Cognizant Technology Solutions Corp (CTSH) — Q1 2018 Transcript

Thank you, operator. And good morning, everyone. By now, you should have received a copy of the earnings release for the company's first quarter 2018 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 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. Please go ahead, Francisco.

Good morning, everyone, and thanks for joining our call. This morning, I'd like to cover two topics: first, a few highlights from our Q1 performance; and second, an update on how we're competing effectively and scaling up our business in the current environment. Let's begin with the quarter. We've gotten the year off to a solid start. First quarter revenue was $3.91 billion, at the high end of our guided range and up 10% year-over-year. Our first quarter digital revenue grew about 27%, well above the company average and represented about 29% of total revenue, reflecting the profile of many of our clients who are pivoting quickly to digital. Our portfolio of digital services generated above the company average margins, and our non-GAAP EPS for the quarter was $1.06. Turning to guidance, we expect second quarter revenue to be within a range of $4 billion to $4.04 billion. We now expect full year revenue to be within a range of $16.05 billion and $16.3 billion, a growth of 8.4% to 10%. And we remain confident in our previously stated guidance of achieving a non-GAAP operating margin in 2018 of approximately 21%. Moving to my second topic, thriving in today's environment. Cognizant continues to be one of the world's fastest-growing professional services companies, even at our scale. We've sustained our growth by innovating in response to macroeconomic and technological changes and the resulting shift in our clients' needs. The current environment is defined in part by global economic momentum, accelerating technological progress, and increasing demand for colocating with clients. As a result of these trends, we see tightening labor markets and skill shortages in many parts of the world. To thrive in this environment, we continue to emphasize three broad approaches that I'd like to cover this morning. I'll refer to them as digitized, internationalized, and localized. Let's start with digitized. We have a distinctive approach to digital that really resonates with our clients. We help them become digital to their core, digitizing their products and services, personalizing the experience they offer customers, fully automating their business processes, modernizing their IT infrastructures, and doing all of this in tandem. We use this approach to transform clients' entire enterprises, their business, their operating and their technology models. This three-layer transformation enables us to build digital at scale and at speed throughout three practice areas: digital business, digital operations, and digital systems and technology. This ability to, in essence, run a digital plumb line through all layers of a client's enterprise gives us an edge in pursuing and capturing a significant portion of the huge market opportunity for enterprise transformation. It also serves to expand our presence well beyond the CIO to other decision-makers within our accounts like the CFO, COO, and the Chief Marketing Officer. Reflecting our commitment to partnering with the CMO, we're delighted that Cognizant Interactive, which is part of our digital business practice, was just recognized by Ad Age as one of the world’s largest digital agency networks. At the same time, we've built a strong and scalable foundation on which to keep advancing our digital capabilities and leadership. Our broad foundation has many elements. These include our trusted intimate relationships with strategic clients and our penetrating knowledge of clients' industries, business models, and technology environments. We know how to apply powerful new technologies like artificial intelligence, the Internet of Things, virtual and augmented reality, robotic process automation, blockchain, and cloud, among others. As clients more fully adopt these technologies, we'll be able to use our leadership position in these areas to capture a substantial portion of the growth opportunity for all of the services and solutions that will emerge. In the meantime, our understanding of how to apply these technologies serves to amplify our ability to anticipate client needs and rapidly develop solutions at scale and at the highest levels of reliability. Perhaps the most important element of our growth foundation is our high-end skills, our global and local delivery, and the end-to-end capabilities which include our global consulting teams that advise on strategy, operations, and technology, all of which enable us to build and deliver specialized software platforms and industry-specific solutions