高知特 (CTSH) 2016 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions second-quarter 2016 earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the conference over to David Nelson, Vice President Investor Relations and Treasurer at Cognizant. Please go ahead, sir.

Thank you, operator, and good morning, everyone. By now you should have received a copy of the earnings release from the Company's second-quarter 2016 results. If you have not, a copy is available on our website, Cognizant.com.

In addition to the traditional speakers on our earnings calls, Francisco D'Souza, Chief Executive Officer; Gordon Coburn, President; and Karen McLoughlin, Chief Financial Officer; we are delighted that Raj Mehta, CEO - IT Services will join our calls beginning with this quarter. Raj is a long-time key executive at Cognizant, who leads our the industries, geographies, and delivery operations on a global basis. Adding Raj to the call will enable us to provide you with additional color on our operations and business opportunities.

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.

Thanks, David, and good morning, everyone. Thanks for joining us today. Our Q2 revenue was $3.37 billion, up 5.2% from Q1, and 9.2% from a year ago, and was within our guided range of $3.34 billion to $3.4 billion. Against a backdrop of a challenging macroeconomic environment, and market environment and a slow start to the year, we executed well last quarter, and we continue to gain market share.

The quarterly sequential dollar growth was one of the strongest in our history, as we added incremental revenues of almost $170 million. This performance represented broad-based growth across service lines, geographies, and industries. As we had anticipated after a slow start in Q1, our financial services and healthcare segments turned in positive sequential growth in Q2. As we enter the second half of the year, we see certain macroeconomic factors, as well as some softness in client's discretionary spending, that will affect our revenue growth, primarily for financial services and healthcare clients.

Additionally, we anticipate a further negative revenue impact of approximately $40 million for the second half of the year, due to the weakening of the pound sterling, following the Brexit vote. For these reasons, we are revising our full-year revenue growth guidance to a range of $13.47 billion to $13.6 billion, while maintaining our full-year non-GAAP EPS guidance within the range of $3.32 to $3.44. Gordon, Raj, and Karen will expand more on the cyclical weakness that we are facing in the short term.

As you listen to their comments, I'd like to emphasize that the medium to long-term fundamentals of our business are strong. We continue to see significant market opportunity, and more importantly, gain market share. Digital transformation continues to be a strong driver for demand, as clients look for new solutions that allow them to defend their businesses against digital disruptors, while innovating to create new areas of growth and differentiation.

Given this context, we continue to invest in three strategic areas, based on the conviction that true digital transformation requires businesses to make fundamental changes throughout their organizations, from the front office, and through the middle office, and to the back office systems. These three areas that will provide the framework for how we think about growing our business going forward.

The first strategic initiative is to help our clients build new front-end capabilities, enabled by digital technologies, that create a personalized experiences for their customers, employees, suppliers, and other stakeholders. Clients recognize our strong digital capabilities, having called out the trend in SMAC over five years ago. We continue to see great success in building out our digital capabilities, through investing organically, as well as through select acquisitions.

We just announced the acquisition of Idea Couture, which will become part of Cognizant Digital Works. As you will recall, Cognizant Digital Works brings together human insight, strategy, design, technology, and industry expertise, to create innovative solutions at enterprise scale, to help clients succeed in this new digital economy.

Idea Couture is a digital innovation firm that operates at the intersection of strategy and technology, and specializes in designing and prototyping products, services, and business models for growth and competitive advantage. Idea Couture serves some of the largest firms in the world, including Samsung, ConAgra Foods, and Pepsi. This was our sixth investment in the digital space, building on prior acquisitions of Cadient, KBACE, itaas and Odecee, in addition to our recent strategic investment in ReD Associates. Collectively, we have deployed over $200 million in capital across these digital investments.

The second strategic initiative is to drive new levels of efficiency and effectiveness in the core transaction processing operations of our clients, by building platform-based solutions and industry utilities. These solutions are offered to clients in a business process as a service, or BPaaS model, that allows clients to shift from buying a service to buying an outcome.

We have developed a number of platform-based solutions across our industry practices, and the result of these investments is best illustrated by our significant progress in the healthcare vertical, where we've been able to successfully combine TriZetto Software with Cognizant's technology and operations capabilities. Since our TriZetto acquisition, we have signed several large platform-based deals, with a combined TCV, or total contract value, approaching $2 billion. Including the program at Emblem Health that we spoke about last quarter. And we're pursuing a number of additional similar opportunities in the market.

The third strategic initiative is to transform clients' existing IT systems and infrastructure to next-generation IT, to help them harness the potential from digital technologies. This includes the simplification of how applications are developed and delivered, along with the standardization of the IT infrastructure, to ensure simplicity and flexibility at an appropriate cost.

We're making good progress in each of these areas, and we are confident that this framework will differentiate our services and solutions in the marketplace, now and in the future. In closing, I'd like to emphasize that we've been through periods of market volatility in the past. While macroeconomic factors such as what we experienced this quarter are not within our control, we're confident that we will execute well through this cycle and continue to gain market share. So with that, let me hand the call over to Gordon to discuss the current demand environment, to Raj to discuss our business performance, and then to Karen to provide more financial details. Gordon?

