Cognizant Technology Solutions Corp (CTSH) — Q4 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 fourth quarter and full year 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; 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 thank you for joining us. This morning, Cognizant announced solid Q4 and full year 2018 results. We also announced, as you've seen, our plan to effect a smooth transition in our leadership team to take the company forward in the coming years. Having co-founded Cognizant, which celebrated its 25th anniversary less than two weeks ago, I've spent half my life here and I've had the privilege of serving as CEO for the past 12 years. Last year, in connection with the board's regular leadership assessment and succession planning processes, I informed my fellow board members that I was considering stepping down from my role as CEO sometime in 2019. As a board, we embarked upon a methodical search for my successor to ensure a fully thought through and orderly transition when the time came. Our announcement this morning is the result of that process. I'm pleased that Brian Humphries, who is the CEO of Vodafone business and a member of Vodafone Group's Executive Committee, will be the new CEO of Cognizant effective April 1 of this year. Brian is a terrific executive, and I look forward to working with him closely to ensure the smoothest possible transition. I would like to take a moment to thank the entire global Cognizant team for the tremendous accomplishments of the past 25 years and in particular, during my tenure as CEO. My thank yous need to begin with my long-time colleague and the President of Cognizant, Raj Mehta. Raj has been our President for the past two-and-a-half years and has provided Cognizant with his leadership, operational skills, and passion for clients for more than two decades in a variety of operating roles. We are grateful to Raj for his countless contributions to the growth and success of Cognizant over the years. He's ready for a new challenge and has decided to step down from his role as President and to leave the company shortly after Brian arrives. On behalf of the Board, I wish Raj well in his future endeavors. I'm proud of what our global team has worked with such skill and energy to build during my CEO tenure. Over the past dozen years, we've grown annual revenues from $1.4 billion to $16 billion, moving Cognizant into the Fortune 200. We’ve scaled our talent base over that period from 39,000 to 282,000 associates. And since our IPO, we've increased the company's market value more than 400-fold, from less than $100 million to approximately $40 billion. I'm especially proud of how we've served as a trusted partner and guide to our clients as they transition from one technology era to the next and as they transform their businesses to improve operational performance and generate new growth. And now with the mainstream adoption of digital at scale, we have invested significantly in the capabilities needed to set Cognizant up for its next stage of sustainable strong growth and value creation. In fact, over the past several years, we've evolved nearly every aspect of our company: our domain knowledge, our services portfolio, our methodologies, our geographic footprint, global and local delivery, our leadership team, and even our culture, to ensure that we can provide compelling value to clients and capture this market opportunity, which is larger than any we've seen before. We're gratified that others have recognized the strength of this foundation, as Fortune Magazine recently named us one of the world's most admired companies for the 11th year in a row. It's been an honor and a privilege to lead the best team in the industry as we've accomplished milestones that few others in the services business have been able to match. So on April 1, the time will be right for me to pass the baton to Brian, who has the experience, the drive, and the commitment to execute on our growth agenda. The board embarked on the search process with the view to our long-term future, knowing that the full transformative effect of the digital build-out on our clients, our company, and the economy is still to come. We sought someone with the track record of success across multiple companies, industries, technologies, geographies, roles, and organizational cultures. Brian fits that bill. At Vodafone Business, for