Cognizant Technology Solutions Corp (CTSH) — Q3 2021 Transcript

Thank you, Operator. And good afternoon, everyone. By now, you should have received a copy of the earnings release and the investor supplement for the Company's Third Quarter of 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. 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 like to turn the call over to Brian Humphries. Please go ahead, Brian.

Thank you, Tyler. Good afternoon, everyone. We executed well in the third quarter, delivering revenue of $4.7 billion, up 11.8% year-over-year or 11% in constant currency. Bookings growth, a key leading indicator, accelerated to 24% year-over-year growth in the third quarter. Our book-to-bill ratio of 1.2 times revenue on a trailing 12-month basis underscores our commercial momentum. I'm grateful to our teams around the world for their resourcefulness in meeting our client commitments despite a challenging labor market. We delivered solid sequential adjusted operating margin expansion in the third quarter as we offset the cost of increased hiring with cost discipline elsewhere. I'm also pleased with our progress against our key strategic initiatives. For example, third quarter digital revenue grew 18% year-over-year. Digital represents 44% of our overall revenue mix. We expect this percentage to grow in future periods, positioning Cognizant for both top-line momentum and margin expansion. Moreover, the intimacy of our C-suite engagement increases as we serve clients in their digital transformations. Better-than-expected growth in our non-digital business impacted our digital mix progression, but is nonetheless a welcome outcome. During the third quarter, we saw continued strong top-line momentum in our digital business operations practice, reflecting our differentiated offerings for digital natives, our BPaaS leadership position in healthcare, and our strength in intelligence process automation solutions. We recently announced Cognizant Neuro, a simpler and more effective way for clients to achieve the full potential of intelligent process automation and speed time to results. Everest Group, a leading industry analyst firm, recently recognized Cognizant Neuro as an exciting development to enable automation at scale. Moving to industry segments, financial services ongoing recovery continued, with growth of 4.3% year-over-year in constant currency in line with our expectations. We posted strong double-digit growth year-over-year in constant currency in products and resources and in communications, media, and technology. Within products and resources, we continued to deliver excellent growth in manufacturing, logistics, energy, and utilities, as well as across retail, consumer goods, and travel and hospitality, which have recovered to pre-pandemic levels. In communications, media, and technology, we continue to lead with our digital engineering capability to win transformation deals while leveraging our alliances to be a premier cloud transformation partner. In healthcare, we had another solid quarter, achieving 9.8% constant-currency growth. Momentum in life sciences continued, demand across payers remain strong, and we're beginning to see an uptick in demand across providers as they look to digital technologies to help reduce operating costs and strengthen new channels for delivering care. Our products business saw a continued double-digit growth in Q3. We're expanding our footprint in the healthcare market and adding new growth members on our platforms. We're also well underway with our digital transformation of our products, including the launch of our connected interoperability solutions to help clients provide secure, real-time data access, and meet compliance deadlines. We're proud of the work we're doing in partnership with clients like Parkland Community Health Plan. Parkland was looking for better ways to meet the growing needs of its medically underserved populations in Texas. As a better manager of health insurance claims, member transactions, and network of physicians and hospitals, our TriZetto QNXT Core Administration platform, delivered in a BPaaS model, is enabling the delivery of care management, claims processing, member services, provider services, and quality on a single platform, thereby enhancing care coordination and member experiences. Our healthcare business is a hugely strategic asset. I'm pleased with the progress we've made accelerating growth in healthcare, and I'm optimistic in our future prospects as healthcare companies modernize their business to address the need for enhanced client experiences, including virtual care solutions. Let's turn now to Strategy, including our digital ambitions. I remain bullish on both the macro demand environment and Cognizant's growing momentum in Digital. Clients continue to accelerate their investment in digital operating models to improve