Ladies and gentlemen, welcome to Cognizant Technology Solutions Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Thank you. And I will now turn the conference over to Katie Royce, Global Head of Investor Relations at Cognizant. Please go ahead.

Thank you, Devin and good afternoon, everyone. By now you should have received a copy of the earnings release and investor supplement for the Company's second quarter 2020 results. If you have not, copies are available on our website cognizant.com. The speakers we have on today's call are Brian Humphries, Chief Executive Officer; and 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. Today I'd like to cover four topics with you including, a summary of our second quarter performance, an update on our purpose, vision and strategy, some thought on the macro demand environments and evolving client needs and an update on our efforts to ensure the highest levels of resiliency to our clients. Before I proceed with our second quarter earnings call, I would like to add some commentary to today's announcement that Karen McLoughlin has decided to retire from Cognizant after more than eight years as Chief Financial Officer and an incredibly successful career in the company spanning almost 70 years. During this time Karen's role in helping Cognizant become one of the world's leading professional services companies cannot be overstated. It's been a privilege to work with Karen over the past 16 months and I am forever indebted for her assistance and leadership. Karen, on behalf of the entire Cognizant family, I'd like to thank you for your many contributions to Cognizant. You’ve done a fantastic job and can be proud of your accomplishments. We wish you nothing, but success in your future endeavors. We are excited to welcome Jan Siegmund to Cognizant. Jan has been accomplished executive with a wealth of experience in finance, strategy and general management. Jan will join us in the CFO role on September 01, 2020. Karen will continue in her capacity as CFO through August 31st and then remain with us in an advisory role through December 31, 2020, thereby ensuring a smooth CFO transition. Most recent Jan served as Chief Financial Officer of ADP, a role which he held for seven years. It follow that many of you will recognize his name and will experiencing engaging with Jan in the past. You'll understand therefore why…

Thank you, Brian and good afternoon, everyone. Before I start with my prepared remarks I'd like to take a moment to say that my 17 years at Cognizant have been more rewarding than I could have ever imagined. During my eight years as CFO, we have grown from 138,000 associate and about $6.1 billion in annual revenue to over 280,000 associate and over $16 billion in annual revenue today and I'm very proud of our achievements along the way. I've been honored and privileged to work alongside our associates around the world with passion and commitment to our client, our colleagues and our community never ceases to amaze me. This is a very special company with a wonderful future. I am so pleased to pass the baton to Jan Siegmund, who, as many of you know is a very accomplished executive. I am confident Jan will do a wonderful job working alongside Brian and the rest of the Cognizant team to lead the company forward. In the meantime, I look forward to working with Jan, Brian and the rest of the Cognizant team through the end of the year to ensure a smooth transition. Now let me turn to our results. Second quarter revenue of $4 billion declined 3.4% year-over-year or 2.5% in constant currency including a negative 120 basis points impact from the exit of certain content related services and a negative 90 basis points from the ransomware attack impact on fulfillment, the latter which was skewed towards our financial services and healthcare segment. After working through COVID-19 related fulfillment challenges early in the quarter, we saw improved momentum in May and June driven by double-digit growth in our digital service offerings, particularly in areas such as cloud and enterprise application services, IT modernization and digital engineering. Moving to…

[Operator Instructions] Our first question comes from the line of Bryan Bergin with Cowen. Please proceed with your question.

Hi, good afternoon. Thank you. Karen, I wanted to wish you good luck.

Thank you, Bryan.

So first question here. Within your outlook, are you assuming 2Q was a trough from a growth perspective across each industry segment? So any sub-verticals that may weaken further before improving? And I heard your comment here at the end, Karen, as far as bill days for 4Q. But really my question is more so from a demand standpoint.

Yeah. So I think -- and so I'll ask Brian to also chime in. But I think from a demand perspective, we're predicting relatively consistent trends as we move into the back part of the year as we saw in Q2. Certainly, as we said on the call, in our prepared remarks, travel and hospitality, retail and consumer goods, we expect will continue to be under significant pressure in the back part of the year. Similarly, we are not expecting any significant recovery in Financial Services, whether that be either banking or insurance. But I do think Healthcare, certainly, we continue to expect some improvement in Healthcare as we get into the back part of the year. We had talked earlier in Q1, obviously, that in Q2, barring what happened with COVID and the ransomware that the Healthcare payer business would have started to get stronger, and certainly we've seen strengthening in their pipeline. And then we would expect to see continued good growth from our manlog sort of manufacturing, energy and utilities business as well as life sciences and the tech business once you back out the content services business. So I think really generally speaking, the same trends that we've seen in recent months.

