Cognizant Technology Solutions Corp (CTSH) — Q3 2016 Transcript

Thank you, Rob, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's third quarter 2016 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; Raj Mehta, 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 risk and uncertainties as described in the company's earnings release and other filings with the SEC, including our Form 10-Q filed this morning. I would now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco.

Thank you, David, and good morning, everyone. Thanks for joining us today. Our Q3 revenue was $3.45 billion, up 2.5% from Q2 and 8.4% from a year ago. This is within our guided range of $3.42 billion to $3.47 billion. These results were driven by growth across all of our industries. This was encouraging given the weakness in the pound sterling and the softness we've seen this year in our Financial Services segment stemming from macroeconomic concerns and in our Healthcare payers segment due to industry consolidation. Turning to guidance, we're trimming the high end of our full-year revenue expectation and now expect our revenue to be in the range of $13.47 billion to $13.53 billion. This guidance includes the absorption of an incremental $18 million negative impact due to the recent weakening of the pound sterling. We're tightening our full-year non-GAAP EPS guidance to a range of $3.38 to $3.41. I'll talk more about the business in a moment and why we're well-positioned going into 2017. I'd like to take a moment to update you on the internal investigation we announced at the end of September. The investigation is focused on payments relating to permits for certain company-owned facilities in India and whether such payments were made improperly or if there was a possible violation of the U.S. Foreign Corrupt Practices Act and other applicable laws. First, I think it's important to note that we do not anticipate any impact on our ability to continue to provide the quality services our clients expect from us. Second, as disclosed in the Form 10-Q we filed this morning, we've identified approximately $5 million in potentially improper payments to date. We've evaluated the effect of such payments and concluded that they are not material and do not require a restatement of our historical financial statements. Karen will provide additional details on this in a few minutes. Third, and also disclosed this morning, we discovered in the course of the investigation that certain members of senior management may have been aware of or participated in the matters under investigation. Any such conduct would be inconsistent with our core values. Based on the results of the investigation to date, those who may have been involved are no longer with the company or in senior management positions. Finally, I would like to reaffirm our strong commitment to compliance with all applicable laws and regulations. We voluntarily disclosed the matters under investigation to the U.S. Department of Justice and the Securities and Exchange Commission in September, and we've been fully cooperating with both agencies. Based on the results of the investigation to date, we have already started and will continue to enhance our internal controls and compliance programs. Let me now turn to the rest of the business. Today and moving forward, what remains most essential to Cognizant's success is our unwavering focus on our clients. Their changing needs are the inspiration for our strategy, and we are actively executing that strategy. As we look ahead, we believe our market opportunity has never been greater. That's because with more technology in every product built and behind every customer experience, and more data generated at every turn, our clients' businesses are and will continue to become increasingly technology-intensive. Our opportunity then is to work with these clients to help them win by making the fundamental technology-enabled changes throughout their organizations that are required for them to compete in this new technology and data-intensive world. We have spoken to you in past calls about our three strategic initiatives designed to enable this kind of work across our clients' businesses from front to back. We recently took an important step in executing this strategy by aligning and branding all our capabilities into three practice areas: Cognizant Digital Business, Cognizant Digital Operations, and Cognizant Digital Systems and Technology. Our Cognizant Digital Business practice works with clients to reshape their products and business models and the resulting impact on how organizations interact with their customers, employees, and partners. Our