CTSH Stock Cognizant Technology Solutions Corp Q1 2019 Earnings Call

ladies and gentlemen welcome to the cognizant technology solutions first quarter earnings conference call all lines have been placed on mute to prevent any background noise after the speakers remarks will be a question-and-answer session if you'd like to ask a question at that time please press star 1 on your telephone keypad and a confirmation tone indicate your line is in the question queue you may press star 2 if you'd like to remove your question from the queue for participants using speaker equipment it may be necessary to pick up your handset before pressing star keys in order to allow as many participants as possible to ask questions today please lend yourself to one question I will now turn the conference over to Katie Royce Head of Investor Relations please go ahead miss Royce Thank You Rob and good afternoon everyone by now you should have received a copy of the earnings release for the company's first quarter of 2019 results if you have not a copy is available on our website cognizant comm the speakers we have on today's call are Brian Humphries chief executive officer and Karen McLaughlin 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 risk and uncertainties as described in the company's earnings release and other filings with the SEC additionally during our call today we will reference certain non GAAP financial measures that we believe provide useful information for our investors reconciliations of non-gaap financial measures where appropriate to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC before I practice a Brian let me address one issue we understand that there was some inadvertent communication of our release and other materials this afternoon shortly before market closed obviously we are going to take a look into what happened here we simply wanted to let you know that we are aware of the issue and we will undertake a review with that I'd like I now like to turn the call over to Brian Humphries please go ahead I'm well thank you Casey and good afternoon everybody I'm pleased to join you today my first earnings call is cognizant CEO I've long admired cognizant my vantage point at other leading technology companies since moving into the role five weeks ago I've been busy getting into the heart of the company's operations I traveled across three continents - listen directly to our clients and partners have conducted more than two dozen deep dives into our industries lines of service and regions and I've met with nearly all of our global executive leadership team and talked to hundreds of our associates in person I can tell you that the initial reasons for my enthusiasm about cognizant have been strongly confirmed I'll share some observations later in the call this is a great company and I'm excited to have the opportunity to lead the company forward that said we had a disappointing first quarter performance we have a lot of work to do to get back to what I believe is companies capable of achieving to seize the market opportunity in front of us in q1 a revenue grew 6.8 percent year-over-year in constant currency to 4.1 billion dollars this fell short of our guidance and resulted in an earnings shortfall our softness and top-line growth resulted from a weak performance in banking and financial services which was flat year of a year and constant currency and slowing growth in healthcare excluding the contribution of bolder healthcare solutions a revenue performance reflects both external factors including insourcing among a few large financial services clients and the spending pullback in health care clients that are in the midst of merger integration as well as covers and specific execution issues that we need to get behind us setting this weakness in financial services in healthcare we delivered strong double-digit growth in two of our other major business segments products and resources and communications media and technology later in today's call I let Karen take you through the details of the quarter beforehand I want to offer three observations first notwithstanding a disappointing q1 the foundation and capabilities of business are solid and the market opportunity is robust I've spent enough time reviewing the business and meeting with clients and partners over the last five weeks to notice to be true I want to stress that our customer centricity is as strong as ever having met face to face with hundreds of our associates over the past five weeks I can attest that our passion for clients incredible resource fulness innovation and desire to win their winning spirit derives from decades of commercial success this kind of spirit is hard to create but once it becomes a core cultural cultural attribute as it is in cognizant it's also hard to break second we know we can and must do better we are committed to delivering consistent financial performance that aligns with the expectations that we set and communicate and third we also recognize that the first quarter revenue weakness follows a loss of top-line momentum over the past 18 to 24 months one of my top priorities is to act to restore top-line momentum restoring our momentum goes to a question I've been asked many times by associates and others about revenue versus margin trade-offs I've long believed that it is possible to achieve solid revenue growth and drive margin expansion simultaneously I've seen nothing to date at cognizant that changes this belief to do both we must be fit for growth and by this I mean establishing a healthy cost structure that allows us to be cost competitive whilst enabling us to make investments that create value for our clients investments of course can take many forms including marketing demand generation partnerships we skilling increased sales coverage or increase spending platforms tools and automation I believe cost equals growth they are not mutually exclusive therefore as we said about reviving top-line momentum we will improve our cost structure as a means to invest in growth and unlock higher levels of performance one example is our cost of the list during my recent trip to India I saw firsthand how important our delivery teams are to our strategy through our customer engagements our teams in India not liver but also develop solutions and drive customer innovation that bring our digital capabilities