their customer and employee experiences, and modernize their operations through data automation and cloud. While most companies have launched digital initiatives, few have made the shift to a fully-digital operating model. Cognizant is now one of the few global firms that can serve clients across all stages of their digital transformation, from modernizing their technology foundation to implementing agile workflows. This is in part a result of investing approximately $3 billion in mergers and acquisitions over the past few years to broaden our portfolio while strengthening our relationships with hyperscalers and key partners. A good client example is Cabot Corporation, a global leader in specialty chemicals and performance materials, who recently engaged us to help transform their digital operating model. We'll be providing application development and maintenance, as well as infrastructure and operation services, enabling Cabot to create an enhanced digital experience that drives value for its customers and employees. Gaining our international operations is another strategic priority. And during the Third Quarter, we grew bookings and revenue solidly in both Europe and the rest of the world, with the highlight being 19% constant-currency revenue growth in the United Kingdom. We remain optimistic on our international market prospects and aim to accelerate growth as we invest in our talents, brand, partnerships, and operations. Global Biopharma leader Sanofi has selected Cognizant as a strategic partner to deploy an omnichannel customer engagement model; the solution will enable their customer-facing teams to engage with healthcare professionals through the new digital channels, provide them more personalized content, and also suggest next best actions. Cognizant deployed the cloud-based CRM, integrated marketing automation, and Intelligent Data Platform to the first 18 markets in just eight months. And for Her Majesty's Revenue and Customs, the UK government's tax authority, we're providing broad technology expertise across its Pega technology stack and enabling Pega application development and operational support that will facilitate case management and customer service applications. Moving on now to the intensifying competition for talent across multiple industries. The demand-supply imbalance in our industry remains particularly acute. Third-quarter voluntary attrition reached 33% on an annualized basis, or 24% on a trailing 12-month basis. As a reminder, when we measure attrition, we count the entire Company, including trainees and corporate across IT services and BPO. Despite elevated attrition, we increased our net headcount in Q3 by over 17,000 sequentially, which speaks to the tremendous work and effectiveness of our recruitment team. Given our focus in recent years on accelerating pressure hiring in India, we've made meaningful progress on addressing our pyramid. In the fourth quarter, we expect to make offers to 45,000 new graduates in India for on-boarding in 2022. Retention and recruitment have our leadership’s full attention. We are continuing our comprehensive program to support our associates' career growth and engagement to a range of initiatives that include: committed annual increases and an evolved approach to promotions, job boards so associates can easily explore open leadership roles Company-wide, abundant new training and development programs, sustained communication with our commitment to belonging and inclusion across our Company and to society more broadly, and the continuing pursuit of an ESG agenda which shows special meeting for our associates. To this point earlier this year, we published our first ESG report and set out on a path to reduce our emissions and increase our energy efficiency. Last week we announced Cognizant's commitment to achieve net zero greenhouse gas emissions by 2030. We plan to achieve this net zero goal through ongoing investments in renewable energy. Building on our initial success in India, where a quarter of our energy has come from renewable sources since 2020. We will also be investing in new energy-efficient technologies across our offices and data centers globally. In addition, we will extend our expertise in Cloud IoT and AI to help clients meet their sustainability goals. In closing, while the industry faces unprecedented competition for talent, during the third quarter, we attracted a record number of employees to Cognizant and stayed focused on delivering against our client commitments and our strategic repositioning. We're bullish on the industry and on our growing commercial momentum. Jan and I look forward to discussing Cognizant's future with you at our November 18th investor briefing. With that, I will turn the call over to Jan, who will cover the details of the quarter and our financial outlook before we take your questions. Jan, over to you.

