高知特 (CTSH) 2017 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

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

Thank you, operator, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's third quarter 2017 results. If you have not, a copy is available on our website, cognizant.com.

Additionally, we have loaded an investor presentation onto our website. This presentation covers the key points discussed on this call. The speakers we have on today's call are Francisco D'Souza, Chief Executive Officer; Raj Mehta, President; and Karen McLoughlin, Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risk and uncertainties as described in the company's earnings release and other filings with the SEC, including our Form 10-Q filed later today.

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 today. Cognizant delivered solid third quarter results. Q3 revenue was $3.77 billion, which is at the high end of our guided range and up 9.1% year-over-year. 3 of our 4 business segments were strong contributors to our performance. Healthcare, Product and Resources and Communications, Media and Technology averaged double-digit growth rates.

Our third quarter digital-related revenue grew well above company average. And to further enhance our digital capabilities, we recently announced 2 acquisitions: Netcentric, a leading independent Adobe partner in Europe and a leading provider of digital experience and marketing solutions for some of the world's most recognized brands; and Zone, a U.K.-based leading independent full-service digital agency that specializes in interactive digital strategy, technology and content creation. These acquisitions will broaden our portfolio of digital services and solutions.

To continue with our financial results, non-GAAP EPS for the quarter was $0.98 and our non-GAAP operating margin was 20%. For 2017, we've delivered 3 consecutive quarters of strong execution at the top and bottom lines. This consistent performance underscores the soundness of our strategy and investments and the continuing strong demand for our portfolio of services.

Turning to guidance. We are again raising the low end of our revenue guidance range and expect full year revenue to be in the range of $14.78 billion and $14.84 billion, and we expect our full year 2017 non-GAAP operating margin to be at least 19.6%.

Now we're in the business to help our clients adapt, compete and grow in the face of continual shifts and disruptions within their markets. Therefore, we've systematically built out significant capabilities to enable clients to transition from the physical to the digital world. Today, making that shift has become mandatory for them.

Most clients now know they must become digital enterprises themselves or, more precisely, the right mix of physical and digital. So we work with them to transform their business, operating and technology models simultaneously. This 3-layer transformation is what we mean when we talk about digital at scale.

In prior calls, we've discussed how we enable this transformation, applying our deep industry knowledge, innovation, advanced technologies and consulting expertise. More recently, we've also been emphasizing our client co-innovation centers and our platform-based software and solutions. The result of developing and integrating all these capabilities and intellectual property is that we are turning Cognizant into a different kind of company that's envisioning and building the digital economy. Increasingly, we see ourselves as a leading firm that develops repeatable solutions by fusing software and services to deliver business outcomes that make a real difference to clients. And this morning, I'd like to highlight how this new Cognizant is resonating with clients and winning in digital.

The best place to begin is with a few client examples of digital at scale delivering a competitive upside for Cognizant. For a U.S. car company that's preparing for a future of ridesharing and driverless cars, a team of consultants, developers and social scientists from Cognizant and ReD Associates helped to reimagine the relationship between driver and automaker. And then they jointly developed a marketplace that offers mobility services to help drivers move around more easily and access services remotely, from vehicle diagnostics to smart parking reservations.

For a leading financial institution facing slowing growth in a major business, Cognizant developed an artificial intelligence-enabled robotic investment adviser that would appeal to a new market of approximately 90 million millennials and that will enable the firm to achieve its goal of doubling retail assets under management by 2020. To envision and build this digital solution, we brought a cross-functional team from the client together with Cognizant Digital Business designers, strategists, technologists and financial services experts.

And we also helped a leading life sciences company bring to market new drugs with proven therapeutic benefits for smaller patient populations. We assembled a team of doctors, nurses, pharmacists and technology and design consultants to drive efficiencies in the clinical development process and apply digital marketing techniques. As a result, the client was able to achieve the goal of bringing new therapies to even relatively small patient populations. Absent this new approach, these drugs might not have been economical to develop and market. The upside for Cognizant is that most of the world's companies are now dealing with these digital at scale challenges in one form or another, and therefore, we can keep combining our services and software in new ways to create repeatable solutions for a wide variety of clients.

Our enterprise transformation is such demanding work that we make sure that all our services and solutions are organized from the client's perspective, which is why, last year, we established Cognizant Digital Business, Cognizant Digital Operations and Cognizant Digital Systems & Technology. These 3 practice areas, which run across our business segments, mirror our clients' needs and the parts of their enterprises they need to transform. And Raj will talk about how our digital practices are progressing in solving clients' current and emerging challenges.

