Viavi Solutions Inc. (VIAV) CEO Oleg Khaykin on Q4 2020 Results – Earnings Call Transcript


Viavi Solutions Inc. (NASDAQ:VIAV) Q4 2020 Earnings Conference Call August 11, 2020 4:30 PM ET

Company Participants

Bill Ong – IR

Oleg Khaykin – President and CEO

Amar Maletira – EVP and CFO

Conference Call Participants

John Marchetti – Stifel Nicolaus

Samik Chatterjee – JP Morgan

Alex Henderson – Needham & Company

Michael Genovese – MKM Partners

Tim Savageaux – Northland Capital

Meta Marshall – Morgan Stanley

Richard Shannon – Craig-Hallum Capital

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Viavi Solutions’ Fourth Quarter and Fiscal Year-End 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Bill Ong, Head of Investor Relations. Thank you. Please go ahead.

Bill Ong

Thank you, Mike. Welcome to Viavi Solutions’ fourth quarter and fiscal year-end 2020 Earnings Call. My name is Bill Ong, Head of Investor Relations. Joining me on today’s call are Oleg Khaykin, President and CEO; and Amar Maletira, CFO.

Please note this call will include forward-looking statements about the company’s financial performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations and estimations. We encourage you to review our most recent annual report and SEC filings, particularly the risk factors described in those filings. The forward-looking statements, including guidance we provide during this call are valid only as of today. Viavi undertakes no obligation to update these statements.

Please also note that unless we state otherwise, all results except revenue are non-GAAP. We reconcile these non-GAAP results to our preliminary GAAP financials and discuss their usefulness and limitations in today’s earnings release. The release, plus our supplemental earnings slides which includes historical financial tables are available on Viavi’s Web site. Finally, we are recording today’s call and we’ll make the recording available by 4.30 PM Pacific Time this evening on our Web site.

I would now like to turn the call over to Amar.

Amar Maletira

Thank you, Bill. Fiscal Q4 saw a seasonal growth in revenue and operating profit, despite the impact to our business due to COVID-19. Revenue grew 4.1% sequentially, while operating profits increased 37.6%, driven by sequential growth in our NSE business. While fiscal Q4 revenue at $266.6 million declined 8% year-on-year, operating profit at $52.3 million grew 2.8%, and operating margin at 19.6%, expanded 200 basis points, EPS at $0.18 was up by a penny or 5.9% from a year-ago.

Now, moving to our reported Q4 results by business segment, starting with NSE; NSE revenue at $208.4 million grew sequentially 11.4% while declined 5.9% year-on-year. Within NSE, NE revenue at $108.9 million declined 8.3% from a year-ago, due to pandemic-related declines in our field instruments products, and this was partially offset by 5G-related growth in our wireless lab products. However, sequentially, NE revenue grew 10.4%, primarily driven by growth in both wireless lab, as well as our field instrument products with demand stabilizing at service providers.

SE revenue increased 19% sequentially to $27.5 million, and grew 14.1% year-on-year, led by strong performance in our enterprise and datacenter products, combined with growth in our assurance products. NSE gross margin at 64.6% decreased 110 basis points year-on-year. Within NSE, NE gross margin at 63.7% decreased 160 basis points year-on-year, primarily due to lower revenue volumes in our field instruments. However, SE gross margin at 70.5% increased 200 basis points from a year-ago, largely due to higher revenue volume and favorable mix from datacenter products. NSE’s operating margin at 16.9% expanded 350 basis points year-on-year due to a 14% reduction in our operating expenses, driven by disciplined expense management, ongoing efficiency programs, and lower variable expenses in commissions, travel, and fringe benefits.

Now, turning to OSP; in our fiscal Q4, OSP revenue at $58.2 million decreased 15.9% sequentially and 14.8% year-on-year as a result of the expected lower anti-counterfeiting revenue, as some demand shifted into our fiscal Q3. This was partially offset by growth in 3D sensing revenue. Gross margin at 51% increased 150 basis points year-on-year due to improved efficiencies. Operating margin at 29.4% declined 160 basis points year-on-year, primarily due to lower revenue volume on relatively fixed OSP operating expenses.

Now moving to our fiscal year 2020 performance, despite the impact of the COVID-19 pandemic on our fiscal second-half performance, Viavi’s revenue at $1.1 4 billion increased modestly by 0.5% from a year-ago, driven by a slight growth in NSE revenue, partially offset by a small decrease in OSP. Viavi’s operating margin at 18.6% expanded 110 basis points year-on-year, primarily driven by gross margin expansion as a result of efficiency initiatives in our manufacturing, combined with disciplined OpEx management. Operating profit at $210.9 million grew 6.7%, increasing $13.3 million year-on-year. EPS at $0.73 grew 7.4% or $0.05 year-on-year, and reached the high-end of our September 2019 Analyst Day guidance range of $0.67 to $0.73. Please note that our September 2019 Analyst Day guidance for fiscal 2020 had not contemplated the impact to our business from the pandemic.

Now turning to the balance sheet, our total cash and short-term investments ending balance was $544 million, operating cash flow for the quarter was $27.2 million, which includes $19.4 million of one-time withholding cash tax payment to repatriate cash to the U.S. from our foreign entity. In fiscal Q4, we repurchased approximately $0.6 million of Viavi stock at an average cost basis of $10.60 per share, including commissions. Of the $200 million authorized share buyback announced during our September 2019 Analyst Day event, we have repurchased to-date $44.4 million of Viavi stock at an average cost basis of $11.99. We continue to be opportunistic in our share repurchase.

Now on to our guidance, we expect fiscal first quarter 2021 revenue for Viavi to be approximately $270 million plus or minus $12 million, operating margin between 16.3% to 18.3%, and EPS to be in the range of $0.14 to $0.16. We expect NSE revenue to be approximately $180 million plus or minus $10 million, with operating margin at 6.5% plus or minus 1%. We expect OSP revenue to be approximately $90 million plus or minus $2 million, with operating margin at 39% plus or minus 1%. Our tax expense rate is expected to be approximately 19% to 20%. We expect other income and expenses to reflect a net expense of approximately $3.5 million. We estimate our share count to be approximately 232 million shares.

With that, I will turn the call over to Oleg.

Oleg Khaykin

Thank you, Amar. Fiscal Q4 results grew sequentially, helped by the stabilization of demand in NSE that was partially offset by the expected decline in OSP. The business improvement within NE was driven by record wireless revenue growing by double-digit percentage both sequentially and year-on-year benefiting from continued strong demand for 5G wireless lab equipment.

Field instruments segment although down from a year-ago, saw seasonal strength and some signs of stabilization as service providers resumed their field operations. SE revenue improved both sequentially and year-on-year, driven by strength in both assurance and enterprise and datacenter products, helped by deals that were pushed out from Q3 and closed in Q4. In OSP, the anti-counterfeiting revenue was down sequentially in line with our expectations. 3D sensing revenue improved sequentially, and by seasonal increase [technical difficulty] in customer demand and initial orders for the next generation of products.

Looking back at fiscal year 2020, it is a tale of two halves, where the first-half was characterized by a record six-month revenue and non-GAAP operating profits, driven by our three major growth product areas. The second-half however was heavily impacted by COVID-19 pandemic. Despite that, through solid execution, we managed to grow annual revenue and profitability in fiscal 2020 from our year-ago levels. Pandemic disruption notwithstanding, our combined wireless and fiber portfolio in NSE grew in fiscal 2020, led by our 5G Wireless lab equipment, which finished strong with record revenues in Q4, and in OSP, 3D sensing grew by more than 20% year-on-year. In fiscal Q1, we expect OSP to achieve a record revenue level, driven by increased 3D sensing revenue, and increased demand for anti-counterfeiting products helped by banknote redesign and an increase in reprint volumes as currency printing operations resume.

In NSE, we expect Q1 revenue to be seasonally down from the June quarter. Looking ahead, we expect NSE to recover in calendar 2021. For OSP, we expect anti-counterfeiting to strengthen throughout the year driven by a multitude of fiscal stimulus across the world, along with strong growth in 3D sensing. Overall, our long-term secular growth drivers in 5G wireless, fiber and 3D sensing remain intact, and we expect to continue to achieve higher levels of revenue and profitability. In conclusion, I would like to express my appreciation to our Viavi team for their continued extraordinary performance during these challenging times. I also wish all our employees, supply chain partners, customers and our shareholders to stay safe and healthy.

I will now turn the call over to Bill.

Bill Ong

Thank you, Oleg. Mike, let’s begin the question-and-answer session. We ask everyone to limit discussion to one question and one follow-up.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from John Marchetti from Stifel.

John Marchetti

Thanks very much. Oleg, I was wondering if you could take a minute and just discuss sort of what you’re seeing in the different markets globally, it looks like all of the growth this quarter at least sequentially came from the North American market. I was just curious, as you’re looking out over the next quarter and into next calendar year even, how you expect some of these different geographies to start to contribute for you here?

Oleg Khaykin

Sure. So, I would say, I mean maybe if before I go by geography, I’ll talk first about the different businesses. So, I would say anything to do with lab and production continue to be pretty strong and healthy as most manufacturing operations and engineering labs continue to operate throughout the pandemic. It by the way, also includes our internal labs, all our engineers are back at work. Obviously, we implemented various safety protocols, but if I look at our own internal engineering labs and our manufacturing facilities, they continue to operate with no interruption, and we’re seeing the same thing pretty much with all our major customers. So, those two segments were quite good, and we expect them to continue to do fine. I mean the only thing I would say is the conversion cycle from design win to appeal is a little longer, because you have to ship the equipment to the customer, you cannot enter their facilities because they’re quarantined, but you have to do everything remotely. So, it takes a bit more time, but that flow of business continues to be pretty strong.

The area where we saw weakness towards the end of Q3 and through most of the Q4 is the field operations, and it’s largely because of the disruption to a lot of the operators, but throughout the summer, we’ve been seeing stabilization as more and more of them send their technicians back in the field, and they kind of got their act together and kind of found the new normal and gradually, they’re all reassessing what they need to do, and I actually do think, given the plethora of challenges, the lot of operators are facing with different work-from-home environment, it will be very positive for our field instrumentation business in quarters to come.

In case of OSP, one of the things we saw in Q3 and Q4, a lot of the governmental printer operations have been shutdown, so the currencies were not printed. So, a lot of the inventories of finished notes have been depleted, and a lot of the inventories of whatever raw materials in the channel were depleted. So, as such, starting this quarter, and I think for the next several quarters, I expect demand for anti-counterfeiting products to be running above our average, which combined with a fairly strong 3D sensing demand that we see coming in the coming quarters would be a very — it will lead to kind of record performance for our OSP business unit. So, in that respect, I think our OSP business unit is almost countercyclical to some of the challenges we faced in NSE business units. So, that’s a welcome outlook there.

In terms of geographies, I would say Asia-Pacific kind of saw the initial brunt of the coronavirus. So, that was kind of the canary in the mineshaft. We saw the initial decline and also a shutdown of facilities there; mostly end of January through February. Since then, pretty much most of the Asia-Pacific operations have recovered, although there is still obviously continued some challenges COVID-related, but in terms of manufacturing and lab and engineering, and production demand in that region, it all continues to be pretty well. Europe surprisingly kept its resiliency, even during the worst of the crisis, and I mean the only obviously challenge is converting design wins to POs takes a bit longer, given the remote work environment, but Europe was pretty good. North America had some stumbles in March, April, May, but things starting to stabilize and recover throughout the summer. One region that’s really been impacted heavily is Latin and South America, and that is driven — obviously COVID is a big influencer there, but also a significant devaluation of currency presented challenges for a number of customers. Now, luckily for us, it’s a very small part of our business, but nevertheless, if I would say geographically, I’d say Central and South America have really been the regions that have been most impacted by combination of COVID and economic challenges.

So, hopefully, that gives you some color on regional as well as the different business product lines.

John Marchetti

Thanks very much. And Amar, if I can just ask a follow-up, I’m wondering if you can just discuss some of the fixed versus variable costs in the margins for particularly for NSE, this quarter obviously a very strong performance on that operating margin line, in the guidance there, even if we take the high-end fairly significant sequential decline. So, if you could just maybe talk for a little bit about that variable versus fixed cost, and maybe what we need from a revenue perspective to sort of consistently achieve more than a 10% operating margin in that NSE business? Thanks.

Amar Maletira

Yes. So, a good question, thanks for asking the question here. So, as I mentioned in the last earnings call, the mix of variable to fixed is sort of 40% variable, 60% fixed cost. So, we have a very good mix of variable to fixed costs. So, sequentially, we did see the OpEx go down, and I’ll explain the sequential decline here. I did explain the year-on-year in my prepared remarks. So, sequentially, we went down about $6.5 million dollars from our fiscal Q3 to fiscal Q4, and those are the results of three things: one is a disciplined OpEx management, number two is ongoing operational efficiency programs, and number three is reduction in variable expenses related to travel; very less to no travel happened between April, May and June, and we did benefit from that. We also benefited from some payroll and fringe benefits savings, in case of, say, healthcare costs went down, in some geographies, we are self-insured, people are working from home, they’re not visiting doctors or hospitals as frequently. So, our healthcare cost came down. We also saw some small one-time benefits as we took advantage of some payroll benefits in couple of countries. So, if I have to characterize the $6.5 million of sequential reduction, I would say, really one-third of that reduction is ongoing efficiency, so it is something that will stick, and two-thirds of that is lower variable expenses. We should come back as, say, travel restrictions or work-from-home are lifted.

Now, all in all, we expect our operating expenses to be in the range of 43% to 44% of revenue. I think that should be what you should be modeling. For fiscal Q1, which is the current quarter we are in, we also have one additional week. So, it’s a 14-week fiscal quarter, so we’ll have one additional week of payroll expenses, and so, our OpEx should be between 43% to 44%, but more towards the high-end of that range, at least for fiscal Q1, but I think long-term, you should model as about 43% to 44% of revenue.

John Marchetti

Thanks very much.

Oleg Khaykin

Thank you.

Operator

Your next question comes from Samik Chatterjee from JP Morgan.

Samik Chatterjee

Hi. Thanks for taking my question. Just starting off, Oleg, I kind of wanted to ask you to just help me think about the longer-term impact on the business from COVID. I definitely get the limited visibility here in terms of return of field technicians to work, but when we look at kind of previous peaks in any revenue, like the $203 million that you did in the first-half of the fiscal year, do you see anything overall in the long run that would impact your ability to kind of get back to that level even with the slower recovery maybe in — or return to work for field technicians that you’re seeing?

Oleg Khaykin

Well, I think the field instrumentation businesses generally fairly kind of stable — in some cases — depending on the cycle in the technology deployments could be a little bit higher, a little bit lower. I think a lot of companies’ service providers, and when they went into a lock down, a lot of their programs were put on hold, and it was really all about triage, only ordering and buying, whatever was absolutely necessary, and a lot of the — fundamental like POs that are flowing through the system got interrupted because of there’s a lot of approvals in the chains that need to happen, and it’s one thing — it’s very easy to get them done. When you have a person, one of our account managers in the building, they can hit everybody in one day and the PO is done. Once you’d have to go remotely and through email and catch all the right people, it takes just fundamentally took a lot longer, and I think for a lot of the service providers, surprisingly for companies that are fundamentally provide networks, they still work very much in the headquarter-centric environment, and we found a number of them when they had to work from home, a lot of the processes broke down and system were just not as optimized to work remotely or work across multiple offices.

So I think that’s really been the thing, and I mean, from what I see at least all the talk and all the sense we get a just everybody see acute need for network improvement and in network investment, because of the service degradation and challenges they’re all facing, so that is all positive, and I think that’s all going to manifest itself in the higher spend down the road, but I mean, in fact, a lot of customers now are all analyzing the lessons learned in the last three months based on their network performance, or all the issues that they faced, and it’s actually putting a lot of what I would call a less — a low — used to be a lower priority projects on the front burner, and I think that’s actually going to benefit us, and I think when you see significant uptick in demands for services from companies like CommScope, or the fiber from Corning. That’s basically a leading indicator because within next several quarters, once that fiber is laid and that improvements to networks are done, these services need to be turned on and our demand usually tracks them by several quarters lagging.

Samik Chatterjee

Got it, got it. Maybe just moving to OSP and sounds like there is a positive outlook there on the anti-counterfeiting business, also you’re ramping on 3D sensing for the next product cycle. Just help me to think about the magnitude or kind of growth that you’re thinking for 3D sensing in fiscal 2021 versus fiscal 2020, and if I mean not looking for a specific guidance, but more in terms of drivers how you’re thinking about the unit outlook improvement as well as content opportunity with some of the OEMs, smartphone OEMs that would be helpful to understand.

Oleg Khaykin

Well, I think, if I look at our OSP, as I mentioned in our last call for anti-counterfeitings, for example, we saw with all the stimulus programs around the world going in a fact it was just a matter of time until there was a heightened demand for reprint volumes, right, and it took about a quarter longer than we thought. When we follow, we find out, it’s actually a lot of print works were shut down and all the currency that was distributed was distributed from inventory. So now you have a very low finished goods inventory, a fairly low raw materials inventory in the channel, and that’s actually, I think, going to result in multi-quarter heightened demand for our anti-counterfeiting products. If you overlay on top of it, some of the redesign notes going in production, we should see some pretty strong demand for anti-counterfeiting over the next year or so. So that’s an anti-counterfeiting story, which is great because it just drives a lot of loading on our factories and drives better absorption. It’s all goodness to the bottom line.