to quickly create new value for clients. And therefore, we're sustaining our investments to further scale our digital practices aggressively across industries and geographies, both organically and through acquisitions. Now with over 80% of our revenue coming from the work we do for clients in financial services, health care, retail, and manufacturing, we're at the center of the fintech, health tech, biotech, and smart product revolutions. Our clients depend on us to keep them at the leading edge of these shifts. We do so by developing solutions to advance their businesses. Here are two quick examples: We partnered with an engine manufacturer to identify potential engine failures on long-haul truck runs. We helped the client increase truck utilization and catch 20,000 faults per month, enabling preventive maintenance across a fleet of 150,000 vehicles. We also helped a leading health care company save as much as $60 million by identifying 85,000 at-risk patients. We developed an advanced machine learning algorithm to analyze and report on the warning signs of patients who exhibit behaviors that may indicate patterns of substance abuse. This enables professionals to intervene early to improve these patients' quality of life. We continue to invest to broaden and deepen our services and capabilities, and we've intensified our focus on developing more end-to-end industry-specific solutions. Based on our forward momentum and sustained investment, we expect our digital portfolio to continue to grow at double-digit rates. Our second approach to today's environment is to further internationalize. Non-U.S. markets are sizable and fast growing, and the application of digital technologies is absolutely a worldwide phenomenon. Last year, our businesses outside the U.S. crossed the $3 billion revenue mark for the first time. We've expanded our geographic footprint organically, adding new delivery and operation centers, as well as Collaboratories in our key global markets. We have digital-at-scale projects underway with the likes of the English Football Association, SoftBank Robotics, Centrica, Dexia, BHP, and a consortium of Indian life insurers, to name just a few projects. Many of our acquisitions over the past couple of years have been outside the U.S., among them Idea Couture, Mirabeau, Brilliant Services, Adaptra, Netcentric, and Zone. In essence, we've been methodically planting seeds across Europe, Asia Pacific, and Latin America, and many of these have already become growth engines for us. In short, we have the clients, the talent, the operating model, and the integrated delivery to excel outside the U.S., and we see the potential for several of our non-U.S. markets to each become billion-dollar businesses early in the next decade. Our third emphasis is on continuing to localize. As you can imagine, when you're partnering with clients to transform their business, operating and technology models, the need to engage with them locally is essential. In fact, the growing volume of digital-at-scale work we're doing typically involves agile development and a deeply consultative in-person approach with clients. So we continue to invest extensively in training and rescaling our teams and in substantially expanding our local workforces around the world. Our goal is to complement the massive delivery capability and operations we have in India with additional specialized points of delivery around the globe. That's why we've built a network of local and regional delivery centers in Europe, Asia, North America, and Latin America. With their proximity to clients, these delivery centers also enable high-quality digital, agile, and secure services that comply with local regulations and are delivered using the technologies and languages clients require. These centers also enable us to hire, develop, and retain talented local people who can serve multiple clients. By the way, as we've built skills and capabilities in the local communities where we operate, we're also partnering with educational institutions to establish and fund retraining programs in high-demand digital technologies. To wrap up, our business is strong, as is our ability to sense and respond quickly to market shifts. Our digitized, internationalized, localized approach is serving us well in today's business environment. We're one of a small handful of companies with the range of capabilities to help clients transform at every level of their enterprises. We've developed a strong and scalable foundation on which to extend our leadership as the builder of the digital economy, and we expect our forward momentum to deliver a strong 2018. And now over to Raj, who will discuss how we're working with clients to speed them along their digital transformation journeys as well as the specifics of our business segment performance.

