高知特 (CTSH) 2003 Q3 法說會逐字稿

Good morning, my name is Sylvia and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cognizant Technology Solutions third-quarter 2003 earnings call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Caron Smith, for Financial Dynamics.

Thank you, Sylvia and good morning everyone. By now, you should have received a copy of the company's third-quarter earnings release. If you have not, please call Kelly Cunningham (ph) at Financial Dynamics at 212-850-5600. 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 call, and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. I would now like to turn the call over to Kumar. Kumar, please go ahead.

Thank you Caron, and good morning everyone. Thank you for joining us on our third-quarter earnings call. We're pleased to report that Cognizant has once again delivered a record quarter, with strong performance in all of our key financial and operating metrics.

At the Smith Barney Technology Conference in September, we indicated that Cognizant would exceed previously-provided third-quarter guidance of at least 94 million in revenues, and earnings per diluted share of 21 cents. I am pleased that we have done just that. We finished the quarter with sales of 98.1 million, up 60 percent, when compared with 61.2 million in the third quarter of 2002, and up 12 percent sequentially from the second quarter of 2003.

Earnings per diluted share were 23 cents, compared to 15 cents on a split adjusted basis for the third quarter of 2002, and 20 cents in the second quarter of this year.

We added 30 clients to our client roster this quarter, of which seven were strategic clients. We continued to enjoy a high win rate against both of the traditional offshore competitors and the global systems integrators, despite less-aggressive pricing this quarter. We added more than 1,000 associates during the quarter, closing the quarter with just over 7,700 associates. All in all, it was another very successful quarter for Cognizant. We remain optimistic about our growth prospects for the remainder of this year, and into 2004.

We have said for some time that we are in the early stages of a global megatrend in offshore outsourcing. This really is not generally accepted among industry analysts and on Wall Street, with most observers estimating long-term growth in the 30 percent range. Cognizant has, for some time now, grown faster than the industry, because of our industry-leading fourth generation business model and strong execution. In Gartner's recent window (ph) rating, Cognizant was only one of only four (indiscernible) to receive the highest award rating. Gartner said Cognizant -- the emerging window "most likely to challenge windows with the largest revenue base." And pointed to many ways which Cognizant is differentiated from the competition.

One aspect of Cognizant's differentiation is the ability to partner with clients in the process we call transforming while performing. To significantly cut IT and business process costs, to portfolio rationalization, while realigning the clients IT portfolio with business priorities. Cognizant has the ability to develop and sell a multi-year plan to senior client executives, and then guide its execution. This not only allows us to ramp up our clients' business at a faster rate, but also to cross-sell services, as clients turn to Cognizant to help them find additional ways to maximize their business performance.

What we have also found is that strong execution and effectively managing the clients change process are crucial. Our unrelenting focus on business applications incurred key verticals without the distraction of unrelated businesses. It has resulted in strong strategic capabilities, exceptional execution, and unparalleled customer satisfaction. As Forrester has said in their evaluation, "in customer loyalty, no one beats Cognizant."

Turning now to staffing -- the quality of our people is clearly another key differentiator and the driving force behind that success. During the quarter, we added over 1,000 employees. And, as of this week, we have crossed the 8,000 employee mark, up from 6,170 at the beginning of the year. We continue to aggressively build out our senior management team, with several key hires this quarter, including senior executives to lead large deals acquisitions, business technology consulting, e-business, and ERP. These hires include partners from McKinsey and CSC Consulting, and senior business and practice leads from the big five and other top systems integration firms.

One of our big advantages as a multinational organization is the ability to attract and retain top local talent in key markets. Based on the high level of interest in Cognizant as an employee of choice, and the consistently-high caliber of candidates we are attracting, we are confident in our continuing ability to recruit and retain the best people to maintain that competitive position.

Last week, we held our annual Cognizant community event, where we gathered together nearly 200 client executives, partners, industry analysts and associates to share their experience of outsourcing and working with Cognizant. Obviously, this event gives us significant insight into our customer relationships, their evolving needs, and how the market is developing as a whole. The satisfaction with Cognizant services is universally high. And the desire to further leverage the offshore model is exceptionally strong.

