Cognizant Technology Solutions Corp (CTSH) — Q1 2021 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 first quarter 2021 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.

Thank you, Tyler. Good afternoon, everybody. I would like to start today's call by addressing the humanitarian crisis in India. As many of you know, India is the heart of Cognizant, and home to more than 200,000 of our associates. I would like to express my support and solidarity for our Indian associates wherever they are in the world. My sympathy for any who have suffered a loss during the pandemic. In addition to the ongoing support of our associates, which includes homecare and hospitalization assistance, vaccination cost reimbursement for our associates and their families, and making vaccine availability easier for those with disabilities. Cognizant is making a multimillion-dollar investment to assist India through the crisis. This is focused on covering operational expenses at hospitals throughout India that are caring for COVID-19 patients. Funding the efforts of UNICEF in India to deploy oxygen generation plants, COVID diagnostic testing, and medical supplies and partnering with one of India's leading hospital chains to set up vaccination centers in locations across the country, including some of Cognizant's own facilities. The impact of the pandemic on industry attrition rates, absenteeism, and client delivery remains somewhat uncertain. We monitor our situation daily, and we'll continue to prioritize the health and safety of our associates while serving our clients who have been particularly supportive in recent weeks. As the COVID situation differs throughout the world, our return to office strategy remains country-driven. Currently, almost all of our associates are working from home, and business travel remains on an exception-only basis. Let's turn now to the first quarter. First quarter revenue was $4.4 billion representing growth of 2.4% year-over-year in constant currency. Although we executed well in the quarter and delivered against our expectations, revenue upside was limited by elevated attrition, reflecting the intensely competitive market for digital talent that we spoke about in our last earnings call. This put some pressure on salaries as roles were filled by lateral hires or contingent workforce. And in some cases, commercial opportunities were forgone due to an inability to source talent. To address retention challenges, we've been executing a multi-part plan that includes stepping up our internal engagement efforts and increasing investments in our people through training and job rotations to provide opportunities for career growth. Shifting to a quarterly promotion cycle for billable associates and implementing further salary increases and promotions for high-demand skills and critical positions, and ramping our hiring capacity by adding hundreds of recruiters and making over 28,000 offers to new graduates in India, a new record. Daily resignations increased through the first quarter peaking in March.

Thank you, Brian, and good afternoon, everyone. Our Q1 revenue was $4.4 billion, representing growth of 4.2% year-over-year, or 2.4% in constant currency, compared with the prior year period. This includes approximately 300 basis points of growth from our acquisitions, and a 90 basis points negative impact from the exit of certain content services. Digital revenue in Q1 grew approximately 15% and represented 44% of total revenue versus 39% in the prior year period. We were pleased with this growth acceleration compared to Q4 particularly in light of a competitive hiring environment for digital talent. Now moving on to segment results, where all growth rates provided will be year-over-year in constant currency. Financial Services declined 1.7% reflecting more moderate declines in both banking and insurance, in line with our expectations, we are seeing early signs that the investments and repositioning of both businesses are resonating with our clients. This includes financial services bookings growth, outpacing total company bookings growth in Q1 and a solid pipeline growth. We continue to expect a phased recovery for this segment over the next several quarters and anticipate that we will see positive momentum throughout the year. Healthcare growth was 7% and accelerated from last quarter, driven by strong performance in both our healthcare payer and life sciences businesses. Following strong performance in the last quarter, in Q1, our healthcare business had its best year-over-year growth quarter since 2018 benefiting from increased demand for our integrated payer software solutions, and improving fundamentals in our provider business. Life sciences revenue continued to benefit from strong demand for our digital services among both pharmaceutical and medical device companies. Products and resources increased 2.4% driven by the fourth consecutive quarter of double-digit growth in manufacturing, logistics, energy, and utilities. This growth was partially offset by mid-single-digit declines in retail consumer goods and double-digit declines in travel and hospitality.

Hi, good afternoon. Thank you. I wanted to ask about the situation in India. Can you explain how you are considering the potential impact this may have on the business in the near term? Also, can you confirm whether there is anything included in the outlook regarding a possible revenue disruption? Similarly, regarding margins, is there anything factored in concerning those additional costs related to supporting the workforce and the broader population? Thanks.

