Cognizant Technology Solutions Class A Earnings Call Insights: The Demand Environment and Infrastructure Efforts

Cognizant Technology Solutions Corporation Class A (NASDAQ:CTSH) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

The Demand Environment

Rod Bourgeois – Sanford C. Bernstein & Company: One quick clarification and then a question on the demand environment. In your Q1 guidance, can you just clarify if there is any acquisition revenue content in that? Then I guess the big question. Can you just give us an update on the client budget closing process and more specifically as budgets are being finalized, what is the pace of deal ramp ups as new deals get started in the calendar year to set you up for your important Q2. Are you seeing a good pace of deal ramp ups this year as you set up for the important Q2? That would be very helpful.

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Karen McLoughlin – CFO: Rod, this is Karen. I’ll take the first part of that around the guidance for Q1 and then I’ll turn it over to Gordon and Frank to add some color on the demand environment. In terms of the guidance for Q1, there is less than $10 million, obviously the (Medco) acquisition closed in Q4 and that’s small, obviously $15 million incremental for the full year, that’s a couple of million dollars in Q1. Then we expect the C1 acquisition to close late in the quarter. So in total the two will be less than $10 million for the quarter.

Gordon Coburn – President: Rod, on your question of the pattern of demand and ramp up, we are pleased with what we’re seeing. Budgets are – clients’ budgets are tracking the way we want. When we look at the momentum of stuff that is kicking off, how we think went – how we come out of Q1 for the important Q2, I think you’re highlighting important – it is tracking the way we’d like to see it at this point of the year.

Rod Bourgeois – Sanford C. Bernstein & Company: Then just real quick on that. I mean in the Healthcare vertical, you ran a little bit of low in the latter part of last year in terms of the demand progression there. Are we still in that low or are you starting to see a turn in that? I mean you had reasonable sequential growth in Healthcare in Q4 and I’m wondering if that sector or that vertical is getting back on track.

Francisco D’Souza – CEO: Rod, it is Franc. Look, I was pleased with what we saw in Healthcare in the fourth quarter but I’m still cautious. I don’t think one quarter makes the trend yet. So I still watch it for another couple of quarters. My hope is that we might be at somewhat of a bottom, but let’s wait a couple of quarters before we make a call on whether we’re seeing sustained recovery there.

Gordon Coburn – President: Rod, also remember in the Pharma side of the business, Q3, Q4 tends to be stronger than Q1, Q2. So you do have some lumpiness there and obviously that’s all baked into our guidance.

Infrastructure Efforts

Edward Caso – Wells Fargo Securities, LLC: Another solid quarter. I would love to learn a little bit more about your infrastructure business and your efforts. How much of it is greenfield opportunity versus an in-house solution and how much of it is takeaway work from call it IBM, EDS, CSC, I mean where you are just coming in with a more attractive solution than they historically had offered on their (indiscernible) renew?

Francisco D’Souza – CEO: I don’t have the exact proportions, but I will say that you know about –approximately half of the work would be where we’re going into a situation where the client is running their infrastructure in-house and we are transforming that in some way taking the infrastructure management, the management layer to a global remote infrastructure management approach or taking the actual physical infrastructure to a cloud-based approach. In many cases, when a client is – or in a client’s infrastructure – environment some parts of that will be done with a traditional provider that’s what running their infrastructure and what we think of a traditional asset heavy model. In those cases, which is why I would say the other half of the business we would be taking that and restructuring it to the new cloud-based model, adding a layer of global delivery on top of that for the infrastructure management capability. There is a third category in there, which sort of straddles both of those which is where we are combining apps and infrastructure together, particularly in our application maintenance business, Ed, we are seeing that when we are maintaining an application there are lot of synergies to also being responsible for some portions of the underlying infrastructure for those applications. So that’s a different cut where in many cases what our value proposition becomes is the ability to run the apps and the infrastructure together in a combined way and drive further efficiency and effectiveness for the client around that portfolio of applications. So I think those are the three big sort of approaches or sort of themes as we go to market with infrastructure.

Edward Caso – Wells Fargo Securities, LLC: So related, is there a bias success and at a different vertical, particularly your two big ones, Finance and Healthcare? Is there a geographic bias as well? I guess, also, how many of these deals are advisor involved deals?

Francisco D’Souza – CEO: I think if I look at the infrastructure business, I would say that of the two big verticals at Cognizant, it’s probably, I would say, roughly equally split between the Pharma – our Pharma clients and our Financial Services clients, particularly when you look at this trend I talked about of infrastructure combined with applications. That’s a trend that banks and Pharma clients, I think, are recognizing as important. In terms of advisor based, I don’t think it’s any more or less intensive than the rest of our business. Again, I don’t have the stats, but I would say just off the top of my head a third of our deals generally tend to be advisor led and the rest are deals that either the client is running themselves or that we proactively gone out and created where there isn’t an advisor or there wasn’t an RFP, but we sort of created the demand through a piece of proactive selling.