Our quality of execution and follow-through means that we continue to effectively cross-sell our services, and win additional new business from existing strategic clients. Eighty-four percent of revenues in the quarter were from clients who have worked with Cognizant for at least one year.

Although, in general, we do not announce individual client wins, a great example of a new strategic client is the Credit Suisse deal announced today. Credit Suisse shows Cognizant as its offshore outsourcing partner with a five-year outsourcing agreement for one of its most important set of applications -- the development and maintenance of their new online retail banking solution. We were picked after a very competitive process that included all the leading Indian firms, and all the global systems integrators. And, we are delighted with the feedback we received regarding our win. In their own words, Credit Suisse said they "chose to work with Cognizant because of their depth in banking, extensive product management experience, their unique fourth-generation outsourcing model -- providing us with responsiveness, high-quality and fast turnaround."

It is clear that Cognizant's investments in its vertical practices is paying off. We continue to see strong growth across all of our vertical business segments, but especially in financial services, and health care. We have also begun to see some early signs of improvement in the telecom sector in the U.S.

Turning to geographic trends, Credit Suisse is a key win for our European operations, which are gathering marketplace momentum. In addition to the Credit Suisse deal, we recently signed another $5 million data warehousing deal in Europe, competing against all of the other offshore providers and the big five. Through our client relationships, we have been able -- we have begun to make significant progress on a global basis. We embarked on our first client products in China, for a U.S.-headquartered client. I would stress that this is a small project, but it is a good example of how we are expanding strategically to meet that customer's growing global needs. We are also working with global clients in Japan. By working with our global customers on defined projects to meet their growing needs around the world, we can tightly-manage and mitigate the potential risks normally associated with developing operations in new markets.

Our operating margins remained stable in the 19 to 20 percent range, and we expect that to continue. Pricing has also remained firm, due to strong demand, and average prices inched up slightly in the quarter. As I mentioned on our last earnings call, the industry appears to be moving from a demand-constrained to a supply-constrained environment, which should reduce the prospect of further price erosion, and actually support stable prices, going forward.

The challenge for everyone in the industry will be the ability to activity recruit and retain sufficient numbers and quality of staff to keep pace with the growing demand. Longer-term, the demand-constrained environment may begin to have some knock-on (ph) affects on local wages in India. However, we have not seen any evidence of this to date. Rupee appreciation is also a risk we are watching. Despite these pressures, we are confident of our ability to sustain operating margins of 19 to 20 percent because of the leverage in our cost structure. As we have indicated previously, we have historically invested at a much higher rate than our competition in areas such as sales and marketing -- particularly in locally-based practice (indiscernible) and strategic planned partners, and our top management costs are lower for the new breed of larger relationships than in the past.

Although we are maintaining the commitment to investing in these areas, we are now starting to see the real benefits from those prior strategic investments. Initially, as we saw last quarter, we are benefiting from considerable unit cost reductions for real estate as we continue moving into our own buildings -- in addition to the savings we receive on our investment in infrastructure, such as communications and computing. And this trend continues. For all these reasons, we remain confident in our ability to maintain 19 to 20 percent operating margins for the foreseeable future.

Turning to our mix of services -- we continue to see some encouraging signs in demand for new development projects (indiscernible) in the third quarter. Development in integration continues to grow faster than applications management for the second quarter in a row -- at a sequential rate of 18 percent, compared with overall revenue growth of 12 percent. This growth and development is a direct result of our strategy to successfully cross-sell our development and integration services to application management clients. And is a part of transforming (indiscernible) for these clients.

In conclusion, Cognizant finished the third quarter with strong momentum and solid performance across the whole business, going into the last part of the year. Our pipeline remains the strongest it has ever been, and our win rate continues to be strong against both the top-tier offshore companies and the global SIs.

