Cognizant Technology Solutions Corp (CTSH) — Q1 2015 Transcript

Thank you, Jansen, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's first quarter 2015 results. If you have not, a copy is available on our website, cognizant.com. The speakers we have on today's call are Francisco D'Souza, Chief Executive Officer; Gordon Coburn, President; and Karen McLoughlin, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. I would now like to turn the call over to Francisco D'Souza. Francisco, please go ahead.

Thank you, David, and good morning, everyone. Thanks for joining us today. We had another great quarter and a solid start to 2015. Our first quarter revenues were $2.91 billion. This represented a sequential increase of 6.2% after a negative currency impact of 1.1%. Our sequential growth was well ahead of our previous guidance and was driven by strong organic growth in our core business, coupled with solid inline performance in the TriZetto business. Non-GAAP operating margin was 19.8%, at the higher end of our target range of 19% to 20%. Based on our current visibility and strong sales pipeline, we are pleased to increase our full year revenue guidance to at least $12.24 billion and non-GAAP EPS guidance to $2.93, which reflects our strong over-performance during quarter one. Our results this quarter and our guidance for the full year are a clear reflection that we are well positioned to serve the needs of our clients. As I said in the past, we are in the midst of a once-in-a-decade shift in the technology landscape, which is creating significant opportunities for services firms that have the right portfolio. Our results demonstrate that our strategy, investments, and solutions are strongly aligned with the evolving market demand. Today more than ever, our clients are grappling with the dual mandate, and our 'run better, run different' value proposition is resonating well with them. On the side of the dual mandate, the shift towards digital is front and center for our clients. Our digital offerings are seeing strong traction in the market. In addition, as clients deploy digital technologies, it’s creating demand for our traditional services in areas such as legacy modernization and integration. Gordon will give you examples of some of our leading-edge digital work in a few moments. On the other side of the dual mandate, clients continue to drive down costs in their core operations. We see this manifested in two ways. First, clients are adopting our traditional service offerings more broadly and driving demand for integrated multi-service deals. And second, we are seeing clients exploring new frontiers of cost and operating efficiency through new as-a-service utility models. As we saw this scenario unfold over the past few years, we embedded in the company a systematic capability in the form of our three-horizon model, to rapidly identify changing market demands and capitalize on them. As a result, we now have a solid comprehensive portfolio of services for the current needs of our clients, as well as a robust mechanism to ensure that we have the organizational agility to make the right investments to remain relevant to clients going forward. On the digital front, our differentiated approach that we call 'digital works' has seen great traction, and recent digital acquisitions like Cadient, Odecee, and itaas have helped to round out our digital services and geographic footprint. Beyond digital, we have a number of other high-growth businesses. Our investment over the past several years in business process, infrastructure, and consulting services have paid off, and these practices continue to be solid drivers of growth. Each of these practices has the potential to be a multi-billion dollar revenue source for the company. This quarter, I am particularly pleased with the growth of infrastructure services which crossed the $1 billion annual run rate mark. And finally, I am very excited about our portfolio of as-a-service utility offerings that we build through acquisitions like TriZetto and Sourcenet, client transactions like Health Net, and our own organic efforts with clients such as TransCelerate. Let me spend the next few minutes providing more detail around the key trends that we see shaping demand. I'll then turn it over to Gordon to provide deeper insights on what we see across our business segments and to Karen for details on the financials. The first key trend shaping demand is the shift towards digital, which is a priority for our clients because it’s a priority for their customers. Having worked with clients on hundreds of digital projects, it’s very clear to us that winning in the digital era requires a new engagement model. Clients need a partner who can bring new capabilities in design, data science, and digital technology in addition to a deep understanding of our clients' business, operating model, and technology landscape. Clients recognize that they often do not have in-house capabilities in all these areas and are looking to deepen relationships with partners who have invested for the digital landscape. Furthermore, what's interesting and important to note is that the shift to a digital enterprise is in turn driving demand for our traditional services. No digital transformation is complete without integration with the enterprise's legacy systems and business processes. Existing IT infrastructure, systems and applications, and business processes often need to be re-tooled to accommodate the explosion of users, data, devices, and sensors that offer the company digital deployments. Clients continue to look for new ways to drive down the cost of operations in their core business in order to remain competitive and to fund their digital transformation. As I mentioned, we're seeing clients broadening and deepening their use of our services, often through multi-service solutions. In these situations, our broad portfolio of services is critical to provide a comprehensive solution to a client. We are also pushing beyond traditional delivery models and creating as-a-service utility, industry utilities that provide clients a low cost, high efficiency shared capability and variable cost structure. By bringing together applications, cloud, and business process services to create industry utilities, we are helping clients by distributing high fixed costs across multiple customers in an industry. These are clearly exciting times in our industry, and we believe that Cognizant is well positioned to be the partner clients will return to in transforming their businesses. With that, I'll turn it over to Gordon, and I'll be back to take your questions.