to life for clients this is a prized asset and a valued competitive advantage but we must also be more efficient to ensure we can accelerate growth set about getting fit for growth change management clarity of roles and responsibilities and communication are critical we will ensure that all of our associates understand the connection between top-line momentum and a healthy cost structure and that everyone is clear about our go forward priorities and their role in making this happen for example I want our sales and delivery teams focused on customer acquisition upselling and cross-selling we didn't exist in clients co-creating innovative solutions to customer pain points and maximizing customer satisfaction meanwhile Karen and I will focus on ensuring a rigorous approach to non investment costs while prioritizing investments related to growth once we get the balance right in steady state I believe we can accelerate growth and deliver margin accretion simultaneously that aside in the meantime I'm doing what you would expect a new CEO to do I will dig into every part of the business to fully understand our strategy market structures competitive dynamics client buying behavior control points and the engagement levels and collaboration of our teams allowing to leave no stone unturned I've already launched a series of work streams to review our growth and margin opportunities these work streams focus on areas including or organizational structure to assess role clarity and decision rights among our verticals regions and lines of service and to ensure a clear accountability model that drives a culture that is both empowered and performance oriented our sales model including how we segment customers align sales coverage and establish sales performance metrics and more leveraged sales commission plan in our digital strategy as well as the practical matters of ensuring our pivots digital will be successful via structural leadership and compensation actions and their delivery model particularly on lowering the load the cost of delivery to Imperium at actions tooling and automation and optimizing the mix amongst our delivery locations finally and acknowledging people are at the heart of everything we have work streams focus on our leadership and culture emphasizing rigorous data-driven talent management succession planning and leadership attraction and development topic of leadership an essential part of my role is to ensure we have the right team in place to propel cognizant forward conducted over two thousand four to five our business reviews in the last five weeks I've had a good deal of interaction with most of our senior leaders I believe we have a highly experienced deeply knowledgeable and accountable team that serves our clients and shares my commitment to getting the company back to executing the basics well recognize however that when a new CEO joins some reshaping of the leadership team is inevitable and this has already begun to happen as you know with my arrival Frank facism moved into the role of executive vice chairman and will transition to vice-chairman of our boards at the end of June Raj Mehta has stepped down as president I'm not planning to backfill this row I want to be deeply engaged in the business and also want to flatten our organizational structure so that we can take out layers of cost communicate quicker and move greater speed and agility our focus and accelerating our growth in digital business I've just appointed Malcolm Frank as the new president of cognizant digital business Malcolm will bring significant customer centricity passion strategic mind and a partnership mentality to this critical position our performance in banking and financial services which represents 35% of cullerton's annual revenue I've asked Prasad Chintamani knee or EVP and president of global industries and consulting in addition to his existing responsibilities to also assume the direct management of the banking business on an interim basis earlier in his career Prasad led our banking and financial services segment therefore I am confident that he will immediately make a difference as we launch a search for a new head of our banking business Prasad will continue to maintain all of his existing responsibilities in addition to his interim role finally before turning the coal to Karen I would like to touch briefly on cognizant significant market opportunity one of the things that drew me to cognizant is our large addressable market the rates of digitization across industries create a significant opportunity for us at clients as they recognize digital as both an opportunity and the threat we built leadership positions in many industry verticals and strong client relationships where we can upsell and cross-sell our lines of service we have an opportunity to further diversify our client base and on a geographic basis there's a huge opportunity outside of North America but our global growth markets currently accounting for just over a quarter of our total revenues I believe that we have the right strategy and portfolio of services and solutions to capture the market opportunity and we will double down an execution to ensure success I've been focusing our investments on six advanced capabilities that our clients need to become fully digital businesses these six capabilities which form the core of our digital strategy our core modernization digital engineering where I'm really enthusiastic about capabilities enabled by cognizant soft vision AI and analytics intelligent process automation industry and platform solutions and interactive customer experiences to this list I have added one more capability Internet of Things the advent of 5g will vastly expand the impact of IOT and create significant opportunities across our verticals as we help our customers be successful in additional world we need to extend our IRT portfolio of offerings and build that our iot partnership ecosystem growth in all of these areas which offer strong margin profiles and a combined market opportunity that we estimate to be in the hundreds of billions of dollars as we get after these opportunities we will be ultra efficient in our legacy operations prioritizing our investments investing in partnerships and ensuring we digitize our own operations short my mission is to ensure that cognizant is well-positioned for long-term success my