cognizant earnings call
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Cognizant earnings call

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Edtech 6 Stories. Sunday, 15 Jan, Read Complete Print Edition . New-age Cos Think Beyond Pay, Perks to Win Talent Wars While BharatPe co-founder Ashneer Grover announced this week that he would gift Mercedes cars to employees who stay on for five years at his new company, Third Unicorn, the mood among the rest of the startup ecosystem is one of caution and fiscal prudence.

Read More News on cognizant q3 revenue cognizant net profit cognizant revenue it recession cognizant cognizant annual guidance cognizant ceo brian humphries infosys wipro tcs. Stay on top of technology and startup news that matters. We've seen lengthening purchase cycles and clients being a little bit more judicious in their approval of expenses.

But Lisa, specific then to the impact of attrition, by definition, as people were dialoguing with clients around price increases, which has been one of our success stories, helping margin as well as addressing fulfillment challenges, it's made the commercial team somewhat hesitant, I think, to go to full mild to get the commercial momentum as strong as it needs to be in terms of increasing pipeline and accelerating bookings.

The good news now is we're quite vocal with our team in terms of what we're seeing from a resignation point of view, and therefore, what they should be anticipating in Q4 in terms of attrition levels, which, as I said, will be meaningfully down from Q3 voluntary attrition levels. So I think we're starting now to get confidence in the commercial team that the effort we put in place around attrition and resignations will kick in.

Of course, this is happening in a period where, as I said on the call, we're a little more concerned now than we were 3 months ago in terms of the macro demand environment.

So that's probably been a bigger impact on bookings this quarter than previously, the whole concern amongst the C-suite as they're scrutinizing their spends, and it's not clear to me that we'll see a budget flush at the end of this year, and we'll certainly anticipate furloughs at the end of this year relative to last year. So it remains to be seen, and we factor that into our guidance. Rod Bourgeois. Yes, guys. So I wanted to ask how you feel about your progress and outlook in ramping your international revenue presence and also ask if your efforts in doing that are detracting from your efforts in North America or perhaps it's just that your talent challenges are more pronounced in North America, but some color on that would be really helpful.

I'll start with the international business, which we expect very good things in the coming years there. We've refreshed some leadership over there. And examples of that include the U. And I've spent a large part of the last year going around the world, and I'm pretty optimistic around our potential internationally.

So we're optimistic, but I don't think it's really taken away from the North America focus. In North America, Canada there has been a shift more to offshore and nearshore.

We're building out capabilities in Canada. But candidly, a shiftwards India has happened -- our net headcount has materially increased in India on a year-over-year basis, and we have to -- we get the balance right. Three years ago, we were over visa-dependent in North America. We've been pretty disciplined around that as we are trying to land that at the right level. Candidly, what's been happening in the COVID world is that consulates internationally are just not functioning at the same capacity as before.

So we've gone a little bit too far in that. That's actually a good news, by the way, in terms of reversing that for our attrition because that has hurt our attrition in the last 2, 3 years as people saw that opportunity be less available than previously, but now that we're turning that tap on a little bit to rebalance subject to the capacity of consulates that will not only help onshore headcount, but actually help morale and I believe attrition in India as well.

So I think the U. And let me ask a follow-up about the cloud services market. We definitely see some changes happening in that market. So I just wanted to ask about what you're seeing in that market, particularly your competitive position there, and to what extent some of the recent macro challenges are having an impact in cloud or maybe not so much.

It'd be great to hear some thoughts on the cloud market. Well, first of all, I'll actually call out Prasad Sankaran, who joined us yesterday. He's got a very strong background in cloud as well. So he and I spent a great deal of time talking about where that market is going. And ironically, in the client Advisory Board last week, it was a great topic of discussion amongst [indiscernible] clients, too.

I would say our position with some of the packaged application players like Salesforce, Workday is stronger than it's been for many, many years. And so we feel good about the progress there. And yesterday's announcements of OneSource Virtual, we'll continue to strengthen our Workday practice. Vis-a-vis the hyperscalers, it's kind of interesting. I'm seeing clients clearly accelerate their path to the cloud.

Within the same vein, Rod, I see a growing dialogue amongst clients around how to optimize your position in the cloud as in lifting and shifting your current suite of applications [indiscernible] refactoring or another way transforming ahead of the transition.

It doesn't necessarily always give them the efficiencies that they would have anticipated. So there's more dialogue around how to optimize your cloud journey. And so what you'll see us do and continue to do is stand up capabilities and resources behind that, both in the cloud practice as well as in our consulting business as we anticipate cloud modernization journeys or tech more generally, you'll see us add more advisory capabilities there as well.

Our next question is from the line of Ashwin Shirvaikar with Citi. Ashwin Shirvaikar. Could you talk about what you're seeing in digital especially since you mentioned slowing discretionary spend? Is that more of a company-specific positional thing because other companies have spoken to have not yet mentioned anything specific with regards to digital specifically slowing down?

So look, the first thing on a broader macroeconomic environment, I'd say it's difficult to be conclusive or dogmatic at this moment in time. It's certainly what we determine uncertain macroeconomic environment. And the outlook is a little more concerning now than it was 3 months ago if you go back to my comments back then. We are seeing spend being reduced in lower priority projects or those with longer ROI periods. And even discretionary cloud projects, as I referenced in my prepared remarks, are selectively being reduced.