Within these practices, our value to clients’ hinges, of course, on the depth, breadth and currency of our knowledge. So we've been aggressively building high-end digital skills in areas such as data science, design thinking, cybersecurity, the Internet of Things, artificial intelligence and automation. But strong digital skills alone are not enough so we combine these skills with our industry expertise to speak the language and understand the core processes and technologies of every industry we specialize in, and we draw on this knowledge to build specialized software platforms and industry-specific solutions to quickly create new value for clients.

We can see all of this come together, for example, in the way we've invested to extend our leadership as a fully integrated digital health care technology and operations provider. We've made major health care investments beginning with the TriZetto Healthcare administration platform, a leading software platform used by payers and providers. Earlier this year, we moved our TriZetto products to the Microsoft Azure cloud and launched our Healthcare Cloud Solution, a SaaS platform for health care payers of any size.

And having completed the TMG Health acquisition in August, we've now combined TriZetto with the business process services of TMG. TMG Health has further strengthened our scalable Business Process as a Service or BPaaS solution for the government and public health program markets. These investments, along with our market-leading footprint in the commercial space, establish Cognizant as the top solution provider of enhanced government process platforms, digital solutions and services for commercial and government-managed health care programs in the U.S.

Since TriZetto, we've invested in many other platforms in areas such as digital content operations, sales transformation, mortgage servicing and patient safety. All of these technologies and platforms provide the benefits of scale, enabling Cognizant to develop repeatable offerings that can be used by multiple clients across multiple markets.

While digital at scale is a heavy lift, Cognizant has the resume to execute this transformation successfully. It starts with a high level of client trust that encourages and enables the successful co-innovation of solutions with clients. Once we've established a vision for the future, we know how to design, prototype and scale digital experiences to reshape client's products and business models.

But building digital experiences for the front-end of a client's business is not enough. We have the deep knowledge to help clients reengineer, digitize, manage and operate their core business processes and build software platforms for specific processes and industries. We couple this with a mastery of the technologies, software and tools to develop digital solutions as well as the ability to combine digital technologies with client's heritage systems and applications, and we provide much of this capability to clients using our highly efficient and reliable global delivery model, which works at scale.

And finally, we have the global consulting expertise to advise on strategy, operations and technology and orchestrate all of the knowledge, services, software and solutions that come together to enable enterprise transformation. Cognizant brings this entire set of capabilities to the table. That's what continues to differentiate us in the marketplace. And by integrating all of these capabilities and intellectual property, that's how we are turning Cognizant into a different kind of company that's envisioning and building the digital economy.

And now over to Raj, who will talk about the work our 3 practices are doing to drive digital at scale for clients and then review our business segment performance. Raj?

Thanks, Frank. At the core of our competitive advantage in digital is our ability to lead clients through the 3-layer enterprise transformation Frank just described. This work is the focus of our 3 practice areas.

Cognizant Digital Business helps clients conduct business digitally by developing virtual channels with customers and creating smart products. Our experts design, prototype and scale digital experiences to reshape clients' products and business models, all aimed at generating new growth. Cognizant digital operations draws on deep process and technology knowledge to help clients reengineer, digitize, manage and operate their core business processes to lower costs and deliver growth. And Cognizant Digital Systems & Technology works with clients to simplify, modernize and secure their heritage IT infrastructure and applications.

In addition, our nearly 6,000 consultants advise CEOs, CFOs, chief operating officers and line-of-business heads, in addition to the CIOs we've long worked with on issues that cut across strategy, operations and technology. Digital at scale requires our clients to rebuild all 3 models. Cognizant will often apply the capabilities of all 3 practice areas on their behalf.

Here's an example of our multi-practice efforts. We're partnering with a leading provider of educational content that needed to pivot its business to deliver more affordable next-generation learning that is both interactive and immersive. In the first stage of our work, Cognizant Digital Systems & Technology helped the client set up a shared service center. The center consolidated their global systems and technologies, delivering economies of scale and saving tens of millions of dollars and has become the backbone of the client's more agile and efficient IT operations.

In the second stage, our digital business teams worked with the clients to develop a new operating model for content that leads with digital delivery. To achieve this, the operating model included building learner-centered design labs that will enable experience-based learning. And in the next stage, the prototypes from these labs will be developed into interactive content within the client's content operations center, which Cognizant digital operations will run.

By the way, this was a consulting-led engagement. Our consultants defined a road map for the future of content operations and then put together the full range of services and solutions from our 3 practice areas. By understanding this transformation journey, our clients will achieve efficiencies that can be reinvested in designing, building and distributing tomorrow's educational content.

Now let's turn to the financial performance of our business segments and geographies. Banking and Financial Services grew 3.8% year-over-year. We had a solid contribution from our insurance business and double-digit growth in our mid-tier banking accounts. This helped to offset the continuing weakness of large money central banks, which remains focused on optimizing their spending on legacy systems and operations as they shift investments to new areas of spend such as digital.