aim is to leave no stone unturned so that we can identify all opportunities for improvements in growth efficiency and profitability I look forward to giving you an update on our progress in the coming quarters we have a solid strategy engaged associates an incredible client centricity and we're fully committed to executing this strategy okay with that my pleasure to turn it over to Karen who will give you an update on both our operational and financial performance as well as the view and how we see the year ahead Karen thank you Brian and good afternoon everyone while the quarter started as expected we saw a deterioration in our performance in the second half of the quarter which led to a slower than expected q1 revenue of 4.1 1 billion an increase of 5.1% year over year or 6.8% in constant currency digital however continues to be the most significant driver of our growth and now account for over a third of total revenue moving to the industry verticals where as Brian mentioned the q1 under performance was primarily driven by financial services and health care financial services growth with flat year-over-year in constant currency driven by both banking and insurance in insurance growth with slower than our expectation at the beginning of the year as executive transitions underway at several of our clients slowed the decision-making process in the latter part of the quarter particularly around larger deals in the pipeline in banking we continue to see softness and a few of our largest banking clients that during the quarter we also saw a more conservative approach to spend with several of our regional banking clients in north america including some banks that were impacted by M&A activity consistent with what we communicated our Investor day in November two of our top five clients continued to show good growth while spend at the other three clients remains under pressure we have however made progress in furthering our platforms and solution strategy for the banking clients through the recent acquisition of merit soft the capital markets software platform for post trade receivables and payables processing with offerings and regulatory tax operations and fees and billing and the previously announced partnership with three finished financial institutions to transform and operate a shared core banking platform based on the Temenos platform which began as expected in the second quarter however we are seeing some cautiousness in the banking sector around levels of spend in the second half of the year so the moderating outlook for growth in their business moving on to healthcare it grew 4.6 percent year over year in constant currency within our health care vertical slower than expected growth of our payer clients is largely the result of several large clients involved in mergers as well as the accelerated movement of some work to a captive at a large client the continued ramp down of an account in which we are subcontractor to a third party also continue to negatively impact revenue we expect these trends to continue and likely deteriorate in the second quarter as some of these clients finalize new contract negotiations before embarking on the execution of their integration plans over the last several years we've seen periods of heightened industry consolidation and healthcare creating pressure on our organic growth rates during those periods while the revenue associated with integration work is typically follows M&A can be meaningful we recognized the volatility that has resulted from a handful of large clients over this period as we broaden our client base within healthcare by expanding into new care clients through platform offerings developed for contracts such as TMG as well as the provider space the diversification of our client mix should over time contribute to more consistent growth life sciences soft broad-based acceleration in the quarter contributing above company average growth we are seeing good traction in large enterprise transformation deals and momentum where there are industry specific platforms such as the shared investigator portal for clinical trials and resources hit another strong quarter showing throat 13.8% growth year over year in constant currency we saw double-digit growth in constant currency across retail and consumer goods travel and hospitality as well as manufacturing logistics energy and utilities building on the momentum that we saw in the fourth quarter retail continued to perform well despite a handful of bankruptcies in some of our smaller relationships during the quarter we continue to see strength in cloud and digital engineering services an increased demand for interactive IOT and analytic solutions across clients our communications media and technology segments hit another strong quarter with year-over-year growth of nineteen point six percent in constant currency driven by software and platform clients within the technology sector within media and communications growth is primarily driven by digital services for media and entertainment clients to accelerate their transformation to modern media companies partially offset by slower growth with communications clients involved in industry consolidation technology delivered double-digit growth driven primarily by our digital content solutions now moving on to Gio's the rest of the world through 7.1 percent year-over-year in constant currency results in asia-pacific continue to be negatively impacted by the weakness in some of our larger banking clients on a constant currency basis the three industry segments outside of financial services saw double-digit growth in the quarter Europe grew fourteen point three percent year-over-year and constant currency in continental Europe we saw strength in life sciences and telecom while a few of our larger banking relationships in Europe remain under pressure we did see good growth from several of our newer logos while North America remains a significant and growing market for us we should we see tremendous opportunity for growth in other parts of the world we have made a number of organic and inorganic investments in continental Europe which have given us a strong foundation for future growth going forward we expect to increase our investments and drive an even greater focus on international growth in Europe 15 nada margins are gap margin and EPS or 13.1% and 77 cents