Ladies and gentlemen, welcome to the Cognizant Technology Solutions Fourth Quarter 2022 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 Mr. Tyler Scott, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release and investor supplement for the company's fourth quarter and full year 2022 results. If you have not, copies are available on our website, cognizant.com. The speakers we have on today's call are Steve Rohleder, Chair of Cognizant's Board of Directors; Ravi Kumar, Chief Executive Officer; and Jan Siegmund, 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 or 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 like to now turn the call over to Steve. Please go ahead.

Thank you, Tyler, and thank you all for joining us today. Given the recent news, I wanted to join the call for this quarter to introduce myself and explain the changes we've recently announced. For those of you that don't know me, I'm Steve Rohleder, and I joined the Board as an Independent Director in March of 2022. Last month, I became Chair of Cognizant's Board of Directors. I previously spent 35 years at Accenture, where I served as Group Chief Executive of Health and Public Services, Chief Executive of North America and Chief Operating Officer. Today, I'd like to briefly discuss our recent CEO transition and the Board changes announced this afternoon supporting our ongoing Board refreshment process. I also want to explain why we're excited for Cognizant's next chapter. Ravi will then introduce himself and share his thoughts before Jan discusses our fourth quarter results in detail. We'll then proceed to Q&A. Regarding our CEO transition, as we announced a few weeks ago, the Board appointed Ravi Kumar to succeed Brian Humphries as CEO. Brian was a resilient leader providing a steady hand as he steered the company through various challenges, including the global pandemic. On behalf of the Board, management and all of our associates, I want to thank Brian for his contributions, which have helped to position Cognizant to capture a large growing market and fuel profitable revenue growth beyond our short-term challenges. We also appreciate that Brian will remain with the company as a special adviser until March to ensure a seamless transition. As part of the Board's strategy to help Cognizant achieve long-term sustainable growth, we also announced today a new Board appointment. Eric Branderiz, a proven financial executive and public company director with demonstrated experience supporting growth in technology and in the energy…

Thank you, Steve, for that very warm introduction. Good afternoon, everyone. My appointment as CEO is one of the proudest moments of my life. I'm excited as well as humbled by this opportunity to lead Cognizant, a company I've long admired, closely watched and competed against. As I've experienced, Cognizant has a diverse, highly skilled and a fully engaged Board. I'm grateful for the Board's trust and support and for their efforts to lay the groundwork for me and the company to flourish. I'm also very grateful to my predecessor, Brian Humphries, who led the evolution of Cognizant's business. He refreshed and broadened the strategy, extended the company's portfolio and drove the implementation of more rigorous systems and processes. With a very strong foundation in place, I'm not going back to the drawing board. Instead, I plan to move forward by building on and refining what already exists, which will include calibrating a thinking to a growth mindset. I want to see us offer the full breadth of our industry-specific solutions, whether developed organically or acquired through targeted acquisitions to a large installed base of clients and investor growth. A few days after my appointment, I participated in Cognizant's annual sales kickoff, which was held in Abu Dhabi. At the summit, 1,000 of our client-facing associates came together from around the world to take stock of all of what we have and what we need to accelerate growth. I was so deeply moved by the warmth and the enthusiasm I was greeted with. We set ourselves a goal to be an employer of choice, which we believe will be a pivot for growth. I plan to spend the next several months meeting with so many associates, clients, partners and shareholders as much as I can. I will listen carefully with…

Thank you, Ravi. And good evening, everyone. Fourth quarter and full year 2022 revenue were above the high end of the guidance range we provided on our third quarter earnings call in November and in line with the revised expectations we provided on January 12. Operating margin was negatively impacted by the previously disclosed noncash charge in the quarter, which I will cover in more detail later. [Indiscernible] of this charge, we were pleased with the continued progress towards our operating margin goals driven by commercial discipline, the depreciation of the Indian rupee and SG&A leverage. During the quarter, we made progress improving fulfillment, driven in part by a meaningful reduction in voluntary attrition, which declined to 19% on a quarterly annualized basis from 29% last quarter. This has allowed us to further decrease subcontracted usage and will enable us to put greater focus on driving improved commercial momentum in the quarters ahead. That said, the macro environment remains uncertain, and we continue to see pockets of weakness across several key verticals. Now moving on to the details for the quarter, fourth quarter revenue was $4.8 billion, representing an increase of 1.3% year-over-year or 4.1% in constant currency. Year-over-year growth includes approximately 40 basis points of growth from our acquisitions and a negative 60 basis points impact from the sale of Samlink completed at the beginning of 2022. Full year 2022 revenue was $19.4 billion, representing an increase of 5% year-over-year or 7.5% in constant currency. Year-over-year growth includes approximately 100 basis points of growth from acquisitions and a negative 60 basis points impact from the sale of Samlink. In Q4, digital revenue grew 4% year-over-year or 7% in constant currency. This resulted in full year 2022 digital revenue growth of 11% or 13% in constant currency. Digital mix was…