Among the recent wins in the segment is Voya Financial, which engaged us for an end-to-end transformation that included infrastructure, security and data-centric transition. Voya, a long-standing client of ours, chose Cognizant for this expanded engagement because of our history of reliable delivery and our advanced as-a-service model, which will enable them to substantially improve service levels while lowering their cost.

In Healthcare, our third quarter revenues were up 9.3% year-over-year. We saw consistent demand across payer clients and increasing interest in our digital, analytics, cloud and virtualization solutions. As Frank mentioned, our third quarter acquisition of TMG Health extends our position as a leading software and services health care partner. In fact, Cognizant now provides products and services to more than 230 organizations that support a substantial percentage of the Medicare Advantage and Managed Medicaid markets.

And to further enhance our health care consulting expertise, we acquired Top Tier Consulting, a California-based health care management consulting firm with strength in strategy, operations, IT and business intelligence. We're well positioned to capitalize on the continuing digitization of the health care industry as it strives to reduce costs, improve quality of care and deploy new business models.

Let's turn to Products and Resources and Communications, Media and Technology. Products and Resources grew 14% year-over-year. We continue to see strong growth with our manufacturing logistics clients and our energy and utility clients, which offset sluggish growth in retail. The strength in manufacturing reflects both our emphasis on leading with digital offerings and the fact that CXOs increasingly engage us to create smart products and transform their business models.

Communications, Media and Technology had another strong quarter of broad-based growth, up 18.2% year-over-year. The third quarter saw solid growth across this segment with an expansion in areas like creating and curating content. Our clients are turning to Cognizant to help them transform the delivery of their customer-facing channels by improving the experience with personalized and rich content.

Now a quick look at our performance by geography. Europe grew 16.9%, and the rest of the world was up 19.9% year-over-year. Within Continental Europe, we signed a 10-year agreement to become the strategic provider of IT and business process services for a major Belgian-French financial institution. The goal is to transform their technology infrastructure and lay a foundation for more agile, efficient and secure operations. This agreement and the digital at scale work we're doing has brought applications to other clients, and it builds on the platform strategy that Frank discussed. For example, the managed service platform we're developing will provide a utility for processing structured loans for other European clients.

Cognizant's progress is receiving broad validation from industry analysts. Everest Group named us as 1 of only 2 star performers at the top of its leaders' quadrant for redefining the customer experience with digital. And ISG Research ranks Cognizant a leader in its cloud provider research, citing our leadership in public cloud infrastructure consulting, implementation services, managed services and brokerage. I'm also pleased to mention that Fortune magazine has named Cognizant to its new Fortune Future 50 List, the rankings of U.S. companies that are best positioned for breakout growth.

Clients turn to us to lead them through their enterprise transformation journeys because they simply do not have the range of skills to do this work themselves. What's more, the technology is constantly evolving and digitally skilled people remain scarce. Cognizant has long invested heavily in the retaining and reskilling of our associates. But building skills when technology changes as fast as it does today requires an expanded approach. That's why we are pursuing several tasks to attract, build and retain the workforce of the future. These include developing and acquiring skills in advanced technologies, exploring new sources of talent and investing in public-private partnerships to provide intensive technology training programs.

In addition, we're building and expanding our local delivery centers across the globe. That way, we can quickly deploy talent closer to our clients while establishing training hubs with our education partners to reskill the local workforce. Cognizant is absolutely committed to recruiting and training associates everywhere we are. To sum up, to stay competitive, our clients are determined to do digital at scale, and they view Cognizant as a go-to partner to help them become digital enterprises.

Karen, over to you.

Thank you, Raj, and good morning, everyone. Q3 performance is solid, and we continue to make significant progress on each element of our overall plan. Third quarter revenue of $3.77 billion was at the high end of our guidance range and increased 9.1% year-over-year. Non-GAAP operating margins, which excludes stock-based compensation expense, acquisition-related expenses and realignment charges, is 20%, and non-GAAP EPS was $0.98.

In the third quarter, we completed the $1.5 billion accelerated share repurchase program, and today, we declared a quarterly cash dividend of $0.15 per share for shareholders of record at the close of business on November 20. This dividend will be payable on November 30.

Now let me discuss additional details of our financial performance. Consulting and technology services represented 58.6% of revenue; and outsourcing services, 41.4% of revenue for the quarter. Consulting and technology services grew 11.3% year-over-year, driven by an increased demand for digital solutions. Outsourcing services revenue grew 6.1% from Q3 a year ago. During the third quarter, 38% of our revenue came from fixed-price contracts. We continue to make progress towards shifting the mix of our business over the longer term towards more fixed-price or managed services arrangements.

We added 7 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 350.