respectfully our gap margin and EPS were negative negatively impacted by a one hundred and seventeen million dollar accrual related to a recent ruling of the Supreme Court of India interpreting certain statutory defined contribution obligations of employees and employers which alters the historical understanding of such obligations by extending them to cover additional portions of an employee's income our accrual covers prior periods and assumes retroactive application of the Supreme Court ruling however as further discussed in the financial table to our earnings release there is significant uncertainty as to how the liability should be calculated and whether the Indian government will apply the ruling on a retroactive basis as such the ultimate amount of the company's obligation may be materially different from the amount accrued as a result of this ruling the contributions of our employees and the company in future periods are required to be increased this change will result result in approximately 15 million dollars of incremental expense for the remainder of 2019 related to the employer portion of this contribution adjusted operating margin which excludes realignment charges and the 117 million dollar incremental accrual related to the India defined contribution obligation with 16% and our adjusted EPS was 91 cents into 1g1 margins followed our typical seasonality and were lower than the full-year projection in q1 we also had two continued absorption of headcount additions and wage increases and promotions from the fourth quarter our adjusted operating margins of the lower expectations for the quarter due to costs related to headcount growth outpacing the lower than expected revenue growth in the quarter which negatively impacted operating margins by 70 basis points and EPS by 4 cents and an anticipated increase in bad debt expense related to a few bankruptcy filings by clients primarily in our products and resources segment this bad debt expense negatively impacted operating margins by 30 basis points and EPS by 2 cents for the remainder of 2019 we expect Morgans to remain below our previous expectation but to improve in the second half of the year as we align our cost structure with revised revenue expectations as we discussed during our Investor Day back in November while we have taken steps to improve our cost structure it remains much more we can do to enhance margins to areas such as pyramid optimizations sustaining higher levels of utilization and improved pricing levers there is additional opportunity to simplify parts of our business unit overhead structure and take a hard look at the cost of delivery additionally a shift to higher value services such as digital will continue to support me support margins I'm a people and talent perspective are annualized attrition rate at nineteen percent let's flat with q4 that remains elevated we continue to focus on our workforce strategy and overall management training to the balance sheet which remains very healthy we finished the quarter with 3.7 billion dollars of cash and short-term investments down eight hundred and forty three million from December 31st 2018 this decrease is largely due to the 750 million dollars of share repurchases under our stock repurchase program including the funding of the 600 million dollar accelerated share repurchase program launched in early March and annual bonus payments as a reminder our short-term investment balance includes restricted short-term investments to 427 million these restricted amounts are related to the ongoing dispute with the Indian income tax department we generated 163 million of free cash flow in the quarter following the typical seasonal pattern free cash flow and q1 is impacted by the timing of our bonus payout additionally we have an uptick of DSO of three days compared to q1 2018 which negatively impacted free cash flow by 125 million and included an increase in unveiled receivables we billed approximately 57% of the q1 unbilled balance in April which is in line with our historical norms our outstanding debt balance was 746 million at the end of the quarter and there was no outstanding balance on the revolver during the first quarter weary purchased approximately 9.5 million shares and our diluted share account decreased to 575 million shares for the quarter I would now like to comment on our outlook for q2 and the full year 2019 for the full year 2019 we expect revenue to grow in the range of 3.6% to 5.1 percent year-over-year in constant currency based on current exchange rates this translates to growth of in the range of 2.7 percent to 4.2 percent reflecting our assumption of a negative 90 basis points for foreign exchange for the full year the revised guidance reflects the slower growth in the quarter one as well as a more muted outlook for financial services including banking and insurance as well as healthcare for the second quarter of 2019 we expect to deliver revenue growth in the range of three point nine percent to four point nine percent in constant currency based on current exchange rates this translates to growth in the range of two point six percent to three point six percent reflecting our assumption of a negative 130 basis point for foreign exchange for the second quarter for the full year 2019 we expect adjusted operating margins to be approximately 17 percent and to deliver adjusted EPS in the range of 3.87 cents to $3.95 the reduction in our operating margin guidance is primarily the result of headcount which grew faster than revenue for the last two quarters while we will better align our cost structure with our revised revenue growth expectations we will also continue to invest in talent and development of solutions that further our position in the digital marketplace in the second quarter we expect adjusted operating margins to be in line with q1 at approximately 16 percent while we take prospective cost alignment actions that will take several months to implement this guidance anticipates a full-year share count of approximately 572 million shares and a tax rate in the range of 24 to 26 percent guidance provided for adjusted EPS excludes realignment charges and any other unusual items net non operating foreign currency exchange gains and losses the incremental accrual related to the India defined contribution obligation and the tax effects of the above adjustments