Thank you, Frank, and good morning, gentlemen. I'd like to start by providing some additional context on the specific short-term headwinds that are leading us to revise this year's revenue guidance. First, as we indicated on our last two earnings calls, discretionary spending in the banking sector remains soft, weighed down by macroeconomic concerns, and a prolonged low interest rate environment.

While we did see a return to healthy sequential growth in the second quarter, we expect banking discretionary spending during the second half of 2016 to be slower than we anticipated three months ago. Complicating the situation of course is the uncertainty arising from the Brexit vote in the UK. Economic growth forecasts and short to medium-term interest rate projections have generally been revised down since the vote. Given this new development, we see the banking sector being more cautious in spending over the near-term, and therefore, we believe it is prudent to err on the side of caution in banking and financial services revenue planning for the remainder of this year.

Second, the sharp weakening of the pound sterling will have a negative impact on our second-quarter revenue of approximately $40 million, assuming the currency holds at current levels. As you know, the pound sterling is seeing a 12% depreciation since the Brexit vote.

Third, as we indicated to you at the beginning of this year, consolidation within the US healthcare industry has impacted the revenue growth of our healthcare practice. Given the status of the M&A regulatory approval process, we anticipate our project spending will continue to slow for clients involved in these consolidations for the remainder of the year. Finally, we're also seeing customer pull back on discretionary spending in other pockets of our business. For example, some clients within our information services practice are taking a more moderate approach to spending as we go into the back half of the year.

While we're taking a cautious approach to our revenue expectations for the remainder of 2016, we believe that the medium to long-term outlook for our business remains as strong as ever. The pipeline is healthy, and we continue to make investments in skills and capabilities that will help us meet our clients' evolving need to simultaneously run better, and run different. I'd like to take a moment to outline three trends that are driving client demand, and our optimism for the medium and long-term outlook for our business. You'll see that these trends are the basis for the investment areas that Frank described a few moments ago.

First, in the shift to digital, there's a greater sense of urgency among CXOs to build new innovative models to drive revenue growth and create a differentiation in the market. I see this in almost every client meeting I attend, regardless of industry. These conversations have evolved from a discussion of SMAC, which is now table stakes, to the exploration and execution in areas such as artificial intelligence, IoT ecosystems, augmented reality, adaptive manufacturing, and block chain, just to name a few.

Digital is no longer about deploying new technologies, rather it is an integration of insights, strategy, design, technology, and industry knowledge, to create new capabilities that can distinguish a client in the market. We've invested heavily over the past several years in building a true leading world-class digital capability. An achievement which has now begun to be well-recognized in the market.

Second, there is a growing realization that there's a difference between doing digital and being digital. For example, clients understand that the mobile enablement of an enterprise app, while necessary, is not sufficient to take on digital disruptors in their industry. Digital transformation requires a fundamental change, not just for clients' front office capabilities, but across their entire business and technology architectures, in both their mid and back offices, to create nimble, efficient, and innovative ways to meet customer demands.

Given the existing infrastructure investments of our enterprise clients, we believe that the winning model for many is a hybrid model, combining aspects of their heritage or legacy infrastructure with new digital technologies. This belief is core to our strategy going forward. Our intimate knowledge of core business and legacy infrastructure and business processes across our clients' mid and back offices, combined with our leading-edge digital capabilities, as required in the front office, give us a highly differentiated offering, and a value proposition in the market today.

Finally, the drive for getting continued efficiencies from existing IT infrastructure, to be able to fund innovation projects, remains absolutely essential to almost every client. This in turn leads to a demand for more automation, simplified application development methods, process efficiencies, platform based solutions, and industry utilities. Our strong vertical presence and investments in building sharply-focused industry-specific platforms allow clients to obtain these efficiencies by shifting from buying a service to buying an outcome. These trends will continue to open opportunities for us over the coming years. With that, let me now turn the call over to Raj to provide additional details on our business performance.

Thank you, Gordon, and good morning, everyone. I'm delighted to be here today, and look forward to interacting more with the investment community going forward.

Let me now provide some additional color on our performance, across industries and geographies. Our banking and financial services segment was up 5.1% sequentially, and 8.1% year-over-year. As expected, banking and financial services returned to positive sequential growth in Q2. Due to the increased macroeconomic uncertainty, and a prolonged a low interest rate environment, we expect spending within banking to be sluggish during the second half of 2016, and revenue for our BFS segment to be up slightly sequentially for Q3 and Q4.

Within our insurance practice, demand remains solid, particularly for solutions which help transform the claims and underwriting processes, and deliver greater efficiencies, increasingly through managed services or other outcome-based arrangements. In addition we've seen increasing demand for solutions which help clients rationalize and transform their infrastructure landscape.

