Ladies and gentlemen, welcome to the Cognizant Technology Solutions' Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Thank you.And I would now like to turn the conference over to Katie Royce, Global Head of Investor Relations. Please go ahead, Katie.

Thank you, Rob, and good afternoon, everyone. By now you should have received a copy of the earnings release for the Company's fourth 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.With that, I'd now like to turn the call over to Brian Humphries. Please go ahead, Brian.

Thank you, Katie, and good afternoon, everybody.As I stated on prior calls, Cognizant is in the midst of a multi-year project, whose aim is to re-position the Company to realize its full growth potential. And today, I'd like to briefly cover our Q4 performance and then turn our attention to 2020.After a challenging start to 2019, we're seeing higher levels of engagement from our leaders and optimism as we rally behind client centricity and revenue growth. We're making progress, but there is more work to do in the quarters ahead.Q4 revenue grew 4.2% year-over-year in constant currency, or $4.28 billion. Non-GAAP EPS was $1.07 and we delivered strong cash flow. Macro demand remains stable, but challenging. There is a distinction between traditional work versus digital. Legacy services are subject to meaningful pricing pressure at renewals, competition and indeed in-sourcing.Meanwhile, clients continue to invest in digital to become modern, data enabled, customer centric and differentiated businesses. These trends are set to continue to our strategic posture and operational and financial initiatives are aligned to address this market reality.On a geographic basis, Q4 revenue in North America grew 3.1% year-over-year, while revenue in our growth markets region grew 7.4% in constant currency. In both geographies, we are determined to accelerate growth, but the opportunity is especially significant in our international business where we remain under-penetrated and we must do better.From an industry segment view, in Q4, our Financial Services global revenue grew 1.5% year-over-year in constant currency. Both banking and insurance were weak throughout 2019. Full-year insurance revenue growth slowed primarily due to a modest decline in North America, albeit with a return in the second half of the year, where we saw growth in Q3 and indeed Q4 year-over-year.In banking, we continued to see particular weakness in capital markets and commercial…

Thank you, Brian, and good afternoon, everyone.For the full-year 2019, revenue increased to $16.8 billion and represented growth of 4.1% year-over-year, or 5.2% in constant currency. Fourth quarter revenue of $4.3 billion was above the high end of our guided range and represented growth of 3.8% year-over-year, or 4.2% in constant currency.The revenue out-performance versus guidance was broad-based across our industries. Digital revenue continues to grow above 20% year-over-year and represented approximately 38% of total revenues for the quarter.Moving to the industry verticals, Financial Services growth was up 1.5% year-over-year in constant currency driven primarily by insurance. However, the project-based work that we benefited from in Q3, did not extend in the Q4.We saw a modest slowdown in Banking sequentially, reflecting typical year end seasonality and furloughs. As Brian mentioned within Banking our performance continues to be negatively impacted by a few of our global accounts, as well as some slowness in certain regional and other clients.While macro uncertainty persists, we expect budgets within Banking to be broadly stable in 2020, with North American banks better positioned relative to UK and Continental Europe given continued Brexit uncertainty and our ongoing challenges with a few of our largest accounts.Against that backdrop, we continue to have a muted outlook for Banking. However, we are confident in the initial steps our new Head of Banking has taken to re-position us for growth. We expect this client centricity to drive deeper and more robust account planning and marketing.By partnering well with digital business to ensure we increase our relevance to banks, we have also implemented a solutions team to bring ease of repeatability, ensure we develop more compelling thought leadership and better align with key partners.Moving on to Healthcare, which returned to year-over-year growth up 1.8% in constant currency. Life sciences again grew strong…

[Operator Instructions] And our first question comes from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.

Want to ask about the cadence of revenue growth in 2020. Looks like you guided 1Q 2020 revenue guidance, 3% to 4% constant currency. Full year of fiscal year 2020 growth is pretty similar at 2% to 4% constant currency. So is Cognizant expecting kind of steady revenue growth with no fluctuations or do you expect maybe a little bit of a drop in the middle of the year and a pick up in the fourth quarter?I guess another way to ask this is, do you see an inflection point in revenue growth on the horizon? Thanks so much.