And now moving to an update on margin. In Q3, we continued to take actions that will improve our cost structure and operating margins while allowing us to continue to invest in the business for growth. These actions resulted in approximately $19 million of charges related to the realignment program, primarily from severance costs incurred in the quarter. Going forward, we expect to incur additional costs related to advisory fees, severance, lease termination and facility consolidation costs. Additionally, as we accelerate our pursuit of broad-based, high-value digital transformation work, we will continue to reassess less profitable opportunities that do not further our position in the digital marketplace. We remain committed to reaching our target of 22% non-GAAP operating margin in 2019 by balancing growth and profitability and, to date, have made significant progress towards this target.

Utilization in Q3 moved higher as we continue to effect structural changes in our headcount management. We expect that these changes will help improve our resource alignment, help drive greater operational efficiency and thus, improve our profitability. While our overall headcount was essentially flat, growth hires were almost 14,000 in the quarter. Annualized attrition of 22.5% during the quarter, including BPO and trainees, increased from 16.6% in the year-ago period but declined over 100 basis points from the previous quarter. While our attrition level was higher than normal, partially due to the continuing impact from performance management and severance programs initiated in the first half of the year, we did see an increase in voluntary attrition during the quarter. While we will, of course, carefully manage headcount, we will continue to hire and invest in critical skills needed to grow our digital business as well as work to bring voluntary attrition back to more normal levels.

Our offshore utilization for the quarter was 79%. Offshore utilization, excluding recent college graduates who are in our training program, was 82%, and on-site utilization was 93%.

Turning to our balance sheet, which remains very healthy. We finished the quarter with $4.7 billion of cash and short-term investments. We had strong operating cash flow in the quarter, generating $773 million, reflecting improved profitability of the business. Receivables were $2.9 billion at the end of the quarter, and we finished the quarter with a DSO including unbilled receivables of 74 days, down slightly from the year-ago period. Our unbilled receivables balance was $403 million, broadly flat from the end of Q2. We billed approximately 61% of the Q3 unbilled balance in October. Our outstanding debt balance was $823 million at the end of the quarter, and there was no outstanding balance on our revolver.

As part of our ongoing commitment to return capital to shareholders, we completed the $1.5 billion ASR in quarter 3 and received and retired 2.2 million shares in addition to the 21.5 million shares received and retired at the commencement of the ASR in March. Our diluted share count was 592 million shares for the current quarter.

I would now like to comment on our outlook for Q4 and the full year 2017. Following our continued strong performance, we are again raising the low end of our full year 2017 guidance range to be in the range of $14.78 billion to $14.84 billion or year-over-year growth of 9.5% to 10%. Our guidance is based on the current exchange rates at the time at which we are providing the guidance and does not forecast for potential currency fluctuations over the course of the year.

For the fourth quarter of 2017, we expect to deliver revenue in the range of $3.79 billion to $3.85 billion. For the fourth quarter, we expect to deliver non-GAAP EPS of at least $0.95. This guidance anticipates a share count of approximately 592 million shares and a tax rate of approximately 26%.

For the full year 2017, we expect non-GAAP operating margins to be at least 19.6% and to deliver non-GAAP EPS of at least $3.70. This guidance anticipates a full year share count of approximately 595 million shares and a tax rate of approximately 23%. This guidance includes the full impact of the $1.5 billion ASR. We remain committed to our plan to repurchase an additional $1.2 billion by the end of 2018 and will provide additional details on that program at a later date.

Our non-GAAP EPS guidance excludes net nonoperating foreign currency exchange gains and losses, stock-based compensation, acquisition-related expenses and amortization and realignment charges. For the full year, it also excludes the recognition in Q1 of the income tax benefit that was previously unrecognized. Our guidance does not account for any potential impact from events like changes to immigration or tax policies. In summary, we have continued our momentum throughout 2017, and we expect to close out the year with solid revenue and earnings growth, along with a substantial capital return to shareholders.

Operator, we can open the call for questions.

(Operator Instructions) Our first question comes from the line of Tien-tsin Huang with JPMorgan.

Good results here. Just I wanted to ask actually about your margin performance, especially in SG&A, which stood out. It was especially low versus our models. So a couple of questions there. Just your confidence that the lower SG&A so far hasn't hurt your sales pipeline, your ability to be -- replenish the pipeline, the backlog. And then also, just gross margin implications in the fourth quarter and next year, given all the moving pieces with utilization and wages and whatnot. I know you manage to overall margin, but just kind of any help between the 2 lines would be appreciated.