Good morning, Francisco. And thank you. Before we provide more detail on our industry, services, and geographic segments, let me offer some color on how the shift to a digital enterprise is driving greater demand for our traditional services and is in many cases changing how we deliver these services. Clients are reconsidering how they manage their traditional investments in technology and business processes as they are striving to drive higher levels of efficiencies and fund their transition through digital enterprises. Often, this is manifested in integrated multi-service line deals. As Francisco said, we are seeing a stepped-up demand for new business models, such as-as-a-service utility for platform-based models, which create variable cost structures, enhance efficiency, and drive agility and time to market. Let me explain this a bit further with some recent examples. Integrated multi-service solutions typically include a combination of consulting, IT services, BPO services, and infrastructure services to drive higher levels of efficiency, agility, and innovation. We recently entered into a strategic partnership with CNO Financial Group to transform its IT capabilities for its insurance subsidiaries, enhancing agent and customer experience. These subsidiaries include well-known brands like Bankers Life, Colonial Penn, and Washington National. This deal encompasses multiple IT functions, including application maintenance, application development, testing, and select IT infrastructure services. In addition to delivering annual expense savings to CNO, this partnership will innovatively help CNO Financial to better compete in the underserved middle market. Another example is how we're combining our finance and accounting automation and enterprise analytic capabilities with Drug Insurance, a leading insurer in the Nordics, to drive end-to-end accountability for data compliance, as well as financial reporting, thus improving risk assessments and governance. Lastly, as Francisco mentioned, we are increasingly bringing together applications, infrastructure, and business processes to create industry utilities benefiting multiple customers in an industry. This approach is helping clients from setting strategy, to transforming business operations, to managing technology needs and is helping us establish even greater mindshare and market leadership. Let me now move to a detailed commentary of our individual industry practices. Our banking and financial services segment grew 3.6% sequentially and 13.4% year-over-year, driven primarily by continued strong growth in our insurance practice. Within banking, clients remain focused on cost optimization, vendor consolidation, regulatory compliance, and cybersecurity. In addition, there is an increased focus on newer technologies in digital and automation, particularly in areas that improve customer experience and drive digital customer self-service. An example of our work in digital is a program for Chola Investments in India. We are helping this client to digitally transform its entire vehicle finance business by reengineering business processes, digitizing workflows, and developing multi-channel applications to drive real-time decision-making, improve customer experience, and enhance operational efficiencies. And for a leading bank in the US, we are helping build the branch of the future by providing a seamless multi-channel integration and in-lobby digital applications, so it can provide customers with a compelling real-time personalized experience. Our healthcare segment, which consists primarily of our payer, pharmaceutical, biotech, and medical device clients, grew 13.8% sequentially and 42.7% year-over-year, including the impact of TriZetto. Our payer clients continue to take a cautious approach to spending. Cost optimization is still a key driver while clients are also looking to leverage analytics to drive profitability and improve customer retention. The payer sector is undergoing fundamental changes, driven by the changing regulatory environment, increasing focus on medical, and the consumerization of healthcare. We believe these changes create longer-term opportunities that we are well-positioned to capture. The integration of TriZetto is on track, and our combined offerings are clearly resonating with clients. We've moved aggressively to increase staffing. We've added 500 consultants who are already deployed or trained and ready to deploy to assist in driving revenue synergies. In addition, we've added 300 people to our global delivery centers to accelerate product development in our TriZetto platforms. This action is already paying off. In the first quarter alone, we were selected for synergy deals with a total contract value of $200 million. With a number of additional deals in our pipeline, we are in active discussion with a number of payers about integrated solutions leveraging TriZetto's platforms and our service capabilities. As you can see, we're well on our way to generating the $1.5 billion of revenue synergies that we spoke about at the time of acquisition. Moving on to our pharmaceutical business, we continue to see a trend towards multi-service deals across infrastructure and IT services, leveraging cloud technologies and platforms. Additionally, we are seeing steady demand driven by vendor consolidation and cost optimization across many existing and new clients. We're quite pleased with the traction we are seeing from our acquisition of Cadient, where we've added nine new logos since closing the acquisition late last year. Recently, our Otsuka Pharmaceutical, a US pharmaceutical research and development company, publicly highlighted the work Cadient delivered in helping it to develop and deploy a highly innovative approach to communicating with clinical trial investigators