Bryan it's Karen. So the one think I would say is, nothing particularly unusual. There is no large deals there is no - nothing unusual right now from a seasonality perspective. So, I think it will be relatively a typical seasonality - that will start to ramp as we get into Q2 and then Q3. The one thing I would say, well the back half might be a little bit stronger because of the sales investments that we're making now right.So we launched that hiring program late last year. So folks are coming on board as we expected. And certainly, while we said we would expect it to take about a year for them to start to ramp, but we should start to see a little bit of that benefit as we get into the back part of the year.

Yes, and maybe the only addition I'd make to that Karen, is obviously the content moderation ramp down will offset that somewhat as it grows throughout the course of the year.

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

Brian I was hoping you could give more information about the sales force transformation, where do you stand on hiring? You mentioned the words on track, but a little bit more color on what on track means would be great?And on the flip side is there perhaps any heightened attrition you expect to see for the traditional sales force that was already there given maybe they new compensation schemes or any changes there, so sales force update?

It's very interesting because as I said, we were at our Global Planning Summit in the last month or so. And the sales force were actually very motivated by their compensation changes because they can actually make more money than they could in prior periods. So actually on the contrary I actually feel there's a great deal of optimism in the sales force. People are - when the CEO visits clients every single day, it leads to a certain cultural demand in the organization.And I think people are motivated to get the company back to an accelerated growth rate, but I feel good about where we are. I'm not overly concerned about attrition in the legacy sales teams. We've had great look, I would say fulfilling the pipeline of opportunities. We don't break out on a quarterly basis where we are versus at hiring. We're less than halfway through the 500. I will tell you that.There is a lot of work still to do, but I track it on a monthly basis at Executive Committee and we're pretty much in line with what we anticipated in terms of costs. I've also been keeping an eye, not just on the accounts that these folks are assigned to, but also the pipeline that they are building and in some cases, I've been pleasantly surprised that the early pipeline builds have even been ahead of my expectations.So look more work to do to continue to review that, but there's a lot of energy and urgency in Cognizant in these days and I think we're all very clear what we're setting out to achieve. And I feel very good in terms of where we are to to-date. So the broader sales force update is consistent with what I said last quarter, that's not going to change. We've implemented a RAD model, which is retention, acquisition and development.That's all about trying to get the right folks on the right accounts at the right time, aligning specialist resources, which are by practice, such as big data or cloud, with a generous client partner. The client partner is the quarterback on the accounts, they have decision rights, they own the P&L for the accounts. They can move with speed and accountability within the framework of authority that we have delegated to them and they are complemented by subject matter expert solution architects and the like.We implemented that model on January 1. So far so good, and we obviously got to continue to push that out in the course of the year ahead. But I feel good about where we are.

Our next question is from the line of Lisa Ellis with MoffettNathanson. Please proceed with your question.

Brian, one of the things you mentioned was that you're doubling the number of people supporting Cognizant's major strategic alliances and I know that that is also somewhere where you have been spending your own time as well. Can you just provide a little bit more richness on where your focus there, where maybe Cognizant is already strong? Where you think there is opportunity to improve and how that sort of fits into the overall updated strategy and fit for growth plan? Thank you.

Yes, I will and look we have Lisa, some really strong alliance partners and partnerships by key verticals, whether that's Temenos in Financial Services, Pega, Adobe, or otherwise. But I've really spent a huge amount of time in the last nine months trying to build out and foster a business plan behind Amazon, behind Microsoft. We are now working through Google Cloud Practice as the hyperscale players and indeed really selectively aligning Cognizant to some of the leading SaaS type players as an example, such as Salesforce or ServiceNow or indeed Workday.To make sure that we go to market with the companies that are growing 20%, 30%, 40% year-over-year. Not to say we won't continue to obviously partner with others, but we are putting - allocating even more capital to the winners in today's environment. That invariably means for us just to be very clear, it doesn't mean hiring more alliance partners and having a bunch of coffee drinkers sitting around feeling good about hosting meetings.This is lot about building our business plans with solution architects and big data experts and the like. Align to each and every one of those companies I talked about. It involves putting an operational cadence together on a rolling four-quarter basis. So I know in a certain date, I'll be sitting in a room with the CEO of that company, review not just what we're setting out to achieve as a company, which has dollar targets against it, which are intersected by country and vertical.But also looking at the pipeline shape, where we are in the funnel and really operationalizing that strategic alliance vision into day-to-day reality, which includes joint customer calls, joint - in person visits to clients with the leadership of those companies, joint emails to clients, or letters to clients and the like. So it's strategic, but to be very clear, it's also very operationally inclined and pragmatic with a view to successfully driving acute cadence going forward with these clients and partners and making sure we show up better than we ever have in the past.