Thank you. [Operator Instructions] Our first question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.

Thank you and congratulations and welcome Ravi and Steve as well, congratulations to you. It’s good to reconnect. I think my first question is growth mindset, I get that, what are some of the explicit steps you might need to take incrementally to return to that growth mindset, if you can speak to your early view on what’s needed for sales investments, capability investments, just the G&A investment to chase large contract, things like that?

Thank you, Ashwin, for that question. Good to connect with you. Having spent a significant time in this industry. I would say to build a growth mindset. There are a number of things we need to do. But I would probably highlight three of them as I talked to today, the most important priorities. First and foremost, Cognizant has to be an employer of choice in this industry. What I mean by that is spending time in the IT industry, IT service industry, what I mean by that is, you create a self-reinforcing cycle with employees and clients. Sustained success is based on quality, dedication and scale of the talent, but client experience and employee experience are so tightly linked. We have the opportunity to build a self-reinforcing cycle with engaged talent with a passion for clients and the growth mindset, which attracts the best clients. So that whole flywheel has to be self-reinforcing. It means a lot of things, all the way from retention to upscaling to leadership development to infusing the project and program leaders. Remember, we are a company of projects and programs, which essentially means as they walk the corridors, they mine our clients, these project leaders. And equally, they talk to our associates every day. So that is a starting point of where you try to build a trust with that player and continue to create that self-reinforcing virtual [ph] cycle does they call it. I think you talked about large deals. I think large deals has investments on both sides, investments on dealmakers, deal influencers, ability to create that momentum by supporting our client initiatives in various transformational initiatives of theirs. But equally, at the back end, you have to start to work on solutioning capabilities and the ability to build a continuum all…

Got it. Thank you for the obvious thought you put into that answer. The second question is on the health care contract that was a problem in the quarter. Any granularity on sort of separating out the top and bottom line impact? And is it link-fenced now? In other words, at least the margin impact taking into account entirely in 4Q? Or is there a forward-looking impact? What’s the forward-looking revenue impact as well?

Yes. Maybe I'll take this. The Health Sciences clients that we have is a volume-based contract-based on the performance of that healthcare client. And so as the outlook of our client has changed, we had to adjust our revenue expectations going forward, which led then to a charge that we had to take for the expected lower volumes of incoming business to us in essence. And so the revenue impact is really going to be baked into our natural revenue guidance and forecast. So the charge that we have been taking is a discrete charge of $60 million. And that is a non-cash charge of prior capitalized implementation costs that we are now taken out of the contract. So future volume changes of this client could impact our calculation on these capitalized implementation costs as well. So there's still outlook. We obviously work very hard with our clients to drive great revenue growth as our interest and the clients' interest, but there is still a possibility of depending on the revenue development and the market performance of the client that we could be impacted in the future as well.

Okay. Thank you.

Next question comes from the line of Tien-Tsin Huang with JP Morgan. Please proceed with your question.

Hey thanks so much guys. Steve, nice to hear from you upfront. It's been a while. So I want to ask similar to Ashwin to Ravi here, just the goal of being the employer of choice and having a growth mindset makes a lot of sense. How long do you think it would take for – to change the culture to get to that level? I'm imagining it can't be a quick fix, but maybe you feel differently?