using iPads and large format touch screen technology. Additionally, we are proud that Cadient recently won a prestigious life sciences industry marketing award that is further validation of the value we're providing to clients. Our retail and manufacturing segment was up 2.7% sequentially and 7.2% year-over-year. We are seeing early signs of improved demand following a soft 2014, particularly in areas of modernizing supply chains, as well as digital and e-commerce engagements. For a large retail client in Southeast Asia, we are implementing a digital e-commerce platform to deliver a seamless omni-channel shopping experience for their customers. This will allow more efficient retail management and a better understanding of customer preferences and purchasing history. And for many other retailers around the world, we are helping them exceed customer expectations with the latest digital technologies. For example, we're partnering with a major US clothing manufacturer to redesign their stores. We are helping a prominent retailer in Asia Pacific to provide a seamless multi-channel shopping experience. And we're supporting a leading US discount retailer in using the cloud to deliver superior services at its 8,000 stores. Our other segment, which includes hi-tech communications and information, media and entertainment clients, was up 2.6% sequentially and 19% year-over-year, driven primarily by improved discretionary spending at our hi-technology clients. Partnering with Google, we are helping a major workforce solution and servicing company reengineer how they approach search and match talent against demand, creating a new paradigm around finding the right candidate. As transactions increasingly become video-enabled, we are seeing strong demand for services provided through our iTask acquisition with our communications and media and entertainment clients, as well as a growing demand among clients in other industries such as banking and retail. Let me now turn to our Horizon II service lines. We continue to be pleased with the market traction we’re realizing here. Our Business Process Services or BPS practice saw continued success during the quarter, launching on the ramp-up of a number of wins in prior quarters across financial services, insurance, and healthcare. BPS is a critical component in bringing operating efficiencies to our clients; increasingly this is delivered through solutions leveraging technology and robotic automation. Through the acquisition of TriZetto, we gained a strong robotic automation platform with artificial intelligence and machine learning capability. This platform is now part of our suite of automation platforms within our robotics process automation practice. This practice focuses on automating both technology and business processes where physical labor is replaced with digital labor. The business outcome includes faster processing times with fewer errors, virtually unlimited scalability, and lower cost of ownership, along with the ability to make timely business decisions through automation-enabled analytics. Let me give you an example. We use this platform to help a major US healthcare payer in their claims processing organization. The client was initially expecting a six-month project to clear claims backlogs primarily by using additional people for processing. We were able to implement a robotic process automation solution in six weeks and clear the backlog in just one additional week. Cognizant infrastructure services had another strong quarter. Clients are looking for solutions that drive simplification and predictable operations to accelerate their IT transformation. Increasingly, this is being delivered through multi-service solutions, often combining applications and infrastructure as well as the use of newer technologies such as our hybrid cloud and mobility solutions. Cognizant was recently named a top IT infrastructure transformation consulting provider by Kennedy Consulting Research and Advisory. The report highlighted our strong capabilities in IT infrastructure transformation strategy and roadmap development, advisory services across data center and storage transformation, workplace transformation, business continuity and disaster recovery, and IT infrastructure security. Cognizant business consulting or CBC continues to take a lead role in many of our transformation deals, helping architect the deals and drive change management in our clients' businesses. As we mentioned last quarter, over 60% of CBC's pipeline has a digital component. For example, we're helping a major US hotel and casino operator to utilize big data and analytics to speed up and improve decision-making across all aspects of their business. From a geographic standpoint, North America grew 7.4% sequentially and 24.8% year-over-year. Our European operations recorded strong growth when read from a local currency perspective. As you know, the European currencies have declined significantly against the US dollar during the first quarter. Revenue in Europe was up two-tenths of a percent compared to the fourth quarter after a 4.8% negative currency impact. Continental Europe declined 2.9% sequentially after a 6.3% negative currency impact. We expect solid growth in the continent over the coming years as we increasingly benefit from the structural shift towards larger multi-year outsourcing programs. Finally, we saw good traction in the rest of the world, which was up 7.6% sequentially after a 2.8% negative currency impact. Growth was driven primarily by strength in key markets such as India and the Middle East. We're pleased with the strength of our performance across industries, service lines, and the geographies we serve. With that, let me have Karen provide more color on the financial details of the strong performance.