So we still have a lot of confidence in our digital capabilities. But some of the challenges we talked about, the macro demand picture as well as the U.

And then as you know, yesterday's announcement of acquisition -- the first acquisition we've done this year. So we haven't had the tailwind in our digital momentum that we had last year from the series of acquisitions that we did.

That being said, as Jan pointed out, we are committed to our framework of extending our portfolio in line with our digital strategy, and we have a series of deals in the pipeline as we speak. So I'd expect that ultimately over time to get back in a more normal course for us.

But I don't believe that all digital projects will be immune from the current economic climate. Jan Siegmund. And then aside from the demand -- market demand that Brian mentioned, obviously, in North America, we are also affected by our fulfillment challenges that we experienced in the quarter, which proportionately affected our non-digital business as well as our digital business. So it's a combination of all these factors together. And what does this lower exit growth rate for the year means in terms of achieving sort of your medium-term targets?

And I completely appreciate the high level of macro uncertainty that we have, but any granular thoughts how you're planning for next year would be greatly helpful. So that somehow I thought the question would come up. So number one is we feel our growth framework that we discussed with you in basically pretty much a year ago -- a little bit more than a year ago, it's still intact overall. Maybe a few pointers, the growth framework sees our revenue growth, which you're referring to, really in light of a CAGR over the 3-year time horizon.

So it's a compounding growth. And obviously, we didn't quite anticipate at that point the economic uncertainty that we're facing today, but we think the framework from our perspective is intact. And then we will give guidance, obviously, for next year in our fourth quarter earnings call in January.

The next question is from the line of Bryan Keane with Deutsche Bank. Bryan Keane. Just on the fulfillment challenges. I know that kind of was an issue last quarter, and it seems like it got pushed into this quarter. And then it's caused you to miss the guidance, that and maybe the economy a little bit. Just trying to figure out, is the fourth quarter -- how comfortable are you with those numbers? Or could we still have some of these fulfillment issues lingering that could push us into lowering expectations again?

Maybe I'll start with it, and then I'll let Brian jump on top of it. If we think about the mix, as Brian mentioned and as we talked on our call, had a number of factors in it in fulfillment as fairly logical. So we misjudged or we had a little bit -- a faster improvement in the third quarter of our attrition anticipated.

And then we have a number of initiatives in place to accelerate the hiring and inflow, in particular, in North America of initiatives. And here, we obviously saw the North American challenge to grow our headcount and initiatives in place from funding our -- and ensuring we have full capacity of hiring in place to focusing on the full fledge of resources available to us, including the utilization of subcontractors and accelerating visa travel and increasing employee referral product.

So we have a set of initiatives in place. These initiatives have shown initial momentum, but they were scaling slower than we anticipated. So we have now our trajectory, and we think we have appropriately risk-adjusted our new revenue guidance. So we're keenly interested to meet our own expectations in it. And so yes, we have assumed an improvement in attrition levels that we can see. But we also see now the trajectories of some of these initiatives clearer than we had in the third quarter.

And just to build on that, the resignations visibility we have, of course, differs in India versus North America because the notification period in India is slightly different. But I mentioned on last quarter's earnings call had July resignations have come down, and through August and September, it was a different plateau for those 3 months vis-a-vis the prior 6 months.

Certainly, if you look at India and indeed in North America and Europe, and in the first month of this quarter, it's continued to be low, in fact, lower than the prior 3 months. So we feel, Bryan, at this stage, very, very confident about that. And as Jan rightly pointed out, we wanted to give guidance that we want to make sure we can hit. So we're in the right zone. And then did the fulfillment challenges, especially in North America, will that be fixed by the time we get into the first quarter?

Or could it linger into the first half of the year? We're aiming. As I said on the -- in my prepared remarks, we're working through that as quickly as we can, and we aim to make progress in Q4, but I think it'll still be a headwind in Q4.

We hope by the time we come out of Q4, and we'll clearly give you an update on that in next quarter's earnings call, we hope to walk into Q1 with clear progress by the time we get through Q1. Next question is from the line of Bryan Bergin with Cowen. Unidentified Analyst. This is [indiscernible] on for Brian. Another one on the fulfillment issues. Could you give us some real-time insight into the nature of conversations that you're having with clients here?

And kind of just thinking about all the rebranding and repositioning that the company has done in recent years, what are you doing to reassure clients that you are a digital transformation partner of choice? We actually see different stories, to be honest, Brian, across different industries in terms of our evolution towards digital, even banking where we are, let's say, more heavily exposed to time and materials.

We have been able to increase our digital mix, and we've got some good proof points with certain clients. But more fundamentally, the journey we've been on is to extend the portfolio, which we've been successfully doing in recent years, and yesterday's announcement is another example of that. To try to complement that portfolio then with a client-facing team that is more consultative in nature as anybody who's overseen a sales force and knows that is a multiyear journey. So we're en route, but it takes time to get there.

To complement then that more consultative sales force with a more industry-aligned consulting business, and so that's the space we should continue to watch in Cognizant because we will invest behind that, and we've got strong leaders in the capacity these days and then just to make sure that there's increasing brand awareness around the capabilities we have and references and case studies that we can showcase.

