Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to 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 third 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 Humphries, Chief Executive Officer; and Karen McLoughlin, 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.

Well thank you, Katie, and good afternoon, everybody, and thanks for joining us in today's call. Over the past few months we've initiated what we expect will be a multi-year evolution of our business aimed at returning or company to historical levels of performance. We view this as a systematic process of revitalizing the company and one we're pursuing with rigor and urgency.Today I want to clarify where we are in this project and where we're headed by briefly covering our Q3 performance and then reviewing how we’ve begun to operationalize the conclusions of the transformation office, including our refined strategic posture, which aligns to our client's digital imperatives and our plan for resetting our cost base to facilitate investments in growth.Let's begin with our third quarter earnings. Q3 revenue grew 5.1% year-over-year in constant currency to $4.25 billion and non-GAAP EPS was $1.08. In an uncertain economic climate our year-over-year performance in North America improved modestly in the third quarter.As we've discussed in prior calls, our ability to accelerate the Company's top line growth depends on revitalizing our North America performance and in-particular our banking and financial services and healthcare businesses, both of which were under new leadership.While we have more work to do, we now have highly engaged strategic leaders running these businesses who bring a fresh perspective and huge client-centricity. Arguably, even more important than the modest year-over-year growth improvement we've seen is the new energy we have in our North America leadership team and our clients are noticing this.At a global level, in Q3 banking and financial services was up 3% year-over-year in constant currency and healthcare was down 90 basis points year-over-year in constant currency.In banking and financial services against the backdrop of growing demand for DevOps and some insourcing of skills we see cost…

Thank you, Brian and good afternoon everyone. Third quarter revenue of $4.25 billion was above the high end of our guided range and represented growth of 4.2% year-over-year or 5.1% in constant currency. Digital revenue growth within the mid-20% range and represented over 35% of total revenue.Moving to the industry verticals where overall company performance continues to be impacted by Financial Services and Healthcare. Financial Services growth was up 3% in constant currency driven by the ramp up of several projects and insurance and banking performance which was consistent with last quarter.Within Banking, our performance continues to be impacted by a few of our largest customers. Consistent with the last quarter, two of our top five accounts continue to grow while three remain under pressure, a trend we expect to continue through the remainder of the year. As we had expected when we did our last earnings call, insurance in Q3 benefited from a ramp up in project based work. However, in Q4 we anticipate a continuation of trends seen over the course of this year where executive transition is underway and several of our clients slowing the decision-making process, particularly around larger deals in the pipeline.Moving onto Healthcare which declined 0.9% year-over-year in constant currency, within our Healthcare vertical, performance continues to be primarily impacted by large clients involved in mergers. The continued shift of work to a captive at a large client and the continued year-over-year impact from the completed ramp down of an account in which we were the subcontractor to a third-party.Additionally, in the quarter we were impacted by a charge related to an ongoing contract dispute with a large client. This charge impacted both revenue and margin. Life Sciences again grew double-digits year-over-year, benefiting from continued demand within digital operations. Large enterprise transformation deals, migrating…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Lisa Ellis with MoffettNathanson.

Hi, good afternoon and thanks for going through all this. That's fantastic. Brian, I'd like to double click on one of the investment areas in sales and marketing, clearly, one of the most critical areas to reaccelerating top line growth. You mentioned a few things, the 500 new salespeople, the return to the two-in-a-box model. Can you provide maybe a more holistic view of the major changes you're planning to make to Cognizant's sales strategy and sales coverage and overall go-to-market model? Thank you.

