Ladies and gentlemen, and to the Cognizant Technology Solutions Q4 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn this conference over to Ms. Katie Royce, Global Head of Investor Relations at Cognizant. Please go ahead.

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 fourth quarter and full year 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.

Thank you, Katie. Good afternoon everybody. Today, I'd like to address three topics with you; namely, a brief summary of the fourth quarter, our continuing progress executing our strategy, and our confidence about the future. Let me start with Q4. Fourth quarter revenue was $4.2 billion, a decline of 3% year-over-year in constant currency. This included a negative 120 basis point impact from the exit of content moderation services and a negative 250 basis points impact related to the anticipated exit from a large financial services engagement. This relates to a complex ambitious project that was scoped in late 2018. Over time, both parties realized that the transformation aspect of the project as initially conceived was unlikely to achieve our shared expectations. I'm confident that it is in everyone's interest to manage to an exit. Jan will provide more details on the financial implications of this exit in his remarks. However, I want to underscore that I'm confident in both our client portfolio and our deal review and solutioning processes, many aspects of which we've overhauled in the last year. Excluding the impact from the anticipated exits from this engagement, we executed well in the quarter and delivered against our expectations and our guidance. Gross margins increased, cash flow is strong, and we continue to invest significantly to fuel our growth priorities. We maintained our momentum in the quarter with full year 2020 bookings growth in the mid-teens. With over one year of data, assumption tweaks and refinements behind us, our analytics have been improved on going to bookings, bookings growth, including renewals and new business, and bookings to revenue. We entered 2021 with growing confidence in our strategic, operational and commercial progress and a strengthening demand environment.

Thank you, Brian and good afternoon everyone. I'm delighted to be with you on my second earnings call and to be reporting another good quarter, excluding the one-time impact I'll discuss more later. The business performed well, modestly exceeding our expectations during the quarter, driven by solid performance across the board, excluding financial services, and the industry's most directly impacted by COVID, notably retail, consumer goods, and travel and hospitality. For the full year, revenue was $16.7 billion, representing a decline of 0.8% compared to 2019 and a decline of 0.7% in constant currency. Compared with the prior year, this includes a negative 110 basis points impact from the exit of certain content services, a negative 70 basis point impact of the anticipated exit from a large engagement in our Financial Services segment and a positive approximately 210 basis points of contribution from our acquired businesses. For the full year, digital grew over 13%, it represented approximately 42% of total revenue, an increase of five points as a percentage of total revenue from 2019. Our Q4 revenue was $4.2 billion, representing a decline of 2.3% year-over-year or 3% in constant currency. Compared with the prior year period, this includes a negative 250 basis points impact of the anticipated exit from a large engagement in our Financial Services segment a negative 120 basis points impact from the exit of certain content services and a positive 270 basis points of contribution from our acquisitions. Before moving on, I will provide some additional details relating to the anticipated exit from the previously mentioned large engagement. In discussions, the parties agreed that a clean separation would be to our mutual benefit. As a result of those discussions, in the fourth quarter, we made an offer that includes among other terms, a proposed payment and…

At this time, we will be conducting a question-and-answer session Our first question comes from the line of Lisa Ellis with MoffettNathanson. You may proceed with your question.

Terrific. Thanks for taking my question. Brian, in your prepared remarks, you highlighted a number of areas of progress in the Cognizant transformation, both strategic and operational. Just can you take a step back here now almost two years in, how would you characterize where you are in the transformation journey at Cognizant, kind of still in the beginning, middle innings near the end? And what aspects would you say are mostly completed versus what are the big steps still remaining? Thank you.

