高知特 (CTSH) 2002 Q2 法說會逐字稿

Good morning, my name is , and I will be your conference facilitator. At this time, I would like welcome everyone to the Cognizant and Technology second quarter, 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the No. 1 on your telephone keypad. If you would like withdrawal your question, press star, then the No. 2 on your telephone keypad. I will now turn the call over to Mr. of Morgan, Walk and Associates. Sir, you may begin your conference.

Thank operator, and good morning everyone. By now you should have received a copy of yesterday's press release. If you haven't, please call F.D. Morgan Walk at 212-850-5664. On the call today, we have Kumar Mahadeva, Chairman and CEO, and Gordon Coburn, Chief Financial Officer, of Cognizant Technology Solutions. Before we begin, I would like to remind you that some of the comments made on today's and some of the responses to your questions may contain forward-looking statements and statements are subject to risks and uncertainties as described in the company's earnings release and other filings with the SEC. And now I'd like to turn the call over to Kumar. Please go ahead.

Thank you and good morning. I'm pleased that you've joined us to discuss what was an outstanding quarter for Cognizant. In the second quarter, we experienced accelerated sequential revenue growth, ending the quarter with $54.4 million in sales, up 17 percent from the first quarter of this year and 20 percent over last year's second quarter. Net income for the second quarter increased to $8.6 million, or 41 cents per diluted share, from $5.8 million, or 29 cents per diluted share in the second quarter of 2001 under the head of Wall Street consensus. Revenue for the second quarter exceeded our expectations and represented the highest quarterly revenue in Cognizant's history. Our success this quarter was driven by continued sequential growth in applications management and a modest increase in development work for existing clients. This marks the second quarter in a row that we have experienced solid sequential growth in these two areas, and we think that we are seeing the beginning of a trend. In the quarter our application management services represented 57 percent of revenue and application development and re-engineering accounted for 43 percent of revenue.

E-business, which primarily falls under application development, was approximately 29 percent of revenue. As in the past, we had strong repeat business with approximately 90 percent of our revenue coming from clients with whom we have been working for longer than one year. We added 12 new customers this quarter, primarily large, blue-chip names with substantial revenue potential. Our VIN rate in large-scale, strategic IT outsourcing deals remains high, at around the 60 percent level. Because of our high VIN rate, we are gaining market share from our off-shore competitors and continue to win more steals against domestic companies with off-shore capabilities. We anticipate continued growth as CEO's and CIO's increasingly turn to the off-shore model to meet their business performance objectives. The market continues to turn in the direction we expected. Our clients are rapidly expanding their offshore programs this year and expect to continue this in to 2003. Investments being made in our enterprise consulting service line is paying off as we start to see renewed demand for e-business, and .

Cognizant is strongly positioned as one of only a couple of offshore companies able to execute large scale Big Five type projects and our clients are increasingly turning to us for this type of work. The early commitments we made in our market strategy are also paying off as knowledge - as demand knowledge becomes a key differentiator. If you look at the quarter on a basis, we performed well in each of our key .

Financial services continues to perform well for us with all financial plans continuing to ramp up their use of our services. Financial services is now 30 percent of revenue. Existing banking and insurance are rapidly expanding their relationships, and we continue to add several industry leaders to our impressive client roster. OK, also up in dollar terms, thought slightly down on a percentage basis to 35 percent of revenue.

We recently our partnership with , the leading supplier of managed care claims processing systems and together with our majority owner , we increased our focus on the pharmaceutical industry. We also added several new health care clients and expect them to yield strong growth in this .

Our retail manufacturing and logistics also performed solidly over the last year with the addition of several blue chip clients, and now accounts for 19 percent of revenue.

that we close the deal with in which we acquired their IT development and maintenance business is Ireland, as we announced last month. We expect to use the Ireland facility as a near-shore incentive for Europe as well as an alternate off-shore location for U.S. customers. We expect to fully integrate Ireland as one of our mobile development centers.

We are once again raising guidance and now expect to do at least $57 million of revenues and at least 41 cents EPS is the third quarter.

For the full year we are raising guidance to at least $218 million in revenues, up from 200 million, and at least $1.59 in EPS, up from $1.50.

We have chosen to keep our revised guidance somewhat conservative because of the continuing political tension between India and Pakistan. However, based on , we understand that strong growth will continue, and that their will be upside to these numbers

And with that Gordon.

Thank you, Kumar, and good morning to everyone.

I would like to provide some additional information on the second quarter and then discuss our financial expectations for Q3 and beyond in more detail.

Revenue for the quarter far exceeded our expectations and represents the largest sequential increase in quarter revenue in two years. All of our core businesses remain solid and performed well. We experienced growth in our key . Our pipeline is robust and we are confident in our ability to continue to deliver healthy sequential revenue growth for the remainder of this year.

Both application management and development grew sequentially in Q2. During the quarter application management grew 20 percent sequentially and 34 percent year over year. Application development and re-engineering grew 12 percent sequentially and four percent year over year.

We added 12 new customers during the second quarter, including two health care organizations, two major insurers, two large financial institutions and a pharmaceutical company, as well as a Fortune 500 manufacturer.

