Ladies and gentlemen, welcome to the Cognizant Technology Solutions First Quarter Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Katie Royce, Head of Investor Relations. Please go ahead Ms. Royce. Please go ahead Ms. Royce.

Thank you, Rob, and good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's first quarter 2019 results. If you have not, a copy is available on our website cognizant.com. The speakers we have on today's call are: Brian Humphries, Chief Executive Officer; and Karen McLoughlin, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures, where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC. Before I pass this to Brian, let me address one issue. We understand that there was some inadvertent communication of our release and other materials this afternoon shortly before market closed. Obviously we are going to take a look into what happened here. We simply wanted to let you know that we are aware of the issue and we will undertake a review. With that, I'd now like to turn the call over to Brian Humphries. Please go ahead, Brian.

Well, thank you, Katie and good afternoon, everybody. I'm pleased to join you today on my first earnings call as Cognizant's, CEO. I've long admired Cognizant from my vantage point at other leading technology companies. Since moving into the role five weeks ago, I've been busy getting into the heart of the company's operations. I traveled across three continents to listen directly to our clients and partners. I've conducted more than two dozen deep dives into our industries, lines of service and regions. And I've met with nearly all of our global executive leadership team and talked to hundreds of our associates in person. I can tell you that the initial reasons for my enthusiasm about Cognizant have been strongly confirmed. I'll share some observations later in the call. This is a great company and I'm excited to have the opportunity to lead the company forward. That said, we had a disappointing first quarter performance. We have a lot of work to do to get back to what I believe this company is capable of achieving to seize the market opportunity in front of us. In Q1 our revenue grew 6.8% year-over-year in constant currency to $4.1 billion. This fell short of our guidance and resulted in an earnings shortfall. Our softness in top line growth resulted from a weak performance in Banking and Financial Services which was flat year-over-year in constant currency and slowing growth in Healthcare, excluding the contribution of Bolder Healthcare Solutions. Our revenue performance reflects both external factors including in-sourcing among a few large Financial Services clients and the spending pullback in Healthcare clients that are in the midst of merger integration, as well as Cognizant-specific execution issues that we need to get behind us. Offsetting this weakness in Financial Services and Healthcare, we delivered strong…

Thank you, Brian, and good afternoon, everyone. While the quarter started as expected, we saw a deterioration in our performance in the second half of the quarter which led to a slower-than-expected Q1 revenue of $4.11 billion, an increase of 5.1% year-over-year or 6.8% in constant currency. Digital however continues to be the most significant driver of our growth and now accounts for over 1/3 of total revenue. Moving to the industry verticals, whereas Brian mentioned the Q1 underperformance were primarily driven by Financial Services and Healthcare. Financial Services growth was flat year-over-year in constant currency driven by both banking and insurance. In insurance, growth was slower than our expectation at the beginning of the year as executive transitions underway at several of our clients, slowed the decision-making process in the latter part of the quarter, particularly around larger deals in the pipeline. In banking we continue to see softness at a few of our largest banking clients, but during the quarter we also saw a more conservative approach to spend with several of our regional banking clients in North America, including some banks that were impacted by M&A activity. Consistent with what we communicated at our Investor Day in November, two of our top five clients continue to show good growth while spend at the other three clients remains under pressure. We have however made progress in furthering our platforms and solutions strategy for the banking clients through the recent acquisition of MeritSoft, a capital market software platform for post-trade receivables and payables processing with offerings in regulatory, tax, operations and fees and billing. And the previously announced partnership with three Finnish financial institutions to transform and operate a shared core banking platform based on the Temenos platform which began as expected in the second quarter. However we are…

Well, thank you, Karen. Before we take your questions let me close by saying once again, how delighted I am to have the opportunity to lead this great company. My 286,000 colleagues and I recognize that we have work to do to get Cognizant back to basics and to strengthen our execution. We will roll our sleeves up and ensure that we tenaciously follow through on our strategy to produce the kind of results I know Cognizant is capable of achieving. We are all dedicated to our clients and we are all committed to advancing Cognizant's pivot to digital and spurring the next phase of growth and success. And with that, I'll ask the operator to open the lines for your questions. Operator [Operator Instructions] The first question is from the line of Lisa Ellis with MoffettNathanson. Please proceed with your question.