approach combines data science, design thinking, and deep industry and process knowledge with solid technology capabilities to unite the physical and virtual aspects of a company's offering seamlessly across every channel. Together, we identify insights, develop business strategies, and design, prototype, and scale meaningful experiences. Our Cognizant Digital Operations practice helps clients reengineer, digitize, manage, and operate their most essential business processes, lowering operating costs, improving user experience, and delivering better outcomes and top-line growth. Across the practice, we are creating automated data-driven platforms and industry utilities. We help clients run better by applying traditional optimization levers, and we help them run differently by creating competitive advantages through process excellence which often leads to more effective operating models and corresponding top-line revenue growth. Our Cognizant Digital Systems and Technology practice works with clients to simplify, modernize, and secure IT infrastructure and applications, unlocking the power trapped in their technology environments. We help clients create and evolve systems that meet their needs in the modern enterprise by delivering industry-leading standards of performance, cost, and flexibility. Now, the names of these practice areas reflect our belief that digital technology must be embedded as an integral part of all our offerings. All three practice areas work in close partnership with our vertical and geographic businesses and with Cognizant Business Consulting to ensure tight alignment and market relevance. Let me underscore how central this is to what differentiates Cognizant. When we say digital, we're not talking just about building user interfaces or implementing digital marketing, but about creating industry-specific solutions woven deeply into the workings of an organization to create new levels of value enterprise-wide. In summary, our clients are finding it unique and differentiating that Cognizant can consult with them to build digital businesses, operations, and systems. For example, we're helping insurance companies go beyond managing claims to preventing losses with the power of predictive analytics. We're working with healthcare companies to bring payers, providers, and patients together on an integrated platform that reduces waste and improves health outcomes. We're helping manufacturers evolve from using stand-alone goods to orchestrating entire ecosystems of smart connected products. But as much as we're focused on the opportunities of today, looking ahead at evolving clients' needs is one of Cognizant's core strengths. We continue to develop innovative products and services, part of what you've heard us refer to as our Horizon 3 capabilities, through an internal investment program that powers long-term growth opportunities for Cognizant and our clients. First, the Cognizant Global Technology office identifies the emerging technologies with the potential to create real business value. Then, Cognizant Accelerator scales the most promising technologies, productizing services, solutions, and business models, and speeding them to market. Together, these teams have spearheaded our entry into SMAC and IoT for example. And today, they are working to realize the potential of developing technologies like artificial intelligence and blockchain, and to incubate new IT-based offerings. As we planned for 2017 and beyond, in addition to continuing to scale our comprehensive services portfolio, we're expanding our vertical and geographic focus as well. We're seeing increased traction with clients across Continental Europe, Asia-Pacific, and the public sector who are finding our comprehensive capabilities unique in their markets. In closing, it's clear that today our clients realize digital should be an enterprise-wide endeavor and that they need a comprehensive partner like Cognizant capable of working across every aspect of the organization that technology should enrich: business, operations, and systems. Let me now turn the call over to our new President, Raj Mehta. On our last earnings call, we introduced you to Raj, a long-standing Cognizant leader. He's been a Cognizant associate since 1997, building strong relationships with clients throughout his 20 years at Cognizant, and leading many of our market-facing and delivery teams in driving industry-leading growth. Now, as President, he has direct responsibility for the overall P&L of Cognizant's operations. Raj will talk to you about the success we're already having in executing our strategy from his perspective running these businesses. Raj?