Our active customer base is now approximately 105.

Turning to costs. Costs to revenues increased 26 percent for the quarter as compared to the second quarter of 2001.

The increase is almost entirely due to additional technical staff both onsite and offshore required to support our revenue growth. We increased our technical staff by approximately 660 people compared to the second quarter of 2001. And ended the quarter with 3,825 technical staff. This is a net increase of 425 staff from March 31 of this year.

In addition, during the second quarter of this year the percentage of work delivered onsite increased on a sequential basis due to the short term knowledge transfer activities associated with rapid ramp up of several of our newer clients.

We delivered approximately 30 percent of our services onsite in Q2 compared with 29 percent in the first quarter of this year and 27 percent in the fourth quarter of last year. The higher salary costs associated with onsite personnel contributed in part to the sequential increase in cost of revenues.

However, most importantly, due to the significant increase in our expected financial performance for the year, we increased our employee bonus accrual to a level well in excess of 100 percent of target. This increase in anticipated bonus payout reduced risk margin by several hundred basis points during the quarter.

Our underlying gross margin remained very strong during the quarter. Gross margin was 46 percent, a decrease of 250 basis points compared with the gross margin of the second quarter of 2001 and a 200 percent - a 200 basis points decline compared to the first quarter of this year, the driver of the reduced gross margin with increased bonus accrual which I mentioned earlier partially offset by improved utilization.

SG&A expenses including depreciation were $14.3 million, up from 13.2 million in the second quarter of last year. As a percentage of revenues, SG&A was 26.3 percent for the second quarter, a decline of 270 basis points from the second quarter of last year resulting from our ability to leverage last year's sales and marketing investment as well as continued cost actions.

Operating costs for the quarter increased 21 percent to 10.7 million and our operating margin was 19.7 percent up approximately 20 basis points from the second quarter of 2001 and flat with the first quarter of this year. We were able to maintain our operating margins despite the significant increase in our bonus accrual due to our ability to leverage last year's sales and marketing investment as well as continued cost control actions and improved utilization.

Interest income to the second quarter was 405,000 compared to 617,000 last year. Interest income declined despite higher cash balances due to the significant drop in short term interest rates. We had a $46,000 foreign exchange gain during the quarter due to the strengthening of the British pound and the stability of the Indian rupee.

Our tax rate declined to 22 and-a-half percent for the quarter based on an expected full year rate of 23.4 percent. At the end of the first quarter we projected our full year rate to be 24 and-a-half percent. This projection has been reduced to 23.4 percent for the full year due to additional tax law legislation that was approved in India during the second quarter.

The second quarter tax rate is slightly below the expected full year rate in order to bring the year-to-date provision to 23.4 percent. The impact of the reduction in the second quarter tax rate was approximately one cent per share. We expect that the tax rate for the remainder of this year will be 23.4 percent.

Turning to the balance sheet. We finished the second quarter with $103.8 million of cash, an increase of 12.7 million for the quarter and 18.9 million year-to-date During the second quarter operating activities generated 12.9 million of cash. Financing activities - specifically the exercise of stock options - generated an additional 5.3 million of cash. These amounts were partially offset by $3 million for our acquisition in Ireland, and $2.6 million of capital expenditures, including expenditures on our Indian construction program.

For the full year we still expect to spend between 20 and $22 million on capital expenditures, with much of the construction expenditure occurring in the fourth quarter.

Our collection of trade receivables during the quarter remained healthy, based on our $38.1 million balance on June 30th, we finished the quarter with a DSO, including unbilled receivables, of 64 days, below our targeted DSO of 70 days. Excluding unbilled receivables, our DSO was 52 days.

Overall our accounts receivable balance grew by $8 million during the quarter. Approximately $5 million of this increase was a direct result of our 17 percent sequential revenue growth. The remaining increase of $3 million, which increased our DSO by six days compared to the first quarter of this year, resulted from several factors, including slightly long payment terms on several accounts, a minor increase in unbilled receivables due to the certain milestones in relation to the quarter end, and the timing of a few large payments that arrived in early July rather than late June.

The quality of our receivables portfolio remains exceptionally strong. Of our total AR balance, less than two and a half percent is over 90 days old. Our unbilled receivable balance increased during the quarter by $1 million to a total of seven million. This increase resulted from the company's continued effort to ship work towards fixed-price contracts. During the second quarter, 25 percent of our revenue was from fixed-bid contracts, and revenue from fixed-bid contracts increased by $1 million from the first quarter of this year.

Our fixed-bid contracts generally have quarterly billing milestones. Approximately 45 percent of our June 30th unbilled balance will be invoiced this month.

Turning to headcount: at the end of the second quarter, our world-wide headcount, including both technical professionals and support staff, totaled approximately 4,240. This represents a net increase of 400 people during the quarter. The majority of second quarter additions were lateral hires of experienced IT professionals. Annualized turnover was 13 percent during the second quarter, including both voluntary and involuntary. Voluntary turnover was approximately seven percent annualized during the quarter. during the second quarter increased to approximately 91 percent on-site, and about 69 percent offshore.

