Cognizant Technology Solutions Corp (CTSH) — Q3 2020 Transcript

Thank you, operator, and good afternoon, everyone. By now, you should have received a copy of the earnings release and investor supplement for the company's third quarter 2020 results. If you have not, copies are available on our website, cognizant.com. The speakers we have on today's call are Brian Humphries, Chief Executive Officer; and Jan Siegmund, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information to our investors. Reconciliations of non-GAAP financial measures, where appropriate, to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC. With that, I'd now like to turn the call over to Brian Humphries. Please go ahead, Brian.

Thank you, Katie. Good afternoon, everybody, and a warm welcome to Jan, who many of you know, in what is his first Cognizant earnings call. Today, I'd like to address four topics with you, namely, a brief summary of the third quarter; an update on our employee engagement; observations on the demand environment and clients' evolving needs; and our strategic focus areas as we aim to revitalize revenue growth. Let's start with the third quarter. Third quarter revenue was $4.2 billion, a decline of 70 basis points year-over-year in constant currency. Excluding the negative 130 basis points impact from the exit of certain non-strategic content services business, revenue grew 60 basis points year-over-year. We executed well in what remains a challenging environment. Highlights of the quarter include: continued commercial momentum with bookings growth in excess of 25% year-over-year; ongoing momentum in digital with revenue growth up 13% year-over-year and continued strength in digital bookings and qualified pipeline; gross margin and cash flow strength, enabling us to continually invest in the business; and significantly increased and sustained financial flexibility on India earnings and cash. Jan will provide more insights on the quarter in his prepared remarks. Moving to our second topic, I would like to briefly address our talented associates. I'm grateful to each of them for their professionalism and perseverance in serving our clients during this protracted pandemic, which has put a tremendous strain on families and compressed their lives to screens and homes. We could not have executed against our commitments in 2020 without their client centricity, work ethic, and engagement. Given our financial performance and in recognition of the contributions of our associates, we are creating 2020 bonuses at higher levels than 2019. We are also implementing targeted merit increases and promotions in the fourth quarter. Both will hurt our cost structure in 2020 versus the prior year, but are an essential and normalized part of the cost structure in the services business. In stressful times like these, we are especially attentive to employee engagement, a measure of how committed and connected people are to our company. Our recent Cognizant people engagement survey showed scores consistently above industry benchmarks. And our overall engagement score meaningfully increased versus prior surveys. In an external endorsement of sorts, Forbes Magazine just ranked Cognizant #19 out of 750 companies across 45 countries in its World's Best Employers list. These high levels of employee engagement, coupled with current economic environment, contributed to our fifth consecutive quarter of reductions in voluntary attrition. We anticipate some sequential increases in voluntary attrition in the coming quarters after the forthcoming merit-based promotions and salary increase cycle. We continue to prioritize the health and safety of all our associates and remain in a work-from-home and restricted travel posture with only limited exceptions. Now I'd like to turn to clients, and in particular, the trends we are seeing. These trends fall into two categories, one cyclical and one secular. First, on the cyclical side and set against a protracted pandemic, clients are increasingly decisive on their technology priorities. They are focused on cost savings, CapEx reductions, resiliency, and agility. This is slowing large project deployments with extended paybacks, but creating other opportunities. We are seeing accelerated vendor consolidation trends, which we stand to benefit from given our deep strategic relationships and client references in buildup rate and our enhanced portfolio and growing reputation in digital, where more and more clients want to see us challenge digital incumbents. Client focus on innovation and cost savings is also creating opportunities for incumbent vendor displacement as larger deals. We plan to be disciplined and selective in our pursuit of larger deals, including captives, as these transactions, if not well-conceived, can bring diluted compound annual growth rates, margin pressure, and unfavorable terms. I want to focus my comments on the more consequential secular trend, digital transformation. This is our top priority. It goes to the heart of client business model innovation, transformation, and experiences. COVID-19 has widened the digital divide between the digital natives and legacy economy companies, which have struggled to shift to a fully digital operating model. These industrial era companies have focused on upgrading their tech stack at the infrastructure, data, and application layers. They have migrated their apps and data to the cloud and improved the agility of their underlying technology. These improvements, however important, all short of delivering the full power of digital transformation as they optimize the technology foundation rather than the business process or operating model. I believe the industry is at an inflection point in digital adoption. We see growing client interest in realizing more immediate customer and business value by identifying use cases to shift to agile digital workflows. That means transforming processes to become agile, data-driven, and automated. Workflows can be industry-specific such as claims and policy management or pharmacovigilance, or horizontal such as close to cash or digital marketing. In such cases, how we engineered an agile digital workflow for a leading app company that needed a return-to-work and to store strategy. We offered our safe workforce solution, built on the Salesforce platform. This comprehensive employee safety solution provides management with information about public health conditions, office capacity, employee health, and shift schedules. We can stagger arrival times to minimize contact, encourage hygiene through automated reminders, and when connected with IoT centers, help enforce social distancing and occupancy limits. As more clients implement agile digital workflows, the digital services market is evolving into a third phase. In Phase 1 of digital, clients sought to understand what digital really meant to their industries. In Phase 2, they implemented digital experiments and projects at the edge of their enterprises. In Phase 3, clients realize they must be software-driven enterprises and digital to their core. So what does this shift to agile digital workflows mean for services companies, and who will be the winners? The first and perhaps most obvious thing to say is that there will be more than one winner. That being said, everything we are doing as a company, from our strategy, solution portfolio, partnerships, mergers, acquisitions, branding and marketing, and talent is focused on being one of the biggest beneficiaries of this new phase in digital. To become modern businesses and create business value, companies need to embrace a digital technology stack that consists of: personalized and engaging customer and employee