On 3D sensing, clearly the big driver, now I’d say the first-half of this fiscal year is the world facing camera that’s being introduced, and that’s clearly giving us a good boost, and more than offsetting the customary ASP erosion and things like that, but in terms of really how I think about growth, it’s really going to be a function of Android adoption. I mean to date, Android has been lagging. In fact, it’s started out pretty good with the Huawei and Chinese vendors leading the pack, but then the economic slowdown caused them to put a lot of higher end models on the back burner and tried to reduce costs on their handsets. I think they will all be watching how successfully Apple launches their world facing camera, and how well it performs, and I do think they all have designs already done. They just don’t really — I think they suffer from a lack of imagination what to do with it, and they usually look to innovation leader, which in this case would be Apple to see what applications and technologies they introduce and then they try to follow. So, clearly, if Android follows up with the world facing cameras and those things get designed into the phones for later in the year that could mean a meaningful uptick for the 3D sensing. If Android does not happen, I think the overall growth will be flat to slightly up.

Samik Chatterjee

Okay, very helpful, thank you. Thanks a lot.

Operator

Your next question comes from Alex Henderson from Needham.

Alex Henderson

Thank you very much. First question, I wanted to ask really is your view of the financial conditions of your primary customers and what that might — how that be impact the outlook as we go into the back-half. Obviously, with large number of unemployed risks of skinny bundles, there was cord cutting. Have you had any conversations with your key Tier 1 that might give us an indication of the direction of their spending intention as an offset potentially to the obvious acute need that you sighted moments ago?

Oleg Khaykin

Well, it’s a very good question. Obviously, that’s how the thing I look at. However, if I look at what we’ve seen so far, if people are willing to go for go a lot of other things, but not their high-speed data. So I cannot pine on the TV bundles or entertainment bundles, but what we’ve seen is just the opposite. We’ve seen a number of customers upgrading their packages in terms of the speed, the high data speed that they get from their — to their home, so they could be able to work from home. So, I guess, there is a bifurcation, there is a work from home crowd, who either have subsidies from their work or they have to have a better performance of internet for them to do work from home. So that actually resulted in let’s say a higher demand and more complaints when the things don’t work, consumers who are just used to consuming entertainment don’t complain much one service goes out for a few minutes or an hour. However, if you cannot do your business and you cannot communicate with your workers and your internet service goes down. The number of complaints and very irritated customers has increased dramatically and that’s obviously being heard, and then, of course you know, there’s a heightened visibility about the lack of access to high speed data for a lot of the rural and other communities in the country. So there’s, again, increased interest in funding more broadband access at the political level. So I say actually, if we look at our cable customers and look at our telecom customers. If anything, they’ve actually seen increase in demand for their business. I don’t know how it would manifest, if people lose those subsidies in federal subsidies $600 a week and so on, but so far what we’ve seen, it seems people are willing to forego a lot of other things before they give up their mobile phone or their high-speed data access.

Alex Henderson

Second question on the other direction of it, we obviously have a system that was designed around the download speeds, and did not take into account the video conferencing and work from home type of environments that we’re now faced with. I hear significant commentary about cable companies and other companies needing to become more symmetrical. Does that not drive significant need for your product as they do high splits and those splitting?

Oleg Khaykin

You’re absolutely right. So, that is actually the nub of the problem. In fact, what we are seeing, you know, in a quick and dirty as they just basically give you more capacity, but they by turning on some noisy channels that generally they avoid using because of a lot of interference, and that obviously causes a lot of problems in network and periodically networking needs to be shut down and reset, and that this is awful lot of consumers. So, but meanwhile, what a lot of conversation we’ve been having is, how do you increase the bandwidth altogether, so you can give more and have better specs — spectral efficiency, have more symmetric data flowing in and out, and that obviously needs to has significant architectural ramifications and the capital investment. So, a number of our customers are already thinking about it, and actually that would drive you in greater demand for our products because no splitting, you now have to see visibility of fiber much deeper into a network. So I’d say it’s actually really good news for both our fiber cable and ultimately even some of our 5G products on the edge to give an additional bandwidth for the last mile.

Amar Maletira

Yes, totally new testing procedures, hence new testing tools.

Oleg Khaykin

That’s right.

Alex Henderson

Thanks, guys.

Amar Maletira

Sure.

Operator

Your next question comes from Mehdi Hosseini from Susquehanna.

Unidentified Analyst

Hey guys, this is Nick on for Mehdi. Thanks for taking our call. Just first off and talking about OSP for a second, when thinking about the guidance for the next quarter, how should we think about how that plays into the push out from one of the major U.S. based smartphone OEMs and versus maybe some other channels?

Amar Maletira

Sure. Just to clarify here, Nick, is this a question on 3D sensing specifically?

Unidentified Analyst

Yes, specifically 3D, yes.

Amar Maletira

Yes. So, as Oleg mentioned earlier, I think, let me give you a full-year kind of view, and then basically boil it down to Q1 and Q2. For full-year, we believe that 3D sensing, as we look out as of today, the 3D sensing revenue too should be sort of flattish to slight growth, and that’s mainly driven by our flagship customer. The flagship customer demand remains robust. In fact, now we are on not just one socket and one skew, but we are multiple skews and there are more than one socket. So we are in front facing as well as World facing. So from that perspective, the volumes have gone up. So from that, if you factor that in, we from — at least from a flagship customer perspective, we should see growth in overall revenue in fiscal ’21 versus fiscal ’20. On the other side, the adoption on the Android side has actually been quite endemic, and we think that the Android customers are kicking the can down the road. So if Android customer’s adoption happens in the next couple of quarters. That should basically result in overall upside to what I talked about flattish to slight increase. So for fiscal Q1, I think our — what I would say is the revenue from 3D sensing should be up sequentially significantly and should be on a year-on-year basis, roughly flattish to slight decline.

Unidentified Analyst

Fair enough. Thank you. And just shifting a little bit, as long as you touch on 400G networking, first off, just an updated sense of the timeline here, and then, how we should think about the order or what types of customers are going to adopt 400G first. So any comment on that would be great? Thanks.

Amar Maletira

So we didn’t catch the first part you said.

Oleg Khaykin

The first thing you asked.

Unidentified Analyst

Just an updated timeline on 400G on the rollout…

Oleg Khaykin

400G. Okay, so I mean the 400G to us right now is really, I would say more of a field opportunity. I mean, it’s no longer in the lab. I mean, the lab has moved on to 600 and 800, so 11 production 400G today is very much already in production, and increasingly, we’re seeing more and more demand for our field instruments that have 400G in them. So I would say in Metro 400G is happening now, but also, I think it’s probably one of the bigger opportunities we see there is in the data center where 400G’s already kind of the main backbone of data center. So I’d 400G today is the mainstream.

Unidentified Analyst

And that is bilaterally you are saying, it’s starting with the carriers in the telecom network, and then, only subsequently we’ll move to data center?

Oleg Khaykin

Yes, it started out with the core of the network, the telecom, and then, it kind of moved into the datacenter as well, and now it’s moving into the metro.

Unidentified Analyst

So, early days.

Oleg Khaykin

It’s early days, yes, so I’d say it’s probably the next three, four years as it’s going to get penetrated deeper and deeper into the metro network, but and the data center. I mean, what are we seeing in data center is the copper backplane being replaced with optical backplane, and it’s opening up new markets for us there as well.

Unidentified Analyst

All right, great, thanks guys so much.

Oleg Khaykin

Sure. Thank you.

Operator

Your next question comes from Michael Genovese from MKM Partners.

Michael Genovese

Hi, thanks. I guess, I want to ask about the NSE guidance, which I’m — it doesn’t, it seems fairly historically normal, but maybe on the high-end of historically normal declines. So just in terms of that outlook, what was the book-to-bill? What are you seeing in the different segments of NSE and is it — is there a bigger decline in against the tougher SE comparison this quarter, I just wanted to ask that question as well?

Amar Maletira

Yes, so thanks Mike for the question. So, let me do a little bit of color on NSE guidance for Q1 — of fiscal Q1, and then, Oleg can jump in here and get more additional color here. So, if you look at historically, our fiscal quarter. Q1 in NSE, the revenue typically goes down about mid to high single digits sequentially, going from fiscal Q4 to fiscal Q1. As we start a new fiscal year, and also, you know, Europe typically goes on vacation. So those are two factors that typically take the revenue down sequentially. So, having said that, we are guiding to a little bit cheaper than that typical sequential decline in Q1, as Oleg mentioned in his earlier comment, our sales funnel in NSE remains healthy, we have seen demand stabilizing in NSE, but due to the travel restrictions. A lot of virtual meetings, remote meetings we are seeing that the conversion of the funnel into orders is taking a little longer than usual. So I would say we are being a bit conservative here in terms of our guidance in NSE revenue outlook for Q1, and now if we do better than the outlook of say $180 million that we guided, given the operating leverage we have in the NSE business. I think you should have a very good positive impact on our operating profit and EPS, but that’s how we look at the NSE guidance. So yes, it has stabilized, funnel remains healthy, conversion is taking a little bit longer, and hence, that’s the reason why we are guiding a little bit steeper than the typical sequential decline you see in fiscal Q1.

Oleg Khaykin

Also, I just say this very good point and if you compared to the last couple of years, it’s a bit of a skewed compare. The September quarter in last year and two years ago were characterized by some new technology adoption, so far so cable rollout DOCSIS 3.1 2 years ago, and some major customers upgrading their DSL networks last year. So, some of the seasonal dip that we would have seen in Q1 was not as apparent in the last 2 years. I mean, this year there’s really nothing new happening in terms of new technology adoption, so it’s very much a seasonal trend, which is further somewhat pressured by the COVID environment, but I don’t say in the absence of pandemic, we probably should see about maybe up to $15 million to $20 million more this quarter.

Michael Genovese

Thanks for that color. And then, just my other question is as I understand it, the 3D sensing into the iOS ecosystem issued by me saying that you supply filters and not diffusers and is there any update or ability, is still is out of the question that you would start selling them diffusers in 2021 or is that still a possibility?

Oleg Khaykin

Well, I mean, when we acquired RPC. I mean, they were the early on, they were the — their kind of preferred source, but they decided to pass on them because they were a startup. Needless to say, we do see a great opportunity for our diffuser technology. It would be a perfect fit. Down in the next couple generations of weather is going to be 21. I don’t think it’s 21, but I think we may have our opportunities into models for ’22 or ’23 type calendar year, it’s just the final design funnel too for you to really be in let’s say 2022 you should have been designed in ’18 or ’19. So I think, I do believe in the — especially as a world also goes more and more towards time of flight, our diffusion of technology has a good opportunity for us to increase a share in both the iOS and Android ecosystems.

Michael Genovese

Thanks guys, and congrats on a solid execution.

Amar Maletira

Thank you.

Oleg Khaykin

Thank you, Mike.

Operator

Your next question comes from Tim Savageaux from Northland Capital.

Tim Savageaux

Hi, good afternoon. Maybe keep the focus on NSE or really any in particular. Oleg you mentioned that maybe you’re having an impact on the pandemic a 15 to 20 million in the quarter. I mean is that something that you think you can pick up through the remainder of the fiscal year, especially given the increased traffic demand in some of the leading indicators that you noted previously, and in addition to that, I wonder if I could get an update on where you’re standing on the wireless field instrument side in terms of that potentially beginning to ramp, you mentioned some continued strength on the lab side. To what extent do we see that translate into the field in fiscal 2021?

Oleg Khaykin

Sure. So in terms of I think your first question, kind of makeup, the difference is there going to be a catch up. I don’t believe there is going to be a catch up because the reality is, I think, our quarterly demand will recover to the pre-COVID levels, and the reason for that is has nothing to do even if there is a pent-up demand. Service providers can absorb new products at only a certain rate. It’s fundamentally they can only do so much with number of people they have, and the training and deployment and things like that. So if they skip a quarter, it just basically the whole thing just shifts. It does not really bunches up and comes in sooner, because I mean, they just — I don’t think they can process higher volume than what they normally consume in any given quarter because it involves not only receiving it, it also involves distribution to their field force training, the field force qualifying them, certifying, and it’s just fundamentally fairly fixed pipeline how they do it. In terms of the — what was the second part?

Tim Savageaux

The wireless instrumentation…

Oleg Khaykin

The wireless instrumentation, as I think you guys all know and we’ve been saying all along, the 5G deployment rollout will be slower than most people initially expected, and it’s very much playing out as we predicted. So, we feel pretty good that next calendar year is the year where 5G networks are getting deployed. What we do meanwhile it’s actually worked out extremely well for us. It gave us time to fully develop the full wireless field toolkit. So we no longer have a one trick pony. We actually have a comprehensive wireless deployment, a workflow, the toolkit and everything, and we are now aggressively working with service providers and leading NAMs to get them familiarized with our instruments with our automated workflow management and training and everything else kind of bringing a lot of the things that cable and telecom company has been doing, a wireline company has been doing forever in terms of really industrializing service deployment, bringing it to wireless, which has traditionally been more of a cottage type garage type industry, and I feel that at least on all the commentary and reaction we get from NAMs deployment resources as well as the service providers, we should be able to carve out meaningful share for ourselves.

Amar Maletira

So if I just can add, Tim, what you’re seeing now, and I’m sure you’re hearing it in news that 5G is rolling out. These are all pre-commercial rollouts, and the real commercial rollout, which is at scale to Oleg’s point, was mainly a calendar 2021 phenomena. That’s where most of our field instruments will be actually deployed, and once the deployment happens, they move into the maintenance phase, and again, we have an opportunity to again go sell into the maintenance groups too.

Operator

Your next question comes from Meta Marshall from Morgan Stanley.

Meta Marshall

Great, thanks. A couple of questions, maybe first on Europe, you noted kind of they’ve been more resilient. Just a question as to whether that’s been more apparent on the wireless or wired side? And then second, you just mentioned in the answer to Tim’s question about, building your wireless toolkit and having kind of time for that to be deployed. I guess I was just wondering progress without face to face meetings, and whether you think ultimately kind of having more of that toolkit sale will take kind of a resumption of travel to kind of close those sales? Thanks.

Amar Maletira

Yes. So I will take the first one on Europe and I am sure Oleg will give more color here. The resiliency in Europe is across both wireless as well as wired, and when I talk about wired, it is mainly on the fiber side. So, I think, wireless lab has been strong in Europe and also on the fiber side. So I think Europe has been generally very strong for us actually in fiscal 2021, fiscal 2020 through the pandemic too. On the wireless toolkit, I will start, and so, on the wireless toolkit, this is — it’s a long process. You have to get designed in and that’s where our teams are working on for the last couple of quarters. As Oleg mentioned, now we have a fully developed product. We have launched that product. We’re adding more features and functionality to it. It’s important to get it designed and before the commercial rollout happens. So we are talking to the service providers. We are talking to the network equipment manufacturers. We are talking to SIs. We’ll also participate in this rollout, and so, it’s a very broad kind of approach, and yes, travel restrictions do impact, but our teams have been working very effectively virtually, doing demos virtually, et cetera. So I think that funnel will start building ahead of us, but this is — at this point in time I think we are sort of in the mid stages so to speak and getting designed in.

Oleg Khaykin

So, I would just say, lack of ability to travel and face to face meetings, significantly benefits incumbent, and we see that in all of our core markets, where we are the incumbent, we have name recognition, we have established contact networks and it’s all working very well for us. In wireless, it is a challenge, all right, I mean, because we’re a new kid on the block, but we have some very exciting products and we started talking to a lot of these players well before the COVID hit. So, I mean, as Amar said, look, I mean, there is no — we don’t want to pull wool over anybody’s eyes and we have recognized it is more challenging than we thought. Because clearly when you’re a new kid in the block, you want to be there face to face, because a lot of the training happens at hands on. You got to be working directly with the technicians and their engineers, but I think, we just have to be that much more creative with our online webinars and training and leveraging our strains in wireless lab where we are the incumbent to really help us get introduction into the field organizations and developing good inroads into field organizations. So, let’s say, net answer, it would be a hell of a lot easier if we could travel, but we got to do best to what we’ve got.

Meta Marshall

All right, thank you.

Operator

Your next question comes from Richard Shannon from Craig-Hallum Capital.

Richard Shannon

Well, thanks guys for taking my question. I want to follow-up on, Oleg, on your comments regarding the sales funnel conversion. I want to see if that’s specific to any particular medium cable, fiber, DSL, wireless, et cetera and whether there’s any differences across geographies as well?

Oleg Khaykin

Which one, you said, funnel conversion?

Amar Maletira

Sales funnel conversation.

Richard Shannon

Yes.