Our healthcare segment, which consists of payer, provider, pharmaceutical, biotech, and medical device clients, grew 4.9% sequentially, and 6.9% year-over-year. The industry consolidation among several of our largest US payers continues to weigh on our healthcare payer practice. However, we remain optimistic about the long-term opportunities within the payer segment, as the industry embarks on a fundamental change in the business model.

This is driven by the Affordable Care Act, the changing regulatory environment, consumerization of healthcare, and increased focus on medical cost. In this rapidly-changing environment, it is critical that payers have solutions in place that can both drive efficiencies and adapt to ongoing regulatory and technological changes. We're able to offer clients fresh solutions through our combined TriZetto software with Cognizant Services. Last quarter, we spoke about a large healthcare deal that we launched with Emblem Health, leveraging the TriZetto platform. This program continues to ramp up as expected.

Moving on to our life science business, we saw strong demand in the quarter driven by a trend towards multi-service line deals, leveraging cloud technologies and platforms, as well as advanced data analytics. As drug pipelines and product launches have improved for pharmaceutical and biotech companies, we expect this to drive demand in our life sciences practice. Our retail and manufacturing segment was up 4.4% sequentially, and 14.2% year-over-year, driven by the strength in manufacturing and logistics.

We're seeing growing demand for solutions which leverage our ability to integrate multiple service lines, as front-end digital technologies such as IoT are being scaled and integrated across our organization. We are building deeper partnerships with many of our manufacturing clients, by proposing innovative solutions which harness the power of data from connected products, to help them optimize their product portfolios, addressing key business problems, and driving sources of revenue growth.

For example, our client, one of the world's largest auto manufacturers, is rolling out the deployment of telematics across all new cars by next year. As you know, telematics tracks a variety of items relative to driving, including maintenance, driver safety, and road emergencies. While the client is looking to enhance its relationship with its customers, they are also concerned with the risks associated with the rollout of this new digital technology at an enterprise scale.

Cognizant will combine its design, technology, and business process expertise to create a scalable solution that manages both customer satisfaction, and helps run the transaction processing and telematics operations efficiently. Additionally, we will leverage predictive analytics to anticipate issues and create valuable insight to support future product development. Our other segment, which includes high-tech medications and information media and entertainment clients, was up 8.1% sequentially and 11.2% year-over-year, driven by both telecom and technology clients as we continue to expand our range of services.

Let me now quickly turn to our Horizon 2 service lines. Cognizant business consulting, infrastructure services and business process services. Our Horizon 2 strategy has worked with all three service lines having reached a critical mass at a combined $3 billion run rate, and continuing to grow faster than the Company average. These services are an integral part of the digital platform and next-generation IT solutions we are building out for our clients.

From a geographic standpoint, North America grew up 5.1% sequentially, and 8.3% year-over-year. Europe was up 4.1% sequentially and 8.9% over last year, after a 2.9% negative currency impact. Growth in Europe was driven primarily by the ramp-up of work with recent wins, particularly in markets such as Germany and the Nordics. The UK grew 4% sequentially and 4.4% year-over-year.

And continental Europe grew 4.4% sequentially, and 15.5% over the prior year. Finally, we saw continued traction and the rest of the world, which was up 10.8% sequentially, and 25% year-over-year. Growth was driven primarily by strength in the key markets such as Singapore, India, and Australia. With that, I'll turn over the call to Karen.

Thank you, Raj, and good morning, everyone. Second-quarter revenue of $3.37 billion was within our guided range, and represented sequential growth of almost $170 million or 5.2% sequentially. Revenue increased by 9.2% year-over-year, including a negative currency impact of $25 million or 80 basis points.

Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition-related expenses, was 20.3%, slightly above our target range of 19% to 20%. This positions us well to absorb our compensation increases, which will take effect during the third quarter. Non-GAAP EPS of $0.87 was also above our guidance range of $0.80 to $0.82, due to a slightly lower tax rate and stronger operating margins.

During the quarter, we executed a one-time remittance of cash from India to the US and to other international markets. This will provide additional financial flexibility in funding our strategic investments to drive long-term growth for Cognizant.

Let me provide you some additional color on this transaction. In May, our India subsidiary received approval to repurchase stock worth $2.8 billion from certain of its shareholders, which are non-Indian Cognizant entities. This repurchase resulted in a one-time remittance of $1 billion to the US, net of taxes, with the other $1.6 billion to other non-India overseas locations.

This buyback also resulted in a one-time tax impact of $190 million in the second quarter, with approximately $24 million incremental tax impact expected in each of the third and fourth quarters this year. The tax impact of this transaction had a $0.31 per share impact on our Q2 GAAP EPS, but was excluded from our non-GAAP EPS calculations due to the non-recurring nature of this transaction.

Consulting and technology services and outsourcing services represented 57.5% and 42.5% of revenue respectfully for the quarter. Consulting and technology services grew 4.6% sequentially, and 9.3% year over year. Outsourcing services revenue grew 6.2% sequentially, and 9.1% from Q2 a year ago.