Thank you, Gordon, and good morning everyone. First quarter revenue of $2.91 billion represented growth of 6.2% sequentially and 20.2% year-over-year. On a sequential basis, we had a $30 million negative currency headwind which impacted revenue growth by 110 basis points. Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition-related expenses, was 19.8% within our target range of 19% to 20%. Non-GAAP EPS of $0.71 exceeded guidance by $0.02. Consulting and technology services and outsourcing services represented 56% and 44% of revenue, respectively, for the quarter. Consulting and technology services increased 10% sequentially and 32% year-over-year. Outsourcing services were up 1% sequentially and grew 8% from Q1 a year ago. During the first quarter, 36% of our revenue came from fixed-price contracts, and as expected, overall pricing was stable. We added seven strategic customers in the quarter, defined as clients who had the potential to generate at least $5 million to $50 million or more in annual revenue, bringing our total number of strategic clients to 278. During the first quarter, we repurchased 4,000 shares at a total cost of approximately $25 million. To date, we have repurchased approximately 35.6 million shares for a total cost of approximately $1.2 billion under our share repurchase authorization of $2 billion and have approximately $789 million remaining unutilized. Our fully diluted share count increased slightly to 613.9 million shares during the quarter. Total receivables were $2.1 billion at the end of the quarter, and we finished the quarter with a DSO including unbilled receivables of 73 days. The unbilled portion of our receivables balance was approximately $388 million, up from $325 million at the end of Q4. We billed approximately 51% of the Q1 unbilled balance in April. The increase in unbilled receivables was primarily due to the timing of certain milestone deliverables. Our balance sheet remains very healthy. We finished the quarter with approximately $3.35 billion of cash and short-term investments, down by approximately $425 million from the quarter ending December 31st and down by approximately $515 million from the year-ago period. Our outstanding debt balance was approximately $1.1 billion at the end of the quarter, including approximately $100 million outstanding on our revolver. Financing activities resulted in approximately $557 million being used for cash during the quarter, with almost all of those claims being used to reduce borrowings under our revolving credit facility. Operating activities generated approximately $189 million, and capital expenditures were approximately $58 million during the quarter. Let me now provide some color on our business and operating metrics. During the quarter, we added approximately 6,200 employees, and we ended the quarter with approximately 217,700 employees globally. Approximately 204,000 of our employees are service delivery staff. Annualized attrition of 14% during the quarter, including BPO and trainees, improved by 110 basis points year-over-year. Utilization was essentially flat on a sequential basis. Offshore utilization was approximately 70%, offshore utilization excluding recent college graduates in our training program was approximately 76%, and onsite utilization was approximately 92% during the quarter. I would now like to comment on our outlook for Q2 and for the rest of the year. As Frank mentioned, we are increasing our full year revenue and our non-GAAP EPS guidance to reflect a strong over-performance during quarter one. Therefore, we are revising our full year guidance to at least $12.24 billion, representing revenue growth of at least 19.3% over 2014. Our guidance is based on the current exchange rates at the time at which we are providing guidance and does not include additional potential currency fluctuations over the course of the year. For the second quarter of 2015, we expect to deliver revenue of at least $3.01 billion. During the second quarter and for the full year, we expect to operate within our target non-GAAP operating margin of 19% to 20%. For Q2, we expect to deliver non-GAAP EPS of at least $0.72. Non-GAAP EPS guidance excludes net non-operating foreign currency exchange gains and losses, stock-based compensation and acquisition-related expenses, and amortization. This guidance anticipates the share count of approximately 613.5 million shares and a tax rate of approximately 26.6%. We are raising our full year non-GAAP EPS guidance by $0.02 to at least $2.93. This guidance anticipates a share count of approximately 613 million shares and a tax rate of approximately 26.4%. Now we would like to open the call for questions.