Last week in the Client Advisory Board was a very good example of certain clients not really been truly aware of the extent of our portfolio. So we have [Technical Difficulty] ourself.

But I would say brand awareness of the company is up. Digital awareness is increasing, but it's a multiyear journey, and we're in the middle of all of that. And it starts with our client-facing teams and our delivery capabilities and our partnerships.

And I certainly see in dialogue, with some of our key packaged application partners like Salesforce and SAP, growing recognition that we are getting stronger. That's helpful.

And just a follow-up. The forward-looking attrition commentary is encouraging. Perhaps you can share updated views here and the time line for when [indiscernible] is more in a steady state mode as it relates to attrition. I think it's very hard to really be precise on that, Bryan. There's just so much going on in today's world. We've gone through a period of pretty significant disconnect between demand supply on key labor -- key digital skills. We're going through a hybrid work environment as a society where, arguably, people are less entrenched or engaged with companies as they work remotely.

And now we've gone through a very different scenario that the economy is uncertain, slowing. And people are -- recruiters have been laid off across the globe.

We're seeing in certain companies, people are being laid off. And so the market is suddenly perhaps less hot than it was previously. And that can also have an immediate impact on attrition trends and voluntary resignations in particular.

So we will see where water find its own level over time. I'm encouraged by our specific actions that we've taken. Jan and I have also built that into our financial plan.

So we have, notwithstanding a slowing, I would say, labor markets, we know that we want to invest on a sustainable basis in our employees in the years to come, and we factored that into our multiyear financial framework, and that will help increase our relative compensation vis-a-vis peers.

And simultaneously, we're doing everything we can around training and development and career path and employee value proposition. So I'm not sure when it normalizes to a new norm. I still believe there will be a new norm, and we won't go back to historical levels. And I think as a society at large, we'll probably see attrition slow across the industry in Q4 and beyond. But time will tell.

Our next question is from the line of James Faucette with Morgan Stanley. James Faucette. In terms of skills and looking at kind of -- as that relates to fulfillment, where are you seeing the most challenges in terms of finding the appropriate people and getting them into your fulfillment capabilities right now?

And how are you thinking about the pyramid itself as it relates to solving for that? And I'm just wondering how that then impacts the you think about financial guidance? Kind of a complicated question, but hopefully, that's clear. I mean there's -- it's actually quite nuanced because, first of all, our headcount has materially increased year-over-year, but most of the increase has been in India.

So by definition, then you have different bill rates. Within India, the lower levels of our pyramid are actually a fatter for lack of a better word than they were in the last few years. And that's because if you go back this year, we'll bring in about 40, graduates, 45, last year, 33, the year before, about 17, the year, less than 10, We had been too narrow as a period previously.

We've done a good job, I think, addressing that. And that afforded us the opportunity to have more upward momentum in the company, which is one of the many factors that has helped us actually drive margin expansion year-over-year and sequentially in both Q2 and Q3. And -- but James, the fundamental element in terms of the demand supply economic imbalance and key digital scales was heavily related to skills related to all hyperscalers, things like Salesforce, [indiscernible] full stack engineers.

I mean they've been probably the hottest parts of the market and there's been very irrational behavior, I would argue, over the last 18 months in terms of comp increases that went in, in glove with that. That's where we've seen the hottest challenges. In terms of the absolute attrition, it's fundamentally been in India and at the lower levels of the pyramid. Are those accelerating? Are they going to be permanent? I guess should we expect 2 cycles a year?

That's maybe for me to answer. So effectively, our acceleration of our typical merit cycle that we're just experiencing in the fourth quarter and moving it up to the second quarter has really -- a main reason for it is to better align our HR processes, evaluation processes and reward processes together. So it is a benefit from a talent management perspective to have our merit increase in the second quarter. So that's really a very important driver of it.

And second important driver is obviously because we're accelerating the second -- this merit cycle by 2 quarters, we will incur a onetime shift of compensation by -- to our merit increase by 2 quarters forward. And that's going to be a onetime effect only because we're staying with an annual merit increase process. So in , the normal cycle will be 4 quarters later again in the second quarter of the year.

So we are capturing basically, I think, here an opportunity to improve our talent management processes, but also allows -- which also allows us to drive a faster compensation increase to our associates, which we think is timely because we really do want to be focused on attrition, and we anticipate that, that will have a positive impact on attrition, even though hard to measure, but we think it will send a positive signal of our commitment to our associates to be competitive on compensation and benefits.

Tien-Tsin Huang. Just thinking about the knock-on effects of the fatter pyramid plus the attrition. Just -- is there an impact there on your ability to capture price or even be competitive on pursuing new work bookings, that sort of thing?

Just trying to understand sort of the collateral impact because you're seeing some of that. So what we -- maybe I'll talk a little bit about our overall maybe gross margin development, kind of what you're focusing on, Tien-Tsin, here is we did see, obviously, a decline, but I think the relative performance overall compared to the [indiscernible] has been relatively good. And so a few factors I want to point out. When we talk about pricing, I think we need to kind of -- in particular, now that we have been added for a little while, think about them as a regular contractual increase, pricing increases with our clients, but also a discipline to price our business appropriately in the market.