Hey, Bryan, it's Brian here. So let me just touch upon this. First of all, I think it's really important for us to acknowledge it is a humanitarian crisis. And we've been prioritizing the health and safety of our associates and of course, their dependents, hoping that they stay safe as they work essentially from home at this moment in time. As I said in my script, we're doing a series of things to help in terms of medical expense support, pre-vaccinations, covering the expenses in hospitals, working with UNICEF, et cetera. To the question around in terms of how I think about the impact on the business, I think about the humanitarian side as being relevant. But candidly, the business side of the hot market is in some regard more meaningful in the sense that most of our attrition, and the resignations we talked about were happening in prior months, which are leading indicators of Q2 attrition, and the end of Q1 attrition. All of that was happening in a period when the COVID situation in India was substantially less severe than it is at this moment in time. So we're working through our business operations with our teams who are working remotely. It's a challenging environment. Of course, it's a stressful and emotional time for associates and their families. The impact, Bryan, on attrition rates and absenteeism, and client delivery remain somewhat uncertain. We look at it on a daily basis; we have crisis management teams involved. We've created a COVID delivery risk management process which allows us to initiate remediation actions. We're required to review the status of our delivery portfolio project by project where possible to shift work between offshore or nearshore and on-site teams. But I will say clients have been incredibly supportive as we go through this. I've received a series of emails from clients who are wishing us the best of luck and are certainly not putting a lot of pressure in the system at this moment in time. The financial impact of our actions is assumed in our guidance, and that is assumed off of what we know today, which is today's rates of absenteeism and today's resignations that we've seen. It is unclear whether attrition will actually slow because of this, or whether attrition will go up or stay stable, but it will potentially go up because of absenteeism. But to date, in our guidance includes what we know today. To date, we feel as though our guidance is appropriate.

Okay, great. So, Brian, you're very full two years into your leadership role at Cognizant. When you started at Cognizant, there were some meaningful management challenges there waiting for you? You're now navigating a pandemic with multiple waves across regions. So it's definitely been an eventful two years. In that context, I'd like to ask if you can grade Cognizant's underlying progress, the progress that you've made over the last couple of years. And if there's a way to decipher between internal progress, market progress, financial progress I'm assuming those dimensions may be progressing at different stages. But overall, it would be helpful to hear how you grade Cognizant's last two years and its progress.

Thank you, Rod. It's a comprehensive question in nature. But yes, I would echo the word an eventful first two years, given the transformation agenda, the leadership changes required as part of that. Global pandemics and ransomware attacks, of course, and now, a war on talent that is happening in the midst of the humanitarian crisis in India. And I would say, first of all, it's a team sport. This is about 300,000 associates pulling in one direction. I'm truly pleased with the executives I've got around me these days; we're all eager to show what we can do, and hopefully, I believe can become an iconic leadership team together in the years ahead. I've also been supported by a terrific board who's been 100% behind our vision and our strategy of the company. As I'm answering your question, I will start by saying I inherited a great company and a company of great pedigree, a company with a growth DNA, and a company with pride, proud employees. But it is clear that the company had not been hitting its stride in recent years. I asked our organization to pull together to help me operationalize a broad transformation agenda, which included strategy structure, commercial transformation, delivery optimization, and cultural elements. I also asked the company to help me with a restructuring program that we weren't used to, but that would allow us to free up capacity to make investments in growth in our systems and in our people. This is a growth company, and we needed to restart the engine. As part of that, you have to go through the corporate strategy, who are we? Who do we want to be? That leads to portfolio adjustments, both exits, such as content moderation, as well as meaningful M&A aligned to the corporate strategy. We've also doubled down on partnerships, including hyperscalers. All of this was just a means to an end, to set out to build a pipeline to accelerate bookings, and ultimately, to get the company back to industry-leading growth. Because I think growth will ultimately make the P&L work again. We're certainly in the middle of a lot of this. I will say I'm more confident now than ever that we can do this. I believe we're on track. We've made great progress internally, to go to your framework. Look, we've got a clear purpose vision, a set of values, we have a clear strategy, and we've got a more competitive portfolio that is aligned to our strategy. We've got a better talent philosophy, including diversity and inclusion, which is critical in a knowledge-based business. We progress on important things like sustainability and cybersecurity; I think we're getting our belief back. Testimony to that is the notion of employee engagement, at multi-year highs in 2020. Although we are fully aware that we got more work to do on our employee value proposition, and indeed, of course, on attrition. Commercially, when I answer your question on markets, I am not talking about Wall Street; I'm talking about commercial markets as in our clients. We've overhauled our commercial team, we've increased the sophistication of the team, I think we went back to our tuna box model where we got tight alignment between commercial and delivery, we've refined our customer segmentation strategy. We know who are the clients that we need to partner with deeply, we've implemented a more refined variable compensation program, we've refreshed our talent to ensure we can represent the entire portfolio and address client pain points beyond the CTO or CIO. I'm excited about how we're now being seen by clients. We're no longer necessarily just viewed in the build or operate space. We have a growing reputation and recognition in digital and cloud following our M&A strategy, and that is now showing up in sustained book-to-bill ratios in excess of 1.1, which I feel is critical to drive the revenue growth rate that I'm aspiring to, and our qualified pipeline and win rates are as healthy as they have ever been. All of that leads ultimately to financial outcomes. I don't think the true benefits of this are yet visible. We have seen the margin dilution of the investments in commercial hiring, IT security, modernization, M&A dilutions, and some brand investments we are making. We continue to review the trade-offs between revenue growth and margin expansion. But I will say we expect to see revenue benefits on the back of the bookings momentum and margin should improve each year for the foreseeable future, albeit with a balanced approach to trade-offs between revenue growth and further investments to drive sustained outperformance versus the competition. In short, a lot of work ahead and I look for great years ahead.