So Tien-tsin, this is Karen. Thank you. I think we've been very thoughtful around cost management this year. We knew going into 2017, based on the work that we did late last year, that there were opportunities to more effectively manage our SG&A spend, particularly around the corporate functions, and we've talked about things like facilities and other costs within SG&A. So while SG&A overall is down in terms of dollars Q3 versus Q3 of last year, we're very comfortable that we have protected the investments that we need to make to continue to grow the business, and I think you'll see SG&A move around a little bit from quarter-to-quarter as we continue on that path. In terms of gross margin, it is obviously trending a little bit lower than where it had been. Part of what happened in Q3 or a big -- significant part of what happened is that we did take up our variable compensation accrual rates during the quarter. Obviously, the business has performed very well this year. It's been a tough year for a lot of our folks as we've gone through a lot of this transition, and so we wanted to ensure that, as we move into next year, that we can pay out good variable compensation for the year. So that did put some pressure on the Q3 gross margin as it's a year-to-date catch-up. What you'll see as we move into Q4 is that raises and promotions will kick in, in Q4, effective in October. Typically, that's been in the July time frame. We did defer that this year with all the transition happening in the company. And then as you said, as we move into 2018 and beyond, we'll continue to manage to the operating margin targets that we've set for the organization.

Our next question comes from the line of Brian Essex with Morgan Stanley.

Karen, I was wondering if you can comment a little bit on contribution of TMG in the quarter, how that might impact your full year guidance. And the opportunity there, is that going to be maybe similar to TriZetto where you have longer sales cycles? Or how do you think about that? And how is that kind of built into the Healthcare portion of your platform?

Sure. So thanks, Brian. So the TMG deal did close towards the end of the third quarter. So there's a small amount of revenue in Q3 for that transaction. As you may know, the vast majority of that work is with one client, and then there were a number of other third-party clients as part of that contract. It will start to move towards a steady state essentially in Q4. We have not broken out the size of the transaction, but it is essentially straight-line revenue for the next 2 years. And then it will move to more of a transaction-based pricing model in the future. There's a combination of contract structures in that deal, but roughly speaking, it'll be straight line for the next few quarters of revenue. And we don't really -- sorry, go ahead.

Okay, I'm sorry. And any -- I know you had some, in the Healthcare segment, exposure to some consolidation. The rumors around transaction with Aetna and consolidation in the CRO market, are you seeing any of that? It doesn't really seem like you are, but just wondering if you -- that's coming up in conversations at all.

Go ahead -- I'll let Raj comment on that.

Yes. Look, Brian, I think, over our Healthcare -- Healthcare just remains strong for us. I'm not seeing any conversations or impacts right now of any potential acquisitions. I think, overall, as you know, we've invested a lot in our Healthcare business. We see strong growth in both the midsized payers along with the large payer companies out there. In addition to that, we continue to see a lot of opportunities on our BPaaS solutions.

Yes. So I think a little bit remains to be seen what happens if some of those deals go through. The Aetna-CVS deal, for example, I think it's early to tell at this point.

Our next question comes from the line of Keith Bachman with BMO Capital Markets.

I want to follow on Tien-tsin's question a little bit on the margins. It looks like you're guiding operating margins on a non-GAAP basis in Q4 to be, call it, the mid-19% level. And calendar year, it sounds like Q4, will also still benefit from some workforce realignment. My question is -- Karen, I think you said that in next year, calendar year '18, you wouldn't anticipate further headcount reductions. But I'm unclear on -- without the headcount reductions, how do you continue to advance those operating margins, particularly given some of the gross margin pressure that still seems to be exhibiting? If you could talk a little bit about the forces from here. How do you continue to try to march those operating margins up when most of your competitors' margins are eroding?

So Keith, let me break that into a few pieces. In terms of the Q4 margin, we are guiding to a slightly lower Q4 margin than Q3. That is because of the raises and promotions that will kick in, in October. That's typically about 100 basis points of margin decline. We have obviously not baked all of that into our guidance because we will continue to see some of the benefits accruing from the cost optimization that we've taken so far. So that's what's pushing down the Q4 margins. As we move into 2018 and beyond, we haven't really said that -- we haven't made a statement one way or the other, frankly, about headcount and what will happen to headcount next year. Margin improvement as we move into 2018 and then into 2019, 2018 will be a continuation of the cost savings that we generated this year. A number of those cost savings didn't start until the midsummer time frame so we'll get the full year benefit of that. There are additional cost-saving opportunities that we continue to look at, whether it be around facilities or travel or other types of expenses as well as headcount and what that means going forward. And then as we move further into '18 and into 2019, what we had said is that a lot of the margin improvement would come from the shift in the business towards the higher -- continuing to move towards higher-margin digital business as well as the BPaaS or platform business becomes a larger part of the organization and starts to mature and starts to reach a strong margin profile in that business as well.

Our next question comes from the line of Lisa Ellis with AllianceBernstein.

I guess another question on this point about -- now that you've got utilization levels back to basically their all-time highs, 93% on-site and about 80% offshore, can you give some detail around so what you're doing from a pyramid structure and operation efficiency initiatives to potentially take utilization up further as we look forward? I know you've talked about how you're sort of taking Cognizant into a new state of maturity when it comes to how you're managing the labor model. Can you just give a little bit of color around that? It feels like now you're sort of at the stage where you've gotten -- you've kind of gotten back to where you used to be, and from here, you've got to take it up one leg further.