Thank you, Brian. And good afternoon, everyone. Our Q3 revenue was $4.7 billion representing growth of approximately 12% or 11% at constant currency. Revenue growth was led by digital, which grew 18% and represented 44% of total revenue for the quarter. As Brian mentioned earlier, our digital business operations practice area is also growing strongly. Year-over-year growth includes approximately 300 basis points of growth from our recent acquisitions. Moving on to segment results, where all growth rates provided will be year-over-year in constant currency. Financial services revenue increased approximately 4% in line with our expectations. We continue to make steady progress as we reposition this business and have seen recent improvement in bookings and pipeline. We continue to expect modest growth for this segment for the full year. Healthcare revenue increased approximately 10%, again, driven by strong performance in both our healthcare and life sciences businesses. Revenue growth within our Healthcare business was primarily organic, and demand for our integrated software solutions remains strong. We also remain very pleased with our life sciences business, which grew double-digits organically year-over-year. Products and resources revenue increased approximately 18% driven by the sixth consecutive quarter of double-digit growth in manufacturing, logistics, energy, and utilities. Retail and consumer goods, and travel and hospitality also grew double-digits year-over-year, with both sectors experiencing demand for digital services as they recover from the impact of the pandemic in 2020. Segment growth also included approximately 600 basis points from inorganic revenue. Communications, Media, and Technology revenue grew 19%, of which approximately 500 basis points of growth was attributable to recent acquisitions. Organic growth was led by our Technology business, where our work with digital native clients has continued to drive growth in our core portfolio. From a geographic perspective, North America grew approximately 10% year-over-year, driven by demand from healthcare, life sciences, manufacturing, logistics, energy and utilities, and technology. Growth in North America also included the benefit of recently completed acquisitions across segments. Revenue outside of North America grew approximately 16% year-over-year in constant currency, led by growth in the U.K. We also experienced strong growth in Germany and Australia driven by the impact of recent acquisitions of ESG, mobility and Serbian, respectively. Now, moving on to margins. In Q3, our GAAP operating margin was 15.4%, and adjusted operating margin was 15.8%. Adjusted operating margin excludes the impact from the legal settlement, which if approved by the court, will resolve the previously disclosed 2016 securities class action lawsuit. On a year-over-year basis, adjusted operating margin declined approximately 10 basis points. Continued elevated attrition resulted in higher subcontractor recruiting, and other delivery costs. Additionally, our recently completed acquisitions negatively impacted our margin, and we continue to invest in SG&A to drive and support organic revenue growth and modernize our core IT and securities infrastructure. These headwinds were partially offset by savings from our cost initiatives in 2020 and 2021. Our GAAP tax rate in the quarter was 25.6% and our adjusted tax rate was 26% towards the high end of our full-year guidance. Diluted GAAP EPS was $1.03 and adjusted diluted EPS was $1.06. Now, turning to the balance sheet. We ended the quarter with cash and short-term investments of $2.4 billion, or net cash of $1.7 billion. Free cash flow in Q3 was $897 million, representing approximately 165% of net income and in line with our expectations. Year-to-date, free cash flow of $1.5 billion represents over 90% of net income. DSO of 72 days increased by one day sequentially, and is flat with the prior year period. Management remains keenly focused on this metric as it is a key lever for free cash flow conversion in the future. During the quarter, we repurchased 1.3 million shares for $100 million under our share repurchase program and returned $127 million to shareholders through our regular dividend. Year-to-date, we have returned over $1 billion to shareholders through share repurchases and dividends in line with our previously disclosed capital allocation framework. During the quarter, we also spent cash of $57 million on acquisitions, bringing the year-to-date spend on acquisitions to over $700 million. Turning to guidance, for Q4, we expect revenue in the range of $4.75 billion to $4.79 billion representing year-over-year growth of 13.5% to 14.5%, or 13.3% to 14.3% in constant currency. Our guidance assumes currency will have a favorable 20 basis points impact, and inorganic contribution of approximately 310 basis points. As a reminder, Q4 2020 revenue was negatively impacted by the $107 million charge related to our proposed financial services contract exit, which is expected to benefit Q4, 2021 year-over-year growth, compared by approximately 250 basis points. At the midpoint of our Q4 revenue outlook, we expect full-year revenue of $18.5 billion, representing 11.1% growth or 9.8% growth in constant currency. With that, we're guiding towards the high end of our prior full-year guidance. Our outlook assumes currency will have a favorable 130 basis points impact, and includes 330 basis points contribution from inorganic revenue. Our guidance also assumes continued momentum across healthcare, CMT, and products and resources, and modest growth in financial services for the full year. Moving on to margins. Our full-year adjusted operating margin outlook is unchanged at approximately 15.4%. As I mentioned earlier, elevated attrition is leading to increased costs in certain areas, including recruiting and subcontractor costs, in addition to higher wages for lateral hires. We also continue to invest significantly in our people through increased compensation, rolling quarterly promotions for billable associates, and training. As a reminder, our annual merit increase for the majority of our associates is effective October 1. This will impact our Q4 margin and implies a sequential decline in adjusted operating margin from Q3. To partially offset these headwinds, we continue to moderate the pace of non-strategic SG&A spends. This leads to our full-year adjusted EPS guidance, which is $4.2 to $4.6 compared to the $4 to $4.06 previously. Our full-year outlook assumes interest income of approximately $30 million compared to $25 million to $30 million previously. Our outlook assumes average shares outstanding of approximately 528 million, and a tax rate of 25% to 26%. Both share count and tax rate are unchanged from our prior outlook. Finally, we continue to expect free cash flow will represent approximately 100% of net income for the full year. With that, we will open the call for your questions.