experiences, enabled by software engineering, powered by customer and operational intelligence, driven by data and run on a modern cloud business platform. We haven't always done a great job marketing this, but we are one of the few firms in the world with solutions and partnerships across every layer of this stack. Inorganic investments have strengthened our SaaS partnerships with both Salesforce and Workday, complementing long-standing relationships with SAP, Oracle, and ServiceNow to offer clients the full suite of enterprise application services they require to modernize their core processes and enable agile digital workflows. In the last six months, we have further strengthened our partnership commitment to all three leading hyperscale providers, announcing the formation of dedicated business groups for both Microsoft and AWS, and investing to enhance our Google Cloud credentials. Whatever approach a client wants to take to become a modern business, our portfolio adds multiple overlaps. Let's say a client wants to start at the bottom of the digital technology stack by accelerating cloud migration. We can do this for them, driving efficiencies that can subsequently be invested in innovation. And that's exactly what we're doing for a global automotive manufacturer that came to us for help to bring agility, innovation, and efficiency to their business processes. We started by executing an agile delivery model for core modernization. We then deployed our one DevOps model across the clients, dealers, supply chain, accessories, parts, and incentives, improving speed, flexibility, and user experience. In another example, we're engaged in partnership with Snowflake in a digital transformation project for a leading financial services firm. We're building a cloud-based intelligent data platform that facilitates multiple analytical and machine-based use cases. This platform unlocks innovation opportunities and value-added use cases, including real-time intelligence for fraud detection, a better user experience for opening and reactivating accounts, a reduction in loan dispute processing time, and improved field agent selling effectiveness. More and more clients are, however, starting at the top of the digital technology stack, by focusing on the customer and employee experience. Such experiences can be continuously improved through the magic of human-centric insights, software product engineering, automation, and applied AI. And hyper-personalization, all of which ultimately requires clients to embark on a core and data modernization journey. That's what we did for a large global insurance company, Cognizant, to design, implement, and run a new direct-to-consumer business that will provide a compelling AI-enabled interactive experience to consumers and agents. Recognizing this needed to be integrated with existing core systems and data architectures, we then worked with AWS to host this in a scalable modern digital platform. In these examples, you will see the opportunity to create a flywheel effect, a virtuous cycle, which Cognizant and our clients stand well-positioned to benefit from. In a world of vendor consolidation, Cognizant is one of the few firms that can capture this opportunity. I'd now like to turn to the company's future and our goal to increase our relative commercial momentum and revitalize revenue growth. In the knowledge-based business, investing for growth starts with attracting, developing, and retaining talent. In the last six months, we have overhauled our talent management and annual performance evaluation processes, which allow us to develop a diverse, inclusive, and high-performance team, where talent is identified and nurtured for promotions. Meanwhile, we have invested in growth by strengthening our country leadership with senior hires in Germany, the Nordics, Australia, and Asia Pacific Japan. Earlier this week, we also announced the completion of our Executive Committee with the announcement of our new President for Global Growth Markets and the newly created role of Executive Vice President and Chairman for Cognizant India. We've also rallied the organization behind what we call the Cognizant Agenda, which articulates our purpose, vision, and values. Our vision is to become the preeminent technology services partner to the Global 2000 C-suite. To achieve this, we are aligned behind a series of both moves that require investments. First, we will meaningfully increase investments in branding and marketing including launching a breakthrough global brand campaign in the coming months. This campaign will reposition the Cognizant brand, and will reach beyond our familiar technology audience to the entire C-suite as well as the next generation of talent. Second, we will continue to accelerate digital. Our priority areas of digital engineering, AI and analytics, cloud and IoT are more relevant than ever to clients. We aim to lead in the third phase of digital, which will require continued investment in M&A, our commercial and delivery capabilities, offer management, talent, and branding. Third, we will continue to globalize Cognizant by investing for growth in targeted countries, strengthening our regional capabilities, scaling our brand internationally, and executing a global delivery network that will ensure greater resiliency in our delivery capabilities. And fourth, we will continue to make investments that increase our relevance to clients by strengthening our industry expertise and technology consulting capabilities, investing in our talent, and extending our solution integrator and designer competency. As we invest for growth, we will also continue to leverage our balance sheet to accelerate our strategy. Our M&A strategy continues to be focused on advancing our digital priorities across the globe. Last month, we closed the acquisition of Tin Roof Software, a custom software and digital product development services company that expands our software product engineering footprint in the United States. And earlier this month, we closed the acquisition of 10th Magnitude, one of Microsoft's longest-standing Azure-centric partners. This deal expands the Microsoft Azure expertise within our new Microsoft business group and adds development on managed services hubs throughout the United States. And last week, we agreed to acquire Bright Wolf, a technology services provider that specializes in custom industrial IoT solutions for Fortune 1000 companies, which will expand our smart products and Industry 4.0 expertise. In short, we are committed to growth, and we'll continue to make meaningful investments to ensure we increase our relevance to clients and enhance our competitiveness. While the macro and political backdrop remain uncertain, come what may, our goal is to ensure we outgrow the market, just like we did in the third quarter, whilst remaining commercially disciplined. In closing, I would remind you that 18 months ago, when we set Cognizant's transformation in motion aimed at returning the company to be the IT services industry bellwether, we knew this would be a multi-year endeavor, and our view has not changed. While we continue to have a lot of work ahead of us, we are encouraged by our progress. Our employees are energized, united by our shared purpose and vision. We're excited about our strengthening competitive position, the opportunity to expand internationally, and the opportunity presented by the third phase of digital. There will be several big winners in this attractive market, and we aim to be one of them. With that, I'll turn the call over to Jan, who will take you through the details of the third quarter and our fiscal year outlook before we take your questions. Jan, over to you.