And with both of these things, we have seen slow start in the fiscal year. And now we have seen steady improvement and compounding impact of those initiatives. So that has been getting better and has helped us on the relative gross margin performance. Also, the shift to the -- in our pyramid has been positive. We have been able to, to a large degree, offset the impact of comp and benefit increases by streamlining our pyramid and focusing on a slimmer permit, as mentioned, and that paired this promotion opportunities, which are positive, our associates, I think, we'll have over the next couple of years, as that is still scaling and maturing, a positive impact on how we price and how we win deals.

So we're feeling, I think, good -- well, we're feeling good about the improvements we're making of how we manage the business opportunities. It's a thoughtful process. It allows us actually also to make our strategic best moving forward. I think our margin profile is in good shape, and that should offer us opportunities to make our strategic bets where we want to go and grow faster revenues on a much more solid base than we are today. The only thing I would add there, Tien-Tsin, is I don't think we were doing anything except correcting what was an overly narrow pyramid back in the day.

And on the contrary, I think because we had somewhat canceled the college intake in prior years, it led us having folks further up the pyramid doing work at lower billable rates than were optimal.

So I think what we've done in India is appropriate, and it's more in line with industry rates based on the dialogue I have with those from other companies. Where we have to do a better job on campus and college graduates, I think, is both onshore in Europe and Asia as well as in North America, where we are not adequately getting after the market opportunity there. It's -- obviously, there is a war on talent still. So we have to look at vocational colleges and not just the classic places as well, and that's an area of focus we'll have.

Fortunately, with Ravi coming on board in North America, he has run a play there previously, which we will obviously aim to replicate over here. And that can help our pyramid. But generally, I feel good about our skills in our pyramid. I think we corrected something that was mis-skewed. And I don't want anybody to get off the call worried about our skill set in our pyramid where we've got very talented employees, and I feel good about that.

Just quickly, if you don't mind, a quick follow-up, just on the capital allocation front. I have to ask a capital allocation question.

Just with the buyback of the authorization here, just your appetite to back stock. I know you talked about the acquisition you just announced. But just thinking about buyback here at this point in the cycle.

That's the general philosophy that we've been following with no intent to build up cash on our balance sheet. And so that flexibility is in the model.

So it's -- this we announced the deal, but compared to last quarter, we really moved the needle forward on our business development activity with very talented team.

And we see also, I think, a little bit more realistic behavior in the market relative to acquisition opportunities. So I think for us, the goal would be to get back to normal to the capital allocation framework that we have been talking about for a long time.

It's going to be the mindset for us going forward. Next question is from the line of Darrin Peller with Wolfe Research. Darrin Peller. Can we maybe go into a little bit more detail on the vertical specifically and just help us understand -- maybe starting with Financial Services, but any other one you think makes sense. Really, what you believe is the driving for some of the change in outlook, whether it's, number one, macro and just pure simple demand and bookings; number two, headcount -- your billable headcount available; and number three, is there anything else that's maybe, like, either tech stack or capability or competitive dynamics?

I'm just really trying to parse out what's driving the story and what can be improved on your own doing versus macro.

Look, it's a good question. It grew about 1. And that's the low industry. We've got a lot of work to do there, as we've cited previously. There is a slowdown in certain segments there we've touched upon in the prepared remarks, the mortgage segment in particular. I'm also seeing some of the C-suite there talking about, let's say, tightening their belts as they go into the fourth quarter and beyond.

So I think that will be a tougher sector for others as well. But fundamentally, our bigger issue there that we're evolving from, it's not just the folks we have in front of those clients, but also how the clients think of us. We've very often trained them to think of us as a provider of resources. I'm pleased to say that our digital mix in Financial Services is improving, and our staff -- or time and material mix is not improving enough yet.

So we have to get that balance right in the period to come. Insurance, we're doing better than banking, and that's obviously in banking area we've got to go fix.

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Three years ago, we were over visa-dependent in North America. We've been pretty disciplined around that as we are trying to land that at the right level. Candidly, what's been happening in the COVID world is that consulates internationally are just not functioning at the same capacity as before.

So we've gone a little bit too far in that. That's actually a good news, by the way, in terms of reversing that for our attrition because that has hurt our attrition in the last 2, 3 years as people saw that opportunity be less available than previously, but now that we're turning that tap on a little bit to rebalance subject to the capacity of consulates that will not only help onshore headcount, but actually help morale and I believe attrition in India as well.

So I think the U. And let me ask a follow-up about the cloud services market. We definitely see some changes happening in that market. So I just wanted to ask about what you're seeing in that market, particularly your competitive position there, and to what extent some of the recent macro challenges are having an impact in cloud or maybe not so much.

It'd be great to hear some thoughts on the cloud market. Well, first of all, I'll actually call out Prasad Sankaran, who joined us yesterday. He's got a very strong background in cloud as well. So he and I spent a great deal of time talking about where that market is going. And ironically, in the client Advisory Board last week, it was a great topic of discussion amongst [indiscernible] clients, too. I would say our position with some of the packaged application players like Salesforce, Workday is stronger than it's been for many, many years.

