Ladies and gentlemen, welcome to the Cognizant Technology Solutions First Quarter 2020 Earnings Conference Call. [Operator Instructions] 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.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 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.

Thank you, Katie, and good afternoon, everybody.Today, we have several topics to discuss with you as a follow-on to our April 9th business update. These include a review of our first quarter 2020 results, an update on COVID-19, a discussion on the Maze 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 from the exit of certain content services business. Non-GAAP EPS was $0.96, 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 trailing 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 its 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…

Thank you, Brian, and good afternoon, everyone.First quarter revenue of $4.2 billion grew 2.8% year-over-year or 3.5% in constant currency, including a negative 50 basis-point impact from the exit of certain content-related services. We saw strong momentum across the business in January and February with the initial impact of COVID, particularly on the fulfillment side, starting to impact the business in the middle of March.During the first quarter, we also took a fresh look at our definition of digital revenue and have better aligned it to our digital imperatives. Substantive changes to the definition include the addition of certain platform solutions and the removal of certain content services work. Based on this new definition, digital revenue, as a percentage of total revenue, was approximately 41% for the first quarter and grew by approximately 19% year-over-year.Moving to the industry verticals where all of the growth rates provided will be year-over-year in constant currency. Financial Services growth of 1.8% was driven by banking, including strong performance in Europe attributable to the Samlink deal and regional banks in North America. Weakness persisted across global accounts, particularly in capital markets and insurance.Moving on to Healthcare, which grew 2.7%, performance was led by strong double digit growth in life sciences in Europe. Within our Healthcare vertical, revenue declined low single digits as the headwinds in North America, we highlighted in 2019, continued to impact the business in Q1. However, contract signings in Healthcare were a meaningful contributor to the overall strength in bookings that Brian mentioned in his comments.Products and Resources growth of 5.3% was driven by manufacturing, logistics and retail and consumer goods, and partially offset by softness in travel and hospitality. Roughly 60% of this segment represents revenue within the travel and hospitality, and retail and consumer goods industry, which have experienced the…

Thank you, Karen.Let me wrap up by saying that Cognizant is built on financial strength and flexibility, unwavering client-centricity that has earned the enduring trust of clients and 290,000 talented associates who once again proved a great selflessness and determination in recent weeks. While 2020 will be a challenging year given COVID-19, we are confident that our industry, geographic and customer segment mix and our balance sheet, our momentum in a digital imperatives and our growing competitiveness will enable us to compete well on a relative basis, regardless of the macro environment.The post-COVID world will create new norms and hasting trends to highly mobile, virtual and personal world. We won't just be talking about teleworking but rather remote everything from digital workflow, to design, to e-commerce, e-banking, education and telemedicine.Against this backdrop, our strategy to win in the digital battleground with AI and analytics, digital engineering, cloud and IoT become more relevant than ever. We will continue to use M&A to accelerate the execution of our strategy. On Tuesday, we announced an agreement to acquire Collaborative Solutions, one of the world's largest workday consultancies. With its rich expertise and leading position in the workday ecosystem, Collaborative Solutions will expand our opportunity in cloud by establishing a neat practice in this large, fast-growing market.The acquisition brings key skills to Cognizant and differentiates us in the market, especially against Indian pure-play competitors. The acquisition also compliments the capabilities we've been building out in our sales force practice.We’ve come through a lot so far this year. Through this, we’ve always sustained our focus on our client-centricity and our determination to execute our strategy. Our increased commercial momentum in the first quarter affirms that our strategy, our solution portfolio, and our renewed vigor is resonating well with clients. While the COVID-19 and the recent ransomware attack have been a setback, I’m confident that Cognizant will emerge strongly from these challenges.Of course, no one knows how long the pandemic will last, only that eventually will fade, certainly the business world will be quite different from what it is today. I've been here long enough at Cognizant to know that we will rise and surmount this challenge and come out the other side stronger. We'll keep our culture strong through this period, the spirit of teamwork and collaboration on the vast scale that I've seen from our associates during the crisis are I believe the direct result of our Company’s deep-seated and shared sense of purpose. Come what may, it's in our DNA to help our clients succeed.And with that, operator, we can open the call for questions.