Great. And just a quick follow up that kind of dovetails with some of the things you mentioned. It seems attrition is a top of the list of things to address at this stage. Can you just speak to what you see as the root factors causing the attrition and your confidence in being able to fix that?

Look, it's a two-edged sword. We've seen a V-shaped recovery as an industry, and Cognizant certainly is after a weak March and April last year. We snapped back immediately. That leads to a skill shortage. It's an industry problem. I think you've seen that in the earning cycle to date. Of course, I caution people to compare attrition rates between various competitors; we include BPO. Our calculation is current quarter annualized, which is the worst of all worlds at this moment in time versus some peers who exclude BPO and look at attrition on a rolling 12 months, which includes some lower levels of attrition because of COVID. I think about our attrition, which went up 200 basis points sequentially against two parameters: one is macro considerations. The market is extremely competitive at this moment in time. There are supply-demand imbalances across cloud, across digital engineering, across data. I sense that the work from home environment has given people a sense of community. And I also see the build-out of captives which tends to pressurize salaries. On top of that macro backdrop, I think we have some Cognizant considerations as we continue to transform the company. We're driving toward a culture of meritocracy and a performance culture, evolving more towards a global or sometimes local workforce, which is in line with client expectations, and regulatory policy around the world. In some regards, we're late to some of those elements. We're dealing with some of the pain that others have dealt with previously. I am 100% confident we're managing attrition actively as best we can. I'm pleased to say that attrition peaked in March, slowed in April and continues to slow in May, albeit early days in May. We have a lot of work streams around employee engagement, training, job rotations, and we've taken the decision to invest more in targeted salary increases and promotions, shifting to quarterly promotion cycles for billable associates. We've added hundreds of recruiters in the last four months and we're making a record number of 28,000 offers to new graduates in India, which is up from 17,000 hired in 2020. In 2018, we may have actually not even hired any Gen Z graduates into Cognizant, so we're doing the right thing to address attrition. In the meantime, we're working to manage the salary inflationary elements. As Jan pointed out, P&A expectations in the second half of the year are lower than previously anticipated. That will temper some of the downsides, but these are investments that I think will help stem attrition which will give us more productive hours from our employees. We have other levers at our disposal to manage salary inflation, be that on offshore or nearshore mix pyramid optimization, delivery industrialization including automation methodologies, templates, and the like. We have a new chief procurement officer coming on board soon. Everything else we're doing as we evolve the company against the line of work that we actually sell and deliver as we shift from staff augmentation towards managed services and project-based delivery transformation. We know what we need to do and we're honest. I think we'll see sequential increases in attrition based on the resignations in the last few months because there is a two-month notice period in India. We have a strong understanding of what attrition will be in Q2, but that's been factored into our model and into our guidance. In the meantime, we've been hiring at record pace, given the extra recruiters we put to work.

Thank you. Hi, Brian. Hi, Jan. So a couple of things I guess. I might have missed this. But can you quantify the revenue growth you were not able to get solely because of the talent shortage? And then when I think of headcount growth, in spite of the hiring, headcount growth is still at relatively low sequential levels. Is it a question of these folks have not yet joined or is that the net number because of the attrition? And could you separate out what is digital headcount growth versus overall headcount growth?

