Greetings, and welcome to the Cognizant Q3 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Katie Royce, Global Head of Investor Relations. Please go ahead, Katie.

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 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 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 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 to 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. Good afternoon, everybody, and a warm welcome to Jan, who many of you know, in what is his first Cognizant earnings call. Today, I'd like to address 4 topics with you, namely, a brief summary of the third quarter; an update on our employee engagement; observations on the demand environment and clients' evolving needs; and our strategic focus areas as we aim to revitalize revenue growth. Let's start with the third quarter. Third quarter revenue was $4.2 billion, a decline of 70 basis points year-over-year in constant currency. Excluding the negative 130 basis points impact from the exit of certain nonstrategic content services business, revenue grew 60 basis points year-over-year. We executed well in what remains a challenging environment. Highlights of the quarter include: continued commercial momentum with bookings growth in excess of 25% year-over-year; ongoing momentum in digital with revenue growth up 13% year-over-year and continued strength in digital bookings and qualified pipeline; gross margin and cash flow strength, enabling us to continually invest in the business; and significantly increased and sustained financial flexibility on India earnings and cash. Jan will provide more insights on the quarter in his prepared remarks. Moving to our second topic, I would like to briefly address our talented associates. I'm grateful to each of them for their professionalism and perseverance in serving our clients during this protracted pandemic, which has put a tremendous strain on families and compressed their lives to screens and homes. We could not have executed against our commitments in 2020 without their client centricity, work ethic and engagement. Given our financial performance and in recognition of the contributions of our associates, we are creating 2020 bonuses at higher levels than 2019. We are also implementing targeted merit increases and promotions in the fourth quarter. Both will…

Thank you, Brian, and good afternoon, everyone. I'm very happy to be part of the Cognizant team and look forward to connecting with all of you going forward. From the onset, I was intrigued by Cognizant's meaningful growth opportunity, and my first weeks in the job have more than confirmed my initial assessment. I will work hard to fill Karen's shoes and wanted to say a big thank you to her for making my onboard so smooth and seamless. Moving on to Q3 results. Third quarter revenue of $4.2 billion was flat year-over-year or a decline of 70 basis points at constant currency. Compared to the prior year period, this includes a positive 250 basis points contribution from inorganic growth and a negative 130 basis points impact from the exit of certain content-related services. Sequentially, we saw a broad-based improvement in the business, particularly in areas such as cloud and enterprise application services, IoT and software engineering. Moving to the industry verticals where all of the growth rates provided will be year-over-year in constant currency. Financial services declined 2.2% with similar performance in both banking and insurance. Retail banking improved in the quarter, driven by regional banks, while capital markets returned to growth after several quarters of softness. However, we continue to see weakness across global banking accounts and with clients in the payment sector. We continue to expect below company average performance in the Financial Services segment for the next several quarters. Healthcare grew 4.2% led by double-digit growth in life sciences, driven by strong growth in the biopharma clients, and included the contribution of the Zenith acquisition which we lapped mid quarter. Growth was partially offset by continued weakness in the medical device clients. Within our health care vertical, revenue saw modest growth. After 6 quarters of decline,…

[Operator Instructions] Our first question today is coming from Jason Kupferberg from Bank of America.

Congratulations on the quarter. Maybe I'll just ask 2 quick ones upfront in the interest of time. First off, in light of what's happened recently with SAP, we've been getting a lot of questions just around the size of the practice that you guys may still have in that area. So any sizing you can give us there would be helpful. And then can you just comment on -- with the digital bookings growth being strong as it has been, I think you're up 40% year-to-date. When does that start translating to faster digital revenue growth? I know we've been hovering in kind of the almost the mid-teens range here the last couple of quarters. And then that kind of dovetails with a related question of do you think revenue growth could actually turn positive in Q1? I know previously, you said that we may still see negative growth through the first quarter of next year, but obviously, you're on a better trajectory now.