[Operator Instructions] Thank you. The first question is coming from the line of Lisa Ellis with MoffettNathanson. Please proceed with your question.

Hi. Good afternoon, guys, and good to hear your voices. Brian, thanks for the visibility on some of those sales metrics in the first quarter. You highlighted the 30% increase in total contracts awarded. You've made a number of changes to Cognizant's go-to-market model since you joined Cognizant. Can you highlight what changes have been making this difference or driving this early traction you're seeing? How far along are you on this journey? And are there particular service lines or project types where you're seeing particular traction at this point? Thank you.

Yes. Hi, Lisa. So, look, we made a significant amount of changes from a go-to-market point of view in the last year. But, it really kicked in Q1 of this year, because a lot of work was needed before we could actually determine how to best deploy this. And that included a different sales compensation model, which shifted more compensation to variable comp away from fixed compensation. It included a resegmentation of clients into a RAD model, which is a sophisticated methodology to deploy resources against accounts that you are currently in or you're trying to farm versus hunt, new logos. It also required us to build out extensive new relationships with partners, who need to become very much part of our ecosystem. And on top of that, of course, we have been in the process of hiring 500-revenue-generating resources and/or supporting resources, which could include commercial pricers, lawyers, et cetera. We're about 60% through that.But, let's not overlook the fact as well. Just the notion of getting the Company back focused on growth, focused on client-centricity and getting the vigor back into the Company to tap into something that fundamentally is in our core D&A is very, very important. We've been doing that for a period of time now. We've also made some leadership changes. We've really tried to hone in on client-centricity in the leadership team, starting with myself. And that's what I believe has led to the significant momentum we've had in the first quarter. And I would say, even for some of our larger industries like insurance, banking, healthcare, that momentum was actually continued into the month of April, albeit not at the really robust strength that we saw in the first quarter. But, the 33% growth in the first quarter is our strongest bookings since…

Our next question is from the line of Edward Caso with Wells Fargo. Please proceed you’re your question.

Hi. Thank you. I was wondering if you could give us a little bit more color on the ransomware attack. So, when did it first appear? Was the takedown of the credit line related to that? And what sort of -- you talked about great awards in Q1. Has this slowed down that favorable TCV momentum? Thanks.

Yes. This is Brian. So, the ransomware attack hit us prior to the work-from-home enablement. We saw what was happening, and as we were trying to shut it down, we were faced with therefore a ransomware attack. And we had three calls with clients, two in the month of April and then one last week and where we acknowledged containment. The credit line or the line of credits drawdown had nothing to do with this. This simply gives us optionality. We already have a very-strong balance sheet, as you know, strong collections as Karen’s indicated, in the quarter. So, frankly, it's nothing to do with ransomware.The TCV growth in Q1 was independent of ransomware. I don't believe ransomware had any meaningful impact on our business momentum. Certainly, we had an impact in the month of -- the latter part of April and early May as the ransomware attack had effectively disabled some of our internal systems that have been encrypted, which impacted some of our work-from-home enablement and indeed certain clients had opted, just as an abundance of caution to isolate themselves from our network. But, given we have contained the virus by working night and day candidly internally as well as working with leading cybersecurity partners, including Mandiant and of course the federal authorities. We are now in a better position than clients on a daily basis, are again cleaning this up. So, I think that will be felt from a revenue and margin point of view. For the most part, the vast majority will be felt in Q2. Thereafter, I imagine where we will be half [ph] that.That said, we will continue to spend money in Q3, Q4 and beyond to further strengthen our security framework. So revenue margin impact is more in Q2, cost impact will continue a little bit through the rest of the year.But, Ed, I think we handled the ransomware attack as well as one can in these circumstances. We chose to be very deliberately client-centric by having three clients conference calls, by doing hundreds of client calls with the executive team and our security team and indeed Mandiant, and this [ph] throughout this period by being as forthright and as transparent as we possibly could. And nobody wants to be dealt with a ransomware attack. I personally don't believe anybody is truly impervious to it, but the difference is how you manage it. And we tried to manage it professionally and maturely.