Our next question is from the line of Tien-tsin Huang with JPMorgan. Please proceed with your question.

Everything looks in line a little bit with what we had. It was just gross margins that was a little bit different. I know you mentioned Karen the 50 bps or the $25 million healthcare write-down. Can you maybe quantify some of the pricing pressure you're seeing coming from the heritage work or anything else on delivery cost that might have surprised you?I know the fit for growth piece is coming in to. So just overall try and give some more color on the quarter and then maybe how the year is going to play out here in 2020 for gross margin? Thanks.

I don't think in the quarter Tien-tsin I wouldn't say there was any real change in pricing trends, but as we talked about on the prepared comments, we certainly are continuing to see pressure on renewals in the heritage or for legacy IT side of the business. Right now that's being offset by higher pricing on the digital side of the business. But certainly we think we can do better on pricing in digital services and really to make sure that we are pricing to the market and for the value that we are providing to clients.So that is certainly an initiative we have underway, as well as do a far better job on things like COLA and getting adjusted bill rates and people are being promoted or rotating our staff to take effect of a more optimal pyramid. Certainly the savings that we've seen so far has been primarily in the SG&A buckets, as we've been focused on the top end of the pyramid, mostly which is done in SG&A.But as we move into Q1 and Q2 and further into the fit for growth program, we would certainly expect to see improvements in the middle to upper middle of the pyramid as well, and also be able to drive improvement in some of these revenue levers, which will hopefully start to stabilize in gross margins.

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

Brian, is your team now in place? I know you had one of your execs cycle out not that long ago, but do you have the people that you need down a level or two at this point to drive the transformation?

Look, I'm a big believer Ed that A players attract A players and the more we upscale and make sure we have the right team around meet those people in turn we’ll make sure that they replicate that trend through the organization. I will say we have gems in Cognizant, really, really strong leaders. I talked about life sciences growing double-digits that's an internal promotion that happened in the last year.So it's always going to be a combination of complementing excellent internal talent with excellent additions from the outside and putting a system of meritocracy and a performance culture in place. So everybody knows what we celebrate and what we condone versus what we don't tolerate.So of course, in the years ahead, there will always be refinements. I want to drive a performance culture, and we're getting there, but of course, there will be, even in the foreseeable future, ongoing refinements as we continue to attract better people from the outside to complement internal talent.I will say one thing that's very pleasing to me, there is no shortage of people reaching out to Cognizant at this moment in time, feeling both from clients and otherwise that there is a new vigor in the Company, a new urgency in the Company and a confidence that we can get back to been the great Company that we have been in the past. So it's very encouraging to me to know that we can still attract great talent from the outside.And in the same vein, with a new Chief People Officer, Becky Schmitt, who joined this Monday, who almost had two decades in Accenture, and most recently had been in Walmart. We have a very strong people agenda program lined up in the coming years to attract, motivate, develop, retain and put very sophisticated talent management programs in place internally. And I believe that will not just make us a very appealing place to come and develop your career, but it will also have intrinsically a direct impact on our attrition rate, which as I said in the call, I'm pleased with, but we can always do better.

Our next question comes from the line of Keith Bachman with Bank of Montreal. Please proceed with question.

Karen, just for clarification, could you tease out the guidance from a revenue perspective in terms of isolating what M&A contribution is expected to be? And particularly the M&A contribution, does that include some of the very, very recent deals? And then, Brian, for you, if you could just revisit on healthcare and how we should be thinking about healthcare cadence, both this year and frankly exiting this year? As the deals we anniversary in earnest in the June quarter in particular, has the price activities of the M&A client, has that already played out or will that continue to play out for the year, but just more broadly talk a little bit about healthcare, both this year and kind of exiting the year? How you see the opportunity there for Cognizant? Thank you.