Thank you, Brian, and good afternoon, everyone. I'm very happy to be part of the Cognizant team and look forward to connecting with all of you going forward. From the onset, I was intrigued by Cognizant's meaningful growth opportunity, and my first weeks in the job have more than confirmed my initial assessment. I will work hard to fill Karen's shoes and wanted to say a big thank you to her for making my onboarding so smooth and seamless. Moving on to Q3 results. Third quarter revenue of $4.2 billion was flat year-over-year or a decline of 70 basis points at constant currency. Compared to the prior year period, this includes a positive 250 basis points contribution from inorganic growth and a negative 130 basis points impact from the exit of certain content-related services. Sequentially, we saw a broad-based improvement in the business, particularly in areas such as cloud and enterprise application services, IoT and software engineering. Moving to the industry verticals where all of the growth rates provided will be year-over-year in constant currency. Financial services declined 2.2% with similar performance in both banking and insurance. Retail banking improved in the quarter, driven by regional banks, while capital markets returned to growth after several quarters of softness. However, we continue to see weakness across global banking accounts and with clients in the payment sector. We continue to expect below company average performance in the Financial Services segment for the next several quarters. Healthcare grew 4.2% led by double-digit growth in life sciences, driven by strong growth in the biopharma clients, and included the contribution of the Zenith acquisition which we lapped mid-quarter. Growth was partially offset by continued weakness in the medical device clients. Within our healthcare vertical, revenue saw modest growth. After six quarters of decline, we are pleased with early signs of improvements in the healthcare business, we see improvement in the payer segment across key accounts which is offsetting the decline in the provider market that continues to be negatively impacted by COVID. Products and Resources declined 4.6%, with double-digit growth in manufacturing, logistics, energy, and utilities, offset by double-digit declines in travel and hospitality and high single-digit declines in retail and consumer goods. While we saw strength in bookings in retail and consumer goods, we expect continued pressure in 2021 as a result of the ongoing pandemic. Communications, Media and Technology was flat, including the approximately negative $57 million year-over-year impact to technology from our decision to exit certain portions of our content services business. Excluding this negative 920 basis point impact, growth in Communications, Media and Technology was approximately 9%. Communications and media grew mid-single digits as growth in communications and education clients offset continued weakness in media and entertainment. We expect pressure in media and entertainment into 2021. While overall, we saw improved momentum across the business, the demand environment remains uncertain. But we believe we are gaining traction across industries as reflected in the strong bookings and pipeline numbers Brian referenced earlier. Moving on to margins. In Q3, our GAAP operating margins and diluted EPS were 14.2% and $0.64, respectively. GAAP EPS reflects $140 million or $0.26 per share income tax expense related to the reversal of our indefinite reinvestment assertion on accumulated India earnings. I'll comment more on that decision later in my prepared remarks. Adjusted operating margin, which excludes restructuring and COVID-related charges, was 15.9%, and our adjusted diluted EPS was $0.97. Adjusted operating margin was down 140 basis points year-over-year primarily driven by higher incentive-based compensation and the dilutive impact of our recently completed acquisitions, which more than offset savings from our Fit for Growth program, lower T&E expense, and the favorable movement in the rupee. Additionally, during the quarter, we incurred $43 million of charges related to the Fit for Growth Plan. The actions drove continued cost discipline, which allowed us to further invest in our growth initiatives. The majority of the actions under Fit for Growth are complete, and we have achieved our savings targets. We expect charges to be approximately $200 million in annualized gross run rate savings of $520 million to $550 million in 