We have recently accelerated our hiring plans in India in response to the strong demand we are seeing for application outsourcing. Based on current hiring plans, we expect to finish the year with over 5,000 employees worldwide. We are on-track to hire in excess of 500 during the second quarter alone, before attrition.

I would now like to comment on our expectations for the second quarter of this year and beyond. As Kumar mentioned, we are comfortable with our ability to deliver revenue in the third quarter of at least 57 million. We continue to have significant revenue visibility due to our high level of recurring revenue, and the long-term nature of customer relationships. Today, we have customer commitments for well over 90 percent of our third quarter revenue guidance, and over 80 percent of our Q4 expectations.

During the third quarter we intend to closely monitor our spending and expect our operating margin to continue in the range of 19 to 20 percent, in line with historic margins. With this expected level of revenue growth and our expected operating margins, we are comfortable with our ability to deliver EPS with at least 41 cents in Q3.

Based on a tax rate of 23.4 percent and a return to a modest FX loss on a quarterly basis. Looking at quarter year 2002, based on existing customer commitments, recent application management wins and a review of our sales pipeline, we are comfortable with our ability to deliver at least $218 million in revenue.

We are optimistic about this year, based on our continuing success in expanding relationships with our existing customers and winning new customers who identified offshore services as a strategic component of their technology strategy. Based on this expected level of revenue growth and our expected operation margins, we are comfortable with our ability to deliver EPS of at least $1.59 for the year.

I'd now like to open the call for questions. Operator?

At this time, I would like to remind everyone if you would like to ask a question press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from with SG Cowen.

Good morning guys. Kind of a - finally great to see somebody with their stock up this morning.

Talk a little bit about your bid and proposal pipeline. Which verticals, you know, where do you see some of the coming in? Some of the verticals? The nature of the work? That's question number one.

And then, have you seen any meaningful contract referrals during the June quarter given the concerns over the political tensions on the border and then maybe you can give us a feel on a what have you been seeing so far in July in terms of demand patterns or clients coming in visiting your site at India?

Thanks.

, it's Kumar Mahadeva. The answer is yes we did see some delays when the issue hit the headlines, I guess going back a couple of months now. If we compare it with the sort of impact we had after September 11, I'd say it was much smaller in magnitude.

What has really even surprised us is that at this point, clients really have not - do not seem to have pulled back. Existing clients really have gone back to the programs they had anticipated at the beginning of the year. The delays I would say, maybe up to a month to six weeks in terms of ramps up but that's about all.

We had a couple of clients, new clients, who were in the early stages of looking at offshore who held off for a little while. But, again, our pipeline is extremely strong. We've, you know, been intentionally cautious with our guidance in case there's something we're not seeing so far. But certainly based on pipeline we see no evidence of significant impact ...

Just a couple of other comments, . The nature of the pipeline is very consistent with what we were seeing in first quarter. It tends to be the large strategic deals, where companies have already made their decision to going offshore. It's not a question of which company are they going to go off shore with.

Weighted towards the financial services sector, some retail, some healthcare concern, but certainly the biggest level, strongest level, of activity in is financial services in the broad definition that we use. So we continue to be very pleased with both what we're seeing in terms of new prospects coming into the pipeline and the rate at which prospects are flowing through the pipeline. On your question about are people travelling again? People are starting to travel again. We have prospects scheduled to travel during the month of July, as well as during the month of August. Clearly there was a hiatus for awhile, but the travel restriction has been reduced, and we are starting to see some travel activity again.

On your pipeline, I was - I spoke to one or two of your potential clients. It seems that there are a couple of potential bits there that could be as large as your second or third largest client in general. Is that a correct assessment.

Yes . I think that we really have had a tremendous run in the last six months in adding clients, with several of whom could get up into the top five. And I'm not sure which ones will get in, but clearly there are clients, many of whom will, over time, start doing 10, 15, 20 billion dollars a year with us, which is part of the reason for our optimism going into the latter half of this year and certainly into next year.

Your next question comes from of Bear Stearns.

Congratulations on a super job here.

Thanks Andrew.

Thank you.

Yeah. One thing that we heard that was encouraging out of emphasis was pricing stability after a period of time where off-shore rates were under pressure. What were your average bill rates, and what do you sense is the pricing environment for the leadership off-shore companies?

The average billing rates are very consistent with Q1, right around $24 an hour offshore, right around $70 an hour on site. So we, at this point, we are protecting - realize billing rates will remain fairly steady.

Right.

What we are seeing, I think Andrew, is sort of to confirm, I guess, what you heard say, that we see prices stabilizing and utilization levels are up. And frankly, at this point, we are scrambling to hire. So I think that, to some extent, is probably what other competitors are seeing as well, I assume. And that should certainly take some pressure off. I think the other thing to also comment on, I think which is important is that these deals are a lot larger than we've seen in the past and are more profitable. The SGNA costs involved in running these deals is smaller than our traditional deals. The management costs are lower, the communications links costs are lower, so even if - and we do have some volume discounts built into these things. But despite that, I think at the operating margin level, the deals may end up being very profitable. So I think pricing, in our view, has stabilized. And hopefully, if the trends continue, it will be a non-issue going forward.