I'll start with the healthcare question Keith, because actually ironically I have been on the phone with the leadership team of - as it happens, both of those combined companies as recently as this morning. So I'm pretty current in terms of where we are on the accounts, and indeed the opportunity.And I will say. I continue to be pleased that we show up a little bit better than we have. And both executives and companies reassured me that the merger integration work is still there and as they think about consolidating to preferred vendors we are firmly and squarely in a go-forward strategy as well.So I do feel there's lots of opportunity for us, even in those larger accounts, where we've seen consolidation from four to two in the last year and we have seen some pressure on rates as part of that, but we do want to get back once we anniversary that into a stronger growth trajectory in healthcare.In the same vein, I just want to caution the amount of work that needs to be done. We've also had our healthcare team today here in New York, about 20 people in a room reviewing last year, reviewing revenue, pipeline, win rate, margin trends, a very strong call to action in terms of what we need to do in the coming year.So we're not out the other side on that yet, but I choose to be glass half full here in terms of a lot of the actions we are doing are not specific to one vertical. Better aligning marketing spend, making sure we have the right customer segmentation strategy in place, up-skilling our client partners, making sure we have the best specialists in the world to complement them, going to market with some of the hyperscale players in financial services or healthcare, et cetera, et cetera, because that will bear fruits in each and every one of our industries healthcare included.We do expect still some, I would say, modest - we still have modest expectations for healthcare in the coming year, but as we go through the course of the year, I'd like to think that we will start to make some progress.

And Keith, it's Karen. Let me just comment on the guidance. So for the first quarter, there is about 120 basis points of inorganic revenue baked into the guidance. That includes only the transactions that have already been completed. So that would include Code Zero, but not the EI Technologies transaction. As that has not closed yet. And then on a full-year basis, the guidance similarly, only for deal closed, is about a 100 basis points of revenue growth year-over-year. And that's down from, if you recall in 2019, the impact was about 200 basis points.

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

So on the last earnings call, you talked about a set of growth investments that would cost you about 150 basis points on margin. So I'm just looking at the further needs to build into the digital era. And besides the growth investments you've already articulated, are there additional growth related investments that you'd like to start making in 2020, such that if you had more room in your margin plan, are there additional investments that you would like to make besides the ones you've talked about?

It's Brian. So listen, the way I think about this, this year, if you normalize for, let's say, target bonuses as Karen has articulated in this call and prior calls, margins would have been roughly mid-15%. We've guided 16% to 17% for next year. So call the midpoint 16.5%. And we're assuming, by the way, next year that our bonus structure is a normalized part of our cost base. So hence organically, if you will, a 100 basis points of margin improvement year-over-year.Now, to your point, we've made reference before of $250 million plus of investment back into the business, a lot of that we called out explicitly like 500 headcount related to this revenue generation. We're doing more on sales and marketing, we're doing more on training, et cetera. So that's approximately 1.5%. So had we not done that, margins naturally would have been higher.But I'm not here to try to operationalize Cognizant from $17 billion to $20 billion. We're trying to make this a $25 billion, $30 billion, $35 billion company in the years ahead. And as part of that, I think, it's always wrong to look at one element on a continuum and trying to spotlight there and think, well, Brian had you not made those investments, could you deliver higher margin rates. And Rod, I know your investment thesis on the stock.I certainly know that's not your intent either behind your question. What I want to do is continue to reinvest into the business. So if we can prove a strong return on these investments we're making, including the sales force hiring, we get win rates higher. If we get a good pipeline that we convert to TCV and revenue, my inclination will be to continue to deliver and apply more of the upside back into the business and get us back into the Cognizant that was tried and tested for many, many years that made this company a great success story over the years.So that's the intention that we're setting out to deliver here in the next five years to 10 years. I'm confident we're doing the right thing. I will tell you, I'm really pleased and I spent a lot of my time with clients and partners. Our strategy is resonating. They see the renewed energy in the company. We have lots of work to do, but I'm very pleased and optimistic with the progress we're making and nonetheless that we still have more work to do in the year ahead.

Our next question is from the line of Jason Kupferberg with Bank of America. Please proceed with your question.

Just a two-pronged question on M&A. First, I know that EI Technologies you just said is not in the guide at this point, but assuming that closes in line with the timing you're expecting, roughly how much revenue would that add this year? And then can you just comment more broadly on your M&A strategy? It feels like the frequency and intensity of M&A is picking up a little bit, Brian, under your watch over the past years. Is that an accurate assessment in terms of where you intend to take that strategy as well? Obviously these kind of tuck-in size digital assets really stand out.