And so we feel good about the progress there. And yesterday's announcements of OneSource Virtual, we'll continue to strengthen our Workday practice.

Vis-a-vis the hyperscalers, it's kind of interesting. I'm seeing clients clearly accelerate their path to the cloud.

Within the same vein, Rod, I see a growing dialogue amongst clients around how to optimize your position in the cloud as in lifting and shifting your current suite of applications [indiscernible] refactoring or another way transforming ahead of the transition.

It doesn't necessarily always give them the efficiencies that they would have anticipated. So there's more dialogue around how to optimize your cloud journey. And so what you'll see us do and continue to do is stand up capabilities and resources behind that, both in the cloud practice as well as in our consulting business as we anticipate cloud modernization journeys or tech more generally, you'll see us add more advisory capabilities there as well.

Our next question is from the line of Ashwin Shirvaikar with Citi. Ashwin Shirvaikar. Could you talk about what you're seeing in digital especially since you mentioned slowing discretionary spend? Is that more of a company-specific positional thing because other companies have spoken to have not yet mentioned anything specific with regards to digital specifically slowing down?

So look, the first thing on a broader macroeconomic environment, I'd say it's difficult to be conclusive or dogmatic at this moment in time.

It's certainly what we determine uncertain macroeconomic environment. And the outlook is a little more concerning now than it was 3 months ago if you go back to my comments back then. We are seeing spend being reduced in lower priority projects or those with longer ROI periods. And even discretionary cloud projects, as I referenced in my prepared remarks, are selectively being reduced.

So we still have a lot of confidence in our digital capabilities. But some of the challenges we talked about, the macro demand picture as well as the U.

And then as you know, yesterday's announcement of acquisition -- the first acquisition we've done this year. So we haven't had the tailwind in our digital momentum that we had last year from the series of acquisitions that we did.

That being said, as Jan pointed out, we are committed to our framework of extending our portfolio in line with our digital strategy, and we have a series of deals in the pipeline as we speak.

So I'd expect that ultimately over time to get back in a more normal course for us. But I don't believe that all digital projects will be immune from the current economic climate. Jan Siegmund. And then aside from the demand -- market demand that Brian mentioned, obviously, in North America, we are also affected by our fulfillment challenges that we experienced in the quarter, which proportionately affected our non-digital business as well as our digital business.

So it's a combination of all these factors together. And what does this lower exit growth rate for the year means in terms of achieving sort of your medium-term targets?

And I completely appreciate the high level of macro uncertainty that we have, but any granular thoughts how you're planning for next year would be greatly helpful. So that somehow I thought the question would come up.

So number one is we feel our growth framework that we discussed with you in basically pretty much a year ago -- a little bit more than a year ago, it's still intact overall. Maybe a few pointers, the growth framework sees our revenue growth, which you're referring to, really in light of a CAGR over the 3-year time horizon.

So it's a compounding growth. And obviously, we didn't quite anticipate at that point the economic uncertainty that we're facing today, but we think the framework from our perspective is intact. And then we will give guidance, obviously, for next year in our fourth quarter earnings call in January. The next question is from the line of Bryan Keane with Deutsche Bank. Bryan Keane. Just on the fulfillment challenges. I know that kind of was an issue last quarter, and it seems like it got pushed into this quarter.

And then it's caused you to miss the guidance, that and maybe the economy a little bit. Just trying to figure out, is the fourth quarter -- how comfortable are you with those numbers?

Or could we still have some of these fulfillment issues lingering that could push us into lowering expectations again? Maybe I'll start with it, and then I'll let Brian jump on top of it. If we think about the mix, as Brian mentioned and as we talked on our call, had a number of factors in it in fulfillment as fairly logical. So we misjudged or we had a little bit -- a faster improvement in the third quarter of our attrition anticipated.

And then we have a number of initiatives in place to accelerate the hiring and inflow, in particular, in North America of initiatives.

And here, we obviously saw the North American challenge to grow our headcount and initiatives in place from funding our -- and ensuring we have full capacity of hiring in place to focusing on the full fledge of resources available to us, including the utilization of subcontractors and accelerating visa travel and increasing employee referral product.

So we have a set of initiatives in place. These initiatives have shown initial momentum, but they were scaling slower than we anticipated. So we have now our trajectory, and we think we have appropriately risk-adjusted our new revenue guidance.

So we're keenly interested to meet our own expectations in it. And so yes, we have assumed an improvement in attrition levels that we can see. But we also see now the trajectories of some of these initiatives clearer than we had in the third quarter. And just to build on that, the resignations visibility we have, of course, differs in India versus North America because the notification period in India is slightly different. But I mentioned on last quarter's earnings call had July resignations have come down, and through August and September, it was a different plateau for those 3 months vis-a-vis the prior 6 months.

Certainly, if you look at India and indeed in North America and Europe, and in the first month of this quarter, it's continued to be low, in fact, lower than the prior 3 months. So we feel, Bryan, at this stage, very, very confident about that. And as Jan rightly pointed out, we wanted to give guidance that we want to make sure we can hit. So we're in the right zone. And then did the fulfillment challenges, especially in North America, will that be fixed by the time we get into the first quarter?

