Ladies and gentlemen, welcome to the Cognizant Fourth Quarter and Full Year 2018 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. [Operator Instructions] Thank you. I would now like to turn the conference over to David Nelson, Vice President, Investor Relations and Treasurer at Cognizant. Please go ahead, sir.

Thank you, operator, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's fourth quarter and full year 2018 results. If you have not, a copy is available on our website, cognizant.com. The speakers we have on today's call are Francisco D'Souza, 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. I would now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco.

Good morning, everyone, and thank you for joining us. This morning, Cognizant announced solid Q4 and full year 2018 results. We also announced, as you've seen, our plan to effect a smooth transition in our leadership team to take the company forward in the coming years. Having co-founded Cognizant, which celebrated its 25th anniversary less than two weeks ago, I've spent half my life here and I've had the privilege of serving as CEO for the past 12 years. Last year, in connection with the board's regular leadership assessment and succession planning processes, I informed my fellow board members that I was considering stepping down from my role as CEO sometime in 2019. As a board, we embarked upon a methodical search for my successor to ensure a fully thought through and orderly transition when the time came. Our announcement this morning is the result of that process. I'm pleased that Brian Humphries, who's the CEO of Vodafone business and a member of Vodafone Group's Executive Committee, will be the new CEO of Cognizant effective April 1 of this year. Brian is a terrific executive and I look forward to working with him closely to ensure the smoothest possible transition. I speak for all of my fellow directors in saying that Brian is a strong choice to lead Cognizant in its next phase of growth. I'll have more to say about Brian in a minute. Before I do, I want to take a moment to thank the entire global Cognizant team for the tremendous accomplishments of the past 25 years and in particular, during my tenure as CEO. My thank yous need to begin with my long-time colleague and the President of Cognizant, Raj Mehta. Raj has been our President for the past two-and-a-half years and has provided Cognizant with…

Thank you, Frank and good morning everyone. Q4 performance was solid rounding out full year results which were within our expectations and reflect continued execution of our strategy to drive sustainable revenue and earnings growth. Fourth quarter revenue of $4.13 billion was at the high end of our guided range and increased 7.9% year-over-year or 8.8% in constant currency. The adoption of the new revenue recognition standard had an $11 million positive impact to revenue in the quarter. Banking and Financial Services continued to see slower growth at 2.8% year-over-year in constant currency, driven by softness at a few of our largest banking clients. As we discussed back at our Investor Day in November, the pressure in our Banking business has primarily been driven by some of our largest banking clients. Two of our top five clients continued to show good growth going into 2019, while spend at the other three clients remained under pressure. Despite the continued pressure in these three accounts, the rest of our Banking portfolio continues to grow nicely. And based on deals that we've already closed and our late-stage pipeline of deals, we do expect recovery in Banking over the course of 2019. As I will discuss in a few moments, we have made significant progress in developing platforms and solutions for the European Banking markets and expect to see accelerated growth in those markets in 2019. Moving on to Healthcare, which grew 7% year-over-year in constant currency. Growth with our Healthcare payer and provider clients excluding the contribution from Bolder Healthcare was impacted by the continued ramp-down of an account in which we were a subcontractor to a third-party and a temporary slowdown with several large clients involved in mergers where the potential spending associated with integration work is not yet underway. We expect…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.

Hi, thanks so much. I want to say, Frank congrats on a amazing run as CEO, enjoyed working with you and interacting with you. So, best wishes to you and Raj as well. I want to -- let's start with that, I guess, on the CEO transition plan. So, Brian Humphries you gave a lot of good detail there. What stood out for him to be chosen as CEO as an outsider? Can we infer that his international experience may be signals a greater global focus for Cognizant on top of carrying forward the plan you set up three months ago?

Tien-Tsin thanks a lot for the kind words. Yes, look -- I think that -- I'd say a couple of things. When we set out to think about my successor, the Board conducted a thorough process. And what we were really focused on Tien-Tsin was sort the strategy that we laid out for all of you at Investor Day as the sort of the core of what's going to take the company forward. And as we assessed our choices, Brian is just a solid choice. He is well-regarded -- highly regarded Technology Executive. He's got a great track record of success across multiple companies, industries, technologies, geographies, roles, and organizational cultures. And I think with his global perspective, but also client focus experience with transformational technologies, he is the right Executive to execute on our strategy as digital continues to permeate and power every industry.

Got it, got it. So, maybe if I can just add a quick outlook question. Just thinking about fiscal 2019, the big differences here, and how you might see growth shape up versus 2018. It looks like you're guiding the top end of the outlook to be pretty consistent what you achieved in 2018.