example, which had annual revenues of approximately $14 billion in fiscal 2018, Brian is responsible for the entire global portfolio, which consists of all B2B fixed and mobile customers, as well as IoT, cloud hosting, and security services. Brian has successfully run large-scale global technology businesses and he has a focused and disciplined approach to execution and driving profitable growth. Brian's first day as Cognizant's CEO will be April 1. Until then, I'll continue in my role as Vice Chairman and CEO. And once he is on board, I'll transition to the full-time role of Executive Vice Chairman to actively support Brian and to help him get off to a running start. When that transition concludes, I'll remain on the Board as Vice Chairman. I'm fully committed to ensuring Brian's success and Cognizant's continued growth in my current and future roles. Turning to an update on our business. I'd like to run through a few Q4 and full year highlights followed by guidance for 2019. Starting with Q4, revenue was $4.13 billion within our guided range and up 8.8% year-over-year in constant currency. In the quarter, our digital revenue grew in the mid-20% range, well above company average and is now over 30% of total revenue, reflecting our continuing shift to digital revenues. Our portfolio of digital services generated margins above the company average and our non-GAAP EPS for the quarter was $1.13. For the year as a whole, revenue grew 8.5% in constant currency to $16.13 billion. During the year, we diversified our revenue base and our client roster and invested significantly for growth. We instilled greater operating discipline across the company, further simplified the business, and acquired five companies. For the year, we returned $1.6 billion to shareholders through our capital return program. Let's turn to guidance. For the full year, we expect revenue growth to be within a range of 7% to 9% in constant currency, which falls within the medium-term target we defined at the Investor Day. And for the first quarter of 2019, we expect revenue growth to be within a 7.5% to 8.5% range in constant currency. Turning to margins, as you'll recall from Investor Day, from here forward we will include stock-based compensation expense and acquisition-related charges in our non-GAAP measure of operating margin. For 2019, our adjusted operating margin target will be approximately 19%. I'd like to offer a few thoughts now on the demand environment. As we referenced on prior calls, we are moving quickly to an era in which technology's role has shifted from supporting the business to actually being the business. Clients are clear about this dynamic and continue to see the business case for digital transformation as absolutely compelling even against the backdrop of some global economic volatility. Our strategy for continuing to deliver disciplined and profitable growth as outlined at the November Investor Day responds directly to our clients' mandate for transformation. To help clients speed their journey to digital at scale, we're investing to build distinctive leadership in the six advanced capabilities: interactive, artificial intelligence and analytics, intelligent process automation, platform solutions, core modernization, and digital engineering. These six capabilities are aligned to our three practice areas and play to our expertise and strong market positions. All six areas offer ample headroom for growth. When we combine our focused investment through these capabilities with targeted acquisitions, as well as continued geographic expansion and industry diversification, we have our engine for delivering continued growth. The board and I kept this strategy front of mind during the CEO selection process we undertook. So we expect the strategy presented at the Investor Day to continue to direct Cognizant's approach to the market opportunity shaped, of course, by Brian's perspective as he transitions into the CEO role. I want to close by saying how fortunate I am to lead a company of Cognizant's scale and stature and how proud I am of the work our associates do every day across the globe. I look forward to continuing on the Board and to ensuring a smooth transition. I'm confident that Cognizant's best days are ahead. With that, I'll turn the call over to Karen, who will give you an update on both our operational and financial performance. Karen?