Additionally, new strategic clients are ramping up quickly, and we continue to see strong revenue growth from our established customer base. With every quarter, Cognizant is further solidifying its position as a highly-differentiated premium provider of offshore outsourcing services. As such, we are pleased to increase our guidance for the fourth quarter and the full year. We now anticipate revenues of approximately 105 million, and EPS of approximately 24 cents for the fourth quarter. This equates to revenues and earnings per share for the full year of approximately $365 million, and 86 cents, respectively. This compares with guidance we provided in early 2003 of 300 million in revenue, and 69 cents in EPS. Our full-year EPS guidance excludes the impact of non-recurring expenses we incurred in the first quarter, related to the IMS-helped split (ph) of exchange offering. Including these expenses, we expect full-year GAAP EPS of approximately 83 cents. We are expecting 2004 to be another good year, and fully expect to be able to grow the business at least as fast as the industry, which is currently projected to grow about 30 percent.

Finally, I am pleased to say that the latest issue of Forbes has Cognizant listed (ph) as the number one small company in America. This is the fourth time Cognizant has been on the Forbes list, and Cognizant stock has appreciated 800 percent since we first appeared as number one on the 1999 list. I guess, on occasion, these best-of lists really to work.

I would now like to turn the call over to Gordon for a more-detailed look into the financial performance and guidance, going forward. Gordon, please go ahead.

Thank you, Kumar, and good morning to everyone. I would like to provide some additional information on the third quarter, and then discuss our financial expectations for Q4 and beyond, in more detail. Revenue for the third quarter exceeded our prior guidance due to faster-than-anticipated ramp up of clients won over the past year or 2, and a continued pick-up in development spending -- a trend that started for us in the second quarter. Revenue grew 12 percent, sequentially, and 60 percent, year-over-year. Our core businesses remained solid and performed well. Our pipeline is robust. And we are confident in our ability to continue to deliver healthy sequential revenue growth during the remainder of this year.

Application management represented 58 percent of revenue, and application development and integration, the remaining 42 percent. Both services grew in Q3. On a year-over-year basis, application management grew 59 percent, and application development and re-engineering grew 62 percent. On a sequential basis, development grew faster than maintenance for the second quarter in a row. Application management grew 8 percent, sequentially, and development grew 18 percent.

All of our key industry sectors grew on a sequential basis. As anticipated, we experienced continued strong growth in our financial services and health care sectors. Financial services, which includes our practices in insurance, banking, and transaction processing, grew $2.7 million, sequentially, and represented 44 percent of revenue in the quarter. Health care grew $4 million sequentially, and was 23 percent of revenue in the quarter. Retail manufacturing was 16 percent, and information services was 11 percent of revenue. The remainder of our revenues came primarily from other service-oriented industries, as well as our alliances.

During the quarter, approximately 89 percent of revenue came from clients in North America. This is consistent with Q2 levels. We are now starting to see an increasing interest level in northern Europe for offshore services -- both in the European divisions of our global clients, as well as from an increasing number of local clients.

We added approximately 30 new customers during the third quarter -- a significant increase from our historic customer addition rates. Our active customer base increased to approximately 140. Seven of the clients won during the quarter, we consider to be strategic, and have the potential to become significant revenue sources for us in the future. We ended work for approximately 15 clients during the quarter. The majority of which were very small and unprofitable clients, acquired as part of our second-quarter acquisition of Aces (ph), which did not fit our business profile.

Turning to cost -- cost of revenues increased 61 percent, as compared to the third quarter of last year. The increase is almost entirely due to additional technical staff, both on-site and offshore, required to support our revenue growth. We increased our technical staff by approximately 1,000 during the quarter, and ended the quarter with over 7,000 technical staff. This is a net increase of approximately 2,300 from September, 2002. The additions during the quarter were roughly an even split between college graduates, who will be in our training program for six months, and lateral hires of experienced personnel, who will quickly join project teams. Gross margin was 46 percent for the quarter, a decrease of 20 basis points, compared to our gross margin in the third quarter of last year, and flat compared to the second quarter of this year.

During the quarter, gross margin benefited from slightly-higher on-site utilization and slightly-higher average bill rates -- offset by lower offshore utilization, due to the trainees that joined during the quarter; continued appreciation of the Indian Rupee; and a further increase in the 2003 bonus accruals, due to the further increase in our expected financial performance for the year.

