Cognizant Technology Solutions Q3 2021 Earnings Call Transcript

Presentation

[Operator]

Operator: Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn this conference over to Mr. Tyler Scott, Vice President of Investor Relations. Please go ahead, sir. You may begin your presentation.

[Tyler Scott, Vice President of Investor Relations at Cognizant Technology Solutions]

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 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.

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

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 the 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 health care, and our strength in intelligent 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 continue 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 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 and to better manage its health insurance claims, member transactions and network of physicians and hospitals. Our TriZetto QNX core administration platform delivered in a BPaaS model is enabling 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 for 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. We 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 and enabling Cabot to create an enhanced digital experience that drives value for its customers and employees. Scaling our international operations is another strategic priority. And during the third quarter, we grew bookings and revenue solidly in both Europe and Rest of World, with a 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 talent, 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 via new digital channels, provide them more personalized content and also suggest next best actions.

Cognizant deployed a cloud-based CRM, integrated marketing automation and intelligence 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 OR 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 corporates across IT services and BPO. Despite elevated attrition, we increased our net head count 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 fresher 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 onboarding 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 through a range of initiatives that include committed annual increases and 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 a 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 an 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 are bullish on the industry and on OR growing commercial momentum. Jan and I look forward to discussing Cognizant's future with you at our November 18 investor briefing.

With that, I'll 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.

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

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 healthy demand for digital services as they recovery 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 have 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 UK. We're also experiencing strong growth in Germany and Australia driven in part our recently completed acquisitions of ESG Mobility and Servian, 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 transaction 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 as 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% at constant currency. Our guidance assumes currency will have a favorable 20 basis point 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, compares 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 are 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 a 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, growing 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 our nonstrategic SG&A spend. This leads to our full year adjusted EPS guidance, which is $4.02 to $4.06 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 rates 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.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from the line of Tien - Tsin Huang with JP Morgan. You may proceed with your question.

[Tien - Tsin Huang, Analyst at JP Morgan Cazenove]

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 look 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.

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

Hi, Tien - Tsin. It's Brian. And I'll possibly Jan maybe directly after this. Look, first of all, attrition is elevated when you're 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 attrition rate and that is healthy, we look naturally at resignations on a daily basis. We think as we 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 a 12-month basis, but 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 has less of an impact on margin compensation does. So just -- and when we think about hearts and minds, we're thinking about a sense of belonging, newness, celebrating success, career path discussions, training and development.

And making sure that we have processes in place for people can actually get promoted more readily internally and so we've made a serious of adjustments to internal processes to facilitate that. We've also really embraced the bottom of the pyramid after a few slower years at between 2017 and 19 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 as we told. I previously, name we have skills as well as the bottom of the pyramid. On pricing and on margin implications, I will pass through to Jan.

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

Maybe I'll start with the gross margin in the third quarter, which was relatively consistent to prior year. And obviously, a lot of in and out and clearly, we observed the impact of increased compensation onto the thing. But we had also positive effects like, for example, a modest shift in our digital revenues is helping us, overall acceleration of revenue growth has been a factor of helping our gross margin. And a lot of ins and outs, and compare year-over-year because of the COVID situation. So you should expect, in the fourth quarter, pressure on our gross margins because we're implementing our compensation increase for the vast majority of our associates of having implemented October 1st. So you do see some pressure on the gross margin in the fourth quarter. And clearly, we're working on all elements of curtailing that. But I think you will see net pressure. Pricing, I wanted to do two comments before I pass it back to Brian.

You know, of course, that the pricing takes some time to implement since clients have longer-term contracts, but when we -- when I will observe in particular, our digital business, I think I can say that our clients start to really see the value that Cognizant is delivering and understand the value that we can bring too. So we're pleasantly satisfied, we are really happy with the situation that our core thesis about our strategy to shift to digital driving higher gross margin, is holding in helping us over the medium-term on the gross margin side. Back to you, Brian.