Thank you so much. I want to ask on the attrition and the gross margin lines and what to think about here, going into the fourth quarter. Gross margin, this quarter was actually pretty healthy despite this step-up in attrition that you had signaled to us. So looking ahead, what should we think about there with attrition and gross margin specifically and are you able to pass along price increases? Have you seen any delivery execution issues, that kind of thing? Thank you.

Hi, Tien. It's Brian. And I'll pass it to Jan maybe directly after this. Look, first of all, attrition is elevated; going into the quarter, it would remain elevated. We expect going into the fourth quarter it will also remain elevated. However, we do expect some modest declines in the attrition rate, and that is healthy. We look naturally at resignations on a daily basis. We think as we’ve hopefully shown in the course of the year, we understand what's going on, what to expect from an attrition point of view. Clearly, while the headline number is high, when you apply the rate of attrition to more industry standard definitions, such as on a 12-month basis, we think we are more in line with the industry in the low twenties. As I think about this, we spent a tremendous amount of effort to try to address that both hearts and minds as well as compensation; hearts and minds have less of an impact on margin; compensation does. We’ve made a series of adjustments to internal processes to facilitate that. We've also really embraced the bottom of the pyramid after a few slower years from 2017 to 2019, or what we call GenC or fresher intake has increased meaningfully, and that is also helping our pyramid and our ability to have good promotion capabilities this year. As we said in our prepared remarks, we'll add 45,000 offers. So I feel pretty good about what we're doing from an attrition point of view. The reality is, however, we're in an industry that is facing unprecedented competition for talent. And we continue to see attrition in the same areas we've told you previously, such as skills in high demand as well as at the bottom of the pyramid. On pricing and margin implications, I will pass through to Jan.

Maybe I'll start with the gross margin in the third quarter, which was relatively consistent with the prior year. We observed the impact of increased compensation as a factor. However, we also had positive effects, such as a modest shift in our digital revenues helping us overall. The acceleration of revenue growth has been a factor as well. You should expect pressure on our gross margins in the fourth quarter because we're implementing our compensation increase for most of our associates effective October 1st. So you will see some pressure on the gross margin in the fourth quarter. We're working on all elements to curtail that, but I think you will see net pressure. Pricing, I wanted to make two comments before I pass it back to Brian. Pricing takes some time to implement since clients have longer-term contracts, but when we observe in particular our digital business, I think I can say that our clients start to really see the value that Cognizant is delivering. So we're satisfied and happy with the situation that our core thesis about our strategy to shift to digital driving higher gross margin is holding and helping us over the medium term on the gross margin side. Back to you, Brian.

Actually you've largely touched upon what I was going to say. I think the implications of digital are of course important from our pricing point of view, but also the competitors against which we're going up, enables us to be a very strong challenger brand; and so we have pricing, I would say, appreciation as opposed to dilution. One other important point, over the last few years, many people have asked me how I think about structured deals or captive takeouts. We've naturally, heavily embraced digital, and our growth rate in digital has been twice that of the industry over the last two years. One of the benefits of digital is, of course, the smaller contract durations you get, given the nature of the work you're performing, which ensures we haven't actually been locked into multi-year pricing agreements as part of a 5 or an 8-year contract. That's favorable for us going forward. But all of this is heavy lifting. We have to get it right in the quarters ahead, but we feel that we're on the right track.