Okay. And then just on the bookings number. Can you give us a sense on how much of this is new versus renewals? And Brian, can you clarify the 25% figure you noted, I thought I heard it was ex-Samlink? Is that accurate? And is this an area as you think about bookings to something you intend to provide more disclosure on going forward?

Hi, Bryan. So yes, we grew bookings 14% in the first half, with particular strength in the digital, which grew almost 50% in the first half and then a few industries, like Healthcare, also grew very strong so too did insurance. And the reference we made to Samlink related to our global growth markets bookings, North America grew 25% plus in the first half, global growth markets was down. But in Q2, in the prior year period, we had our biggest deal in a long, long time. And I hate to normalize for bookings, and that's not how you should expect me to talk about very often, but were you to exclude that, global growth markets also grew 15% plus in the first half of the year and the total company grew 25%. Look, to be honest, when we start thinking about then the RAD model and then hunting versus farming, we actually feel very good about our momentum both in renewals as well as in new business. We've also clearly tracked the new hires of the 500 plus people, of which about two-thirds were quota-bearing and the rest were some ports. We see those to have been self-funding in the first half of this year and they're bringing through good TCV and decent margins, which more than covers the costs of those resources. So it gives us food for thought in terms of continuing to invest for growth on a go forward basis.

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

Hi, good evening. All the best, Karen. Can you talk a little bit about the contribution from the acquisitions. I'm thinking that Collaborative was on the $150 million per year range and Signature in the sort of the $50 million to $60 million range. Can you sort of -- what's baked in the guidance? And then my second question is, give us an update sort of how much M&A are you looking for as part of your plan to sort of grow from here? Thank you.

So I can take that, Ed, and then Brian can chime in about the future. But first of all, thank you for the nice comment. Inorganic revenue in the quarter was about two points, but Collaborative, as you know, didn't close until late in the quarter, so very small contribution in the quarter. We have not broken out the full year revenue from Collaborative, but obviously, that is baked into our guidance for the remainder of the year. And New Signature, again, we've signed it, but we have not closed and do not expect to close until later this quarter. So in terms of the back half of the year, we'll will have a very small immaterial impact on revenue. But Brian, perhaps, you want to talk about acquisitions going forward.

Yeah. So hi, Ed. So first of all, I don't really wake up in the morning and think about how many points of growth I want to achieve next year from M&A. I think about the portfolio and our strategy and where we have gaps and where there are logical plays that can complement what we're setting out to achieve. And as you know, first and foremost, our strategy is all about accelerating digital. And therefore, the five or so deals we've done have always been 100% aligned to digital, which is why I think we've been able to feel good about deploying capital, and the board obviously have been very supportive of us in that regard as well. I will continue to use M&A as a means to support the strategy. We will do it thoughtfully, of course. I don't want anybody feel as though we take anything for granted. But in the same vein, we are organically investing behind our strategic priorities. So while we've done a series of cloud acquisitions in the last year, we have also set aside tens of millions of dollars to invest in hyperscale partners and SaaS vendors with a view to accelerating or cloud practices.

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

Hi, good afternoon, and thanks for taking my question. First, congratulations, Karen. Of course, we will miss you. Brian, can you just comment based on what you're seeing with clients in the sales pipeline? How confident you are that the IT spending will remain strong as we sort of transition out of pandemic mode into recession mode? I mean, so far it's been just remarkably strong, but obviously, typically in a recession, it dips. So how -- what's your sort of confidence or how would you handicap that as you're looking out to the rest of the year? Thank you.