During the second quarter, 37.6% of our revenue came from fixed-price contracts, and as expected, overall pricing was stable. We added seven strategic customers in the quarter, defined as clients that have the potential to generate at least $5 million to $50 million or more in annual revenue, bringing our total number of strategic clients to 315.

We added 11,300 net new hires in the quarter. Annualized attrition of 17.1% during the quarter, including BPO and trainees, was down 200 basis points from the year-ago period. Total headcount at the end of the quarter was 244,300 employees globally, of which 229,400 were service delivery staff. Offshore utilization was 73%, offshore utilization excluding recent college graduates who are in our training program was 79%, and on-site utilization was 91% during the quarter.

Our balance sheet remains very healthy. We finished the quarter with $4.5 billion of cash and short-term investments, up by $30 million from the quarter ending March 31. In addition to a payment of $134 million for withholding taxes related to the aforementioned share repurchase of our India subsidiary, we also paid down the $100 million outstanding balance on our revolver during the quarter. Our cash and short-term investments, net of debt, were up by $1.1 billion from the year ago period.

Moving on to receivables, which were $2.4 billion at the end of the quarter, we finished the quarter with a DSO, including unbilled receivables of 74 days. This is flat with last quarter and up from 72 days in Q2 of 2015.

Our unbilled receivables balance was $451 million, up from $432 million at the end of Q1. We billed approximately 55% of the Q2 unbilled balance in July. The increase in unbilled receivables was properly due to the timing of certain milestone deliverables.

Our outstanding debt balance was $909 million at the end of the quarter. There were no outstanding borrowings on our revolving credit facility.

Turning to cash flow, operating activities generated $360 million, financing activities were a $143 million use of cash during the quarter, and capital expenditures were $75 million during the quarter. During the second quarter, we repurchased just over 840,000 shares, for a total cost of $50 million, and our diluted share count decreased to 608.8 million shares for the quarter.

As of the end of Q2, we had repurchased 46.3 million shares, for a total cost of $1.9 billion under our stock repurchase authorization of $2 billion. Our Board of Directors has approved an increase of the Company's stock repurchase program by $1 billion, from $2 billion to $3 billion, and an extension of the program until December 31, 2018. This reflects our confidence in our business and our commitment to driving shareholder value.

I would now like to comment on our outlook for Q3 and the full year. In the weeks since Brexit there have been significant fluctuations in global exchange rates and particularly the British pound, which has declined 12% versus the US dollar since June 23, and 14% year over year. The guidance that we provide is based on exchange rates at the time at which we are providing the guidance, and does not consider potential currency fluctuations over the remainder of the year.

For the full year 2016, we have revised our revenue expectations to be in the range of $13.47 billion to $13.6 billion which represents growth of approximately 8.5% to 9.5%. For the third quarter of 2016, we expect to deliver revenue in the range of $3.43 billion to $3.47 billion. During the third quarter and for the full year, we expect to operate within our target non-GAAP operating margin range of 19% to 20%. For the third quarter, we expect to deliver non-GAAP EPS in the range of $0.82 to $0.85. Our non-GAAP EPS guidance excludes net non-operating foreign currency exchange gains and losses, stock-based compensation, and acquisition-related expenses and amortization.

For the remainder of the year, our non-GAAP diluted EPS guidance also excludes the impact of a one-time incremental income tax expense related to the India share buyback transaction. This guidance anticipates a share count of approximately 610 million shares, and a tax rate of approximately 30.5%, including an approximate $24 million impact from the incremental tax from the India remittance.

For the full year, we expect to deliver non-GAAP EPS in the range of $3.32 to $3.44. This guidance anticipates a full-year share count of approximately 610.2 million shares, and a tax rate of approximately 36%, including an approximate $238 million impact from the incremental tax from the India remittance.

Now, we would like to open the call for questions. Operator?

(Operator Instructions)

Tien-tsin Huang, JPMorgan.

The prepared remarks were helpful but just wanted to ask about the outlook. I guess the mix of products for the lower revenue outlook but it's the second cut here this year. I wanted to ask you, is the business just getting harder to predict for maybe secular reasons, or is the macro just getting really tough on some of your larger clients? Just trying to understand the secular versus the cyclical side of things.

Is a Gordon. It's a bit of both. Certainly the macroeconomic environment has gotten tougher to predict, both certainly the UK vote, and not necessarily the direct impact but the indirect impact of more sustained lower interest rate environment.

What certainly is a surprise to us, and it would have been tough to predict, and it was a surprise to our banking and insurance clients, and you are seeing the impact on that. So that sort of thing is tough to predict. Obviously some of the uncertainty around the US elections creates some uncertainty.

In terms of structural things for us, the business -- when you think about digital and so forth, tends to be more -- a little bit more project oriented, but these are swings we go back and forth on. So I wouldn't argue that there's any long-term structural change in the ability to predict the business, short-term there is a bit.