Yes. So Lisa, I think that's fair in a sense. I think with the utilization, what we've always said is that as the business continues to grow and mature, that utilization rates should continue to trend upwards over time. It's 93% on-site. We can run the business very comfortably. I think you can get to 94% or maybe 95%, not sure you can get much above 95% on a consistent basis. Certainly, offshore, as we continue to grow, we think there's opportunities to continue to take up utilization. It won't be quarter-to-quarter, but certainly over the long term, that trend line should move upwards. I think as you mentioned, another one of the big levers we've been looking at is the pyramid. Historically, we have had a more top-heavy pyramid than our peer group. And in parts of the business, that makes a lot of sense. In other parts of the business, we think there's opportunity to optimize that. We are also starting to see things like automation kick in both on the delivery side of the organization as well as in our corporate functions. So if I look at my finance organization, for example, we're using automation to help streamline some of our processes in the organization, which allows us to scale the business without having to add headcount. So I think you'll see a number of those opportunities over the next few years.

Our next question comes from the line of Jim Schneider with Goldman Sachs.

I was wondering if you can maybe just address the financial vertical a little bit. Raj, you provided some helpful color, the difference between the weakness you're seeing from the money center banks and some of the strength in insurance and the smaller banks. Can you maybe give us a sense of, in your client conversations, what they're saying in terms of balancing increased IT budgets potentially in 2018, whether that is part of the conversation or not, versus the optimization of some legacy systems and kind of directionally, where you see their total consulting and outsourcing spend budgets going next year?

Yes. Jim, thanks. This is Raj here. So look, overall, Financial Services, it's strong growth that we're seeing on our insurance-based clients, continued a lot of work in terms of digital and obviously looking at new areas in terms of continued optimizing work that we're doing at those clients. The banks, it's a mixed story. I mean, we're -- as I mentioned earlier, we're seeing double-digit growth from the regional banks. But some of the challenges exist on these large money center banks that we have. And there, there's, I guess, a tale of 2 stories, right? There's, I would say, continual focus on the cost optimization, and they're obviously leveraging that to free up some of the dollars in terms of investing on the digital side of the business. Now the good news is, obviously, we're engaged in many of those digital opportunities with those banks, and actually, our digital revenues is growing at those banks in line with the rest of the company as well, too. So -- but we haven't seen there an influx of new budgets. Obviously, we're seeing the whole focus of, in terms of continued optimization, freeing up dollars and investing on the digital side.

Our next question comes from the line of Bryan Keane with Deutsche Bank.

Just was going to ask Francisco just an overall feel of how you guys are doing in transitioning Cognizant's business model to this new model. The plan to get to 22% adjusted operating margins in 2 years, just curious, are we ahead of plan, at plan, everything is going exactly how you thought? Just wanted to get just a feel for that. And then, Karen, just on digital, is there a percentage of total revenues digital now represents and maybe the growth rate?

Bryan, it's Frank. I'll talk a little bit about the overall plan. I think we are roughly right on track, right where we expected to be. The -- I think about the transition to or the shift to digital in 2 pieces. There's sort of the services that we offer to clients, and I think we continue to make great progress there. I'll let Karen comment on the overall digital revenue. It grew again double digit -- at a double-digit pace, much ahead of company average this quarter. The 2 acquisitions that we announced a few days ago, Netcentric and Zone, add to that capability, and we feel good about our -- the transition of the service mix to digital. I think it's also important that -- just to note that, as we've said before, that today, our portfolio -- if you look at the entire portfolio of digital revenue, it is running at a higher margin than the rest of the business. So overall, just a very healthy mix shift going on, and I think that, that will continue to unfold through 2018 and beyond. The other side of that -- of this transition that we talked about when we laid out the plan for you a couple -- a few quarters ago, at the beginning of this year, is on the margin improvement side. And I think we've demonstrated there that we are well on track there this year. If anything, I think we're a little bit ahead of where we thought we'd be. That's good. And we'll continue to -- we feel very comfortable, as Karen said in her prepared remarks, with the target of 22% by 2019, and I think we'll just keep executing on that. And I'll turn it to Karen to talk about percent of digital revenue.

Yes, sure. Thanks, Frank. So we did not break out the percentage of digital revenue last -- this quarter rather. But as you may remember, last quarter, we said it was about 26% of revenue. It continues to grow upwards of 25% year-over-year and continues to become a larger part of the business each quarter. One of the things we've also been looking at, which Raj referred to in his comments about BFS, is that we're seeing very nice traction really across all of the business units and all of the industry. So we continue to see very good progress there, and we'll continue to update as there's relevant information on that metric.

