twin challenges of COVID-19 and a ransomware attack, we, like many of our clients, are increasingly focused on improving our business resiliency, especially within our delivery and technology organizations. Let me first address delivery. While I'm extremely proud of our delivery team and how well they enabled the safety of our associates and continuity of mission critical services for our clients, the pandemic highlighted the need to increase the robustness and resiliency of our delivery operations. We are taking a fresh look at our delivery organization and defining a next generation delivery model that will extend the work we've done in recent years to further globalize our network of delivery centers across the globe. which will complement our India hub. This will ensure greater resiliency, enable us to better service our clients' needs for Scrum teams nearshore and onshore, and give us greater access to global talent. Automation will, of course, be pervasive to our ads. And on the point of technology, I've appointed a new head of technology and strategy who will report directly to me and focus on informing our strategy, digitizing our business, and strengthening our IT and security capabilities. Their first priority, when they start next week on August 3rd, will be to complete our IT and security remediation efforts. We've devoted substantial time and resources towards remediation, and as a result have made significant progress in recent months. Not only have we essentially completely contained and eradicated the ransomware, We've also begun what we expect will be a multi-quarter initiative to refresh and strengthen our approach to security. A subcommittee of the Board of Directors will help me provide oversight of this effort, which is being conducted in conjunction with external security experts. In closing, for several quarters, I've been speaking with you about our multi-year effort to reposition Cognizant to achieve its full growth potential as we execute the initiatives of the Transformation Office. We've not let COVID-19 or ransomware distract us from this work, but we've made steady progress across many dimensions, including accelerating our digital strategy, globalizing Cognizant, and increasing our relevance to clients. These teams require ongoing investments, including our portfolio, our brand, our talent, and our partnerships. While more work is needed in the quarters ahead, I am confident about Cognizant's growing stature, and our competitive position. We are controlling what we can control, making progress in our competitiveness relative to peers, and positioning ourselves for commercial momentum. With that, I'll turn the call over to Karen, who will now take you through the details of the quarter and our outlook before going to questions and answers. Karen, over to you.