Thank you, Frank, and good morning, everyone. I'm glad to be here and honored to be taking the role of President at this important time in Cognizant's journey. Anyone who has followed the company over the years knows that we stand for three things: our relentless focus on our clients; making sure we have world-class teams that deliver consistently for them; and scaling our capabilities to address new client needs. I know we're succeeding when clients tell me that working with us feels different. As we help clients with the shifts they need to make in the digital era, I'm doubling down on the principles that have made us successful so far; client focus, world-class teams, and scaling capabilities while maintaining our flexible, collaborative way of working. In working closely with clients across our industry businesses, we see that we face many of the same underlying challenges. They need to deliver the convenient experiences people expect today across their complex organizations. They need to develop an operational agility to respond to fast-changing business needs. They need to free up dollars to invest in innovation and transformation by optimizing and modernizing their legacy IT systems. It's these challenges that our practices, Cognizant Digital Business, Cognizant Digital Operations, and Cognizant Digital Systems and Technology, are focused on helping clients answer. Working closely with Cognizant Business Consulting and domain experts from our industry businesses, we're creating frameworks, platforms, and solutions that clients are finding valuable as they pursue next-level savings and new revenue streams. Now, I'll review the performance of each of our industry verticals, highlighting key trends and some of the areas we're focusing on with our clients. Our Banking and Financial Services segment was up 1.8% sequentially and 7.1% year over year. During Q3, the increased macroeconomic uncertainty and the prolonged low-rate interest environment that we have commented on throughout 2016 continued to moderate spending at several of our larger banking clients. Our super-regional banking businesses continue to perform well as many of those clients look to us for solutions that both optimize cost and generate revenue. While we've seen a slowdown in spending in recent months with several of our insurance clients who are also pressured by the low interest rate environment, demand has remained solid over the past year. Clients have been particularly interested in Cognizant Digital Operations solutions that transform underwriting and claims processes through managed services or other outcome-based delivery models. Our Healthcare segment, which consists of payer, provider, pharmaceutical, biotech, and medical device clients, grew 3.5% sequentially and 5.7% year-over-year. The industry consolidation among several of the largest U.S. payers continues to weigh on our healthcare payer practice. Still, we remain positive that the fundamental shifts underway in the market will create long-term opportunities. Through solutions from our Cognizant Digital Operations practice that combine TriZetto software and Cognizant services, we are well positioned to help clients deal effectively with this disruption. In our life sciences business, demand has picked up steadily over the past year as drug pipelines and product launches have improved for pharmaceutical and biotech companies. In particular, we're seeing a trend towards multi-service line deals, leveraging analytics, cloud technologies, and platforms. Our Retail and Manufacturing segment was up 2.8% sequentially and 12% year-over-year. Strength in manufacturing helped to offset ongoing softness in retail. A number of retail clients have moderated their discretionary spending over this past year as consumer spending has been weak. Cognizant Digital Business has seen growing demand among manufacturing clients who want to help in transforming the products they make through sensors, IoT, and analytics. They are also looking for solutions that increase the productivity of core IT infrastructure and application services. Our Other segment, which includes high-tech communications and information, media, and entertainment clients, was up 1.7% sequentially and 13.6% year-over-year. Last quarter, we highlighted that macroeconomic uncertainty was causing a slowdown in decision-making for our information, media, and entertainment clients. This has largely been offset by a rebound in our communications business. Let me give you a few examples of how Cognizant is partnering with clients in engagements that are pivoting their businesses and shifting their industries in meaningful ways. Let's talk first about KeyBank. Cognizant has partnered with KeyBank on a variety of different initiatives over the past 10 years, assisting in significant projects like the recent integration of their acquisition of First Niagara Bank. Today, KeyBank wants to leverage digital to compete and lead in their category, and they started that journey with Cognizant. We are working together to simplify the way they do business and offer their customers streamlined experiences, financial wellness tools, and digital product offers and services. Cognizant is helping with the implementation of a transition to the Oracle Banking Platform. As part of our work, we're helping in delivering improved digital experiences on web and mobile interfaces, reengineering business processes, and enabling new technology architecture for the bank's retail digital channel. This retail digital channel modernization is the first wave of the transformation, but we'll expand the use of this platform to manage other core processes and to deliver new differentiated services to customers within the coming year. Let me tell you about another project we're doing in the manufacturing space, helping a top-five auto manufacturer change what people expect from their cars. As sales in developed markets plateau, our client is looking to serve new needs of their customers by offering a range of transportation services and solutions. We are their strategic partner helping to develop their strategy and user experiences and to build a platform that will be the backbone of an evolving new ecosystem of offerings. While this platform will initially focus on areas such as parking, vehicle health, and retail and rewards programs, the data captured by their platform will eventually be used to model how people will move differently in the future. We will work with our client to develop this and other potential opportunities to expand the services that they offer to their customers. Finally, I would like to highlight a growing part of Cognizant Digital Systems and Technology where our deep knowledge of client legacy environments enables us to modernize their IT by migrating to cloud-based solutions, utilizing providers such as AWS. A couple of recent examples: We recently worked with LexisNexis to develop a cloud-based solution on AWS that supports search capabilities on a database of over 2 billion searchable documents on their news archive platform. For Sotheby's, we migrated their critical business applications including their flagship website from on-premise data center to AWS. For both clients, this is a major step forward towards the modernization of their IT infrastructure. In future calls, you'll continue to hear more from me about what Cognizant and our clients are focusing on together, how we're building world-class teams to serve them better, and how we're scaling our capabilities to meet changing needs. Now I'll turn the call over to Karen to discuss our financial performance.