Our next question is from the line of Bryan Bergin with Cowen. Please proceed with your question.

Good afternoon. Thank you. I hope you're all doing well. I wanted to ask on client behavior. Really, just what you're seeing over the last two weeks versus the spending appetite in early and mid-April? And any semblance of stabilization in any verticals yet? And can you just comment on the types of programs that are moving forward?

Hey, Bryan. I don't think there's any stabilization per se. Budgets, from my perspective, wear being revised downwards throughout all industries. Certainly, some industries will be hit more than others. I think, digital remains a priority. Virtual work, virtual healthcare, education, banking, e-commerce, you name it, remains of course top of mind for people in today's environment. The shift to SaaS continues. Digital engineering continues, by definition, to fuel some of those capabilities. But, I would say, projects, the short-term paybacks continue. But anything that is deemed discretionary is being delayed. We have seen some requests for furloughs, rate concessions, et cetera, but not a meaningful amount.I would say, in the same vein, we are still seeing some pretty substantial opportunities there, including captive opportunities. And as I referenced in my prepared remarks, pipeline shape on a qualified basis actually looked reasonably healthy as we exited Q1, and even now after the month of March.So, we are being very opportunistic here. We are making sure we fine tune our offerings to take advantage of the new norm that we're in today. We have work streams lined up behind that. And of course, we continue to push our digital imperatives, which are from my perspective firmly and squarely into the area of the market where growth will continue, if not accelerate into the foreseeable future. And that includes data modernization, cloud, applications generally including SaaS and indeed, core modernization. So, we feel well positioned. But, it's particularly difficult environment call at this moment in time. There's not a lot of visibility and clients are, I think obviously being cautious.

The next question is from the line of Tien-tsin Huang with JP Morgan. Please proceed with your question.

I have a follow-up and then a question. A follow-up to Lisa’s question, just on the sales signing success. Are you seeing an uptick in sole source deals given your investments in sales? Obviously, the win share is up against the bigger pipeline, but it sounds like maybe the sole sourced piece could be up. Just curious on that. And then just, it sounds like, Brian, your M&A appetite is still there. Should we expect a pause, given everything going on or are you still pretty active with the M&A? Thank you.

I don't think we see a lot of sole source per se, but I will say we have seen some renewals where we've had the opportunity to renew without those contracts being up for a bid or tender. And that's been on the basis of very strong deliveries and strong client satisfaction, and frankly a very-strong executive engagement, which has been quite intentional over the last year. But, as ever, clients are always looking to extract value for money and of course they also wants to sleep well at night. So, they want to work with partners who honor their commitments and deliver well.I’m feeling good generally, however, about our momentum in the field and our competitive positioning. Our win rates are improving, as I said. Our contracts bookings speak for themselves. If it was one vertical or one service line, I wouldn't quite be so adamant about this. But, I genuinely feel as that we've made tremendous progress in the last year.From an M&A perspective, I’m fortunate to be backed by a Board who are very supportive of the project we're undergoing. We have a clearly defined strategy. The M&A transactions that we have made in the last year have been against a defined strategy that was blessed by the Board last September. We will continue to obviously monitor collections and monitor our liquidity as well as our balance sheet. But, we feel very comfortable in our current position. And I will say, we will continue to conduct M&A transactions, albeit in a prudent manner. We want to conduct transactions that solely fit and are squarely aligned to our strategy and that we have confidence that we have the right leadership team in place to integrate them successfully.

The next question is from the line of Keith Bachman of BMO. Please proceed with your question.