Oleg Khaykin

Sales funnel conversion. So, I would say probably for the service providers that’s the longest conversion. It’s a bit better for the lab, and it’s pretty good for production because production you just basically ship more orders, they already know what they want, right. In lab, the challenge there is you cannot coming in demo equipment, so you have to arrange equipment to be shipped to then somebody’s got to receive it, they got to set it up, and then you got to remotely provide the demo and consultancy, and then you got to chase down and close the PR. So I’d say it probably adds maybe, I’d say, three to four weeks at most. I think the service provider because the nature of the business is, it’s not a monolithic entity where you have one person you sell to in headquarters and they place an order, you got to sell it twice, you got to sell it to the central engineering kind of the network operations, and then you got to sell it to every single regional operating unit that buys the instruments and deploys them into their daily life. So you have to just fundamentally more points to connect and the mere fact that connection takes longer to get them all online is probably where you have. So I would say the worse case you may see eight weeks delay, but I think in average, I would say it’s probably three to four weeks is what you’re running for some of them.

Now, that said, that’s really more for the new projects, things like that. For areas where you already sold it and customer just pulls the equipment as they needed. That’s not an issue because they’re already signed-off and they just place recurring orders. That’s why I said, it’s good to be an incumbent because everywhere where you are an incumbent in the existing program, that’s usually where you benefited a lot in the last several months, because you just basically have orders coming in and they pull your equipment from you as they needed.

Richard Shannon

Okay, that’s helpful discussion, Oleg. The follow-up from one of your prepared remarks, and I apologize, I may have missed this, I had my own little Internet outage right in your prepared remarks, but I think you’re talking…

Oleg Khaykin

Is your problem complete?

Richard Shannon

Well, it’s maybe Comcast listening to this, can you tell them to get my one gig service up that I just installed.

Oleg Khaykin

You may call him and you just go online and make a lot of nasty comments.

Amar Maletira

Yes, till then use Viavi tools.

Oleg Khaykin

Yes, until use real tools.

Richard Shannon

I will certainly do that. I think you talked about some stabilization with field operations or something along those lines. Maybe you can describe that a little bit more, and specifically, I think last quarter, you talked about some differing dynamics between the FieldCore and FieldEdge, maybe you can provide some more color there please?

Oleg Khaykin

Yes, so I mean FieldCore is always easier because you sell to one central entity, right whereas FieldEdge you got to sell to multiple entities, right. NetSuite requires training and a lot of other kind of hand holding. So and usually those things, those are the people who come in contact, that’s usually also the people who companies sent home to avoid during the lockdown. So that’s where I’d say I would kind of delineate, right, and when I say stabilization, which it means customers are picking up the programs where they drop them off, drop them like sometime in March or April, they’re reestablishing connections, they kind of got their act together, and now they are now internally discussing what plans they’re going to do. They have reprioritize since but I tell you priorities that every service provider that they had their top five in January, is no longer the same top five, it’s all changed, and the mere fact you’re having outage from very reputable service providers is a testament to it because networks that were working just fine in January are no longer working just fine in June, I tell you, I get outage, and I’m in the heart of Silicon Valley. I get an outage for anywhere between 15 minutes, to hour and a half between like 9 AM and 3 PM which is prime working hours, right.

So, it just tells you the challenges everybody’s facing, and as a result, the priorities that all of them are travelling with are completely different, when they were in January. So, (a), they change their plans, their top five are different than they were in January, but now those top five is identified, the architectural decisions being made, and orders are started being placed. So that’s what I mean by stabilization. I mean the kind of the fire drill that everybody was running around is over because nobody was making a decision, when nobody knew what they needed to do. Right now they know what they need to do. They got themselves recalibrated, and that’s where I see the discussions are flowing and use cases being proposed and the PO is being issued. I’d like them to be flowing at a faster pace, but it’s a heck of a lot better environment than it was in April of this year.

Amar Maletira

Just to add; April, May, and June, the travel was almost nil, right, very, very less travel, and we still were able to deliver $208 million of revenue that itself, some people have used to this new normal of working virtually, but the demand is still there, the demand is still there, the demand is not degrading, it’s not getting destroyed, it’s just taking more time to convert it because of certain demos need to happen, et cetera.

Oleg Khaykin

NE just got to do better planning. I mean, even things like shipping something, there’s no longer as many flights as there used to be, especially if you’re going international, you’ve got a lot of the routes that were direct are no longer direct, so you have to budget a few extra days. So it’s especially get dicey around the end of the quarter because just because you’re able to ship it out of the factory doesn’t mean it’s going to get in time to the customer. So I think we’ve learned quite a bit how to manage it better. Our customers are learning the same way. So as I’m saying by stabilizing, people found a way to adapt.

Richard Shannon

Okay, great perspective, guys. Thanks. That’s all from me.

Amar Maletira

Thanks, Richard.

Oleg Khaykin

Sure.

Operator

I’m seeing no more questions at this time. I will turn it back to Bill Ong for closing remarks.

Bill Ong

Thank you, Mike. This concludes our earnings call for today. Thank you everyone.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.





Original source link

Allscripts Healthcare Solutions, Inc. (MDRX) CEO Paul Black on Q2 2020 Results – Earnings Call Transcript


Allscripts Healthcare Solutions, Inc. (NASDAQ:MDRX) Q2 2020 Earnings Conference Call July 30, 2020 4:30 PM ET

Company Participants

Stephen Shulstein – Vice President, Investor Relations

Paul Black – Chief Executive Officer

Rick Poulton – President and Chief Financial Officer

Conference Call Participants

Charles Rhyee – Cowen & Company

Robert Jones – Goldman Sachs

Sean Dodge – RBC Capital Markets

George Hill – Deutsche Bank

Eric Percher – Nephron Research

Stephanie Davis – SVB

David Windley – Jefferies

Michael Cherny – Bank of America

Matthew Gillmor – Baird

Richard Close – Canaccord Genuity

Raymond Xu – Morgan Stanley

Operator

Hello and welcome to the Allscripts’ Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Stephen Shulstein, Vice President, Investor Relations. Please go ahead, sir.

Stephen Shulstein

Thank you very much. Good afternoon, and welcome to the Allscripts’ second quarter 2020 earnings conference call. Our speakers today are Paul Black, Allscripts’ Chief Executive Officer and Rick Poulton, our President and Chief Financial Officer. We will be making a number of forward-looking statements during the presentation and the Q&A part of the call. These statements are based on current expectations and involve a number of risks and uncertainties that can cause our actual results to vary materially. We undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our earnings release and SEC filings for more detailed descriptions of the risk factors that may affect our results.

Please reference the GAAP and non-GAAP financial statements as well as the non-GAAP tables in our earnings release and the supplemental workbook that are both available on our Investor Relations website. Please also reference supplemental investor presentation and the supplemental financial workbook posted on the IR website for additional information on our margin improvement initiatives and segment reporting.

And with that, I am going to hand the call over to Paul Black to begin.

Paul Black

Thanks, Stephen and thanks everyone for joining the call. I’d like to begin by commending our associates for their bravery and dedication to our clients who are on the front lines of this pandemic, who are 100% focused on providing the best patient care they possibly can. We are very pleased with our results for the second quarter despite the disruption to our client base in the global economy. Our business model proved resilient as we were able to move to a virtual sales and implementation model. We generated $188 million of new bookings in the quarter, where our clients were rightly focused on managing the pandemic.

We also had a number of long-term extensions in the quarter. These extensions included Maimonides Hospital in New York through 2027, demonstrating our strength with our client base and the importance of having a solid core EHR installed. These extensions are often accompanied by purchases of additional solutions and services. In the second quarter, we also signed 8 new client logos in the independent physician practice segment, including continued growth in revenue cycle management services.

I would like to focus my remarks today on three topics. First, I’ll discuss how we introduced innovative solutions to our clients to help them manage through the COVID-19 pandemic. Second, I’ll talk about thoughts of the health care – the health of our client base. And finally, I’ll cover important partnership with Microsoft and how we are thinking about the evolution of our solutions. Allscripts responded to the urgent needs of our clients by offering specific solutions to help providers fight the spread of COVID-19, including the rapid deployment of FollowMyHealth telehealth, COVID-19 specific workflows for Sunrise, capacity surveillance and regulatory reporting within our electronic health records and IT services staffing to supplement our client teams.

The core fundamental capabilities of the EHR and our commitment to an open architecture strategy have never been more important, either mission-critical systems that our clients rely on 24 hours a day. These solutions, including our EHR platforms, analytics, post-acute networks and patient engagement are what enable the necessary actions to successfully treat and contain the pandemic. In all cases, critical – the critical component is access to data, enabling systems to deploy resources based on search predictions and patient acuity and leveraging various care settings to ensure all patients are cared for. Community-wide data and referral networks ease patient transitions and facilitate provider resourcing, which contributes to broad unified patient care, using the clinical and financial burden in any particular system.

Here are some examples of how we helped our clients successfully manage through the clinical and financial upheaval to their operations. Using Allscripts Sunrise EHR data, Northwell was one of the first U.S. organizations to report presenting characteristics and outcomes of a large cohort of patients hospitalized with COVID-19. Knowing that a generalizable and simple survival calculator based on data from U.S. patients hospitalized with COVID-19 had not yet been introduced, Northwell has used data from Allscripts Sunrise to refine our understanding of caring for COVID-19 in America.

Northwell’s COVID-19 survival calculator uses 6 factors routinely available at hospital admission to estimate the probability of survival during hospitalization, designed to complement clinical evaluation and assist in treatment decisions, it has been internally and externally validated across 13 acute care hospitals in New York City. To help improve patient access and care throughout the rest of the country, Northwell has made this calculator publicly available through the web. In the United Kingdom, Gloucestershire Hospitals NHS Foundation Trust went live with Sunrise EHR in March. The trust added e-observation functionality, which included automatic calculation of NEWS2, the National Early Warning Score designed to pick up patients at risk of deterioration. This – the implementation of NEWS2 is immediately helping the trust manage patients during the COVID-19 outbreak. Gloucestershire Hospitals has also introduced icons to its patient tracking board to identify patients with COVID-19 and made those results available throughout the rest of the system. We moved rapidly to new ways of fully supporting go-lives without risking the health of our staff, NHS staff or patients from traditional support and floor-walking activities.

Our CarePort platform is providing substantial value for our clients. CarePort played a big part in elevating the public conversation about COVID-19 and its impact. Early on, Washington Post published an article detailing real-time data captured by the CarePort team that will help organizations and their clinicians better understand how the virus is affecting patients. Using CarePort, hospitals in Michigan proactively communicated COVID-19 testing status to post-acute providers, both pre and post-discharge. As a result, post-acute providers could take necessary measures to protect staff and patients and manage the use of personal protective equipment. CarePort created new capabilities to allow hospitals to identify post-acute providers accepting COVID-19 positive patients, minimizing times spent by discharge planners and case managers calling individual facilities to determine their capabilities and their capacity. This was especially critical as hospitals throughout the state reached their exceeded capacity during the COVID-19 surge.

Our telehealth offerings continue to see broad adoption amongst our client base. Close to 200 clients has selected FollowMyHealth telehealth, enabling safer care to be delivered to patients in their homes and improving communication between quarantined people and health care organizations. FollowMyHealth, which has an EHR agnostic patient record at its core, provides vital connections to the patient’s care team. This provides better outcomes for both physicians and patients in siloed solutions, providers on practice fusion platforms have also rapidly adopted telehealth. For the second quarter, we saw 698,000 total telehealth visits from Practice Fusion, up 300% from Q1. In total, during Q2, close to 900,000 telehealth visits were experienced by our entire client base, combining both of those solutions.

Now moving on to the health of our client base and how we believe we are thinking about IT solutions going forward. While there continues to be much uncertainty around the progression of the pandemic, we believe our clients have begun recovering from the worst of the impact that we saw in April. We have seen patient volumes and elective surgeries come back strongly in June and July. In my conversations with CEOs, they have indicated that outpatient, inpatient, emergency department visits and surgeries are back at 80% to 90% of pre-COVID levels, with some variation by region.

Providers continue to benefit from government relief, including the CARES Act, which initially authorized $100 billion in funding the hospitals and other health care providers and also removed many of the policy barriers to the use of telemedicine during the crisis. An additional $75 billion in funding became available through the Paycheck Protection Act and Health Care Enhancement Act. Specifically, the Department of Health and Human Services targeted allocations to help providers in the high-impact areas. $12 billion went to 395 hospitals in those areas, $10 billion was sent to 4,000 rural health care providers and additional $19 billion was allocated to organizations like safety net hospitals, skilled nursing facilities and hospitals in small metropolitan areas.

The HEROES Act, which is under discussion as Congress negotiates the next coronavirus release package, proposes an additional $100 billion for that provider relief fund. The Senate version calls for an additional $25 billion, so whatever the number they decide on, there will be additional provider relief coming. These supplemental programs, along with the rebound in patient volume and elective procedures, have helped to stabilize the financial situation of many providers, and we believe we are well positioned as they continue to invest in solutions that improve clinical outcomes and financial performance. During these times, clients are looking for a supplier with scale, that offer solutions not just siloed products, which is exactly how we’ve been positioning our offerings to solve problems across and throughout the enterprise. Our investment in R&D, building out new platforms, have proven to be durable competitive advantage for Allscripts.

Now, turning to our relationship with Microsoft, we recently announced the extension of our strategic relationship with Microsoft for 5 years. The extension will further enhance Allscripts’ cloud-based Sunrise electronic health record, announcing Microsoft as the cloud provider for the solution opens co-innovation opportunities to help transform health care to smarter, more scalable technology. This will accelerate the development and delivery solutions, including a cloud-based version of Sunrise. As I meet with our client CEOs, I am constantly asked 4 things: one, lower my total cost of ownership; two, improve my electronic medical record experience for my doctors; three, innovate, giving new cool and impactful solutions; and four, help me connect my consumers, make it easy.

Moving to the cloud will accelerate the platform to drive these 4 asks to market success. We have solutions natively written for Microsoft Azure already, such as FollowMyHealth and 2bPrecise. Through our partnership, Allscripts is positioned to leverage Microsoft’s extensive platform, tools and intellectual capital of the world’s best software designers and application architects to create a modern, progressive, innovative user experience for our clients and their consumers. This strategic alignment will also create co-innovation opportunities working with Microsoft to transform health care. A cloud-based version of Sunrise will offer the benefits such as improving cybersecurity, organizational effectiveness and solution interoperability. Faster implementations and upgrades that are less intrusive for our clients, and we expect our clients to start experiencing some of these advantages by the end of 2020. Using the cloud, we will also positively impact patients in smaller rural U.S. hospitals, extending the reach of this great platform to those who have, in the past, had to settle for sub-par EMRs, broken promises and the lack of innovation. Patients in these areas will now have better access to their health records to make more informed decisions, removing perhaps the last roadblock to access and nudging them to take charge of their own health.

Finally, I’d like to highlight a significant new win for the company. Allscripts has been selected by MicroHealth to migrate the U.S. Department of State medical health units to a cloud-based solution for their electronic health records. This will be done using our TouchWorks electronic health record for our patient – and our patient engagement solution FollowMyHealth. Through this partnership, approximately 450 clinicians and their staff at state will gain access to a scalable EHR as it is deployed across the world at more than 200 designated health units and missions on a rolling basis through 2023. This is a significant competitive win for our ambulatory business, and we expect this to provide additional momentum as we pursue additional opportunities.

Looking ahead to the rest of 2020, we remain focused on assisting our clients during this uncertain time. Our diversified portfolio has never been more relevant, and we believe we are able to capture new opportunities and to demonstrate the value of our solutions with both new and existing clients.

With that, let me turn the call over to Rick for our financial performance.

Rick Poulton

Okay. Thanks, Paul. I have a lot to cover, but I’d like to start by echoing Paul’s comments thanking our team members for their hard work and commitment to our clients during these difficult times. The energy and the commitment has been amazing to witness and the leaders in our organization have never been more focused than they are right now.

I am going to structure my comments today around three areas. First, a brief review of our second quarter performance. Second, as promised at our last earnings call, I will provide additional details and disclosures around our segment reporting and the implications for our portfolio. And then finally, I will give an update on the progress we have made on our margin improvement program and our near and longer-term adjusted EBITDA margin goals under that program. Just a reminder, what Stephen told you earlier, we have posted a supplemental presentation in addition to our usual supplemental data workbook on the Investor Relations website. These documents provide additional details on our margin improvement initiatives and segment reporting, and I’ll be referring to the content in these documents during my commentary.

So starting with the quarter, given the macro environment during the quarter, we were pleased with the $188 million of bookings that we recorded. This reflected broad-based strength across the portfolio of solutions, including Sunrise expansions, and continued success with new account wins in our ambulatory solutions, as Paul went through. Revenue for the quarter was $406 million, which was down $11 million from first quarter, primarily as a result of the COVID impact on patient volumes. Recall from our first quarter call how COVID impacts our revenue.

With regards to our recurring revenue, the areas of our business that are most directly impacted by patient volumes at our clients, are our ambulatory revenue cycle management services, our payment clearing house and some transactional service lines we have around lab connectivity, e-prescribing, pre-authorizations and chart polls. Collectively, these represent approximately 10% of our recurring revenue in any given quarter. And of course, our non-recurring revenue in any given quarter is driven by mix of in-period sales and backlog burn down. Over the longer term, stability in non-recurring revenue is highly dependent on new sales activity. But in the near term, our substantial backlog helps cushion some of this against any in-quarter weakness in sales activity or sales mix. During the quarter, our recurring revenue remained at 82% of total revenue, consistent with where we were at the first – in the first quarter of 2020.