2021. While we don't anticipate charges under Fit for Growth to continue in 2021, we will continue to invest savings achieved to help accelerate growth aligned behind the four strategic areas Brian outlined: repositioning the Cognizant brand, accelerating digital, globalizing the company, and increasing our relevance with clients. Now turning to the balance sheet. Our cash and short-term investments balance as of September 30, stood at $4.6 billion or a net cash of $2.1 billion. Our outstanding net debt balances include the approximate $1.7 billion drawn on our revolving credit facilities in the first quarter of 2020. We had a strong cash flow quarter generating $821 million of free cash flow, largely driven by improved collections of our receivables. DSO improved 5 days year-over-year to 72 days. Before turning to guidance, I will provide additional details on our decision to reverse our indefinite reinvestment assertion on accumulated India earnings totaling $5.2 billion. The decision was made based on our strategic priorities to accelerate growth in international markets, and to expand our global delivery footprint, changes to the India budget enacted in April, and changes to the U.S. tax regulations that became effective in September. This reversal resulted in a one-time GAAP-only tax cost of approximately $140 million, and makes those earnings available globally. In October, we distributed $2.1 billion from our subsidiary in India, which resulted in a net $2 billion cash transfer from India after payment of India withholding tax. Importantly, on a go-forward basis, we can now more efficiently utilize 100% of free cash flow globally, which gives us greater flexibility in our ongoing capital allocation program. While we are reviewing our capital allocation plan, we initiated our share repurchase program and intend to repay our credit facilities by the end of this month. The share repurchase activity will offset a portion of the EPS impact from the lost interest income historically generated from cash balances held in India. While interest rates in India have steadily declined in the last several quarters, year-to-date, that cash had earned roughly 5%. This generated approximately $95 million of interest income or $0.13 per share. Since September, we have deployed over $700 million on share buybacks, repurchasing approximately 10 million shares. Now turning to guidance. The macroeconomic environment remains uncertain and the pace of recovery complicated by the evolving nature of the coronavirus pandemic. While we are pleased with the solid bookings and pipeline of the business year-to-date, how that pipeline converts to revenue will likely be impacted by the pace of economic recovery and thus, clients' confidence and spend. We are reaffirming revenue guidance at the high end of our previously guided range. Specifically, for the full year 2020, we expect revenue to decline approximately 0.4% year-over-year in constant currency. Based on current exchange rate, this translates to a decline of 0.5% up to approximately $16.7 billion on a reported basis. Our revenue guidance includes our estimate of the negative impact of approximately 110 basis points to the full year revenue from our decision to exit certain work within our content services business that will be reflected in our CMT segment and a positive contribution of approximately 200 basis points from closed acquisitions. This guidance continues to reflect the muted outlook for Financial Services, and the retail and consumer goods and travel and hospitality portions of our Products and Resources segment. For the full year 2020, we expect adjusted operating margin to be approximately 15%, which assumes incremental costs associated with the remediation of the ransomware attack, wage increases and promotions for certain of our associates effective October 1, and incentive compensation above 2019 levels. Our current guidance also assumes that Q4 revenue will be negatively impacted by lower bill days versus Q3 and the typical cycle of furloughs. We expect to deliver adjusted diluted EPS in the range of $3.63 to $3.67. Please see the non-GAAP reconciliations in the 8-K we filed today for a full definition. This guidance anticipates a full year share count of approximately 541 million shares and GAAP tax rate of approximately 32%, which implies a Q4 tax rate of approximately 27%. Our guidance does not account for any potential impact from events like changes to the immigration and tax policies.