Thanks, Frank, and good morning, everyone. To echo Frank, we feel very good about Cognizant's range of capabilities, business model, and sustained investment. In combination, they're enabling us to be the scale builder of the digital economy and the go-to transformation partner for our clients. I am going to cover our industry, segment, and geographic performance. But first, I want to add to Frank's discussion about how we create value for clients, and there's no better way than with a concrete client example. Consider the work we're doing with a top property and casualty insurer of high-net-worth individuals and families. Our client needed help rethinking and redesigning a key moment of truth in their claims process. This is a point where a policyholder calls to report an accident or damage to property. Of course, people are often stressed when they make such a call. So that experience can determine client satisfaction and retention. Cognizant developed an analytics platform informed by artificial intelligence to transform this first notice of loss. Our AI solution enables the insurer to audit and analyze conversations between policyholders and customer service representatives and guide the representative in real-time about how best to respond. We brought together machine learning, chatbots, voice-to-text transcription, and analytics to automate repeatable processes. The machine learning alone has dual knowledge gained from reviewing 25,000 policyholder calls. This has improved the quality of the information captured and reduced the likelihood of misunderstandings that can result in litigation or fraud. As a result, the insurers saw about a 30% reduction in call length and associated expenses and a 15% reduction in total labor and expect to see significant improvement in client satisfaction. We have many other client engagements underway in which we're doing AI-enabled work that delivers business outcomes of this importance. It's this combination of capabilities, including continued investment in our client-facing teams and further scaling of our practice areas, that equips us to be the go-to partner for our clients' digital-at-scale transformations. Let's look now at how our industry segments performed in Q1. Banking and Financial Services grew 6.2% year-over-year. In the quarter, we had double-digit growth in our insurance business that was driven primarily by large strategic deals. Insurers are increasingly interested in using advanced technology to transform the customer experience, as conveyed by my earlier example. Moving to Banking, we continue to see strong growth among our mid-tier banking clients as they work to transform their business models, which involves greater investment in advanced technologies. As large money-center banks reported a more positive industry business climate, they're putting more pressure on their run-the-bank spending while stepping up investment in change-the-bank technology. While we're seeing a pickup in this digitally intensive work, we anticipate continued optimization of the legacy portion of our banking business and a modest overall improvement. Turning to Healthcare, our revenue was up 11.8% year-over-year. We saw consistent demand across payer clients with increasing interest in our digital, analytics, cloud, and virtualization solutions. We continued to invest and position our health care practice to capture demand as clients shift their underlying business models from fee-for-service to value-based care. To complement our strong position in the payer market, we've expanded our scope to include the provider network of doctors, hospitals, and other clinicians. We recently closed our acquisition of privately held Boulder Healthcare Solutions, a leading provider of end-to-end revenue cycle management solutions to hospitals and physicians. Boulder expands our health care consulting, IT, and business process services portfolio and extends our leadership in digital health care technology and operations. By bringing together Boulder Healthcare with TriZetto, TMG Health, and Top Tier Consulting, we now have offerings that span the payer and provider business value chain. Turning to Products and Resources, we increased revenue 11.4% year-over-year. Strong growth from our manufacturing and logistics clients continues, which offsets sluggish growth in retail. Our strength in the manufacturing, logistics, energy, and utility areas is the result of our emphasis on leading with digital offerings. The infusion of digital has already made many products smarter and the consumer experience richer. And now, AI-based autonomy enabled by sensors, data analytics, and machine learning is making machines far more versatile and self-driven than ever before. This has caught the attention of CXOs who are increasingly engaging us to implement advanced digital processes to transform their business models. Communications, Media, and Technology had another strong quarter of broad-based growth, up 18.4% year-over-year, with an expansion in areas like creating and curating digital content for digital platform providers. The digital economy is all about creating meaningful experiences with personalized content. As we have seen with many of our Silicon Valley clients, this requires the ability to help manage and run digital business to deliver personalized content. These clients seek our help with the sheer volume of content monitoring and moderation, particularly as they intensify their efforts to verify the authenticity of user-generated content and scale globally. Looking at our geographies, our markets outside the U.S. continue to exhibit strong growth. Europe grew 22.4% year-over-year in Q1, including an 11.7% positive impact from currency. The rest of the world was up 11.9% from a year ago, including a 310 basis point positive impact from currency. We now have offices in over three dozen countries, and much of our growth has been enabled by successful localization across many of these countries. The value we create for clients is predominantly knowledge-based work, so we depend heavily on the insight, passion, and collaboration of our global associates. We continuously invest in the skills and development of all of our associates to keep Cognizant strong and relevant to clients. At the same time, we're aware that our annualized attrition rate of 20.3% this quarter is several points higher than our historic norm for Q1. We believe the higher attrition is largely the result of increasing global demand for the very skills we specialize in, including shortage of technology talent, particularly in local markets, and the transition our organization has gone through to build a scalable foundation for expanding our digital leadership. We continue to focus on our workforce strategy and management. To sum up, over the past year, we focused considerable energy and investment in strengthening our foundation for profitable growth and extending our capabilities to help clients succeed in their transformation journeys. Karen, over to you.