Right. Any of them with those volume discounts. I understand you have shot at higher operating margin, but do you think that your sort of $24 an hour rate will get down, or do you think that overall rate is steady as it has been?

With volume discounts, some of the new contracts, as they ramp up the off-shore rates and correct me if I'm wrong here to 10 ...

Could be slightly lower than that ...

... slightly lower than that.

I don't expect to see any major movement from that $24 rate though.

OK. Super. Appreciate it. Thank you.

Your next question comes from of UBS Warburg.

Thank you, good morning guys. I normally don't say this on any call, but ... some good numbers as we mature in terms of our initiative - initiatives on deposit growth. On the home equity side, you know as long as rates continue to be historically very low, we - we expect to see some growth - continuing growth in our home equity portfolio.

Remember, I think we said this - most of the growth in the second quarter came from our branches, our franchise centers. But we also are benefiting from the map of just starting to put champion home equity loans on our balance sheet just a little over two years ago. So we - we continue to think that because we started with a zero base from the champion perspective, that that portfolio, that asset category will continue to show growth through the remainder of this year.

OK, and then just one follow up on the credit quality outlook.

Yes.

First of all, can you just refresh my memory -- kind of - and I know this is difficult to predict - but if you can look into the future and say you know, in the normal economy you know, less volatility in the market, revival of commercial demand, say two percent GDP growth you know, what do you think your continuing portfolio loss rate would be? And then secondly, you know you expressed some kind of conservatism in that you don't expect your continuing portfolio to come down in the second half. Is that because you had an eight percent rise in your MPAs out of the continuing portfolio? Because you know, generally speaking it seems like you know based on watch list trends or into MPAs, you know some people are starting to get a little bit more optimistic.

if I could respond to the - to the first part of your question. The - probably in a - in a good economic environment we would anticipate that losses might be in a more normalized range of say, 50 to 65 basis points, somewhere in that vicinity. With regard to the - to the second question, there - there is always a little bit of a lag time between the time a non-performer comes in to the time that it gets by a charge off restructure or a restoration to good status.

All right. Thank you.

And our next question comes with .

Hi. Two questions, the second on strategy, the second on ethic quality. Could you talk about your results, any - any changes in classification or anything else that came out of that?

I - what - as far as the shared credit review is concerned, I would say that for the most part it was pretty much a non-event, probably typical of what has occurred in previous years. Excuse me, you have to bear in mind that we don't know the full results of the , but what we have seen so far has been pretty normal.

And second, more broad question, I think sometime in the fourth quarter conference, you had said - and I'm very loosely paraphrasing, so please help me. That when - when the starts coming back into this economy, he's both you know, should hopefully rise faster than everybody else's given the number of strategic changes in repositioning that you've done in the company. I'm not saying that that's necessarily going to happen in the next 90 or 180 days, but do you feel confident that you have repositioned the company or are there still other moves to come in order to do that - to anticipate the revival of the economy?

Well there are no... and so forth is a huge sign that demand is really getting much much stronger. But how do you balance that versus the somewhat hesitant spending delays, the political risks over there? Do you still a little bit in anticipation that there could be a bump in the road or are you kind of you know throttling up here at 100 percent? What's your mindset right now and how fast - how aggressively you're ramping up versus the demand?

Sure. You know one of the great things about the offshore model is we can run them a little bit lower utilization in anticipation of demand. Utilization's getting pretty high offshore right now.

Right.

So we actually want to bring it back down a little bit. A lot of the people we hire in the third quarter are right out of college. So they have to go through five or six months of training before they're billable. So, you know clearly our philosophy is to hire out in front of demand. And if demand ends up being a little light, utilization goes down a little bit. But since it's offshore it has essentially no impact on the numbers.

Got it.

You know we don't want headcount to be a constraint to our growth.

Is that another reason why gross margins could be down a little bit the next couple quarters versus the historical levels not only to the bonus accruals but also because you're going to have newer people "on the bench" receiving their training before they get billable?

No. That - the - those costs are quite small. Yes, they have impact but it would be negligible.

OK. OK. Great guys. Thanks again.

Thank you.

Your next question is a follow up question from of .

, I forgot to ask, did you disclose the amount of bonus accruals that you've recognized during the quarter?

We don't - for competitive reasons we don't disclose the specific amount but I did say that the accrual in excess of 100 percent resulted in gross margin coming down by several hundred basis points.

So - OK. That's fine. And then did you break down the reengineering revenues specifically out of because I think you've provided - you added both and reengineering together.

Yes. At this point we're not even tracking it separately. It was becoming such a gray area between what was reengineering and what was development we decided to start at the beginning of this year to just combine the two categories.

OK. I think last quarter it was maybe a little bit below a million bucks.

Yes. As we said though that was a pretty rough number because we're just not scrubbing that as well since we combined the two. And this quarter we didn't even bother . . .

Yes. One of the things we are seeing a lot of and what some of the work we are doing is really combined reengineering in which people are trying to consolidate multiple legacy systems and at the same time new web capabilities. So it just became harder and harder to figure out what was reengineering and what was new development which is why we decided to combine those categories.

OK. Last question. , did you mention that win rates have been going up to 60 percent during the quarter?