So, I think that's fair Tien-Tsin. If you remember back at Investor Day, right, we talked about that we thought near-term -- near to midterm growth would be in the 6% to 9% on an organic constant currency perspective, and that in the near term we'd be at the lower end of that range. And then as we continue to grow and add on more acquisitions we would move up the range. So as we're seeing this year, we think it plays out very consistently with what we outlined at Investor Day. Q1 is a little bit slower than the full year. But as we talked about in my comments, we are starting to see some nice recovery with some of the new partnerships in Financial Services particularly in the European markets, and so we're very confident that as we get into the second quarter that we'll start to accelerate growth in banking, which then obviously supports the overall growth rates for the year. But I think in terms of general trends, obviously, shift to digital continues and really no significant changes from where we saw the recent quarters.

All right. Appreciate it. Thanks.

Thank you. Our next question comes from the line of Lisa Ellis with MoffettNathanson. Please proceed with your question.

Hi, good morning. I'll echo Tien-Tsin's comments. Frank, congratulations on a phenomenal run. I think we’re all curious to see what you're off to next. I will actually start then taking this opportunity to ask you one more long-term industry vision question. As you are moving into a -- moving out of your CEO role at Cognizant, when you look out over the next five to 10 years in what ways in your mind will the IT services industry be meaningfully different and comment on Cognizant's distinctive positioning relative to those changes, things that perhaps we're not -- we don't have from our seats the opportunity to see in the way that you do?

Yeah. Thanks a lot Lisa. I appreciate again the kind words. It's been quite a run. And just as an anecdote I was thinking about it the other day, this is my 48th quarter that I will be reporting as the CEO of this place. So I guess as a CEO you measure by public company quarters. Look, I think, Lisa, here's what I would say to your question. I think that as I look forward, the difference that we're going to see over the next five, 10 years is -- and we've been saying this and it may even sound somewhat clichéd at the moment, but technology is really going from a decade ago when it was supporting the back office of a business to really being the very essence of businesses today. I say often that every enterprise is now a technology enterprise. Every business leader is really a technology leader. Every budget can be to considered a technology budget inside of our clients. I mean, there's really this pervasiveness of technology where we're already starting to see, and therefore, which I think we're going to continue to see as technology becomes just more and more integral to not just businesses, but governments and societies and so on and so forth. Against that context, I think that firms like ours need to really have a set of capabilities that line up directly with that role that technology will play going forward. And that's why I think that the six capabilities that we outlined for you at Investor Day are so important. If you look at them as capabilities, they individually represent big market opportunities. But if you look at them as a set, as a group they really represent what I believe as the core capabilities that every enterprise is going to need to embed deeply into their operations, into their P&L into their business, so that they can fully take advantage of digital at scale. And so, I think that this notion of how you organize yourself as a services business and how you respond to this idea of digital at scale, the pervasiveness of technology across the enterprise is really going to be the core trend that services businesses will have to respond to over the coming decade.

Great, thank you. And then maybe as my follow-up, I'll ask the inevitable every two-year's question, I suppose. With new Congress in session inevitably over the next couple of months, I imagine we'll hear some noise surrounding H1B visa reform. So just perhaps to get ahead of that, can you proactively highlight what progress Cognizant has made over the last couple of years, reducing your dependence on H1B visas? I recall, I believe, at Investor Day you gave some statistics about the percentage of your U. S. workers that are now permanent residents or citizens etcetera. Can you just maybe put those top of mind before we see any of that noise coming out over the next couple of months? Thanks.

Thanks Lisa. Look I always start the immigration questions with the big picture answer which is that, the reality is that in many parts of the world certainly in the United States, many parts of Western Europe there really is a significant shortage of technology talent which needs to be addressed for these economies to stay -- to remain competitive. If you go back to the first part -- your question as the world becomes more technology-intensive we -- these economies really need skilled technologist to maintain the competitive edge. We continue to make progress. At Investor Day we shared with you that, at the moment in North America over 40% of our North American workforce or let's say our U.S. workforce is citizens or permanent residents. We continue to make significant progress and I expect that in the medium term we'll be well over 50%.

And I think, Lisa, -- this is Karen. If I can just add to that, I mean as I think and if you’ll recall last year we set up our U.S. Foundation which we funded with $100 million initially to continue to launch more training programs in the U.S. As Frank said, obviously the biggest challenge is shortage of talent not just here, but in other parts of the world as well. So we are certainly focused on helping to change that trajectory in the coming years.

Terrific. Thank you, both, and congrats again, Frank.

Our next question comes from the line of Edward Caso with Wells Fargo Securities. Please proceed with your question.