Or could it linger into the first half of the year? We're aiming. As I said on the -- in my prepared remarks, we're working through that as quickly as we can, and we aim to make progress in Q4, but I think it'll still be a headwind in Q4.

We hope by the time we come out of Q4, and we'll clearly give you an update on that in next quarter's earnings call, we hope to walk into Q1 with clear progress by the time we get through Q1. Next question is from the line of Bryan Bergin with Cowen. Unidentified Analyst. This is [indiscernible] on for Brian. Another one on the fulfillment issues. Could you give us some real-time insight into the nature of conversations that you're having with clients here? And kind of just thinking about all the rebranding and repositioning that the company has done in recent years, what are you doing to reassure clients that you are a digital transformation partner of choice?

We actually see different stories, to be honest, Brian, across different industries in terms of our evolution towards digital, even banking where we are, let's say, more heavily exposed to time and materials. We have been able to increase our digital mix, and we've got some good proof points with certain clients. But more fundamentally, the journey we've been on is to extend the portfolio, which we've been successfully doing in recent years, and yesterday's announcement is another example of that.

To try to complement that portfolio then with a client-facing team that is more consultative in nature as anybody who's overseen a sales force and knows that is a multiyear journey. So we're en route, but it takes time to get there. To complement then that more consultative sales force with a more industry-aligned consulting business, and so that's the space we should continue to watch in Cognizant because we will invest behind that, and we've got strong leaders in the capacity these days and then just to make sure that there's increasing brand awareness around the capabilities we have and references and case studies that we can showcase.

Last week in the Client Advisory Board was a very good example of certain clients not really been truly aware of the extent of our portfolio. So we have [Technical Difficulty] ourself. But I would say brand awareness of the company is up. Digital awareness is increasing, but it's a multiyear journey, and we're in the middle of all of that.

And it starts with our client-facing teams and our delivery capabilities and our partnerships. And I certainly see in dialogue, with some of our key packaged application partners like Salesforce and SAP, growing recognition that we are getting stronger. That's helpful. And just a follow-up. The forward-looking attrition commentary is encouraging. Perhaps you can share updated views here and the time line for when [indiscernible] is more in a steady state mode as it relates to attrition.

I think it's very hard to really be precise on that, Bryan. There's just so much going on in today's world. We've gone through a period of pretty significant disconnect between demand supply on key labor -- key digital skills. We're going through a hybrid work environment as a society where, arguably, people are less entrenched or engaged with companies as they work remotely. And now we've gone through a very different scenario that the economy is uncertain, slowing.

And people are -- recruiters have been laid off across the globe. We're seeing in certain companies, people are being laid off. And so the market is suddenly perhaps less hot than it was previously. And that can also have an immediate impact on attrition trends and voluntary resignations in particular. So we will see where water find its own level over time.

I'm encouraged by our specific actions that we've taken. Jan and I have also built that into our financial plan. So we have, notwithstanding a slowing, I would say, labor markets, we know that we want to invest on a sustainable basis in our employees in the years to come, and we factored that into our multiyear financial framework, and that will help increase our relative compensation vis-a-vis peers.

And simultaneously, we're doing everything we can around training and development and career path and employee value proposition. So I'm not sure when it normalizes to a new norm. I still believe there will be a new norm, and we won't go back to historical levels.

And I think as a society at large, we'll probably see attrition slow across the industry in Q4 and beyond. But time will tell. Our next question is from the line of James Faucette with Morgan Stanley. James Faucette.

In terms of skills and looking at kind of -- as that relates to fulfillment, where are you seeing the most challenges in terms of finding the appropriate people and getting them into your fulfillment capabilities right now? And how are you thinking about the pyramid itself as it relates to solving for that? And I'm just wondering how that then impacts the you think about financial guidance? Kind of a complicated question, but hopefully, that's clear.

I mean there's -- it's actually quite nuanced because, first of all, our headcount has materially increased year-over-year, but most of the increase has been in India. So by definition, then you have different bill rates. Within India, the lower levels of our pyramid are actually a fatter for lack of a better word than they were in the last few years. And that's because if you go back this year, we'll bring in about 40, graduates, 45, last year, 33, the year before, about 17, the year, less than 10, We had been too narrow as a period previously.

We've done a good job, I think, addressing that. And that afforded us the opportunity to have more upward momentum in the company, which is one of the many factors that has helped us actually drive margin expansion year-over-year and sequentially in both Q2 and Q3. And -- but James, the fundamental element in terms of the demand supply economic imbalance and key digital scales was heavily related to skills related to all hyperscalers, things like Salesforce, [indiscernible] full stack engineers.

I mean they've been probably the hottest parts of the market and there's been very irrational behavior, I would argue, over the last 18 months in terms of comp increases that went in, in glove with that. That's where we've seen the hottest challenges. In terms of the absolute attrition, it's fundamentally been in India and at the lower levels of the pyramid.

Are those accelerating? Are they going to be permanent? I guess should we expect 2 cycles a year? That's maybe for me to answer. So effectively, our acceleration of our typical merit cycle that we're just experiencing in the fourth quarter and moving it up to the second quarter has really -- a main reason for it is to better align our HR processes, evaluation processes and reward processes together.