our guidance also does not account for the impact from shifts in the regulatory environment including areas such as immigration and tax as part of our balanced approach to capital allocation we intend to utilize approximately 50% of global free cash flow annually for dividends and share repurchases in q1 we executed share repurchases that will reduce our average share for the full year by more than our target of 1% in addition the board has declared a queue to cash dividend of 20 cents per share for shareholders of records at the close of business on May 22nd additionally we intend to utilize approximately 25% of global free cash flow on acquisitions and have closed two acquisitions thus far in 2019 we continue to look for acquisitions that are enhance our longer-term strategy of enriching our digital capabilities expanding our geographic footprint and enhancing our vertical expertise with that I will turn the call back over to Brian thank you Karen before you take your questions let me close by saying once again how delighted I am to have the opportunity to lead this great company by 286,000 colleagues and I recognize that we have work to do to get conversant back to basics and to strengthen our execution we will roll our sleeves up and ensure that we tenaciously follow through and our strategy to produce the kind of results I know Carlton is capable of achieving we're all dedicated to our clients we are all committed to advancing cognizant pivot to digital and spurring the next phase of growth and success with that I'll ask the operator to open the line for your questions thank you well now be conducting a question and answer session if you'd like to ask a question please press star 1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue you may press star 2 if you'd like to remove your question from the queue for positions using speaker equipment it may be necessary to pick up your handset before pressing the star keys in the interest of time we ask that you limit yourself to one question one moment please will be polled for questions thank you the first question is from the line of Lisa Ellis with Moffatt Nathanson please receive your questions hi good afternoon guys in now welcome Brian look forward to working with you thank you pod can you can you give a sense I know you've just been on the ground like you said for five weeks or so but given you landed in an organization that's clearly in this you know pretty tough period of transition can you just map out for us a little bit how you envision the next six to twelve months for you looking like like where you're going to focus are there some immediate shifts and changes you can already envision you might want to make things you want to be doing faster investing and more aggressively any just early thoughts thank you I'm happy to do so and ultimately over the last five weeks I spend my time across three continents and ultimately have been prioritizing business reviews spending time with our associates and spending time with clients and partners and to a great extent that will be how I will continue to expend my time going forward from my point of view but great news is that we have an exciting market opportunity the potential is there but one of the things we're going to have to get back to doing is understanding the relevant trade-offs between costs investments and growth I don't view costs and investments to be the same thing but I do view costs and growth to be the same thing you have to be fit for growth so in order to do so we need to invest in growth in order to invest in growth we need to free up dollars for investment and to a certain extent Lisa I really feel is that we have to restore the engine that was the secret sauce of cognizant we have very engaged associates who have a winning spirit there's a great opportunity out there but we have to go back to making the investments getting our cost structure right really embracing digital and doing the basics well and sometimes those basics and companies can be overlooked in terms of structural decision rights sales commission plans etc etc if we get all of this right I think we'll be position to execute our strategy and to do well thank you our next question comes from the line of Tintin one with JPMorgan let's just here with your question thank you and Brian thanks for the thoughtful comments I wanted to ask you you know our understanding was that the board when they selected the CEO that would ultimately carry out the strategy that they laid out at investor day late last year so given what you've learned and what you described in one key results are the company's longer-term growth and margin goals still relevant or our changes required again based on what you've seen and observed like has really commented or what the board saw in a candidate so the question is for them to answer over time what I will say is that slide weeks into my tenure I'm still very much in the steep learning curve as you can well imagine delighted to be here and obviously optimistic about our potential and why of course as I said the market opportunity is there to be taken I'm surrounded by a lot of really smart people were brought industry knowledge and I'm leaning on them to help me execute our plan in the years ahead we do have a base of associates as I said that our client centric which is a huge asset to have a winning spirit and that's based on years of commercial success now we have a set of customers with light cognizance and that gives us an opportunity to upsell and cross-sell to install base but we also have an opportunity to go after new customers within our largest and most successful verticals as well as in the other segments and indeed as current vegetable within growth markets and we have to embrace digital further and leverage your strong c-suite relationships notably at the CIOs back to better penetrate the rest of companies in their digital ambitions what's easy or what's easy to articulate in one hand is obviously harder to execute you ask me what needs to change clarity for me two comments and I'll be in a better position to address that obviously down the line in the outer quarters maybe let me answer your question indirectly by saying and touching upon some of the work streams that I've started what's really clear and important to me in good boneses that roles and responsibilities