Thank you, Raj, and good morning, everyone. As Raj mentioned, the business performed within expectations as third quarter revenue of $3.45 billion was within our guided range and represented sequential growth of 2.5% and a year-over-year increase of 8.4%. We had a negative currency headwind which impacted sequential revenue growth by $24 million or approximately 70 basis points and year-over-year revenue growth by $42 million or 130 basis points. Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition-related expenses, was 19.3% within our target range of 19% to 20%. Non-GAAP EPS of $0.86 was $0.01 above our guidance range of $0.82 to $0.85. As a reminder, the remittance of cash from India to the U.S. that occurred in the second quarter had an incremental tax impact of $24 million in quarter three and is expected to have a similar impact in the fourth quarter. The tax impact of this transaction had a $0.04 per share impact on our Q3 GAAP EPS that was excluded from our non-GAAP EPS calculation due to the non-recurring nature of the transaction. Before I provide a detailed commentary on the quarter's performance, let me provide some additional color on the ongoing internal investigation, which is being overseen by our Audit Committee. As Frank noted, based on the results of the investigation to date, we are not restating our historical financial statements. At present, the investigation has identified a total of approximately $5 million in potentially improper payments for certain company-owned facilities in India. Of that amount, based on the preliminary results of the investigation to date and as disclosed in our Form 10-Q and earnings release, we determined that it was appropriate at this time to record an out-of-period correction of $3.1 million related to certain of these payments. Also, as disclosed in the Form 10-Q, we announced a determination of a material weakness as of December 31, 2015 and the subsequent interim period. Based on the results of the investigation to date, certain members of senior management may have participated in or failed to take action to prevent the making of potentially improper payments by either overwriting or failing to enforce the controls established by the company relating to real estate and procurement, principally in connection with permits for certain facilities in India. We have already taken and continue to take remediation measures in the areas of procurement and accounts payable as they relate to real estate transactions in India. Now turning to third quarter performance. Consulting and technology services and outsourcing services represented 57.4% and 42.6% of revenue, respectively, for the quarter. Consulting and technology services grew 2.4% sequentially and 6.9% year-over-year. Outsourcing services revenue grew 2.6% sequentially and 10.3% from Q3 a year ago, driven by strength across digital operations and the infrastructure portion of Cognizant Digital Systems and Technology. From a geographic standpoint, North America grew 3.3% sequentially and 7.9% year-over-year. Europe declined 1.7% sequentially after a 4.4% negative currency impact and grew 5.6% from last year after an 8.3% negative currency impact. Growth in Europe was driven primarily by the ramp of work coming from recent wins particularly in markets such as Germany and the Nordics. The UK declined 5.7% sequentially and 2.3% year-over-year after a 7% and a 13.9% negative currency impact, respectively. Continental Europe grew 3.5% sequentially and 17% over the prior year. We have established a solid foothold on the continent and expect this to continue to be a driver of future growth. Finally, we saw continued strong traction in the rest of the world, which was up 3.8% sequentially and 23.2% year-over-year. During the third quarter, 37.5% 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 that have the potential to generate at least $5 million to $50 million or more in annual revenue, bringing our total number of strategic clients to 322. We added 11,500 net new hires in the quarter. Annualized attrition of 16.6% during the quarter, including BPO and trainees, was down 350 basis points from the year-ago period. While attrition remained slightly elevated, we are pleased with the year-over-year decline as we continue to enhance our various employee engagement initiatives. Total headcount at the end of the quarter was 255,800 employees globally, of which 239,500 were service delivery staff. Offshore utilization was 73%. Offshore utilization, excluding recent college graduates in our training program, was 79%, and on-site utilization was 90% during the quarter. Our balance sheet remains very healthy. We finished the quarter with $4.9 billion of cash and short-term investments. Net of debt, this was up by $390 million from the quarter ending June 30 and up by $861 million from the year-ago period. Moving on to receivables, which were $2.5 billion at the end of the quarter. We finished the quarter with a DSO, including unbilled receivables of 74.5 days. This is roughly flat with the last quarter. Our unbilled receivables balance was $424 million, down from $451 million at the end of Q2. We billed approximately 58% of the Q3 unbilled balance in October, and the decrease in unbilled receivables was primarily due to the timing of certain milestone deliverables. Our outstanding debt balance was $900 million at the end of the quarter, and there were no outstanding borrowings on our revolving credit facility. Turning to cash flow, operating activities generated $594 million. Financing activities were a $119 million use of cash during the quarter, and capital expenditures were $74 million during the quarter. During the third quarter, we repurchased just over 2.5 million shares for a total cost of $145 million, and our diluted share count decreased to 608.5 million shares for the quarter. As of the end of Q3, we had repurchased 48.8 million shares for a total cost of $2 billion under our stock repurchase authorization of $3 billion, with approximately $1 billion remaining unutilized. I would now like to comment on our outlook for Q4 and the full year. For the full-year 2016, we are trimming the high end of our revenue expectations to be in the range of $13.47 billion to $13.53 billion which represents growth of approximately 8.5% to 9%. For the fourth quarter of 2016, we expect to deliver revenue in the range of $3.45 billion to $3.51 billion including $18 million of incremental negative currency impact due to the recent weakening of the pound sterling. As is the typical pattern in the fourth quarter, client furloughs, seasonality of our retail practice, and fewer billing days will have an impact on sequential revenue growth. During the fourth quarter and for the full year, we expect to operate within our target non-GAAP operating margin range of 19% to 20%. For the fourth quarter, we expect to deliver non-GAAP EPS in the range of $0.85 to $0.88. Our non-GAAP EPS guidance excludes net non-operating foreign currency exchange gains and losses, stock-based compensation and acquisition-related expenses, and amortization. For the remainder of the year, our non-GAAP diluted EPS guidance also excludes the impact of a one-time incremental income tax expense related to the India share buyback transaction. This guidance anticipates a share count of approximately 609 million shares. For the full year, we expect to deliver non-GAAP EPS in the range of $3.38 to $3.41. This guidance anticipates a full-year share count of approximately 609.6 million shares and a tax rate of approximately 35%, including an approximate $238 million impact from the incremental tax from the India remittance. Now, we would like to open the call for questions.