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

Actually you've largely touch upon what I was going to say. I think the implications of digital is 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, accretion as opposed to dilution. And then just one other important point. Over the last few years, many people have asked me how I think about structured deals or captive takeout's. 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 benefit 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 multiyear pricing dimensions as part of a 5 or an 8-year contract. That's actually, in a strange way, or that's to be quite favorable for us going forward. But all of this is heavy lifting. We have to get right in the quarters ahead, but we feel that we're on the right track.

[Tien - Tsin Huang, Analyst at JP Morgan Cazenove]

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

[Operator]

Our next question comes from the line of Keith Bachman with Bank of Montreal. You may proceed with your question.

[Keith Bachman, Analyst at Bank of Montreal]

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?

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

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 was really executing extremely well in the last few quarters and we'll continue to execute well going forward and hence, we've had a headcount increase sequentially of 17,000 by the way, which excludes subcontractors, which also grew. But the reality is we don't have enough headcount to fulfill our potential. And therefore we've been faced with choice points, which clients to serve, which deals to chase, where we walk away, where we're willing to make pricing stances that may put a deal at risk, but it's the appropriate thing to do given to the demand, supply and balance. So that is already underway, Keith. I will say in the same vein, we're really delighted with the commercial momentum, we have bookings growth of 24% in the quarter, which brings year-to-date up to mid-teens -- on the back of mid-teens bookings growth last year, tells me that we have actually really turned a corner in terms of commercial momentum. So 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 it is time despite all the net ads and they were record levels in the quarter, we have enough attrition as does the rest of the industry to mitigate that. With regards to the first question around the industry forces that will alleviate attrition. Look, it's a very difficult question to answer it. The reality is, I don't see immediate line-of-sight to this. I foresee elevated attrition in the industry in the coming quarters. I think the only winner in times like this is actual individual employee because companies like us don't win from this, clients don't win from this. And as such, hopefully, this will right itself over time. And hence, our focus both much on a compensation were extreme. We stood up a war room from a retention point of view, about 9 months ago at this stage, and we spent an extraordinary amount of time on the hearts and minds angle. And I personally now spend 1 hour per day with 5 -- groups of 5 or 6 employees that are deep into the organization to make sure we're hearing demand, understanding what's on your mind, validating that they understand what we're up to. I will say I like the fact that we're back to double-digit growth more sustainably, because that helps us get a little bit more swagger back in Cognizant. And, obviously, it demonstrates ability for us to benefit our clients as much of our clients are employees, and talk about the fact that they will have career advancement opportunities and we will have gross margin opportunities to invest in their careers and training and development, etc. So time will tell what's going to happen overtime, but we've really -- we're doing what we can do. And core to that is also via, let's say, the re-invigoration of our fresher program, which had stalled, but I think at this stage we're starting to get our pyramid back into the right shape after a few years of being off kilter.

[Keith Bachman, Analyst at Bank of Montreal]

Thanks, Brian.

[Operator]

Our next question comes from the line of Rod Bourgeois with DeepDive Equity Research. You may proceed with your question.

[Rod Bourgeois, Analyst at DeepDive Equity Research]

Okay. Great. Thank you. Brian, when you started your turnaround effort, you made international revenues a big priority, which had been actually 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 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.

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

It's a great question, Rod, because we're very often spend a lot of time on one of our other strategic postures, which is around accelerating our digital footprint, which isn't relevant, just on a total corporation level, but also internationally. So scaling our international capabilities is something I'm 100% focused on.

Today is just 26% of our revenue. And so if you think about our footprint internationally, our brand internationally, and our operations, they are in need of scaling. And it's not just revenue scaling, but it's also our delivery capabilities overseas, both in terms of near-shore and onshore, that will enable our shift to digital, but also, I would say its very 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 largely refreshed a lot of the international leadership team. Very senior hires in the U.K., Australia, New Zealand, Germany, Japan, the Nordics; the people we've targeted are well-connected into local industry, they understand the local markets.