SG&A expenses, including depreciation, were 25.9 million, up from 16.2 million in the third quarter of last year. As a percentage of revenue, SG&A was 26.4 percent in the quarter.

During the quarter, we continued to strengthen our vertical expertise; we aggressively hired client partners to manage and grow our customer base -- a key differentiator for Cognizant; and we further expanded operations in Continental Europe to position ourselves for emerging opportunities in that region.

Operating income for the quarter increased 59 percent to 19.3 million. And our operating margin was 19.6 percent, down approximately 20 basis points from the third quarter of last year, and flat sequentially. During the third quarter, we continued our long-stated strategy of reinvesting any margin above our targeted (technical difficulty) 20 percent range back into the business.

Interest income for the third quarter increased to 617,000, compared to 471,000 in the third quarter of last year. Interest income increased due to higher global cash balances, and an increased balance in European currencies, which earned slightly-higher interest rates -- partially offset by the significant drop in short-term U.S. interest rates. We had a $21,000 foreign exchange loss during the quarter.

Our tax rate was 19.7 percent for the quarter. This is slightly lower than the rate we originally anticipated. We currently expect the tax rate to be 20 percent in Q4 of this year, and in 2004.

Turning to the balance sheet -- Our balance sheet remained healthy. We finished the third quarter with approximately $160 million of cash -- an increase of $22 million for the quarter. During the third quarter, operating activities generated $19 million of cash, financing activities -- primarily to exercise the stock options -- generated an additional $9 million of cash. These amounts were partially offset by $6.6 million of capital expenditures, including expenditures on the completion of our India construction program.

Our collection of trade receivables during the quarter was exceptionally strong, once again. Based on our $61.7 million balance on September 30th, we finished the quarter with a DSO, including unbilled receivables, of 58 days -- well below our targeted DSO of 70 days. Excluding unbilled receivables, our DSO was 50 days. Overall, our billed and unbilled AR (ph) balance grew by $9.5 million during the quarter, as a result of the strong sequential revenue growth that we experienced.

The quality of our receivables portfolio remains exceptionally strong. Of our total AR balance, only 4 percent is over 90 days old. Our unbilled receivable balance was $8.5 million at the end of the quarter, down $800,000, sequentially. The decline in unbilled receivables resulted from several factors, including the timing of milestone completion of several large projects, and transition of billings for our Aces acquisition, to a month-end cycle. This was partially offset by the (indiscernible) associated with that strong sequential growth. 67 percent of our September 30th unbilled balance, we'll bill this month.

During the third quarter, 26 percent of our revenue came from fixed-bid contracts, unchanged from the second quarter of last year. If we look at this between our two service areas, approximately 31 percent of our development revenue was on a fixed-bid basis, and 23 percent of our maintenance revenue.

Turning to headcount -- at the end of the third quarter, our worldwide headcount, including both technical professionals and support staff, totaled 7,740. This group (ph) represents a net increase of over 1,000 people for the quarter. These additions were a combination of recent college grads and lateral hires of experienced professionals. We expect to finish the year with close to 9,000 employees, globally.

Annualized turnover was 17 percent during the quarter, including both voluntary and involuntary. Approximately half of our turnover resulted from employees voluntarily joining other companies. Over 90 percent of Cognizant's turnover occurs in India, resulting in on-site annualized attrition rates well under 5 percent. In addition, attrition is heavily weighted towards the most junior members of our staff in India.

Due to the strong demand for Cognizant services during the third quarter, utilization levels remained quite high. Despite the significant hiring of both trainees and experienced staff, on-site utilization was once again above 90 percent, and slightly above utilization levels in the second quarter. Utilization offshore increased to 77 percent, excluding recent college graduates, who were in our training program during the quarter. Including trainees, offshore utilization was approximately 68 percent during the quarter. We had approximately 600 people in our training program at quarter-end, up substantially from the end of the second quarter. As additional Class of 2003 graduates join us in the fourth quarter, we expect the number of trainees to further increase on a seasonal basis.