Yeah. Look, it's a broad question, Lisa, but macro demand for the services sector, as you know, came in stronger than expected in this earnings cycle. And I actually believe that within that, we as a company, are becoming much more competitive. And hopefully, our bookings trends and our win rates and qualified pipeline illustrate that's as indeed as our digital growth and our digital mix, which augurs well for our future. I'm seeing trends of substantial acceleration through the second quarter, both in terms of bookings and indeed in terms of revenue. I'm also seeing trends amongst clients where budgets are certainly being reduced in the run-off rate space, and therefore, pricing pressure follow. So of course, automation and efficiencies and industrialization is important as is knowing what to build yourself versus what to partner on. So clearly digital is accelerating and I actually believe that COVID will single-handedly meaningfully accelerate digital. And clients will realize that digital transformation is not one or two outliers in the portfolio, they fundamentally have to get through use cases and workflows and make sure that they digitize all of that for the benefit of their clients and indeed their employees. Digital for us grew, from a bookings point of view, 50% in the first half of the year. And what was very interesting for me, as you go through the data and interrogate it is that about 75% of our digital bookings in the quarter entered the pipeline since Q1, i.e., in the first six months of the year with about 50% of the bookings being created and closed in the same quarter. So there is tremendous velocity through the channel as well. I also think clients are looking at opportunities to consolidate vendors, certainly as they're looking for commercial constructs or…

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

Hi. Thank you very much. Brian or Karen, I'll direct this towards you. And I want to try to understand the puts and takes associated with the targeted operating margin of 15% for this year. And what I meant is just falling into three buckets. One is, are there still cost that's benefits are going to flow through from the 14% that you reported to get to that 15% number versus the second force, I think about as revenue variances that obviously benefit the bottom line versus the third dynamic, Brian, that you mentioned repeatedly was investing for the business. And so I'm just wondering what are the drivers? And part of the reason why I want to understand the second half dynamics, but also as a jumping-off point as we begin to think about calendar year '21? Thank you.

So I'll pitch upon Karen, if you will, the notion of investments. And Karen, if you want to touch upon then the dynamics in the second half guidance. Keith, we're not really thinking about '21 at this moment in time. Of course, we're doing a lot of work on it internally, but it's very hard to understand what's coming in the next six months, never mind the next 18 months. That being said, as ever, we will always focus on what we can control and inherent to that is our cost structure and making sure from a margin rate point of view, if the market is not volatile on the top-line, we should obviously do our best to optimize our margin rate. Specific to investments, yeah, listen, we are committed to winning and becoming preeminent in technical consulting and to be one of the leading professional services firms in the world. In order to do so, we have a series of transitions we have to make, scaling international markets, getting much more commercial coverage out there, continue to industrialize our delivery capabilities and globalizing the company as well as changing some of the brand attributes and a lot of that requires capabilities and skills. And then none of that is arguably more important than ensuring we accelerate our digital capabilities, which requires personalities, skills, talent, brand attributes, partnership ecosystem, coverage, not just from a general sales point of view, but also a specialist sales point of view. So we are committed to investing for the medium and long-term. As you know, I take my quarters very seriously. So we like to manage, I guess, our commitments in the short-term. But the fundamental principle we're setting out to achieve here is to accelerate on the medium term, the growth profile of the company to get back to what we've always been good at and inherent to that will be continued investments of the company. That's what we did and set out to achieve in 2020. Notwithstanding COVID and ransomware, we had still stayed true to our strategy of investing in digital, investing in sales coverage and so too, will you see us take the same principles into 2021. Karen, over to you for the second half guidance.

Sure. Thanks, Brian, and hi, Keith. So I think in terms of how we thought about the second half margin guidance, we said approximately 15% for the full year, which puts the second half at about 15.2%. And if you think about what happened in the first half of the year, Q2 margins came in at 14.1%, and then for the first half we were at 15.2%. As we look forward, and I think about this more sequentially as we get into the back part of the year, obviously the COVID -- any COVID fulfillment issues and the revenue impact from Maze are behind us, but we will continue to have remediation cost as we get into the back part of the year. We have wages and promotions, that as we said, will take place in as effective as of October, so that will certainly put pressure on the Q4 margins. And then obviously, we're not expecting a significant acceleration in revenue based on the guidance that we've provided on a sequential basis. So those are really the biggest pieces of this. And then additionally, obviously, we've got the acquisitions. So anytime we close an acquisition, there are obviously deal costs and integration costs and so forth, which while not individually material, certainly as we look forward sequentially into the back part of the year, just given the timing of the acquisitions, both when Collaborative closed late in Q2 as well as the New Signature deal in the back half of the year will put a little bit of pressure on those margins as we get into the back half of the year.