Great. Thank you for the complete answers, guys. Thank you.

Hi, thank you very much. Good evening. I wanted to ask a similar question, Brian. But I'm going to go at a different direction. You used the word unprecedented and I agree, it does seem to be unprecedented attrition. But I'm wondering what slows it. You've talked about specific steps that Cognizant's taking, but it's clearly an industry problem. And the other side is, does it require a slowdown in revenues across Cognizant its competitors in order for attrition to come down? But I'm just wondering, what are some of the industry forces that might help alleviate some of this pressure? And then Brian, I will just go ahead and ask my second question since they're related. As you're facing such unprecedented attrition, how do you think about the trade-offs that you need to make related to gross versus margins, as you look out over the next couple of quarters, or even the next year?

Hey, Keith. Let me start with the second question, given it's fresh in mind. Look, we've already started making some of those trade-offs, some growth versus margins. I think the reality is I’m delighted with our team and our recruitment engine which really executed well in the last few quarters and will continue to execute well going forward and hence, we've had a headcount increase sequentially of 17,000, which excludes subcontractors, which also grew. But the reality is we don't have enough headcount to fulfill our potential. Therefore, we've been faced with choice points, which clients to serve, which deals to chase, where we walk away, and where we're willing to make pricing stances that may put a deal at risk, but it's the appropriate thing to do given the demand-supply balance. Those trade-offs are underway. I'd like nothing more to accelerate hiring from current levels so that we can really fulfill against our true potential, but due to the net ads and record levels in the quarter, we have enough attrition as does the rest of the industry to mitigate that. Regarding the first question about the industry forces that will alleviate attrition, it’s a very difficult question to answer. The reality is I don't see immediate line-of-sight to this. I foresee elevated attrition in the industry in the coming quarters. The only winner in times like this is the individual employee because companies like us don't win from this, clients don't win from this. Hopefully, this will right itself over time and hence, our focus is both much on compensation and retention. We've stood up a war room from a retention point of view, about 9 months ago, and we’ve spent time on the hearts and minds angle. Personally, I now spend 1 hour per day with groups of employees deep into the organization to understand what's on their minds and validate what we're up to. I like that we are back to double-digit growth sustainably since it helps us get more swagger back in Cognizant. It demonstrates the ability for us to benefit our clients as much of our clients are employees and they will have career advancement opportunities and we will have gross margin opportunities to invest in their careers, training, and development. Time will tell what happens over time, but we're doing what we can do. Core to that is the re-invigoration of our fresher program, which had stalled, and we are starting to get our pyramid back into the right shape after a few years of being off-kilter.

Thanks, Brian.

Okay. Great. Thank you. Brian, when you started your turnaround effort, you made international revenues a big priority, which had been something Cognizant had somewhat struggled with over the years. Your international growth is outperforming in these latest results. So I wanted to see if you could speak to the levers that you're pulling to help with the international revenue progress. And I'd love to get your sense of whether you're sort of sustainably on a path to increase the international revenue mix at this point going forward.

It's a great question, Rod, because we often spend a lot of time on one of our other strategic postures, which is around accelerating our digital footprint, relevant both on a total corporation level and also internationally. Scaling our international capabilities is something I'm 100% focused on. Today, it's just 26% of our revenue. Our international brand and operations are in need of scaling. It's not just revenue scaling, but also our delivery capabilities overseas, both in terms of near-shore and onshore, that will enable our shift to digital, but it's also core to our desire to build a global delivery network where we can provide greater business continuity capabilities for clients as well. We're executing well against those initiatives, we've hired and refreshed a lot of the international leadership team with senior hires in the U.K., Australia, New Zealand, Germany, Japan, and the Nordics. These people are well-connected into local industry, they understand the local markets, and the impact of that is becoming evident in strong revenue growth in the third quarter as well as in year-to-date growth across Australia, the U.K., and Germany in particular. Our bookings momentum internationally has been well above company average, and these people are bringing followership from both a client and employee perspective. They also give me confidence that I'm investing M&A dollars behind senior leaders who will ensure proper post-merger integration. As you’ve seen earlier this year, we acquired Serbian in Australia and New Zealand, and ESG mobility in Germany. While we are different internationally, I expect we will continue to double down in that arena too. We'll talk more about this on November 18th at the Investor Summit.

