Cognizant Technology Solutions Corporation (CTSH) Earnings Call Transcript & Summary

Brian, you're there?

Yes. Good morning.

Morning, morning. And thank you for doing this. So let's just kick off. Everyone, thanks for being on. I'm Ashwin Shirvaikar. I'm Citi's payments processors and IT services analyst and the covering analyst for Cognizant, which is next up on the agenda. From Cognizant, we are fortunate to have Brian Humphries, CEO, and a very busy CEO with all these acquisitions and stuff that you have been doing that we hope to get into. One quick logistical comment. If during the course of this, if you have a burning question that you want me to ask, just e-mail. There should be an e-mail list, my e-mail as well as Ryan Potter on my team, his e-mail should appear on the screen. You can just e-mail the questions to us, and we will try and incorporate them into our question stream.

With that, let's kick off. Brian, thank you very much for doing this. Let me start off with -- a year ago when we spoke at this conference, you just -- you announced the transformation office. It was a few months old. Fit for Growth initiative has just been announced. Can you talk through the main elements of plan, where have you done well, where has performance either been lacking? Or you've just not got to it? And what's next on the agenda?

Yes. So well, first of all, thanks for having me. Yes, it's been a very busy 16 months. And last April or May, we announced the transformation office, and there were 6 elements of that. First of all, strategically, who are we? What are we trying to become? What do we need to accelerate? Are there elements of the portfolio we should exit, including, as an example, we took a decision to exit content moderation? Strategically, of course, we decided to double down on accelerating our digital portfolio. And hence, we've done a lot of M&A, to your point. The second piece related to commercial transformation, and that involved better leveraging the partnership ecosystem, changing our customer segmentation model, upgrading our client partners who are at the tip of the spear for us. Changing sales force compensation and indeed adding 500 revenue-generating resources. And all of that was would have you to kick starting the revenue growth story. That needed to be fueled by investments. And in order to get investments into commercial transformation, we need to find efficiencies. There were 2 areas that we look towards. One was delivery transformation, which was a lot around pyramid, automation, et cetera. And then the second piece was Fit for Growth, which was a lot around a restructuring program and making sure that we have the right systems, tools and capabilities and cost structure to invest in growth and to be cost competitive. And then we had a work stream around our structure and of course a work stream around talent and culture. Now surrounding all of that, Ashwin, as you can imagine, change management was essential because this is a knowledge-based business. So 1 year on, or a little bit beyond that, where are we? Look, I feel really pleased with the progress we've made. We had a lot of balls in the air in the first year. And in addition to that, we had a series of leadership changes. And then we had some exogenous events that came into play, both the global pandemic as well as a ransomware attack on Cognizant. And I really feel as though we've made great progress against it. Our people scores, now we do an annual people engagement survey, and we just completed that in the last 2 months, grabbed multiyear highs and actually above the industry benchmarks, which is, of course, a very good data point for us, knowing that we needed to win over the hearts and minds of employees as we were doing this. In terms of execution of the transformation office, I feel it's 100% on track. There are certain things where, of course, with COVID, the cost structure, we had to go deeper because revenue as an industry, instead of growing 5%, 6%, was assumed to decline 5% or 6%, so a 12-point swing. And accordingly, CFOs and CEOs need to change their cost structure in light of that. And as you know, we're regaining share again and becoming much more competitive. But maybe I should also illustrate that elements here sometimes take multiple years to get right. Let me compare and contrast a few things. The commercial transformation required about 6 months of work around customer segmentation and sales compensation models, and then we implemented this on January 1. The restructuring program was also implemented in Q3 2019. So those are quick things to get done. However, at the end of every year, you'll also continue to tweak sales compensation, and you'll continue to upgrade your client partner teams. And that's the same as the talent or cultural element. It is a series of years before you ultimately optimize your talent pyramid. So Ashwin, if I take you, we put you in a role, you excel. We promote you again. If you excel again, 2 years later, we put you in a bigger role. If you take somebody called Brian and put him in a role and he fails, then you remove him from that role, put him in another role. If they fail twice you probably remove them from the company. But inherent in that statement, you have multiple placements and promotions that take time to flow through the system before you truly understand who your top talent is in various circumstances. So good progress. Certain things triggered, everything well underway, but certain things will take longer to play out than others.