Thank you, Raj, and good morning, everyone. The business got off to a solid start in Q1, which positions us well to achieve our updated full-year revenue and margin guidance. First quarter revenue of $3.91 billion was at the high end of our guidance range and represented a year-over-year increase of 10.3%, including a positive 210 basis point impact from currency. Non-GAAP operating margin, which excludes stock-based compensation expense, acquisition-related expenses, and realignment charges, was 20.3%, and non-GAAP EPS was $1.06. Our Q1 non-GAAP tax rate of 24.6% was higher than expected primarily due to the updated interpretation of the global intangible low tax income or GILTI provision of the new U.S. tax law. As I will discuss further in the guidance section of my remarks, this updated interpretation of the GILTI provision is estimated to have a full-year EPS impact of $0.09 per share. In the first quarter, we demonstrated our commitment to return capital to shareholders through launching a $300 million accelerated share repurchase or ASR program in March, with completion expected during the second quarter. This ASR marked the second piece of our expected $1.2 billion share repurchase by the end of 2018. And today, we declared a quarterly cash dividend of $0.20 per share for shareholders of record at the close of business on May 22. Additionally, during the quarter, we repatriated $2 billion of earnings that were available for distribution to the United States as a result of U.S. tax reform. We have already deployed approximately 25% of that cash through the acquisition of Boulder. We are continuing to evaluate the implications of U.S. tax legislation on our overall capital return program. Now let me discuss additional details of our financial performance. Consulting and technology services and outsourcing services represented 58% and 42% of revenue, respectively, for the quarter. Consulting and technology services grew 10.7% year-over-year, and outsourcing services revenue grew 9.7% from Q1 a year ago. During the first quarter, 39% of our revenue came from fixed-price contracts, and we continue to make progress over the long term, changing the mix of our business to more fixed-price or managed services arrangements. Also, as we've spoken about for some time, we are seeing an increasing trend towards output or transaction-based pricing. And so, beginning with Q1, we are breaking out transaction-based contracts separately, which were approximately 9% of revenue in the quarter. We added 7 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 364. And now moving to a discussion on margin. We remain committed to and are on track to achieve our target of 22% non-GAAP operating margin in 2019. In the first quarter, we continued our focus on driving higher-value services, in addition to continual improvement in our business, focusing on levers such as sustained higher levels of utilization, optimal pyramid structure, simplification of our business unit overhead structure, and leveraging our corporate function spend more effectively. Our offshore utilization for the quarter was 79%. Offshore utilization, excluding recent college graduates who are in our training program, was 83%. And on-site utilization was 92% during the quarter. Turning to our balance sheet, which remains very healthy. We finished the quarter with $5 billion of cash, short-term investments, and restricted cash. Net of debt, this was up by $33 million from the quarter ending December 31 and up $1.15 billion from the year-ago period. This balance at the end of the quarter includes restricted cash and short-term investments of $507 million. These restricted amounts are related to the ongoing dispute with the India income tax department. Receivables were $3 billion at the end of the quarter. We finished the quarter with a DSO of 75 days, up 4 days versus last quarter. The adoption of the new revenue recognition standard increased our DSO for the quarter by two days. Our outstanding debt balance was $773 million at the end of the quarter. Our diluted share count was 589 million shares for the current quarter. Now I would like to comment on our outlook for Q2 and the full year 2018. For the full year 2018, we expect revenue to be in the range of $16.05 billion to $16.3 billion, which represents growth of 8.4% to 10%. Our guidance is based on the current exchange rates at the time at which we are providing the guidance and does not forecast for potential currency fluctuations over the course of the year. For the second quarter of 2018, we expect to deliver revenue in the range of $4 billion to $4.04 billion. And for the second quarter, we expect to deliver non-GAAP EPS of at least $1.09. This guidance anticipates a share count of approximately 586 million shares and a tax rate of approximately 27%. For the full year 2018, we expect non-GAAP operating margins to be approximately 21% and to deliver non-GAAP EPS of at least $4.47. This guidance anticipates a full-year share count of approximately 585 million shares and a tax rate of approximately 26%. As I mentioned earlier, our tax rate expectation has increased from our previous guidance due to an updated interpretation of the GILTI provision. The impact of this higher estimated tax rate on EPS is partially offset by our better-than-expected performance in Q1, as well as the expected benefit from the Boulder acquisition, which closed last month. As we receive additional clarification and the interpretation continues to evolve, our estimate of the impact of the GILTI provision could change. Our non-GAAP EPS guidance excludes stock-based compensation; acquisition-related expenses and amortization; realignment charges; net non-operating foreign currency exchange gains and losses; any future adjustments to the one-time 2017 incremental income tax expense related to the tax reform act; and our contribution to the new Cognizant U.S. Foundation, which we expect to fund in the second quarter of this year. Our guidance also does not account for the impact from shifts in the regulatory environment in areas such as immigration or tax. In summary, our solid execution in Q1, along with continued investment in the business, has positioned us well to deliver another strong year of revenue and earnings growth in 2018. Operator, we can open the call for questions.