We were encouraged to see patient volumes recover in June, for example, in our Payerpath ambulatory claims clearinghouse business. We saw claim volumes drop to 60% of normal volumes in April. And then they recovered back to approximately 80% of normal volume in June. And we witnessed similar trends in other patient volume-sensitive areas of our business. We are very pleased with our margin performance in the quarter as we benefited from the margin improvement initiatives that we previewed last quarter. Consolidated non-GAAP gross margins increased 150 basis points sequentially. And our adjusted EBITDA margins increased 530 basis points sequentially as we dramatically improve the profitability of our client services organization and reduce low-value operating costs around the company. I’ll share more details about our margin improvement plan and our outlook for adjusted EBITDA margins in a little bit.

As we had previewed on our last call, we recorded a restructuring charge in the second quarter of $28 million, most of which was related to severance costs as we implemented this margin improvement plan. Looking out over the balance of the year, I would expect no more than $10 million in additional restructuring charges, and this will be split between both the third and the fourth quarter.

Overall, for the P&L, we recorded non-GAAP earnings per share of $0.18 in the quarter, which exceeded last year’s second quarter non-GAAP earnings per share, even with revenue down approximately $39 million on a year-over-year basis. The new margin efficiency is already beginning to show itself in our free cash flow performance. For the first half of 2020, if you adjust our reported operating cash flow for the impact of $73 million in payments that we made to the DOJ as well as approximately $23 million in cash restructuring charges. We generated $55 million in free cash flow, and that is more than a $90 million improvement relative to the first half of last year. So we’re not done with our free cash flow improvement, but we think we’re well on our way to a good start.

Now let me shift to our segment disclosures. As we had promised, we significantly enhanced our business segment disclosures this quarter to improve transparency and provide more clarity and visibility around our business units. The core clinical and financial solutions segment includes our EHR software and services for both inpatient and outpatient providers as well as our patient engagement solutions. And in totality, it comprises about 77% of our total revenue today. Our data, analytics and care coordination segment comprises 21% of our total company revenue. And it includes our point-of-care and clinical data solutions for payer and life science customers, and it also includes provider solutions that bridge traditional acute to post-acute care and to manage the expansion of value-based care.

Finally, the unallocated segment includes our EPSi financial decision analytics platform, which is typically sold to our hospital clients. As you saw in our press release, earlier today, we finalized an agreement to sell our EPSi business unit. The purchase price of $365 million represents a multiple of approximately 7.5x trailing 12-month revenue and approximately 18.5x trailing 12-month adjusted EBITDA for this business unit. The deal is a significant win for Allscripts’ clients and shareholders and tangibly demonstrates how valuable some of these business units outside our core clinical and financial solutions may be. The transaction is expected to close later this year, and the after-tax proceeds will be used to de-lever and further strengthen our liquidity position.

So stepping back to our two main business segments, despite attrition related to decisions made a number of years ago, our core clinical and financial segment has regained some near-term momentum with major inpatient clients extending their long-term contracts and key new wins in the ambulatory business, including the state department deal that Paul mentioned earlier. Our international presence continues to expand as we view the core business outside the U.S. as a growth business, with large opportunities in the pipeline. While the timing of these deals is hard to predict, we do believe that we will win our fair share of new deals, and we are in advanced negotiations on some significant opportunities at this time.

Our data, analytics and care coordination segment contains our higher-margin and higher growth opportunity businesses with products that are sold inside and outside of the Allscripts installed EHR base. This includes Veradigm, which is focused on solving key problems for payer and life science companies using the point-of-care presence and clinical data that we have. It also includes our CarePort business, an end-to-end platform that bridges acute and post-acute EHRs and provides visibility for providers, payers and ACOs into the care that patients receive across care settings. CarePort currently manages 40% of post-acute transitions in the United States and processes more than 18 million annual referrals. To be precise, our cloud-based precision medicine platform harmonizes genomic, clinical and lifestyle data and brings precise EHR agnostic and workflow interventions that work seamlessly with existing provider workflow, and truly facilitates decision-making at the point of care.

And finally, our Payerpath claims management solution, reduces the time, cost and clutter associated with managing health care transactions for practices of all sizes, and manages the claim reimbursement cycle, ensuring prompt and accurate payment. What all these solutions have in common is that they provide a high recurring revenue stream with high margins on cloud-based tech stacks. Their end market customers are not limited to the Allscripts pace of EHR customers, and they all operate in large, faster-growing markets when compared to the U.S. markets for our core clinical and financial solutions. This comment on faster-growing markets may ring a little hollow when you see that Q2 revenue was slightly down on a year-over-year basis in the segment. But this was driven by 2 temporary headwinds in the quarter, the first being the impact of lower patient volumes, and the second was a temporary setback for Veradigm in the aftermath of the DOJ settlement. But our expectations are that both of these headwinds will dissipate and will have a smaller and smaller impact as we look ahead.

New this quarter, we are showing segment profitability all the way down to the adjusted EBITDA level. We believe this makes our segment disclosures more useful and the methodology for how we did this is laid out in the supplemental information I referred to earlier. We intend to continue this presentation in future quarters. Putting all the pieces together and you can see that the core clinical and financial solutions segment comprises 77% of total revenue, but 58% of our total adjusted EBITDA earnings. While our higher-margin data analytics and care coordination segment comprises 21% of total revenue, with 35% of total adjusted EBITDA across the company.

So now let me shift and update you on the status of the margin improvement plan that we discussed on our last earnings call. We’ve made significant progress since we hired AlixPartners in March to help us develop and execute with a primary focus on improving adjusted EBITDA margins. At the beginning of our margin improvement program, before we started on these margin initiatives, our adjusted EBITDA margins in our core clinical and financial segment were 9.9%, and they were 24.8% in our data analytics and care coordination segment. We began our work by setting appropriate goals for where we thought our performance should be.

For the core clinical and financial segment, we set that at a level of 18% to 20% adjusted EBITDA margin, and this was based on competitive benchmarking of similar-sized companies in our sector. As for the data analytics and care coordination segment, we set a best-in-class 30% plus adjusted EBITDA margin goal for those businesses. Working in tandem with AlixPartners to evaluate our cost structure, business processes, customer profitability and our overall solutions portfolio, we were able to identify and implement $76 million of permanent annualized margin uplift through June. And we have a high level of confidence in an additional $25 million of annualized margin uplift over the next 18 months. And also, we have – finally, we have identified an additional $70 million beyond that of early-stage initiatives that are likely to provide additional margin uplift in the quarters ahead.

Let me give you some examples of where we have been able to improve processes and reduce costs across our cost of sales, our R&D and our SG&A. In our cost of sales, we have now right-sized our services organization to reflect the current revenue environment as well as improve the productivity of this labor base by setting scheduling and improving our ability to flex costs up and down based on the volume of work and thus avoiding unproductive bench of resources. We have improved our hosting costs by aggressive vendor management, and we have shed some low margin revenue, including hardware and some third-party solutions. In our R&D, we have significantly restructured our R&D organization to focus on high ROI projects and optimize the mix of onshore and offshore developers. We are laser-focused on only funding investments with a clear path to deliver value to our clients.

And finally, on the SG&A line, we have reduced layers of management and increased spans of control across the organization, which we believe will not only increase efficiency, but also make us more responsive and nimble to our client needs, putting all this together results in confidence that we will be able to increase margins over time even as we remain in an uncertain revenue environment. Based on initiatives implemented to date as well as those we expect to implement over the time we – over the remaining course of the EBITDA margin plan, in our core clinical and financial solutions segment, we expect to increase to margin – EBITDA margin target of 15.5% to 16% by the fourth quarter of 2020 and to continue to improve from there in 2021. In the data analytics and care coordination segment, we expect adjusted EBITDA margins to increase to 29.5% to 30% by the fourth quarter of 2020 and then to also continue to improve throughout 2021. These margin expectations assume no changes in the underlying portfolio of solutions in each of our segments, and we will have some seasonality that will drive quarter-to-quarter variability. But we are very confident in our trend line.

And so with that, I would like to open up the call for questions.

Question-and-Answer Session

Operator

Thanks you. [Operator Instructions] Our first question today is coming from Charles Rhyee from Cowen & Company. Your line is now live.

Charles Rhyee

Hey, thanks for taking the question guys. And maybe a question for you, Rick, obviously, you gave some pretty positive EBITDA margin targets by year-end. Can you talk about sort of what – sort of the changes that have already happened so far in terms of sort of taking costs out? And what needs to be done over the next couple of quarters sort of to get there? And you said that it really doesn’t depend on – it really just assumes the current portfolio stays the same, anything else besides with EPSi going? Anything else maybe in the core business that could potentially also be looked at being sort of maybe more non-core going forward? Thanks.

Rick Poulton

Okay. Charles, thanks for the questions. You covered a little bit of ground there. So let me try to pick them off. I mean, so we obviously have made substantial improvement during the quarter in our EBITDA margin numbers. I just went through all those details, and you can see them in all the supplemental information in quite a bit of detail. What I – the message that I am trying to get you to take away is we did a lot upfront, get the proverbial low-hanging fruit. It was comprehensive across the organization. The way you should think about the buckets of margin are really in our cost of sales, our R&D costs and our SG&A costs. And so I went through some examples of things we did in all those areas. And there’s more to be done. So my optimism around continuing to see an increase to the margins is because we have done a lot of work, building a plan. And while we have executed a lot of it, there’s still a high degree of confidence in some initiatives that are yet to be fully implemented. So yes, we do expect an increase as we get towards year-end on that. The second part of your question, Charles, I think, was with respect to the portfolio. And we do have some information in the investor presentation that’s posted that makes it clear what margins are with and without EPSi on a consolidated basis. But the reason we have presented this on a segment basis is this transaction around EPSi doesn’t impact any of those numbers because we have had that excluded from those segments. And your comments on, is this – is that the only piece of the portfolio that we could sell or might sell? No, I think what the takeaway that I want everybody to have is we have a lot of good businesses, both in our core and around the core. And many of those businesses in the data analyst and care coordination segment are businesses that do more business outside the Allscripts EHR customer base than they do inside and are very capable of standing on their own. So we are not predicting or foreshadowing anything, but they certainly are possibilities going forward.

Charles Rhyee

Okay. Appreciate that. Thank you.

Rick Poulton

You are welcome.

Operator

Thank you. Our next question today is coming from Robert Jones from Goldman Sachs. Your line is now live.

Robert Jones

Great. Thanks for the questions. I mean, I guess, Rick, just to stick on that theme. Like clearly, nice progress on the margin improvement and where you see it headed. And you highlighted the free cash flow generation. Certainly, a lot of progress there, too. And I guess if we take a step back and we look at these two new segments that you guys recut, how do you kind of think about growth in each one of those buckets, if we are able to kind of look out beyond this COVID window? And I know it’s a bit of a tough question, but I think you guys have done a lot of heavy lifting internally, clearly, but just trying to think about what the outlook is on the top line and returning to growth?

Rick Poulton

Yes. Yes, Bob. So it’s in part why we have created the segments because we do see different growth drivers in these different areas of the business. The core clinical and financial solutions, which to date are highly weighted towards the United States. It’s no mystery to anybody on this call that the U.S. market is a relatively mature market for those solutions. There is some level of replacement activity that’s been happening, and we think will continue to happen. We expect to be a net share shift winner. But the pace and the volume of what that could look like, I think, is difficult to predict, particularly with COVID. And what’s that doing to priorities at certain places. But the international markets remain, I think, an exciting area, and we have some very strong points of presence internationally. We have a strong resume internationally. We think we are very competitive internationally, and we would expect to see some growth off of that. That tends to be difficult to predict. It’s a little bit like drilling for oil. They are big hits when they happen, but difficult to predict when they will. So I don’t – we are not going to foreshadow a growth rate, I don’t think, Bob, but I do think we are ready to – we are competing vigorously in many markets, and we would hope to be back with some good news on that. In the…

Robert Jones

I get it.

Rick Poulton

Pardon.

Robert Jones

No. No. Sorry, go ahead.

Rick Poulton

Well, so then on the other segment, the data analysts and care coordination side, I mean, those are – again, we segment those businesses because the addressable market is fundamentally different than our EHR client base. And therefore, a larger market and there are macro forces that are driving more growth opportunities there. So with the continued growth of value-based care, the shift from Medicare to Medicare Advantage plans. Those are driving a much greater interest in managing costs from acute to post-acute environment. And we have a platform that is extremely well positioned to take advantage and capture some of that growth. We – Veradigm and the ability to connect payers and life science companies to the clinical point-of-care and with the clinical data, that’s an exciting opportunity. And it’s why we have put investment into that space to position ourselves to ride that growth. And we have an ability with our clearinghouse business to continue to grow that in terms of its market penetration as well. So I think generally, without giving you numbers on expected growth, Bob, because they will all be a little bit different by different market segments there. But in general, we feel that the growth opportunities are going to be a lot more significant on that data side. And that’s why we are trying to create more some of the transparency that we are doing with this presentation.

Robert Jones

No. That’s helpful, Rick. I guess maybe just a quick follow-up, as you highlighted for the EPSi sale. Healthy multiple, looks like maybe $20 million EBITDA you are talking about rightsizing the portfolio. Are there any assets as you think about some of those buckets you just highlighted where you would look to add any kind of tuck-in or bolt-ons that might help supplement or replace the EBITDA and revenue of some of the businesses that you have shed?

Rick Poulton

Yes. I mean, absolutely. We are constantly thinking about and scouring the market for things that we think are good adds. You don’t have to look too far backwards, Bob, to see we have deployed a fair amount of capital. I mean, even just last year, we have put out a fair amount of capital to continue to strengthen the Veradigm asset base. But yes, we will be opportunistic. But to be candid, given where we have seen our stock trading and how poorly we are getting valued, I think it’s difficult to do a lot of capital deployment with that market situation. So we have focused on improving the operation. We are hoping with, again, a little more transparency, the market will wake up, and we will get a fair value on the assets we have. And I think that will, in turn, lead us to think about how to continue to optimize. And whether that’s being an acquirer of assets or a seller of assets, I think, remains to be seen.

Robert Jones

Great. Thanks for all the comments.

Rick Poulton

Sure.

Operator

Thank you. Our next question today is coming from Sean Dodge from RBC Capital Markets. Your line is now live.

Sean Dodge

Hi, thanks. Good afternoon. Maybe going back to the EBITDA margin initiatives, Rick, you mentioned that the cost actions you are taking to help achieve those. Is that all you need to do to get to those targets? Or is it going to take some revenue growth as well? I guess of the longer-term targets you laid out, are those achievable on your current revenue base?

Rick Poulton

Yes. Well, we have calibrated the cost base, Sean, to the existing revenue environment. So from my perspective, as revenue comes back and we see growth, that will make it a lot easier, frankly, to get to those numbers. But we are not counting on it with what we are working on right now. So it’s a lot of cost, but it’s not 100% cost, and we had some, in my view, junky revenue, too. And we are being a little more selective in where we are going to spend our time generating revenue, too. So that works against some of the top line growth, but we think it’s the right trade to make to create a more efficient organization. So I don’t – I’m not – maybe said it differently, if behind your question is, are you banking on a certain revenue growth to hit those targets? The answer is no.

Sean Dodge

Got it. Okay. That’s helpful. And then maybe on the EPSi transaction, from a strategic or a mechanical standpoint, how difficult is it going to be to disentangle that from the rest of the solutions or capabilities you are providing clients? Is there some type of commercial agreement you will have on the back end of this where you will continue to sell it? Or was EPSi pretty much already operating independently from everything else?

Rick Poulton

We manage the company today with very much a portfolio type of approach, meaning the way the segments are outlined is very consistent with how we manage it. So those businesses are – have an independent identity. If you get a chance to look at the investor presentation Slide we posted, we talk about how we calculated profitability. And you will see there’s a lot of it is directly attributed and directly kind of lines up with these business units. Very little of it is allocated. And that’s indicative of these business units outside the core are fairly independent to the core, so unraveling it, not – I am not saying it’s no work, but it’s a pretty modest lift to unravel it. There are some of our EHR clients that do use the solution. And so there might be some contract unraveling to do there. There’s a little bit of TSA-type support we have to provide. But not – there’s not a lot of hooks.

Sean Dodge

Understood. Thanks again.

Rick Poulton

You are welcome.

Operator

Thanks. Our next question today is coming from George Hill from Deutsche Bank. Your line is now live.

George Hill

Yes. Good afternoon guys and thanks for taking the question. I guess, Paul and Rick, my question on EPSi is, I guess, how did we come to the conclusion to sell that asset versus any other part of the asset? Was it more valuation driven for the demand that you saw for the asset? Or was it the kind of the output of the portfolio review? And I will pause there for a second.

Rick Poulton

Yes. So George, it’s more – I would say it started with output of the portfolio review and what we felt was most strategic and less strategic. And then we compare that to what we thought about our competitive positioning and where we thought we would be long-term with that. And then, again, ran that up against the need or the priorities for capital and liquidity and things like that. So it was kind of a triangulation of all of the above.

George Hill

Okay. That’s helpful. And maybe a quick follow-up for Paul, kind of away from the strategic review. I guess, Paul, could you just talk a little bit about the disruption of the sales process during the COVID environment? And kind of how far back do you think we are to kind of being able to sell as normal in the market versus still being at a pretty highly – high level of disruption? Thank you.