Hi, thank you. Great results. I just wanted to ask, I guess your results here were quite strong relative to peers. How would you explain the difference versus what we hear from our peers? Any commentary would be great? Thank you.

Hi, Tien-tsin. It’s Frank. We were pleased with our Q1 result, so I think it's just a manifestation of what we've been saying to you for some time now. I think we're doing well because we're winning in digital. We've got a great portfolio of services in the digital space. We've got this unique approach to helping clients with digital transformation, what we call 'digital work'. It’s a fully integrated companywide approach to helping clients with digital transformation. And on top of that, as the trend towards digital picks up momentum, it's driving demand for our core traditional services, which is in turn fueling growth again for us. And it’s very important that we are able, and I think that drive demand for us, that we are able to offer that to the clients, sort of this end-to-end ability to the digital transformation, and then pick up the demand on the other side with the traditional legacy modernization. So I think it’s strong performance in digital. We feel like we've got a great position in the industry that we serve. We've been investing for a long time, as you know, in things like consulting and deep domain industry expertise, so you put all of that together, and I feel like we're very strongly positioned in the marketplace.

Hi. Congratulations on the good start to the quarter. I guess my question was on the cadence of Q2 versus Q3, normally these are your two very strong quarters. When do you expect the contribution from Health Net to begin? And Gordon, you mentioned TriZetto synergy; that’s a good start. But when do they actually start in revenues?

Sure. Hi, Ashwin. We continue to expect Health Net to be approved and go live in the mid-year. So we would expect the benefits from that to start to kick in in the third quarter of this year. So things are right on track for Health Net. Ashwin, what was the second one?

The question was on TriZetto. You mentioned TriZetto synergies; when do they actually start hitting revenues?

Sure. So that wraps over time, we've been awarded $200 million worth of deals; some of that is consulting work which kicks in fairly quickly; other that is more associated with implementations that takes a bit longer.

Thanks guys. Nice job on the quarter. Just wanted some general quick on your guidance. I mean, you raised by about it looks like things are going a little bit better than you had expected graphs on the synergy side with TriZetto? When we just talk about that for a moment, any elements conservative on the guidance and maybe in the past you've said things like discretionary might come up more through the year, we are waiting to see. So what kind of color can you give us on that? What are you still waiting to see through the year before potentially guidance driven better raise? And then in terms of synergies, are you seeing more than you thought, or is it inline? Thanks a lot guys.

Sure. I think you hit it exactly right because the strength is coming from the discretionary side of the business in digital; it is a little bit tougher to predict that. So we are clearly still being conservative in our guidance, and that’s why we use the terminology of that 'least.' So we let Q1 flow through, and then we'll continue to watch, you know, at what levels of strength do we have in digital going for the rest of the year. But we'd rather be conservative than get out ahead of ourselves.

And Darrin, I think on TriZetto synergies, I would say that we've been pleased with—we always knew that there was a strong synergy case here. We told you that when we did the acquisition. I think we've been pleased with the momentum we've seen; it's been a little bit faster than we expected. As Gordon mentioned in his prepared remarks, we've added 500 consultants to the business at this point already in what's a little over 90 days effectively, not all of those folks billing yet, but a large number of them are billing, and we expect that the rest would be billing relatively quickly. So that’s already kicked in, that showing the results right away. We also have a healthy pipeline and also deals that we've been awarded sort of longer-time synergy deals. So I think I would say that we've done a lot in 90 days that’s exceeded my expectations a little bit. And so I am optimistic that the revenue synergies will start to manifest themselves in our results a little bit faster than we had originally expected.

Just a clarification on the guidance: 1Q organic constant currency revenue rose sequentially ex- TriZetto. My math was about 4% to 2Q 2015 guidance sequentially is about 3.4%, then I know typically 2Q sequentially rose faster than 1Q, but it doesn’t appear to be the case there. Just curious on your thoughts on that. And then secondly, outsourcing when we increased 1% sequentially little surprised hitting growth faster, any help on that too? Thanks so much.

So Bryan, this is Karen. Your calculations for 4% organic on a constant currency basis, right, that’s about the right number for Q4 to Q1. We did see strong growth obviously in the quarter both on organic and as well as the consolidated basis. I think as Gordon just talked about given the level of digital and discretionary spending that we're seeing in the portfolio right now, we've been prudently thinking our guidance for Q2 and for the rest of the year; as we said, we've guided to about 3.4%. Currency rates obviously have stabilized this past week; the first few weeks of April, obviously they were moving quite a bit. But based on where we are now, we're generally back in line with where they were when we provided guidance back in February, but we think we've been prudent in our guidance for the quarter and the full year. In regards to your question about outsourcing, I think Frank you wanted to comment on that?

Yes, look, as we've said in the past, we won a bunch of outsourcing programs. We expect them to ramp up in the coming quarters. We talked to you a quarter or two ago about these three large deals that will all be in the outsourcing space, including Health Net, and that will start to ramp up. But I think what's important here also is to understand the underlying trend of what's going on; as clients go through this big investment cycle around digital and start to focus a lot of energy and attention on implementing new digital capital in their organizations. There is a natural shift of a little bit away from doing what I consider to be the more discretionary aspects of maintenance work. So you're not going to invest substantially in supporting or enhancing rather an existing application if it's going to be replaced or supplanted by a new digital capability. And so you're going to see a little bit of that, I would suspect as we go through this which may manifest itself in a little bit more lumpiness in discretionary versus outsourcing in the coming quarters. I think it's important to understand what's driving that, in the net I view it as a very positive thing because it says to me that we're winning in digital, we are helping our clients transform their businesses, and seem maybe investing a little bit less than that in maintaining or enhancing the existing systems, and that’s okay because we're picking it up on the digital side.