Congratulations on the quarter. I have two quick questions. First, in light of recent developments with SAP, we've been receiving numerous inquiries about the size of your practice in that area. Any information you can provide would be appreciated. Second, with strong digital bookings growth at 40% year-to-date, when can we expect that to translate into faster digital revenue growth? We've been around the mid-teens range for the last few quarters. Additionally, do you think revenue growth could actually become positive in Q1? I understand you mentioned that we might still see negative growth through the first quarter of next year, but it seems like you're on a better trajectory now.

Jason, it's Brian. So let me take a shot at this. These may be for Jan. By all means, feel free to jump in if you see incremental details to add. So SAP as a practice, it's multiple hundreds of millions of dollars for us. It's sub-$1 billion. It is actually a very healthy business for us, and I have been in touch with the SAP leadership team in recent periods to see what we can do to accelerate our momentum there. It's pretty intuitive, what they're doing. But in the same way, it's also interesting for us given our ambition to scale much more internationally and given the installed base of SAP. So it's a partner that really is strategic to us, and we will continue to work closely with. Digital bookings. Look, more broadly, if I stand back from this. Bookings are strong overall, and it's broad-based by geography, by industry, by new and expansion versus renewals, and digital bookings are continuing to be strong as well. So what's been very pleasing to me is in the course of the last year, we have consistently shown strong bookings growth year-over-year. That has enabled us to actually build a stronger backlog through the year. And now we're in a very healthy position, healthier than we've been before. And of course, the pipeline, as Jan suggested earlier, is strong as well. Not just strong overall, but also strong in visual, in particular, and strong in the strategic accounts that we focused on as part of our customer segmentation exercise in the model. So I feel really good about our momentum there. The timing of all of this to revenue can vary by quarter, of course, and in the face of an economic environment, which is unsettled, to say the very least, including announcements made tonight across Europe. But we're pleased with what we've done. And if this continues, it all goes very well for our future. We're not going to make commentary around Q1 or indeed, fiscal year '21 at this moment in time. The only thing I'll say is we will continue to try to outgrow the industry. That's what we did this quarter. We think we're more competitive than we've been before. And we're absolutely committed to growth and to make investments to grow. If that means compromising some margins in the short term to achieve, we will absolutely do that. But I'm expecting performance to improve in 2021, but we'll share more details of that, of course, Q4 earnings. But the big caveat around this is what we're going through this sometime, which is a very uncertain macroeconomic environment.

Congratulations.

Let's start first with the headcount situation. I think our utilization levels are now quite high. We tightened our belt earlier in the year as I think every company in the world did, but we've seen somewhat of a V-shaped recovery, particularly in the digital side of our business. And as such, we're at the stage now that our bench is light, and we're committed as a leadership team to build that out. And we've already started that over the last month or so. But it takes time, of course, to get that built out. Obviously, we want to continue to drive more operational rigor around forecasting, which triggers enterprise resource management and all of that to make sure we have the right resources in the right place at the right time. So you will see us continue to build out our capabilities with evergreen skills or hot skills, as we would call them, and build upon our capabilities such that we can reduce utilization, which is a little bit higher at this moment in time. I am pleased with the employee engagement. I am pleased that voluntary attrition is down for the fifth quarter in a row. Notwithstanding that we're really pushing meritocracy and a performance culture these days. So you have seen a big bifurcation between voluntary versus involuntary attrition. And we do expect voluntary attrition to pick up a little bit in the coming quarters as we go through the merit-based promotion and salary cycle we're going through. And I underscore the word merit-based. With regards to H1B visas, look, it's quite topical, but perhaps I could stand hand back here a little bit and talk because the administrative rule changes with regards to skilled integration leases that have been quite topical in recent weeks. Some of those have been enjoyed through litigation already. And for other elements, there are challenges pending at this moment in time. So whether the rules, survive or not remains to be seen. All that being said, I actually think all roads are leading this direction anyway. So we will always intend to comply with the letter of the law to use these applications and any extensions we intend to pursue. We are a H1B visa, I would say, dependent organization. You used the word evolution, and I think that's the right word. Over the years, we have reduced our dependency on visas, and we've also acquired companies that enable us to be more global in nature. But in the same vein, some of the strategic decisions we took, which were in the right decisions, including exiting a portion of content moderation, has put us back a little bit. That being said, the rule is solely triggered by new applications and extensions. And H1B visas are currently under a 3-year visa. So this will roll in gradually. And I would say, I don't want to reassure everybody, our intention is to globalize Cognizant. And so you'll see us build out much more of a global-based workforce to meet client expectations, whilst, of course, stay focused on quality of delivery. And that will include a whole host of things that we will do, including U.S. college campus recruiting, upskilling and just a broader effort around a local employee base in the U.S. and indeed globally.

My question is on the healthcare vertical, and it's good to see the improvement. Question is with regards to the sustainability of that and the investments that you're making in various healthcare capabilities, including, but not limited to TriZetto? And on the topic of TriZetto with the Atos settlement, was that included in the cash forecast that you have? What does it mean from an operational perspective in terms of your client relationships, if you could address those questions.