Good morning. Thank you for releasing your 10-Q. Could you talk a little bit about the Financial Services vertical? And how much of the Q3 and particularly Q4 pace of business is sort of unique to this year and unique to the current challenging environment for your clients? And how much of it may be more secular in nature? Thank you.

Yeah. Hey, Edward. This is Raj Mehta here. Look, we've talked about Financial Services in terms of some of the macroeconomic trends, especially around the low-rate interest environment. But I think it's important to note, it's not just banking, but across many of our industries we serve that technology is becoming more intensive to our clients, and our clients are becoming more dependent on technology and data to compete. We continue to believe that the benefits of outsourcing, including the ability to attract talent, scale efficiently and bring deep technology and domain knowledge, have not changed. The benefits clients can achieve through outsourcing are things they cannot replicate on their own. So, in summary, right, the range of skills that are required, and the technology is broadened and not narrowed, and we're still very much looking forward to continuing to grow these businesses in that respect.

Yeah, good morning. Thanks for the FCPA update and the materiality stuff there. So, has the FCPA issue had any impact on the client side and on the investigation itself, what needs to happen from here for the issue to be resolved? Could there be any additional costs to remedy the internal controls, for example? Thanks.

Hey, Tien-Tsin. It's Frank. Look, I would say it's business as usual in terms of serving clients at this point. As I said, we expect no impact on our ability to provide high-quality services to clients, and in fact, haven't seen any. The fundamentals are we've got great associates doing good work every day on behalf of our clients, and I think our clients recognize that. The investigation is ongoing. I don't want to speculate on how long it's going to take or the costs that may be associated with it going forward, but our commitment is to conduct a thorough investigation, and we're committed to doing that.

Thank you.

Thanks.

Hi. Good morning, and thank you for taking the question. I was wondering if you could comment at least on the Healthcare vertical. You've had some pretty large customers there that have throttled back on spending all year. Any conversations with them that might indicate the tenor or demeanor of their spending in the next year, should those investigations be resolved? I understand they're right around the corner, so I don't know what their spending intentions are or if you'd talked to them with regard to contingency plans one way or the other.