Okay. Great, results. Thanks for the help.

Morning, thank you. Could you talk about growth at your largest top five and top 10 customers in the quarter, maybe give us what percent they represent of revenue and what's the trend been there?

Sure. Sara, this is Karen. Good morning. So top five for the quarter represented 11.2% and top 10 about 19% for the quarter, so down a little bit from where they were in Q4, which we would expect, obviously the business continues to move and expand. From a sequential basis, our top five rather grew 2% for the quarter and our top 10 grew just under 1% for the quarter, on a reported basis.

Hi. Good morning, guys. And Frank and Gordon, you talked a lot about the demand on the client side for more as-a-service models. Can you talk a bit about the pricing environment you are seeing there and the willingness of clients to adopt outcomes-based pricing?

Sure. So let's talk about clients’ willingness to adopt. I think we can put it into three buckets: input-based pricing, output-based pricing, and outcome-based pricing. Clearly, clients are comfortable with the shift from input to output. So moving to fixed price to managed services and so forth. What's finally quite intriguing is as clients are now starting to give out outcome-based pricing. We do this in a large healthcare deal that we announced where the clients are going to pay per member per month, here regardless of what are the volumes involved in supporting those clients. We think that is the way of the future, particularly these end-to-end solutions that we're talking about, where we provide everything from the applications to the infrastructure to the business process services. So it's taking soft-as-a-service one step further and actually providing the transactional services around it. In the end, it will be a continuum. Some people will still want on-premise custom applications and we'll continue to do that in our traditional business; some clients will want a SaaS model, clearly TriZetto supports that; some will want a full end-to-end solution, we'll have that through the Health Net platform as well as the TriZetto platform. So we're feeling quite good about how the migration is happening across this spectrum of ways to engage. Pricing on the end-to-end solutions and SaaS, obviously there are scale efficiencies there, so when you start out with the new offering until you gain scale you—even if your pricing is fine there will be pressure on margin, and that’s normal. That’s exactly how it should work where you're making that upfront investment. But then as you gain scale, we feel pretty good about it. So overall, as Karen mentioned, pricing is stable, which is in this environment I think is good, clients are focused far less on the rate card, much more on what is the cost of ownership. So if we can demonstrate best in class delivery, constantly lowering the cost of ownership through periodicity, through automation, clients are very happy and I think that’s one of the reasons on the traditional side of the business we continue to do quite well.

Good morning. Thanks for taking my questions. I was wondering if you can look at your healthcare and financials internal plan versus a quarter ago, can you talk about what the movement has been either to a positive or negative, and maybe call out any sub-segments that were particularly strong or weak on an incremental basis this quarter?

I'm not sure there would be any big changes. We were obviously quite optimistic coming into the year, we provided industry-leading revenue growth guidance. I think we're one of the very few who were actually increasing guidance in this environment. So it's—I think we called it right when we started the year on that. You know, we have stability in our healthcare, stability in financial services. We see clients looking for vendor consolidation. We're seeing them look for best in class delivery, and clearly we are seeing them interested in digital. Our services capabilities, importantly the investments we've made over a number of years in our consulting capability and in our domain expertise have become critically important, and I think that’s one reason why you're seeing the body language that we're providing today.

Thank you. Good morning. Gordon, you gave us some color on the healthcare segment, what the drivers are; I wanted to get a sense from you in terms of what's changed thus last year—the drivers are still in place, but then you had a weak healthcare segment. Maybe just give us a better sense of what's changed from last year versus this year in terms of the catalyst on the healthcare side?

I think there are several things. We have to break it down by sub-segment. In the pharmaceutical industry, last year was very tough because of the drug patent cliffs that clients were facing. This year, you are seeing movements in the pharmaceutical space towards vendor consolidation, towards shared services. So even though it’s still a tough economic environment, we are seeing clients make very thoughtful and transformative decisions, and we’re just incredibly well positioned to assist them in that. On the payer side, obviously TriZetto was a game changer. We already had a strong practice; now we have just an incredible practice that payers across the board look to Cognizant to solve some of their toughest problems, whether it be on the cost side or on the innovation side or controlling management costs. So I think we're incredibly well positioned to help those payer clients and have a material impact on the delivery of healthcare in America on the cost of healthcare delivery in America.

Good morning. Thank you for taking the question. I was wondering if you could comment on a little bit what you've seen on the I guess, where your posture is on M&A. Now that you kind of got a little bit better integration now with TriZetto, and we're looking into 2015, what's your posture on M&A? I see you've been able to pay down a little bit of debt, but we've seen a lot of consolidation in the industry as well. Just looking for your view going into 2015 how that might have changed or maybe you've been aggressive on that front?