Yes, hi Lisa. So I'll give you four examples. First of all, it's important to clarify to roll up the client partner and returning to two-in-a-box, I think really simplifies Cognizant's go-to-market team in front of the customer. So we traditionally used to have two-in-a-box of client partner and delivery partner. A few years ago, we moved to three-in-a-box and we were returning to what we traditionally have had with greater clarity of roles and responsibilities.Therefore, between the client partner and the new role that we will term an engagement delivery partner. Second point, we will actually add more headcount in sales or the commercial function than before. I've referenced this in our prior call. We are adding approximately 500 headcounts. Not all of those are quota carrying, but some for instance will be business finance people or indeed commercial lawyers, but it's all with a view to helping us show up to more clients and have greater agility and for the clients with greater responsibility.The third major thing relates to how we want to compensate our commercial teams. As of January 1, we will move to a more leveraged sales compensation plan with at least 70% of the base fixed or at most and then 30% variable. And within the variable portion of their compensation, there will be strict parameters in terms of what they are required to sell that will enable us to ensure that people do not follow the path of least resistance, which is what they sold yesterday, but more readily embraced the things that we need them to sell, which is part of our digital strategy.And then the fourth thing we will deploy something we spend a lot of time working on the last four months, what I call a RAD model. That is a term to address how you think about sales segmentation in the purest form, how you tier customers, Tier 1, 2 and 3 based not just on what you sell them today but more readily on what you have the potential to sell them on.So potential versus current and then you tier customers between an existing customer or that you want to retain or potentially develop subject to your share of wallet or a customer that you want to acquire. And according to where a customer sits in that nine box, then the degree of sales coverage that they get or visits from somebody like myself changes.So those are four examples of what we're doing to try to ramp our commercial momentum. Obviously in addition to that, I've talked previously about greater alignment with strategic partners. I referenced in today's script the notion of going to market more readily with hyperscale players, but we have some tremendous partners in industry verticals like Temenos, Guidewire, Adobe and the like that we want to embrace further and make sure we go-to-market with together.

Thank you. The next question comes from the line of Edward Caso with Wells Fargo.

Hi, good evening. Thank you for all the detail. Could you flesh out a little bit more of the commentary around – it sounded like an inability to get pricing and it is – is that going to take time for the sales organization to get going and the workforce to be sort of calibrated here? I mean, sort of when do you think you can get those – start to get some of the pricing for the value that you're hoping to give?

That's inherently a complex topic because we have a series of activities that we have from time and materials staff augmentation through to managed services or more fixed price type bids. But let me decompose your question down and Karen, perhaps you can comment as well on this.With regards to the sales teams, their ability to ramp ultimately also depends on where they've come from before and if they know the client itself or if they know the industry. Our intent is of course to hire people who are able to sell business outcomes, who have the gravitas and the wherewithal to speak with the C-suites, understand the industry pain points and sell a business outcome.So you need to expect them to last. However, as we deploy these salespeople and for the clients, they build relationships subsequently build a pipeline, the pipeline is ultimately progress and eventually turns into TCV, which later turns into revenue. For that reason that we spoken previously around the impact of these 500 headcount that we've agreed to hire, it's more a negative impact in terms of our cost structure into short-term.However, I don't view it as a cost. I viewed as a investment that will have an appropriate return over time in the form of sales force gearing. So OpEx to gross margin dollars or indeed OpEx to revenue dollars and we are anticipating the revenue return from that to really kick in more in Q4 next year or indeed the first half of FY2021.Look, the pricing dynamics are important. Karen can comment on those. I just wanted to add one point. If the client partner is the quarterback on a deal, they need to be surrounded with world-class experts that are aligned to a key practices and have competencies in those areas, whether that is artificial intelligence or analytics or digital engineering or cloud or otherwise.We spend a great deal of time in recent months honing in on the model that we think will give us greater competency and greater technical capability to support a generalist client partner in front of the client. We do want to allocate more pricing power back to the client partner, but they will have to operate within certain bands or parameters as the deals are pricing on a quarterly basis. We will review those, that it will be some notions of checks and balances.