Thank you, Frank, and good morning everyone. Q4 performance was solid, rounding out full year results which were within our expectations and reflect continued execution of our strategy to drive sustainable revenue and earnings growth. Fourth quarter revenue of $4.13 billion was at the high end of our guided range and increased 7.9% year-over-year or 8.8% in constant currency. The adoption of the new revenue recognition standard had an $11 million positive impact to revenue in the quarter. Banking and Financial Services continued to see slower growth at 2.8% year-over-year in constant currency, driven by softness at a few of our largest banking clients. As we discussed back at our Investor Day in November, the pressure in our Banking business has primarily been driven by some of our largest banking clients. Two of our top five clients continued to show good growth going into 2019, while spend at the other three clients remained under pressure. Despite the continued pressure in these three accounts, the rest of our Banking portfolio continues to grow nicely. Based on deals that we've already closed and our late-stage pipeline of deals, we expect recovery in Banking over the course of 2019. As I will discuss in a few moments, we have made significant progress in developing platforms and solutions for the European Banking markets and expect to see accelerated growth in those markets in 2019. Moving on to Healthcare, which grew 7% year-over-year in constant currency. Growth with our Healthcare payer and provider clients, excluding the contribution from Bolder Healthcare, was impacted by the continued ramp-down of an account in which we were a subcontractor to a third-party and a temporary slowdown with several large clients involved in mergers where the potential spending associated with integration work is not yet underway. We expect this to continue into Q1. As Healthcare delivery is shifting from a fee-for-service to a value-based care model, we are seeing increased collaboration and partnerships across payers and providers that's focused on effective consumer engagement with data-driven insights. While we have seen periods of slower growth in Healthcare, we believe that our investments in the industry have positioned us well to take advantage of this shift over the long-term. Products and Resources had another strong quarter showing 15.4% growth year-over-year in constant currency. We were pleased with the good growth in both retail and manufacturing and logistics in Q4, which is typically a seasonally weak quarter for those industries. Let me give you an example of work we are doing to help clients along their transformation journey in this segment. A leading U.S. fast-food chain, which pioneered the concept of the classic 1940s drive-through with on-the-go convenience, is facing the challenge of digital technologies redefining the very concept of convenience. They needed to elevate the guest experience and increase operational efficiencies to stay competitive. Cognizant helped to develop an overall digital strategy, and the restaurant changed its mobile app, including location finding, menu viewing, ordering, and online payment, combined with kitchen, customer service, and supply chain management tools. When the app was initially launched, purchasers saw an average of 12% increase in order value. It has now been deployed across all 2,000-plus franchise locations. Our Communications Media and Technology segment had another strong quarter with year-over-year growth of 20.1% in constant currency, driven by our technology clients. A recent client engagement in our Communications Media and Technology segment illustrates our AI and analytics story. A major software company needed to achieve a higher percentage of subscription renewals for its software and services, reduce costly customer churn, and drive additional sales. The client, however, lacked a central repository of information about past customer transactions, key decision-makers on accounts, or product-related issues. Our team partnered with the client, applying big data and machine learning to develop an automated cloud-based central data repository and predictive analytics that enabled the client to connect the dots of customer behavior across its entire product portfolio. Using machine learning and predictive analytics, the client is now able to predict customer churn with 80% accuracy, take proactive steps to retain high-risk, high-value customers, and spot patterns to identify customers most receptive to cross-sell and upsell. Cognizant was born in the data and analytics space, and we've been consolidating our position here over the last 25 years, so we've been at this for some time. Today, we are a top three leader in this market. Now moving on to Geo's. The rest of the world grew 4.7% year-over-year in constant currency. Results in Asia-Pacific continued to be negatively impacted by the weakness in some of our larger banking clients. Europe grew 20.3% year-over-year in constant currency. Our investments, both organic and inorganic, have given us a solid footprint in Continental Europe from which we expect continued strong growth. We've grown our geographic footprint organically by expanding our client roster, adding new delivery and operational centers, and developing local talent in the markets we serve. Our organic growth has been accelerated with the ramp-up of several strategic client engagements in Benelux in banking and manufacturing, Nordics in energy and banking, France in banking and life sciences, Switzerland in life sciences, and Germany with life sciences and communication media and technology. Acquisitions such as Netcentric, Hedera, Zone, and Mirabeau have enhanced our digital leadership in the region and complemented our ability to service our clients across the entire range of their digital transformation. We have made significant progress developing platforms and solutions specifically for banking clients in Europe. These include solutions for core banking, credit operations, cloud transformation, and digital transformation. These solutions, which require deep industry expertise and local presence, are expected to bring sizable revenue opportunities in the coming years. As an example of core banking transformation, we've recently announced a partnership with three Finnish financial institutions: Savings Bank Group, Oma Savings Bank Plc, and POP Bank Group to transform and operate a shared core banking platform based on Temenos T24 and Temenos Payment Hub that will enable their digital transformation plans. More than 10% of Finnish banking deposits and loans will be managed by the new platform. This partnership will not only help support our acceleration of revenue growth beginning in the second quarter, but over the longer term will provide expanded opportunities in other markets across Europe. An example of cloud transformation is our partnership with ABN AMRO Clearing to cloud-enable its global IT