Hi good afternoon guys and welcome Brian. I look forward to working with you. Brian Humphries>: Thank you.

Can you give a sense -- I know you've just been on the ground like you said for five weeks or so, but given you've landed in an organization that's clearly in this pretty tough period of transition, can you just map out for us a little bit how you envision the next 6 to 12 months for you looking like? Like where are you going to focus? Are there some immediate shifts and changes you can already envision you might want to make things you want to be doing faster investing in more aggressively? Any, just early thoughts? Thank you.

Yes, I'm happy to do so. And ultimately over the last five weeks I spent my time across three continents and ultimately have been prioritizing business reviews, spending time with our associates and spending time with clients and partners. And to a great extent that will be how I will continue to spend my time going forward. From my point of view, but the great news is that we have an exciting market opportunity. The potential is there. But one of the things we're going to have to get back to doing is understanding the relevant trade-offs between costs investments and growth. I don't view costs and investments to be the same thing, but I do view costs and growth to be the same thing. We have to be fit for growth. So in order to do so we need to invest in growth, in order to invest in growth we need to free up dollars for investment. And to a certain extent Lisa, I really feel that we have to restart the engine that was the secret sauce of Cognizant. We have very engaged associates who have a winning spirit. There's a great opportunity out there, but we have to go back to making the investments, getting our cost structure right, really embracing digital and doing the basics well. And sometimes those basics in companies can be overlooked in terms of structural decision rights, sales commission plans etcetera, etcetera. If we get all of this right I think we will be in a position to execute our strategy and to do well.

Thank you. Our next question comes from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.

Thank you and Brian, thanks for the thoughtful comments. I wanted to ask you, our understanding was that the Board when they selected the CEO that would ultimately carry out the strategy that they laid out at Investor Day late last year. So given what you've learned and what you described in 1Q results are the company's longer-term growth and margin goals still relevant? Or are changes required again based on what you've seen and observed?

Well, I can't really comment on what the Board sought in a candidate so the question is for them to answer over time. What I will say is that five weeks into my tenure, I'm still very much in a steep learning curve as you can well imagine. I'm delighted to be here and obviously optimistic about our potential. And why? Of course as I said the market opportunity is there to be taken. I'm surrounded by a lot of really smart people with broad industry knowledge and I'm going to be leaning on them to help me execute our plan in the years ahead. We do have a base of associates as I said that are client-centric which is a huge asset to have a winning spirit and that's based on years of commercial success. Now we have a set of customers who like Cognizant and that gives us the opportunity to up-sell and cross-sell to our installed base, but we also have an opportunity to go after new customers within our largest spend and most successful verticals as well as in the other segments and indeed as Karen touched open within growth markets. And we have to embrace digital further and leverage our strong C suite relationships notably at the CIO stack to better penetrate the rest of companies in their digital ambitions. What's easy or what's easy to articulate in one hand is obviously harder to execute. You asked me what needs to change? Too early for me to comment and I'll be in a better position to address that obviously down the line in the outer quarters. Maybe let me answer your question indirectly by saying and touching upon some of the work streams that I’ve started. What's really clear and important to me in good…

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

Hi, good afternoon, and thank you for taking the question. I guess either Brian or Karen I was wondering if we might be able to get a little bit more color on the Banking and the Financial Services side? And it sounds like things are a little bit softer than you anticipated particularly with North America and regional banking clients? I was wondering maybe if you could help us wrap our arms around that a little bit to understand what -- where the softness came from and is this a temporary issue? Or might there be a fatter pipeline kind of in the back half of the year as you kind of progress through the year?