Got it. Certainly, a lot of surprises going on. Just as a quick follow-up just of the repatriation of cash, is the priority there to buy back stock, or are there some larger acquisitions maybe you want to do in the US or Europe?

Tien-tsin, this is Karen. So I mean, as we talked about, we do want to ramp up the volume of M&A, not necessarily large-scale deals, but certainly more transactions and you see that with Idea Couture and our investment in Horizon and so forth this year. So certainly we will look to deploy that cash effectively, looking to use it to invest in growth for the business.

And on share repurchases, as we said historically, that our target is to maintain share neutrality but we are also opportunistic depending on valuation of the stock.

Thanks for the update.

Bryan Keane, Deutsche Bank.

Karen, I know recently at some conferences you'd stated that Cognizant is likely only to grow organically a max $1.5 billion in any given year. So that limits your top line growth rate as Cognizant gets larger. So trying to figure out what else you can do to grow EPS. Is it time to expand operating margins?

Because essentially, I mean, we're only going to grow EPS at about 10%, if the top lines looking to grow that level, and then as we get larger, it's only going to get smaller. So what are we going to offset the to be able to grow EPS? Is it margins or buybacks or what else can we do?

Bryan, I think what we've been saying is that if you look historically, right, we've been averaging roughly $1.5 billion over the last several years, and that's true if you look at all large services organizations, right? There are many organizations that have grown organically consistently more than $1.5 billion a year. That's not to say there won't be years were you can, and that's not to say that organizations can't do that. We have been referring to what we've done historically, and particularly as people try to think about long-term growth rates, and percentage growth, which obviously comes down over time due to the law of large numbers.

I think, certainly we will look to continue to drive growth both organically and inorganically. As we have said, we clearly look to increase of the volume of M&A transactions that we're doing. We continue to believe there's a significant opportunity in the market for us to grow, and continue to take market share, and certainly at this point, we believe that the 19% to 20% non-GAAP operating margin that we've historically provided will continue to be an appropriate range for us. It gives us the flexibility to continue to grow the business while maintaining strong financial performance.

It's Frank. I'll just add to that and say that I don't think there's anything inherent or magical about a $1.5 billion number, particularly given the structure and dynamics of our industry. If you think about our industry, it's highly fragmented. Nobody has a dominant market share. The ability to take share from each other and not to mention the fact that technology overall in the economy is playing a much larger role. I think the growth opportunities are significant. So I think you should look at the $1.5 billion as in the historical context, but I wouldn't necessarily use that as a rate limiter for our growth going forward.

Okay. Frank, and just as a follow-up, you mentioned that you are taking share, but if I look at your growth rates for 2016, they do appear lower than peers. So just want to make sure what you mean by that comment. Is that a going-forward comment, or is that something else you are looking at that says you are taking share? Thanks so much.

I think it's important when you look at the taking share comment, to look at a couple things. First of all, over a long period of time, I think we have been taking share, and if you look at the long-term trajectory, as we continue to invest in the business, we create disproportionately larger growth opportunities for ourselves, which allows us to take share.

I think, looking at percentage growth rates is only one part of the equation, because that doesn't adjust for size of organization. I think a very interesting number to look at in that context is incremental dollars added. If you look for example this quarter, we added close to $170 million of incremental revenue in the quarter. And so if you, in a sense, think about that as being a proxy for market share gain, I think it tells the story that supports our thesis, that we can continue to grow and take market share ahead of competition by investing in the business.

Ashwin Shirvaikar, Citigroup.

Welcome to the call, Raj. I want to talk about healthcare. And the Emblem Health that you announced -- do you need traditional regulatory approval to continue to ramp that? And I recall you had mentioned another similar deal in your pipeline. So can you provide insight into that, as well as other deals that you may be looking at, in terms of forward growth trajectory?

Ashwin, it's Gordon. Happy to answer both those questions. In terms of regulatory approvals, Emblem's really best positioned to discuss regulatory requirements for their business. But from our perspective, for the work we're doing for them, we've obtained all the necessary approvals to move ahead with our work.

When we look more broadly at healthcare, and end-to-end solutions, we're seeing a lot of interest in the market, and the reason why is health plans are under tremendous pressure right now to keep rate reductions as low as possible. And we can really help them with that, with regulatory compliance, with not having to make investments on their own. So we are seeing increasing interest as we roll out our healthcare platform-based solutions.

We talked about two big deals this year. One of them obviously we just discussed. The other one continues to move along. I think in terms of when it will close, that's probably towards the very end of the year.

But since we talked last three months ago and I look at the pipeline of activities, that continues to increase very nicely, obviously that'll be revenue for next year. But as we just recently sat down and did a review of our healthcare strategy, and we concluded -- we really have identified a market with a need in it, based on the changing dynamics in the industry, and based on the unique capabilities that Cognizant has with a combination of the leading healthcare administration platform and just incredible domain expertise and technical expertise, so we feel really good about healthcare over the medium to long-term. Obviously, there are specific payers in the M&A process that are a headwind in the short term.