Yeah, it's Frank. Let me try to take a stab at that. Look, I think the Healthcare business at Cognizant – before I talk about the specifics, let me just back this up, right. I think that Healthcare, particularly as it relates to the Healthcare payers, is really a core area of deep strength at Cognizant. It has historically been one of our strongest verticals, and with the addition of the capabilities from the TriZetto acquisition, I think it has further strengthened our position there. The combination of Cognizant's services capabilities with TriZetto's platform capabilities has enabled us to create a truly unique platform-based offering in that marketplace, and we continue to see good traction in services and solutions that combine TriZetto's software and Cognizant's core services capabilities. The pipeline of opportunities around that area remains robust, and I continue to be optimistic about the opportunities there. Offsetting that, as we've said to you over the course of this year, is some slowness in the spending from the biggest payers who are particularly the ones that are involved in the potential large combinations. It's a little too early to forecast what happens with those payers as we go into 2017, but as a general matter, I would say that we have seen them slow spending, discretionary spending, through this period of uncertainty. And so, as those situations get resolved one way or the other, my expectation is that we have a great portfolio of services to offer that group of customers, and we will be as relevant if not more relevant than we've ever been to serving those needs of those customers.

Hi. Good morning, guys. Can you talk a little bit about Cognizant Business Consulting? Just an observation that many of the winners, so far, in digital have been some of the very high-end private consultancies. I'm curious to know, kind of I know you've got Cognizant Business Consulting, kind of what you're doing to continue to develop that business as well as how you're seeing demand for digital evolving and whether it's kind of moving beyond the high-end consulting tip of the spear and into more, I'd say, mainstream IT services at this point.

Yeah. Hey, Lisa. It's Frank. Let me try to address that. So, let me start with the three practice areas that we discussed on the call today. We've refocused and rebranded our offerings under these three broad practice areas: Cognizant Digital Business, Cognizant Digital Operations, and Cognizant Digital Systems and Technology. And it's not an oversight that the word digital appears in all three of the practice names. The reason is that as we've said to you for quite some time now, our core and fundamental belief is that digital technology is really embedded in all areas in all aspects of our business in some way, shape, or form. So, Cognizant Digital Business uses digital technologies to create and deliver meaningful business experiences for clients. Cognizant Digital Operations uses digital technology to enable and automate core business operations in our clients' core transaction processing areas. And then, of course, Cognizant Digital Systems and Technology focuses on modernizing, securing, and scaling legacy technology environments. Digital exists in all those places. And to your question about Cognizant Business Consulting, it's really an enabler across all three of those practice areas. The Business Consulting capability is woven in across all of those three practice areas, and really a lot of the work that we are doing today in Cognizant Business Consulting is what I consider to be tip of the spear kind of work that then leads to downstream work in one or more of those three big practice areas. We've clearly seen digital move beyond just high-end consulting to implementation. Raj, for example, spoke in his prepared comments about the work we've done to migrate two big clients to a cloud-based AWS environment; that's an example of sort of what I think of as core technology work that's enabled by new digital technologies, and like that across all the practices, we're seeing not just tip of the spear consulting work but also downstream implementation work that relates to digital.

Thank you.

Hi. Just wanted to ask about the impact of business due to the departure of former President, Gordon Coburn, any big reaction out of clients? And then just secondly quickly, Karen, any impact to the non-GAAP tax rate due to the internal investigation? Thanks so much.

Let me talk about Gordon's departure. I would say that Raj has been a Cognizant veteran for 20 years. Raj has run most of the business operations of the company, the business development, front-end sales, and also the delivery operations for several years now. And so, I would say the transition has been seamless. Raj is supported by a very strong team of Cognizant veterans who have been around the company for many, many years. I would say that transition has been seamless. Our platforms business, or what we are now referring to as Cognizant Digital Operations, reports to me at this point; I have direct oversight on that part of the business. Let me turn it over to Karen on the tax rate question.

Sure. So, Bryan, there was certainly no impact on the non-GAAP tax rate for the quarter based on the investigation. During the quarter, there were two things that happened related to the investigation; we talked about the out-of-period adjustment of $3.1 million that we've recorded. And then, obviously, we had some professional fees in conjunction with the investigation that are ongoing, but those were recorded both in our GAAP and in our non-GAAP financial statements. The tax rate did come out a little bit lower than we expected for the quarter, but that was just based on the settlement of some discrete items in the quarter. Nothing to do with the investigation.

Thanks, guys. I understand digital can be seen across the business, but just given how much of a driver it is now, is there any way to quantify the actual percentage of your revenue you'd consider digital and kind of what the growth rate is relative to what we've seen in some of your competitors? And then, just for Karen, can you just revisit the strategy again over margins, the stability of margins, and the capital return strategy around potential buybacks, given – in light of what's now a somewhat slower top line trend? Thanks, guys.