Our next question comes from the line of Moshe Katri with Wedbush Securities. Please proceed with your question.

Thanks. Great working with you, Karen, and best of luck. A couple of things. First, maybe to Brian. Are you comfortable that you're done with some of the actions that you wanted to take, I guess, on the sales front, on the executive team front? And maybe can you give us some color on where we are in terms of attrition more on the senior side of the headcount? Thanks.

Yeah. From an executive committee point of view, there are few more changes that are happening that we've spoken about previously. We are -- we've upgraded the profile of the managing director role in India to be a direct report to the executive committee, to me. And therefore, we have a search underway and that will ensure we have somebody based in India who will represent our 200,000 employees in India. We'd expect to fill that in the coming months. We also have a global growth markets interim leader at the moment who is doing a fantastic job for us. And we actually have signed somebody who will join the company in the foreseeable future. However, I am not today at liberty to announce who that person is. But that being said, the executive committee now is my team. We're fully onboard, fully committed, driving in the same direction. And I actually feel now I have a A Team, a world-class organization around me to bring this company forward. And I know, Jan has big shoes to fill from Karen, but he will step in and I think culturally will be a great fit for us. With regards to the rest of the organization, voluntary attrition has declined now to about 10.5%. And this is the fourth quarter in a row that we've had voluntary attrition declines. But in the same vein, what we have been doing very intentionally has been to continue to deploy much more of a performance orientation in the company, which means that we are now removing the underperformers on an annual basis. And then on top of that, given the volatility we've seen in the top-line, in the early part of this year, notably because of COVID, it goes without saying that we have responsibilities vis-a-vis, our shareholders, yes, to protect digital skills. But in the same vein, we also have to protect the bottom line by optimizing our team and our bench around the revenue curve. And that's why you've seen in recent quarters a disparity between total attrition levels versus voluntary attrition levels or involuntary levels. And if you look in the supplementary slides, we've actually now started breaking that item on a quarterly basis. So you will see a four quarter trend emerge. I feel very good about the direction we're taking the company. We have just completed actually, earlier this year, what we call Cognizant's People Engagement Survey. And actually, the survey results show that our results are very often better than industry across major categories and up in almost every category in the last two years. So I think morale is actually picking up. I think when we execute well, and I believe our employees were the heroes of this quarter, despite an extremely challenging environments, we executed well and delivered against our commitments, and I think success breeds success. So I'm feeling very good about our ability to continue to engage and motivate and attract world-class talent to Cognizant.

That's helpful. And then given the fact that digital is going to be one of those main drivers down the road, and you've indicated that you've had a pretty significant uptick in digital bookings here, I guess, for the first half of the year. Are you -- maybe we can get some more color on some of those wins. Are you kind of going head-to-head against some of the pure plays? Are you actually going back and getting some of these deals from existing customers? How does that -- how it's actually working?

Look, I've got to be honest. I feel really ecstatic about our momentum in digital. We're doing a tremendous job. I mean, first half bookings growth was fueled by digital engineering, AI and analytics, interactive, and indeed, our software-as-a-service offerings. And we are going head-to-head with the incumbents, be they integrated or portfolio companies or pure plays and winning more than our fair share. And if anything, what I'm finding is clients are highly receptive to our capabilities and to our portfolio, not all of them knew about that portfolio historically. And so, we're being much more aggressive in getting out there, marketing our digital capabilities and going to market with a broad partnership system. And of course, all of that leads to a wonderful outcome that the faster we grow digital, the bigger it becomes as a percentage of our revenue. And therefore, that pays dividends in terms of the overall future company CAGR prospects. So I truly feel we're in a wonderful position. And I feel very confident about our competitive dynamics. And we're happy to get in the boxing ring with any competitor. And I think we'll win more than our fair share.