And with regards to financial services, how much of your commentary has to do with specific dialogue that you're having with your clients, that says that demand will be down versus your fears that demand could be down? And then is pricing a part of this discussion, as well?

Ashwin, this is Raj here. Look, financial services was, obviously we had a good quarter in Q2, but we've guided for a slower growth in Q3 and Q4. And part of that is as we discussed right, some of the low interest rate environment and Brexit. So we do have many of our larger clients looking at it, in terms of how do we continue to drive efficiency and optimization?

So I think that's actually a great opportunity for us, because it allows us to look at a greater percentage of the portfolio for our financial services accounts. It takes us -- it takes time to put all of these pieces together, but we think long-term that's a good opportunity for us, to continue to drive synergies. But more importantly, I think, in the financial services sector, we are seeing great attraction right now on digital, especially around customer experience, and the data analytics behind that. And in addition to that, many of our clients now are looking at the private cloud, and we're helping many of these large financial services customers in that effort. So longer-term, we're seeing good traction there.

And Ashwin, I would just say that to your question about speculation versus certainty, you have to remember that our model is, our people are on the ground with our clients in financial services and in all the other sectors every day. We have people on the ground at the client sites, day in and day out, and so the feedback we tend to get tends to be relatively real time, and it tends to be relatively -- or rather it tends to be based on real conversations and real feedback we're getting from clients as opposed to hypotheses.

Darrin Peller, Barclays.

Given just the relatively high exposure to the financials and healthcare verticals, where it looks like most of the macro deceleration is coming from, and I guess sector specific, when considering just an overview of your overall assets, is there anything that Frank or Gordon, you can say you point to strategically that may be able to help reduce volatility associated with year-over-year revenue in any given quarter?

I think, Darrin, what I would say is, it's a great question. I would say that we continue to -- I would say if you look at the medium term, the playbook is to really build out the three broad areas that I spoke about.

Digital is a macro theme that I think has a lot of wind under its wings. I think we will continue to invest organically and inorganically. The platforms business that I spoke about, we think there's a tremendous potential to take the success we've seen in healthcare to all of our other industries, all of the other industry groups that we serve.

I would say that the TriZetto experience has been ahead of anything that we would have imagined it to be. We've ramped up TriZetto faster than we anticipated when we did the acquisition, and I think that gives us a sense of confidence that the model works, that we can execute against the model, so there's opportunity to take that to other industries.

And then, of course, the third area is so-called next gen IT, where we can -- as Raj said, we continue to feel like there's opportunities for us as our clients face tough macro environments. For us to continue to optimize and bring new ways and innovative ways for them to be more efficient in how they run IT. So that's where I think their focus is in the medium term.

If you look out the over the very long run, clearly our objective is to continue to build out in the non-healthcare and financial services parts of the economy. So if you look at our manufacturing and logistics business, that's been doing well, we will continue to invest there both inorganically and organically. And I would say over the very long run, this business needs to have a reasonable representation of our revenue coming from the sources of global GDP. And so we have to continue to shift the business model, but obviously that's not something that happens overnight. That's a 5 to 10 year journey.

And Darrin, its Gordon, let me just add one more thought on that, around platforms. As we ramp up our platform business, both within healthcare and into other industries, remember, most of that we're going to be bringing to market as a service. And this is core transactional work, so that over time will become a nice recurring revenue stream as it builds up, so that's clearly part of our strategy, as well.

Brian Essex, Morgan Stanley.

I was wondering if I could follow on to Tien-tsin's question regarding the repatriation of cash and prioritization of usage. Could you comment a little bit on your M&A pipeline, and what that might look like? I mean certainly we've seen deals in the quarter and they seem to manage the cash, limited cash in the US. Maybe as a follow-up to that, how much cash does this repatriation put into the US as a percentage of total?

Let me have Karen comment on how much cash in the US, and then let's spend a few minutes talking about M&A pipeline and strategy.

Yes, so Brian, the repatriation resulted in $1 billion net of tax of coming back to the US. And as you remember, at the end of Q1, we had $300 million, $400 million in the US that was available for operating needs.

And from an acquisition perspective, our strategy remains consistent. We look at acquisitions for industry expertise, we look at acquisitions for geographic footprint, and we look at acquisitions for service line and technology capability.

We have a healthy pipeline of opportunities in the digital space. These will tend to be smaller tuck-under acquisitions. We also have a nice pipeline of opportunities in the consulting space across industries, as well as strength in our geographic footprint, particularly in Europe.

So what I think you'll see is, you'll see a pick up in the pace of acquisitions, but I want to be clear. These continue to be small tuck-in acquisitions. We're getting really good at integrating these and capturing the value from acquisitions. We have that down -- we really have that down to a science now. So we've expanded the team in these areas, but the core of Cognizant's growth will continue to be organic, but when we look at where acquisitions can supplement our capabilities, and make us stronger in the market, we'll clearly do that.