Sure. So, Darrin, I'll take both of those. So, on the first one, on digital, as we've talked about, and I think we demonstrated in our conversation today around the script, right, we think that digital is becoming really an enterprise-wide initiative. And as we've said, we think that the definition of digital and how people think about digital revenue will continue to evolve in the coming months and quarters. And so, we have been reluctant, frankly, to define digital because we don't think there is a clear digital definition across the industry today. We've talked about this notion of digital starting in the front-office and now has increasingly moved to the mid-office and the back-office, and hence, the alignment of our three practices that we discussed around digital business, digital operations, and digital systems and technology, which I think starts to get at that notion that it really has become an enterprise-wide initiative for both clients and ourselves. And increasingly, we think it will impact all of the segments of the business. In fact, it already is today. We have been reluctant to break out what's digital because how do you define a project, whether it's got a digital component to it or if the entire project is digital? So, I think those definitions in the market will continue to evolve, and we'll continue to focus on that. I think in terms of margins, clearly, we have talked about staying in the 19% to 20% range. We have done that historically, and I think certainly for the foreseeable future, people should expect that this is a comfortable range for us to operate in. Obviously, it gives us room to make investments to grow the business. Those investments continue to shift as we look at more platforms, as that business continues to expand, and as we continue to expand new skill sets and new offerings to support the digital marketplace. Those are most of the investments that we continue to focus on. From a modeling perspective, you should expect us to stay in the 19% to 20% range. From a capital allocation perspective, there's really no change in our strategy there. As we said in the past, people should expect that over the course of a year, we will essentially maintain share neutrality. We have the buyback program available to us, and we will use that as and when we think it's appropriate to do that, and obviously, we've demonstrated that with the number of shares that we bought back in Q3. We still have about $1 billion left under that program as we look forward into Q4 and beyond.

Good morning. Thanks for taking my question. Given the Q4 growth rate you're guiding to implicitly in around 8% or so, can you kind of give us a sense about based on the backlog of business you see heading into say Q1 or in the beginning of 2017, whether you see that as a kind of a sustainable growth rate at least in the short term, given some of the pressures near term that you mentioned before?

So, Jim, this is Karen. I think it's premature to comment on Q1 or 2017. Clients are just getting underway with their budgets, and so we will obviously work with them on those budgets as we get further into this quarter. When we release earnings and provide full-year guidance in February, we'll provide an update at that time.

Hi. I want to ask a question, Frank, similar to a past question. If I look at Wipro, Infosys, TCS, and Cognizant, both for the reported results of September and guidance and Street numbers for December, it suggests that the industry is growing around 8%. Part of that, ADM is growing less than 5%. As we begin to reflect on calendar year 2017, I'm wondering what's different that would allow Cognizant to grow at something better than 8%. Part of the question is driven by, for the past number of years, probably five years, Cognizant has provided guidance for a full calendar year that's below the Street expectations. So, Frank, I was wondering if you wanted to make any comments on the industry. And the second part of that is how willing would you be, Frank, to pursue M&A that would pressure margins in order to capture some incremental revenue growth? Thank you.

Hi, Keith. So, there were a number of – I think a number of questions, and I will try to get to each of them. I would say that at a macro level, our industry continues to grow as the world becomes increasingly technology and data-intensive. Technology is becoming more complex to implement, and the skill set, as Raj pointed out in his Q&A a minute ago, has broadened, and not narrowed. We believe that this makes services firms like Cognizant as relevant, if not more relevant than we've been in the past. It's also a fragmented industry, so the opportunity to gain market share and capture markets is very much there. We believe that if you drill down further into our footprint of industries and geographies, there remain significant growth opportunities where we are underpenetrated. So, when you put all of that together, we believe that we have significant growth opportunities ahead of us and that our ability to invest to capture those growth opportunities exists in the company with our financial formula, and that forms a core thesis for how we think about the business going forward. As it relates to acquisitions, we've said that we will continue to focus. We have a robust M&A program. We look at mainly smaller tuck-in acquisitions. That's been the primary focus. We will continue to do that. I would expect that as we move forward, you'll see us focus on those kinds of acquisitions. I would expect that we would be more focused on digital and making digital acquisitions as we look to the next few quarters to bolster our digital capability. I think we've got good strong digital capabilities, but particularly as we look into new industries and geographies, you'll see us using inorganic means to grow faster there. For the small tuck-ins, if there's an acquisition that we buy not at Cognizant margins, I'm not too concerned about that because we've shown that we can bring those back up to Cognizant levels through our ability to cross-sell.