Now, I would like to comment on our growth expectations for the fourth quarter and beyond. We are comfortable with our ability to deliver revenue in the fourth quarter of approximately 105 million. We continue to have significant revenue visibility, due to the high level of recurring revenue, and the long-term nature of our customer relationships. In fact, today we have customer commitments for well over 90 percent of fourth-quarter revenue guidance. For full year 2003, based on the strong demand environment for offshore services and the favorable experience we've had on ramp up rates, we now expect revenue of approximately 365 million.

During the remainder of the year, we intend to continue to closely monitor our spending, and expect our operating margin to remain in the 19 to 20 percent range -- in line with historic margin level and prior guidance. With this expanded level of revenue growth and our expected operating margins, we are currently comfortable with our ability to deliver EPS of approximately 24 cents in the fourth quarter. This guidance includes the anticipation of a Q4 share count of slightly over 70 million shares, as a result of the recent stock price appreciation. In addition, this guidance assumes a tax rate in Q4 of 20 percent.

Based on the current trends, we expect EPS for the full year of approximately 86 cents, up from the 82 cent guidance we provided on our last earnings call. Full-year guidance excludes the impact of nonrecurring expenses we incurred in the first quarter related to the split-off exchange offer. Including these expenses, we expect full-year GAAP EPS of approximately 83 cents.

We expect the vast majority of our Q4 in 2004 growth to come from existing clients, particularly the numerous strategic deals we won in 2002, to date in 2003, as well as deals we expect to close during the fourth quarter. Based on the feedback we have been receiving from these clients about their intention to leverage the advantages of offshore, combined with the strongest sales pipeline in our history, we are quite optimistic about the outlook for the remainder of this year, and believe that we are exceptionally well-positioned for 2004.

Kumar and I would now like to open the call to questions. Operator?

(OPERATOR INSTRUCTIONS). Pat Burton (ph), Smith Barney.

Congratulations on the quarter and the CSFB contract, in particular. In the application development space, do these contracts carry higher margins than the core maintenance business? Or are you, again, reinvesting the upside on these contracts? Thanks.

Thank you. And by the way, the contract is actually not with CSFB, it is with Credit Suisse Financial Services in Switzerland.

And, the margins -- this deal is a fixed-price deal. And the margins, assuming things go well, will be higher than we get on P&N work. And, I am not sure that I understood the second part of your question.

Should we look for -- if you have more contracts coming in this manner -- just to assume you will reinvest the difference back in the business as opposed to taking the operating margins higher, as we go forward?

Absolutely. I mean, our policy is to reinvest anything above the 19 to 20 percent range. And the Credit Suisse contract actually has a number of phases, so our expectation is that -- that relationship will grow, assuming we deliver well on the initial phases.

Thank you.

Julio Cuanteros, Goldman Sachs.

Thanks. Actually, Gordon, can you address the turnover rate? I mean, looking back historically, the turnover has been in the 19 percent range on a total basis, annualized basis. Can you just give us a sense of about what point this becomes a problem and the turnover rate continues to uptick from here? I know you've operated with higher turnovers in the past. I'm just trying to get a sense of what kind of incremental exposure this would be on the expense side.

(indiscernible) both in terms of turnover rates and impact that wage relation in India would have. (indiscernible) to get comfortable with it. It does not have a big impact. As I mentioned, we were at 17 percent, sequentially, in Q3, which is higher than we have been running for the last six or eight quarters. Historically, we have run higher than that. But, I think the business optimally runs, sort of, in the low teens for utilization. So, I don't think we would opt (ph) for a turnover. So I certainly don't think we would want it to go much above these levels. The peak turnover was actually in August, and it did decline fairly substantially in September. So we are certainly keeping a close eye on it. But, those recent trends were actually in the right direction.

But, obviously, that leaves the question of -- if turnover will continue and result in some wage inflation, what impact would that have on the business? Let me just give a couple of statistics here -- 17 percent of our global expenses relate to offshore salaries. So, it's actually a fairly small percent of our overall cost base -- is offshore salaries. And that translates into about 14 percent of revenue. So what that would mean is -- hypothetically, let's say that there is 10 percent wage inflation in India -- certainly a level that has not been seen in a long time. In that theoretical example, that would only translate into 140 basis points of margin erosion, which obviously could be easily offset by very modest rate increases or some of the things we're doing in SG&A. So, we're certainly keeping an eye on both turnover and wages in India. Not saying I think that is alarming us by any stretch of the imagination. But, even if some wage inflation does materialize, because it is such a small percent of our overall cost base, we don't see it having an impact on overall margins.