And I would say the impact of that is now becoming more and more evident, not just in strong revenue growth in the third quarter, but also in year-to-date this year, across Australia, U.K., Germany in particular. But also as I think about the bookings momentum we have internationally, the year-to-date in Q3 bookings on our international businesses is well above the Company average. Now those people are bringing followership both from a client point-of-view, as well as from an employee point-of-view, our ability to attract talent is relevant there, but they also give me confidence that I'm investing M&A dollars behind senior leaders, who will take post-merger integration activities seriously.

And as you've seen in the last -- earlier part of this year, we acquired Serbian in Australia, New Zealand, and ESG mobility in Germany. So it goes back to having confidence in the team and having a team who take their responsibility seriously, and a team that's fundamentally connected into partnership ecosystem as well as the client network. While we are different internationally, but Rod, I expect we will continue to double down in that arena too. In the notion of industry alignment, we're very strong from an industry perspective in North America. Healthcare is obviously a great example of that in the payer provider space. But as we scale into Europe and Asia, our largest countries, the UK where we are aligned by industry. But actually some of the country leaders that we've hired now are embracing more of an industry alignment in those countries as well, perhaps not across all industries in every country. But there are major industries that we are aligning behind.

And I think that is the way to go to get after these market opportunities internationally. So not just my expecting, Rod, to maintain this level of growth, my hope is to accelerate our growth internationally in the years ahead. And we'll certainly talk more about that on November 18th at the Investor Summit.

[Rod Bourgeois, Analyst at DeepDive Equity Research]

Very helpful. Hey, I want to ask across the pipeline, particularly about large deals. And I guess I'm wondering, are you significantly pursuing extra-large deals in your sales pipeline, or are you focusing more on mid-sized and smaller deals?

And I'm really asking to see if you are somewhat biased away from the mega deals given some times the risks that they entail, and given that there's a lot of other deals out there right now, given the breadth of demand that exists?

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

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. So if I focus on digital, the nature of the work we do ends up positioning us against smaller contract. And from my perspective, I agree with the inference in your question, 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 compare 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, our win rates on our pipelines, I have nothing but good thoughts. Bookings were balanced by industry, by geography. If I think about even within the digital work we are doing, we have actually seen a little more momentum in the 50 million plus category on a year-over-year basis, and I expect that to continue into fourth quarter as well.

And that's different from $500 million or $1 billion deals, but these are very healthy digital type deals for us. And all of this has led us to be in a position now with bookings 24% year-over-year in Q3 to have a book-to-bill ratio that has now solidly in the 1.2 range. So I feel good about that, I will say the CEO, the enemy is when you have clients that are indecisive, and that is not the case at this moment in time. Pipeline velocity is strong, it's fast. That's why I feel very good about our position. I think the strategic choices we made a number of years ago were the right choices we're executing against that. I think will bear the fruit of that labor in the coming years.

[Operator]

Our next question comes from the line of Lisa Ellis with MoffettNathanson. You may proceed with your question.

[Lisa Ellis, Analyst at MoffettNathanson]

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, 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.

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

That's an unexpected question. Actually the -- Lisa, obviously,

[Lisa Ellis, Analyst at MoffettNathanson]

Well I can go back to asking about attrition if you'd like.

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

No, I actually I do appreciate, I do appreciate the question. The translation of our 4 strategic priorities into operational measures and controlled processes is obviously a big endeavor for a multinational organization like Cognizant, and the finance organization was really laser-focused in supporting those four strategic priorities that Brian has been talking about.

I'll give you example from when you scale and expand your sales force and distribution capabilities, more effective measures on the effectiveness and results of that sales force are required, and I think you have seen this with improving disclosure and our bookings club. So you just see the surface of the effort behind that to drive -- improve transparency not only for us, but also for the street.

Similar initiatives have been underway for supporting our pricing and analytics capability relative to driving relevance to clients and ensuring that we deliver value to our clients, etc. Throughout the fourth, I wanted trough all -- explain through all four initiatives, so what we're doing.