infrastructure and lay the foundation for digital transformation. Further, we have a good pipeline of similar opportunities as we enter 2019. Shifting now to margins. Non-GAAP operating margin, which excludes stock-based compensation expense, acquisition-related expenses, and realignment charges, was 19.5%. Non-GAAP EPS was $1.13, exceeding our guidance primarily due to a lower non-GAAP tax rate. The Q4 GAAP tax rate of 20.6% was lower than our previous guidance of 31%, primarily due to net non-operating foreign exchange gains driven by the appreciation of the Indian rupee and guidance regarding the GILTI provision of the Tax Reform Act issued in the fourth quarter of 2018. This text guidance led to a reversal of the incremental income tax expense accrued for this provision earlier in the year. For the full year 2018, revenue of $16.13 billion represented growth of 8.9% or 8.5% in constant currency. Non-GAAP operating margin was 20.7% in line with our guidance of approximately 21%. Non-GAAP EPS was $4.57. As we presented at our Investor Day in November, starting in 2019, we are revising our non-GAAP operating margin and EPS definitions. Going forward, our adjusted operating margin and EPS will no longer exclude stock-based compensation expense and acquisition-related expenses. When calculated under the new methodology, the full year 2018 adjusted operating margin was 18.1% and adjusted EPS was $4.02. Now turning to our other metrics. Consulting and technology services represented 58.2% of revenue, and outsourcing services represented 41.8% of revenue for the quarter. Consulting and technology services grew 9.5% year-over-year, and outsourcing services revenue grew 5.6% from Q4 a year ago. Consulting growth benefited from the inclusion of several of our recent acquisitions such as Softvision and ATG and continued strong demand for digital solutions. Within outsourcing, we saw continued strength in Digital Operations, partially offset by the ramp-down of the healthcare customer previously mentioned where we were serving as a subcontractor to a third-party. During the fourth quarter, 37% of our revenue came from fixed-price contracts, and transaction-based contracts were approximately 11% of total revenue in the quarter. We added seven strategic customers in the quarter, defined as those with the potential to generate at least $5 million to $50 million or more in annual revenue. This brings our total number of strategic clients to 385. In the fourth quarter, we continued to build on the operational improvements we've made in our business over the last two years such as higher levels of utilization and simplification of our business unit overhead structure, and continued leveraging our corporate function spend. Net of hedges, our Q4 margins also benefited from the depreciation of the Indian rupee versus a year ago by 120 basis points, allowing us to continue investing for growth. The solid margin performance also allowed us to absorb the remaining wage increases and promotions in the quarter while achieving our full year non-GAAP operating margin target. In 2019, we expect continued margin improvement to be underpinned by ongoing improvement in operational efficiency and discipline, a continued shift within our business to focus on higher-value services, improving profitability of our portfolio of large structured contracts, and ongoing reassessment of less profitable opportunities that do not further our long-term strategic position. From a people and talent perspective, our annualized attrition rate at 19% declined over 300 basis points from Q3 but remains elevated. While we are pleased with the decline in the attrition rate, we continue to focus on our workforce strategy and overall management. Turning to our balance sheet which remains very healthy. We finished the year with $4.5 billion of cash and short-term investments, down $545 million from December 31, 2017. Net of debt, this balance was down by $417 million from December 31, 2017. As a reminder, our cash balance includes restricted short-term investments of $423 million. These restricted amounts are related to the ongoing dispute with the India Income Tax Department. We had strong cash generation in the quarter with free cash flow of $606 million. On a full-year basis, free cash flow of $2.2 billion as the ratio to net income was just over 1 times. Our outstanding debt balance was $745 million at the end of the quarter, and there was no outstanding balance on the revolver. During the fourth quarter, we repurchased approximately 3.6 million shares, and our diluted share count decreased to 579 million shares for the quarter. I would now like to comment on our outlook for Q1 and the full year 2019. For the full year 2019, we expect revenue to grow 7% to 9% in constant currency. Based on current exchange rates, this translates to growth of 6.3% to 8.3%, reflecting our assumption of a negative 70 basis points for foreign exchange. For the first quarter of 2019, we expect to deliver revenue growth of 7.5% to 8.5% in constant currency. Based on current exchange rates, this translates to growth of 5.8% to 6.8% reflecting our assumption of a negative 170 basis points for foreign exchange. For full year 2019, we expect adjusted operating margins under our revised definition to be approximately 19% and to deliver adjusted EPS of at least $4.40, a 10% increase versus 2018 on a like-for-like basis. This guidance anticipates the full year share count of approximately 578 million shares and a tax rate in the range of 24% to 26%. This tax rate range is consistent with our midterm expectations. Our guidance provided for our revised non-GAAP measure, adjusted EPS excludes realignment charges and other unusual items if any, net non-operating foreign currency, exchange gains and losses, and the tax effects of the above adjustments. Our guidance also does not account for the impact from shifts in the regulatory environment, including areas such as immigration and tax. We are committed to the more balanced approach to capital allocation that we outlined at our Investor Day last November. Beginning in 2019, we intend to utilize approximately 50% of global free cash flow annually for dividends and share repurchases. This should allow us to maintain a dividend payout ratio of about 20% and reduce our outstanding share count by approximately 1% annually. The Board declared a quarterly cash dividend of $0.20 per share for shareholders of record at the close of business on February 21st. Additionally, 25% of our annual global free cash flow is intended to be used for acquisitions that enhance our longer-term strategy of enriching our digital capabilities, expanding our geographic footprint, and enhancing our vertical expertise. In summary, our solid execution in 2018 along with continued investment in the business has positioned us well to deliver another solid year of revenue and earnings growth in 2019. Operator, we can open the call for questions.