Our next question comes from the line of Moshe Katri with Wedbush Securities.

Going back to the commentary regarding large money center banks and their spending patterns. Raj, is there any indication about the outlook for 2018? And is there an expectation internally in terms of when some of those deals that you're talking about could actually start converting?

Yes, Moshe. So look, it's a little bit too early right now to start looking into 2018. Obviously, I think the bigger opportunity comes, as what we've always talked about, as digital at scale. And many of these large money center banks, we have numerous engagements going on. But I think as those opportunities become larger, that's when we have an opportunity to see back to the growth that we've gotten accustomed to at those banks.

Having said that -- Moshe, it's Frank. I think it's worth adding one additional piece of color for you, which is that Karen mentioned that last quarter, digital revenue as a percent of total company revenue was about 26%. We are right around there in Financial Services as well. So this isn't a story of we are waiting for digital revenue in Financial Services to convert. We are already doing a substantial amount of work in digital in Financial Services. So I don't think by any stretch that we are not a significant player in the digital aspects of Financial Services as these big money center banks start to think about and start to execute on their digital plans.

But would you say that some of those deals that you're talking to those large banks about, could -- if they do convert to digital, could be pretty significant down the road?

Again, I want to separate. We're already doing a considerable amount of work. So yes, there are deals that if they convert could be significant going down the road, but we are already -- the point I was making, Moshe, is that, today, digital is already in Financial Services. It's roughly in line with our company average. So think about the 26% number. We are right around there in Financial Services, so we're already doing a considerable amount of work in digital in Financial Services.

Yes. So I think -- Moshe, this is Karen. Let me just sort of wrap that up. I think, as both Frank and Raj talked about, right, strong digital business in banking. I think it is too early to say whether or not that results in a net increase in growth in 2018. We're not making any commentary right now on 2018 or whether we continue to see the shift that we've been seeing with the banks today, which is they take money from one pocket in terms of their legacy spend or their business-as-usual spend and redirect that spend to digital. How that balance plays out in 2018, I think it's too early to tell.

Our next question comes from the line of Arvind Ramnani with KeyBanc Capital Markets.

I just had a question on the Healthcare business. Over the past few years, your Healthcare capabilities has been materially enhanced based on the internal capabilities, acquisitions, client base. At the same time, the health care market has changed and expected to continue to change with value-based care, et cetera. How do you think about the opportunity in the space over the next 2, 3 years? And how do you feel you are positioned?

Look, I think -- Arvind, I'll let Raj answer as well, but it's Frank. Look, I think change is -- change plays to our strength actually. As the health care market changes and evolves, we have just sort of a very strong end-to-end portfolio of service offerings, whether that's consulting to help our clients figure out what they need to do to respond to the changes, whether that's operating in terms of our BPaaS offerings and our ability to run core parts of the operation for our client or whether that's on the technology front as they think about modernizing and digitizing their technology backbone. I think we are very well positioned both at the business model, the operating model and the technology model level. So as these changes come to health care, given that we have such a strong portfolio of assets, both software assets, intellectual property in the form of our people and capabilities, I think you put that together and we're very -- we feel like we're very well positioned for health care going forward.

Yes. I would just add to Frank's comments. I think we've obviously seen a lot of traction around our BPaaS solutions and then strong growth in the payer space as well. But I think as we move -- look out, as the health care industry continues to evolve, you're starting to see a lot of providers, large providers come up with own plans, and I think that's a good opportunity for us as well with evolution. Obviously, they're showing a lot of interest in our BPaaS solution as well. So I think we're well positioned and continue to look forward for next year.

Our next question comes from the line of Darrin Peller with Barclays.

First question is just on EmblemHealth and the impact on the quarter. How much was that still not run over from third quarter last year? And I guess that should be fully out in fourth quarter. I think we estimated around 100 bps or so to the overall growth rate, but just whether TMG is offsetting that. And then just a follow-up on capital allocation. You finished the $1.5 billion accelerated buyback. I know you have a couple of million in your authorization left. I just -- I don't remember ever hearing, but can you tell us what you guys would want to do for capital allocation towards acquisitions just given the digital push? And on that topic, what was inorganic -- what contributed to inorganic growth this year from acquisitions?