Hi. Thank you very much. And, Brian, congratulations on a good March. It seems pretty clear in the absence of COVID that Cognizant was on a very good path for 2020. My question is, I want to dig a little bit in at least around some context associated with margins over the next couple of quarters, and what the puts and takes are. You mentioned that Cognizant is on a journey to invest, including the sales reps that you mentioned. Karen listed a number of things that were incremental -- sounds like incremental cost savings. And I just wondered is the way to think about the dollar amount of incremental cost savings associated with those new areas since the advent of COVID, just so if we can at least try to think about where the margins might be in turn? Part B of that is, as you think about the malware situation, will those costs for remediation, will those be non-GAAP item? In other words, would those be GAAP charges but would be taken out of the non-GAAP results? And that's it. I mean, just any other comments, Brian, on how we should be thinking about margins for the next two quarters in particular?

So, Keith, I'll kick it off and then maybe Karen can jump in, if it’s okay, Karen. We're obviously not in the same location today. Keith, thank you. First of all, I do feel that we did have momentum that was building as we exited Q4. January and February were particularly strong. I felt we were on track to have a very strong quarter relative to Wall Street expectations. And then, of course, March arrived with COVID.As Karen will attest, the change in dynamics was relatively abrupt. Obviously because first and foremost because of fulfillment where in countries like India, we had four hours. We had obviously triggered a business continuity plan weeks ahead. But the ultimate decision to lockdown India came with a four-hour notice. So, we -- like many services companies, I imagine we're scrambling to fulfill work-from-home capabilities via encrypted desktops or laptops or remote VDI, et cetera. So that hurt us from a fulfillment point of view. And as such you have costs, but add the revenue. Similarly, that's compounded itself in the first few weeks of May and the last few weeks of April yet again, not only were we dealing with COVID, but then we had a ransomware attack that encrypted servers, which actually took out some of the work-from-home capabilities that we had enabled in the prior weeks, and also slowed our ability to enable further work-from-home because of some of the systems and tools we would have used to automate and provision laptops were no longer functioning.So, we had the perfect storm in which we still had costs without revenue. And on top of that when you have clients who disconnect you from their network for a period of time until such time as you're contained the malware, yet again, you want to keep those skillets ready to reengage as soon as the clients permit you to reengage.So, I think, what you'll find in Q2, we had the perfect storm of cost without revenue, and of course then you have to adjust to reflect the demand-supply imbalance. And that is ultimately I think what will hurt our margins in the foreseeable future. And then, as Karen will tell you, of course, we want to protect skills like digital skills, and of course therefore we want to take out any so-called no-regrets costs to try to mitigate that. But Karen will give you a little bit more details.

Sure. Thanks, Brian, and thanks, Keith. In terms of the ransomware question that you asked, we will not be adjusting that out of our non-GAAP. Those costs will stay both in our GAAP and our non-GAAP margins as they continue through the rest of the year. We will, however, as we've done in the past with some other large unusual transactions, try to call those out on a quarterly basis, if they're meaningful, so that investors will see what that cost looks like.And as Brian said on the margin side, obviously, there are a number of things that happened very quickly and where we can move to take cost or cost gets eliminated or doesn't happen such as T&E and so forth, which like others, we started to see the benefits of in late March. Obviously, because people aren't physically at work at clients' sites, they're not relocating and we don't have to worry about immigration and other things as people are moving around the country and so forth.And then, as we mentioned in my prepared remarks, while we will continue to honor all of the outstanding offers that have been accepted, we have, for the most part, shut down much of our hiring. And so, recruiting costs obviously go away along with that. But, I think, as we've talked about, in this business, obviously, when there is a revenue slowdown, it depends what the cause of that revenue is as to what happens to your resources and your utilization rates.As Brian talked about, with things that we think are short-term, such as we had with the fulfillment, challenges with COVID late-March, early-April and then more recently with the ransomware, clearly we want to hold onto those resources, so that they can continue to deliver services to clients as that…

Just to conclude at this point, I felt as though very much the story was on track. The commercial momentum started to build, the Fit for Growth was well on track. And I would say, then we suffered a micro event, which is our ransomware attack, which we have dealt with since. And then, of course we're faced with a macro environment because of COVID-19. In the absence of those, I would say, the story remains very much consistent with what we've been saying for the last year, which is differentiating between a cost versus an investment, trying to pivot the Company back towards a growth story and making sure we have a refined strategy that we can invest on and execute well to unlock more shareholder value creation. And that certainly will be the playbook we will go back to. And I'd like to think we’ll come out of this storm well, given the business mix, given our balance sheet, given our liquidity and with even a leaner cost structure, given the environment we're going through in the meantime. Hopefully, we can continue the commercial momentum, at least on a relative basis and then, come out of this strongly.