Sure. And so let me talk about a couple of things in pricing. One is what I would call market bill rates and pricing for new deals and renewals and so forth. If you look at the digital business, pricing continues to be very strong there. Obviously, you have a high demand in that business and the short supply of talent. So by definition bill rates continued to be strong there, where you do continue to see pressure on deals and particularly with renewals and vendor consolidations and so forth.It's in the core part of the business, the heritage application maintenance, et cetera, part of the business where we do continue to see pricing pressure on those transactions. The other piece which we are referring to in the script is also around, what I would call contract hygiene. So the ability to get COLA increases, to get rolling changes when we promote people.As you know for several years that was something that just was not commonly done in the industry. And it's something that many firms have started to reinitiate into their portfolio over the last few years. We've made some progress this year where we have automated COLA adjustments and so forth, but I think we still have a lot of opportunity to continue to get better at that and enforcing contract terms. And in particular, when we promote people to either rotate them into new opportunities that are appropriate for their new level or to get rate adjustments within their existing clients, so both of those are opportunities that we continue to see as we move forward.

Thank you. The next question is from Tien-Tsin Huang with JPMorgan.

Hi, thanks so much and appreciate all the detail here. I just wanted to get your thoughts on the cost, the soft cost, the hard cost to attain the $500 million to $550 million in savings from Fit for Growth. How much disruption might there be on both culture and then also on the revenues, aside from the 250 that you called out from getting out of the content work?

I would say, the majority of the people we're targeting through this exercise are senior to mid-level executives. They tend to be not declined partners in front of clients, but some degree of middle management that has crept into the system over the years. Of course, we're spending a huge amount of time bringing our team through these changes and making sure that they are contextualized and that people know we are investing in growth.To be honest, I feel as though there's a degree of swagger coming back in Cognizant these days. Client partners, in my opinion, will be delighted with the news today that we are returning to a two-in-a-box model. And they do appreciate the fact that we're spending hundreds of millions of dollars to reinvest back into the business, including more coverage and giving the sales folks an opportunity to earn more than ever before via having a more leveraged sales compensation plan.Of course, that is not for everybody and there will be some degree of disruption. But we aim to mitigate that as best we can. And as I said, not only we are adding more people in deploying segmentation, but we're also honing in on optimization of skills via competency model that will be measured on a more thorough basis going forward. So look, it's very hard to control this. It's a people business. We're spending a huge amount of time communicating, contextualizing but we feel it's the right thing to do.

Thank you. Next question is coming from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question.

Hi. Thanks very much. I wanted to ask a clarification. The question, Karen, the clarification, just to be clear on the content ops is whatever we think the normalized run rate for Cognizant in 2020, we should go ahead and take an additional amount out from our revenue expectations of, I don't know, $150 million or something. As we assumed that content ops gets at least partially taken out next year.And then my question is directed to Brian. Brian, you talked about swagger in the last comment. And on the last conference call, I think you said win rates had gone up, but I was hoping you could just talk a little bit about what you see as the economic backdrop. A number of companies, the IT services side have called out some incremental weakness, but juxtapose that against what you've seen in your time there. I think frankly, putting a lot more initiative into the sales side, if you could talk about a little bit about your win rates and how those might bounce out. Thanks very much.

So Keith, it's Karen. Let me just cover off on the content situation. First, you're right. As you think about the model for next year, it is appropriate to take some portion of our estimate of the 240 to 270. As we said, it will not – we don't expect it at this point to all go away at the beginning of the year. We think that we'll phase in throughout the year, although I would say it would be more heavily weighted to the first part of the year.The other thing I would also like to find out what that range is that it does assume that in certain of the client's situations that they may exit more than just this specific digital operations work, that they may choose to transition more work. So this is our best estimate at this time of what we think the annualized impact would be. And obviously, we'll provide as much color as we can as we understand further the transition plans.