So Jan, I'll touch on the healthcare business. If you want to touch upon then the cash flow and the cash balance and the Syntel settlement, which we were pleased to see yesterday. So Ashwin, first of all, healthcare is really important to us. It's almost 30% of the total company, and it consists of two major portions. One is life sciences. We're doing really well there. We have been for a long time. It's highly strategic to us. You are seeing the lapping of Zenith technology, which happened in Q3 of 2020. So that will impact growth rates a little bit. But I'm very optimistic around the opportunities in life sciences at the intersection point of biopharma medical devices, right through to industry 4.0 healthcare, retail, and indeed health tech. And I spent a number of hours on that with the team over the weekend. So we're really pumped around what we can do there, and you will see us continue to invest in it. The majority of the businesses, however, the U.S. healthcare business, which is split between payer and providers. The payer business accelerated meaningfully this quarter, which strengthened services and indeed in products. We have a new leader who took over the Healthcare business earlier this year, an internal promotion, who has done a fantastic job, and this entire team are doing great for us. Bookings are very strong. Product growth is strong. We're getting new logos. Margins are improving. And we're just generally feeling very good, a better payer business. The provider business, which is much smaller than our payer business, saw significant erosion year-over-year in the third quarter as did the industry. As you know, the provider business is suffering from transaction volumes that are decreasing because the pandemic is obviously reducing elective procedures. And I would say that's an area that we would expect to come back but more holistically, the momentum we're seeing in payers, which is 3/4 of the business, and life sciences will give us confidence that we can continue to pull strong health care results going forward. We're improving. Jan, over to you.

Let me provide some additional comments regarding the Syntel lawsuit. This morning, we achieved a jury verdict of $854 million. This lawsuit has been a longstanding matter for Cognizant, centered on our claim that Syntel misappropriated TriZetto's intellectual property related to certain software products while Syntel was a subcontractor for TriZetto. The jury found no liability for TriZetto or Cognizant, which is a significant outcome. While we are pleased with the results, Atos, the parent company of Syntel, has expressed intentions to appeal the verdict. Therefore, it will take some time before we have the final outcomes from this trial. It is too early to factor in that cash for any decisions. Nonetheless, we are satisfied with the jury's decision favoring Cognizant. Regarding cash repatriation, I want to elaborate a bit. We had a cash balance of $2.1 billion in India, and at the end of September, we decided to reverse our indefinite reinvestment assertion and repatriate that cash. This decision was driven by two primary reasons. Firstly, it aligns with our strategic goal of globalizing the enterprise, allowing us to invest in international markets where capital is necessary. Secondly, the budget enacted for fiscal year 2021 in India, along with changes in U.S. tax regulations, enabled us to bring this cash back in a cost-effective manner, which we accomplished in October. Historically, the cash in India has generated interest of approximately 5%. We utilized some of the cash returned from India, along with our available cash, to repurchase shares in September and October. The addition from these buybacks roughly offsets the interest income we would have earned in India. Overall, the outlook is well balanced. We are enthusiastic about the benefits of this transaction because it provides us with full flexibility and access to our free cash flow globally moving forward.

Just thinking about your largest verticals here. So you've turned the corner on healthcare. I wanted to ask on Financial Services. I hear the commentary on lower-than-average growth for the next few quarters. I'm curious what you're seeing in the areas of the clients. And whether it's still limited to only a handful of the former large banking accounts. Really, how close are you to the end of the tunnel on stabilizing those? And what do you think you need to do in those areas to really turn the corner in Financial Services, too?

Yes, the situation remains challenging. Financial services, much like healthcare, is significantly affected by ransomware. When discussing financial services results, I would separate them into two main areas. First, the insurance sector, which has faced considerable pressure over the past year due to the pandemic, insurance rebates, automotive issues, and disruptions affecting small and medium-sized businesses. This is impacting property insurance, alongside increased mortality rates for life carriers. Furthermore, catastrophic events and low interest rates are contributing to the struggles in this sector. Our insurance business is predominantly in North America, making up about 80% of it, which is higher than most companies. It's one of our strongest areas, but we anticipate a decline this year, so we need to improve our pipeline. While bookings have been robust, the pipeline is not sufficient. Recently, our leader retired, bringing in new energy, and we hope to get back on track. In banking, if I outline the broader picture, as mentioned earlier, capital markets, retail, and commercial banking have experienced year-over-year growth, although card and payment services decreased. Regarding larger global banking clients, it's a smaller group, with some issues linked to ransomware that we are addressing. Other problems stem from internal issues related to the seniority of client partners, and a trend of insourcing seen at these banks. To improve the situation, I'm confident we can turn around the insurance sector. We also expect progress with regional banks in North America, and we have recently elevated some accounts to platinum status after surpassing $100 million. However, we still have significant work in our current accounts, particularly in expanding our digital presence in these banks. The good news is that our digital bookings in those banks have increased by over 50%, indicating we are starting to make inroads. We continue to enhance our client partnerships and refine our account planning. At all levels, including the executive committee, we are focused on penetrating other large banks, and I believe we are making progress with two specific institutions. Unfortunately, banking in Europe remains weak; we lost an account last year and are facing some challenges with transformation projects and one major account. While it is possible to fix these issues, I don't anticipate a rapid turnaround in European banking as quickly as what I've witnessed in healthcare.