Well, headcount grew about 5,000 people year-over-year, but Ashwin, that excludes subcontractors and contingent labor, which have increased sequentially and year-over-year materially; it's not a number we disclose. We've turned to external sources, both lateral hires on subcontractors and contingent labor, as we've been working through the attrition situation internally, nor do we break out digital versus non-digital headcount. To be very clear, you can have somebody working in a test with testing capabilities, and they can work on what could be viewed as legacy projects. But in the same vein, as part of an agile squad, they could be working on something as familiar as a frequent flyer website. It's difficult to classify workforce between legacy and digital. We are not quantifying the opportunity cost, but certainly, it's material enough to talk about. When I review countries, there's hundreds of basis points of growth in some cases that we could have had, in other cases less. It's been a pain point for us throughout the quarter. We talked about attrition being a worry in our last quarter because we could see resignation rates and see what's happening in the industry as people are doing their best to put in counter-offers to stop resignation. I'm glad we anticipated instead and we set appropriate guidance. We're doing the same this time around.

Could you comment also on the potential for greater use of technology to decouple revenue and headcount growth?

Well, that's the holy grail, of course, in some regards, but a lot depends on the way you're running your business and the businesses you're winning, whether you're in a BPO type business or a tech services centric project. We have a huge effort underway around automation, not just in delivery, but also some very exciting IP that we have been developing that hopefully we'll be able to talk about in the next quarter or so that I think will completely set us apart in the industry. It is truly the holy grail. Of course, you've also got to think about the pyramids. I told earlier about adding 28,000 offers for new graduates into the bottom of the pyramid this year. The bill rates of those will be very different from the rates of onshore delivery. So it's very difficult in a succinct way to decouple revenue growth from headcount growth because there are so many factors at play. But rest assured that the industrialization of delivery, including automation, is top of mind for us.

Hi, guys, Brian, I wanted to direct this to you if I could; I want to understand how you're thinking about growth. You've obviously given guidance for the year, but I wanted to see if you could put some context and maybe even some philosophical views on longer term. You're guiding to basically 3% to 4% organic constant currency growth, maybe a little closer to the 4% if we take out or normalize for the Facebook business. How should investors be thinking about that growth potential longer term? And a, if you could talk a little bit about how the pipeline growth looks now? What are some metrics you can provide us also in terms of, b, the capacity that you see for incremental M&A from here, whether it's the ability to the financial resources and or the management resources to keep driving M&A? And then finally, c, I was hoping you could touch on financials, it's still candidly serving as an anchor to your growth rate, not in a positive way, but limiting your consolidated growth. If you could touch on growth pipeline, M&A capacity, and then financials, thank you.

Okay, so M&A, first of all, let's go back to the Capital Framework we've set forth in recent quarters. We plan to deploy approximately 100% of our annual free cash flow through a balanced capital allocation program. I will say these are our guiding principles and we will continue to be opportunistic, approximately 50% towards M&A in areas wholly aligned to our strategic priorities, and of course, the remaining 50% towards dividend and share repurchases targeting a consistent dividend payout ratio in the range of about 25%. M&A will continue to be a priority for us. As I said earlier, we announced three acquisitions in the first quarter and indeed signed an agreement to acquire ESG Mobility. M&A is not something we wake up every morning feeling we have to do; it's just an enabler for us to achieve our strategy. Our strategy is built around accelerating digital, which are our higher growth categories, and our strategy is also built around globalizing the company from a Delivery Network, getting after exponential growth overseas. Digital, as well as our overseas opportunity, I think, puts us in a position to have ambitions well in excess of 3% to 4% organic growth rate Keith that you mentioned. However, I will refrain from getting into long-term financial statements here. I would be very, very disappointed in the years ahead if we do not significantly exceed those growth rates. We've been doing what was needed in the last year to start replenishing our backlog to consistently drive a book-to-bill ratio in excess of 1.1. That puts us in a position that organically, coupled with the accretive nature of the acquisitions we've done, we should have continued upward pressure on revenue going forward. That being said, I will caution everybody, we're in somewhat of an unpredictable world at this moment in time with the humanitarian crisis in India. That's how I think about organic possibilities, as well as the fact that we have an M&A lever exposing us to higher growth categories. All of this is in the context where we are substantially more operationally inclined and sophisticated in how we think about delivery and commercial leverage going forward. On financial services, it's critical we turn around financial services. I'm proud of the progress we made in healthcare, which is catching up on financial services as almost being our single biggest industry sector. Financial services account for 1/3 of our revenue and in dollar terms, it modestly grew, but in constant currency terms, it declined 1.7%. Within that, we have two groups: the banking and financial services business that is more than half of the business, and we have insurance, which is less than half. It's a tale of two cities in insurance; North America was weaker than the international business. Within banking and financial services, there are consistent trends; capital markets declined, retail banking grew modestly, but was offset by declines in commercial banks and cards and payments. Global banks, as we call them, have continued to in-source and that business continues to decline for us, offset somewhat by good momentum with some regional banks. We have a plan of attack and healthy bookings throughout financial services, both banking and insurance in 2020. We've added extra commercial coverage, refreshed a significant amount of our commercial teams, and embraced digital. We've had strong digital bookings in those areas in 2020 working more with our partners who are interested in our strength in healthcare and financial services. It is a business under repair, and we expect to see gradual recovery in 2021. We should see stronger growth in Q2, obviously, for easy comparison reasons as well as COVID and ransomware attacks. I'd like to think that by the course of the year, we can get this thing shaped up to be in better condition than it is today.