Right. Right. And then the last part of that was, does Fit for Growth itself as a program, does it evolve? What's next on the agenda? Is there a Fit for Growth 2.0, so to speak?

Well, listen, I think we're very much focused now on our clients and executing our strategy. I think it's important for any company to optimize our cost structure and keep it efficient and lean. But in the same vein, as I've always said, I'd like to differentiate between a cost and an investment. So right now, our focus is on executing our strategy. And of course, we've been dealing with COVID, just as the rest of the industry has. As long as we stay focused on our strategy and our clients, in my mind, we will grow faster. We've got 3 major initiatives underway which are not mutually exclusive with the transformation office. They are linked inherently to the actions we talked about already. One is to accelerate digital. As we saw, bookings are strong year-to-date for the first half of the year, up almost 50%, revenue growth up 15%, revenue mix now at 42% of the company. But accelerating digital is much more than a slide. It's all around talent. It's about the portfolio of capabilities we have. It's about organic investments as well as inorganic investments. It's around brand attributes. So a very comprehensive program behind that. Second major program around globalizing Cognizant, which goes well beyond our revenue mix. Today, 75% plus of our revenue is in North America. We naturally want to penetrate global markets more aggressively. We have too little coverage in those overseas markets, therefore, it creates a huge opportunity for us because we are not saturated in those markets. Globalizing Cognizant also means a more global brand, a more global and diverse leadership team as well as from a delivery point of view, much more of a global delivery network. And we've made some appointments and announcements on that in recent months. And then the third major theme that we're working on, all within the construct of executing against our strategy, is increasing our relevance to clients. That is a lot about continuing to fine tune our understanding of the pain points by C-suite, by industry. It's a lot about continuing to evolve our solution portfolio to address those pain points and our partnership ecosystem to enable us to go-to-market jointly. But it's also about us evolving from rate-card type work to more selling a Cognizant offering that aligns to a client need or a client desired outcome. And if we get all of those things right, our relevance to clients will be greater even than it has been historically. Brand is permeating all of this. We've done a lot of work, Ashwin, in our brand in recent months. We've broken down the brand attributes. It's kind of interesting. We're neither perceived as an American company nor an Indian company nor a global company. And that's why you're going to see us rollout a pretty comprehensive injection of branding and marketing into the company in the coming years because as a percentage of revenue, our brand spend has been much lower than the industry norm. Generally, though, we're in the mode of executing. Our leadership team is more settled. I firmly believe it's stronger than it was a year ago. And actually, we'll bolster that further with hopefully 2 announcements that will announce in the coming 4 to 6 weeks, which will include the new leader for global growth markets and indeed a new Chairman and Managing Director of India, which is an appointment I wanted to make, we wanted to upgrade that role and put somebody of a caliber of an EC level person to be the Head of India, and that's what we will announce imminently.

Okay. Understood. So in terms of the actual execution of this, maybe let's start at the top of the funnel, let's start with bookings. And bookings, not necessarily a metric that Cognizant has historically shared for many years, a relatively new metric. So perhaps we can start with defining what goes into bookings, just to make sure that we kind of level set? Does it have renewals? Does it include -- is it TCV or annualized? Is it M&A? Is the M&A in there? And then while bookings have been solid recently, has your win rate actually improved when it comes to...