Jason, it's Brian. So let me take a shot at this. These may be for Jan. By all means feel free to jump in if you see incremental details to add. So SAP as a practice, it's multiple hundred millions of dollars for us. It's sub-$1 billion. It is actually a very healthy business for us, and I have been in touch with the SAP leadership team in recent periods to see what we can do to accelerate our momentum there. It's pretty intuitive, what they're doing. But in the same way, it's also interesting for us given our ambition to scale much more internationally and given the installed base of SAP. So it's a partner that really is strategic to us, and we will continue to work closely with. Digital bookings. Look, more broadly, if I stand back from this. Bookings are strong overall, and it's broad-based by geography, by industry, by new and expansion versus renewals, and digital bookings are continuing to be strong as well. So what's been very pleasing to me is in the course of the last year, we have consistently shown strong bookings growth year-over-year. That has enabled us to actually build a stronger backlog through the year. And now we're in a very healthy position, healthier than we've been before. And of course, the pipeline, as Jan suggested earlier, is strong as well. Not just strong overall, but also strong in visual, in particular, and strong in the strategic accounts that we focused on as part of our customer segmentation exercise in the -- model. So I feel really good about our momentum there. The timing of all of this to revenue can vary by quarter, of course, and in the face of economic environment, which is unsettled to say the very least, including announcements made tonight across Europe. But we're pleased with what we've done. And if this continues, it all goes very well for our future. We're not going to make commentary around Q1 or indeed, fiscal year '21 at this moment in time. The only thing I'll say is we will continue to try to outgrow the industry. That's what we did this quarter. We think we're more competitive than we've been before. And we're absolutely committed to growth and to make -- investments to grow. If that means compromising some margins in the short term to achieve, we will absolutely do that. But I'm expecting performance to improve in 2021, but we'll share more details of that, of course, Q4 earnings. But the big caveat around this is what we're going through this some on time, which is a very uncertain macroeconomic environment.

Our next question is coming from Lisa Ellis from MoffettNathanson.

Congratulations. All right. So with the election, inevitably causes and triggers some discussions and questions related to H1B visas and L1 visas. Can you just remind us what fraction of Cognizant's U.S. labor force is currently on visas? What sort of your level of dependence and focuses on that program, and maybe kind of a little bit of the movie of how your labor force structure has evolved over the last few years and how that's evolving going forward. Maybe I'll just dovetail that into my other kind of observation was just that you actually had head count increase sequentially quarter-to-quarter and that utilization is way up. Attrition is way down. Are you kind of at where you want to be with your labor force at this point going forward?

Lisa, Brian here. So let's start first with the headcount situation. I think our utilization levels are now quite high. We tightened our belt earlier in the year as I think every company in the world did, but we've seen somewhat of a V-shaped recovery, particularly in the digital side of our business. And as such, we're at the stage now that our bench is light, and we're committed as a leadership team to build that out. And we've already started that over the last month or so. But it takes time, of course, to get that built out. Obviously, we want to continue to drive more operational rigor around forecasting, which triggers enterprise resource management and all of that to make sure we have the right resources in the right place at the right time. So you will see us continue to build out our capabilities with evergreen skills or hot skills, as we would call them, and build upon our capabilities such that we can reduce utilization, which is a little bit higher at this moment in time. I am pleased with the employee engagement. I am pleased that voluntary attrition is down for the fifth quarter in a row. Notwithstanding that we're really pushing meritocracy and a performance culture these days. So you have seen a big bifurcation between voluntary versus involuntary attrition. And we do expect voluntary attrition to pick up a little bit in the coming quarters as we go through the merit-based promotion and salary cycle we're going through. And I underscore the word merit-based. With regards to H1B visas, look, it's quite topical, but perhaps I could stand hand back here a little bit and talk because the administrative rule changes with regards to skilled integration leases that have been quite topical in…

Our next question today is coming from Ashwin Shirvaikar from Citi.

My question is on the health care vertical, and it's good to see the improvement. Question is with regards to the sustainability of that and the investments that you're making in various health care capabilities, including, but not limited to TriZetto? And on the topic of TriZetto with the Atos settlement, was that included in the cash forecast that you have? What does it mean from an operational perspective in terms of your client relationships, if you could address those questions.

So Jan, I'll touch on the health care business. If you want to touch upon then the cash flow and the cash balance and the Syntel settlement, which we were pleased to see yesterday. So Ashwin, first of all, health care is really important to us. It's almost 30% of the total company, and it consists of 2 major portions. One is life sciences. We're doing really well there. We have been for a long time. It's highly strategic to us. You are seeing the lapping of Zenith technology, which happened in Q3 of 2020. So that will impact growth rates a little bit. But I'm very optimistic around the opportunities in life sciences at the intersection point of biopharma medical devices. Right through to industry 4.0 health care, retail and indeed health tech. And I spent a number of hours on that with the team over the weekend. So we're really pumped around what we can do there, and you will see us continue to invest in it. The majority of the businesses, however, the U.S. health care business, which is split between payer and providers. The payer business accelerated meaningfully this quarter, which strengthened services and indeed in products. We have a new leader who took over the Healthcare business earlier this year, an internal promotion, who has done a fantastic job, and this entire team are doing great for us. Bookings are very strong. Product growth is strong. We're getting new logos. Margins are improving. And we're just generally feeling very good, a better payer business. The provider business, which is much smaller than our payer business, saw significant erosion year-over-year in the third quarter as did the industry. As you know, the provider business is suffering from transaction volumes that are decreasing because the pandemic is obviously reducing elective procedures. And I would say that's an area that we would expect to come back but more holistically, the momentum we're seeing in payers, which is 3/4 of the business, and life sciences will give us confidence that we can continue to pull strong health care results going forward. We're improving. Jan, over to you.