Sure. Brian it's Karen. I'll take that. So I think, certainly as we've talked about for several quarters, the top five banking clients have been under pressure and we saw the nice recovery in two of the top five last year and that continues into this year. We haven't really seen any change of the profile of those clients or their behavior. But we did, as we said on the call in my comments see some pullback in the regional banking clients. Some of it was M&A as we’ve always talked about when there were acquisitions happening between clients particularly when both sides of the acquisition are clients of ours. We do tend to see some pullback as the deals are getting finalized and closed before integration spending, so there was a little bit of that in the quarter. But we saw some general softness at some of our other regional clients as well, not on a material basis in any individual client, but a number of small pullbacks across the industry. I think it's early to say what's happening in the broader market. But at this point I don't expect to see a significant recovery as we move into the back half of the year. But neither do we expect to see significant deterioration beyond what we've already seen with the three of the big five banking clients, but it was a little bit of a surprise in the quarter as we got further into it.

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

Hi, thank you very much. I want to -- Brian this is for you and I wanted to start with you're lowering estimates, which I don't candidly think as a surprise, but the magnitude's certainly a bit larger than we were thinking. And as you indicated you've been there a short period of time. And so I just wanted to get kind of comfort level that you had enough time to at least give some assessments that would suggest that the estimates are set at a reasonable spot. And the second part of the question is you are taking a fresh look at things. And one of the things that does surprise me a little bit is the free cash flow targets, in other words, using 25% of your free cash flow for acquisitions. And given your attached rates to some of the troubled banks and the gravity that that poses, I would think that Cognizant would be well-served by perhaps leaning a bit more on M&A as your friends from Accenture doing in other firms. And so the corollary part of the question if you saw opportunities that would advance the cause of Cognizant would you be willing to flex away from some previous statements that were made to advance Cognizant? That's it for me.

Well, thank you, Keith. Let me first start with capital allocation because the M&A question is inherent in that. Look you can well imagine Keith, our Board of Directors and I will continue to evaluate our framework on an ongoing basis to ensure we're maximizing value for people like you and our shareholders generally. We do have a very strong balance sheet. At this moment in time, there is no change in our previously disclosed capital allocation framework. I will say more explicitly to the question on M&A, it has been and will continue to be a level of -- a lever to execute our strategy. I'm very clear in my mind that M&A is not a strategy, it is a means to execute a strategy. So, all acquisitions that come forward to me needs to be contextualized against our strategy and we need to have clear business ownership and sponsorship and a clean line of sight to integration. At the moment, we're not working on major acquisitions and I'm more historically favorable to tuck-in acquisitions as opposed to anything beyond that. And I do think we should be able to use those as a means to an end to drive further revenue growth in line with our strategic ambition. Back to the first part of your question which relates to the margins, look everybody knows I've been here five weeks, so I arrived in April 1st, the quarter was closed and immediately we started looking at the results and trying to decompose them down understanding what happened in the latter part of the quarter. By definition, I have been focused on what is a secular trend versus a cyclical trend, what is an external factor versus a Cognizant-specific factor? I'm pleased with the work that Karen and I have done to try to get below those as best we can. I'm obviously focused on putting guidance out there that I know we can actually execute against. And that will enable me to invest in the long-term health of the business to ensure we can drive shareholder value creation. So, at this moment in time, that's as much as I can say.

And I think Keith if I could just add to Brian's comments on capital allocation and acquisitions. As you'll recall at Investor Day what we outlined was a framework that on average in a given year, we would deploy 50% of our free cash flow for buybacks and dividends, 25% for M&A, and then 25% on average goes to India. But we continue to have a very strong balance sheet both with cash and excess capacity for debt if we needed the appropriate time for acquisitions or other investments.

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

Hi, good afternoon. I know you guys gave guidance on February 6, so I'm just trying to understand in the first quarter, the miss of op income was by $100 million versus $300 million and margins ended up being down 170 basis points. So -- and I know we talked about margin expansion this year. Margins were going to be up 100 basis points. Now they're going to be down 100 basis points. So I'm just trying to put what happened to the margin expansion and just the shortfall in revenue for the quarter doesn't make up for it. And I'm sure you knew about headcount raises already. So I'm just trying to reconcile the differences? Thanks.