Paul Black

I think that people, George, depending upon where you are and what part of the country, a lot of clients will still see us. I have had a lot of client visits. They are still working. The CEOs are showing up. The CEOs, they are saying it’s hard for them to expect their docs and nurses to show up, but they are not at work themselves. So they actually will see us. So that actually is – that I wouldn’t say is business as usual, but it’s more common to still do face-to-face meetings with many of our large organizations. On the new business side, we are doing a lot of creative things with regard to the way that we demonstrate the product today versus what we used to, setting up websites for people to actually go in and actually experience the solutions. And in a mentored way for them to actually walk through it. And then, specifically, everybody is doing it this way. So it’s not like you are being disadvantaged or we are being disadvantaged from a different competitor because they are able to do something that we are not. So from a long-term perspective, I actually like the ability for people to look at software remotely. And for people to actually play with it themselves versus a room full of people being proctored to by one really smart doc or really smart nurse. So there’s a kind of a new way of doing this, I think, is pretty important. But broadly, it’s a different way of doing business. But our people are – in my perspective, are gravitating to it pretty nicely. A lot of people like to do this from home, and a lot of people are getting good at it.

George Hill

Thank you.

Operator

Thank you. Our next question is coming from Eric Percher from Nephron Research. Your line is now live.

Eric Percher

Thank you. I wanted to return to the cost reduction, but maybe a little more forward-looking. The vision of another $70 million is pretty bold. When you look at that, what of the three areas you have focused on do you see as representing the greatest opportunity?

Rick Poulton

Well, Eric, let me – let’s first qualify that, right? So I said we put in the bank already $76 million. We had $25 million of what we are calling highly confident of exercising over the next 18 months. And we have identified early stage initiatives of $70 million? Okay. So the reason I am clarifying that is very typical in these kinds of drills that you identify something and then you put it through the kind of – you put it through the sanity check and you have some stuff fall off. So I don’t want you to put that money in your pocket yet. I certainly haven’t. So you shouldn’t. But it’s indicative of the – there’s a building spectrum of opportunities we have identified and some are already completed. Some are in the near, should be completed over the near-term and some are longer-term opportunities that we are working towards over the long-term as well. So I just want to make sure you don’t have a misperception on what we said. Then with that backdrop, where is the next layers of opportunity? Look, we still have areas that are underperforming. I think you see that still with the core margins. While we made significant progress in Q2, we are still below where I think for sure where we want to be, but even if you did a basic competitive benchmark, you would see that. And it’s indicative of, there is still some pockets. And one I will pick on is our – like our hosting costs, for where we provide hosting services to our clients are still not where they ought to be. And we have more work to do. And just that area alone has, I am not exaggerating, I’m going to tell you 20 different initiatives that are all going to chip away at some of that work. And longer term, the Microsoft relationship that Paul talked about, and we were very proud to cut with them is part of getting at some of the structural cost inefficiencies that we have today. So it’s an area that those – it’s an example of – so in our cost to sales, there is a couple of things that weigh us down, and it’s why our gross margins are not – we’re still not where we would like to see them wind up. But I think we worked pretty hard on the R&D side already. I don’t think there will be a lot more coming out of there, but we still have some areas that are in the R&D investment bucket when we classify R&D that are not people that write code. So we have a lot of solution management organizations, things like that, that we have to continue to just rationalize and make sure we are set up as efficiently as we want to be. But our biggest – my biggest focus is the corporate overhead. And so SG&A is an area that, for me, is where we will have maybe an outsized look at how can we make that more efficiently?

Eric Percher

That’s helpful. I was curious to see if you’d land on Microsoft. When we think about that, do you have to get to a point where you’re migrating more of what you have today, meaning later in the 5 years than earlier? Or are there opportunities early on?

Rick Poulton

There are definitely some opportunities early on. We have already created instances with our ambulatory. These are ambulatory technology that was built client server. But we are moving into Azure-based environments already. And we are running some clients in instances like that already. And I think as we get more and more comfortable with making those transitions and running them efficiently, we will see more flow in that direction. But I think the inpatient side is still an opportunity that’s in front of us. And that will take a little longer to make real.

Eric Percher

Thank you.

Operator

Thank you. The next question today is coming from Stephanie Davis from SVB. Your line is now live.

Stephanie Davis

So a large portion of the margin improvement this quarter came from R&D reduction, which is a pretty big departure from one of your large national peers and their view on that. So I was hoping maybe you could give me more detail on where you found pockets of cost opportunity without sacrificing growth. And as a follow-up, how you benchmark your internal targets for R&D as a percentage of revenues going forward given the broad array of mature software companies out there?

Rick Poulton

Yes. Well, I will start by saying, I can guess who you are referring to, but let’s just – I’ll just talk about that.

Stephanie Davis

Not so subtle.

Rick Poulton

Yes. We are – we invest just as much, if not more, of our revenue dollar back into our solutions as anybody in the industry. So obviously, size can change what that absolute dollar amount is, but we invest every bit as much. Some of what you’ve seen is your observation. I mean, I’d actually encourage you to keep looking deeper because a lot – the impact was across many different areas. But without compromising what you’re investing for clients, I mean, we had a huge opportunity to optimize our mix of onshore and offshore developers. I mean, those significant opportunity. And we can do that efficiently because we have a very large operation offshore that we’re – they’re all our employees. It’s not like we’ve sent it out to third parties. We can efficiently staff up in locations like that. We can efficiently recruit quality talent, and that’s a big cost savings for us. So that’s an opportunity where nothing got lost in terms of value to clients, but we were able to really push on optimizing that mix. Another example is, again, inside R&D, it’s not just people who write code. I mean, we had large, and I would argue, excessively large, project management offices that did a lot of work that didn’t meet our standard for ROI. And so we have right sized that a bit. So we feel really good about the changes we are making and have – but have done it all with the client interest at heart. And we feel like we are investing very much the appropriate amount of money in our solutions given the marketplace that we are in. So – but again, that’s – I’m trying to answer your R&D question. But again, we’ve made changes up and down all buckets of the organization.

Stephanie Davis

Understood. Understood. And historically, when I have talked to you folks about R&D spend and why it was outsized versus other industries, there was a heightened level of regulatory compliance spend just given the health care focus. Is that taking down a bit just given where the industry is?

Rick Poulton

Well, no. I mean, the regulators are not sitting on their hands. There’s definitely continued requirements that come our way. And it tends to go in waves a little bit, Stephanie. I mean there is – you remember, the big waves, obviously, at Meaningful Use 1 and 2. There is a lot of work now – right now happening around interoperability rules. So those do come in waves. And at those times, it can separate the strong and the weak. So we may see – continue to see some industry evolution from that. But regulatory-driven investment has not gone away.

Stephanie Davis

Okay that’s helpful. Thank you.

Rick Poulton

You are welcome.

Operator

Thank you. Our next question is coming from David Windley from Jefferies. Your line is now live.

David Windley

If I heard correctly, I think you said 200 clients on your telehealth or telemedicine solutions and some 900,000 visits in 2Q. I guess two questions around that. Is that a material revenue opportunity for Allscripts – maybe three questions, that, how are you pricing that? And is there an opportunity – is there a difference in that pricing strategy kind of in the midst of COVID versus after things start to normalize? Thanks.

Paul Black

We do charge for it, and we charge on a per visit basis. And we also charge dependent upon inside of our other organization, inside of Practice Fusion, we actually do it on a per provider basis. So we do think it is a revenue opportunity, and our clients really like it. The – that some – in many cases, been talking to clients, they keep that around 70% of their visits on the ambulatory side went to virtual. And they’re trying to figure a way, and that’s up from like 15% of their visits, and they’re trying to manufacture a way to make that happen and stay at that rate, at 50% is kind of the floor they’re trying to hit at. This is all subscription business for us. So it’s all recurring revenue. And I think that as a result of COVID that many consumers are going to permanently demand, that this is the way that they have their interaction with their docs, especially on the primary care side and certainly depending upon the age of that cohort. But interestingly, there was a lot of folks that were, I’ll just say they were more – they’re elder. They were also taken with this, and they enjoyed being able to see their physician online versus having to come in and sit and wait, being a little bit, if you will, nervous about the potential health and safety of being – sitting in a waiting room.

David Windley

Understood. So to clarify, is it either a per physician or a per visit or is it actually both?

Paul Black

It’s a subscription.

Rick Poulton

It’s a PM – per provider per month kind of pricing typically, David.

David Windley

Okay. So not a per visit, patient visit-driven revenue model? Just want to make sure I understand that correctly.

Rick Poulton

Right. Right. Paul, I think was referring to it. The client can bill per visit, but we charge them on a subscription basis.

David Windley

And in your discussions on this, how important if you get into this at all, how important do your customers indicate the ongoing reimbursement regime will be to their decisions around embedding telemedicine in their practices like they are doing with your solution?

Rick Poulton

Look, there is no doubt that normalizing for reimbursements for the virtual visit has helped. It certainly removes the conflict of trying to force people into the office. So that has definitely helped. But I think the answer to your question is kind of rewritten every day with the reality of the world we’re in. I mean, I think we – I think a lot of our clients would like to practice medicine the way they – with a personal touch, but that’s a problem for both them and the patient. And so seeing them on a virtual basis, is better than not seeing them at all. So I think the evolution is happening on a daily basis.

David Windley

Very good thank you for the answers.

Rick Poulton

Thanks for the question.

Operator

Thank you. Your next question today is coming from Michael Cherny from Bank of America. Your line is now live.

Michael Cherny

Good afternoon and thanks for all the color so far. Just diving in again on the Microsoft side, as you think about the push going forward, is there anything that, as you go through this partnership, go through this expansion that you’re seeing more for anything else that what they’re doing on their health care side that they want to bring to the table? I guess, relative to the initial partnership, has the end goal changed?

Rick Poulton

For them? For Microsoft? No…

Michael Cherny

There’s been tiny little pieces on the part with Microsoft over time. I’m just curious to see where we sit.

Rick Poulton

Yes. Microsoft has been pretty clear that they’re not going to be in the application business. They are not going to be in the end user business and/or competing with us. They want to be a service to us and for people like us that do what we do. So they have been pretty clear about that. They have a series of things that they offer around cognitive services around the way that they build their applications that make it much slicker for us and much faster for us to stand up new capabilities that we are going to take full advantage of because of the way that they do that inside of the cloud. Things like credentialing, things like AI that you can call as a service. And it is pretty – it’s very impressive, and it allow us to get to more interesting solutions much more quickly. And then just the scale that they have is also quite impressive to us, their ability to gen up new regions and do things more quickly. And then lastly, the cyber impact, they spend billions of dollars a year on cyber. And that is a race that will continue to be run for here through eternity, and we think that’s lining up with somebody like them with their capabilities and their capital spend on that every year is something that we think is incredibly important.

Michael Cherny

Great. And then just one quick technical question, Rick, I’m sorry, I missed – if I missed this. You noted your view of where the stock sits. Obviously, you have been historically active on the buyback side. How do you think about that on an intermediate basis?

Rick Poulton

Yes. I mean, it’s attractive, Mike, for sure. I think we have been active. I would expect to be active again. But we are – with the first the onslaught of COVID and potential implications and unknowns around liquidity. We thought it was smart to be husband our cash and just be prudent during that. I think we are feeling better about that. But I think we are also feeling like it’s a good time to take down our leverage a little bit. But we will continue, as we generate cash in the business, etcetera, you should expect us to continue to be an opportunistic buyer if the stock is undervalued.

Michael Cherny

Great. Thanks Rick.

Rick Poulton

You are welcome.

Operator

Thank you. Your next question is coming from Matthew Gillmor from Baird. Your line is now live.

Matthew Gillmor

Hi, thanks for the question. I just had a quick clarification. With the EPSi proceeds, will there be any tax leakage with that or do you have some ability to shield any gain?

Rick Poulton

We have some tax attributes left, Matt. So we won’t have a full incremental effect, but we will pay some taxes. Yes.

Matthew Gillmor

Okay. Is there an easy way for us to just think about what the net proceeds are or is that sort of TBD at this point?

Rick Poulton

It’s still TBD, but I mean, you should assume some deal costs, and then you should assume some taxes and – why don’t we sketch out some numbers and then we’ll have – I’ll have Stephen post them or something like that rather than just do something off the top of my head here.

Matthew Gillmor

Got it. Fair enough. Thanks a lot.

Rick Poulton

Welcome.

Operator

Thank you. Our next question is coming from Richard Close from Canaccord Genuity. Your line is now live.

Richard Close

Great, thanks. Congratulations on the expense controls there. Just with the new buckets here, divisions. Appreciate the revenue on the last 12 months. Are you going to be reporting those divisions, the actual numbers on a quarterly basis going forward, like in the 10-Qs and Ks and whatnot, so we can sort of track that going forward? That would be my first question.

Rick Poulton

Yes. Sorry to interrupt you, Richard. But the answer is yes, when you see our Q filed, you’ll see some of this same information.

Richard Close

Okay. And then will we be seeing sort of like a quarterly look back in terms of the historical numbers?

Stephen Shulstein

Yes. Rick, it’s the – we have it posted on in the supplemental workbook going back to 2018 and we have quarterly for 2019 and the first two quarters of 2020. So you can see the segment breakdown all the way down to adjusted EBITDA.

Richard Close

Okay, excellent. And then just, Rick, just a clarification on the data analytics side, you had mentioned the revenue decline there. You said Payerpath, I understand that, but I didn’t quite get what the Veradigm was. What caused that?

Rick Poulton

Yes. It’s a fair question, Richard. What I was saying is I think the settlement we reached, which we – you’re certainly familiar with that and talked about that. And we didn’t have all the same disclosure clarity that we have today. But I think for the last couple of quarters, there’s been an observation that the growth in the Veradigm area was not – was kind of stunted a little bit. And what I’m saying to you is we did have, I’d say, a little bit of a pause that happened with the DOJ announcement, and we – I think a lot of the business partners of Veradigm wanted to understand that and get comfortable with it. And the good news is we’ve worked through all that and feeling much better about the look ahead. But I mean, we had a couple of quarters of pretty stagnant growth coming out of them because of that.

Richard Close

Okay, thank you.

Operator

Thank you. Our next question is coming from Ricky Goldwasser from Morgan Stanley. Your line is now live.

Raymond Xu

Hey, this is actually Raymond on for Ricky. I wanted to start by asking about strategic areas and adjacencies that you can see as potential fits. And a lot of our conversations, we hear about the consumer and at home care being very interesting areas. What are your thoughts on those as potentially being fit for your business?

Rick Poulton

Well, Raymond, I mean – so we have made some significant investments in positioning ourselves for adjacencies for several years now. I think an area that is close to what one of the things you just gave an example of is in patient engagement. I mean, we think all of our health system clients from the large all the way down to the small, are very interested in patient engagement solutions of all levels that kind of get them tighter connected with patients on a pre-visit and post-visit basis. And so our health grid platform is a really good tool for that. And we would expect to see some growth coming out of that in the quarters ahead. But a lot of the issue – a lot of the businesses that we’ve just described in the data analytics and care coordination segment are really all about pursuing some adjacencies beyond just the core clinical EHR and financial solutions market. So things around bringing personalized medicine and genetic testing into the clinical workflow, that’s what to be precise is all about. Transitioning from acute to post acute care, that’s what CarePort is all about. And Veradigm is all about bringing the clinical, again, point-of-care as well as clinical data that we’ve collected for decades now to those entities and help them reduce some of their friction costs that they have with trying to interact with the point of care. So these are all, in our view, adjacencies that we have positioned ourselves into with both organic and inorganic investments.

Raymond Xu

Thank you.

Rick Poulton

You are welcome.

Operator

We reached the end of our question-and-answer session. I’d like to turn the floor back over to Mr. Black for any further or closing comments.

Paul Black

Very good. Thank you, everybody, for staying on the line with us today and for listening to the Allscripts conference call. I’m impressed with three different things. In spite of the pandemic that’s going on around the world, we had a very strong performance from the sales organization from our global people, from the client relationships that we have, from the new business that we have as well as the recent Department of State win. I am also pleased with the strengthening we have in the building of an enduring company with respect to a lot of the hard work that’s going on with the AlixPartners initiative, which brought a lot of focus, a lot of clarity, and we have also taken substantial actions already to make sure that we have the right size of company and the right margin profile as we look forward that will strengthen us for the long pull, and I’m very proud of what we’ve been able to accomplish in a very short period of time. And then from a development standpoint, from a solution standpoint, that’s also extraordinarily important to us as a software company, obviously. And our work with Microsoft and what we are doing and our plans there will help us to be much more agile on a going-forward basis. And have, importantly, great new solutions that are going to be, we think, very well received by the marketplace as we are already in those markets, and we know what they want, and we know what their specific asks are with regard to total cost of ownership and the ability for them to connect more efficiently through a cloud-based solution. So with that, we thank you for your time and your interest in Allscripts. And we will talk to you soon. Appreciate it.

Operator

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.