So Darrin, it's Karen. Let me start, and Raj and Frank can join in as necessary. Let's start with the capital allocation question around the buybacks. As you mentioned, right, we completed the ASR in Q3. We have also committed that between now and the end of 2018, we'll allocate another $1.2 billion back to a buyback program. We haven't defined that. We'll provide more color on that in appropriate time. We have not broken out the dollars that we're committing towards M&A, but certainly, in our capital allocation strategy, we have withheld a nice fair amount for M&A deals. We've talked now for some time about ramping up the volume of those deals, and obviously, we've been doing that. We've closed -- or signed rather, not closed, 2 deals last week. And certainly, our pipeline of M&A deals is quite active, and so we would expect to continue to ramp up that volume of deals. And we'll keep a nice balance between returning cash to shareholders versus both organic and inorganic growth for the organization. In terms of TMG and Emblem, so Emblem, as you said, did start to lap in the middle of Q3, so small incremental year-over-year revenue growth for Emblem. And then in Q4, that will fully lap. And then TMG, as we said, we haven't broken out the size of the TMG relationship, but it did start in the last part of the third quarter and will obviously ramp to full scale in Q4. In terms of overall organic versus inorganic growth, the inorganic growth in 2017 is very small. We had a couple of -- Mirabeau, Idea Couture and so forth, which were all very small deals that we've closed over the last 12 months, so a very small percentage of growth this year has been from inorganic.

Our next question comes from the line of Bryan Bergin with Cowen and Company.

I wanted to ask on the marketing-related acquisitions you added last week and then others in the past. Can you just talk about how you're integrating them into your tech services or if you're running them autonomously, how that will work? And then what are really the top 2 or 3 KPIs you're using to determine the right targets for you?

It's Frank. Let me take that. When closed, the 2 acquisitions will become part of the Cognizant Digital Business practice area. So recall that, as I said in my prepared remarks, we have, and Raj talked about as well, 3 big practice areas: Cognizant Digital Business, Cognizant Digital Operations and Cognizant Digital Systems & Technology. These 2 acquisitions will become part of Cognizant Digital Business. We will continue to let them operate relatively independently, but of course, we have a synergy plan which is largely focused on revenue synergies around taking their capabilities and taking those to a broad range of Cognizant clients. We do a tremendous amount of marketing work today for our clients across all 3 practice areas. So in Cognizant Digital Business, we are doing marketing work that relates to content, content creation, marketing, marketing strategy, channels, those kinds of things. In Cognizant digital operations, we're doing marketing-related work that's largely around content and content management, content creation and curation that Raj spoke a little bit about in his prepared remarks. And in Cognizant Digital Systems & Technology, we're doing a lot of marketing work that you can think about in the broad area of marketing technology, right? So across all of our 3 practice areas, we are doing a significant amount of marketing-related work. These acquisitions in a sense will allow us to put a front end on a lot of that work that we're doing and take that to clients in a more integrated and holistic way. And so -- and that's our broad clients. So we'll run them relatively independently, let them continue to do the great work that they've been doing for their clients. We'll execute on the revenue synergy front by bringing them -- largely by bringing them into our clients. We think there may be some opportunity to cross-sell our traditional services into their clients, and we'll continue to execute on that going forward.

Our next question comes from the line of Anil Doradla with William Blair.

So Francisco and Karen, you guys talked about the 22% target. So that's about 200, 250 bps from where you're going to exit this year. So if I look at the trajectory, is most of that increase going to be coming in '19? Or is it '18? Or is it linearly spaced out based on some of the efforts that you guys are doing?

So Anil, we obviously haven't given 2018 guidance yet, but you will -- you should expect to see some benefit next year. And then the last part of it will be in 2019.

Okay. Francisco, you talked about repeatable business in your opening comments. Are you introducing some new metrics to kind of quantify that? Some are the obvious metrics, but are you creating some new incremental metrics to emphasize on some of that repeatable aspect of the business?

Yes. I think what I was referring to when I talked about repeatable is the sort of the solution packages and solution offerings that we're creating, which we've been talking to you about in the past, things like our BPaaS offerings and so on and so forth. By combining sort of our services and software capabilities increasingly together, we're creating these -- think of them as solution offerings, capabilities that we take to the market. We've always, as a company, tracked repeat business from our existing clients. And I think that's where you'll really see it continue to play out, is repeat business from our existing clients because that's really the metric that we focus on, is to say, are we continuing to be relevant to our existing clients? And to be relevant to our existing clients, we've got to continue to innovate, we've continued -- we've got to continue to find new sources of value. And that shows up in repeat business because every year or every period, our clients are assessing the work we're doing for them, and they're choosing to give us new work based on the relevance of that work. So the metric that we use internally is repeat business from our existing customer base, which is a metric we've been tracking for -- from the beginning, as far as I can remember.

Ladies and gentlemen, we have come to the end of our time allowed for questions. I'd like to turn the call back to Mr. D'Souza for any closing comments.

Well, Thanks very much. Look, everyone, thanks again for joining us today, and thanks for your questions. We're pleased with the results this quarter, and I look forward to speaking with you again next quarter. Thank you.

Thank you. This concludes today's Cognizant Technology Solutions Third Quarter 2017 Earnings Call. You may now disconnect.