But that has been really the primary focus of the work and I have to say, I'm pleased because in the outcome, you have kind of experienced Cognizant as an organization that has made good in the last couple of quarters on our promises.

And that's how I measure ourselves really in the end, can we fulfill the financial commitments that we make to our shareholders And in terms of fulfilling our expectations, that has worked out with a lot of work pretty well, I think, particularly in the last half year where we have faced that really -- that changed industry with high attrition rates. I remain personally excited about that opportunity. It's a Company that is changing, that is winning in the marketplace and you can feel that the energy is visibly accelerating over time. And that's part to -- it's fun to be part of that team.

[Lisa Ellis, Analyst at MoffettNathanson]

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 sense for some of the other priority areas that you guys are focused on in terms of building technology partnerships?

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

Yeah. Lisa, look. Some of the hyperscalers are obviously omnipresent, extremely powerful, and the platform scales into various different technologies. Cloud migration immediately gets you into data modernization, AI, machine learning, IoT, etc. But then beyond that, we have some of the traditional partners we've had for years, some of which were stronger than others, the Oracle, DSA P, ISVs of the world, but we've certainly been a huge focus as well on what I would call next-generation leaders, companies like ServiceNow, companies like Salesforce, Workday. As a reminder, in the last year-and-a-half, we acquired collaborative solutions to scale a Workday practice.

We've also done 3 acquisitions in Salesforce. We have meaningfully changed our position with Salesforce. I was in a recent with the Salesforce leadership team and they were singing our phrases in terms of how our position in Salesforce has exponentially grown. And then we will continue to do acquisitions in those areas as well that are aligned to our higher-growth categories. Voltus set up 3 business groups behind the hyperscalers, though it's not lip service, it is true organization, we take it very seriously. I actually see the hyperscalers now focusing more and more towards industry alignment, and Cognizant, since it's our strength, particularly in healthcare and financial services, is naturally of interest to those.

Now, there are individual cases where you have industry-specific plays. It could be Pega Guidewire, Temenos, Duck Creek, etc. Naturally, they are relevant to individual industries within Cognizant, but on a more horizontal nature, is to companies I've referenced. And then of course in our operations business, which I'm very proud of, we've done a fantastic job over the last two years as we exited content moderation. And frankly got the business back to meet the high-teams growth. And they have very strong partnerships across some of the high PA players in particular. Automation anywhere in present etc.

[Operator]

Our next question comes from the line of Bryan Bergin with Cowen. You may proceed with your question.

[Bryan Bergin, Analyst at Cowen]

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? And specifically, I'm referring to things like the incremental recruiting of the 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.

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

I want to be careful in giving you too much detail that it was going to be hard to interpret over time. But off the margin pressure that we have seen to the growth in the SG&A approximately 50% or so, is due to M&A activity. This could be upfront deal costs, this could be deal-related expenses, and the higher SG &A load that some of the M&A transactions carry with them. So that has been a meaningful pressure for us, let's say maybe in the range of a 100 -- around 100 basis points or so. And then the rest of the pressure that we have seen is kind of split evenly between three major areas, I would say. Area number one is our IT modernization. That's clear it's starting to stabilize and that has put pressure on it. We had investments into our HR and recruiting organization in order to scale our hiring activity.

And thirdly, our investments into our sales force and marketing capabilities. Those would be roughly in even, I think it's a fair amount to say, and some of those are now starting to, that's kind of what we are starting to anticipate and plateau. We do not want to reduce those expenses obviously because they are important to us; but we have found, I think levels that are allowing us to have a more moderated SG&A development going forward. You will see more detail around that, obviously in our November meeting. But the third quarter is a little bit of an indication on what's happening here basically. Because we had still growth in these strategic investment areas, but we have started to curtail that growth in more traditional SG&A areas to offset that. And you can see that the has started to bend a little bit, more work to be done. But it really developed as I would have expected in the third quarter.