Original source link

NexTech AR Solutions: Virtual Gold Rush Play (OTCMKTS:NEXCF)


NexTech AR Solutions Corp. (OTCQB:NEXCF) (CN:NTAR) is a Canadian company that provides augmented reality (“AR”) solutions for ecommerce. Management has indicated its intention to uplist from the OTC where it currently trades to the Nasdaq National Market. This is a rare pure play on the growth in the nascent AR industry. The recent acquisition of Jolokia, a webcasting software company, allows NexTech to combine their AR software solutions with Jolokia’s platform, formulating the first-ever virtual event platform with AR enhancements.

The Jolokia platform allows for large group participation of up to 100,000 while providing features such as word search, closed caption, uploading of prerecorded video, and availability in 64 languages.

NexTech technology allows for multiple participants to virtually visit a trade show booth or a school or lecture and speak to a representative, interact with a teacher or listen to a speaker and see people and things in 360-degree views. No special equipment or training is necessary. Participants just click and holograms pop up out of your device and create an interactive experience.

NexTech has a diversified revenue stream, strong initial commercialization revenue ramp up, the ability to be a first-mover disruptor in multiple industries with very large TAMs, and has a strong balance sheet with a lofty but defensible valuation.

Strategy

Management welcomes the opportunity created by the COVID-19 pandemic to showcase what it can do and believes that the shift to virtual events and online purchases will be long-lasting after the pandemic passes. Virtual events are less expensive, costing just thousand of dollars and do not require travel plans, lodging arrangements or service of refreshments while AR tools help to create a fun, convenient, and easy to use virtual experience.

NexTech offers services that other companies can’t match. CEO Evan Gappelberg explained at the July 10th Wall Street Reporter Next Super Stock conference:

The difference between us and everybody else (like Zoom) is that we’re a virtual events platform plus AR. Nobody else has AR built into their platform, and it gives us a very unique advantage when it comes to winning new business. There is an enormous amount of money flowing into augmented reality and virtual conferences… we are just a month into our new business and we are landing major contracts, and we expect to see many millions of dollars in new contracts signed over the next 12 months.

NexTech does not compete or try to displace any company but instead promotes integration of the major players such as Zoom (NASDAQ:ZM), Microsoft Teams (NASDAQ:MSFT), Skype, Cisco Webex (NASDAQ:CSCO), BlueJeans, Google Hangouts (NASDAQ:GOOGL) (NASDAQ:GOOG), Google Meet, and GoToMeeting into their platform.

Having government agencies and Fortune 500 companies as clients has led NexTech to partner with Fastly (NYSE:FSLY) for state-of-the-art security.

Management plans to continue to develop AR enhancements by their own R&D and by acquisition.

Revenue Stream

NexTech is well positioned to capitalize on the convergence of various technological trends sweeping across various applications. The company has recurring revenue from 3D AR ads that are sold on a software-as-a-service basis (“SaaS”) with a $99 start up fee and either $49.99 monthly or $479.88/yearly per stock keeping unit (“SKU”).

Corporations and trade shows are flocking to virtual events and physical event companies are likely to follow Skybridge that has agreed to partner with NexTech for its future virtual events. Many educational systems are choosing to go virtual when they open in September and are likely to follow the Dallas Independent School District that has contracted NexTech. Houses of worship are sure to follow the Y.A.S.M. ministry’s two-day youth conference featuring seven holograms appearing in participants living rooms. Fees for virtual events depend on options chosen from the services menu and can be bought on an annual basis.

The ARitize 360 AP is available for free download for Android and iOS and allows users to create apps for a fee. There’s a $9.99 per month subscription fee for sizing shoes and sneakers online. The company plans to add other products such as glasses and clothing soon.

Source

The first combined conferencing product using the Jolokia platform and AR is expected to be announced any day now. It will be a solution aimed at the education technology and telemedicine sectors.

Revenue Ramp Up

Fiscal 2019 Fiscal 2020e Change
$6 Million $20 Million* 300%
Q1 2019 Q1 2020
$0.9 Million $1.3 Million 178%

*Forward estimate from management guidance.

Gross margins have been improving from 46% in 2018 to 54% in 2019 to 56% in the first quarter of 2020 with an expected rise to 70% for the year with revenue growth expected to double from 2020 estimates to $40 million for fiscal 2021.

The company has added a new Director of Sales for Europe and three new sales staff increasing the sales headcount to nine in order to pursue capturing market demand. There likely will be additional hiring. Each member of the sales team has a monthly sales quota of $100K.

Industry Disruption

The COVID-19 pandemic has sped up growth in several industries that were already in growth modes due to the travel restrictions and social distancing mandates calling for more work at home and shop at home solutions.

The use of AR in advertising has shown to boost sales and is becoming more popular. It is easy and fun to use and draws consumers in. The pandemic has increased remote shopping where AR is at its best.

Rise in AR usage:

Asia Pacific Augmented Reality Market

Source: Grandview Reports

The virtual events market is expected to rise at a CAGR of around 22% over the next five years according to a study by the IMARC Group. Educational Technology is forecasted to grow to $341 billion by 2025. Telemedicine expected to reach $155 billion, growing at a compound annual growth rate of over 15 percent through 2027. These are just some of the industries that NexTech is geared up to penetrate and illustrate the endless possibilities for this company.

Management And Advisors

Founder and CEO Evan Gappelberg has extensive Wall Street experience in M&A and start-ups. He was involved in taking Take-Two Interactive Software public.

President Paul Simon is the inventor of the HumaGram, which are interactive holograms and holds the patent for the invention of holographic telepresence over the internet. Here’s a video of Mr. Simon speaking on how NexTech developed their AR for retail at AWE USA 2019.

CFO Kashif Malik has an extensive background in M&A and IPOs.

Advisor Ori Inbar is considered the godfather of AR. He is the founder of AugmentedReality.Org. and on a mission to inspire 1 billion active AR users.

Advisor Mike Boland is the founder of ARtillery Intelligence where he covers developments in AR and VR industries.

Advisor Scott Starr brings his experience in retail sales at PTC, SalesForce.com and LivePerson.

Share Composition And Valuation

The CEO has been on a share buying spree and is now the largest shareholder. Insiders own about a third of the shares. There are 72 million fully diluted shares. At today’s share price of $7, the market cap is $504 million. The company has about $8 million in cash and no debt subsequent to a recent capital raise. This is more than sufficient to cover operational expenses which currently are about $2 million per year.

The EV is $488 million. At the forecasted $20 million revenue for this year, the EV to sales ratio is 20X, which appears to be high but in line with what the market has been assigning to fast growing software companies. Interestingly, WiMi Hologram Cloud (WIMI), a Chinese AR advertising company seems to be the most appropriate comp for NexTech and sells at the same EV/S ratio.

An analyst has a price target of $20 for NexTech shares which would result in a market cap of $144 million and an EV/S ratio of a much more modest 6X. I think that the $20 million revenue guidance is modest and that the $20 per share price target is reasonable.

The share price has appreciated about 300% over the past few months due to the reported record revenue, forecasted strong growth, the symbiotic relationship, and unique product opportunity from the most recent acquisition and the expected Nasdaq uplisting.

I am an investor in start-ups that are at the beginning of their commercial stage. These companies burn cash as they pump money into developing their products and grow by acquisitions. I expect that NexTech stock will continue to rise from here as there’s imminent news on their new virtual conference product and the Nasdaq uplisting and there will be periods of profit taking following new highs. The Nasdaq listing will bring in new buyers such as institutional investors and index funds which tend to avoid OTC stocks.

My investment style is to build an initial position, add trading shares on weakness and sell the trading shares on strength. I will hold my initial position as long as the fundamentals remain consistent.

Startup Evaluation

I like to use Peter Thiel’s evaluating principles from his book, “Zero To One: Notes on Startups, Or How To Build The Future.”

Thiel NexTech
Market a new idea. The company is a rare pure play in the AR industry and currently the only company that is able to offer virtual events with AR enhancements.
Band a team. Management has previous history of startup to success and they’ve put together a well qualified team of advisors as well as gained talent via acquisitions.
Add partners and collaborators. All of the major virtual conferencing companies have been integrated with the company platform. The company has partnered with major technology companies to enhance their products.
Build a strong foundation.

The convergence of technology and the COVD-19 pandemic have created a super opportunity for the company to build on.

Disguise the emerging monopoly as the union of competing forces. Being complementary instead of combative is at the core of the business model.
Avoid competition. No other company can offer services that this company can.

Created by the author

Risks

This is a micro-cap company with a short history as a commercial entity and, therefore, insufficient data to base forward conclusions on. The company competes with giants in the AR industry such as Microsoft and Google which are likely or at least potentially future competitors. Competition could also come from WIMI should they decide to expand beyond China as well as from the thousands of AR start-ups that are currently not in a position to compete.

Full roll-out of AR capabilities is dependent on 5G which is not yet available.

This is not a stock that a value investor would find appealing as the company has no record of profitability and is placing a greater importance on revenue growth than on profitability.

Conclusion

This company is in the right place at the right time to capitalize on converging technologies as well as solutions for virtual events and the online marketplace. The addition of AR to a virtual conference is a unique offering that the company is already finding broad demand for barely a few months since the concept became a possibility.

Disclosure: I am/we are long NEXCF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





Original source link

Cognizant Technology Solutions’ (CTSH) Management on 2020 Bernstein Strategic Decisions Conference – Transcript


Cognizant Technology Solutions Corporation (NASDAQ:CTSH) 2020 Bernstein Strategic Decisions Conference May 28, 2020 4:00 PM ET

Company Participants

Karen McLoughlin – Chief Financial Officer

Conference Call Participants

Harshita Rawat – Bernstein

Harshita Rawat

Good afternoon, everyone. Thank you for joining us today for our 36th Annual Strategic Decisions Conference. I am Harshita Rawat, the Senior Analyst Covering IT Services and Payments at Bernstein. I’m delighted to be joined today by Karen McLoughlin, the CFO of Cognizant. I hope everyone is safe and healthy. Two quick housekeeping items for investors during this webcast.

They’re able to submit questions through the pigeonhole link available on the left hand side of your viewing screen. Also please complete the Prosensus poll at the end of the fireside chat, and you will have immediate access to the poll results. The link to the poll is also on the left hand side of your screen.

Now, with that, let’s begin. Karen, thank you very much for joining us today.

Karen McLoughlin

Thank you, Harshita. It’s a pleasure to be with everybody. I wish you could be here and worse for everyone, but this is the best for now.

Harshita Rawat

The safest for now.

Karen McLoughlin

Exactly.

Harshita Rawat

So, Karen, and this is going to end up some of the top questions I have now in my inbox too. The situation is very fluid and changing almost every day. But can you talk about the current demand environment you were seeing across different verticals and geos? And also outside of travel, even in your core verticals?

Karen McLoughlin

Yes, absolutely. And I think as everybody said, it’s been a very interesting several weeks now. And I think if we go back to the later part of Q1, the March timeframe, I think like many others, we started to see a little bit of a slowdown in travel and hospitality, but Q1 overall was quite strong. And as we talked about on our earnings call, we created TCV bookings in January and February. And we were very pleased with the way the quarter was shaping up.

I think, as you got towards the very end of March and countries around the world really started to shut down, you did see a fairly significant drop off in demand at that point for a couple of weeks. And I think a lot of companies at that point were trying to understand what it meant to work from home and what did they need to do for their organizations and how long this might take.

So the last part of March and the first couple of weeks of April, I think, were quite uncertain for a lot of our clients. What we’ve noticed in the last couple of weeks is a certain level of stabilization. I don’t want to certainly imply that we’ve returned to strong growth or anything like that. But you have seen, I think, companies start to understand a little bit about what their environment is going to be like for the next few months, trying to understand what their priorities are and how they’re going to manage through this crisis in this downturn.

And then look for ways to both at the same time drive savings into their business as many of our clients are struggling from a top-line perspective and so also need to drive savings, but at the same time protects their transformation agendas. And it’s very different stories across the industries and particularly within clients within industries. So travel and hospitality has obviously been the most impacted industry in the short-term. And I think that’s very easy for everybody to understand. When I look for example, at say life sciences, so in life sciences, which has been a very strong practice for Cognizant over the years, we have some clients whose work is involved in dealing with the pandemics, so working on vaccines, test kits, other treatments for the pandemic. So they obviously have a lot of work going on.

We also have other life sciences clients whose work primarily support, say, elective surgeries. And so with elective surgeries not happening in most parts of the world, their work has been significantly impacted. And so, obviously, we’re seeing a bigger negative impact there. Similarly within retail, you have certain retailers, who are doing very well during this time. Other retailers whose businesses have been very impacted because they have had to shut down and perhaps don’t as – either aren’t deemed essential services or don’t have a strong online business.

And so, we saw a lot of pull back initially in those retailers. Now as the market starts to open up and stores are able to start reopening, those clients are beginning to get a better sense of what their recovery looks like and what their spend will look like for the rest of the year. So we’re getting to see a little bit better color there. Communications, media and entertainment, it’s another one where perhaps initially it wasn’t as obvious to everybody what the impacts would be.

But when you think about professional sports shutting down around the world, so clients who maybe are in that business or in the TV, the cable space that provide all the cable programming for sports, a big impact there. Theme parks, studios shutting down, all of those things are impacting certain of our clients, obviously much more than say just a traditional telecom company. So, very mixed behavior across clients really depending upon how the pandemic has been impacting their business specifically.

Harshita Rawat

And, Karen, can you talk about how is Cognizant stand positioned in this demand environment, which in terms of what percentage of your revenue is exposed to critical systems and infrastructure versus revenue exposure to discretionary projects with longer payback thesis? I know it’s kind of like very client by client too in many occasions, but any color you could provide there is very, very helpful.

Karen McLoughlin

Sure. I mean, if you think that at a very macro level, if you think about the notion of outsourcing versus consulting in our business. So the outsourcing business tends to be to run the business spends. So it’s application support. It’s infrastructure services. It’s digital operations or BPO type work. And so that business historically has been the longer-term contracts, less sensitivity sometimes to economic downturns and so forth. Although there’s still a volume impact in that business, so particularly when we think about some of our BPO work, a lot of that work is volume based, so as the clients volumes go up or down, the revenue goes up or down.

The consulting side of the business is where you tend to have more of the true discretionary projects. Although even there given the nature of our work and the amount of our work that’s in regulated industries, there’s always some level of work that is more or less discretionary depending on what its objective is. But that’s where a lot of our digital work obviously happens, a lot of the transformation work. And going into the recession and even for the last couple of years as people have been wondering about when the next recession would come and what its impact would be on the industry, we’ve had a hypothesis that a lot of the digital work while one might deem it discretionary because it’s project based work, clients would actually look to protect a lot of that work as best they could through a downturn because it is so critical to the future of their business and what their business will look like on the other side of a recession.

And I think we would still argue that that seems to be the case. Well, certainly, we’ll see a slowdown in growth in the – even in that area in the short-term, we can see – continue to see a strong pipeline for digital work. We are continuing to work with clients on their transformation journeys and really focused now on how do we help them maybe drive even more savings in their – run the business side while freeing up those investment dollars to continue to drive transformation. And as we come out of this recession when we do, we definitely expect to see that part of the business accelerate faster than potentially and even has been in recent times as clients continue to really look to drive resiliency and virtualization into their own business.

Harshita Rawat

And Karen, I have a number of questions for you on the digital side, but before we get there, just two more follow-up questions here. So if I – are you seeing any within the demand you’re seeing from clients, any sizable pressures for rate reductions or any more broader pricing pressures from clients just yet?

Karen McLoughlin

So we have a few requests from clients to give them some temporary breaks on specific projects or pieces of work within a client. In some cases, you may have had clients defer some more, but most of those have been quite small in nature and very short term focus. So concessions that we’re doing at this point have really been focused on just the Q2, Q3 time frame. And they’ve been quite limited to industries or clients that we know are really suffering in this time frame, but their suffering, which should be a clearly, I don’t want call it short term, but a manageable time frame, right, that their business will recover at some point.

And so those are the folks we’ve been focused on helping whether it’s through some kind of rate concessions or even some payment term extensions in that space. You are seeing, as you would expect to see in a downturn, some pickup in vendor consolidation opportunities in captive opportunities with clients. Those tend to be larger transactions. And there, you will have a few folks competing for those types of deals as they have been for many years now, they will be competitive from a pricing perspective, but you also get a lot of scale with those deals.

So I wouldn’t say that I’ve necessarily seen a big change in pricing across the board. I think as we’ve always said, there’s always going to be transactions in the market that one player versus another, things are particularly strategic for them that they may go after aggressively. But in terms of broad-based across the board pricing, I haven’t seen a significant change. And as we know in this industry, every now and then, when a competitor tries to get very aggressive on pricing, it tends to rate itself fairly quickly because the industry as a whole can move to support that. So…

Harshita Rawat

And Karen, the demand side, the near-term demand impact, is it more deferment of projects or cancellations that you’re seeing right now?

Karen McLoughlin

Yes, it’s been more deferment or slowing it down, right? So they may not set a project completely, but they may say we’re going to slow it down, so send X percentage of the team off for now. And we’ll pick it back up in the fall. It’s a little bit of a mixed bag, though, I think as you would expect by client as to – there’s been some clients who have had to cancel projects just because of the impact of their business. That’s been so great. As they say, we just – we can’t continue with XYZ project. But for the most part, you’re seeing clients try to maintain some level of the work, but either defer new work or slow down starting new work.