Thanks, good morning. I wanted to ask if there's any change to your organic revenue growth outlook versus 90 days ago. The Boulder Health, I thought that would have a little bit more impact starting in the second quarter. So can you also maybe update us on the acquisition contribution to revenue this year? Thanks.

Sure. Tien-tsin, this is Karen. Let me take that. So as you would have seen, we took up the bottom end of the revenue guidance to about 8.4%, which did account for the Boulder acquisition. However, FX also moved against us, so that offset about half of the benefit that we'll get from Boulder this year. So if you recall, at the beginning of the year, we had said there was about a 100 basis points of FX year-over-year impact. That number has now dropped to about a 70 basis point impact on a year-over-year basis because of the recent movement in the European currencies.

Got it. So on the organic revenue side, any change there, since I'm at it, on the 606 front? What can you - go ahead, sorry.

Yes. So on an organic basis, no changes in our guidance other than for Boulder and the FX movement as we talked about. The 606, as you saw, was a little over $20 million for the quarter. Obviously, that's more of a timing issue than anything because, ultimately, that reverses as those contracts mature. So on a full-year basis, we still don't expect to have a material impact from 606.

There is a material, okay. Thank you, Karen.

Hi, guys. I'll ask my questions upfront. Just looking at Financial Services, on the larger bank spend. It doesn't look like we've seen any real pickup in increase in spend there. And then secondly, Karen, how long can you guys continue to grow the revenue growth high single digits to low double digits without growing the headcount much? Thanks.

Yes, Bryan, this is Raj. I'll address the first part, and then Karen can respond to the second part. Our banking portfolio is undergoing a transition. We're seeing healthy growth in the mid-tier banks, but the large money-center banks present challenges. Part of our portfolio still includes legacy work, which we are optimizing. We are assessing what is strategic to ensure we maintain high margins on that work. Meanwhile, we are experiencing strong growth in the digital portfolio at these banks, with success in mobility solutions, legacy application modernization, and even initial work in blockchain. The digital business is growing at a healthy rate, in alignment with Cognizant's overall digital growth. As digital spending increases, I believe we will return to the strong growth we have previously experienced in banking.

And Bryan, so to answer your question about headcount. So I do think that as we look to the next few months, we'll start to see headcount increase on an overall basis. There's a number of things. Obviously, did a great job of bringing up utilization last year, and it held fairly flat on a sequential basis from Q4 to Q1 both on-site and offshore. But I wouldn't want to take it up much beyond where we are right now given the current environment and the demand environment and this need for new skills and so forth that we're seeing in the marketplace. But having said that, while you've got headcount growth and strong demand obviously in digital, then there are parts of the business where automation and so forth are also helping us to drive utilization and manage headcount more effectively. So I do think you'll see headcount grow in the coming months. But as we've talked about in the past, I would no longer expect headcount and revenue to grow in line with each other as the business continues to evolve.

Okay. Thanks for the color.

Good morning. Thanks for taking my question. Maybe just one more on the financials, Karen. Can you maybe talk about the extent to which you expect attrition to tick down either short term and what your plans are to kind of reduce the attrition rate longer term? And maybe talk about how much of the attrition was voluntary versus involuntary in the quarter.

Yes. Jim, this is actually Raj. We don't separate the voluntary and involuntary attrition. The important point to note is that the number we provided includes everything, including attrition from our BPO business, our training pool, and all voluntary and involuntary exits, in addition to trainees. One thing to consider is that we are dedicated to reducing attrition rates. Over the past seven years, we have invested significantly in digital initiatives, particularly in areas like social, mobility, analytics, and cloud. We have also trained many of our associates in various digital skills, so it's not surprising that in this environment, our competitors are leveraging these skills to attract our associates. However, we continue to monitor attrition levels closely. We have seen similar patterns in the past, particularly during the dot-com era, with fluctuations in attrition. We are focused on attracting talent, staying engaged with our employees, and we believe we have a strong platform for growth for our associates, which we expect will help decrease attrition levels in the coming quarters.

Yes. It’s important to remember that attrition has some seasonal patterns. We typically observe an increase in attrition following bonus payments, promotions, and raises. Last year, we delayed our promotions and raises until the fourth quarter, which has altered the seasonal pattern somewhat. This year, we plan to return to our normal schedule for raises and promotions in early Q3, but there is still some seasonality to these figures.

Okay. That's helpful. And then maybe just as a follow-up, can you maybe provide us with a little bit of an update on your M&A outlook and particularly your willingness to commit to some larger deals rather than some of the tuck-in acquisitions you've been doing thus far?

Jim, it's Frank. I would say we remain largely consistent with our previous statements, focusing primarily on small tuck-in acquisitions. As we grow, our definition of what constitutes small and tuck-in deals evolves. The Boulder acquisition was somewhat larger compared to our past deals. However, we are open to pursuing larger, more transformative opportunities if they align with our goals. The TriZetto acquisition from a few years ago is now well-integrated, and we have the necessary capabilities and management resources to handle a bigger integration at this stage. We will proceed cautiously and will only pursue larger deals if they are strategically sound, economically viable, and capable of generating value for our shareholders. Our ongoing focus will include areas such as digital, where we've made significant progress. If we identify opportunities that can enhance our digital transition, we will consider them. We are also interested in international growth, as we believe there are substantial opportunities outside the U.S. Additionally, we will continue to explore options in software, intellectual properties, and platforms.