Hi, good morning. I was curious if you could give more color to your strategic accounts 385 of them. Sort of how many at this point are above the desired $5 million? And maybe like some of your peers could you array them as to over $100 million over $50 million? Just give us a little bit more color other than, it goes up seven every quarter? Thank you.

Sure. So Ed this is Karen. All of those accounts are actually over $5 million and most of them are considerably above $5 million on an annual run rate. We have not broken out how many accounts we have over $100 million, but it is in the range of -- doing this off the top of my head about 30 -- over 30 accounts at this point. So, there's a fairly large number of significant clients that has emerged over the years.

Right. And my other question is on the Healthcare. How sensitive are you to winning sort of these large transformational deals to sort of get the Healthcare group back on track. Thanks and Congrats to Frank.

Thanks, Ed. Look I don't think we are dependent on winning large transformational deals. The business is built on this -- and the vast majority whether it's in Healthcare or in any of other verticals, is built on this idea of continuing to grow with our clients in a methodical way. That usually involves many, many small and medium-sized projects with each client to continue to grow. We'll continue to do large transformational deals. We announced the deal that Karen spoke about recent -- this quarter with the three Finnish banks. That's a great example of the transformational deals that plays into our strategy, platforms, and so on and so forth. And so I certainly don't -- will not rule out doing those deals going forward but I don't think the engine or the Cognizant business is built on an assumption that we're going to do those deals to continue to grow.

And I think, Ed, if I could just also add to what Frank said, I think we talked about this last quarter a little bit, right, particularly with the platform deals, so the TMG deal and the EmblemHealth deal, you want certainly that large feed client to launch the platform and be able to build out the capability and so forth. But after that it actually enables you to add a lot of smaller engagements with smaller clients that historically we may not have not been able to really support in a meaningful way and we're certainly starting to see that traction now particularly with the TMG relationship and being able to onboard now smaller opportunities which obviously you can move a lot faster and they become accretive quite quickly. So, that's certainly happening in that side of the business. And then overall in Healthcare as we had talked about, there's been obviously a number of mergers that are underway in Healthcare. And while we certainly expect to get our fair share of the integration work once that commences, we certainly have seen a little bit of pullback recently as those clients are planning for integration, that's typical. We said that at some point, we thought that would happen and we've seen that a little bit over the last few weeks. But at some point, they will move into execution of the integration.

Thank you. Our next question comes from the line of Brian Essex with Morgan Stanley. Please proceed with your question.

Good morning and thank you for taking the question. Karen maybe if -- wondering if you could touch on inorganic contribution in the quarter. You guys had a pretty active fourth quarter with deals and it sounds like you continued that activity into this year. Just wondering what the contribution is and how we might anticipate contributions through the remainder of the year. And I have a quick follow-up.

Sure. So, M&A contribution in Q4 was about 250 basis points on a year-over-year perspective. That is also true in Q1, so you will see that again in Q1. But for full year 2018, it was about 150 basis points on a year-over-year basis versus 2017. And in our 2019 guidance that includes the deals that we have already completed, which is also about 150 basis points of revenue. New deals as we talked about at Investor Day, we would expect to add about 150 to 200 basis points a year of new deals, so we've, obviously, done that for 2018, we will done that again included in our 2019 guidance and then new deals in 2019 would be beyond that.

Got it. That's super helpful. And then maybe if we could touch on, you mentioned in your prepared remarks that the impact of the rupee appreciation gave you a little bit of flexibility to invest for growth. I think some are anticipating a little bit of maybe that's flipping to a headwind this year. And if that's the case, what sort of measures might you have to continue to, I guess to manage that and continue to invest for growth throughout fiscal 2019?

Sure. So I mean we certainly ramped up hiring in the fourth quarter to support growth as we go into 2019 and we'll put those folks who could use, I think as we look at 2019, utilization stayed fairly consistent last year with 2017. We know we've got a little bit of room to continue to push that if need be. Certainly we continue to focus on our pyramid as we move into 2019. And then really scaling some of the larger, more structured deals or platform opportunities as we have said, really two years ago when we had started outlining this new frameworks that initially those deals do tend to be margin dilutive. And as we get into the outer years such as where we're starting to get now with some of the original ones, you start to see that margin accretion kick in, which then allows us to continue to fund more investments. So those will be some of the major things that we're looking at this year as well as continuing to leverage SG&A but really our focus right now is driving for growth and making sure that we're investing in the talent and re-skilling and so forth to do that.

Great. Very helpful. Thank you very much.

Thank you. Our next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.