Very helpful. Hey, I want to ask across the pipeline, particularly about large deals. Are you significantly pursuing extra-large deals in your sales pipeline, or are you focusing more on mid-sized and smaller deals? I’m asking to see if you are somewhat biased away from mega deals given some risks that they entail, and given that there's a lot of other deals out there right now, considering the breadth of demand that exists?

Look, I've made no qualms about the fact that my priority was to expose Cognizant to higher-growth categories, notably digital and international markets. If I focus on digital, the nature of the work we do positions us against smaller contracts, and from my perspective, I agree with your inference: this is a resource-constrained environment, and putting valuable resources against digital is much more interesting for me than putting them against captive or structured deals where you may have an income for one year or two, but thereafter you're in a book of business that you have to work very hard to grow. I will say, when I think about our booking and win rates on our pipelines, I have nothing but good thoughts. Bookings were balanced by industry and geography. Even within the digital work we do, we have seen momentum in the $50 million-plus category on a year-over-year basis, and I expect that to continue into the fourth quarter. That’s different from $500 million or $1 billion deals, but these are very healthy digital-type deals for us. All of this has led us to a position now with bookings at 24% year-over-year in Q3, which brings our book-to-bill ratio solidly in the 1.2 range. I’m confident about that; the enemy is when clients are indecisive, but that is not the case at this moment in time. Pipeline velocity is strong and fast, which is why I feel so good about our position. The strategic choices we made years ago were the right choices and we are executing against them, which I believe will bear fruit.

Terrific. Thanks a lot, guys. Good stuff here. Brian, I can really break from talking and ask Jan a one-year-in kind of question; you've been in your seat as CFO now, at Cognizant for a little over a year. Can you just give a quick look back from the CFO seat on what you feel like has been going well in the last year and then what your personal priorities are for the CFO organization going forward? Thanks.

That's an unexpected question. I appreciate it. The translation of our four strategic priorities into operational measures and controlled processes is obviously a big endeavor for a multinational organization like Cognizant, and the finance organization has been laser-focused on supporting those four strategic priorities that Brian has been talking about. An example is when we scale and expand our sales force and distribution capabilities, more effective measures on the effectiveness and results of that sales force are required. I think you've seen this with improving disclosures and our bookings club. You see the surface of the effort behind that to drive and improve transparency not only for us but also for the street. Similar initiatives have been underway for supporting our pricing and analytics capabilities related to driving relevance to clients and ensuring that we deliver value. Throughout the fourth, I wanted to illustrate this through all four initiatives. I must say I am pleased because the outcome shows that Cognizant has made good progress in the last couple of quarters, fulfilling our promises. That's how I measure ourselves: can we fulfill the financial commitments that we make to our shareholders? In that sense, this has worked out well, particularly in the last half-year where we faced a challenging industry with high attrition rates. I’m excited about the opportunity because it's a Company that is changing, winning in the marketplace, and visibly accelerating over time, and it’s fun to be part of that team.

Okay. And then my follow-up is on the technology partnerships side. I think Brian; you've mentioned the hyperscalers as a priority a number of times. Can you just give us a sense of some of the other priority areas that you guys are focused on in terms of building technology partnerships?

Yeah, Lisa, look, some of the hyperscalers are obviously omnipresent, extremely powerful, and their platforms scale into various technologies. Cloud migration immediately gets you into data modernization, AI, machine learning, IoT, etc. Beyond that, we have traditional partners we've had for years, some of which are stronger than others, like Oracle, DSA P, ISVs of the world, but we've had a huge focus on what I would call next-generation leaders, companies like ServiceNow, Salesforce, and Workday. As a reminder, in the last year-and-a-half, we acquired collaborative solutions to scale a Workday practice. We’ve also done three acquisitions in Salesforce. We have significantly changed our position with Salesforce. I was recently with the Salesforce leadership team, and they were highly praising our position with them. We will continue to pursue acquisitions aligned with our higher-growth categories. We have set up three business groups behind the hyperscalers; it’s not just lip service; it is a true organization that we take very seriously. I see hyperscalers focusing more and more on industry alignment, and Cognizant, since it’s our strength, particularly in healthcare and financial services, is naturally of interest to them. There are individual cases where you have industry-specific plays; it could be Pega, Guidewire, Temenos, Duck Creek, etc. Naturally, they are relevant to specific industries within Cognizant, but more broadly, companies I've referenced are of importance.