[Bryan Bergin, Analyst at Cowen]

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?

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

Bryan, there are multiple elements at play there. One of the bigger ones from a weighted impact is actually our business operation -- digital business operations business, which has been growing into strong teams within that we have elements that we classify as digital and are in our digital mix and there are elements that we don't classify digital. We have tended to be quite disciplined. We changed the definition of digital over two years ago at this stage and we've maintained that ever since. But there are other areas including a non-digital element of our AI and analytics portfolio. Again, we're being disciplined. They're elements that we view as digital, and elements that we view as more traditional business intelligence, etc.

And then on top of that, we have elements within some of our enterprise applications business, and CIS business that have grown as well. Our goal, to be very honest, in a multiyear basis, is to mitigate the risk of declines in the non-digital business and hopefully maintain some growth in the non-digital business. If we manage to do that, which requires us to be very disciplined from a pricing, from a renewal point-of-view; that will frankly complement what we expect to be very strong growth in digital, and therefore its goodness for the entire corporation. But at this moment in time, that is something that I think you've seen in competitive earnings as well. If you extrapolate the digital growth they have versus the total Company growth, particularly for those who suggest have a very large portion of their revenue that is digital, you will be able to truly extrapolate that they are seeing declines in their legacy businesses.

[Bryan Bergin, Analyst at Cowen]

Okay. Thank you.

[Operator]

Our next question comes from the line of James Faucette with Morgan Stanley. You may proceed with your question.

[James Faucette, Analyst at Morgan Stanley]

That's great, and thanks for all the detail today. And certainly pleased to see the control on margins, etc., in spite of a very odd environment. So I'm wondering on the control around SG&A. And I know you've kind of addressed this but, I'm wondering, is there a point at which, you know, trying to control for those margins, etc., starts to cut into the proverbial muscle?

And 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 areas like recruiting, etc., so that you really can continue to march forward even if you're controlling a little bit more judiciously expenses?

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

Look, I think Brian explained it earlier in the call and we iterate it. We keenly focus on accelerating our growth rate. So we see momentum organically as we see -- we want to continue with our capital allocation program as we have announced it. So the acceleration of revenue growth is front and center in our view. We have ample of opportunity. And as such, we have made decisions to; of course, support the opportunities that we promised to our clients with staffing.

So HR will be funded as needed and we're actually very proud about the amount of scaling that we achieved and the amount of change in policy of accelerating the hiring of fresher's, optimizing our permit, scaling training programs; at our size it's a really important and complicated effort that that team executed well, and I will of course, or the Company will provide the funding for that as it's part of our growth engine.

But there are other elements that need themselves more natural to scale in certain IT components, certain marketing components, certain finance and classic support functions in the SG&A to themselves for scaling. And we're going to continue to fund obviously, our sales force in the distribution area, I'm actually pretty pleased we have a good combination of growth and resources, but also of improvement in productivity in those sales forces.

And we have been busy at work to optimize our go-to market strategies, and I think we have more opportunities in that space, but also we will be funding organic growth appropriately to capture those opportunities. So I'm not too religious here relative to what the exact percentage growth of SG&A is, but you get the philosophy enough in my answer.

[James Faucette, Analyst at Morgan Stanley]

Yeah, I know, for sure. And then as we're trying to model things out, and I realize it's a super dynamic world, but how are you planning for things like timing and impact of return of T&E, what that will look like? I'm just trying to make sure that at least we understand what your planning assumptions may be, like, going into the next couple of quarters.

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

Yeah. I'd be excited about talking about the next year in the next quarter and -- but -- and I'm not expecting any meaningful increase in my travel expense for this quarter, but to be a little bit more forthcoming. Obviously, the decisions of the return to work are going to be affected by really a myriad of factors: our client's need, our associate's preferences, the health situation by country, and it is really dynamic.