Yes. So I think Bryan the way to think about it is that the revenue shortfall was clearly the biggest piece in the sense that we have ramped up hiring in Q4 and then the beginning of Q1 for the anticipated growth this year. And as you know it's hard to -- you can pull down the hiring, but once you have the people on board you need the revenue to support that. And when we gave guidance, while we did not give quarterly margin guidance certainly our Q1 margin does tend to be below the full year average. And so while the 16% adjusted operating margin was slightly below our own expectations we had expected that there would be a ramp of margins as we went through the year as revenue continued to build and as we were be able to deploy the headcount that we had bought on in Q4 and the early part of 2019. And I think what you'll see, as I’ve said in my comments that margins, there will be a little bit of a different seasonality this year. So margins -- adjusted operating margins in Q1 and Q2 will be roughly the same. Q2 tends to be our strongest margin quarter, but given the pullback of revenue and the headcount that we have on board now, Q2 margins will be similarly in line with Q1, but then we'll see the ramp as we get back into Q3 and Q4 and we can better align the cost structure to the revenue.

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

Good afternoon. Thanks for taking my question and welcome Brian. Maybe if we could go back to the conversations you've had with clients over your initial month at the company. Can you maybe just talk philosophically about what they've told you about their willingness to potentially give you more business, if business conditions were different? In other words, for example with respect to pricing is -- do you believe that you could actually accelerate revenue growth at the company by potentially being a little bit more aggressive on pricing? And can you maybe -- understanding that you don't believe there's a direct trade-off between revenue growth? And margins, just talk about your thoughts on how you could re-accelerate revenue growth beyond all of the kind of temporal issues that are going on with the clients in Banking, Healthcare right now?

Yes. I think it's a good question and inherent in that is the notion of elasticity and also our position within clients in terms of where we stand, not just in legacy but also in the new. I've seen quite a lot of clients across three continents and I have approached those meetings very openly soliciting feedback on Cognizant, on our brand, on what we stand for, on our client teams and delivery and project management. I've tried to obviously in the same vein understand what those customers are working on. And I would say very clearly and consistently spend pressure continues on the run side of the business in Financial Services everywhere else kind of consistent theme. And all firms are fully aware of the do-or-die notion that digital disruption brings their way. So they are in a highly competitive market with legacy competitors as well as new. And so very often the message is, we have to find ways to get our investments down in legacy, free up dollars for investments in security, but also free up dollars for innovation, to enable them to better participate in the digital world, if you will. So there is spend, but it's not always where we would traditionally played. And so our task is to optimize our portfolio, being as efficient as possible in our legacy business, and better positioning ourselves then in the digital world. And that brings with it complications as well as opportunities. The nature of the contracts from longer-term contracts to more project-based contracts is the fact that we have to juggle with, the nature of the skills required to get at those opportunities and the relationships, how we get into the front door? How we leverage our strength with CIOs and strong customer NPS to sponsors with their CMO, COOs, CEOs? How we get the right skill sets? Who we talk to? How we talk to them? How we follow-up? What collateral to leave? You name it. It's fundamentally an opportunity for us, but also something we have to grow into and continue to flex our muscles in, as we become more of an advisory element. Cognizant Digital Business is really important to making that happen. Winning new logos of course will enable us to grow too. But more broadly, almost two-thirds of our business is in Financial Services and Healthcare, so it's important that we turn those businesses around. It's important that we buttress our North America business with further growth in global growth markets, which grew 12% in the first quarter. And, if we get all of those things right and invest for growth, I am confident that over time in a steady-state, we will be able to simultaneously deliver better margins and accelerated growth. At this moment in time, of course, we have a lot of work to do.

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

Hey, welcome, Brian, and nice to have the fresh perspective. Hey, I just want to go back to where we had been recently. I mean, it does seem that the Analyst Day and the related financial targets that were set by the outgoing management, it does seem that those targets were awkwardly timed. And so I just wanted to inquire, a couple of things. One has the process for forecasting risk rating prospects in the pipeline and so on, has that process changed as you've come to the helm? And two, is there a plan for the role that Frank will be playing going forward? Is he ultimately going to transition out or is he staying for an extended period? So any clarity on that in the context of having these financial targets that were issued when there was the CEO change eminently about to occur. I think a lot of people are now especially now wrestling with the awkwardness that was created with that. So has the guidance process and the forecasting assumptions and approach changed? And is there a plan for the role of Frank going forward?