The next question is from the line of Rod Bourgeois with DeepDive Equity Research. Please proceed with your question.

So, the payers subsegment of your Healthcare vertical has been weak for a good while, while the life sciences subsegment has been strong. We actually entered 2020 thinking this is the first time in a while that you could be in a better place to grow the payer subsegment of your Healthcare vertical. So, my question is, looking beyond the immediate crisis on a more secular basis, are you starting to see opportunities for better relative growth in the payer subsegment or maybe you were seeing better opportunities and now COVID is making that murky. But, I'd like to ask for any color on that if you can. Thanks.

Look, we had an outstanding first quarter in Healthcare from a bookings point of view, triple-digit growth. By the way, we also had growth into the month of April on a year-over-year basis as well. And I've been particularly pleased to see the direct wins we have seen in the payer area, but also frankly even in the provider area. So, it feels to me that we were starting to turn a corner in Healthcare. And as you know, once we hit Q2, we will anniversary the tougher compares that we hit last year because of some of the consolidation in the industry. So, we still have work to do, of course, to continue to sharpen our pencils on our strategy. But, I feel as though we have made very good progress. We have a leadership team that's very engaged, and we seem to have growing momentum with our major clients.

Thank you.

Okay. I think with that we will take one more question.

Thank you, Brian. That is from the line of James Faucette with Morgan Stanley.

Hey. This is Jonathan on for James. Thanks for squeezing me in here. I want to ask about what you're seeing on the work that's being canceled versus the type of work that's being deferred. Are you seeing a difference in that type of work? I know discretionary work is off the table. But, can you help dimensionalize relative to your service lines, what's being considered discretionary now?

Look, it’s highly nuanced; it’s client by client, but I would say things that have a long payback, tend to be pushed out at this moment in time, some change requests or anything that's so called discretionary that's not being critical is certainly being pushed. But, we have seen good momentum, as I said in our digital engineering business, we feel very good about our cloud momentum. And actually we've had great receptivity to this week's announced acquisition of Collaborative Solutions. So, I think that the fact that the core elements of the secular trends that have been in the market from my perspective, will accelerate as clients strikes, you have a much more agile, modern infrastructure, and ultimately try to take advantage of the data that they have accumulated over the years to really try to have a much more modern perspective in terms of how to think about individuals. And I truly believe we're moving to a mobile, a virtual, and a truly personal world on a go forward basis.Okay. I think with that we’re at the top of the hour. So, I'd just like to thank you for joining. I know it was a complex earnings call, because not only did we talk about the Q1 results, we also touched upon the COVID-19 implications, the ransomware attack and how we've dealt with that and a little lens into the future.I would just want to wrap up by saying the following things. I truly feel as though we're more competitive than we have been as evidenced by win rates, as evidenced by our pipeline growth, as evidenced by 33% bookings, our highest momentum since 2017. Yes, it is true that COVID brings a great deal of uncertainty, but I believe our business mix and indeed our growing competitiveness will help us on a relative basis come what may. Ransomware attack is regrettable. It is contained. I believe we've managed it well. We've had good client feedback. We've been transparent. We were forthright. The impact is on revenue and margin primarily in Q2. There will be some residual costs that we will incur in Q3 and Q4 as we continue to harden and strengthen our security position, and that is an absolute no-regret spend. Fundamentally, our strategy is sound, it resonates with clients and you're seeing that show up now in our numbers. And last but not least, we're 100% focused on executing that strategy. And our client-centricity is greater than ever and we expect to accelerate out of the corner once we got through COVID-19.So, with that, I'd like to thank you for joining us.

Thank you. This concludes today's Cognizant Technology Solutions first quarter 2020 earnings conference call. You may now disconnect.