So we're evaluating this basically on a monthly basis and at the current point, we are still, as all competitors are, largely in a virtual environment which has worked actually pretty well for us. So we are planning to think about that as a strategic opportunity that meets the needs of all those stakeholders going forward.

And I have to say that is an -- it's a work in progress, that we really evaluating and there will be a gradual decision to the new business model that will be different than the historic business model.

[James Faucette, Analyst at Morgan Stanley]

Thanks for those comments, Jan.

[Operator]

Our next question comes from the line of Moshe Katri with Wedbush Securities. You may proceed with your question.

[Moshe Katri, Analyst at Wedbush Securities]

Hey, thanks for asking -- for letting me ask a question here. And congrats on very strong key numbers. Two questions. One, Digital was up 18%, I think you said. It's still kind of trailing some of the pure-play digital mains.

Brian, what do you need to do to get to those growth levels of some of your peers? And then on the attrition side, are we at a point where we're feeling comfortable that the employees that we're losing are not at the senior level because we just had some -- in the past, as you know, you've had some high-caliber kind of departures from the Company? Thanks a lot.

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

Listen, I think we've got a great senior leadership team these days. Most of the senior changes are, as I would view as to be very much in business as usual these days, retirements, internal promotions, some performance orientation, but this is kind of classic Fortune 200 Company land at this stage. I got to say, I'm delighted with the Leadership team we have around us these days.

We're getting back into a growth trajectory after a few years where our backlog and our pipeline haven't been -- on bookings hasn't been as strong as it needed to be. And I think you've seen united leadership team here orienting the Company towards a evolve business model, both geographically as well as the offerings that we ultimately solutions and deliver.

So that's not a concern to mind anymore. And of course, we'll always be press article at the individuals with a Company with 320,000 employees. Please don't get distracted by that on not. And with regards to digital, of course, it all depends on the portion of the portfolio you would look at, our digital growth with 18% within our portfolio.

If I look at our digital engineering business, our growth rate is equivalent to the pure plays that are announcing their results. If I look at our IoT business, the digital growth is as fast as the pure plays out there, same for our cloud business or digital experience business. So as I said, we tried to be extremely disciplined in the definition of digital, and in many ways we penalized ourselves.

But as a broader Company within the categories we look at, and I'll talk a little bit of this in the November 18th Investor Summit, we have some gems in our portfolio that are growing at significant rates, and ultimately that will continue to drive the growth rate of the Company forward.

A little bit that the mix shift this last few quarters, that has been hanging around in the mid-40s is somewhat reflective of numerator -denominator, where the non-digital business has actually had some better growth than anticipated.

[Moshe Katri, Analyst at Wedbush Securities]

Thanks, good job.

[Operator]

Our last question comes from the line of Ashwin Shirvaikar with Citi. You may proceed with your question.

[Ashwin Shirvaikar, Analyst at Smith Barney Citigroup]

Hey, Brian. Hi, Jan. I just wanted to get a little bit deeper into, sort of, the Digital business. You've mentioned, for example, that you're doing very well with digital engineering, digital experience. Speaking with some of your competitors, they often bring up more so application modernization as an area.

So from your perspective in the areas that you are not quite growing as fast in the digital arena, is that choice? Or is that the modernization deals you just necessarily have to go after large carve-out type stuff and that's not what you want? I mean, could you talk a little bit about the strategy versus availability of talent versus where you are?

[Brian Humphries, Chief Executive Officer at Cognizant Technology Solutions]

Well, I just think, again, it goes back to the definitions that companies have for digital. We've been quite intentional on being restrictive on what is digital, including our digital businesses, our TriZetto platform business, which is growing at a very healthy double-digit pace these days, significantly up from prior years. But it's not growing at the rate of maybe a digital engineering Company pure-play because it's not at all the same business or business models.