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

Thank you so much. And Karen, wish you all the best. Thanks for the partnership after all these years. My question builds on what Moshe just asked. I'm just -- I'm curious with voluntary attrition trending better -- and thanks for the data, by the way. It sounds like you're mostly done with the headcount cuts. Can we say that the culture is in a good place here, Brian? And it's a hard question to answer, I know, but what I'm getting at is just this concept of transitioning to growth with the culture and we're seeing this growing divide across a lot of tech firms now where the culture between legacy and digital firms is quite stark. So where do you fall in that spectrum versus where you want to be? Is there a way to address that here on the call? Thanks.

Well, I think it goes without saying that if there ever is a growth culture and the company with a growth culture, it is Cognizant. And maybe in recent years we had lost our mojo a little bit, but this company is full of people who pride themselves in serving clients and actually outgunning the competition. And that's certainly how I feel we will continue to be focus in the years ahead. So I feel very good about our capabilities and very good about the culture, not just an aggressive culture, but also a culture of focus on client centricity and a culture of focus on continuous learning and making sure we have look wherewithal to go out and outcompete the competition. Again, I'm not at all concerned about that. I actually think the place where we have sharpened our pencils a little bit in the last year has been much more around partnering with the hyperscalers and making sure that as the world shifts to platform and micro services and open APIs, etc. that we are fully in ensconced with those characters and making sure that we are showing up to clients together. But generally, I feel as our culture is a winning culture, it's a growth culture and it's a culture that's always been about being a challenger and beating the competition. We certainly have strong credentials. I see that every single day when I talk to clients and I see a tremendous amount of receptivity to Cognizant's ambition to win in digital.

Our final question comes from the line of Rod Bourgeois with DeepDive Equity Research. Please proceed with your question.

Hey, Brian. So my question is simply, you're definitely feeling much better about bookings and competitiveness now than it appears you were a year ago. Can you just articulate what's the main change that's happened that's giving you this added confidence? How much of the change is the market turning maybe more in your favor vertically and with certain parts of digital? And how much of it is -- you talked about client centricity changing the culture and so on. Can you articulate what the main thing that's recently changed that's making your outlook on competitiveness sounds so much better?

Well, I think first of all, the quality of the dialog that we're having as an executive committee, the level of engagement, level of harmony at the executive team is now truly what I would term world-class. We are all in this together. We're all partnering and teaming and we've got the whole organization I think motivated to win. And I don't want to underestimate the benefit of having a focus on growth and a reinvigorated focus on client centricity. I think at the client partner level, we've had that over the years. But perhaps in more recent years, we had a number of distractions on the outside, and perhaps even some financial model changes that didn't allow us to do what I think we need to do. So I feel very good about the harmony of the team, the level of energy. And frankly, that is permeating throughout the entire organization. And there's just, again, once again somewhat of a feel good factor happening in Cognizant these days. I think also, we have better instrumentation in the business. I think we have got much more data now at our fingertips than we had a year ago and we've got a stronger partnerships than we had perhaps a year ago. And generally, I think this has not been an easy 15 months or 16 months, there's been a lot of work. And these last few months have been particularly challenging, as everybody can imagine given macro as well as micro elements that are at play, vis-a-vis, Cognizant. But -- and the other thing, digital is a bigger portion of the mix. And let's face it, that's where the growth is in the market. My board have been extremely supportive of our ambitions to scale there. The organic investments are for me and my leadership team to work through, but when it comes to deploying the balance sheet, we obviously have close communication and coordination with the board of directors. And we have been aggressively moving. And in turn, we have scaled out our capabilities meaningfully. And acquisitions like Collaborative Solutions work wonders because our pipeline immediately builds in some of our existing accounts. New signature, similarly, I think you'll see our ability to scale the Microsoft business practice rapidly. So I just think the portfolio is broader. The leadership team are more harmonious. There's more energy. And we're completely focused on winning again. And any external distractions over the last few years are 100% behind us at this moment in time.

Hi. This is Katie. I just want to say thank you all for joining and for your questions. I think that's all the time that we have for tonight.

Once again, thank you for joining us on today conference call. You may now disconnect your lines at this time and have a wonderful day.