Hi Lisa. Yes, thanks for the question. I'd say we're in the middle. And I think we still have a few years of work ahead of us, but we've made huge progress, and I'm very proud of the team and grateful for everything that they've helped us to do. If you go back two years ago, we talked about a transformation office that started with our strategic direction and refinements, which naturally led to refinements of our company portfolio, both exiting non-strategic elements. Such as content moderation as well as strengthening our digital capabilities with an intensive targeted set of M&A transactions. We're now much more in the strategic execution mode and there are four elements to that. Core to this is globalizing and repositioning the brand. You've seen some recent announcements. We'll have more to go through in the coming weeks and months. That will actually help us with our second goal, that of globalizing Cognizant, which involves really getting after underpenetrated markets internationally, which today still represent approximately a quarter of our revenue as well as giving clients around the world, greater assurance that we have a robust and resilient delivery network. The third goal will be around accelerating digital, and we made good progress there, and we will continue to invest behind this strategic goal and I should point out that clients are very pleased that we are actually showing up with a broader portfolio, giving them optionality and alternatives. And then the fourth point that you'll see us continue to invest in as part of our transformation is increasing our relevance to clients. That has involved us changing out some of our commercial teams, refreshing them bringing in people with much deeper industry knowledge, and indeed, sub industry knowledge and making sure we have client-facing teams who can interface across the entire C-suite of Global 2000 companies. So, we've accomplished a great deal. Some would say against the odds, particularly given COVID and ransomware in the last year. But the team are energized, we're in this together, and we're all committed to do something incredible in the coming years. But that's why, to be very honest, we've also left room in our financial plan in the coming years to continue to invest behind the transformation because we're not done yet.

Terrific. Thank you.

Our next question comes from the line of Bryan Bergin with Cowen. You may proceed with your question.

Hi. Thank you. I wanted to ask around bookings performance. Any color you can give as it relates to the overall company and digital bookings in 4Q? And then as you think about your growth here over the last, let's say, two quarters or so, can you give us a sense of whether that's been from stronger competitive wins and better positioning of Cognizant due to the investments you've been making versus just the rising tide in the recovery of overall demand and spend? Just curious if you can give us a sense of how you see the mix of contributing factors to your booking performance here?

Yes. I'll jump in and kick us off on the bookings side, because I think I mentioned in my last call, I had to do some formal training to dive in and deeper understand our bookings number. And I did so. Our full year bookings growth for this year was in the mid-teens. But as I learned, of course, bookings numbers -- we offer this bookings number for illustrative purposes to convey basically, the distribution momentum and self momentum and success we have with our clients, and you should see it as that. Brian mentioned in his in his notes that we continually improve review and understanding of this bookings number, and we made good progress in the fourth quarter. So I'm delighted that, the momentum continues basically in the mid-teens. We did make some adjustments to our bookings number as we shifted a little bit the bookings between the quarters. But the full year number is similar to what we've reported in the third quarter 15 -- round the mid-teens. And then, Brian, do you want to give some more detail on digital bookings and distribution up bookings?

Yes. So look, I think, first of all, it's fair to say, I believe we are more competitive than we have been. I believe we're more client-facing than we have been in recent years. That starts with a tone from the top, but we've also added significant coverage in the course of the last year. In some regards, that's positive, but it should be more positive on a go-forward basis as well because these people that we brought into the company will ultimately become more productive as time goes on. And some of the goodness from that, which will ramp over time, will also be complemented by the fact we've had some disruption this year, because we've been upgrading our client-facing teams. Because we wanted to have a set of client-facing teams who are better capable of conversing across the entire C-suite. So I think we're stronger. We're more energized. We're more client centric. Frankly, we also have a stronger portfolio. We have been aggressive in our M&A stance in the past year. We got a lot of momentum behind the assets we've acquired, and that puts us in a position where we can show up well beyond the CIO, CTO organization and now engage much more broadly at the C-suite. Similarly, I think it is fair to say that the -- there is growing optimism in the market. If I think about client behavior, clients are certainly making investment decisions. It's somewhat of an uncertain background because of where we are with vaccine rollout spread to world. But clients are being decisive. And in decision is the enemy of CEOs of Services Company. So I'm happy to see them making decisions. What are they putting their money behind? Ultimately, growth acceleration, efficiency, agility, scalability, business continuity, of course, this leads to investment decisions, if you will, around Customer 360, customer experience, cloud acceleration, automation, hyper personalization, of course, which brings you with the core and data modernization, AI analytics and machine learning. So this is all happening in a period where we're working in a different manner. And clients have gotten used to working via distributed agile, which I think will fuel different ways of working going forward. I believe it's also giving rise to questions around who strategic partners are, which is why we're really committed to continuing to invest behind industry thought leadership, industry solutions, partnerships, technology consulting and vendor consolidation is real, and I'm delighted to say Cognizant can truly play across build, operate and indeed into transformation innovation with our extended brand. So I feel very good about our position. The market is getting stronger. If anything, right now, what we have is a disconnect between demand supply economics. And I'm worried about skill shortages across the industry.

Thank you.

Our next question comes from the line of Keith Bachman with BMO. You may proceed with your question.