Hi, thanks so much. I want to say, Frank, congratulations on your outstanding tenure as CEO. I enjoyed our collaboration and interactions. Best wishes to you and Raj as well. Now, regarding the CEO transition plan, Brian Humphries provided a lot of useful details. What made him the choice for CEO as an outsider? Can we interpret his international experience as an indication of a stronger global focus for Cognizant, in addition to continuing the plan you outlined three months ago?

Thank you, Tien-Tsin, for your kind words. I want to share a couple of thoughts. When considering my successor, the Board conducted a thorough evaluation focused on the strategy we presented at Investor Day, which is essential for the company's future. In reviewing our options, Brian stood out as an excellent choice. He is a respected Technology Executive with a strong record of success in various companies, industries, technologies, geographies, roles, and organizational cultures. With his global perspective and experience in client-focused transformational technologies, he is well-equipped to execute our strategy as digital continues to influence every industry.

Got it, got it. So, maybe if I can just add a quick outlook question. Just thinking about fiscal 2019, the big differences here, and how you might see growth shape up versus 2018. It looks like you're guiding the top end of the outlook to be pretty consistent with what you achieved in 2018.

So, I think that's fair, Tien-Tsin. If you remember back at Investor Day, we discussed that we expected near-term to midterm growth to be in the 6% to 9% range on an organic constant currency basis, and that in the near term we would be at the lower end of that spectrum. This year, we believe things are unfolding consistently with what we outlined at Investor Day. The first quarter is somewhat slower than the full year. However, as I mentioned earlier, we are beginning to see a nice recovery with some of the new partnerships in Financial Services, especially in European markets. We are very optimistic that as we move into the second quarter, we will see growth acceleration in banking, which will certainly support the overall growth rates for the year. In terms of general trends, the digital shift continues, and there have been no significant changes from the patterns observed in recent quarters.

Hi, good morning. I'll echo Tien-Tsin's comments. Frank, congratulations on a phenomenal run. I think we’re all curious to see what you're off to next. I'll take this opportunity to ask you a long-term industry vision question. As you transition out of your CEO role at Cognizant, how do you envision the IT services industry changing over the next five to ten years? Also, can you comment on Cognizant's unique positioning regarding those anticipated changes, especially insights that might not be visible to us?

Thank you, Lisa. I truly appreciate your kind remarks. It's been quite a journey. Just to share a thought, I realized the other day that this marks my 48th quarter reporting as CEO here. Looking ahead, the transformation we'll witness over the next five to ten years is significant. We've been emphasizing this and while it may sound cliché, technology has evolved from supporting the back office of businesses a decade ago to becoming the very core of operations today. I often point out that every enterprise is now a technology enterprise. Business leaders are essentially technology leaders, and every budget can be viewed as a technology budget for our clients. Technology has become so pervasive that we are already seeing its integral role in businesses, governments, and societies, a trend I believe will continue. In this context, firms like ours need to develop capabilities that align with the future role of technology. That’s why the six capabilities we discussed at Investor Day are crucial. Individually, they represent significant market opportunities, and collectively, they embody the core capabilities every enterprise will need to integrate deeply into their operations and financial strategies to fully leverage digital at scale.

Great, thank you. And then maybe as my follow-up, I'll ask the inevitable every two-year question, I suppose. With new Congress in session, inevitably over the next couple of months, I imagine we'll hear some noise surrounding H1B visa reform. So just perhaps to get ahead of that, can you proactively highlight what progress Cognizant has made over the last couple of years, reducing your dependence on H1B visas? I recall, I believe at Investor Day you gave some statistics about the percentage of your U.S. workers that are now permanent residents or citizens etcetera. Can you just maybe put those top of mind before we see any of that noise coming out over the next couple of months? Thanks.

Thank you, Lisa. I want to emphasize that there is a notable shortage of technology talent in various regions, especially in the United States and many areas of Western Europe. This shortage must be addressed for these economies to remain competitive. As the world becomes more reliant on technology, these economies increasingly require skilled technologists to maintain their competitive edge. We're making progress; at Investor Day, we noted that over 40% of our North American workforce, specifically in the U.S., consists of citizens or permanent residents. We are on track for significant improvements, and I anticipate that we will exceed 50% in the medium term.