Yes. So listen, a good question. I wouldn't say to-date that the frequency has picked up that much. February 6, last year I was announced as the new CEO, so I started in April 1, and since then, we've done until this week two acquisitions, Contino and then prior to that Zenith Technologies. It just so happens that we were diligently working to review our strategy and finalize that and only with that behind us, that we absolutely go - now, let's go and put our balance sheet behind us to make sure we position ourselves strongly behind our strategic intent.And I as said earlier, that's a lot about protecting and optimizing the core including scaling internationally, but it's also about winning in key digital battlegrounds. And both acquisitions we made this week are firmly behind the cloud ambition that we have and you'll see more of the same on a go-forward basis behind each and every one of those digital battlegrounds.To be very clear, I view M&A as a means to an end to achieve the strategy. And while I'm pleased with the $2.2 billion we spent on share repurchases last year, you will see an absolute conviction to return capital to shareholders in the form of periodic dividend increases, as well as share repurchases, with a particular eye to offset dilution, but also potentially opportunistic. I will say that you will see us more towards accelerating M&A on a go-forward basis as long as it is supportive of the overall Company strategy.Share repurchases, while adding value, do not reposition the company against the strategic intent. M&A can enable us to do that. So with almost a year behind me, under my belt here in Cognizant, getting my head around the Company, the industry better, the operational rigor and control we have with the team around me, we're absolutely inclined to accelerate M&A a little more in the years ahead and make sure we use that as a means to accomplish overall Company strategy.With regards to the details of the EI Technologies, look we've entered into exclusive negotiations. Deal is not closed. It is material for France, but it's absolutely immaterial from a company perspective in terms of the dollar additions, so its basis points in terms of growth as opposed to anything else.But as I said, that with Code Zero is firmly behind our Salesforce ambition and we've been spending a lot of time. I personally have met with Salesforce CEO I think probably now five times in nine-months. And these are very symbolic moves to make sure that we strengthen our capabilities behind the Salesforce practice that we're building out.

We have time for one final question today it's coming from the line of Moshe Katri with Wedbush Securities.

Brian, you spoke about the need to potentially accelerate growth in International where you feel that the company is under-penetrated. Can you talk a bit about what sort of actions you are taking to get there maybe some color there would be helpful? Thanks.

Yes. It ultimately takes three portions, one is organic investments, one is partnership and another one is M&A. To be very clear is Zenith Technologies, which was at the intersection point of life sciences as one of our really strategic vertical, as well as IoT, was a perfect illustration of hitting many birds with one stone geographic expansion strengthening European footprint, aligning to our IoT digital priority and aligning to one of our strategic vertical.We also announced and closed Contino, which has got a very strong international footprint in the form of DevOp and data in Q4. So those are good illustrations, and of course, EI Technologies that we announced earlier today, will be another good illustration of strengthening our footprint in Europe, in this case in France.Organically, of course, we're strengthening our capabilities by building out more footprint, and supporting that footprint with better allocation of resources globally. As an example, we will modify our marketing mix this year to shift much more towards our international expansion. In prior years, out marketing spend was actually less in our international business than the actual current revenue mix, notwithstanding the fact that our growth opportunity was bigger there.So that seems to have been something that we wanted to rectify on a go-forward basis. And of course, part of the 500 revenue generating headcount that we've approved, a good chunk of that is in Europe and we want to continue to grow scale there to make sure we have a bigger footprint in those geographies.And then, on the partnership side, whether it's with AWS or Salesforce or otherwise, we've been building out those linkages throughout the world and Europe is no different, with a view to go to market in a digital ecosystem aligned country-by-country. I firmly view partners - Lisa asked the question earlier as an extension of our sales force. We are working on some core banking deals at this moment in time where the CEO of Terminus has actually actively in they engaged and brought us into deals and been a huge proponent of Cognizant, given our world-class capabilities behind seminars.So it's wonderful when a client here is not just for the CEO of Cognizant, but also the CEO in this case of terminals as to our capabilities and our referenceability in that regard. So we're full speed on Board full speed ahead to go scale or international capabilities. It was a little bit disappointing this last quarter, some with self-inflicted we get that right going forward, and it's certainly an area of focus for me, in the coming years.

Okay. With that, I think we will conclude today's call. Thank you all for your questions.

Thank you, this concludes today's Cognizant Technology Solutions fourth quarter 2019 earnings conference call. You may now disconnect.