Thanks. Any comments on the pipeline, Brian?

Look, pipelines are very healthy overall. It's as healthy as I've seen it, and a pipeline for Financial Services is also healthy. We don't have a demand issue in the industry; I'm actually quite bullish on the industry for 2020 and indeed for 2021. That's based on client conversations; I speak with clients every day, and we keep an eye on what industry analysts are saying. I think talent shortages and attrition are a greater concern for the entire industry. Clients are making investments; they are decisive. Indecision is the enemy of people like myself. Clients being decisive is good, talking about more strategic partners; we are in the mix more than ever in that vendor consolidation. I'm quite excited about that. The things we see driving the pipeline stem from business model innovation, customer experience, technology modernization, risk mitigation, and efficiency initiatives. One of the reasons I was so adamant in doubling down with the hyperscalers two years ago is because you shouldn't underestimate the sheer power and scale of hyperscale companies and that they are investing massively by commercial terms aligning companies like Cognizant around industries, massively accelerating cloud migrations. If you believe in platform economics, which opens up the possibilities of microservices and APIs, I think this is the future. We stood up to business groups or business groups are in the hyperscalers in the last few years and I think we're reaping the benefits of that.

Hey, guys, this is Kathy for Jason. The spring time frame is when enterprises typically make decisions on ramping up and moving forward with some of the discretionary projects. Can you just talk a little bit about what you're seeing on that front? Is there any hesitancy or are there any challenges in terms of meeting demand in that regard?

Well, it's very consistent with my last answer, Kathy. I am expecting a robust environment. Clients are being decisive; discretionary projects are being funded. I think we've all grown used to the new world and we're getting at bats more often than ever before. Beyond bill, run, and more in the innovation and transformation agenda. I feel very good and optimistic about the macro demand picture. But as I said earlier, talent shortages and attrition are a much bigger concern for me at this moment in time than macro demand.

Terrific. Thanks for taking my question. The first one just on M&A, just to follow up there. Your Cognizant pace of M&A has increased quite a bit in the last few quarters. Can you just comment a bit on how you're building that muscle so that it becomes more of a strategic differentiator for Cognizant, like what changes have you made to how you're doing sourcing or integration of these companies? Thank you.

Yes, look, the M&A activity had been healthy in the first quarter. So we spent approximately $300 million and announced four acquisitions. But I wouldn't read too much into it as an accelerated pace; I think we're executing against the plan and trying to spend within the framework of the capital we strategically want to allocate towards M&A, and we are executing that. The team has done a fantastic job in aligning our deal sourcing across industries and across the globe. For example, we talked in the last quarter about a slight shift towards more geographic expansion. We have two deals, this Australian deal and, of course, a German deal, also part of the transactions that we could announce and some of them are closed. We're executing in a classic manner; the team is focused on partnering with our markets and service lines to identify strategic areas of growth. It has worked really well. The natural spacing of these things will lead us to execute against our allocated capital. We have lumpy in and out, but a consistent way to do so. The focus in the company is clearly on integration because the synergies that these companies deliver are at the heart of the viability of all M&A strategies. We are pleased with our ability to generate synergies. Our business plans are generally pretty close to the reality on the revenue synergies, and as we have a larger portfolio of acquired companies, we have increased our focus on integration and efficiencies so these companies can fit into the fabric of Cognizant and benefit from the scale that we can bring to the table. You see, we still have dilution from acquisitions, putting pressure on our margin, so you'll see us continuing to drive integration and reap potential cost efficiencies in the future.