I think, Lisa, — this is Karen. If I can just add to that, I mean, as I think and if you’ll recall, last year we set up our U.S. Foundation which we funded with $100 million initially to continue to launch more training programs in the U.S. As Frank said, obviously, the biggest challenge is the shortage of talent, not just here, but in other parts of the world as well. So we are certainly focused on helping to change that trajectory in the coming years.

Hi, good morning. I was curious if you could give more color to your strategic accounts—385 of them. Sort of how many at this point are above the desired $5 million? And maybe like some of your peers, could you array them as to over $100 million and over $50 million? Just give us a little bit more color, other than it goes up seven every quarter? Thank you.

Sure. So Ed this is Karen. All of those accounts are actually over $5 million, and most of them are considerably above $5 million on an annual run rate. We have not broken out how many accounts we have over $100 million, but it is in the range of—doing this off the top of my head—about 30 accounts at this point. There's a fairly large number of significant clients that have emerged over the years.

Right. And my other question is on the Healthcare. How sensitive are you to winning these large transformational deals to sort of get the Healthcare group back on track? Thanks and Congrats to Frank.

Thanks, Ed. Look, I don't think we are dependent on winning large transformational deals. The business is built on this—and the vast majority, whether it's in Healthcare or in any of the other verticals, is built on this idea of continuing to grow with our clients in a methodical way. That usually involves many small and medium-sized projects with each client to continue to grow. We'll continue to do large transformational deals. We announced the deal that Karen spoke about recently, this quarter with the three Finnish banks. That's a great example of the transformational deals that play into our strategy, platforms, and so on and so forth. I certainly don't—will not rule out doing those deals going forward, but I don't think the engine or the Cognizant business is built on an assumption that we're going to do those deals to continue to grow.

If I could just also add to what Frank said, I think we talked about this last quarter a little bit, right? Particularly with the platform deals, so the TMG deal and the EmblemHealth deal, you want certainly that large fee client to launch the platform and be able to build out the capability. After that, it actually enables you to add a lot of smaller engagements with smaller clients that historically we may not have been able to really support in a meaningful way, and we're certainly starting to see that traction now, particularly with the TMG relationship and being able to onboard now smaller opportunities which obviously you can move a lot faster and they become accretive quite quickly. So, that's certainly happening in that side of the business. And then overall in Healthcare, as we had talked about, there have been a number of mergers underway in Healthcare. While we certainly expect to get our fair share of the integration work once that commences, we have seen a little bit of pullback recently as those clients are planning for integration, that's typical. We said that at some point, we thought that would happen, and we've seen that a little bit over the last few weeks. But at some point, they will move into execution of the integration.

Good morning and thank you for taking the question. Karen maybe if wondering if you could touch on inorganic contribution in the quarter. You guys had a pretty active fourth quarter with deals, and it sounds like you continued that activity into this year. Just wondering what the contribution is and how we might anticipate contributions through the remainder of the year. And I have a quick follow-up.

Sure. So, M&A contribution in Q4 was about 250 basis points on a year-over-year perspective. That is also true in Q1, so you will see that again in Q1. For full year 2018, it was about 150 basis points on a year-over-year basis versus 2017. In our 2019 guidance, that includes the deals that we have already completed, which is also about 150 basis points of revenue. New deals, as we talked about at Investor Day, would be expected to add about 150 to 200 basis points a year of new deals so we’ve obviously done that for 2018. We will do that again included in our 2019 guidance and then new deals in 2019 would be beyond that.

Got it. That's super helpful. Maybe if we could touch on, you mentioned in your prepared remarks that the impact of the rupee appreciation gave you a little bit of flexibility to invest for growth. I think some are anticipating a little bit of maybe that's flipping to a headwind this year. If that's the case, what sort of measures might you have to continue to manage that and continue to invest for growth throughout fiscal 2019?