That's pretty consistent I think we mentioned that on the last couple of calls, , that in the deals we've completed - and we are fairly selective. Again, the - I just wanted to go back and say we've had a good run recently because about a year-and-a-half ago we decided to focus on the top 50 or 60 clients and key verticals and focus very hard on those and go after a select number of clients and industries.

And in the deals in which we compete we focus very hard on winning those deals. And in those deals are when we have been 60 percent. So that's the number which has been pretty consistent I'd say for over a year at this point.

Thanks.

Thanks, .

Your next question comes from of CSFB.

Hey guys. Thank you for taking the question. I'll reiterate congratulations on the quarter.

Thank you.

In terms of the related part of your revenue has bounced up a little bit in Q2, can you just talk about expectations for the second half there. And then it sounds like, , you - the development pick up - we shouldn't necessarily read into that that you know we should see some pick up in the U.S. What -- can you just provide a little more color there? Thanks.

Sure, let me just add to the first part of the question. Related party revenue we expect to remain relatively flat sequentially. The only caveat being, earlier this year we announced that we're working with IMS to go after the pharmaceutical industry. As we have some success there, some of that revenue may come to us on a subcontracting basis, in which case we would -- we would clearly highlight what portion of party revenue was really coming from the pharmaceutical companies. But, excluding that, our expectation is that our sequential growth will be -- the vast majority of it'll come from third party.

On the development question, as I said, I - we did see a turnaround in that business over the last couple of quarters. I'm not sure I want to call it a trend yet, but -- I think a couple of things are worth mentioning: One is we really have substantially strengthened our ability to win business in that area, and over the last year made a fairly substantial investment in our task -- what we call our technology architecture and strategy group - in program management capabilities in adding business analysts. So, we are positioned to do very sophisticated and complex development projects, and we've done several, including some of the stuff we announced that we did with General Motors and others, and so -- we think we're extremely well-positioned to win some of that business when it does return. And we are finding that many of our clients are now looking very seriously at giving us that business, whereas a year to a year and a half ago, that type of project - they would not have considered an offshore player. So, I think that is a change, and when the market does recover, I think we are very, very strongly positioned to win and see a quick snap-back in the development and integration business. But, for the moment, we have not assumed any of that in the guidance we've given you.

So, it sounds like that's more of a market share shift than necessarily a significant pickup on the development.

I would certainly say that I don't think there's been a huge change in development spending. I think we are picking up market share. I expect that to continue.

OK. And, was there any revenue contribution from the UnitedHealth Group acquisition?

There was no -- the acquisition closed on the last day of the quarter, so there was absolutely no P&L impact from UnitedHealth in the second quarter.

And will there be much -- can you remind us, I guess, what they -- how large that was from a revenue standpoint?

Our expectation is the Ireland business that we acquired will generate -- ballpark $1 million a quarter for us.

OK. And the decline in D&A this quarter -- what was behind that?

That was just -- it was a very small decline. It had to do with some small assets that were written off last quarter. But, I wouldn't read anything into that. That was just noise.

Thanks, guys.

Your next question comes from Gregory Gould of Goldman Sachs.

Hey, guys. It's Julio and Greg over here. Just wanted to ask you real quickly, on your headcount projections, can you maybe break out the headcount -- onsite, offshore - and then also, maybe, now, as we look forward to the Ireland business contributing a , can you maybe talk a little bit about your expectations for the contribution to the headcount?

onsite, offshore. As you know, the vast majority of our worldwide hiring occurs in India, and -- because we want people to work in our India development centers, understand our processes, before coming on site. So, I would expect most of the hiring that occurs through the remainder of the year will happen in India And that's a question of what's the onsite, offshore ratio?

As I mentioned, it went from 29 to 30 percent from first quarter to second quarter. I don't see any big changes in the second half of the year. Might go up a point or two, it might go down a point or two, but it will stay somewhere around that 70-30 ratio.

Ireland, upon acquisition, has roughly 70 people. You know, my expectation is that it will stay right around that number in very near term as we identify and when additional business can move into that center.

And what are the billing rates like in terms on the near shore side?

What we haven't disclosed as yet. It will be somewhere between the onsite and offshore rates though obviously.

And then real quickly on the - couple of , this is just some housekeeping on the balance sheet. Can you talk a little bit about the other current assets, the growth in that line and then also the growth in the other assets line?

Sure, let me first hit the growth in the other assets. That is the Ireland acquisition, until we finish up, purchase accounting, we put it there and it will be allocated appropriately to goodwill. Current assets, that has to do with a combination of employee loans, prepayments and so forth. Just primarily just issues.

OK. And then in the rate, it sound like, Kumar, what you guys are saying is that the application development snap back that's now been sustained over two quarters is more a function of wallet or I should say market share gains as opposed to the environment actually returning? Is that how we should interpret what you guys are saying there?

I would guess so, , I mean I'm not sure I know what's going on at the total market level. We know that there is a lot of ebusiness types of work. People are continuing to in the healthcare industry. I mean, people are continuing to build ebusiness systems to improve their inter with their provider, with the clients.