Good morning. Thanks for taking my question. And good luck to you Frank in your next phase of your career. Maybe just to start off on the overall IT spending environment you're hearing from your customers right now. Clearly they are spending more on digital and less on maintenance. But can you maybe talk about their overall posture as we go into 2019? Any signs of worries around an economic slowdown or pullback in IT spending or are things pretty much running the same course as they have been?

Jim, it's Frank. Look I think as I said in my prepared comments, what I see is an environment as you said in traditional and what you would think of as traditional IT clearly a pressure on running the business, maintenance types of activities in order to free up the dollars to invest in growth. That trend has been going on for a while. Equally importantly as I said, as technology permeates organizations, I think we are able to tap into new budgets. As I said, almost every budget is now somewhat a technology budget whether it's the R&D budget, whether it's the marketing budget, all of these become new sources of opportunity for us. And so overall, I think our market opportunity has never been larger. It continues to expand given technology permeating all aspects of organizations. I think as it relates to the macro environment clearly there are concerns out there about various issues in Europe, in relations with China and so on and so forth. I haven't seen it yet translate into a meaningful impact on demand for us. And so at this point, when I think about 2019, I see a solid demand environment.

Thanks. And then maybe as a follow up. Regarding the outlook in Financial Services in particular, I think Karen referenced a couple of specific deal wins that would improve the trajectory in Q2. I guess what's your level of confidence in that improvement in financial to sustain itself? And can you maybe just kind of address what you're seeing in your U.S. banking client base as well?

Sure. So in terms of the confidence, Jim as we talked about the Finnish deal for example as a signed deal, so we're just waiting for final clearance and closing of that. We have other deals similarly in the pipeline that we're very close to finalizing here. So we have a high degree of confidence particularly in the European markets in terms of what we're seeing. And then as it relates to -- I'm actually going to talk about North America as well as the top 5. So if you recall at the Investor Day where we talked about top five and that two of them had returned to very nice growth. That continued in Q4 and continues into Q1 where we're talking about, in some cases double-digit year-over-year growth and those are obviously very large relationships. So it's a very nice turnaround there. The other three accounts continue to be under some pressure. And at this point we are not -- certainly not assuming a big turnaround for our guidance for those accounts. But then if we look at the rest of the North America banking business, it has and continues to grow quite nicely. It just gets under pressure when you have some of these larger relationships pulling down the overall growth rate of the business.

Thank you.

Thank you. Our next question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.

Congrats Frank. I did want to ask about the CEO change. I'm a little bit surprised it didn't -- the background of Brian isn't somebody with a little more IT services background or an executive from one of your peers or competitors. Can you just talk about why some of the outside the industry necessarily was the right hire for Cognizant?

Thanks Bryan. As I said before, the board conducted a very methodical search for my successor. We kept in mind very carefully a sort of the strategy that we outlined for you during our Investor Day a few months ago. And as we went through that process we just determined that Brian is the right executive. We think that, he's got terrific track record of success across companies in the technology space, multiple industries, obviously technologies themselves, the geographies, roles in organizational cultures. And when we put all of that together we just think that Brian is the right executive to execute on the strategy that we outlined for you at Investor Day as digital continues to permeate and power as I said before every industry.

Okay, that's helpful. And then Karen on the -- just thinking about the guidance, I know the fourth quarter came in about 8.8% in constant currency. Guidance is calling for 7% and 9%, so I guess you're already running at the high end of the revenue guide and with Financial Services improving in 2019 just thinking about what pulls down maybe the range towards 7% to 9% and not a touch higher since you guys have a little bit of momentum heading into 2019?

I think Bryan, I mean certainly, we -- the guidance is consistent with what we outlined at Investor Day. Q1 is a little soft which obviously puts a little bit of pressure on the full year, although, we're very comfortable with the ramp to the back half of the year. But I think, obviously, we like to be prudent particularly earlier in the year. And as we see things start to evolve, we will certainly take that into consideration. But I think right now we're very comfortable, this is consistent with what we said back in November and we've made the investments to support this growth range for this year.

Okay. All right. Thanks guys.

Thank you. Our next question comes from the line of Bryan Bergin with Cowen & Co. Please proceed with your question.

Hi, good morning. Thank you. Regarding your onshore hiring efforts, can you comment on the inflation levels in this tight labor environment, particularly around digital capabilities? And then how are clients responding on pricing and your ability to pass those costs through?

I would say a couple of things which we've said in the past. On a like-for-like basis, once you look at sort of all-in costs our talent base in the U. S. whether that talent base is, if you will, hired locally or folks like here on some sort of a Visa, there isn't a meaningful cost difference between those two talent pools. So, we are, from a cost standpoint, indifferent. Of course, as I said earlier, we are in a tight -- in a constrained market as you pointed out. And so given the demand for our services, we're always struggling to find the talent that we need to fulfill our growth ambitions. But like-for-like, all-in, the costs are about the same.