And the final thing just to comment on is platform acquisitions. There, we'll look at those absolutely. We did the TriZetto acquisition almost two years ago. And platforms, certainly you have to make sure if you're going to do a platform acquisition, you get enough that you have a basis to build off of. So those probably won't be as consistent or steady, but we'll certainly look at opportunities, because we know in particular areas, we want to be a leader in platforms.

Now some of that will be, we build it ourselves. Some of it is we'll partner with customers and take their systems, and commercialize them, and some like TriZetto will be, we'll go out and buy a leader in the market. So you'll see all that happen, but certainly in the tuck-unders, you'll see a pick up in the pace.

Lisa Ellis, Sanford Bernstein.

The choppiness in the top line growth rate inevitably brings back in the more secular concerns around compression in IT services. So can you just describe, as you are having these strategic discussions with clients around the transformation they're trying to drive in their business, what are the implications for their overall IT budgets? Like up, down? And then also the component of budgets that they are expecting to be spending on services, like third-party services?

Lisa, it's Frank. Let me try to take a crack at that. Look, I think we've seen no evidence that IT budgets overall are coming down. If anything, I would characterize IT budgets as flat to moderately up over time.

There may have -- in some clients, as we said in our prepared comments, there might be short-term pressure, discretionary spending gets put off because of something going on in the macro. But as a big picture, I don't see any evidence that says that budgets are down. I would characterize them as flat to up.

I think if you look inside of that, and unpack it a little bit, there is a shift going on. We are seeing the clients looking to be more efficient, drive better total cost of ownership on what I consider to be the run the business activities, so that they can redeploy them into the change the business or digital or cloud activities.

I think that shift benefits IT services firms, frankly. When you look at the landscape on digital, the technology landscape in digital is very fragmented. There are no clear leaders in digital right now on the technology landscape, from an underlying stack standpoint. And so that requires almost every digital deployment to be -- it requires it to have very heavy integration kind of work.

And so when you look at the digital landscape, there's a tremendous amount of work that needs to be done, both from an upfront strategy, design, human sciences standpoint, to envision the future with the client, but then equally importantly on the downstream, build, integrate, test, deploy. All of that creates tremendous opportunities for services firms.

So I think that net-net, there's a shift going on. Budgets aren't shrinking meaningfully. There is a shift going on inside of budgets, and I think firms that have capabilities on both sides, what we've been calling the run the business and change the business, or run better run different sides of the business, really stand to benefit from that migration.

Keith Bachman, Bank of Montreal.

I would like to direct this question to Gordon, if I could. Gordon, and the question really surrounds run rate. This year, pursuant to guidance, of your guiding revenues to increase $1.1 billion to $1.2 billion, just rough numbers.

Current Street estimates for 2017 are increasing by almost $1.7 billion, and given the issues that you've identified surrounding healthcare, and unclear when those deals may or may not clear in investment banking, I was wondering if you'd like to give any anecdotal or at least directional comment related to a $1.7 billion bogey. And the context is, it's occurred in the last few years where we have crossed over a new year and sell side estimates have proved to be too high. So I just wanted to hear any, given the current issues that you see surrounding the business, would you like to give any directional comment, at least related to 2017, and the current Street estimates?

Keith, thanks for the question. It's just too early to note 2017. What are the things that will influenced revenue next year?

Certainly what happens with healthcare M&A, that's one piece. What happens with the interest rate environment for our financial services clients will be very important, because financial services clients know they have to spend a lot on innovation, but are under tremendous cost pressure right now, and that's both in insurance and banking. The pace of which we actually closed these new end-to-end services deals will be important. All those can be big drivers or big variables in revenue growth for next year.

It's just too early to know, I think the election will have some impact. General macroeconomic trends, and then some regulatory stuff. But as we've all mentioned, when we look at the medium and long-term prospects for the business, we remain very bullish. This strategy of look in the front, middle, and back office and really building up our capabilities to serve clients across all three of those dimensions, I think is going to position us very well. What will both overall macro spending look like, and a couple specific customers things look like for us for next year, just too early to know. Obviously, as we get more color, we'll share it with the investment community.

Jim Schneider, Goldman Sachs.

I was wondering if you could maybe comment on your overall headcount plans. You added a little over 11,000 this quarter, I know it was a relatively strong headquarter add last quarter as well. Could you maybe talk about what you expect that to do for the remainder of the year, and just broadly speaking, what it reflects in terms of your pipeline of longer-term business? Thank you.

Sure. So utilization came down a little bit in the first quarter, that was intentional. We added 10,000, 11,000 people in Q1, as well, even though revenue was down, because we wanted to position ourselves to make sure as client demand shifts a little bit, we have the capabilities, as we finish up retraining our workforce.