They're building those systems, you know, General Motors manufacturing industry in auto ebusiness going on. So, you know, is that an increase in the total market size and growth? I'm not sure. It is great clear to us that we are getting a bigger piece of what the clients are doing.

So we are fairly optimistic, but again, we haven't baked that into our numbers yet.

OK. Great. Thanks.

Thanks.

Your next question comes from George Price of Legg Mason.

Good morning, from Legg Mason. Let me add my congratulations on a great quarter.

Thank you.

A couple of quick housekeeping items. I don't know, Gordon, if you mentioned the percentage of revenue from information services and telecom? And if you could also repeat your third quarter hiring expectations? I missed that.

Sure. Information and media comprised 14 percent of revenue. Telecom was one percent of revenue. And our hiring expectations for the thirst quarter are - we expect to hire in excess of 500 people before .

OK. And I wondered if you could give us maybe an update on what's going on in Europe? Percentage of revenues and then maybe the trends of European value in offshore.

Sure, let me give you percentage of revenues and then can comment on the business in Europe.

OK.

...Europe revenue was 13 percent of total revenue in Q2. That was up from 12 percent of revenue in Q1. And obviously it's off of a bigger base. So we had healthy growth on a sequential basis in Europe.

Yes. We've seen a little bit of a turnaround in Europe. And what we've focused on doing over the last couple of quarters is really to focus on expanding our U.S. clients into Europe and the rest of the world frankly. And we've had a lot of success at that, and we see that program driving growth in Europe, and eventually in the rest of the world. And we think it's a good way to build critical mass in our operation around the world after which we can focus more on sort of the domestically headquartered clients. So what are seeing? We really are seeing U.S. clients extending their off-shore programs from their U.S. operations to their, you know in some cases, very substantial international operations if you think about someone like a General Motors. And I'm not sure I will say for sure that European headquartered clients have moved up the adoption curve to the point where they've caught up to the U.S. clients. I don't think they have. But again I expect that something that will happen in the near future, but certainly we see the European revenues growing because of the U.S. clients expanding their programs.

OK, terrific. And Gordon, on SGNA, obviously you guys have been very good at your costs. I'm curious though. What did you hold back on? If you could talk about the things that you might have maybe held back on? Or what areas? If there's any shift in terms of the type of spending that that SGNA's going toward?

Sure. I think it's important to remember that, even though SGNA declined its percentage of revenue, it - actual SGNA expense increased from Q1 to Q2. So it certainly was not a situation where we cut things we were doing. The good news is with revenue growing so fast, we are getting some leverage out of sales and marketing investment that we made. So what it means is we don't - right now we're not - we're able to grow revenue without adding a lot more SGNA expense over what we already had.

And I think you should remember that our sort of traditional mode of operation has been to try to manage to an operating margin and to reinvest the extra dollars we have, which we will continue to do. And as I mentioned to you, there is some slack in the system, because some of these larger deals do have lower intrinsic SGNA costs. And we are putting that back into reinvestment rather than flowing down to the bottom line. So that's what we'll continue to do going forward, but we are investing very heavily and continue to invest in practice heads, sales and marketing people, client partners, etc...So I don't think you should read that - not anything to do that.

OK, great. Gordon, was there any impact from the UHCI acquisition on the DSO's?

None whatsoever, but as I mentioned. There was no impact on the PNL. The only impact of the Ireland opposition is we wrote a check for - you know there's $3 million of expenditures and there's a $3 million asset on the balance sheet. That's the only impact as of the end of Q2.

OK. And CapEx was a little lighter than expected. I know you reiterated the overall amount that you're spending. Is any of that sort of getting shift, pushed, or is it just a timing issue of it being more in the second half of the year.

Construction programs are right on track. It's just a timing of when we have to pay the construction folks.

OK. And I'm sure you get this question a lot, but can you maybe give us any perspective at this point on what you think IMS is saying?

You know again, I'm not sure there is much of an update. did I think announce on their last quarter conference call that they - that they still view Cognizant as - as - as a non-strategic asset and a financial investment. But you know frankly they continue to do very well and I think they - their you know, in no hurry to get rid of an asset that is doing extremely well. I think eventually their plan still is to do that. But I - I - I don't really have an update, I mean they haven't said anything to us in the last few months that it would indicate any change in their strategy.

OK, and last question, I have a few more but I'll - I'll circle back around. But...

...OK...

...the fixed price was 25 percent in the quarter, and that was versus 27 percent in the first corner, excuse me quarter, but on a higher - the higher revenue base, did I get that right? And what's kind of the trend there? Because we seem to have been moving more toward fixed price.

It would clearly moving more toward fixed price. I think we are at 26 percent in Q1, 25 percent in Q2...

...OK...

...but in real dollars, we were up about a million. But I would certainly have the expectation that over time, that will - that percentage of revenue from fixed will continue to slowly edge up.

Great. Thank you very much.

Your next question comes from of .

Hi, .

How are you doing? My questions have been asked and answered. Thanks very much.

OK, thanks, .

Your next question comes from of .

I know you explained, a little bit already in detail about what we happening with the receivables, but could you just give a little bit more color, and then what would the trend expectations would be for next quarter, and if this is kind of a one quarter-you know you talked about some later payments and some large payments kind of happening in July versus June, maybe if you could just walk through that a little bit more.