Sure. I mean we certainly ramped up hiring in the fourth quarter to support growth as we go into 2019, and we'll put those folks who could use. I think as we look at 2019, utilization stayed fairly consistent last year with 2017. We know we've got a little bit of room to continue to push that if need be. Certainly, we continue to focus on our pyramid as we move into 2019. Additionally, by scaling some of the larger, more structured deals or platform opportunities as we had said two years ago, initially those deals tend to be margin dilutive. As we get into the outer years, such as where we're starting to get now with some of the original ones, you start to see that margin accretion kick in, which then allows us to continue to fund more investments. Those will be some of the major things that we're looking at this year as well as continuing to leverage SG&A, but really our focus right now is driving for growth and ensuring that we're investing in the talent and re-skilling to do that.

Great. Very helpful. Thank you very much.

Good morning. Thanks for taking my question. And good luck to you Frank in your next phase of your career. Maybe just to start off on the overall IT spending environment you're hearing from your customers right now. Clearly, they are spending more on digital and less on maintenance. Can you maybe talk about their overall posture as we go into 2019? Any signs of worries around an economic slowdown or pullback in IT spending, or are things pretty much running the same course as they have been?

Jim, it's Frank. Look, I think as I said in my prepared comments, what I see is an environment as you said in traditional IT clearly a pressure on running the business, maintenance types of activities in order to free up the dollars to invest in growth. That trend has been going on for a while. As technology permeates organizations, I think we are able to tap into new budgets. Almost every budget is now somewhat a technology budget whether it's the R&D budget, whether it's the marketing budget; all of these become new sources of opportunity for us. Overall, I think our market opportunity has never been larger. It continues to expand, given technology permeating all aspects of organizations. As it relates to the macro environment, clearly there are concerns out there about various issues in Europe, in relations with China and so on and so forth. I haven't seen it yet translate into a meaningful impact on demand for us. At this point, when I think about 2019, I see a solid demand environment.

Thanks. And then maybe as a follow-up. Regarding the outlook in Financial Services in particular, I think Karen referenced a couple of specific deal wins that would improve the trajectory in Q2. What's your level of confidence in that improvement in financial to sustain itself? Can you maybe just kind of address what you're seeing in your U.S. banking client base as well?

Sure. In terms of the confidence, Jim, as we talked about, the Finnish deal for example is a signed deal, so we're just waiting for final clearance and closing of that. We have other deals similarly in the pipeline that we're very close to finalizing here. We have a high degree of confidence, particularly in the European markets, in terms of what we're seeing. As it relates to North America, if you recall at the Investor Day where we talked about top five and that two of them had returned to very nice growth. That continued in Q4 and continues into Q1, where we're talking about, in some cases, double-digit year-over-year growth. Those are obviously very large relationships, so it's a very nice turnaround there. The other three accounts continue to be under some pressure, and at this point, we are not—certainly not assuming a big turnaround for our guidance for those accounts. If we look at the rest of the North America banking business, it has and continues to grow quite nicely. It just gets under pressure when you have some of these larger relationships pulling down the overall growth rate of the business.

Congrats Frank. I did want to ask about the CEO change. I'm a little bit surprised it didn't—Brian's background isn't somebody with a little more IT services background or an executive from one of your peers or competitors. Can you just talk about why some of the outside the industry, necessarily, was the right hire for Cognizant?

Thanks, Bryan. As I said before, the board conducted a very methodical search for my successor. We kept in mind very carefully the strategy that we outlined at Investor Day a few months ago. We determined that Brian is the right executive. He has a terrific track record of success across companies in the technology space, multiple industries, obviously technologies themselves, the geographies, roles, and organizational cultures. When we put all of that together, we think that Brian is the right executive to execute on the strategy that we outlined for you at Investor Day as digital continues to permeate and power, as I said before, every industry.

Okay, that's helpful. Then Karen, just thinking about the guidance, I know the fourth quarter came in about 8.8% in constant currency. Guidance is calling for 7% and 9%, so I guess you're already running at the high end of the revenue guide. With Financial Services improving in 2019, just thinking about what pulls down maybe the range towards 7% to 9% and not a touch higher since you guys have a little bit of momentum heading into 2019?

I think Bryan, I mean certainly we—the guidance is consistent with what we outlined at Investor Day. Q1 is a little soft which obviously puts a little bit of pressure on the full year, although we’re very comfortable with the ramp to the back half of the year. But I think, obviously, we like to be prudent particularly earlier in the year. As we see things start to evolve, we will certainly take that into consideration. But right now we're very comfortable; this is consistent with what we said back in November and we've made the investments to support this growth range for this year.