Hey, good afternoon. Thank you. On Margin, can you give us a sense of the magnitude associated with some of the larger strategic investments that you've had a step-up in 2021? Specifically, I'm referring to things like the incremental recruiting of structure, increased S&M campaigns, the M&A dilution pressure because trying to frame the level of catch-up investment in the business this year that may not require such an uptick as we think forward.

I want to be careful in giving you too much detail since it may be hard to interpret over time. The pressure we've seen on margin due to growth in SG&A is approximately 50% or so due to M&A activity. This could be upfront deal costs, deal-related expenses, and the higher SG&A load that M&A transactions carry. That's been a meaningful pressure for us, around a 100 basis points or so. The rest of the margin pressure we have seen is roughly split evenly between three major areas: first, our IT modernization; second, investments into HR and recruiting to scale our hiring activity; and third, our investments into our sales force and marketing capabilities. Some of those are stabilizing, and we do not want to reduce investment there since they are important. We have found levels that allow for more moderated SG&A development going forward. You'll see more detail during our November meeting, but the third quarter gives an indication of what's happening here. We still had growth in these strategic investment areas, but have started to curtail growth in more traditional SG&A areas to offset that.

Okay. Thank you for that; that's good detail. And then just follow-up on the better non-digital business performance. Can you just dig in on what you're seeing as a reason for that, and is it sustainable?

Bryan, there are multiple elements at play there. One of the bigger ones from a weighted impact is actually our digital business operations business, which has been growing into strong teams within that we classify as digital and have non-digital elements. We have tended to be quite disciplined; we've changed the definition of digital over two years ago and we’ve maintained that. But there are other areas, including a non-digital element of our AI and analytics portfolio that we view as traditional, and we've seen growth there. Our goal is to mitigate the risk of declines in the non-digital business and maintain growth there. If we manage to do that, which requires us to be very disciplined from a pricing and renewal point of view, that will complement what we expect to be very strong growth in digital, which is good for the entire corporation. At this moment, you’ve seen this trend in competitive earnings as well. If you extrapolate digital growth versus total company growth, particularly for those with significant digital revenue, you will see declines in their legacy businesses.

Okay. Thank you.

That's great, and thanks for all the detail today. Certainly pleased to see the control on margins in a very odd environment. I'm wondering about controls around SG&A. I know you've kind of addressed this, but is there a point at which trying to control those margins starts to cut into the proverbial muscle? I think, Jan, you mentioned a few areas where you've shown improvement, but are you all the way where you want to be in recruiting and such so you really can continue to march forward even if you're controlling expenses more judiciously?

Look, I think Brian explained earlier in the call. We keenly focus on accelerating our growth rate. We see momentum organically as we want to continue with our capital allocation program as we have announced. The acceleration of revenue growth is front and center. We have ample opportunity. As such, we have made decisions to support those opportunities we've promised to our clients with staffing. HR will be funded as needed. We're proud of the amount of scaling that we achieved and the change in policy of accelerating hiring of freshers and optimizing our pyramid. Scaling training programs is essential as well, and it’s a complicated effort our team has executed well. We will provide the funding to ensure that growth is captured. I'm not too rigid regarding the exact percentage growth of SG&A, but I hope you understand our philosophy.

Yeah, for sure. And as we're attempting to model things, I realize it's a super dynamic world, but how are you planning for returns of T&E; what does that look like going forward? What are your planning assumptions for the next couple of quarters?