Yes. Let me add a few comments to the Syntel lawsuit. You may have seen this morning that we won a jury verdict of $854 million. This lawsuit has a long history for Cognizant. And at the core is our claim that Syntel misappropriated TriZetto's intellectual property related to some software products during that time and -- while Syntel was a TriZetto subcontractor. And the jury verdict, which found no liability for TriZetto or Cognizant, basically speaks for itself. We're gratified with the results. But at Atos, the owner of Syntel, has already indicated that they're planning to appeal the verdict. So it will be quite a bit out, I think, until we have the final results of this trial coming, too. So way too early to take that cash into account for any actions. Nevertheless, I think it was satisfying to see the jury decide with Cognizant's position. Relative to the cash repatriation, it might be worthwhile just spending an extra minute on it, too. So we had about a cash balance in India of $2.1 billion. And we -- at the end of September, reversed our indefinite reinvestment assertion and decided to repatriate that cash from India. And as part of that decision, we could make that decision for 2 reasons. The most important one is strategically driven actually because we are executing well on our strategy to globalize the enterprise, and we'll continue to invest into international markets. And for that, capital will be needed. But number two, also, the '21 -- fiscal year '21 India budget enacted in April and some changes in U.S. tax regulations allowed us to remediate this cash on a cost-effective basis, and we did so actually in October. The cash balances in India historically have earned some interest on the cash balances -- on the cash that we have there. And approximately, I think, as I said in the script, about 5%. And the -- we offsetting -- we used some of the cash that we returned from India and cash at hand to repurchase shares during the month of September and October. And the accretion created to the share buybacks is actually approximately offsetting the contribution that our interest income would have generated in India. So the outlook is quite balanced as a starting point. And obviously, we're excited about the go-forward benefit of this transaction because we, going forward, have now full flexibility and full access to our free cash flow on a global basis.

Our next question is coming from Bryan Bergin from Cowen & Company.

Just thinking about your largest verticals here. So you've turned the corner on health care. I wanted to ask on Financial Services. I hear the commentary on lower-than-average growth for the next few quarters. I'm curious what you're seeing in the areas of the clients. And whether it's still limited to only a handful of the former large banking accounts. Really, how close are you to the end of the tunnel on stabilizing those? And what do you think you need to do in those areas to really turn the corner in Financial Services, too?

Bryan, so I would say, yes, it remains challenged. Look, first of all, just like health care, financial services, so the greatest impact from ransomware. But the Financial Services results, I'd almost cut them into 2 portions of discussion. First of all, insurance -- and as you know, the insurance industry has really been pressured, to say the very late in the last year, both at a pandemic level, insurance rebates and automobiles, SMB businesses, interrupted failures. That's impacting the property as of the insurance entry. And of course, mortality rates of life carriers. And then on top of that to make matters worse, catastrophic events and low interest rates. So that sector is under pressure. Our business is, let's say, 80% of our insurance business is in North America, so a little bit more than the average company. It's one of our strongest franchises, but it will decline in this year, in 2020. So we need to turn it around. We need to improve the pipeline. To be very honest, booking have been strong, but the pipeline isn't strong enough. Our leader has retired in the last month or so, so we have some new energy in there. And hopefully, we can get that back on track. Banking. Look, if I paint the macro picture first. As we've implied in the prepared remarks, capital markets, retail and commercial banking grew year-over-year. Cards or payments were down. With regards to some of the larger global banking clients that you referenced, it's more of a handful. Some of that, to be very honest, relates to ransomware we were turning some around. Some is self-inflicted wounds related to a lack of appropriate senior origin in the client partners we had. And some of it relates to secular pressure towards in-sourcing that we're…

Our next question today is coming from Rod Bourgeois from DeepDive Equity Research.

Okay. Great. Nice progress by Cognizant in these results. I want to ask a high-level question. Recognizing that the COVID pandemic is continuing here. Do you see Cognizant as still somewhat in a crisis response and basic blocking-and-tackling mode? Or have you transitioned now into a more forward-moving strategic attack mode? I guess the main part of the question here is, assuming you are in a transition, what are the next set of metrics you're most focused on to gauge Cognizant's progress moving forward here.