Yes. And I think -- and I'd just add to that [Indiscernible] talking a little bit about pricing. So, I think as Frank said, like-for-like you're actually not seeing a big change and certainly I don't think wage inflation given skills we're hiring has -- we've seen that in a significant way. What you do see obviously is -- and this is always true, skills that are in hot demand, come with a high price. That's no different now versus the last 10 or 20 years so. But the flipside is that in this environment clients need that talent as much as we do and you'll get the pricing to accommodate that. So, I think as we talked about last year, pricing has remained quite consistent. And, in fact, last year was the first year in quite a while that you actually had some pricing strength in the market because of the shortage of talent and that trend has continued.

And the last thing maybe I'll add -- sorry to jump back in. But remember that when we look at our portfolio of digital revenue from digital that is running -- it has and continues to run at above company average margins, which I think speaks to our ability there to drive pricing, despite the fact that in general the talent pool as Karen pointed out in the digital part of the business is a higher cost talent pool.

Thank you. Our next question comes from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question.

Hi, thank you very much. First, Frank, congratulations on Brian. I know him from his HP days. I think he's a terrific choice. As a matter of fact, I think getting somebody from outside of industry could certainly help Cognizant quite a bit. So congratulations on that. My question was a little bit different in that, if I read the press release correctly you're the founder of the company as you said have tremendous success over a number of years. You're going to move to the board seat I think after a transition period. Frequently particularly with founders there are situations, in which when new leadership comes on board they eventually get off to allow the new leadership to have unbridled capabilities to direct the strategy. But it doesn't sound like you plan on doing that? Am I correct in reading that?

Keith, my primary and really only goal here is to ensure that we do whatever is necessary to make sure that Brian is incredibly successful as we go through the transition and beyond that. And my commitment to my fellow board members and to the company is that I will play whatever role is necessary to make sure that that happens, and not a bit more than that. And so we will play that as things come. But at the moment my commitment is to all of you, to our shareholders, to my 282,000 fellow associates around the world and to my fellow board members that my commitment is to make sure that I do whatever is in my power to ensure we have an absolutely smooth transition.

Fair enough, fair enough. Just one for you Karen. I just want to understand 606 in 2019. 606 was a help both the top line and the margins in 2018. My assumption is it's neutral in 2019. I know it's hard to predict because it depends on the nature of the contracts. But is that the right assumption that 606 is neutral to both the top line and to the margins in 2019?

Yeah. That is a fair assumption Keith. And we will no longer -- in 2019 we will not be breaking it out. That was a one-year requirement to make that disclosure. But from a modeling perspective, just assume it’s neutral.

Okay. Many thanks. Cheers.

Thank you.

Thank you. Ladies and gentlemen, our last question this morning will come from the line of Rod Bourgeois with DeepDive Equity Research. Please proceed with your question.

Hey, there. And I’d echo the last comment. I think Brian is a great hire, and it's nice to see the new thinking about being more global and so on. I wanted to ask in that context a couple of things. Do you expect as the CEO change occurs that anything related to guidance or financial targets might be reconsidered? And also do you expect any management departures related to the CEO change besides the one that's already been announced?

Rob, it's Frank. Multiple parts to your question there. Let me just first of all just say that as we think about Raj, I want to just say that, it's worth really spending a minute to thank Raj for his countless contributions to the growth and success of Cognizant. When Raj joined the company, I think we were $20 million in revenue. And from that to over $16 billion last year, Raj has provided leadership, operational skills, passion for clients for over two decades in a variety of operating roles. And he's as you know served as our President for the past 2.5 years. So I just want to thank Raj, acknowledge his many, many, many contributions to the company on this call and wish him well in his future endeavors. I think that as we've outlined for you today, our targets and our guidance for 2019 are based on our best view of the business at this point for the year. We're providing those to you as we always do having considered all of the factors that could positively or negatively influence our performance and this is our best view and that continues to be the case with the 2019 guidance. I am sure that, as Brian comes in, he will bring his perspectives to the role. And when we have updates we will provide those to you and -- or Brian will going forward. I don't think we have anything else to add to that. Karen? So, I guess, thanks very much, everybody. Thanks, again, for joining the call. I want you all to know that I've truly enjoyed many, many interactions with all of you over the 48 quarters that I've done this. I look forward to introducing Brian to you in the days ahead and during the transition process once he's on board. So thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.