are clearly defined teams are empowered with responsibility clarification and empowerment so 2 goes accountability and core to all of that is decision right and we have a matrix as every company has a matrix but we need to and I will explore the D if you will in a rapid between horizontal verticals and a data market it must be clarity in the matrix I also will really want to look at how we get after the sales opportunity and not just in terms of the CIO versus the rest of the c-suite where we in theory should be able to better leverage their CIO relationships to cross-sell into the CMO to see 0:01 and lead to CEO and shift ultimately from the run portion of the business which will always be under some degree of constraint into the optimization or transformation portion of the business leveraging more of a shift - advisory and indeed our digital offerings we have to look at some of the basics as well put summer segmentation Commission plans accounts based marketing all these are critical to growth and it's important to get the basics right and of course as I touch upon our delivery model so look in short I'm learning the business but every passing week I get a little smarter but I've got a lot to learn and unrolling my sleeves up as you can imagine with the team spending time with clients and they themselves will have a huge role to play in informing my priorities going forward thank you the next question is from the line of Brian Essex is Morgan Stanley please just here's your question I good afternoon and thank you for taking the question I guess either Brian or Karen oh this morning if we might be able to get a little bit more color on the banking and financial services side and it sounds like things were a little bit softer than you anticipated a particular fourth American regional banking clients I was wondering maybe if you could help us wrap our arms around a little bit to understand you know what where the softness came from and is this a temporary issue or or you might there be a fatter pipeline kind of in the back half of the year as you kind of progressed through the year thereafter and Carol I'll take that so I think you know certainly as we talked about for several quarters the top five banking clients have been under pressure and we saw some nice recovery in two of the top five last year and that continues into this year we haven't really seen any change in the profile of those clients or their behavior but we did as we said on the column in my comments see see some pullback in the regional banking clients some of it was M&A as Rory talked about when there are acquisitions happening between clients particularly when both sides of the acquisition are clients of ours we do tend to see some pull back as the deals are getting finalized and closed before integration spending so there was a little bit of that in the quarter but we saw some general softness and some of our other regional clients as well not on a material basis in any individual client but but a number of small holdbacks across the industry I think it's it's early to say what's happening in the in the broader market but you know at this point I don't expect to see significant recovery as you move into the back half of the year but neither do we expect to see significant deterioration beyond what we've already seen with the three of the the big five banking clients but it you know with a little bit of a surprise in the quarter as you got further into it next question comes from the line of Keith Bachman with BMO Capital Markets please receive your question hi thank you very much I wanted that Brian this is for you and I wanted to start with you're lowering estimates which which I don't candidly think is a surprise but the magnitudes certainly a bit larger than we were thinking and as you indicated you've been there a short period of time and so I just wanted to get kind of comfort level that you had enough time to at least give some assessments that would suggest that the you know the estimates are set at a reasonable spot and the second part of the question is you are taking a fresh look at things and one of the things that does surprise me a little bit is is the free cash flow targets in other words using 25% of your free cash flow for acquisitions and given your attach rates to some of the troubled banks and the gravity that it poses I would think that cognizant would be well served by perhaps leaning a bit more on MA as your friends from Accenture doing other firms and so the corollary part of the question if you saw opportunities that would advance the cause of cognisant would you be willing to flex away from some previous statements that were made to advance cognizant and that's it for me thank you Keeks let me first start with capital allocation because the M&A question is inherent in that look you can well imagine keep our Board of Directors and I will continue to evaluate or framework on an ongoing basis to ensure we're maximizing value for for people like you and our shareholders generally we do have a very strong balance sheet at this moment in time there's no change in our previously disclosed capital allocation framework I will say more explicitly to the question on M&A it has been and will continue to be a level 2 X a lever to execute our strategy I'm very clear in my mind that M&A is not a strategy it is a means to execute a strategy so all acquisitions that come forward to me need to be contextualized against our strategy and we need to have clear business ownership and sponsorship and a clean line of sight to integration at the moment we're not working on major acquisitions that I'm more historically favorable to token acquisitions as opposed to anything beyond that and I do think we should be able to use those as a means to an end to drive further revenue growth in line with our strategic ambition back to the the first part of your question which relates to the margins like everybody knows I've been here five weeks so I arrived in April first the quarter was closed and immediately we started looking at the results and trying to decompose them down understanding what happened in the latter part of the quarter my definition have been focused on what is a secular trend versus a cyclical trend what is a external factor versus a cognizant specific factor I'm pleased with the work to Karen and I have done