And Keith, with regards to the second question, yes, of course, it didn't go unnoticed with us as well, but we're delighted to have beaten consensus and indeed our guidance for this quarter. But bear in mind, we had set guidance prudently and we're also walking into the coming quarter having read the dynamics in the industry. So we remained somewhat I would say prudent going into this quarter as well. The backdrop is uncertain.However, I would say, if I look at the micro element within Cognizant. First of all, growth is permeating the company. We're going back to our roots, is back to basics and I think people are actually delighted with that. We found appreciation of focusing on growth as opposed to margin rate. We have very deliberately insisted on a significant uptake in executive presence with customers, I'm leading by example myself. And that permeates the organization as well. And then of course, Karen and I have been working on what we announced today for a number of months now.And so we've been trying to start looking at deals, not with today's cost structure but envisaging the economic value of deals over time with tomorrow's cost structure, which as you know, we're aiming to reduce and we know in Cognizant that once we get our foot in the door with clients, because we have confidence in our teams and confidence in our delivery, we tend to land and expand. And hence that’s also the reason we're deploying the RAD model going forward to make sure we accelerate new logos and cross sell and upsell.So, those are the positives, but again, the backdrop is uncertain. Certainly in the UK it's an uncertain, I would say in North America, what we found is there is continued compression in legacy businesses and pricing pressure under renewals continues at a steady rate, but the digital imperatives remain key.I've been pleasantly surprised as I've dealt with C-suite executives throughout the world, that digital is certainly not viewed as a cost center expense. It is very much viewed as a critical enabler both on the defense as well as on the offense for these companies to disrupt or indeed to avoid being disrupted by more nimble next generation companies. And that is an area where on the contrary I do not see demand constraints. I see more supply constraints given the nature of the teams we need to fulfill those demands.

Our next question comes from the line of Ashwin Shirvaikar with Citi Group.

Hi Brian. Hi Karen. It's good to see the velocity on Fit for Growth initiatives. I want to start by asking if you could provide maybe a framework for how investors should think of the trajectory of growth over the next couple of years as these initiatives unfold. I mean, will we see perhaps a flattish type pace before higher growth kicks in. And that's I guess including the impact of the CMT the content ops. And then in the meantime, what are your thoughts on providing metrics to the investor community that help us if you are on the right track?

So Ashwin in terms of growth, I think obviously, it's early to give guidance for next year although certainly we would expect that we will start to see some acceleration over versus constant currency organic growth this year. Q4 is obviously a little bit light and Q1 does tend to be a slower quarter for us. So when we give guidance in February, we'll have a little bit more color on how we see the rest of the year playing out in terms of incremental revenue from the sales hires and so forth.We I think as we had talked about this before, we do not anticipate any significant revenue next year from that investment. It really takes about 12 months for the sales teams to ramp-up and actually generate a revenue that becomes incremental to us. So I think that would be more back ended and certainly into 2021. And now all of that obviously excludes the impact of the content, moderate content work in the digital operations practice. But excluding that, that's how we would expect it to play out.

Thank you. Our next question is from the line of Bryan Keane with Deutsche Bank.

Thanks. On the $500 million to $550 million of gross annualized savings, what's the net savings there? Because it sounds like there's a drag from investments on adjusted operating margins in fiscal year 2020, but can we expect a positive impact of margins there after in fiscal year 2021. I’m just wondering if there might be some one-time investments in fiscal year 2020 that go away so that fiscal 2021 and beyond we'll see some net drop to the bottom line.

Yes. So I think, obviously Bryan as we’ve said, and as you heard on the call we were assuming a target range of 16% to 17% next year, roughly in-line with 2019. As we talked about on the call, there is about a 120 basis points that we have to make up given the lower incentive-based compensation this year. And then on top of that, the investments in sales and training and so forth.I think it's premature obviously to give guidance beyond 2020, but certainly, we think the investments we'll make in sales will start to pay off in 2021. I would anticipate that certainly the investments that we're making in branding and training and rescaling and so forth, and those will continue on for quite some time. I think we think that perhaps those are areas that we've under invested in recently and so those will become part of the core of the organization going forward. But certainly, this is still a relatively linear business. So as we look to accelerate revenue growth in the future, that should certainly help to stabilize and provide some margin opportunity depending year to year on the investments that we want to make in the business.