Thank you.

Thanks, guys. Good morning. I just wanted to ask a follow-up to start on the attrition point. I wanted to see if you could give us a little bit of color on which parts of the pyramid perhaps drove the increase. I know, in the past, when there's been a spike, it's tended to be kind of at the lower levels. And around the middle of last year, we had that dynamic, and are you contemplating higher wage increases this year vis-à-vis last year to try and combat some of the war for talent?

Sure. Jason, it's Karen. So in terms of where the attrition is happening, it does tend to be in the lower ends of the pyramid, which is historically where we've seen attrition. Over the years, the middle and top end of our pyramid tend to have very low attrition, and tend to be skewed towards offshore, obviously, which is where the vast majority of our junior part of our pyramid is based. So that's fairly consistent with what we've seen during other periods of high attrition. In terms of wages, we will base ourselves on what the market does, both in India and elsewhere around the world. And so as that becomes more apparent as to what competitors are doing, we will certainly make sure that we are competitive in the marketplace in that regard.

Thank you.

Thank you for the clarification. When you mentioned Financial Services, did you indicate that you were expecting a modest improvement this year? Additionally, can you quantify the portion of the legacy business in Financial Services to help us understand the overall growth of that vertical this year? Thank you.

Yes, Moshe. We are beginning to see an increase in spending on the digital side of the business, which is growing at a healthy pace, consistent with the company’s overall performance. As we continue to work with the large money-center banks, they are becoming healthier due to some recent tax reforms, which is leading to increased spending. I anticipate that as these engagements with the money-center banks grow larger and more common, the demand will eventually exceed the optimization efforts underway in the legacy portfolio. Overall, the business is growing, and I expect to see some sort of increase later in the year.

Yes. And I think, Moshe, if I could just add to that. In fact, while banking is growing slower than the overall Financial Services practice, Q1 was, in fact, the strongest year-over-year growth in the last several quarters. So I think while still not where we'd like it to be, it's certainly starting to trend in the right direction. And then in regards to your question of legacy versus digital type spend, the banking practice is right in line with company average. So the company average is about 29% of our revenue right now is digital, and that's right in line with our Financial Services practices as well.

Hi, thanks. I wanted to start off with a clarification. Karen, when you said full year ASC 606 is immaterial for revenues, would that apply to operating income and EPS as well? And then the question on reskilling is, can you comment broadly? As you roll out technology training and such, what percent of new skills come from new hires versus reskilled people? And does that have an impact on attrition?

In terms of the revenue recognition changes, this is primarily a timing issue. Depending on when contracts are signed and their structure, revenue can either be recognized earlier or later. On the margin side, with the new rules, we are required to capitalize more transition or implementation costs than we did previously. We saw some of that effect in the first quarter, but we do not expect it to significantly impact the quarter or the year. However, the impact will ultimately depend on the new contracts we secure. Frank, I’ll hand it over to you for reskilling.

Yes, Ashwin, I'm not entirely sure how to respond to your question about reskilling. As you know, we reskilled tens of thousands of employees last year and we continue to do so actively. This isn't a new issue; as Raj mentioned, we've been involved in skilling, training, and executing digital projects for around seven or eight years, dating back to when we first discussed SMAC and similar topics. We believe we have a highly digitally skilled workforce. As Raj noted, one reason for our increased attrition is that competitors see us as an attractive source for talent. This aligns with trends we've observed during past technology transitions. We have a structured process and we focus diligently on reskilling and retraining our employees, ensuring they are deployed into new skills as quickly as possible. This approach not only maximizes our investment but also serves as a crucial retention strategy. Our primary method for addressing skill gaps is through reskilling and redeploying, and we turn to recruiting only when internal efforts are insufficient to meet the needs in terms of skills, geography, or location. When I mention recruiting, I'm referring specifically to experienced recruiting, although we always recruit at the entry level to support our business growth.

Hi, good morning. And thank you for taking the question. I was wondering if I could first start with a follow-up to Jim's question. Just maybe outlook for M&A through the remainder of the year. And maybe to follow up, how much cash in the U.S. on the balance sheet, might we see a bit of an acceleration there, maybe what the composition of your pipeline looks like relative to prior periods. Is that getting more robust? Just a little bit of color on what expectations through the rest of the year might be.