to try to get below those as best we can I'm obviously focused on putting guidance out there that I know we can actually execute against and that will enable me to invest in the long-term health of the business to ensure we can drive shareholder value creation so at this moment of time that's as much as I can say and I think Keith if I could just add to Brian's comments on capital allocation and acquisitions as you'll recall at Investor day what we outlined was a framework that on average in a given year we would deploy 50% of our free cash flow for buybacks and dividends 25% for M&A and then 25% on average goes to India but we continued of a very strong balance sheet both with cash and excess capacity forget if we need it at the appropriate time for acquisitions or other investments next question comes from the line of Brian Keene with Deutsche Bank pleased to see with your question I get afternoon I know you guys give guidance on February 6 so I'm just trying to understand in the first quarter the missive op income was by you know 100 million verse 3 and margins ended up being down 170 basis points so and I know we talked about margin expansion this year margins were going to be up a hundred basis points now they're going to be down a hundred basis points so I'm just trying to foot you know what happened to the margin expansion in just the shortfall in revenue for the quarter doesn't make up for it and I'm sure you knew about headcount raises already so I'm just trying to reconcile the differences thanks yes I think Brian the way to think about it is that that the revenue shortfall was clearly the biggest piece in the sense that we had ramped up hiring in q4 and in the beginning of q1 for the anticipated growth this year and as you know it's hard to you can even slow down the hiring but once you have the people on board you need the revenue to support that and you know when we gave guidance well we did not give quarterly margin guidance you know certainly our q1 margins does tend to be below the full-year average and so while the 16% adjusted operating margin was slightly below our own expectations you know we had expected that there would be a ramp of margins as we went through the years revenue continued to build and as we were able to deploy the head counts that we had bought on in q4 in the early part of 2019 and you know I think what you'll see is in my comments that margins it will be a little bit of a different seasonality this year so margins adjusted operating margin and q1 and q2 will be roughly the same q2 tends to be our strongest margin quarter but given the the pullback of revenue and the the headcount that we have on board now q2 margins will be similarly in line with q1 but then we'll see the ramp as we get back into q3 and q4 and we can better align the cost structure to the revenue thank you our next question comes from the line of Jim Snyder with Goldman Sachs please your shooter question good afternoon thanks for taking my question and welcome Brian um maybe if we could go back to the conversations you've had with clients over your initial months at the company can you maybe just talk philosophically about what they've told you about their willingness to potentially give you more business if business conditions were different in other words for example with respect to pricing is you believe that you could actually accelerate revenue growth at the company by potentially being a little bit more aggressive on pricing and maybe understanding that you don't believe there's a direct trade-off between revenue growth and margins just talk about your your thoughts on how you could reaccelerating growth beyond all the kind of temporal issues that are going on with the clients and banking healthcare right now yeah look I think it's a good question and inherent in that is the notion of elasticity and also or position within clients in terms of where we stand not just in the legacy but also on the new I've seen quite a lot of clients across three continents and I've approached those meetings very openly soliciting feedback on cognisant on our brand of what we stand for on our client teams and delivery and project management and trying to obviously in the same vein understand what those customers are working on and I would say very clearly and consistently and spend pressure continues on the run side of the business in financial services everywhere else candidly has been a consistent theme and all firms are fully aware of the Dewar's I notion that digital disruption brings their way so they are in a highly competitive market with legacy competitors as well as new and so very very often the message is we have to find ways to get our investment down and legacy free up dollars for investments in security but also free up dollars for innovation to enable them to better participate in the digital world if you will so there is been but it's not always where we've traditionally play so our task is to optimize your portfolio being as efficient as possible in our legacy business and better positioning ourselves then in this digital world that brings with it complications as well as opportunities the nature of the contracts from longer term contracts to more project based contracts is the factor we have to juggle with the nature of the skills required to get at those opportunities and the relationships how we get in the front door how we leverage our strengths good CIOs and strong customer NPS to sponsors with their CMO CLO CEOs how we get the right skill sets who we talk to how we talk to them how we follow up what collateral to leave you name it it's fundamentally an opportunity for us but also something we have to grow into and continue to flex your muscles in as we become more of an advisory element cognizant digital business is really important to making that happen winning new logos of course will enable us to grow too but more broadly almost two thirds of our businesses in financial services and healthcare so it's important that we turn turn those businesses around it's important that we buttress or North American business which further growth in global growth markets which creep twelve percent in the first quarter and if we get all of those things rights and invest for growth I am confident that over time in a steady state we will be able to simultaneously deliver better margins and