Harshita Rawat

And Karen, you and many of your peers also have called out the demand for increased demand for modernization projects, remote work, cloud in this current crisis. Can you talk about Cognizant’s current capabilities there, strengths and weaknesses versus peers?

Karen McLoughlin

Yes, so, I think, we’ve done a nice job over the years of building out our digital capabilities. We have – particularly strong in digital engineering. We have a good cloud migration foundation in our infrastructure business and core modernization work that we can do for clients. We have continued and will continue to build out our cloud businesses, both through organic as well as inorganic acquisitions, we believe. And I think this has become – becoming a strength of ours that perhaps wasn’t as much so a few years ago, but really strong partnerships with all the various SaaS players and cloud players in the marketplace.

And they are looking for partners who can scale with them and can really help with implementations and support for clients. So we’re very excited about those opportunities. You’ve seen us do a number of acquisitions in the sales force space over the last couple of years. Most recently, we announced the collaborative solutions, an acquisition in the Workday space, which we’re very excited about. So that deal hasn’t closed yet, but it will close shortly, and that will be a great partnership for us with Workday. And really leveraging those partnerships, we agree. And certainly, we think cloud migration and this notion of virtualization, as we talked about, resiliency is really going to be where a lot of the growth will come from in the not-too-distant future.

Harshita Rawat

And Karen, just talking about the delivery side of this equation. Obviously, as COVID-19 is spreading in India, can you remind us about the changes you’ve made in your delivery over the last few months? What percentage of your fulfillment is now work-from-home enabled? What are you doing for your employees and your clients in India in this crisis?

Karen McLoughlin

Yes, so not just in India but around the world. The vast majority of our people are working from home. In India, we have nobody doing client-facing work, really, in any of our facilities. It’s all work from home. The only folks who are in our facilities today are some of our internal IT support and security and so forth to keep the buildings running. And that’s true in the Philippines, that’s true in India and really most of our delivery centers around the world. In the U.S. and in Europe, we have a few folks who are working in client locations because of the type of work they do, they needed to remain in the client location.

We have a few clients that are asking to bring people back to work in country. But at this point, we’re not anticipating a rush back into the delivery centers in India. We will start to pilot some return to work on a very, very small-scale in one or two of our centers in India in the coming weeks. But we do not expect to have everybody in the centers in any time in the near future. We will continue to have most folks work from home.

Harshita Rawat

And then, Karen, just taking a step back, can you compare and contrast, a potential downturn, not just what we are seeing right now, potentially like COVID-19 triggered down to now versus what happened back in ’08, ’09? Because as you can imagine, these also been the top questions investors are now trying to figure out because, obviously, there’s many differences, we’ve talked about it a couple of weeks ago. You no longer have offshoring as a secular growth driver. It’s probably best pushing for margins, but then on the flip side, digital is a driver of growth. You – financial services, not in the front line this time. So what should investors keep in mind?

Karen McLoughlin

Yes, I think that’s a real key to this, this financial services, right? Because as you said in the last recession, a lot of it was about financial services and the banks were under a lot of pressure, money dried up and so forth. This time, I think, obviously, the financial institutions are in better shape. The governments are supporting the economy more rapidly and so access to capital has not really been an issue at this point for most organizations. And so certainly, the behavior that we’re seeing from clients is that desire to really protect the transformation work.

That agenda seems to be – and, I think, believe it is more critical to clients now than it was ten years ago. Ten years ago, it really was about the cost cutting. And as you said, you could drive a lot of work offshore. There were lots of levers. A lot of those levers still exist today. And so when we think about clients who are looking on the cost side of the business, they are in a lot of opportunities for vendor consolidation. We’re seeing a lot of clients say, I don’t want to run my captive anymore, right, can you come and take my captive over.

So there’s still a lot of opportunities on the cost side of business to help clients but it’s really then about how do take those savings and continue to protect that digital transformation investment that we’re seeing. It is really a quite different than what we saw ten, 12 years ago. I do – it’s still a question in my mind of if this becomes a prolonged recession, what does happen to the financial institutions and the capital markets, it doesn’t have a different impact than what we’re seeing today. But certainly, right now, it feels very different than it did last time.

Harshita Rawat

And Karen, let’s talk about Cognizant’s turnaround journey. It’s been more than a year since Brian became CEO. I know it’s been a very busy last 12 months for Cognizant. Looking back at the last year, what are some of the key changes you and Brian have put in place to put Cognizant back in a good trajectory?

Karen McLoughlin

Yes, I think first and foremost, is the energy and getting everybody focused back on our clients, which is what this company has always done best and so making sure that people across the board are out in front of clients, everyday. And even though now it’s virtually, we’re still doing client meetings and client sales calls and so forth and engaging with clients proactively. I’m really keeping people focused on that. As he talked about when he joined – unfortunately, he had gone to see several clients where he didn’t feel like the executive team or other leaders in the company have really been out in front of our clients and not really showcasing what the organization can do for our clients.

So that’s been a big focus. And I think with some of the leadership changes we’ve made last year, in particular, in some of the North America changes where we moved DK Sinha to North America. We’ve got new leadership in many of our businesses in North America. And really reenergize the teams, and we’ve been able to make some great internal promotions. The folks have really taken off, such as our Healthcare business, where we have an internal promotion. Even as difficult as our retail and channel and hospitality businesses there, we have an internal promotion there and that team has been doing great as well as our communications and tech businesses.

So lots of great stories coming about from that. And you could really feel that energy, I think, in the company, particularly in Q1. And then as we got into the COVID situation, in April, Cognizant did what it did, what it does best, which is it rallies around the crisis. And the energy and the passion coming from our teams during that first couple of weeks of trying to get everybody set up to work from home and really getting our teams to do it, whatever they could do to support clients through this time, it’s just amazing to see. And certainly, as we closed out the March revenue, and into the first part of the second quarter, the performance of the company certainly was better than we might have hoped for going into this. So it’s been great to see that energy level.

I think at the same time, I think we’ve also gotten more disciplined on the cost side. And I think importantly, really thinking about the bifurcation and the types of services we offer. So we’ve been so fortunate over the years to be such a high growth company, and we didn’t have to really necessarily think about whether we were going to invest in one business versus the other because we had enough funding to invest in everybody.

But at this scale, and when you have businesses that are at different growth rates, different margin profiles and more mature businesses versus less mature businesses, we have to be more thoughtful about where we spend our dollars and where we want to make investments. And so I think we’ve been able to bring some of that rigor and discipline to the company, at the same time as we continue to invest for growth.

Harshita Rawat

And Karen, you’d upon a lot of really good points there and I want to zoom in on some of those. So the one of two most critical aspects of Cognizant turnaround or pivot towards digital and also at same time optimizing the cost structure. So let’s starting with digital, and we kind of touched upon that a little bit earlier, but can you talk about Cognizant’s digital capabilities holistically as they stand today? How have they changed over the last few years? And how does that compare versus your peers? And more broadly, how does a part to accelerate the digital growth look like for Cognizant?

Karen McLoughlin

So, I think if we go back, we were really one of the initial companies to start talking about digital with smack back in the day, and horizon one, two and three businesses. So I think we really coined a lot of that. So I do think we’ve got an early head start. I think so, particularly in the last, call it, 12 to 15 months, I think we have done a better job of focusing in on what are the areas of digital we want to be strong in. And while you need to play across the board, obviously, I think each firm will have its own strengths. And for us, we’ve chosen to focus a lot on digital engineering and analytics and cloud and core modernization and so forth, while we’ll continue to have a strong interactive business, that is not necessarily just the primary focus of our investments.

So I think we’ve done a better job of thinking about that and building out those capabilities, both organically and inorganically. I think we’ve also done a much better job in the last year or so building out partnerships. So with SaaS providers and other cloud providers and really having those strong engagements and relationships and getting their support to help grow our business, which is important. And partnerships wasn’t always a really strong point for us. But I think that is something that as soon as Brian came on board, he realized the need for that. He came from a strong alliance of partnership background.

And so we’ve worked very quickly to put a lot of that in place. And so I think when we look at some of the parts of our digital practice, we are one of the top couple of firms in that space. And we do think that coming out of this downturn, this will be the driver of growth, not to say that other parts of the business won’t grow, but in terms of where we expect meaningful growth to come from, it will be from our digital businesses. And we will continue to drive investment there, both organically and inorganically in the coming months and quarters.

Harshita Rawat

And Karen, you touched upon the cost structure. Your cost structure today is higher versus your peers? And it’s just something you and Brian have also highlighted. Why is that? And what does the journey look like for optimizing the cost structure for Cognizant?

Karen McLoughlin

Yes. So I think it depends which peers you’re obviously comparing to. So I think while it’s fair to say that our cost structure is higher than some of the India pure plays or India players, rather, when you look at some of the other firms like Accenture and then even some of the more pure-play digital firms, the digital engineering firms and so forth, their margins are actually lower than ours. So I do think it’s a balance, and I do think it matters where you’re playing in the space.

I think when we look at the sort of heritage Cognizant business and the sort of the core legacy IT business, we do know that our delivery structure was more expensive. There it always was. And that was by design in the early days of the company. When you think back to the days when we were targeting a 19% to 20% operating margin, we intentionally had a higher cost structure than the competitors, which allowed us to grow faster than the marketplace.

Now as that business has matured, obviously, the reality is it needs less investment than it did, say, 5, 10 years ago. And I think that’s the pivot we have to make is how do we think about that cost structure on that part of the business differently. And I’m not sure we will ever get to the levels of a TCS. They do a remarkable job on that and driving margins. But certainly, we know that we can deliver those services at a more effective cost and ultimately price point them to clients so that you can compete effectively in that business, and that’s what we’ve been working on, certainly for the last year or so.

At the same time, we do want to continue to increase the investments on the digital side of the business. Digital in and of itself is a very high value business, and you’ve got great pricing in that market, and it can drive great margins. But it is still very much in an investment phase, and particularly with the acquisitions and so forth that we’re bringing in, we do need to make sure that we can free up some costs from the other parts of the business to fund that.

Harshita Rawat

And Karen, can you talk about the employee morale as you navigate Cognizant through this crisis as well as the turnaround? How do you attract and retain talent in this environment?

Karen McLoughlin

Sure. So I think a lot of it was giving the energy back into the company. So certainly, attrition has been higher than it historically had run and voluntary attrition, both voluntary and involuntary, obviously, involuntary, we were pushing, but voluntary has been a little bit higher. I think part of it is the market. So certainly before COVID, right, we were at a very hot job market around the world, and particularly in India, which, obviously, our largest people base is. The market in India is vastly different than it was a few years ago. A few years ago, really, firms like ourselves or the market in India, and that’s where all the young engineers wanted to come to work and they would get an opportunity to go on-site to whether it be the U.S. or Europe, work with clients and so forth. And it was a great vision for employees.

As the market in India has changed and you now have a lot more captives in India, all the big tech companies have moved into India, the banks have moved into India, you have a lot of start-ups now in India that didn’t really exists the same level that they do now. And so the market for talent in India is much different than it was a few years ago. And folks who come to a firm whether it be Cognizant, Infosys, TCS, Accenture in India, get this great training background, and then they’re given these wonderful opportunities to potentially go and join other firms, which didn’t exist before.

So I think, certainly, it’s fair to say that unless there’s a big change in the market, attrition for that purpose will probably stay a little bit high. Now slowed down considerably, obviously, with COVID, but if we were still in a normal economy, I think we would continue to see some fairly high voluntary attrition.

The flip side is, though, we are really focused on getting the company back to growth. There is a certain amount of energy that has come back to the organization. We certainly went through a lot of change last year, and we’re still going through some of that. Any big transformation program doesn’t happen overnight. But as we bring new talent in and as we bring in some of the new sales teams, some of the leadership that Brian bought in, they bring a wealth of experience to us, and you can really start to see those teams starting to settle in and become part of the fabric of the company, and getting off to a strong start in the first quarter certainly helped with that.

Harshita Rawat

And Karen, the most encouraging aspects coming out of the first quarter earnings call was this win rates improving considerably. Can you talk – can you give a little bit more color on where are you seeing those win rates in terms of the workloads, verticals, cheers? Where are you seeing that?

Karen McLoughlin

Yes. So we saw strong growth across the industries. It’s built a really nice balance of particularly strong growth in digital as well as in some of the core IT work, very good growth in North America as well as some of the growth markets. But I think North America was the piece that we really needed to reaccelerate in many ways. Obviously, such a big piece of all of our healthcare business is in North America, and such a big piece of our banking and insurance businesses are there as well. And so it’s important to really get those markets back on a growth trajectory.

And as we looked at the pipeline and the wins that we had in Q1, it really was across the spectrum, particularly strong in healthcare, which is great to see the healthcare business, as we know, has been struggling a little bit the last couple of years. And with the new leadership we’ve put in there and the energy that that team has put into being back on the road, getting in front of clients and making sure that we have the right solutions to deliver to clients. They’re very quickly starting to see a nice turnaround there. So that was particularly exciting and encouraging to see and great for that team. But strength was really across the board, and that’s what was creating really could feel this great sense of energy and passion across the board and a lot of opportunities to celebrate.

Harshita Rawat

And Karen, Brian has talked about this difference, which it emerged over the last few years in terms of the true capabilities of Cognizant and clients’ perception of it. Do you think that in some of your core verticals, you’re seeing evidence that some of this energy is starting to come back, that client perception starting to change?

Karen McLoughlin

I do. We really have seen a marked turnaround with some of our client conversations. And the notion that we do have solutions that we can bring to bear upon clients and making sure that the sales teams and our client partners had the confidence to go into clients and deliver these opportunities, and make sure that they were bringing in the right talent from around the company to do that. And a lot of that was – some of it was comp changes, obviously, we’ve put in place, but those are recent. The comp changes are really a 2020 initiative, but it was really about making sure that our teams are working together and just opening up the doors to each other.

We have become probably a little bit too silo-ed or matrix organization. So by definition, those could be hard. But I think putting the right leaders in place who are much more open to collaboration and bringing teams in, and Brian, leading by example, frankly. He spent the vast majority of his time until the middle of March on a plane, not just every week, but almost every day. I think he was really out there helping teams and sort of leading by example and encouraging them to get reengaged.

Harshita Rawat

And Karen, just switching gears a little bit. Over the last few years, Cognizant had a little bit of volatility in its financial performance relative to its guidance. And I know there’s a lot of factors there, especially with regard to concentration in Financial Services and Healthcare, where just a few clients could really impact your financial performance? But more broadly, has your guidance and forecasting framework changed under Brian’s leadership?

Karen McLoughlin

It’s necessarily changed. Certainly, Brian is a believer of beat-and-raise as a philosophy and certainly always make sure we guide to something that we think we can achieve. And so we certainly have tried to make sure that we do that the last few quarters. But it is somewhat of a science because there’s a lot of art as well, and then forecasting, particularly when you’re at a time like this, where things are moving so quickly. But I think it really is about making sure we get the energy back and setting targets and creating an environment where the team can be successful.

Harshita Rawat

And Karen, let’s zoom in on your two key verticals, Financial Services and Healthcare. Starting with Financial Services, can you talk about the structural dynamics there? It was a growth sector many years ago because of this secular shift towards offshoring, and that also does compliance-related spend. But now this vertical is not just weak for Cognizant, weak for almost everybody. So in terms Financial Services so important for Cognizant, what’s your strategy to accelerate the growth here?

Karen McLoughlin

And I think I would break banking and insurance into separate thesis because, to your point, I think banking across the board, it is a much more mature industry for the services players. And I think everybody has struggled a little bit with growth in banking. I do think, certainly, for us, that has been focused on a handful of clients. And so certainly, as we look to build out the rest of the portfolio, there’s still a number of banks around the world that are not part of – certainly part of our business and part of our model. We did – done some nice work with smaller regional banks in the U.S., and that was certainly a good driver of growth.

And I would assume we’ll continue to be, but there’s still pockets of those institutions that are really not in the market yet. I think as we look into other geographies, I think there’s room for geographic expansion in Financial Services. But I do think it’s – it is a different footprint. And certainly, I wouldn’t expect it to get back to the growth that it had several years ago. If it does, that’s wonderful, but I’m not banking on that right now. No pun intended.

But as I think about insurance, we are seeing a lot of traction in insurance, particularly around captives and some bigger transformation deals in the insurance space. So I do think that has the potential to be a bigger opportunity in the short-term than seeing a lot of growth on the banking side.

Harshita Rawat

And on the Healthcare side, the last year or so has been weak because of M&A happening in healthcare. There’s also political uncertainty. How should we think about the long-term growth potential in Healthcare for Cognizant?

Karen McLoughlin

Yes. Again, I separate Life Sciences and Healthcare. But Life Sciences has been doing quite well. Obviously, some impact with COVID on certain Life Sciences’ plant, particularly those in the elective surgery space as we talked about, but other parts of Life Sciences is continuing to do very well. And we’re really excited about some of the investments we’ve made in Life Sciences growth in the platforms. And then more recently, last year with the Zenith acquisition, which is in the IoT space for Life Sciences manufacturing. So I think that will continue to be a nice driver of growth for us.