Our next question is from the line of Rod Bourgeois with DeepDive Equity.

Hey guys. Hey, a lot of work done here in seven months. If I go back over Cognizant's history, it's had a distinctive ability to mine its large clients for additional revenues. Clearly that client mining performance has slowed in recent years. And so my question here is whether you're seeing ways to rejuvenate Cognizant's client mining ability. Are there corrective measures being made or new initiatives specifically on the front for client mining? The RAD model makes a ton of sense here, but I'm also wondering if there are practical changes beyond the RAD model to better connect with the large clients.

Yes. So, hi rod. It's a good question and look, if I look back over the last four years and the data will tell you that we have been growing new logos but not really accelerating new logo revenue and really the pipeline and the TCV in the last 18 months or so, stop this year performing where we needed it to be. But the bigger issue was to your point, the install base accounts and we had stopped mining or upselling and on the contrary because of pricing erosion at the time of renewals that became a little bit of a drag on the business.So very much at the core of the RAD model is of course hearing customers, make some potential, not based on where we are today. And of course segmenting customers than between acquisition customers versus a customer that you already exist in that you want to develop or where you already exist that you're simply trying to retain.So the RAD model was key to achieving this. Sales compensation is also key because in our existing accounts, what we want to do is get much more leverage in the sales compensation program and put parameters into portion of people's compensation such that they are not just enticed but they're also obligated from their earnings point of view to cross-sell the portfolio into digital and beyond as opposed to simply selling what they sold yesterday, which has traditionally been a path of least resistance.And then the third thing of course, as we're thinking about upselling and cross selling, a lot of that leads to different decision makers. It's more project based, it's more pod cultures in digital engineering. It's line of service. So, distinctively changing out some client partners, we've done a good job on that in…

Thank you. Our next question is from the line of Bryan Bergin with Cowen & Company.

Hi. Thank you. First I just wanted to clarify on the content ops, is there an opportunity to sell this practice or is this more so a wind down and transfer and then within banking and healthcare, can you just give us a sense on these large clients how close you may be to seeing any inflection in the trajectory there or at what point are they just not among the top clients?

So I think in banking and healthcare we have some tremendous examples actually and I've seen some of these myself have accounts that we have really turned around in the last two years through different account teams, much more focused on digital. But that's a blueprint or a qualification that we need to bring more broadly across the company. You will see some inflection points, particularly in healthcare as we get into FY20, because we will be rounding the tougher compares.As you know, many of our healthcare clients for in particular merged into two and ended up with a very different rate dynamic for Cognizant. And we will be running that once we get to Q1 next year. In banking it's less obvious in the sense there wasn't a single inflection point or ongoing trends, some captives, some insourcing, particularly in a world of DevOps.But as I said earlier, well the legacy business or traditional areas of the business have been under some pressure of price renewals. I do see opportunity for us to better participate in a digital spend that these banks have at their disposal and have been prioritizing and that's what we're setting out to achieve in the coming years, of course.So no major inflection point, but I will say I am pleased with the revised energy I'm seeing in the North America team now in particular and the new banking leader and a new healthcare leader they seem to be going down well with clients. And that's always a good positive leading indicator.With regards to the content moderation business that's something we're working with our partners on right now to understand how to best transition the work. Whether it is one of the options or reference or another, we will determine that in the coming periods. For now, we've taken a restructuring charge against it, but our intention is to work very aggressively with partners to make sure that we can transition our employees with minimal disruption. And of course, financial consequence of that is of course minimal charges as well.

Okay. And this is Katie. I think with that, that will end today's call. Thank you all for your questions and we look forward to speaking with you next quarter.

Thank you. This concludes today’s Cognizant Technology Solutions third quarter 2019 earnings conference call. You may now disconnect.