Hi. I wanted to come at the digital question a little differently. Maybe you can give us some color on how you're measuring success in that business internally and how you're staffing for it. I think the Street has heard some others frame their exposure, and it would be helpful just to be able to measure how you stack up or to have a little bit more information so we can understand your positioning in that business. Thanks.

I think the primary measure that we are using, Joe, it's Frank, is what portion of our existing client base is engaging us on digital capabilities in some way, shape, or form. Now, as Karen said, there's a question of how we define digital. What we are doing is looking at our newest service offerings and making sure that as our clients define digital – and each of our clients defines digital in a slightly different way – that we are engaged with them in their most important and strategic engagements. That's always been the way that we've defined success at Cognizant.

Thanks. Frank, I want to go back to a previous response that you'd given where you kind of said that the ability to provide high-quality services continues and so on, but that really has never been in doubt. The real question is, are there clients who are sort of in a wait-and-see mode because of the ongoing investigation, maybe wanting some sort of an external approval of your processes and so on? Are you seeing any impact from the client side? And is that potentially – because I haven't heard you mention the ability to add $1.5 billion of revenue next year, which you've mentioned the previous couple of calls. Could you comment on those?

I would say, Ashwin, that we haven't seen clients beyond what I would consider to be the normal course of business slowing down in any way. It's a little too early to look at our forecasting for 2017. As we've said, we want to get through our clients' budget cycles, which are just beginning as you know. That's been our traditional pattern. Once we get through that process, I think we'll be in a better position to give you a sense of where 2017 lands.

Thanks. Good morning. Just a couple of quick questions. I guess, it relates to the full-year guidance. You obviously lowered the high end of the guide, perhaps as a combination of being at the midpoint of the range this quarter, but more broadly, I just want to get a sense for the business environment both fundamentally and overall from a macro perspective relative to, let's say, three months ago. Maybe at a high level, sort of, maybe Karen can describe why the high end of the guide comes down. Obviously, we got the incremental FX in there, but any other factors? And as it relates to the FCPA investigation, are we confident at this point that it's been fully scoped at that kind of $5 million or so range? I was surprised at how quickly you've gained clarity on this.

So, Glenn, let me take a stab at that. I think in terms of the business environment, I wouldn't actually say there's really been any change in the last three months. So, obviously, earlier in the year, we had talked about sluggishness in Financial Services and Healthcare, and then over the summer, post the Brexit vote, while we haven't seen disruption I would say specific to Brexit, we certainly saw some concern among insurance clients and Financial Services, and we talked about that on our last call. I wouldn't say there's really been any change in that environment or deterioration in that environment. I think it continued as it was in Q3. Obviously, the pound has deteriorated, and so that resulted in an additional $18 million negative headwind as we approached Q4 based on that. If we had left the range where it was for Q4, it would have been a broad range and more significant growth than we'd ever added in Q4. We thought it was appropriate to taper the top end of the growth range down into something that we thought was more reasonable based on typical buying patterns in Q4 given the fact that there are lower billing days, client furloughs, and seasonality in our retail practice. I think what we're seeing in Q4 is a very typical seasonal pattern for the business, other than the impact of the foreign exchange. I'm sorry. Can you repeat your question about the FCPA investigation?

Are you confident that you fully scoped it at the $5 million, and how did you get clarity so quickly?

Yes. It is early days in the investigation. As we said both in the Q and in the script today, we are continuing to pursue the investigation. We've obviously been working very hard to get our arms around this as quickly as we could. As we said, we've identified to date $5 million of potential improper payments. We were able to get to a place where we thought it was appropriate to record the $3.1 million of the $5 million as an out-of-period adjustment in Q3, but we will continue the investigation until we are confident that we've tracked it all down.

Okay. I think we're just about out of time, folks. So, I want to thank everybody for joining us today and for your questions, and we look forward to speaking with you again next quarter. Thank you.