Yes, that's a good question. I'm just three weeks into the job, so I'm continuing to assess what we have, what we need to do. It's a virtuous self-reinforcing cycle. As I said, as much as it looks easy, it's – if you're on it it's easy, if you're not on it it's not. I'm going to be on a listening tour for the next few weeks and months, meeting clients, meeting associates, meeting partners and I'll come back with assessment. I think we have built enough both on client and employee infrastructure – organizational infrastructure. Now I have to refine it and reset it for growth; that's how I see it. I want to build on it. We're not going to go back to the drawing board. We want to build on what we have and refine it, and as we refine it, we'll make some changes and get there. With related to employees, a lot of our – two-thirds of our employees work out of India. So India is an integral part of our strategy to differentiate and I'm going to spend the next few weeks in India as well, later part of February. And I'm meeting 100 clients in 100 days, and this is a goal which I've set for my own self, so that you get to know the pulse, you get stay focused on large deals. In fact, I'm doing a monitoring of 10 large deals every week, and we are continuing to keep the focus on commercial momentum. So it's in flight transformation, as I call it. We'll continue to do this, but we will continue to look for the medium- to long-term sustained momentum, how you create it. That's how I see it. It's still a question I will probably like to answer once I spend a few more weeks going through the listening part.

Maybe I'll give Ravi also a tiny breather here and talk about the improved attrition, which is certainly one. First step into the right direction of becoming a more attractive employer and seeing it reflected. So clearly the dynamic in the labor markets have shifted also, but we also believe that the investments that we have made not only in regular and competitive merit cycles. You may remember we announced in the last quarter that we had accelerated our – this year's merit cycle to the second quarter, which is also important for the modeling of you guys into the second quarter. And that we have made huge progress on internal promotions, career pathing and learning and development and education, et cetera, as we have increased the number of our college graduates into our permit. So I think we have seen now a year of this permit from a nuts and bolts piece to stabilize, and we were very pleased with this relatively steep drop in nutrition in just one quarter. So we feel we are off to a good start here and then I think Ravi is focus on management, on enthusiasm, on growth and aligning will help. And then we'll kind of continue to refine those investments as we – as we need it. But I think we have already ended the year actually on that side with a big step forward.

And also the talent supply chain, we've been able to streamline it, strengthen it, and be ready for fulfillment and opportunities, which our clients are looking forward to.

Yes. Then if it's okay, if I can ask my follow-up then with – given that 10-point drop in attrition and you've still hired a little bit, the utilization rates did drop. So from a modeling perspective, not to bore people, but anything to guide us to in the short-term on some of those KPIs because they are moving quite a bit here?

We're obviously on this utilization metric also a very detailed answer. In this quarter, the slight decrease in utilization is actually more driven by the relative higher percentage of Gen Z hires into our pyramid, which are not as utilized in the young age and actually a return to normalized location taking compared to the COVID years of where we had abnormally low vacation period. So those were the biggest factors. So I wouldn't model too much into the utilization. Obviously, we need to drive growth and as we now have better fulfillment opportunities. But in this quarter, actually, some of the utilization, both were the 2 biggest factors, Tien-Tsin.

Okay. Perfect. Thank you Jan and Ravi. Appreciate that and look forward to get to the updates and safe and healthy travels. Thanks.

Thank you.

Our next question comes from the line of James Faucette with Morgan Stanley. Please proceed with your question.

Great. Thank you so much. I want to follow-up a little bit on Tien-Tsin's question as well as Jan and Ravi's comment is. If we look at Ravi, your initial stages of evaluating and listening to customers and what you're seeing in the business? And if I put that together with Jan's comments around investment that seems to be helping in attrition, et cetera. I'm wondering if the two of you can give some perspective on if there's anything that stands out right now as maybe points or places where there could have been under investment that you'd like to direct resources, and how does that impact the way that you're thinking about – you and the Board are thinking about the right objectives from a cost and profitability standpoint?

Ravi will chime in after I give you a more technical thing. I think as we mostly developing these plans, so we're clearly not at the end of the job, otherwise, we would give guidance today. But when you think large deals and calculate [indiscernible] of volume, I think deal characteristics of large deals have impact us on to our margin profile. And when we think about that, we need to build kind of our culture to leverage the relative margin strength if you exclude our health care charge and our pricing discipline and our delivery discipline, so that it allows us to be competitive for these larger deals that may cause dilution initially and then ramp up their full margin potential.

So I think the biggest impact practically would be to figure out for us, assuming the success in our large deal focus of what that would mean for the overall P&L structure. I think that's going to be the biggest one. There's going to be other investments that Ravi is going is going to be proposing, but I think we're going to be managing those a little bit more within the framework of an SG&A volume that we have already not to take that away from you, Ravi, but I think...