So it is a benefit from a talent management perspective to have our merit increase in the second quarter. So that's really a very important driver of it. And second important driver is obviously because we're accelerating the second -- this merit cycle by 2 quarters, we will incur a onetime shift of compensation by -- to our merit increase by 2 quarters forward. And that's going to be a onetime effect only because we're staying with an annual merit increase process.

So in , the normal cycle will be 4 quarters later again in the second quarter of the year. So we are capturing basically, I think, here an opportunity to improve our talent management processes, but also allows -- which also allows us to drive a faster compensation increase to our associates, which we think is timely because we really do want to be focused on attrition, and we anticipate that, that will have a positive impact on attrition, even though hard to measure, but we think it will send a positive signal of our commitment to our associates to be competitive on compensation and benefits.

Tien-Tsin Huang. Just thinking about the knock-on effects of the fatter pyramid plus the attrition. Just -- is there an impact there on your ability to capture price or even be competitive on pursuing new work bookings, that sort of thing? Just trying to understand sort of the collateral impact because you're seeing some of that.

So what we -- maybe I'll talk a little bit about our overall maybe gross margin development, kind of what you're focusing on, Tien-Tsin, here is we did see, obviously, a decline, but I think the relative performance overall compared to the [indiscernible] has been relatively good. And so a few factors I want to point out. When we talk about pricing, I think we need to kind of -- in particular, now that we have been added for a little while, think about them as a regular contractual increase, pricing increases with our clients, but also a discipline to price our business appropriately in the market.

And with both of these things, we have seen slow start in the fiscal year. And now we have seen steady improvement and compounding impact of those initiatives. So that has been getting better and has helped us on the relative gross margin performance. Also, the shift to the -- in our pyramid has been positive. We have been able to, to a large degree, offset the impact of comp and benefit increases by streamlining our pyramid and focusing on a slimmer permit, as mentioned, and that paired this promotion opportunities, which are positive, our associates, I think, we'll have over the next couple of years, as that is still scaling and maturing, a positive impact on how we price and how we win deals.

So we're feeling, I think, good -- well, we're feeling good about the improvements we're making of how we manage the business opportunities. It's a thoughtful process. It allows us actually also to make our strategic best moving forward. I think our margin profile is in good shape, and that should offer us opportunities to make our strategic bets where we want to go and grow faster revenues on a much more solid base than we are today. The only thing I would add there, Tien-Tsin, is I don't think we were doing anything except correcting what was an overly narrow pyramid back in the day.

And on the contrary, I think because we had somewhat canceled the college intake in prior years, it led us having folks further up the pyramid doing work at lower billable rates than were optimal. So I think what we've done in India is appropriate, and it's more in line with industry rates based on the dialogue I have with those from other companies. Where we have to do a better job on campus and college graduates, I think, is both onshore in Europe and Asia as well as in North America, where we are not adequately getting after the market opportunity there.

It's -- obviously, there is a war on talent still. So we have to look at vocational colleges and not just the classic places as well, and that's an area of focus we'll have. Fortunately, with Ravi coming on board in North America, he has run a play there previously, which we will obviously aim to replicate over here.

And that can help our pyramid. But generally, I feel good about our skills in our pyramid. I think we corrected something that was mis-skewed. And I don't want anybody to get off the call worried about our skill set in our pyramid where we've got very talented employees, and I feel good about that. Just quickly, if you don't mind, a quick follow-up, just on the capital allocation front.

I have to ask a capital allocation question. Just with the buyback of the authorization here, just your appetite to back stock. I know you talked about the acquisition you just announced. But just thinking about buyback here at this point in the cycle. That's the general philosophy that we've been following with no intent to build up cash on our balance sheet.

And so that flexibility is in the model. So it's -- this we announced the deal, but compared to last quarter, we really moved the needle forward on our business development activity with very talented team. And we see also, I think, a little bit more realistic behavior in the market relative to acquisition opportunities. So I think for us, the goal would be to get back to normal to the capital allocation framework that we have been talking about for a long time.

It's going to be the mindset for us going forward. Next question is from the line of Darrin Peller with Wolfe Research. Darrin Peller. Can we maybe go into a little bit more detail on the vertical specifically and just help us understand -- maybe starting with Financial Services, but any other one you think makes sense.

Really, what you believe is the driving for some of the change in outlook, whether it's, number one, macro and just pure simple demand and bookings; number two, headcount -- your billable headcount available; and number three, is there anything else that's maybe, like, either tech stack or capability or competitive dynamics?

I'm just really trying to parse out what's driving the story and what can be improved on your own doing versus macro. Look, it's a good question. It grew about 1. And that's the low industry.

We've got a lot of work to do there, as we've cited previously. There is a slowdown in certain segments there we've touched upon in the prepared remarks, the mortgage segment in particular.

I'm also seeing some of the C-suite there talking about, let's say, tightening their belts as they go into the fourth quarter and beyond. So I think that will be a tougher sector for others as well.

But fundamentally, our bigger issue there that we're evolving from, it's not just the folks we have in front of those clients, but also how the clients think of us.

We've very often trained them to think of us as a provider of resources. I'm pleased to say that our digital mix in Financial Services is improving, and our staff -- or time and material mix is not improving enough yet.