Hi thank you very much. Good afternoon, good evening. I wanted to ask about guidance, and thank you for the information, 4% to 7% includes 3 points of M&A. But I wanted to get some additional clarifications surrounding the events of Q4. And how should we be thinking about financial services within the context of that 4% to 7% constant currency growth? Given that, I assume this is an ongoing headwind associated with, as you said, the first couple of quarters. But could you give us a little parameters on how we should be thinking about financial services in particular? And then the second part, is there any incremental impact that we should be contemplating to the adjusted operating margin, 15.2% to 16.2%, is there any additional charges related to the -- what happened in Q4 with the financial services organization? Thank you.

Yes. This -- I can add a little bit more color around the exit from this financial services engagement. It's really contained in the fourth quarter. So we put the charge in revenues and -- on the bottom line. And what we -- and that impact on financial services in the fourth quarter had a growth impact of 7 -- a little bit more than 7%, I think I said.

Yes.

And with that, financial services performance continue to be declining in the fourth quarter and has been a weak spot in our performance. So I anticipate that we're -- as Brian and I indicated that we're going to be stabilizing financial services performance throughout the fiscal year and end up in a stabilized way for Financial Services.

Okay. And the margins, is there incremental -- any incremental charges associated with that? Or is that all taken in Q4?

They’re all taken in Q4. There should be no more impact in '21.

Okay.

Keith, it's Brian here. That's behind us. Maybe just a little bit of flavor for quarters where Jan wasn't here last year. Q1, as you know, is a tougher compare than the rest of the year because COVID really started being talked more about in the mainstream media and beyond in the month of March. So the last month of Q1 so the compare and financial services and as we think about the shape of the year, we'll still be, let's say, more challenging there as the turnaround efforts continue to take hold against a tougher backdrop. Q2 should be an easier compare for us. And frankly, the easiest compare for us in FSI should be in Q4, given, as Jan said, we've taken financial entries this quarter related to the anticipated exit of this contract. But I'm fully aligned to Jan's point of view, we'd expect a gradual recovery in 2021 with the quarterly I've just given you against the quarters within that.

Okay. All right. Thank you, Brian.

Our next question comes from the line of Rod Bourgeois with DeepDive Equity Research. You may proceed with your question.

Hey guys. Hey, I just want to ask about the growth versus margin topic as you look forward? Specifically in 2021, does your margin guidance leave you with enough room to invest in building digital capabilities and driving share gains. And then I think even looking beyond 2021, it'd be great to get a sense, do you feel like your growth investments would taper after this year as you make further progress in the turnaround? Or would your growth investments be prone to continue at a similar clip as you look beyond maybe this year? If you can give us some outlook there on the growth versus margin trajectory.

Yes. Maybe I'll jump in with setting the framework. Our guidance includes the impact of acquisitions that we have announced and closed as of today, and is anticipated. These acquisitions will create margin pressure for us in 2021, approximately 100 basis points or so, roughly. And that is built into as well as our continued investment of building out our organic growth capabilities, our investments into marketing, et cetera. So the guidance includes the substantive continuation of our strategic initiatives into 2021. That was very important for Brian and me as we devised our budget process that we continue committed to executing that strategy, which is a multi-year strategy. Future acquisitions, as I indicated, we're planning to continue on our M&A strategy, where I illustrated our capital allocation outlook and plan. So if we were to spend another $1 billion on acquisitions. That would be incremental margin pressure that is now built could be incremental margin pressure. That's not built into our guidance as always will be incremental. But I think the plan as it is provides full support of the strategic direction that Brian illustrated earlier.

Yes. Maybe if I could just embellish those comments that we made. Hello, Rod. First of all, yes, we feel good about our guidance for 2021. It sees us accelerate revenue, show margin expansion, whilst ultimately investing materially into the future. But I always want to be crystal clear on these calls that our goal is to drive shareholder value creation by positioning Cognizant for medium and long-term success and sustained earnings growth, and I think the best way for us to get about doing that is to get after the revenue opportunities. Look, we're in the middle of a -- what we're calling a multi-year project to reposition the company. I’m genuinely pleased with how the team has come together. We're united. We're ambitious. We're eager to prove our potential. In 2020, I asked the team to pull together to operationalize the transformation agenda. That included strategic, organizational, cultural and indeed financial elements, and some of it was uncomfortable for certain segments of the employee base. But we executed an aggressive M&A strategy to complement our portfolio. We executed a restructuring program. The savings of which allowed us to start reinvesting in the business, including hiring those commercial resources we referenced earlier. And with bookings now up in the mid-teens, the P&L can start to work again. And that was the secret sauce of Cognizant over the years. It was always a growth company fueling investments in our clients with delivery excellence, which afforded us to continue to drive that on a sustainable basis. That's the direction we're taking the company forward. We've got so much more work to do, but I think so much more optimism about the future. And I definitely feel a lot better about our position, because a lot of the heavy lifting of the initial portion of the transformation is behind us. We'll continue to invest in delivery excellence, commercial coverage, our talent, our systems and tools, which were not in my mind fit-for-purpose for a Fortune 200 company. That's why we announced today our intent to go forward with Workday and HCM. You know we're investing heavily between IT and security remediation and modernization. We'll continue to invest in our portfolio and in our brand, and we're feeling pretty comfortable in terms of where we are.