I'd be excited to talk about that in the next year and the next quarter. I'm not expecting any meaningful increase in travel expense for this quarter, but to be a little bit more forthcoming, the decisions on the return to work are affected by a myriad of factors: our client’s needs, our associates’ preferences, and the health situation by country. This is dynamic, so we're evaluating this on a monthly basis. At this time, we are still largely in a virtual environment, which has worked pretty well for us. We are planning to think about that as a strategic opportunity that meets the needs of all stakeholders going forward. It's a work in progress as we evaluate.

Hey, thanks for letting me ask a question here. Congrats on very strong key numbers. Two questions. One, Digital was up 18%, I think you said. It's still trailing some of the pure-play digital firms. Brian, what do you need to do to achieve those growth levels against your peers? And on attrition, are we at a point where we feel comfortable that we are not losing senior-level employees, since you had some high-caliber departures in the past? Thanks a lot.

Listen, I think we've got a great senior leadership team these days. Most of the senior changes are, as I view them, business as usual; retirements, internal promotions, some performance orientation, but this is classic Fortune 200 company business at this stage. I'm delighted with the leadership team we have now. We’re getting back into a growth trajectory after a few years where our backlog and pipeline haven’t been as strong as needed. We've seen united leadership orienting the Company towards an evolved model, both geographically and in terms of offerings. That’s no longer a concern. Please don’t get distracted by that regarding the 320,000 employees. With digital, it depends on the portfolio viewed; our digital growth at 18% is solid. If you look at digital engineering, our growth rate matches that of pure plays. Our IoT sector also performs at similar speeds. For digital experience, we align well with competitors, and we've been disciplined about definitions. Overall, I’m pleased with our digital momentum and will continue to work for better results moving forward.

Thanks, good job.

Hey, Brian. Hi, Jan. I wanted to get a little deeper into the Digital business. You've mentioned that you're doing very well with digital engineering and digital experience. Speaking with some of your competitors, they often bring up more so application modernization as an area. Are the areas where you are not quite growing as fast in the digital arena due to choice, or do modernization deals necessarily require pursuing larger carve-out contracts that you don't want? Can you discuss strategy versus available talent versus your current position?

Again, it goes back to definitions that companies have for digital. We've been quite strict about being restrictive on what is classified as digital. Our digital businesses, including our TriZetto platform, are growing healthily. However, they may not grow as quickly as a pure-play digital firm since their business models differ. Our digital momentum excites me; we can always improve and strive to do better. Specifically, we're exploring areas with higher digital growth since they offer higher margins, leading to more relevant client engagements. When I speak to clients globally about our strategy and show references, they're receptive to understanding our value proposition. Importantly, we have gems in our portfolio growing rapidly, which will also drive the Company's growth rate going forward. Some mix shifts recently reflected better than anticipated growth in non-digital sectors, which has impacted our overall digital metrics.

I’d like to share numbers to illustrate our strategic focus areas. Our digital revenue has surpassed our overall Company growth, and we're gaining share in digital revenues. Our emphasis on four digital battlegrounds—data monetization, cloud business, IoT, and digital engineering—has propelled us even further, outpacing overall digital revenue growth. Establishing this focus is crucial and signifies ample opportunities to expand further in the long run.

Very good to know. Maybe a little bit of a symmetrical end to the call. Attrition question. Any details you could provide, I think in the past you have indicated for example the geographic lift and high attrition in India, Eastern Europe is fine. Any details by either level or vertical or geography that you could provide to help understand attrition? Thank you.

Look, I would say our voluntary attrition is highest at the mid-junior levels primarily in India. It's not just in one location in India; it’s broad-based against certain skill sets, whether it's cloud, or skills linked to leading SaaS players like Salesforce, digital engineering, full-stack engineers, or data-related technologies like AI and ML. We're seeing significant attrition in these areas because it’s a hot labor market. This trend is consistent with what you’ve seen from our peers. We are working hard to mitigate that. We expect attrition to fall, sequentially on a year-over-year basis from where it is in Q3, based on the net resignations we’ve seen and following the efforts we've made around compensation. However, at this moment, we're still anticipating elevated attrition in the coming years. We're funding our P&L to tackle that; our compensation measures and recruitment team have been effective and we expect to scale our headcount significantly next year.

Okay. Thank you very much. Look forward to connecting with everyone on November 18th.