Hi. It’s Frank. Look, I think, I would say our posture is unchanged. We continue to look at, as we historically have, small tuck-in acquisitions. I expect that our pipeline of small tuck-in acquisitions continues to be strong and healthy, and I expect that we'll do as we have in past years. Excuse me, we find the right ones and we'll do some of those this year. Our screen is the same as it's always been. We're always looking for acquisitions that help us with new or geographies where we are under-penetrated, deepening our industry skills or expertise, or new technology areas. I'd expect with digital being such a big theme at this point, we will continue to look at that very closely as a potential space for M&A across geographies and particular technology or skill areas in the digital space. And then, as we said, you know, I am very pleased with how the TriZetto acquisition has gone. It was our first large-scale acquisition, and we will continue; we feel like we still need to integrate that and digest it to make sure that it's on solid footing before we continue to consider doing something else of that size and magnitude.

Hi, good morning. Congrats on the quarter. You had mentioned vendor consolidation several times; can you talk a little bit more about the process, like how many vendors shrinking down to how many? And I assume this is a volume-for-price arrangement, so could you give us sort of a sense on how that whole vendor consolidation works?

Hi, Ed. It’s Frank. Let me try and take a stab at it. I think usually what you'll see is clients looking at, you know, a typical scenario is that they would have, in a larger client, they'd have four or five sizeable-scale players working for them and then a very long tail of smaller providers that are each individually relatively small but collectively make up a significant demand of the clients' spend. And so what we typically see is clients saying from that, 'we'll go down to maybe three, sometimes two suppliers' and importantly, we'll cut the tail substantially. So there is a lot of emphasis across our clients on consolidating what's been called a long tail of suppliers, so the smaller suppliers that have a legal system at the client. I would say, and that sometimes—and obviously, there is an economic component to this which is clients looking at better total cost of ownership. And I think that’s important because very often we get confused between the pricing versus the total cost of ownership. But clients are really realizing that this is a total cost of ownership game, and very often when we see these vendor consolidation conversations with clients, they are accompanied with conversations about moves to managed services. And that I would say is a very, very common theme. So it's not just a pure, 'we'll give you more volume and reduce price' in some way, there are performance metrics. The clients recognize that we need to have levers likely to move to managed services, which allows us to drive greater productivity across the greater volume and therefore protect our margin and improve our service quality for them. The last thing I would say, that it’s not just a question of volume and price; there are other considerations that clients look at, particularly around things like security. The idea that dealing with a smaller number of players allows them to manage the security environment a little bit more tightly, so that they have less exposure from that to the endpoint.

Hi, thank you. On the last call, you indicated that TriZetto closed 2014 at $729 million; it was mid-single-digit growth rates and margins that were neutral to the business. Could you just update us on your thinking? You've added a number of consultants related to that; it sounds like growth could be actually a little better in TriZetto and or margins a little bit more of a headwind if you are adding all of those consultants?

So, Keith. This is Karen. So the numbers that we talked about before, the $720 million that you referred to, that’s for one of the core TriZetto businesses, right, and so TriZetto, on its own, we would argue, but still has been a single-digit grower. The growth that we're adding is really to take advantage of the synergy revenues that we talked about back in September when we announced the deal. So really pushing towards that $1.5 billion of revenue synergy over the next five years. In terms of, again, as a core business continues to be margin neutral to us, but as we talked in Gordon's comments, we've obviously added about 500 people to really help drive those revenue synergies and another 300 people to work on the development of the platform. So there's a little bit of impact on margin there; it's not material though, and obviously that's baked into our utilization rates that you saw were essentially flat on a sequential basis.

Great. Maybe you could talk a little bit about some of your competitors, just expectations. You talked about what you heard everything here on the call. Were you one of the price leaders that were causing one of the problems? And maybe you could also just tie in that you've done a lot in the consulting area and obviously in digital. How do you feel that you're positioned in comparison to others? Do you feel you are a material number of steps ahead? Just some comments there will be really helpful.

Sure. I certainly would not view us as a driver of price declines in the market by such imagination. We are positioned as the value that we're delivering to the clients for the price that we charge; clients look at that and say it's an extraordinarily compelling proposition where we have industry-leading security capabilities, industry-leading consulting, industry-leading domain expertise, best-in-class delivery. When clients look at all that, and they say the value of what they get from the price we charge makes it a compelling proposition. I think that’s, in the end, what’s driving our industry-leading growth.