Thank you.

Our next question comes from the line of Ashwin Shirvaikar with Citi. You may proceed with your question.

Thank you. So, I guess the question for me is with regards to the underlying sort of economic and operating assumptions for the lower and upper part of both the revenue and margin outlook? And given the confidence implied in post 1Q acceleration. I guess the follow-on to that is the supply side question because when I look at high utilization and sequentially higher attrition, can you provide some comfort on the ability to meet delivery objectives of that implied acceleration of demand?

So, let me start a little bit with some order questions, Jan, feel free to jump in at any moment here as well. So, first of all, with regards to the delivery organization of where we stand on that, look, we have a demand/supply imbalance, if you will. The market has snapped back aggressively, as evidenced in our strong bookings momentum. I would say that the competition for digital talent is extremely competitive. All major digital domain skills are in high demand across cloud, digital engineering, data, AI and we are, therefore, very much focused on recruitment and attrition. For those of you who track media, you'll see us be much more aggressive in terms of social platforms for hiring. We're doing a luck with our employee base around making sure they see the potential of the company, making sure they understand the growth ambitions of the company, their career opportunities. And so we look forward to trying to optimize that as best we can. But you guys know as much as we do that in a high demand environment, where you have an imbalance, it can lead to certain outcomes. Now, we've got to understand what that means in terms of pricing environment as well to be very, very clear. With regards to utilization, there's a few things happening simultaneously from my perspective. First of all, clients are embracing new ways of working, including distributed agile, and that has been somewhat forced upon them in 2020. But actually, I think it's worked well. And now many clients are looking at real estate consolidation policies and understanding that we can work for them nearshore, onshore or indeed, offshore. The higher the offshore mix can actually help margin rate, but it's not necessarily helpful to margin dollars or indeed revenue dollars. So, we're seeing a trend certainly towards offshore leverage which is pushing the short-term offshore utilization higher as we consume the bench. But I don't know that that's likely to be sustained over the longer term because we plan to increase our hiring, rebuild our benches, and though we are, as I said earlier, in a high demand environment at this moment in time. We're also doing some tactical things internally. We've recently moved our India-based workforce onto a nine-hour Workday, which is in line, I should add, with industry practice which will result in a reduction of utilization in India, in theory, in the next quarter or so by one to two points. But we'll continue to look at utilization and track it and understand how these dynamics play in.

Got it. Thank you.

Our next question comes from the line of Tien-Tsin Huang with JPMorgan. You may proceed with your question.

Hey. Thanks so much. I know you've covered a lot already, but I want to ask about the customer engagement again and what makes this unique hear in terms of what happened and why the exit occurred? I'm just trying to get a better sense of if this was one off? Or are there some other accounts that you're tracking as well?

Yes. Let me get off. And then Jan, if you've any of the financial elements, please embellished this as well. So first of all, we have a delivery excellent organization. That insurers were aligned to a, a sophisticated set of delivery methods for want of a better words, you could think about these as methodologies, principles, programs, tools. As a Global Fortune 200 company, at any time, we probably have between 20,000 and 25,000 projects or programs underway in our delivery organization. And these projects are constantly reviewed and mapped. It goes without saying. For Cognizant then I bet every other services company out there in the world that at any one-time for a company of our size, there are certain projects that are classified amber, some red. These projects are monitored constantly actions and frankly, senior management right up to me get involved in client discussions as needed. I will say we're on top of this. I've reviewed our entire portfolio over the last few years. I know where we stand. We have enhanced rigor in our dealer review and solutioning processes. Many of those aspects, by the way, have been changed in the past year. And just as a reminder, we have a new CFO, who's pretty hands on. We have a new global delivery leader who came into last year, who's We've been new Chief Admin Officer who's charged, amongst other things, with contract management and pricing. Each of these executives bring their own experience and value on complex deal pursuits, steel solution and pricing, which puts me in a position where I feel confidence where we stand.