I would say that the pipeline for smaller acquisitions remains strong, similar to the previous 12 months, potentially with a slight increase but not significantly so. Regarding larger deals, we are still assessing various opportunities, but those tend to be quite unique, so I don't anticipate a significantly larger pipeline than we have had in the past. We continually consider larger transactions, but as mentioned previously, we will proceed with caution and ensure any deal is a good fit. If we identify a suitable opportunity this year, we will certainly evaluate and act on it, but it's not guaranteed that we will proceed with anything this year. We will keep looking and assessing. Now, I'll hand it over to Karen for information on U.S. cash.

Yes. As mentioned on the call, we repatriated about $2 billion to the U.S. following the tax reform, which was certainly advantageous. We have allocated around $500 million, slightly less than that, for Boulder. Our goal is to maintain flexibility globally, including in Europe and other regions, to capitalize on opportunities as they arise. As Frank mentioned, the timing for these transactions isn't always predictable. Therefore, we will keep assessing our cash requirements worldwide and review our capital return program over the coming months.

Okay, great. I want to ask about how the underlying margin picture might be changing over time. In the industry at large, on the negative side, we've seen margin disappointment at Accenture and IBM, and Infosys just guided to some meaningful margin contraction. Our pricing data do show some challenges in certain key markets. But on the positive side, your commentary about digital margins has suggested pretty good prospects. So I guess, in this context, I want to ask, is your path to achieving your long-term margin targets looking more difficult or easier given these big factors in the industry? And I'm not asking about guidance. I know your guidance for margin is unchanged. I'm asking about the challenges involved in getting to those margin targets and whether the challenges are becoming bigger or smaller as you get closer to 2019?

Yes, Rod, it's Karen. Let me address that. As you mentioned, there are several factors involved. When we consider our margin targets, particularly the 22% we aimed for in 2019, it stemmed from various elements. We anticipated that the improvements from 2017 and early 2018 would largely come from better utilization and optimizing our SG&A and overhead costs. We have been on track to realize the benefits from those actions taken in 2017, and now we're seeing the full-year impact in 2018. Looking ahead to 2019, the focus shifts more towards the transition in our business model, particularly the move to digital, which currently offers higher margins compared to our core business. As this transition progresses, it will start to resemble a nonlinear business model that can generate higher margins. We believe we are at a pivotal point where this change in business mix will help us sustain and improve margins next year. While there are various factors that may offset each other, we are confident about the business's trajectory. We've made significant progress in optimizing costs and see further opportunities in areas like workforce structure and automation. However, we will need to observe market trends as we enter 2019 and beyond.

Good morning. Thank you. I wanted to ask on health care. Can you comment on the overall large-deal health care pipeline? And then how may Boulder affect an integrated large-deal offering across health care organizations? Thanks.

Yes, Bryan, it's Raj. Overall, health care continues to perform well for us. We are one of the few companies able to leverage our investments in health care, expanding not only on the payer side but also on the provider side. Regarding the large pipeline, we have been involved in BPaaS deals like those around TriZetto, and there are still significant deals similar to the Emblem ones we've completed in the past, although these take time to materialize, making it hard to predict when they will come in. Additionally, we have seen considerable progress with our TMG BPaaS solutions, which address Medicare and Medicaid. We're experiencing good traction along with new products emerging from the TriZetto space, such as the QNXT platform catering to smaller players and our CareAdvance solution. Furthermore, there are several potential mergers and acquisitions on the horizon. We are enthusiastic about these opportunities as they involve not only the companies being acquired but also those looking to acquire. As these transactions progress, we anticipate good prospects for future M&A activity as well.

Yes. And I think if I could just add to that, Bryan. I think what's nice with the suite of offerings we have now in health care, with the Boulder acquisition in particular, is that really does open up that full end-to-end market of not just the payers, which has been our historical strength, but also the provider market. And with the platforms now that we have between Boulder and TriZetto and so forth, we can really offer that full-service suite of offerings for clients. And it also opens up a whole new market of clients not just in the provider. But even in the payer space, what we're seeing is now, with the platform business, bigger opportunities with what I'd call small and mid-sized payers who historically wouldn't have had enough spend, frankly, to be significant clients for us. But with the platform business, we can really open up those opportunities now, and we continue to be, I think, very bullish on the long-term benefits and opportunities for health care.