I should also point out that the vast majority of -- 60 percent is people who have been with Cognizant less than a year. And one of the consequences of the increase rate of lateral hiring is that you don't have 100 percent hit rate on all the hires. And for one reason or the other, some of them choose to leave pretty quickly. So, part of the pickup internal, I would say, is not because of lack of competitiveness, it is just the very rapid rate of hiring that Cognizant is being embarked on. And as Gordon pointed out, most of the hires -- most of the turnover is restricted to, sort of, two to three years or below (indiscernible) levels with Cognizant. We have virtually no turnover above that.

Okay. Are you finding that these guys are going to competitors, other industries? Where exactly are they going?

I think that they are -- as I said, about 50 percent, I think Gordon mentioned, of the turnover -- of our people going to other companies. And they tend to be the other large companies plus some of the globally-sized -- So, it is a (indiscernible) etc. By and large, there is a lot of turn both ways. We hire from those guys and they hire from us. So that is likely to continue.

Okay. And one additional question as it kind of relates to sort of the expense or the equation here -- H1B V (ph) is and L1 (ph) visas clearly were in the new fiscal year with the lower visas. Can you just walk us through what your plans are here? I think, incrementally, the companies are beginning to -- that we have been talking to -- are beginning to sort of plan out for the lower H1B visas. Can you just kind of talk about your plans and how do you sort of expect to manage through the lower H1B visas available out there?

Sure. As you know, the cap on H1 visas dropped to 65,000 for the government yield starting October 1st. So far as we know, last year far fewer than 65,000 visas were issued. Cognizant uses a combination of H1 visas, L1 visas, and we're now starting to do a meaningful amount of local hirings here in the U.S., as we have sufficient scale to do that. So, we do not anticipate any disruption to the business as a result of the visa cap. As part of our business continuity plans, we always keep a fair number of people visa-ready in India. The cap does not apply to the L1 visas. So it takes, certainly, a little bit more planning. But, other than that, we don't expect it to impact the business model.

I think one important point is that over the last few months, about 50 percent of our recruiting actually has been done in the U.S., and that includes some client stock transfers that we did as well. So, increasingly, the model is shifting somewhat. In fact, we have just launched a program to recruit college graduates in the U.S. and send them to India for training. So, in a sense, we're somewhat reducing the dependence we have on the visas, and really don't see that as a problem.

What about -- maybe from another perspective -- what percentage of your current workforce is actually H1B-dependent?

Probably about 90 percent of our domestic workforce -- that ballpark --is on some type of visa. And, as I mentioned, we use a combination of Hs and Ls.

90 percent? Nine zero?

On some sort of visa.

Okay. Maybe just one last question. Did you provide us with the billing rates, utilization rates, or just the normal -- or can you provide us with just the normal statistics that we keep track of here?

Sure. Absolutely. As I mentioned, on-site utilization was in the low-'90s -- up about two points from last quarter. Offshore utilization was 77 percent, excluding the trainees; 68 percent with the trainees. And obviously, this spread gets much bigger this time of year because we have so many college recruits.

Billing rates were up about 1 to 2 percent, sequentially. So, it still rounds to 24 and 68. But it moved up a little bit from where it was last quarter.

Okay. And what about the onsite/offshore mix?

That was pretty constant -- around 30/70. Roughly 30 percent on-site; 70 percent offshore.

Okay.

Certainly we saw good news. Even with all the hiring, we're able to maintain high utilization. And our average billing rates started to move up. It was clearly moving in the right direction.

Okay. Great. Thank you.

Adam Frisch (ph), UBS.

On the new client ads -- this is obviously a big quarter full quarter for you guys -- is this a macro-demand benefit or the result of the company-specific initiatives? Or a combination that has enabled you to win more business?