Okay. Great. Nice progress by Cognizant in these results. I want to ask a high-level question. Recognizing that the COVID pandemic is continuing here. Do you see Cognizant as still somewhat in a crisis response and basic blocking-and-tackling mode? Or have you transitioned now into a more forward-moving strategic attack mode? I guess the main part of the question here is, assuming you are in a transition, what are the next set of metrics you're most focused on to gauge Cognizant's progress moving forward here?

Thanks, Rod. Brian here. So look there's a short answer and there's a long answer, so I'm going to give you something in between. First of all, I really feel good about the progress we've made in the last 18 months. We've actually done a lot, probably more than people realize. Clarified our strategy. We executed the non-strategic portion of the business. We executed a restructuring program. We used some of the proceeds from that to reinvest back in the business. We meaningfully improved our digital portfolio competencies and partnerships. We've built a strong professional, mature, client-centric leadership team. We've begun a pretty significant commercial transformation that is showing positive leading indicators and pipeline win rates, bookings. And we put, I would say, a better business management system in place to ensure optimal financial and operational rigor. And we did all of that, to be very honest, in a period that I was not expecting. We managed through global pandemics that impacted both demand as well as fulfillment. We navigated a ransomware attack well, and I want to say that humbly. But we did as best as we could, and we've actually received good client feedback on that. We've improved employee engagement to levels not seen for a few years, and that reduced voluntary attrition at 5 quarters in a row. And we've managed to put ourselves in a position that we built a multi-year plan that incorporates sustained investments. So I'd characterize all of that as pleased, but not satisfied, to be very honest. We're not in finish product yet. We're in the middle of a multi-year project. And we must continue to, of course, as we've said, reposition the brand, execute our strategy, globalize the company, take advantage of the opportunity overseas, globalize our delivery, build on our growing momentum in healthcare, and fix financial services and, of course, accelerate our position in digital, which just simply exposes us to higher categories of growth and makes us more relevant to clients. If we do all of this, our bookings momentum will continue, and ultimately, this will translate to revenue growth. And so Rod, everything else at some stage becomes a leading indicator: pipeline, win rates, the leadership team, the bookings. Our goal here is to invest in the business to get back to growth. If we do that, growth accelerates and we will show margin expansion but in a very calculated manner that allows us to sustainably reinvest back into the business. I say all of this with a great deal of caveats given the uncertain macroeconomic situation we're in at this moment in time. That being said, I'll just wrap up by saying, I'm really proud of our team and of our associates around the world. I'm confident of the unity of our leadership team, the absolute support of our Board of Directors who've been tremendously supportive of what we're doing, and our growing execution rigor. And honestly, I think we're on track. We're increasingly competitive, and you've seen that, hopefully, in this quarter's results.

Brian, I wanted to actually try to get to and I'll ask them concurrently. The first is I wanted to return to bookings. And your bookings growth has been really strong. It sounds like it's 15% year-to-date, and it sounded like it was 25% for the quarter, so accelerating bookings growth. And I'm trying to understand the translation of revenue separately for Cognizant. While bookings has been strong, is there something else that we should be thinking about on the other side on attrition, specifically of revenues outside of Facebook. And so normally, you would expect that to start to show up next year, but just want to make sure we understand the other side. Has there been a greater level of attrition, again, outside of Facebook, that would cause revenue growth to perhaps not show up as quickly as we might think over the course of the next year or so? And then the second question, Brian, is I wonder if you could just touch on philosophical margins. And what you mean by that, you outlined your four investment areas, and also the benefit associated with how the savings plan is going to manifest itself during '21. But just philosophically, is there any words that you can give without providing specific guidance on how investors should be thinking about margins given those puts and takes associated with '21.