accelerated growth at this moment in time of course we have a lot of work to do thank you the next question comes from the line of Rod Borgia with deep dive equity please just see you with your question hey welcome Brian and nice to have the fresh perspective hey I just want to go back to where we have been recently I mean it does seem that the analyst day and the related financial targets that were set by the outgoing management it does seem that those targets were awkwardly timed and so I just wanted to enquire a couple things one has the process for forecasting you know risk rating prospects in the pipeline and so on has that process changed you know as you've come to the helm and to is there is there a plan for the role that Frank will be playing going forward is he ultimately going to transition out or is he staying for an extended period so any clarity on that in the context of you know having these financial targets that were were issued when there was a CEO change imminently about to occur and I think a lot of people are now especially now wrestling with with the awkwardness that was created with that so has the guidance process and the forecasting assumptions and approach change and is there a plan for the role of Frank going forward well let me first start with the latter question around Frank who's been nothing short of a gentleman in the transition period with me and I've been delighted to have the opportunity to spend time with him and work with him he's someday I reached out to almost on a daily basis to get guidance and counsel but in the same vein it's clear that he has moved on from the CEO row for the next three months or the next two months at this stage to move into an a EVP or executive vice chairman role and thereafter will transition to the board and I'm sure will be available for me in a non operational capacity but as a counselor as as as needed and as I choose to use with regards to the process for forecasting in the Investor day guidance and q1 guidance I can't really comment on the past it's very clear obviously that I understand the importance of setting expectations we can meet consistency of earnings is something that I hold near and dear to my heart we will continue to work to get rigor in our forecasting process and not just forecasting but an annual budget process forecasts happen on a monthly basis buttoned up from accounts but at the end of the day we set a cost structure and we set leadership bonuses based on the annual budget so we want to make sure we're rigorous not just against forecasting and predictability of guidance but also against the inherent plan as we enter a year thank you the next question comes from the line of Darin Peller with Wolf Research let's just see with your question hey thanks guys listen just to dissect the shortfall on revenue versus you're out initial outlook I mean when we think of the magnitude of you know five six hundred million dollars of revenue here I guess I just love to get a little more granularity as to you know how much of this is a handful of large clients how much of it is broad-based and then really I didn't hear you say a digital sort of digital revenue growth rate maybe if you can give us that and if that's not been really enough to offset what you're saying is legacy revenue decelerating at a faster pace now thanks guys so Darren its Karen so the digital what we've said in my comments was that it's about a third of revenue now it's grew of loads above twenty percent so that low 20s so consistent with where it was running towards the end of last year so no real significant changes to changes there thank you our final question is from the line of Brian Bergen with Cowan please see with your question I thank you I wanted to ask on health care with the political cycle starting to ramp and then you know the rhetoric around health insurance also ramping can you discuss what you're seeing and spending behavior in conversations with your managed care clients and trying to understand the underlying outlook here that's independent of the captive and also independent of the account ramping down and really when do you expect that segments can potentially show a turn of a corner here it's Karen so I don't I think the behavior we saw in q1 was really related familiar to the merger and acquisition activity that we've seen in healthcare so as we all know there's been two very large mergers in the last few months all four of those companies were clients of ours and that was the the majority of where we saw some pullback and we expect to see some deterioration as we said going into q2 and sluggishness for the rest of the year and then we had one large client did accelerate the move to a captive during the quarter at this point I think it's more about those client specific situations versus anything that might be happening in the broader regulatory environment with healthcare but I'll ask Brian to maybe add some color to that as well well thank card well first of all I'd bifurcate obviously life science has been very strong and grew double digits as we said and to healthcare payer business we've had a different story and certainly excluding some M&A it's been slow I would say on a positive nature health care is still about 18% of the nation's GDP and we're starting from a position of strength so we need to understand of course we've had disappointing healthcare results this quarter what we need to do better in the last few days I spent about three hours with CIOs of some of the largest healthcare companies in the world and the message I received was very clear help them on the run to optimize your opportunities or to optimize their run business and get cost savings and yet they are very open to embracing cognizant on their transformation and digital agenda where we have so much opportunity and so it's for us now and Malcolm and his new offer in its new role to get after those opportunities and make sure we bring our acids to bear in customers where we've historically had very strong customer satisfaction and growing business in prior years okay and with that that concludes today's call thank you all for joining and for your questions thank you thank you for joining today's teleconference you may know this connect your alliance at this time thank you for your participation

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