Hi, good morning. Thank you. Regarding your onshore hiring efforts, can you comment on the inflation levels in this tight labor environment, particularly around digital capabilities? And then how are clients responding on pricing and your ability to pass those costs through?

I would say a couple of things, which we've said in the past. On a like-for-like basis, once you look at sort of all-in costs, our talent base in the U.S.—whether that talent base is, if you will, hired locally or folks like here on some sort of a Visa—there isn't a meaningful cost difference between those two talent pools. We are, from a cost standpoint, indifferent. Of course, as I said earlier, we are in a tight—constrained market, as you pointed out. Given the demand for our services, we're always struggling to find the talent that we need to fulfill our growth ambitions. But like-for-like, all-in, the costs are about the same.

Yes, and I think—I’d just add to that. Talking a little bit about pricing, I think as Frank said, like-for-like you're actually not seeing a big change, and certainly I don't think wage inflation given skills we're hiring has— we've seen that in a significant way. What you do see, obviously, is—and this is always true—skills that are in hot demand, come with a high price. That's no different now versus the last 10 or 20 years. The flipside is that in this environment, clients need that talent as much as we do, and you'll get the pricing to accommodate that. So, I think as we talked about last year, pricing has remained quite consistent. In fact, last year was the first year in quite a while where you actually had some pricing strength in the market because of the shortage of talent, and that trend has continued.

Hi, thank you very much. First, Frank, congratulations on Brian. I know him from his HP days. I think he's a terrific choice. As a matter of fact, I think getting somebody from outside of the industry could certainly help Cognizant quite a bit. So congratulations on that. My question was a little bit different in that, if I read the press release correctly, you're the founder of the company, as you said have tremendous success over a number of years. You're going to move to the board seat, I think after a transition period. Frequently, particularly with founders, there are situations in which when new leadership comes on board, they eventually get off to allow the new leadership to have unbridled capabilities to direct the strategy. But it doesn't sound like you plan on doing that? Am I correct in reading that?

Keith, my primary and really only goal here is to ensure that we do whatever is necessary to make sure that Brian is incredibly successful as we go through the transition and beyond that. My commitment to my fellow board members and to the company is that I will play whatever role is necessary to make sure that that happens, and not a bit more than that. We will play that as things come. But at the moment, my commitment is to all of you, to our shareholders, to my 282,000 fellow associates around the world, and to my fellow board members that my commitment is to make sure that I do whatever is in my power to ensure we have an absolutely smooth transition.

Fair enough, fair enough. Just one for you, Karen. I just want to understand 606 in 2019. 606 was a help both the top line and the margins in 2018. My assumption is it's neutral in 2019. I know it's hard to predict because it depends on the nature of the contracts. But is that the right assumption that 606 is neutral to both the top line and to the margins in 2019?

Yeah. That is a fair assumption, Keith. We will no longer— in 2019 we will not be breaking it out. That was a one-year requirement to make that disclosure. From a modeling perspective, just assume it's neutral.

Hey there. I’d echo the last comment. I think Brian is a great hire, and it's nice to see the new thinking about being more global and so on. I wanted to ask in that context a couple of things. Do you expect as the CEO change occurs, that anything related to guidance or financial targets might be reconsidered? And also do you expect any management departures related to the CEO change besides the one that's already been announced?

Rod, it's Frank. Multiple parts to your question there. Let me just first of all say that as we think about Raj, I want to just say that it's worth really spending a minute to thank Raj for his countless contributions to the growth and success of Cognizant. When Raj joined the company, I think we were $20 million in revenue. From that to over $16 billion last year, Raj has provided leadership, operational skills, and passion for clients for over two decades in a variety of operating roles. I just want to thank Raj and acknowledge his many contributions to the company on this call and wish him well in his future endeavors. As we've outlined for you today, our targets and our guidance for 2019 are based on our best view of the business at this point for the year. We're providing those to you as we always do, having considered all of the factors that could positively or negatively influence our performance, and this is our best view. That continues to be the case with the 2019 guidance. I am sure that, as Brian comes in, he will bring his perspectives to the role. When we have updates, we will provide those to you, or Brian will going forward. I don't think we have anything else to add to that. Karen?

Thanks very much, everybody. Thanks for joining the call. I want all of you to know that I've truly enjoyed many interactions with all of you over the 48 quarters that I've done this. I look forward to introducing Brian to you in the days ahead and during the transition process once he's on board. Thank you very much.