More recently, with Healthcare, as you said, Healthcare was impacted by acquisitions and lots of different things. I think we’ve lapped the acquisition impact at this point. So again, barring the COVID situation, I think we would have seen some much better performance in Q2, all else being equal, just because of lapping the acquisitions and the impact of a client building up captive last year. But at the same time, we’ve seen very nice recent wins in healthcare.

Across the spectrum, so both with some of our larger existing clients as well as starting to expand the footprint beyond that core group of clients. And we have a real strength in Healthcare on the back of the TriZetto acquisition. There’s a lot of things we can do in Healthcare in terms of delivering real solutions to the healthcare industry. As I mentioned with the leadership change we’ve made in that practice recently, that team has really been out working with clients on building out solutions that they know clients are looking for that we can take to market using the experience we have with TriZetto with the product side of the business.

So I’m actually, I’ve have always been bullish on our Healthcare business. Knowing – despite its troubles over the last few years, I think there is – and will continue to be a big opportunity there over the next couple of years.

Harshita Rawat

And Karen, you have accelerated M&A as you pivot towards digital over the last year or so, how should investors monitor the success for – of M&A for Cognizant, especially because M&A is such a wildcard in IT services more broadly. It has worked really well for some of your peers, but for some of your peers it hasn’t.

Karen McLoughlin

Yes. Look, in this business, it’s a people business. So when you’re looking at acquisitions, a lot of it really does come down to the people. And can you integrate that acquisition effectively into your culture? When we do acquisitions, we are doing acquisitions to drive growth. And our intent is that we are able to help the acquired company grow faster, and they are able to help us grow faster in the space that they are in. And it always comes down to a build versus buy decision. And so with acquisitions, we’re looking to really attain talent, first and foremost.

And so we spend a lot of time thinking about that cultural fit with the talent. And it doesn’t always mean that we’re going to impose the Cognizant culture on the acquisition. A lot of times, particularly with the digital acquisitions, we’re looking to take some of their culture and bring it to Cognizant in terms of how we think about work and engagement with employees and clients and so forth. But is there a good fit there between the two organizations, where we know we can synergistically come together to make us better as a whole. And that’s really the key for us when we think about these.

Also, when you’re buying smaller companies, which tends to be more of the acquisitions in our industry, we also assume that these features are Founder-led companies. The Founder themselves, hopefully, as a true entrepreneur, and we’ll probably need to go do their next deal. And so you’re looking at that next layer of management, and those are the folks who are really going to be able to grow with our organization and to sustain the value from the acquisition. So there’s a lot of things that go into looking at these deals in which ones will make sense and which ones won’t.

Harshita Rawat

And just switching gears a little bit, Karen. One of the most frequently asked questions I receive in Cognizant is balancing revenue growth with profitability. Can you have both, especially with this urgent need for reinvestment in the business?

Karen McLoughlin

So I think it’s a balance, and you give – you have to make decisions. But I think, first and foremost, this is still a growth market, particularly when we think about digital. And so you want to make sure that you are equipped to take advantage of that and to gain market share, which is certainly our first priority. I think you can manage to a balance of reasonable margins. So I don’t intend in any way to suggest that we will get to mid-20% on the margins. That’s not our intention, certainly not when we see this kind of opportunity for growth over the next few years. But I think it’s possible to have reasonable margins and also drive strong growth and certainly better growth than we had last year.

Harshita Rawat

And let’s talk about the recent ransomware attack, Karen. You – I think it was a very thoughtful color you gave, the earnings call around the near-term impact that you foresee. What’s the long-term impact that we can expect from this? You talked about, so the legal and security costs for the remainder of the year, but there’s any impact on reputational damage or litigation compliance that we should think about?

Karen McLoughlin

Yes. I think it’s a bit early to say on that. Clearly, our focus, first and foremost, was to bring all of our systems back up and ensure that we were able to support the clients that we have today, which we’ve been able to do. Certainly, as I think about the pipeline of deals right now, it continues to be strong. We’ve had one or two companies that we’re concerned about, proposals, RFPs that they had underway. But as far as I know, they’ve all agreed to keep us in the process. Now they may choose to go with us or not down the road. I think that’s really to be seen. Is it likely there could be some reputational damage? But at this point, we haven’t really seen any significant evidence of that.

Harshita Rawat

And then, Karen, we talked about many different aspects of turnaround for Cognizant. What do you think, more broadly, the biggest risk as you execute your growth plan over the next few years?

Karen McLoughlin

We’re making big bets in areas that we believe are relevant to clients’ agenda. And I think making sure we continue to invest enough in those areas of focus for us that we stay in touch with clients. First and foremost, we can’t presume we know what’s on clients’ minds unless we’re out talking to clients. And so I think always engaging with clients and partners in those conversations about where are we investing, what are the solutions that we are planning to build to bring to market is really key, making sure we have access to the right talent, and then our folks on the ground to our sales teams, our client partners who are really are frontline with our clients, have the skill set they need to have the business conversations, which is most important today, right?

While technology is a component of the solution, first and foremost, these are business problems that our clients are trying to solve. And so if we don’t have the right relationships within the senior ranks of our clients and have people who have the ability to have the right business conversations, then obviously, it’s harder to get a seat at the table. So those are all things we’re very aware of and have been focused on investing in, but I think that’s where we need to keep our focus at all times.

Harshita Rawat

And then what aspects about Cognizant’s business, do you think, Karen, is the most underappreciated by investors right now?

Karen McLoughlin

So I think, certainly, some of our digital capability and the innovation that our teams are able to drive. And I don’t think that’s just an issue with investors. I think that was an issue with clients that Brian realized when came in that we had all this great work going on, but we weren’t doing a great job of showcasing it to clients. So I think, first and foremost, it’s been that.

I also think there is just such a sense of this company when it’s faced with a challenge being able to come together to overcome. And we’ve seen this time and time again, whenever there’s, what I call real challenges in the world. So whether it was the Chennai floods back in 2015 or the COVID situation and even the ransomware situation, where this team and our – particularly, our account teams just never lose sight of our customers. And that our job is to be here to serve and help our customers. And the passion and the energy and the collaboration that comes together, when we’re faced with a challenge, until you see it, I don’t think people can really appreciate it. But it’s really quite remarkable to watch when it comes into action.

Harshita Rawat

And Karen, we’re almost running out of time. So my final question for you is, as you think through and beyond this pandemic, how do you expect your priorities to shift, especially if it relates to cutting costs or increasing levels of investments?

Karen McLoughlin

Yes. So I think we really want to protect the investments we’re making. So both inorganic and organic acquisitions or investments, we are continuing with the sales hiring that we had underway at the beginning of the quarter. As we talked about on our earnings call, we will protect digital resources. So even if, for some reason, we have digital talent that becomes unutilized during this timeframe, assuming that they have the right skills and capabilities and so forth, we will protect that talent for the recovery.

On the cost side of the business, we are continuing with our critical growth program. And as we’ve said, most of those resources would be exited by the middle of the year, we’re still on track for that. Lost a little bit of time in April, but we think we’re still generally on track with that timing.

And then if the bench grows beyond the levels that we think are reasonable for maintaining good utilization rates and what we see in terms of the demand environment. As we said, we will manage the bench. We’ve put in place some voluntary programs. So for folks who come to the bench stream, we do have a voluntary separation package that people can avail of if they want to or they could stay on the bench and follow the normal bench policies. But that’s really focused on skills that we think are fairly reasonably and easy to replace in the marketplace. So for skills that are harder to find in the marketplace, we will retain that talent as best we can, but there are certain skills in the market that we all understand are easier to find at any point in time. And so those are the folks that would be on the bench.

Harshita Rawat

I think that’s about all the time we have. For those of you, who are listening in, please complete the Procensus poll and you will have immediate access to the full results. And thank you very much, Karen, for the great discussion today. Thank you, everyone, for listening in.

Karen McLoughlin

Thank you very much. Take care.

Harshita Rawat

Okay.

Question-and-Answer Session

Q –





Original source link

Pangaea Logistics Solutions (PANL) CEO Ed Coll on Q1 2020 Results – Earnings Call Transcript


Pangaea Logistics Solutions (NASDAQ:PANL) Q1 2020 Earnings Conference Call May 14, 2020 8:00 AM ET

Company Participants

Tiya Gulanikar – Investor Relations

Ed Coll – Chairman and Chief Executive Officer

Gianni Del Signore – Chief Financial Officer

Operator

Good morning. My name is Maria and I will be your conference operator today. At this time, I would like to welcome everyone to the Pangaea Logistics Solutions’ First Quarter 2020 Earnings Teleconference. Our hosts for today’s call are Mr. Ed Coll, Chairman and Chief Executive Officer and Mr. Gianni Del Signore, Chief Financial Officer.

Today’s call is being recorded and will be available for replay beginning at 11:00 a.m. Eastern Time. The recording can be accessed by dialing 800-585-8367 or 404-537-3406 and referencing ID number 3289376. All lines are currently muted. And after the prepared remarks, there will be a live question-and-answer session. [Operator instructions] It is now my pleasure to turn the floor over to Ms. Tiya Gulanikar with Prosek Partners.

Tiya Gulanikar

Thank you, Maria and thank you for joining us for this morning’s first quarter 2020 earnings conference call for Pangaea Logistics Solutions. With us today from the company are Chairman and CEO, Mr. Ed Coll and Chief Financial Officer, Mr. Gianni Del Signore.

Before I turn the call over to Ed, I would like to read the Safe Harbor statement. This conference could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 about Pangaea Logistics Solutions. Forward-looking statements are statements that are not based on historical facts. Such forward-looking statements are based upon the current beliefs and expectations of Pangaea Logistics Solutions’ management and are subject to risks and uncertainties which could cause the actual results to differ from the forward-looking statements. Such risks are more fully discussed in Pangaea Logistics Solutions’ filings with the Securities and Exchange Commission. The information set forth herein should be understood in light of such risks. Pangaea Logistics Solutions does not assume any obligation to update the information contained in this conference call. Also, please recall that a supplemental slide presentation will accompany this call. Those slides can be found attached to the 8-K that was filed with last evening’s release, which is available on the Investors section of www.pangaeals.com under Company Filings or on the SEC’s website at sec.gov.

Now, I would like to turn the call over to Pangaea Logistics Solutions’ Chairman and CEO, Mr. Ed Coll, Ed?

Ed Coll

Thanks, Tiya and good morning to all of you and thank you for joining us on the call. This morning, I will provide an update on our operations and the overall market before turning the call over to Gianni, our CFO, to provide a more detailed overview of the first quarter financials. We will then open the line for questions. We hope you have had time to review our press release and the accompanying presentation, which were issued last evening.

First, I would like to begin by expressing good wishes to you and your families. I hope that everyone is healthy and safe and our thoughts are with all of those who have been impacted by COVID-19. We are very thankful to the healthcare professionals and essential workers for their work in the whole global community. We are especially thankful for all our crew members working onboard our ships for extra months who continued to do more than their part in making sure global supply chains continued to work properly. As always, Pangaea remains committed to the health and well-being of our employees and we as a company will continue to always follow all regulatory guidance and good practices when it comes to operating our business safely.

First quarter of 2020, the shipping markets in which we participate continued on a path of volatility. Following the year 2019 with the Baltic dry index range from 595 to 2,518, the BDI averaged 549 during this year’s first quarter. Our quarterly results were negatively impacted by the slow market. The first quarter is typically a comparatively weak one for us and for the industry. This year, we experienced a warmer than normal winter in the Baltic Sea and the demand for ice class tonnage was impacted. Fuel costs decreased operating margins temporarily as we began to consume higher cost fuel that met IMO 2020 compliance requirements. And the precipitous drop in oil prices and bunker costs cost us to lose $2.8 million this quarter in bunker swaps that we had to hold to protect our future operating margins. Our TCE rate continued to outperform against the average of the Baltic, Panamax and Supramax indexes, despite a 13% decrease in our TCE rates from last year’s first quarter. We exceeded the average market rates by 78%, which is attributable to our long-term contracts of affreightment, specialized fleet and cargo focused strategy.

I will now summarize our results for the quarter. Total revenue increased to $95.9 million for the 3 months ended March 31, 2020 from $79.5 million for the same period in 2019 due to an increase in shipping days. We reported a net loss of $6.8 billion during Q1 of 2020 as compared to $3.7 billion of net income in Q1 of 2019. Our TCE rates were down 13% from $12,029 in Q1 2019 to $10,500 in Q1 of 2020. Lastly, we hold cash, cash equivalents and restricted cash of $ 42.5 million. We simply do not know what’s in store for all of us in the short-term during the COVID pandemic, but we see signs of some loosening up of the lockdowns in some places, especially in Asia where the virus first hit. We are optimistic about the summer season, which is strong for us. And at this point, we expect our Baffinland business will be unaffected. We are also hopeful that business will pick up again for the Western countries in the second half of the year. We continue to be opportunistic as we always are and continuing to deliver best-in-class services for our clients, looking to acquire new vessels when opportunities arrives and to renew our own fleet. We look forward to updating you of developments in the coming quarters.

And with that, I would like to turn the call over to Gianni to provide additional details on the financials.

Gianni Del Signore

Thank you, Ed and thank you all for joining us on today’s call. Again, we hope everyone remains healthy and safe as we all adjust to new work environments and we thank our employees and crew for their extra efforts during these unprecedented times.

Before walking through our financials, I would like to expand upon Ed’s earlier comments in how we navigated another challenging market. 2020 began with a significant environmental regulation change for the shipping industry in its switch to IMO 2020 complaint fuel. The collective move toward compliance in stemming bunkers for our fleet just prior to the start of the year resulted in increased bunker expenses during the first part of the quarter. Of course, this is not the market we like to be in. However, as we have said in the past, our business model is built to limit the downside risk as it did in 2016 and as we currently make our way through 2020.

While we recorded a net loss for the period, our nimble cargo-driven charter strategy delivered a 78% premium over the average of the Baltic, Panamax and Supramax indexes. The market volatility also presented an opportunity for us as we capitalized on low rate environment to improve our cost of capital by fixing interest rates on the Bulk Endurance, Bulk Pride and Bulk Independence debt facilities in March. We were also fortunate to sell vessels prior to the decline in the market generating approximately $8.3 million in cash proceeds and ending the quarter with $42.4 million of cash and cash equivalents as we maintain our strong footing in these uncertain times.

With that I will now turn to our first quarter financials. Voyage revenue, which are revenues generated from carrying cargo for our clients was $86.5 million, an increase of approximately 31% compared to $65.9 million for the same period in 2019. This was predominantly driven by a 25% increase in voyage days. Our TCE rates decreased 13% to $10,508 per day from $12,029 in the first quarter of 2019. However the company has achieved TCE rates continued to outperform against published market rates by approximately 78%. Charter revenue, which are opportunistic and tied to market rates, decreased to$9.4 million compared to $13.7 million in Q1 of 2019. This decrease in charter revenue was due to a decrease in market charter rates and a decline in charter days.

Voyage expenses were $47.8 million compared to $32.2 million for the same period in 2019 and an increase of approximately 49% this was driven by a 25% increase in Voyage days and an increase in bunker expenses due to timing of bunker stands in late 2019 to comply with IMO 2020 field requirements charter hire expenses were $32.3 million compared to $24.9 million for the same period in 2019 a 30% increase this was primarily due to a 35% increase in charter days as we chartered in additional tonnage to replace own vessels that were sold as well as vessels in dry dock during the first quarter to meet cargo demand. As we continue to rebalance our fleet, we redeliver vessels to their owners in charter and new tonnage at lower costs. That’s how operating expenses on a per day basis were up by only 2.5% from $5098 a day in Q1 of ‘19 from $5229 in Q1 of 2020. Net loss for the quarter ended March 31, 2020 was $6.8 million or $0.16 per share compared to $3.7 million of net income or $0.09 per share for the same period in 2019.

Moving on to the balance sheet and cash flows, restricted cash and cash equivalents were $42.4 million in Q1 compared to $61.6 million in Q1 of ‘19. Net cash used in operating activities was $6.8 million compared to $12 million of cash provided by operating activities in Q1 of ‘19. Net cash provided by investing activities was $7.5 million in Q1 of 2020 as a result of the sale of vessels compared to the use of cash of $11.6 million during Q1 of 2019 due to the acquisition of the Bulk Spirit in February of 2019. Finally net cash used in financing activities totaled $11.2 in Q1 of 2020 due to the early purchase option on the bulk payout at finance lease facility. Compared to $5 million provided by financing activities in Q1 of 2019 as a result of the financing of the Bulk Spirit in March of 2019. We continue to evaluate our dividend on a quarterly basis to ensure we are implementing a capital allocation strategy that optimizes our business and by extension maximizing shareholder value. For this reason, we are being conservative with our dividend policy and not to declare a dividend this quarter ultimately shareholders will benefit from improved earnings, which is what we believe we are positioning our company to achieve.

With that, I will now turn the call back over to Ed for any additional remarks before we get to the Q&A portion of the call. Ed?

Ed Coll

Thank you, Gianni. We thank our customers, our business partners and our shareholders for their continued commitment and partnership and we look forward to updating you further in coming quarters. I will now open the floor for questions.

Question-and-Answer Session

Operator

Ed Coll

Okay, thank you for taking the time to join us this morning and have a good day and everyone, please stay safe.

Operator

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.





Original source link