It is a combination of the fact that there really is -- the flood gates have opened and just about everyone is out there looking at offshore. And the fact that since the Gartner window rating and Cognizant having sort of established itself clearly as one of the top-tier players, we tend to get into many more of the situations. And we have an extremely-competitive model. So, despite the 30 wins, we walked away from a lot of business, which we felt was not the right price, or where we felt that the client was not approaching the partnership in the right way. So, it is a combination of macro factors and Cognizant's competitive position, I would say.

Also, Adam, as we have gained a lot of visibility in the press and in the trade, we're gaining (indiscernible) in the party a lot more often. So, we are seeing more deals, and obviously, our -- we tend to be successful where we decide it’s a deal we want to win.

Are you also seeing demand coming from verticals that you did not see before? Like manufacturing, retail, health care and things like that?

We tend not to compete in those deals. You know, manufacturing tends to be much more price-competitive. They tend to be procurement-driven. Prices are lower. So, we tend not to compete in those segments, which are purely price-driven commodity types of services. We much prefer the financial services, industry and health care, which tend to value the sort of premium services we provide over some of the other segments. What we did see -- continue to see -- is financial services; health care; some pickup in retail; a few manufacturing deals here and there; and some telecom this quarter.

Okay. You guys normally don't announce specific deals. But, the one with Credit Suisse today was obviously pretty large. Can you quantify it at all? Or at least give us some color on if there are other deals like this in the pipeline that we should be watching out for? Or was this like a one-off (ph) thing?

I think we announced it partly because Credit Suisse was willing to make the announcement, which is sometimes a challenge. But, also because it was kind of an important deal for us, being a major win in Europe with the marquee name, financial service name, which we think will put us on the map. The initial projects are about $2 million, but we expect it to get significantly larger as we go forward.

Okay. And then, what is your perception on the second- and third-tier offshore players? What are they doing in terms of new business (indiscernible) and hiring people? How you think that will influence pricing and margin for the overall industry? Are we starting to see them firm up a little bit?

I think there is clearly more business than the top-tier players can handle today. So, I would assume that some of that is trickling down to the next year. However, I think the big challenge for them is going to be getting people. The fact is that the companies which have the best reputation for the work environment, and then way they treat their people, are likely to end up with the best quality of staff. So, I think that may be a challenge for some of the second-tier players who do not have quite the same types of practices.

Okay. Finally, Gordon, for you, what are you modeling for share count for '04?

For '04, I'm modeling -- it's obviously going to depend dramatically on the stock price. But I model it about 72 million.

Okay. Great. Thank you, guys.

Syndip Ingra (ph), J.P. Morgan.

A couple of questions from me. On the accretion rates, you talked about 17 percent. What was the number a quarter back?

Hold on one second.

I'm just trying to get a sense of (multiple speakers)

Sure. In the second quarter, it was 13 or 14 percent, sequentially -- annualized.

Okay. And just on some of your deal wins you talked about, with the 30 odd customers -- is it fair to say most of these are still coming in? You know, your preferred verticals (ph) -- the financial services, healthcare -- ?

Yes. It is (indiscernible) by (indiscernible) business model. We just do not compete in the other deals, which we feel we do not have a strong focus and expertise. We tend to see most of the deals, but choose not to compete in several of them.

You talked about Europe a little bit. For several years, when offshore players have been a little frustrated about the pace of --you know, the adoption of the offshore model in Europe. Are you beginning to see that change?

Yes, most certainly. We are seeing, for the first time, some of these large offshore initiatives that we've been seeing in the U.S., I guess, for about a year-and-a-half or nearly two years now. So we're finally seeing -- particularly, the large financial institutions in Europe going out with large-scale RPs (ph), with plans to (technical difficulty) (lost audio for three minutes)

Ladies and gentlemen, please continue standing by. The conference will continue momentarily.

Mr. Hingra, will you please continue with your question?

Okay. Thank you. Yes, sorry, I think we just got cut off. I was asking to the trends you are seeing in Europe. (technical difficulty) Operator, are we on?

Your line is open. (multiple speakers) One moment, sir. One moment and the speaker will continue in just a minute.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference. Please hold, and the conference will resume momentarily. Thank you.