Sure, you know it's - I was just looking in to a crystal ball a little bit. But my expectation is that the to increase a portion of that is probably ongoing a portion of it was just one time because of when - when a couple of large payments came in. You know my expectation is you know, the - the range will be going forward will you know - will be somewhere between this 60 and 70 day and I would certainly be disappointed if we are at the high end of that range. So I don't see any major changes in - in our - our . You know, this is a pretty stable business.

The large payments, is that something you were expecting to come in July, or is there...

...we only have 100 customers so you know the checks we get from some of our larger customers are - are - can make a difference of a day or two in . And sometimes you know - you know - we'll get paid at the end of the month, sometimes it will be you know, early in the next month and in this quarter we happened to a couple - a couple of the larger customers paid us in early July instead of the end of June. And that had a couple day impact on .

But that - you know there wasn't a reason why they were paying late...

...other than just when their - their a/p cycle ran this quarter.

OK. And then on the fixed price, you were talking about the shift to fixed price and how they might - that might also have an impact. Is it - you know, can you walk us through a little bit how that's different from your contracts in terms of how it impacts payments and receivables?

Sure, on materials we build monthly. On a fixed bid it tends to be every other month you know, every other month or so we'll hit a billing milestone. So there's a little bit more timing that goes on where - so - so the payments are a little bit more lumpy. And that can either help us or hurt us. But once again, I don't see it having a big impact one way or the other. You know - you know - always get bounced around a couple days one way or the other. You know always keep bouncing around a couple days one way or the other but I don't see any significant movement.

OK. Thank you.

Your next question comes from of Fidelity.

Hi gentlemen. Just wondering what your plans were in terms of acquisitions going forward if there were any?

Yes, , we sort of continuing to focus very hard on international acquisitions as we announced last quarter. We really are trying to build up critical mass particularly in Europe by doing some domestic acquisitions and that's where that - our focus will be.

Also given the increased interest we are seeing in things like and there's a lot of demand in that area if we find small acquisitions we would look at those as well. But, again, I think I've mentioned this before the primary criteria is that their small acquisitions which bring us new clients or new capabilities and we do not plan to do any major you know large scale acquisitions.

Right. My last question just is wondering if - you guys put out a press release a while back about the clients you have. Just wondering if you're expecting to see any incremental ramp up at the end of this year seeing that the deadline is pretty close. And wondering if you can talk about how many clients you have in that practice.

I think we have about 30 healthcare clients. I'm not sure I actually know the exact number where we are doing . But you know it's less than 10 I'd say. The - very often it tends to be part of the ongoing work we do and one of the things we are seeing also is that the HIPAA work or the HIPAA deadline is driving just like ERP as the ERP systems we're seeing the HIPAA deadline driving demand for systems from particularly. So, we'll be seeing some of it reflected also in the implementation work as opposed to straight mediation work.

Great. Thanks guys.

Your next question comes from of Goldman Sachs.

Hi . Hello.

OK. Sir, that question has been withdrawn.

OK.

Your next question comes from of .

Great. Just a follow up from . . .

Sure.

. . . housekeeping items. Could we get five and top 10 percent?

Yes. Top five customers were 39 percent of revenue, top 10 customers were 56 percent of revenue.

OK. Great. And then just quickly I was wondering if you could get a little follow up on the complexes. Is any - maybe a progress status on the building?

Sure. Things are going very well. As you know the first center came on line at the end of last year at to house a thousand people. construction is well under way and we expect to move into that building in the fourth quarter of this year. So, 100 percent on track.

Has that been sped up a little bit? I know we were sort of talking about the end of the year you know with all the hiring. Has that been increased at all or . . .

I think it's more it looks like you know there was obviously some contingency in the timeline. It looks like we won't need the contingency. So we'll really move in the fourth quarter.

OK. Thank you.

Your next question comes from of .

Thank you. Great quarter guys.

Thanks, .

A couple of questions. One, the accrued liabilities on the balance sheet, is that just a function of your increased compensation that you talked about, Gordon?

Absolutely. The increased -- there are other pieces to it, obviously. There's from vacation accrual, to accrual, and everything else. But, you know, the bonus accrual is certainly a big piece of that.

Right. And I may have missed this, but, in terms of the applications in India, where are you seeing the most ? Is it , like some of your peers are talking about? Or is it CRM, supply/chain management? A little more specific information would be helpful.

OK. The two areas that we have focused on is the ERP and CRM. And the nature of the amount is very different. In the ERP it is more application management, upgrades, et cetera. And that amount is certainly very strong in both People Soft and SAP. We also have a very strong practice in and we hired a senior partner from to head up the CRM area, and there it tends to be more CRM strategy through to implementation of new systems, and that -- although we are winning some assignments -- is clearly not as strong as the application management work in ERP. But, I think that is something that we expect will recover later in the year with overall recovery in the business.

So, Kumar, is most of the work right now you're doing on package applications in the application management area, just managing applications right now - tweaking them if clients want that -- but not major new implementations, right?