So we have to get that balance right in the period to come. Insurance, we're doing better than banking, and that's obviously in banking area we've got to go fix. In Health Services, we feel very good about our position on a relative basis or a competitive basis in both payer provider as well as life sciences. That's one of our core franchises, I would say, as a company. The business grew about 5. So it's catching up on Financial Services overall. We've had good momentum in the [indiscernible] business in the last few years.

So I feel pretty good about our relative position there. And then if I talk about the other 2 portions of the business where we have actually historically in the last 2 years, 3 years, been growing double digits, CMT is a good success story of ours.

We've had good client acquisition there, good constant currency growth. Products and Resources, I think we have a lot of room to continue to do well there because our penetration of large accounts is lower there than it is as an example in life sciences, or indeed, the payer business where we are heavily penetrated into the major players. So that's kind of how I think about the framework. The factors we touched upon today, elevated attrition across the industry and Cognizant, within that permeated across all industry segments, and indeed, the U.

So nothing specific to either of those. All right. Just one quick follow-up on the margin side. It did come in well. And I mean your guidance is relatively unchanged also for margin. So just thinking about that in terms of going forward a little more than just the fourth quarter, it would seem that if wage inflation calms down a bit, you should be able to maintain that level.

Is that a fair assumption? Kumar currently serves on the boards of directors of TransUnion, where he is a member of the Mergers, Acquisitions and Integration Committee and the Compensation Committee, and Digimarc Corporation, where he serves on the Compensation and Talent Management Committee and the Market Development Committee. Chamber of Commerce. Kumar earned his bachelor's degree in engineering from Shivaji University and his M.

This reflects a year-over-year increase of approximately 1. Additionally, the Company now expects full-year Adjusted Operating Margin 2 of approximately The impairment is principally driven by the Company's expectation of lower volumes. Cognizant will announce results for the fourth quarter of on Thursday, February 2, , after market close. Following the February 2 nd release, Cognizant management will conduct a conference call at p.

Eastern to discuss operating performance for the quarter. To participate in the conference call, domestic callers can dial and international callers can dial and provide the following conference passcode: Cognizant Call. Please go to the website at least 15 minutes prior to the call to register and to download and install any necessary audio software.

For those who cannot access the live broadcast, a replay will be available by dialing for domestic callers or for international callers and entering from two hours after the end of the call until Thursday, February 16, A full reconciliation of Adjusted Operating Margin and Adjusted Diluted EPS guidance to the corresponding GAAP measure on a forward-looking basis cannot be provided without unreasonable efforts, as we are unable to provide reconciling information with respect to unusual items at this time.

We help our clients modernize technology, reimagine processes and transform experiences so they can stay ahead in our fast-changing world. Together, we're improving everyday life. See how at www. This press release includes statements that may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of , the accuracy of which are necessarily subject to risks, uncertainties, and assumptions as to future events that may not prove to be accurate.

These statements include, but are not limited to, express or implied forward-looking statements relating to our expectations regarding the implications to Cognizant of the change in the chief executive officer, our strategy, competitive position and opportunities in the marketplace, growth of our business, and our anticipated financial performance.

These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions, the competitive and rapidly changing nature of the markets we compete in, the competitive marketplace for talent and its impact on employee recruitment and retention, changes in the regulatory environment, including with respect to immigration and taxes, and the other factors discussed in our most recent Annual Report on Form K and other filings with the Securities and Exchange Commission.

Cognizant undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies.

Adjusted Diluted EPS excludes unusual items such as the effect of recognition in the third quarter of of an income tax benefit related to a specific uncertain tax position that was previously unrecognized in our prior year consolidated financial statements, net non-operating foreign currency exchange gains or losses and the tax impact of all the applicable adjustments.

The income tax impact of each item excluded from Adjusted Diluted EPS is calculated by applying the statutory rate and local tax regulations in the jurisdiction in which the item was incurred. Constant currency revenue growth is defined as revenues for a given period restated at the comparative period's foreign currency exchange rates measured against the comparative period's reported revenues.

Management believes providing investors with an operating view consistent with how we manage the Company provides enhanced transparency into our operating results. For our internal management reporting and budgeting purposes, we use various GAAP and non-GAAP financial measures for financial and operational decision-making, to evaluate period-to-period comparisons, to determine portions of the compensation for our executive officers and for making comparisons of our operating results to those of our competitors.

Accordingly, we believe that the presentation of our non-GAAP measures can provide useful supplemental information to our management and investors regarding financial and business trends relating to our financial condition and results of operations.

A limitation of using non-GAAP financial measures versus financial measures calculated in accordance with GAAP is that non-GAAP financial measures do not reflect all of the amounts associated with our operating results as determined in accordance with GAAP and may exclude costs that are recurring such as our net non-operating foreign currency exchange gains or losses.

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CTSH Stock - Cognizant Technology Solutions Corp. Q2 2021 Earnings Call

Jan 10, Cognizant Technology Solutions last posted its earnings results on November 2nd, The information technology service provider reported $ earnings per share for . Oct 12, To participate in the conference call, domestic callers can dial and international callers can dial and provide the following conference passcode: . May 4, For Q2, we expect revenue in the range of $ billion to $ billion, representing year-over-year growth of % to % or % to % in constant currency. .