Well, let me first start with the latter question around Frank who's been nothing short of a gentleman in the transition period with me. And I've been delighted to have the opportunity to spend time with him and work with him. He’s somebody I reach out to almost on a daily basis to get guidance and counsel within the same vein. He's clear that he hasn't gone from the CEO role for the next three months or the next two months at this stage to move into an EVP or Executive Vice Chairman role and thereafter, will transition to the Board. And I'm sure will be available for me in non-operational capacity, but as a counselor as needed and as I choose to use. With regards to the process for forecasting and the Investor Day guidance and Q1 guidance, I can't really comment on the past. It's very clear obviously that, I understand the importance of setting expectations we can meet and consistency of earnings. It's something that I hold near and dear to my heart. We will continue to work to get rigor in our forecasting process and not just forecasting, but an annual budget process. Forecasts happen on a monthly basis, bottom up from accounts. But at the end of the day, we set a cost structure and we set leadership bonuses based on the annual budget. So we want to make sure we're rigorous, not just against forecasting and predictability of guidance, but also against the inherent plan as we enter a year.

Thank you.

The next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question.

Hey, thanks, guys. Listen just to dissect the shortfall on revenue versus your initial outlook, I mean, when we think of the magnitude of $500 million $600 million of revenue here, I guess, I'd just love to get a little more granularity as to how much of this is a handful of large clients? How much of it is broad-based? And then, really, I didn't hear you say you digital – sort of, digital revenue growth rate. Maybe if you can give us that and if that's not been really enough to offset, what you're seeing is legacy revenue decelerating at a faster pace now. Thanks, guys.

So, Darrin, it's Karen. So the digital, what we've said in my comments was that it's about a-third of revenue now. It grew low – above 20%, so – but low 20s, so consistent with where it was running towards the end of last year, so no real significant changes there.

Thank you. Our final question is from the line of Bryan Bergin with Cowen. Please proceed with your question.

Hi. Thank you. I wanted to ask on Healthcare. With the political cycles starting to ramp and then the rhetoric around health insurance also ramping, can you discuss what you're seeing in spending behavior in conversations with your managed-care clients. I'm trying to understand the underlying outlook here, that's independent of the captive and also independent of account ramping down. And really, when do you expect that segment can potentially show a turn of the corner here?

It's Karen. So I don't – I think the behavior we saw in Q1 was really related primarily to the merger and acquisition activity that we've seen in Healthcare. So as we all know, there have been two very large mergers in the last few months. All four of those companies were clients of ours. And that was the majority of where we saw some pullbacks and where we expect see some deterioration, as we said, going into Q2 and sluggishness for the rest of the year. And then, we had one large client that did accelerate the move to a captive during the quarter. At this point, I think, it's more about those client-specific situations versus anything that might be happening in the broader regulatory environment with Healthcare. But I'll ask Brian to maybe add some color to that as well.

Well, thanks, Karen. Well, first of all, it bifurcates. Obviously, Life Sciences has been very strong and grew double-digit, as we said. In the health care payer business, we've had a different story and certainly excluding some M&A, it's been slow. I would say, on a positive nature, health care is still about 18% of the nation's GDP and we're starting from a position of strength. So we need to understand, of course, we've had disappointing Healthcare results this quarter, but we need to do better. In the last few days, I've spent about three hours with CIOs of some of the largest Healthcare companies in the world. And the message I received was very clear. Help them on the run to optimize your opportunities, which optimize their run business and get cost savings and yet they are very open to embracing Cognizant under transformation and digital agenda, where we have so much opportunity. And so for us now and Malcolm in his new offer – in his role to get after those opportunities and make sure we bring our assets to bear in customers where we've historically had very strong customer satisfaction and growing business in prior years.

And with that, that concludes today's call. Thank you all for joining and for your questions.

Thank you.

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