Thanks, Rod. Brian here. So look there's a short answer and there's a long answer, so I'm going to give you something in between. First of all, I really feel good about the progress we've made in the last 18 months. We've actually done a lot, probably more than people realize. Clarified our strategy. We executed the nonstrategic portion of the business. We executed a restructuring program. We used some of the proceeds from that to reinvest back in the business. We meaningfully improved our digital portfolio competencies and partnerships. We've built a strong professional, mature, client-centric leadership team. We've begun a pretty significant commercial transformation that is showing positive leading indicators and pipeline win rates, bookings. And we put, I would say, a better business management system in place to ensure optimal financial and operational rigor. And we did all of that, to be very honest, in a period that I was not expecting. We managed through global pandemics that impacted both demand as well as fulfillment. We navigated a ransomware attack well, and I want to say that humbly. But we did as best as we could, and we've actually received good client feedback on that. We've improved employee engagement to levels not seen for a few years, and that reduced voluntary attrition at 5 quarters in a row. And we've managed to put ourselves in a position that we built a multiyear plan that incorporates sustained investments. So I'd characterize all of that as pleased, but not satisfied, to be very honest. We're not in finish product yet. We're in the middle of a multiyear project. And we must continue to, of course, as we've said, reposition the brand, execute our strategy, globalize the company, take advantage of the opportunity overseas, globalize our delivery, build on our…

Our next question today is coming from Keith Bachman from BMO.

Brian, I wanted to actually try to get to and I'll ask them concurrently. The first is I wanted to return to bookings. And your bookings growth has been really strong. It sound like it's 15% year-to-date, and it sounded like it was 25% for the quarter, so accelerating bookings growth. And I'm trying to understand the translation of revenue, broadly speaking, for Cognizant. While bookings has been strong, is there something else that we should be thinking about on the other side on attrition, specifically of revenues outside of Facebook. And so normally, you would expect that to start to show up next year, but just want to make sure we understand the other side. Has there been a greater level of attrition, again, outside of Facebook, that would cause revenue growth to perhaps not show up as quickly as we might think over the course of the next year or so? And then the second question, Brian, is I wonder to see if you could just touch on philosophical margins. And what you mean by that, you outlined your 4 investment areas, and also the benefit associated with how the savings plan is going to manifest itself during '21. But just philosophically, is there any words that you can give, without providing specific guidance, on how investors should be thinking about margins given those puts and takes associated with '21.

So look, let me start on the revenue question and the bookings question. There's no big story here, to be honest, outside of the exit of the nonstrategic portion of the content moderation business, which is in our operations business. Frankly, I think we're executing well, both in our -- most of our verticals, we've got more work to do in Financial Services, but even Products and Resources. We're doing well in the areas that are not consumer goods, and travel and hospitality. And so I just feel we have growing momentum, Keith, but I'm very cautious to commit anything because of the macro environment. The bookings is real, when I look at bookings by renewal versus expansion versus new. I just feel as though we had in the last 1.5, 2 years maybe lost a buildup of backlog and we had eroded that. And now we started replenishing what I would call them late. And now we're in a position where I'm feeling better about the future. So there's no major story there. And the more we can keep up this bookings momentum, the better because it's inevitable, then it will show up in the revenue. So we just need to keep executing. With regards to margins and, in some ways, revenue versus margin trade-offs, I guess, comes into mind. Look, I think about this always in 2 ways. First of all, it's important to differentiate between a cost and an investment. And secondly, growth investments will be prioritized versus short-term margin optimization. And our goal is ultimately to increase our wealth and commercial momentum and to revitalize revenue growth. And we will make some short-term margin trade-offs to achieve this. We're investing meaningfully in the business, probably even more than I anticipated a year ago. Because the more…

In the interest of time, we have time for 1 more question from the line of James Friedman from Susquehanna.

I was wondering, Brian, do you have any view at this point on '21 budgets? And if that's too hard, just more generally how important do you think your client budgets are in terms of impacting Cognizant's fortunes?

Well, it's an interesting question, James. There's many moving parts, I would say, a macro demand and on client buying behavior. So on one hand, I really feel good about our momentum today. Bookings momentum, up 15% year-to-date. I'm behind every one of those bookings, either a renewal or expansion or a new logo as a client win. So the first thing I'll say is macro demand is better maybe than the most pessimistic analyst suggested back in April, which is good for the entire industry. But of course, in a world of vendor consolidation, some like Cognizant will do better than others. Second thing is maybe against this protracted pandemic clients become increasingly decisive with their technology priorities and indeed their spend decisions, which is also good because uncertainty is the real enemy. Third, we are less exposed to some troubled verticals or customer segments than others. Travel and hospitality, retail and consumer goods is less than 15% of our mix. We really focus on the global 2000 customer segmentation, so SMB issues are less of a concern for us. And fourth, we have momentum in digital. We strengthened our portfolio, and it can be a winner and will determine the next phase of digital. And I think that inflection point is real, by the way. On the other hand, this week's growing COVID-19 numbers and the latest restrictions, including lockdowns that were announced across Europe today, are a major cause for concern for us. And it's unclear whether this will really impact the decision-making and indeed budgets, so what has looked more promising at least in months may turn against us. So that leaves us in a situation that is challenging going into the months ahead because we have to figure out how to optimize our bench and…

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

This is Katie. Thank you all for joining and for your questions, and we'll speak to you again later in the next quarter. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.