Thanks, good morning. I have a couple of questions to start. Given the size of the Boulder acquisition, Karen, could you help us understand the annual revenue contribution, its impact on margins, and provide some insight into growth expectations? Additionally, Raj, I thought I heard you mention that retail was somewhat sluggish, which seems counterintuitive since the retail environment appears quite solid. Could you clarify that?

So on Boulder, Glenn, we didn't break it out, but it's roughly - this year, it'd be roughly $100 million of contribution, fairly neutral on the margin line, a little bit dilutive but not enough to be material. So - and then, obviously, we'll expect the synergies to start to kick in probably not this year but certainly maybe split into this year or as we get into next year. And then, Raj, you want to comment on...

Yes. So Glenn, look, we're starting to see a little bit of pickup in retail, but I think when I compare it to previous years, it's still a little sluggish. I mean, we're starting to see the retailers are starting to invest a lot in emerging technologies, such as robotic, RPA, and intelligent automation and even AI algorithms. So we're starting to see that, but again, when I compare it to previous years, it's still a little sluggish for us.

Hi. Just a quick clarification. From my understanding, your guidance doesn't include M&A, right?

So Arvind, our guidance does not include prospective M&A. It includes the benefits of Boulder and the deals that we've already completed, but it does not include prospective M&A.

Great. And just a broader question on digital. The definition has certainly evolved from SMAC to digital. Can you comment on what the high-growth areas of digital are, and how are you able to stay in front of these newer technologies? And also, if you can expand on how you're changing your sales and delivery team with the definition of digital keeps evolving?

Arvind, it's Frank. There are several key high-growth areas within digital that I'd like to highlight. Firstly, digital engineering, which represents a new approach to app development, is experiencing significant growth. Additionally, in our digital systems and technology segment, areas such as cybersecurity, cloud migration, and replatforming to the cloud are also contributing to high growth. In the digital operations sector, the areas with the highest growth include robotic process automation and intelligent process automation, which utilize automation and artificial intelligence to improve essential business processes. Almost all of our digital business practice is achieving high growth, including aspects like data and insights and Cognizant Interactive, which I mentioned earlier, as well as smart products within our digital portfolio. This paints a clear picture of our digital landscape. As we’ve noted before, the definition of digital varies across the industry, and we maintain a careful yet possibly conservative definition. We aim to provide clarity on what we consider to be the core high-value digital work that signifies the progress we’re making in this transition. Regarding your question on skilling and retraining, we have had extensive discussions on this topic and have implemented numerous initiatives. We place equal emphasis on rotating our associates across various business areas, as we believe exposure to diverse technologies and skills is crucial. It’s important to highlight that our company has a robust framework for retraining and reskilling, which has been integral to our operations from the beginning. Reskilling and retraining are areas where we excel.

Thanks for squeezing me in here at the end. I appreciate it. A quick question, in your prepared remarks, you talked about driving further international business. Can you talk about demand outside the U.S., especially on the digital side and the margin for that work? And then, as my kind of second part, can you explain a little bit more clearly exactly what the change was in the view on taxes for the year? Thanks.

Sure, Frank. Let me discuss our growth outside the U.S. As mentioned in my prepared comments, last year, our non-U.S. market exceeded $3 billion. We believe there are significant opportunities for further growth in that area. The economies where we operate are generally performing well, and we observe similar fundamental growth drivers globally as we do in the U.S., particularly in terms of digital adoption. In some regions, we even see stronger growth as economies leapfrog older technologies and move directly to digital solutions. Demand is strong worldwide, and typically, our digital projects yield margins that are higher than our overall company average. Now, I'll hand it over to Karen to address the tax question.

Yes, regarding the tax issue, the new U.S. tax laws were implemented quickly in the fourth quarter. As we moved into 2018, many have continued to examine the tax law and refine its interpretation. There have been some clarifications and updates, particularly concerning the global intangible low tax income, or GILTI. This limits the foreign tax credits we can claim. At first, this wasn't clear back in the fourth quarter or in February when we provided our initial guidance. However, upon closer examination of the current law, we believe it will affect our tax rate this year, approximately $0.09 of EPS. There may be further clarifications or even a complete revision later this year, but for now, we felt it was wise to base our guidance, tax rate, and EPS on the current legal wording, which led to the change in impact. If anyone has more questions, please feel free to reach out. We will also provide more clarification in our 10-Q filing later today or tomorrow.

Great. And with that, I think we'll wrap up. I want to thank everybody for joining us again today and for your questions. We look forward to speaking with you again next quarter. Thanks, everybody.