Jan, I think you've covered it so nicely. The one thing I would probably add is, I think in the last one to two years, Cognizant has invested heavily on organizational infrastructure to take large deals on a continuum, all the way from managed services to transaction-based pricing to cost takeout initiatives to digital transformation on that continuum. Now is the time to leverage those investments and take those large deals and be competitive on those large deals. So in a way, I would say a large part of it is done. We have now strengthened it, and we have oriented to the market for the opportunity, which is going to be presented to us. So that's broadly how I see it. As I keep saying, it isn't going back to the drawing board, but I'm going to build on what we have. We're going to refine it. As we refine it, we have to make some changes. We're going to make those changes, but we'll be agile enough in the market to seize the opportunities we have.

Appreciate that. And then just as a follow-up, Ravi, how are you thinking about and what's your perception of the current economic environment? Obviously, as you go to listen and engage with customers, et cetera. It seems like a big part of the challenge for you will be to parse out feedback that is specific to Cognizant and has impact on how you should move the business going forward on a sustained basis versus maybe some things that are happening near-term. So just wanted to hear how you're thinking about the current economic environment and the lens that you're looking at, at some of these comments or listening to these – some of these comments through?

Yes. That's a good question, and I'm going to leave it to Jan as well to chime in. Over the years, IT Services has gone from a homogeneous landscape to a heterogeneous landscape, they're different swim lanes. In an uncertain economic environment, if you're going to see discrete study spend being a little softer. Large digital transformation engagements will start to become moderate in nature. But equally, you're going to see cost takeout initiatives, vendor consolidation initiatives happening on the other hand, I would say that's a different swim lane. But enterprises are continuing to invest because not only are they investing on the consumer side of digital. We're also investing on the employee side of digital because employees today are interacting with their organizations on a digital platform because of the hybridness of how work and what places are. So I would say it's a duality of sorts. On one side, you would see softness. On the other side, you would see cost takeout and vendor consolidation kind of happening. Depending on the industry you look for, there are industries which have lesser tech and digital intensity and the industries which have higher tech and digital intensity. And some of them are using the digital platform to transform and deliver. In fact, I would say, digital technologies is almost like a deflationary force in an inflationary economy. So some of our clients are using digital technologies to do so. So it's a mixed bag. It's – because of the heterogeneity, I would say it's a mixed bag; each swim lane has its own characteristics. Jan, do you want to chime in?

Yes. Like I'll give you a little bit more background maybe about our bookings performance and what – where we have seen the softness and geographically and by digital. We actually did have a relatively solid bookings growth in digital this last year, and I'm giving you full year numbers. It's about I'm doing to 16%,18% or something growth in the digital bookings world. And then we saw actually the weakness by sector really concentrated, as you would expect in our Financial Services Group, where we saw the biggest decline in bookings volume for us. And as Ravi illustrated in his comments, it's kind of almost in every industry where we're trying to sort out, are we having some industries stronger and others, but we do have success stories by industry sector, and we have declines in industry. So it seems to be a little bit client specific of what we need to watch out. You have talked obviously, now looking forward; we entered the year with one of our largest pipelines ever, basically. And now a lot of work, which is for Ravi and the market teams to achieve, is to convert that pipeline into qualifications and into bookings numbers. So there seems to be a lot of opportunity still out in the thing. Obviously, the mix of that business is shifting a little bit. We hope we want to drive a higher participation and higher bookings number for larger deals, which we haven't had in the past, and that's the true revenue – incremental revenue opportunity that we're aiming to capture. And but there is still a very solid market out there. Even though the demand on a sequential basis has gotten a little bit softer, if that makes some sense. So we're going to be laser focused, obviously on converting this opportunity into bookings and then to revenues. But the underlying market remains attractive from my perspective.

That's great. Thanks for the color of Ravi and Jan.

Our next question comes from the line of David Togut with Evercore. Please proceed with your question.

Thanks so much. Congratulations, Ravi and Steve, it's really good to hear your voice again. Could you, Jan, give us some guardrails around gross margins in 2023? Not looking for anything precise, but maybe just help us think through some of the headwinds and tailwinds. You had a number of wage increases in 2022. Obviously, attrition coming down helps a little bit, but could you help us think about, what the gross margin range might be this year?

