Cognizant Technology Solutions Corporation

Ladies and gentlemen, welcome to the Cognizant Technology Solutions third quarter 2022 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'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 using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you, and I'd now like to turn the conference over to Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release and investor supplement for the company's third quarter 2022 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 Jan Siegmund, 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 like to now turn the call over to Brian Humphreys. Please go ahead, Brian. Thank you, Tyler.

Good afternoon, everyone. Third quarter revenue was $4.9 billion, up 5.6% year-over-year in constant currency, short of our expectations. Adjusted operating margin grew 90 basis points sequentially and 60 basis points year-over-year to 16.4% of revenues. While an uncertain macroeconomic backdrop impacted bookings and revenue, the primary driver of the revenue shortfall relates to a reduction in U.S. onshore billable resources in recent quarters, following a period of elevated attrition, a reduction in visa travel, and a COVID-induced shift to near and offshore delivery centers. The financial impact of this headcount reduction is magnified given this is our highest revenue and margin dollar per head population. To reverse this trend, we have already initiated a series of actions that are intended to increase U.S. onshore billable resources, including enhanced focus on lateral hires and subcontractors, accelerated visa travel, and targeted compensation programs. While these actions are gaining traction, it is somewhat slower than previously anticipated. We therefore expect these headwinds to continue in the fourth quarter, ahead of clearer progress in Q1. Let me now turn your attention to global third quarter voluntary attrition. which was a little higher than expected in the quarter, voluntary attrition fell two points sequentially to 29% on an annualized basis and fell three points sequentially on a trading 12-month basis. We've taken extensive actions to increase employee engagement and reduce attrition over the past year. These initiatives, coupled with an uncertain macroeconomic backdrop, have led to reduced daily resignations, a leading indicator of voluntary attrition, across the globe in the last four months. We expect sequential reductions in voluntary attrition to be more meaningful in the fourth quarter. To maintain positive momentum on resignations, we are continuing our comprehensive effort to attract, retain, and rally employees. We remain focused on our people strategy, which includes our refined promotion initiatives, learning and development, and enhanced compensation and benefits programs. For instance, we recently communicated to our associates that we will accelerate next year's merit cycle to the second quarter of 2023, meaning we will have two merit cycles in the space of six months for most of our associates. I would like to now discuss the macroeconomic environment, which Jan will also address in our four-quarter guidance. We see clients closely scrutinizing and slowing their investment decisions faced with a backdrop of uncertain economic conditions. Spend has been reduced on lower priority projects or those with a longer return on investment. We're seeing some early signs of slowing in discretionary digital projects. Industry-wise, we've seen weakness in banking, especially in the mortgage segment, health sciences, and retail. In our international business, the UK remains solid, but deal cycles are slowing, while continental Europe is showing signs of weakness. From a commercial point of view, despite a strategy to sell solution and deliver client outcomes, we remain exposed to time and material engagements across all industries. We've seen clients curtailing their spending, and we expect furloughs to impact the fourth quarter. These factors contributed to a decline in bookings of 2% year-over-year in the third quarter, representing an in-period book-to-bill ratio of 1.0 times and a book-to-bill ratio of 1.2 times on a trading 12-month basis. Turning now to our industry segment performance. Financial services grew 1.6% year-over-year in constant currency, led by growth in our insurance business. This includes a negative impact of 180 basis points from the exit of SAMLINK. In insurance, carriers of all lines of business are enhancing their digital capabilities, driven by demand for new insurance products and improved user experience. For example, Resolution Life US turned to us to execute several digital transformation initiatives, that include large-scale data and application core modernization in cloud migrations. We're also helping them develop and scale advanced capabilities in data and analytics to drive significant operational efficiencies in their closed book portfolio. We were selected by AXA UK and Ireland as a technology partner to help consolidate, modernize, and manage part of their IT operations. AXA is transforming its technology ecosystem to create a more digitally enabled, modern, and agile environment that's data rich, secure, and sustainable. Health sciences revenue grew 5.5% year-over-year in constant currency, driven by digital services among pharmaceutical and healthcare payer clients. I'm pleased to note that our shared investigator platform, a SaaS solution for pharmaceutical companies that streamlines clinical trials to improve the speed of drug discovery, has surpassed 250,000 users across 100 countries worldwide. Keiwa Kirin, a Japanese pharmaceutical and biotechnology company, has signed a multi-year agreement with Cognizant to provide global pharmacovigilance services and help improve patient health through the analysis of adverse reactions across its products. In products and resources, revenue grew 8.2% year-over-year in constant currency. Growth was driven by demand for our digital services among logistics, automotive, consumer goods, and travel and hospitality clients. During the quarter, we extended our long-standing relationship with Centrica, the UK's largest supplier of energy and energy services. Deliver business-critical services encompassing application testing, cloud infrastructure support, and IT infrastructure management. Communications, media, and technology Revenue grew 10.4% year-over-year in constant currency, driven by strength among digital native clients. We're expanding our collaboration with Qualcomm to accelerate digital transformation through a new 5G experience center in Atlanta. The collaboration combines our deep expertise in 5G, IoT, cloud, and data analytics with Qualcomm's intelligent edge devices, AI, and 5G connectivity solutions. We've also had our first substantial win in the legal sector, which has traditionally been a latecomer to outsourcing and digital services. Freshfield selected us to manage their global IT operations and support their ambitious global expansion plans. We'll be providing 24 by 7 managed service of the firm's IT infrastructure and applications, as well as managing its service desk. Cognizant will also help define Freshfield's technology transformation roadmap. As I mentioned in our last earnings call, targeted M&A remains an important tool for enhancing our competitiveness. We have several M&A targets in the pipeline in line with our strategy and capital allocation framework. As always, we continue to focus on opportunities which are value-accretive to cognizant shareholders and aligned with our strategy. Yesterday, we announced an agreement to acquire the professional services and application management practices of OneSource Virtual, a Workday partner based in Dallas. These practices will complement our existing finance and HR advisory services on the Workday cloud platform. The acquisition is anticipated to close by year-end 2022, subject to satisfaction of closing conditions, at which stage we expect to welcome nearly 400 new employees to our strategic Workday practice. Importantly, we continue to strengthen our leadership team. Last month, we named Ravi Kumar, President of Cognizant Americas. He will join us in mid-January from Memphis. where he served as president for the past six years. Ravi brings client centricity and a growth mindset that we believe will help improve our U.S. revenue trajectory. We also announced Prasad Sankaran as the new head of our software and platform engineering practice. Prasad joined us yesterday from Bain, where he was a senior vice president in the firm's enterprise technology global practice. Prior to that, he spent 25 years in senior leadership roles with Accenture. Both announcements speak highly of our ability to attract world-class talent and support two key strategic areas for Cognizant, the Americas region and leading enterprise technology transformation. Before passing the call to Jan, I would like to stress that while we're in a period of economic uncertainty, the entire leadership team knows we must execute better on things that we can control, including optimizing our resources globally and getting the right mix on and offshore in a dynamic demand environment. We will continue to focus on and hone our operational discipline, which is intended to enable us to adapt quickly to demand changes. While we're in an uncertain macroeconomic environment, we remain highly optimistic on the IT services market and our opportunity within it. Finally, following sustained progress in reducing voluntary resignation rates, we expect sequential reductions in voluntary attrition to be more meaningful in the fourth quarter. allowing us to repivot client conversations from fulfillment to innovation, strategic transformation, and growth. With that, I'll turn the call over to Jan, who will cover the details of our quarter and our four-quarter financial outlook before we take your questions.