And let me add, this is Frank. Let me talk a little bit about digital. As I said in my prepared comments, as we've done hundreds of digital projects at this point, it’s very clear to us now that truly being successful in digital is not just about applying traditional approaches and methodologies to a new paradigm; it requires a whole new engagement model. And what I mean by that is that you need to really truly be in the digital business; you need to bring together a new set of skills and capabilities, and these are typically in areas like data science, design, and of course the digital technology skills. We've got to bring those and new capabilities together with traditional capabilities in consulting and strategy and deep domain expertise, and you’ve got to be able to bring these talents together, people with these talents together to create very short-cycle rapid bursts of innovation so that you can respond to the changing market demands very quickly. That requires a new engagement model, and that is what is embodied in our digital works approach and methodology that we've infused across the company. And so we feel like we are several steps ahead of key competitors on building out the methodology, on having a real approach that we've tested, road tested with many, many clients, and of course building out the core fundamental capabilities in these new areas that you need to be successful in digital.

Can you give us any type of sizing you have, so this comparison to the rest of your business?

I think here is the challenge. I know lots of people put out sizes of their digital practice; it’s very difficult at this point to separate what’s digital, what’s not because it's so fully integrated and needs to be integrated. So the answers we can give you—small number or massive number—both numbers would be right depending on the definition. But what we are seeing is that digital component is a digital component more and more of the projects, and I think the value part of what firms like us offer is how it’s integrated back into their systems across our entire service offering. So when I look at what touches digital in our business, it’s a very high percentage.

Hey, thanks. Good morning. Gordon or Karen, can you give us the organic revenue growth number sequentially from the healthcare vertical? And then was there any FX impact on EBIT margin, the non-GAAP EBIT margin during the quarter? Thanks.

Yes, sure. Moshe, this is Karen. So let me talk about margins first; really no impact on margins due to all the currency movements during the first quarter; it’s fairly neutral at the margin level—it’s more of a top-line issue for us. In terms of the healthcare segment, excluding TriZetto on a reported basis, we grew about 2.6%, a little bit faster on a constant currency basis. The healthcare components that are payer businesses are primarily North America businesses, so that does not have any FX impact, but our life sciences business does have some FX impact. So, but it’s grown a little bit faster than the 2.6% reported.

Thank you. Good morning. This is Peter in for Steve. Frank, I want to follow up on a previous question as it relates to digital skills set. As digital gains momentum with the industry, I mean there is concern that competition for digital talent could intensify and potentially be a bottleneck in scarcity for some engineers and data scientists and consultants with the know-how and experience. Do you see this level of tightness today or beginning to emerge, or do you perceive a risk in the future that competition for these skill sets could materially intensify?

Look, I think that's something that’s on our radar, something we're concerned about. We think that we've got a terrific engine to both recruit talent in the marketplace and to train talent and scale up in certain areas. Let me talk a little bit about both of those. I think first of all, in terms of our ability to recruit around the world, as you know it's always been a core competency of Cognizant. But I think the fact that our brand is extremely strong around the world in the recruitment market, the fact that the company performance has been solid over the last several years, and the fact we are winning in digital creates a great platform for us to recruit the best talent in the world. And I think we built a phenomenal set of leadership in digital in these areas. And I am confident that that leadership team will in turn be able to attract and scale their respective teams. In addition to that, in the digital technology areas, we think that our traditional consultants can—we can retrain and re-skill and in fact we already are particularly with those that we need where the real scale is, is on the integration between the new digital world and the traditional environment. And so in that space where a lot of the scale requirement is, we are both recruiting but we are also retraining and cross-training. So I feel good that we've got a roadmap going forward to be able to address the skill issue.

Operator, go ahead.

Do you see digital as primarily an agile effort compared to what has been in the past a more waterfall approach?

Yes, I mean, clearly it’s a little bit more than. I would characterize it's a little bit more than traditional agile development compared to waterfall—it’s a whole—what I think over its agile business profits capability, right, so a business, new functionality capability. So it’s sort of end-to-end from being able to understand what your customers' are looking for all the way through creating a digital capability. That end-to-end process has to be agile in the broader sense of the word agile, which is that you've got to be able to do rapid innovation. You've got to be able to very quickly bring new functionality to market, and you've got to have the ability to test that in real-time and make sure that it’s meeting the needs of the client and it's not back-tracked out of that to be able to change course. So all of that has to happen in very short cycles, which requires, as I said, traditional agile development—it requires a new approach to processes as we use development and testing and so there is a lot of underlying plumbing that needs to change. But I would say it is an overall end-to-end much more agile process, yes.

Thank you.

With that, I think we could wrap up. Thanks everyone for joining us on the call today and for your questions. And we look forward to speaking with you again next quarter. Thank you.