Certainly, headcount additions will slow in the back half of the year from the front half. We don't give specific headcount guidance, but our goal would be to keep utilization in the ballpark that it currently is. And certainly that gives us enough bench capacity for potential ramp-ups, and certainly for positioning ourselves for next year. You get a little bit of seasonality quarter-to-quarter, just because of the timing of bringing college kids in and so forth. But the way I think about it is we are managing utilization to be fairly constant with where it currently is.

Bryan Bergin, Cowen.

Just want to expand on the a vertical pullback that you cited within information services. Is that broad-based or more limited to a handful of clients? Thanks.

Bryan, this is Raj. It is limited to a handful of clients. Some of those clients are reevaluating in terms of some of their discretionary spend that they have. We feel still very optimistic about those clients, because we're having broader conversations in terms of how do we look at the broader platform, and to continue to drive some of the cost optimization that they need, but overall the industry for us is still quite bullish for us.

Jason Kupferberg, Jefferies.

This is Amit Singh for Jason. Just on the cash repatriation, considering the historic low interest rates that are going on right now, why repatriate cash and pay taxes on it, versus just raising debt over here? And also just related to that, sort of the timing of the repatriation. If you look at your full-year guidance, I don't think your modeling a lot of share buyback, considering too what you were expecting last quarter, so a lot of M&A, should we expect that to happen over the next couple of quarters, using most of the cash that you repatriated?

But this is Karen. The repatriation was a one-time opportunity. There was an opportunity that closed as of June 1, so we had a time limit as to when we were able to do that, and we wanted to obviously take advantage of that opportunity to repatriate cash in a relatively tax-effective way from India. As you know, it's typically very expensive to do that, and we don't get much opportunities, so we certainly wanted to take advantage of that.

And I think as we've mentioned, the guidance assumes that we maintain essentially share neutrality which has been our stated position recently. Obviously, if there opportunistic opportunities to buy back shares we will take advantage of that, but clearly we look to use that cash net additional flexibility to drive investment in the business, both organic and inorganic.

It's also important to remember the questions have been focusing on cash brought back to the US. Additional cash was also brought back to non-India locations which is more advantageous for us, both in terms of efficiently doing non-US acquisitions, and if there's ever any repatriation holiday in the future. Operator, this will be the last question.

Joseph Foresi, Cantor Fitzgerald.

I was wondering, could you talk about in this particular quarter, the breakdown of the revision of guidance between some of those concerns that are out in the market, which include obviously healthcare, the banking sector and discretionary spending. Because it seems like the FX was maybe a minor part, and then I've got just one follow-up.

Sure. As we said, the FX impact of the revision guidance was $40 million, of the change. When you look at the other pieces, it overlaps a bit. Right?

Certainly the single biggest impact was our financial services segment. Whether it's the Brexit vote, or the general macroeconomic environment, it's tough to parse that and the low interest rate environment. But certainly our forecast changed the most in that sector. And after that, the next one would be healthcare, with some of the regulatory approval issues that are going on right now for M&A. And then the little things are out there.

But the other thing we wanted to make sure is that when we adjusted guidance, we learned a little bit last quarter -- you don't want to keep adjusting. So we wanted to make sure we adjusted it enough that we are well positioned for any additional surprises that may happen, because of uncertainty around the elections, Brexit, and so forth. So we wanted to be conservative when we cut, so we cut just once, or at least just this one additional time.

Got it and then just as you look at kind of heading into 2017 and beyond, I guess the question for investors are, how much of this is a short-term 2016 phenomenon, versus what we've seen over the last couple of years with the changes in the way that you've given guidance, and now, of course, today's cut. So maybe you could just talk about your outlook briefly heading into next year, and help us understand how this is a short-term thing versus a long-term.

It's Frank. Maybe I'll try to take that. And I'll answer it, obviously, as Gordon said earlier to one of the earlier questions, it's premature for us to comment specifically on 2017, but what I will say is that we continue to remain very optimistic about the fundamentals of the industry, and of our business.

From an industry standpoint, as I've said many times, the key factor to look at is that the world is becoming more technology intensive, not less technology intensive. Across the industries as we serve, and also industries where we are less present, more energy and attention is being focused on technology than ever before. Technology has become not just a way of driving efficiency and operational effectiveness for businesses, but it's become a core to most clients' ability to differentiate, to grow revenue, and to survive in the marketplace. So given that backdrop, we feel that there is a tremendous opportunity for IT services in general, and for Cognizant in particular, given the tremendous investments that we've been making. We feel that the investments that we've made in digital on the front end, process and platforms in the middle office, and our next-generation IT services in the back end, really position us well.

And I'll just finish by saying that we feel that the portfolio of businesses that we have, whether you look at the industry portfolio or the exposure we have to different geographies of the world, represent some of the most progressive and advanced users of digital technologies. And so we feel that the fundamentals remain strong, as we look to the medium term.

So on that note, I'd like to thank all of you for joining us today. Thank you very much for your questions, and as always we all look forward to speaking with you again next quarter.

This concludes today's Cognizant Technology Solutions second-quarter 2016 earnings conference call. You may now disconnect your lines.