Terrific, thank you. And then just a quick follow up. I know, Brian, you mentioned that now you've had a 1.1 or greater book-to-bill for, I think, more than a year now on a very sustained basis. Can you just kind of comment on how you're feeling about the backlog at this point, your confidence level, whether it's improved in kind of your visibility into the sales pipeline and sales forecasting? Thanks.

Yes, actually, I should thank Jan for this. When he came in, he did a tremendous job, really decomposing down prior bookings and tracing them to follow the breadcrumbs into revenue. At this moment in time, we have much better visibility into that than we had this time last year. I feel good about our bookings momentum. To your point, really, since the last time, throughout 2020, we had an exceptionally strong Q1. Through the course of the year, we had strength with mid-teams for the course of the year. But in 2019, you don't get bookings until you start building a pipeline. We put a lot of effort into pipeline building in the second half of 2022, which started showing up in terms of bookings momentum in 2020 and into 2021. We don't have the same easy compares now as we had last year, which is why I want you to contextualize Q1 bookings growth of 5%. I am actually delighted with that because our December was really outstanding; it was an excellent month for us. April has been an excellent month. The Q1 period has been sandwiched between that. It's important to consider bookings on a rolling four-quarter basis because something stepping from the Friday to a Monday, or vice versa, could take a deal from Q1 to Q2, or Q1 to Q4. Book-to-bill is the right way to think about it. Once you're north of 1.1x, it creates a backlog of opportunity to go execute against and hopefully accelerate revenue from here. We're confident in our numbers, and we're also confident we'll have a very strong Q2 bookings number backed not just by excellent April results but also a combination of easy comparison factors this time last year.

Hey, thanks so much. I know you're at the bottom of the hour here. I just want to get a clarification here on the margin side and just ask it at a high level: is the cost of doing business going up? I mean, I see your gross margin in the first quarter was pretty good. But I know you moved into the lower end on the margins side, you said to Lisa that some of the M&A integration costs are going up. I understand that. Is the rest of it just people, and again, has the cost of doing business overall gone higher than you expected 90 days ago?

Tien-Hsin, thank you for the question. I was wondering if it wouldn't come actually, so appreciate it as well, because there's a lot of momentum and movement in our margins that I think is important to put our eyes on. When you compare our margins, overall operating margin is roughly flat slightly improved year-over-year, and on the gross margin side, you can see the benefits of our Fit for Growth strategy. You can also see the benefits of a lower T&E that helped us to expand the growth margins. Utilization helped a little bit, and we had support in the rupee, all helping on the margin side. But then we had accelerated growth on the SG&A side; we're laser-focused on directing that SG&A growth to our strategic initiatives that we think will yield. We view them as investments that will yield accelerating revenue growth rates. You pointed out the two biggest items: M&A is dilutive in its initial years, as well as our investments into sales and account management and growth. Those are two offsetting factors we have seen in the past quarters and this quarter. When we outlook, we are down taking our margin guidance a touch. I think that is reflective of a balance that we're trying to strike here, which could see increases in our compensation costs to lower attrition, attract, and retain talent. We plan to offset that partially with changes; I think the crisis in India illustrates that maybe T&E is not coming back as fast as we had anticipated. We'll also carefully and surgically monitor our future SG&A growth to ensure we keep the overall margin equation together for the full year. The second quarter will be in line with our first quarter margin expectation, and particularly since we're anticipating the SG&A moderation to accelerate in the third and fourth quarter, but some of the compensation measures will likely be visible already in the second quarter.

Thank you for going through that. That was very clear, Jan, so maybe it's a quick follow up. Just you didn't mention contract execution and performance, so I'm assuming things are going well there. Any update on contract execution? And has risk management identified any changes since last quarter on the portfolio?

Yes. I presume you refer to our management of escalations, deals, et cetera. We made progress on our implementation of improvements for deal reviews and deal acceptance and pricing. As we rolled out those initiatives, they are gaining momentum. On the delivery side, I think the primary concern of our clients is our ability to fulfill talent availability. Overall, I would say it was a very solid quarter relative to execution.

All right. I think with that, we'll end today's call. Thank you all for the questions, and we look forward to speaking with you next quarter.