I don't think everybody aligned on vernacular because I myself used to go bookings TCV, but I've been convinced by our SEC reporting team, I should call it bookings. So that's the vernacular we are aligning to now. But bookings, in essence, refer to the total lifetime value of new contracts plus renewals and expansions. Annualized value of a contract or ACV, is if a contract is greater than 12 months, then you -- ACV is equal to 12 months of the value. And then maybe there's even another term we should familiarize ourselves, which is just in-year revenue. And that is, of course, calculated based on the remaining months of a fiscal year when a contract starts. So let me make this really simple, so we can all be very clear in our heads, and if only the world was this simple. But imagine a scenario where we were performing a service for a client, and we sold a contract over 24 months at $1 million per month, and we started that in July 1, and we were able to rev rec as of the month of July, TCV would be $24 million, ACV would be $12 million, and annual or in-year revenue would be $6 million in that illustrative example I gave you. Now of course, the next obvious question is when does the bookings show up in revenue? It's obviously the question I'm also putting pressure on my team to see in forecast reviews. Naturally, the timing of the conversion of bookings to revenue will vary based on a number of factors. It could be service line, it could be customer behavior, it could be the market backdrop. And as you know, today with COVID, the time lines are more challenging. But I actually do feel as though we've made huge progress in that. And some of that has been fueled by just much more client centricity and a tone from the top, starting with myself, and expectations of our leadership team, to be in front of the clients every single day as well as a big push towards digital and a big push naturally towards international markets. So hopefully, we'll see this show up in the foreseeable future. I kind of view it in the same vein, however, as this is a growth company. We had grown enormously relative to the market for the first 2 decades. Maybe in the last 3 years or so, we had not been hitting our stride. And to use an analogy, a lake in California, for instance, it had been a few drought years, we hadn't really replenished it at the level we might have. So the backlog was burning down. Think of this now as a few very heavy winter showers, and the more quarters we have with strong bookings, naturally, the reservoir will be replenished, and you will see that show up in the goodness of revenue.

Understood. Understood. And so some of increasing bookings is getting those 500 extra salespeople, some of it is improving capabilities, so your win rate actually improves. At the current time, what's the bigger contributor, so to speak, in situations? So your win rate actually is going up. In situations where you don't win, what your clients tell you? Where do you think you need to be?

Well, first of all, I think our win -- well, I know our win rates were up actually against both Indian pure plays as well as western competitors, and that's expected of me because they were too low. But also you need to understand, we are actually investing in growth. We're hiring to your point 500 revenue-generating resources. We are overhauling our commercial organization in a form of a multiyear transformation aligned behind sales, compensation, partnership, customer segmentation. So I feel good about that. And I also think we are benefiting from a few other trends in the market. Digital is a natural growth driver in the market, and we have massively embraced that even more than ever in the last 18 months. And I actually think our portfolio is one of the few -- we are now one of the few players in the industry where we can actually benefit, if you will, in the form of a flywheel from our legacy or indeed our new. We can modernize with our traditional offerings, a portfolio and the legacy tech stack that will free up efficiencies. And the branding and the greater client partner capabilities we have in place will allow us, in the future, to better capture the efficiencies which are being used to fuel digital transformation and to make sure that as we are allowing a client to save in one hand, we are also capturing the spend that they are making on the other hand. And that's been a very deliberate strategy of ours. And secondarily, we can also come into clients leading with a business value, leading with digital. And ultimately, if you lead with a value or a client outcome, that's enabled by experience, it's powered by software product engineering, fueled by intelligence on the back of data and data modernization, all that will fundamentally run on a modern cloud-based platform, which will pull-through our legacy, and that's the strategic posture we're putting forward. We'll have multiple on ramps. And certain pure-play companies will not be able to do that. Some integrated companies have been able to do that, but they have had less competition from Cognizant historically than they will in the future. So look, we're growing. And I would also argue part of our core value proposition has been our delivery satisfaction, where historically, we have always landed and expanded unmined accounts. When we lose deals, look, as ever, sometimes pricing gets to a level that, frankly, I'm not comfortable with. We're not trying to rent market share. I would rather have viable relationships that last over multiple years where there is a win-win for the client as well as for Cognizant. And sometimes, candidly, we're not even at the table because people haven't been fully aware of our digital capabilities. And we have been playing historically maybe more in the build or operate space. And that's why we've been very adamant to build out our digital portfolio. You've seen us turn to the balance sheet to accelerate that. And you'll see us launch a different brand campaign in the foreseeable future here as well to build on those capabilities, whilst also building out much more consultative capabilities at our client-partner level.

Right. Right. So this question might head into the accelerating digital that you spoke of. In -- and also take from the last response. One of the success factor that I tend to always look for in a company is the ability to sell sole-source deals as opposed to just responding to RFPs. Where does Cognizant stand today on that metric?