It's not new implementations. There's a lot of upgrade work, though. I mean, it's going from one version of People Soft to another. There's also a lot of integration work. We're integrating ERP to other things.

OK.

But, you're right. In general, it's not someone committing to an ERP System for the first time and implementing all new applications.

But, you have the capability, so, when the demand comes back, you'll be able to take on that work as well?

Yes. Certainly.

OK. I guess the final question is: in terms of building share in India, are you guys spending a lot of money in terms of branding? Is that important the way you see it right now?

You know, we've made a lot of progress in terms of brand in the U.S. You know, at this point, we are really -- are quite well-known in the IT community, and to get included in most of the large RFPs -- particularly in the industries on which we are focusing on, which wasn't the case a couple of years ago. So, that -- in that respect, we've made a lot of progress. In India, we haven't really focused on brand in the generic sense. What we have focused on is building brand among potential employees. So, our share on campus, for example, is extremely high. We are probably - along with -- the most preferred recruiter. Recent survey, we were the top-rated employer in terms of employee satisfaction. Extremely well known - among the group of people we are trying to attract - as one of the best places to work in India, particularly for development work and new technology work. What we have not is to try and match the brand that -- an emphasis of it among the general population -- is hard to do since we are not listed in India. So we haven't made a huge attempt to do that.

From a recruiting standpoint, are you basically hiring from the and some of the top MBA schools? Is that your major resource?

Yes. We focus on the top 40 institutions in India on the technical side, and several of the institute of management on the MBA side, which are the top MBA schools in India. And, you know, we are by far the top recruiter in terms of student preference on the MBA side. And we are up there -- probably on par with , and ahead of many of the others on the technology side.

Thanks, Kumar. Thanks, Gordon.

Your next question comes from Tim of .

Hi. Good morning. Thanks. I've got a question. I noticed that as you guys are pretty bullish on your outlook in raising guidance, it's kind of a quick scan here at Yahoo Finance on insiders transactions, there's been nothing but sales since January. If the outlook is so great, do you guys intend to reverse that at all?

Yeah. I think if you look at the pattern of executive sales, it tends to be fairly steady and consistent as part of a long-term diversification program. So I don't think you'll see - I don't think you'll start seeing any peeks in sales, but rather a fairly steady program of diversification. Which I think is a fairly normal process.

Actually I haven't personally looked at the Yahoo, but I can talk about my own sales. I've had very consistent weekly sales pattern. I still have, through options, over a million shares, I believe. So what I have sold, frankly, given that most of my options have been vested for several years, the proportion I've sold is, frankly, quite small.

And as a follow up on that, if there was such thing as a real time form four, where I didn't have to wait until the 10th day after the month. I mean, do you guys continue to sell into July?

Into July? You mean, from the date ...

From July 1 to now.

I have had a 10B51 plan in place, so to the extent the prices above the target in that thing there would have been some sales.

Kumar is the only executive who has that program in place, so for the rest of the company there is a blackout window which went into effect June 15, which is normal with our approaching quarter end.

So that would be the only sales you would see.

So there is only one executive on a planned sell?

On a formal planned sell, yes.

All right. Thank you.

Your final question comes from Ashwyn Shoemaker of Salomon Smith Barney.

Thanks for taking my call. Solid quarter, congratulations.

Thank you.

Most of my questions have been answered. The one question remaining was that there was a statistic in the early 90 percent of revenue was coming from existing clients who have been with you for a while. What level are you comfortable with as far as that is concerned? And do you see that climbing down?

Historically we've run at about 80 percent of revenue in a quarter, coming from customers who have been with us at least a year.

It popped up a little bit this quarter because some of the customers we won in second quarter of last year have ramped up to become very significant. So, yeah, our long-term basis, you know, I think it'll be that 80 percent of revenue comes from customers who have been with us more than a year. That's been pretty consistent for several years with the exception of this quarter where it actually went up.

OK. And one last question, if I may. Should we be looking for another UNH type of , in reference to Ireland, type of investment? Maybe, you know, consistent with perhaps a follow the sun type of strategy?

As Kumar mentioned, we are actively looking for acquisitions in Europe. You know, I think the UnitedHealth acquisition, the UnitedHealthCare business was the first of hopefully what will be several small acquisitions that we do in Europe to strengthen our footprint and to take advantage of what seems to be a market that's on the verge of having major acceptance wave of offshore.

And we're certainly also looking very actively at development centers outside of India, and looking very actively at China and Eastern Europe because longer term as these off shore, you know, we see the whole globalization of services - the long-term very strong trend. And although India is certainly by far the competitive location today, and there is really no realistic alternative. And we feel that a couple of years down the road we will have to have other alternative locations as well, just in terms in the size of the business and for business continuity reasons. So that's the other trust, whether we do that through acquisition or just organic growth, we're not yet entirely sure.

OK. Thank you. Stock's up more than seven.

I said, I think that's the last call, given it's 11 o'clock. Kumar and I would just like to thank everyone for joining us on our second quarter earnings call, and we look forward to give you another update on the strength of business next quarter.

Thank you for participating in today's Cognizant and Technology second quarter, 2002 earnings conference call. You may now all disconnect.