Let me begin by addressing the revenue and bookings questions. To be straightforward, there isn’t a significant story here aside from the exit from the non-strategic aspects of our content moderation business, which falls under our operations. Overall, I believe we are performing well across most of our verticals. While we still have challenges in Financial Services, we are seeing success in areas beyond consumer goods and travel. I sense growing momentum, but I remain cautious about making any firm commitments due to the broader economic climate. When I analyze our bookings—looking at renewals, expansions, and new business—I feel we had previously lost a backlog over the last couple of years, but we are now in the process of replenishing that late in the cycle. I feel more optimistic about what lies ahead. There isn’t any major narrative here, but the continuation of our bookings momentum is crucial because that will eventually translate into revenue if we maintain our execution. Concerning margins and the trade-offs between revenue and margin, I always consider this in two ways. First, it’s vital to distinguish between costs and investments. Growth investments will always take precedence over short-term margin optimization. Our ultimate aim is to enhance our wealth and commercial momentum while revitalizing revenue growth, and we are prepared to make some short-term trade-offs in margins to achieve these objectives. We are making substantial investments in the business, even more than I had anticipated a year ago, as I uncover more opportunities in talent management. We are issuing bonuses at higher levels and reinstating merit-based promotions and raises. In the digital space, we are attracting limited talent, which creates both an asset and an expense. We are also upgrading our client partnerships to improve our representation beyond traditional CIO and CTO roles. Furthermore, our targeted M&A efforts, which I’m pleased with, come with integration costs. Although our gross margins are decent, we are experiencing some margin dilution in operating income due to the SG&A dimensions of these scaling businesses. We are also focused on commercial hiring to strengthen our delivery capabilities. We are investing in automation, branding, marketing, internal systems, IT and security modernization, and expanding our delivery network globally. Thus, I have a lot to consider to ensure we continue to achieve margin expansion. I view 2020 as particularly challenging for margins due to issues like ransomware and the pandemic. I believe that through our restructuring efforts and increased operational rigor, along with ongoing work in pricing, renewals, upselling, cross-selling, and optimizing our resource mix with an emphasis on automation, we can make necessary investments while still showing margin expansion at a rate that allows for continued business investments. For investors interested in our journey, I believe Cognizant represents one of the more compelling investment opportunities at this time.

I was wondering, Brian, do you have any view at this point on '21 budgets? And if that's too hard, just more generally how important do you think your client budgets are in terms of impacting Cognizant's fortunes?

It's an interesting question, James. There are many factors at play, including macro demand and client buying behavior. On one hand, I'm optimistic about our current momentum, with bookings up 15% year-to-date. Every booking represents a renewal, an expansion, or a new client win. The macro demand seems to be better than the most pessimistic analysts predicted back in April, which is a positive sign for the entire industry. However, in a market defined by vendor consolidation, some companies like Cognizant will perform better than others. Additionally, as the pandemic has persisted, clients have become more decisive regarding their technology priorities and spending, which is beneficial since uncertainty is a significant challenge. We are also less exposed to troubled sectors like travel, hospitality, retail, and consumer goods, as they make up less than 15% of our business. We primarily focus on the global 2000 customer segment, making small and medium business issues less of a concern for us. Moreover, we are seeing momentum in digital, having strengthened our portfolio. This will be crucial for the next phase of digital evolution, which I believe is a real turning point. However, the recent rise in COVID-19 cases and the latest restrictions, including lockdowns in Europe, are worrisome. It's uncertain how these developments will impact decision-making and budgets, which could alter our previously promising outlook. Going into the upcoming months, we face challenges as we need to optimize our resources and adjust utilization while closely monitoring demand and customer buying behavior. With respect to buying behavior, clients are indeed more decisive and are looking for strategic or trusted partners to navigate through the pandemic. They are prioritizing remote working enablement, e-commerce, AI, and analytics, focusing on hyper-personalization. There's a range of initiatives clients are pursuing to achieve cost relief and reduce capital expenditures, and I see a growing number of clients focused on enhancing resiliency, security, agility, and scalability. The trend of cloud acceleration will persist. In the short term, there are opportunities in e-commerce and remote working, though some larger projects, like ERP upgrades, may take longer. There are also opportunities in captives that we will evaluate, as they can be revenue dilutive compared to business acquired through mergers and acquisitions. Furthermore, vendor consolidation presents opportunities for us, particularly in legacy systems, and increasingly in digital sectors as some suppliers seem less flexible than Cognizant regarding terms and pricing. The pandemic is compelling companies to reconsider their operational approaches, including when to partner and where to focus their efforts. These aspects are real and will influence budgets in the coming year. As long as the situation doesn't deteriorate significantly, the critical factor is that clients are making decisions more rapidly and with greater certainty as we approach the budget cycle. If conditions worsen, the industry, including services, might find itself facing challenges again. I am fully concentrated on a significant trend which is digital transformation. It's a strong, lasting trend. Our bookings and pipeline are robust, and our brand is improving. We are seeing strength in digital engineering, including Software as a Service, AI, and analytics. Clients are reaching a realization that even though they have upgraded their technology stack, they are questioning whether they are receiving adequate returns on their investments. As we consider the next phase of digital transformation, COVID has revealed inadequacies within many companies that were previously hidden. Clients are recognizing that their platforms and e-commerce capabilities might be insufficient. Their marketing efforts are often still analog, and their personalization suffers due to poor data management. Their processes are overly dependent on people, making them unscalable. Although we've facilitated multiple digital transitions, we've mostly been enhancing the technology infrastructure for companies that are not digital natives, which doesn't address all their challenges. I believe clients will become savvier in the coming budget cycles, understanding the necessity of becoming more software and data-driven. They will need to embrace user experiences and shift towards agile digital workflows. This is our focus, and we are committed to it while remaining open to other opportunities.

This is Katie. Thank you all for joining and for your questions, and we'll speak to you again later in the next quarter. Thank you.