Look, like every company, we have both sole-source deals as well as other deals that go into RFP. The more we can lead with a consultative sale, the more we can lead with problem solving the client's outcome or desired outcomes, the more we will be able to shape deals in our favor and potentially even keep them from going to an RFP. But our win rate overall, as you know, and as you rightly pointed out, has been increasing across the board. So I don't have a number in my head in terms of what percentage of our business is sole-sourced or otherwise, but we're winning more than our fair share these days.

Okay. Okay. And many investors kind of have this view in their mind that the growth rate at Cognizant, and it is not a wrong point of view. The growth rate at Cognizant can only improve if you fundamentally improve with financial services and health care. In spite of what you're doing to globalize and to get into newer markets, those are still very important. So could you kind of take a verticalized look and tell us where you're putting in these resources and where the response has been best?

Yes. Well, look, actually, it's correct. Financial services and health care are 63% of Cognizant. So we will lever that progress in those verticals. And always the Q2 impact -- on a macro level, people talked about certain verticals like retail, consumer goods, travel and hospitality in the vein of COVID. And we were -- we benefited in those verticals because we have less exposure to those verticals than most of our peers. On the contrary, our heaviest exposure was in financial services and health care, and they were exposed more to the ransomware attack because they are heavily regulated industry. So we actually took a bigger hit on those than perhaps others, but less of a hit because of our mix on the so-called industries impacted by COVID. I would say the way I think about financial services is it remains somewhat challenged, I think for the general industry, but for Cognizant as well because we have some self-inflicted wounds. I'm anticipating it will grow below company average for the next several quarters. Insurance has been volatile for us over the last few years, especially in North America, but bookings year-to-date have been extremely strong, and the pipeline was strong, and there's certainly some nice captive opportunities for us. In banking on a macro level, payments and capital markets have been weak. Retail and commercial banking have been growing. And look, we have a big effort underway to accelerate more with client partner upgrades to push into regional banks. Again I note today, one of our regional banks for the first time has surpassed $100 million per annum, well ahead of plan for the year, better account planning, pulling through digital. So we have big efforts, both on the, let's say, Tier 1 banks where we have some accounts that we have not broken into in recent years, but we have big efforts underway right now. And some of our competitors make $200 million, $300 million, $400 million in those banks. So I'm not saying we have to win $400 million. But if we get any inroads into those, you will see a major share momentum change. But nonetheless, I'm still cautious around financial services in the foreseeable future. On health care, I'm actually quite optimistic. Our health care business, we've got payer provider, and of course, the TriZetto business that was acquired quite a few years ago. At this stage, I don't think the TriZetto business has performed per business plan at the time of the acquisition, but we've rolled our sleeves up a lot on that in the last year. And actually, we're now starting to see some really strong momentum on the license side, on the new logo side as well as in the more broad, let's say, nonproduct side of the business. Our bookings and our pipeline in health care has been very, very strong this year. Last year, we suffered from 4 large clients that merged into 2. But those accounts are now growing again on a year-over-year basis. So I'm actually more optimistic around health care, and I'm feeling good about the momentum we have there at this moment in time. The other portions of our portfolio, within health care, we also have life sciences. That's a gem in Cognizant. I'm delighted with the performance there. Both health care and life Sciences, by the way, are led by people we promoted in the last year into those roles, and they're doing a great job. And then we're actually also performing well in communications, media and technology. That has been pulled down a little bit by exiting a subset of content moderation. But generally, that business is performing well for us as well.

Okay. Okay. No, those are really good updates. I appreciate that. Just a quick clarification. You mentioned pipeline, did your pipeline also grow in spite of the good bookings? Or did you draw down?

No. Actually, our backlog and our pipeline grew in -- year-to-date. Actually, our qualified pipeline was up 15% last quarter. Now of course, I also said we have strong momentum. So the stronger bookings momentum you have, the more you draw down your pipeline. But backlog is a core metric, as you pointed out, and that has been building through 2020. So I'm actually pleased with the second quarter, but maybe not satisfied. And I guess the way I'd qualify that quite pleased. Well, we managed -- to here and now, we managed through COVID, we managed through a ransomware attack. We meaningfully beat Wall Street estimates. And yet we invested in the business in the form of extra investments around security, around our commercial transformation, et cetera. We managed through leadership transitions, and we built solid leading indicators for the future simultaneously: backlog, pipeline and the win rates have been strong as have bookings.