So it's important to recognize that everybody's definition of digital and what is within that differs. I would say I'm very pleased with our momentum in digital, we can always do better. We strive to do better. But our exposure to Digital exposes us to higher growth categories as a corporation, ultimately, higher margin categories as a corporation. It puts us up against a different set of competitors where we have pricing dynamics that will be favorable for Cognizant's pricing.

And ultimately most importantly for me, it makes us much more relevant to clients because we are becoming much more intimate with them as we become part of their transformation journey.

And as I go around and speak to clients around the world when we articulate our strategy and what we're doing, and start sharing some of the references we have, clients are very open to proceeding with the next meeting to better understand what we have, today have optionality versus some of the incumbent. So I feel ultimately that we're in the right spaces. We will continue to double down, of course, there are certain industry where digital is a higher portion of our mix than others.

And there are certain geographies where I want to accelerate our digital capabilities, not just back to Rod's question earlier, the international markets where our digital mix is lower than it needs to be, because historically we spent a lot more of our focus on structured deals in those geographies, but also the delivery capabilities both near shore and onshore to fulfill any demand that we create in our commercial teams internationally, we need to further extend our capabilities there.

And we're working on a number of things that hopefully we can announce in the foreseeable future that will hopefully give you confidence that we're doing the right thing in that regard as well.

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

Maybe I add numbers for illustration that could be helpful. As you know, of course, our digital revenue is exceeding our overall Company growth and we are gaining share in digital revenues. But for me, a good example of the value of strategic focuses.

Also, our focus on the four digital battlegrounds that we have really identified; and those are the data monetization, the Cloud business, our IoT and digital engineering businesses, and those priority -- prioritized areas within digital actually also meaningfully outgrowing our overall digital revenue growth.

So I think for a Company to establish that focus and then executing in those focus areas in a thoughtful way is a good sign, and as ample opportunities to expand those things for the long run, but at least we're seeing in our numbers really, the results of exactly what we wanted that strategy to be.

[Ashwin Shirvaikar, Analyst at Smith Barney Citigroup]

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 lit was high in India, Eastern Europe is fine, any details by either level or vertical or geography that you could provide to kind of help understand attrition? Thank you.

[Jan Siegmund, Chief Financial Officer at Cognizant Technology Solutions]

Look, it's -- I would say if I think about where it is voluntary attrition is highest, the mid-junior levels of the permit primarily in India, it's not just in one location in India, it's broad-based, but also against certain skills, whether it's cloud. Here we're talking Hyperscalers are leading SaaS players like Salesforce, digital engineering, full-stack engineers, job at Dot Netangular or just across data, AI and ML technologies.

We're seeing significant attrition in those areas. And it's just a hot labor market. It is extremely consistent, I think in the country you've seen from our peers in the industry. And as I said earlier, we're working very hard to mitigate that. We do 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 based on what we're seeing following the efforts we've had around hearts and minds on compensation.

But at this moment in time, we're still anticipating elevated attrition in the coming years, and to the question that we received earlier, we're funding in our P&L, what it takes to mitigate that. Those compensation measures as well as our recruitment team have been doing an incredible job for us and frankly, we expect to meaningfully scale our headcount in the coming year.

[Ashwin Shirvaikar, Analyst at Smith Barney Citigroup]

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

[Operator]

This concludes today's Cognizant's Technology Solutions Q3, 2021 Earnings Conference call. You may disconnect your lines at this time. Thank you for participation. Enjoy the rest of your day.

Participants

Corporate Executives

• Tyler Scott, Vice President of Investor Relations
• Brian Humphries, Chief Executive Officer
• Jan Siegmund, Chief Financial Officer

Analysts

• Tien - Tsin Huang, JP Morgan Cazenove
• Keith Bachman, Bank of Montreal
• Rod Bourgeois, DeepDive Equity Research
• Lisa Ellis, MoffettNathanson
• Bryan Bergin, Cowen Inc
• James Faucette, Morgan Stanley
• Moshe Katri, Wedbush Securities
• Ashwin Shirvaikar, Smith Barney Citigroup