Well, that I cannot do. But I think I can give you a few, David. Good to hear your words as well. And I give you a few pointers that I think are kind of important for the modeling that we had prior disclosed. So the usual merit increase that puts negative pressure on our gross margin in the fourth quarter will now occur in the second quarter. So that will disturb a little bit our pattern of regular margin development throughout the year. If anything, I think, that second and third quarter traditionally our strongest margin patterns, and then we have the fourth quarter due to the marathon this will shift a little bit. But other than that, we are not really thinking that the general dynamic of our pattern of the year is going to shift in a very meaningful way. So I think it's like even our past performance, there's no guarantee for future performance. But like when I think about our year, I think that the principal dynamics remain unchanged. We have seen – maybe at this one point I'm getting into 12 years I look at Tyler, but we have seen actually moderate to good success with our pricing initiatives. And so the contribution of our pricing initiative to gross margin in the fourth quarter was the highest. So we have really built quarter-after-quarter momentum, and it was 50% higher than all other quarters together. And so we're entering with a little bit of pricing momentum, and then we have – that's going to be partially offset or offset by our wage increases in the second quarter. And then, as you said, coming up with some sort of metric, which of how attrition is going to help us in revenue or fulfillment and some efficiencies is going to be then for the modeling. That's what we also undergo right now, David. So I really don't have those numbers yet for you, and we're planning to do the update in the second quarter then.

Understood. Thanks so much.

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

Hey guys thanks for taking my call. Congrats to Steve and Ravi. Ravi, maybe just to start with you. I know you obviously need time to study the organization, develop your plan. But just at a high level, is your initial sense that Cognizant has more room to improve in terms of strategy or in terms of execution?

I think it's how I will see it. And of course, I need more time to assess, as I said, it's listening to with both clients and my associates. But the way I see it is the opportunity ahead of us. I think we have an extraordinary set of client relationships, extraordinary talent pool. Looking from outside, I've always been impressed by the entrepreneurs spirit, the bold ambitions and some very good teamwork at Cognizant. The one trend I've always been excited about at Cognizant is the confluence of industry vertical experience with technology expertise, a very unique spot. It's a very, very unique spot. So I could almost see this as a way forward strength and look for opportunities, which will fit the bill. And I do believe that we have been necessary organizational infrastructure to attract employees, retail employees, attract clients, retail clients and also win large deals. That is how I see it. The opportunity in front of us is what I'm kind of configuring and calibrating the firm to instead of actually looking back and looking forward and trying to gear up for that opportunity with what we have and what we need to build. So that's broadly what I can say. How I'm actually trying to approach my way forward direction.

Very helpful. And just as a follow-up, this might be more for Jan. But how close are we do you think to fully remediating the fulfillment issues? And then just any at least directional commentary you can give us on first quarter operating margins? Thanks guys.

Yes. The fulfillment in the fourth quarter really improved very meaningfully. And it gives us part, I think, is part of the optimism we have that we can go to clients and fulfill their needs, which as we have talked in the third and fourth quarter. In the third quarter was hampered at times by our resource constraints. So I think the improvement in fulfillment will translate into accelerated and enhanced sales activity. That's at least part of our thesis that we have. And it should obviously lower our need for recruiting and have efficiencies and the support for all of this will make clients happier and so forth. So the underlying engine running a smoother is really a shift compared to where we were throughout last fiscal year. So I think that's really – that gives us hope and gives us optimism for it. Yes, we're not giving a first quarter margins, unfortunately, so I can't help you with any direction there.

Yes. So just to add to what Jan said, I think my initial few weeks, one of the observations is I think our talent supply chain is grinding well or it's kind of moving very, very well. Some of the clients I've spoken to in the last few weeks have started to tell us that we can start to get some of the demand moved to Cognizant with the fulfillment starting to look good. So I'm actually very excited about the progress we've made on fulfillment. I think we are ready to take more, and we're ready to continuously sharpen the talent supply chain for the opportunity with our clients. Our clients are starting to see that traction with us.

Thanks for the comments.

Ladies and gentlemen, that is all the time we have for questions. I'd like to hand the call back to management for closing remarks.

Great. Thank you all for joining us. We look forward to catching up with you in a couple of months on our first quarter earnings call.

Thank you.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.