Trust rigorous there. Then I think

Our next question comes from the line of Matt O'Neill with Goldman Sachs. You may proceed with your question.

Hey. Hi, gentlemen. Good evening. Thanks for talking my question, a lot of good questions asked and answered already. I was hoping I could ask a little bit more around the sort of hiring dynamics, and as well as the kind of international dynamics as well as far as, Brian, you mentioned hiring a lot of MDs internationally. And what is the kind of sort of expected ramp or lag from kind of higher to accelerating the actual business in some of the international markets as well as going back to the broader discussion on hiring as far as the -- the relative scarcity of talent and challenges there as far as finding the right people with the right skill sets? Thank you.

Look, from the international perspective, we called it global growth markets, which is about 25% of our business. We were quite intentional in the last year that as we're globalizing the company, so too, that we want to localize the company to a certain extent. So that means, as an example, we've recently changed that our Head of Japan. We've hired a Japanese local previously was the Head of Microsoft Japan, prior experience in Oracle, HP, IBM Japan. So somebody with followership amongst clients, somebody would followership with talent and a roster of C-suite networks in the country. That's important to me, but we also need the people who can fit in with Cognizant culture are extremely energetic and really want to do something incredible in the years ahead. I've got to say, it's been an absolute pleasure. We've been able to attract incredible talent to Cognizant across upgrades we've made in the U.K., Ireland, in the Nordics, in Germany, in Australia, New Zealand, in Japan and indeed the new Head of Global Growth Markets, Ursula, who joined us in the month of December as well. And I'm very optimistic that they will ramp rapidly because there are a Class A type personalities, very senior, quick studies. We've helped them already with multiyear business plans to see how we can drive exponential growth in these geographies. Of course, I want to give them time to settle in, but they know that they've been hired with great expectations. And of course, they're charged not just with delivering commercially and from a delivery point of view locally and spending for the principles of the company, but also we are pivoting, transforming the company, the classic, very heavy leverage of application outsourcing, labor arbitrage, India model is being complemented, of course, with much…

Got it. Thank you very much.

We have time for one more question. Our next question comes from the line of Maggie Nolan with William Blair. You may proceed with your question.

Thank you. Brian, you spoke positively about the building strength of the portfolio and your positioning in-light of substantial M&A activity. Can you comment on the competitive environment in the digital engineering space? Do you hope to take up market share with new or existing clients? And do you have to disrupt competitors to do this?

This is one of the hidden jewels, Maggie, in the entire corporation. Obviously, we have a rich heritage in application development and application maintenance, but that gives us a tremendous opportunity then to move much more forward, leveraging the strong skill-sets and the talent that we acquired with Softvision back in 2018. In fact, we've done 2 digital engineering acquisitions in the last probably 4 months, Tin Roof in the United States, as well as Magenic and that most recently as well in this week that we closed. And you'll see us continue to complement those across the globe. We already have a very strong footprint across North America, and you'll see us continue to embellish Western Europe with that skill set as well. Of course, we think we're entering a new phase of digital, and this brings with it different dynamics. Clients aren't thinking of digital necessarily anymore simply as the classic tech stack at the bottom where they think about applications or infrastructure or data. Our vision is ultimately that clients will recognize its power of digital is unlocked not in those silos investments, but more across business processes and operating models. And that ultimately involves selling value, delivering value. It involves intelligence in consumer-grade applications from a CX point of view with security grade features, ultimately driven by intelligence that's fueled by massive data modern architecture sitting on cloud platforms. And our digital engineering play truly bitter interactive and experienced capabilities makes us one of the only companies in the world that can scale from the bottom of the tech stack right up to the top. There are certain pure-play digital companies that play in certain arenas. There are certain IPPs that play more at the bottom of the stack. But we're one of, I think, the…

Thank you.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn the floor back over to management for closing comments.

This is Katie. I'd just like to thank you all for taking the time and joining the call, and we look forward to speaking with you in the coming days. Thanks.

This concludes today's Cognizant Technology Solutions Q4 2020 earnings conference call. You may all disconnect your lines at this time, and enjoy the rest of your evening.