Operator, are you there?

Hello, this is the operator.

Yes, we are back on the call. Can we take the next question?

Andrew Steinerman, Bear Stearns.

Mr. Steinman, please --

Hi, it’s Andrew. My question has to do with the timing of the success here in the record pipeline and in terms of 30 wins, which is twice as many as I can see in the individual quarter. My question is -- what is driving this sort of record level right now? Why did it happen a couple of quarters ago? Is an incremental application development coming back? How many of your 30 wins are application development wins?

I'm not sure I have those statistics at my fingertips, Andrew. But, as we always say, you really should focus on the strategic wins, and there are seven of those this quarter. I think last quarter's number was three or four, I believe. So we've been running at three or four for several quarters. So, it is a significant step up. Those are the clients that will ramp up to $5 million plus. In some cases, a lot more than that. What is driving it? I think it is partly that clients are seeing that they are going to be ramping up their IT spending next year, trying to do a lot more, or would like to do a lot more -- at the same time, try to save some money on application management side. And, also contract for development work. Plus, I think it's just the fact that Cognizant has gotten to a position where we do have a lot more visibility, and now are clearly considered one of the top players. So our win rate is pretty high.

Right. And why go after those, sort of, non-strategic clients? I mean, sort of 30 clients to win in a quarter -- only seven strategic. Why non-strategic client wins? Why go after so many of those?

They, by and large, have some feature that we thought was interesting. It could have been a project, technology. And, also we think it's a good idea to have a mix. The larger strategic clients are great long-term, but they do take a long time to ramp up and can be unpredictable. In some cases, they ramp up very aggressively; sometimes they may take longer to ramp up. But these same non-strategic clients are still clients that give us significant revenues, and tend to be very fast. So, they tend to smooth out our revenue stream and give us experience in a range of technologies in types of projects that we want. I should emphasize that when we say non-strategic, they are all in sectors, verticals, areas that we are focusing on and trying to build competency in.

Sure. That makes sense. Could you comment at all about the record level of the pipeline? How much bigger is it than it has ever been before?

You know, I think is probably up 50 or 60 percent from this time last year.

Okay.

Sort of, in broad numbers. Again, given the nature of the deals we are talking about, it is really very hard to put a number on it, Andrew, because, as you know, you never know the exact size of the deal until you start getting into it. But, sort of -- our pipeline reports (indiscernible) sales force automation system, (indiscernible) the gross number is probably 60 percent higher than a year ago.

And the other change from a year ago is much broader-based. If you go back to a year ago, it is probably 80 percent financial services. We now have a healthy pipeline of healthcare deals, retail deals, some telecom deals. So it has grown beyond just financial services in the last year.

Thanks so much.

Joseph Vafi, Jefferies & Co.

Great results, again. I guess the question has to do with the trajectory and rate of growth, I guess, sequentially. And maybe specifically in the apps management (ph) business. I mean, it continues to grow at a very fast clip (ph). And I guess the question is -- is, given that a lot of this management business is kind of logistically intensive to get up and running, do you see yourselves having the ability to scale and kind of continue to keep up a kind of a relative pace of growth there versus your larger base of business there, as you move forward?

You know, I think the current growth rate -- we've been growing at 60 percent, year-over-year, for some time. We are doing fine. The business is extremely process-driven, not only at the project level, but you know, over the last, one of the things we have done is work very hard on processes -- sort of applying (indiscernible) principles for processes like resourcing, how we regenerate proposals, make sure that the quality is good. All of the business process around -- they are actually the delivery of projects, not just the delivery of projects themselves, which of course are governed by the SEI processes. So, because we have focused, for so long, on building these processes, we are pretty comfortable with the growth rate. The biggest challenge, obviously, is that we do have to do lot of (indiscernible) recruiting. And although we have very careful controls around people we bring and integrate, when it comes to bringing in a lot of people, there are always risk. So, that is the biggest challenge and the reason that we probably would not be able to grow much faster than the 60 percent rate we are hitting right now. But, at the currently, we are pretty comfortable; quality is holding; customer satisfaction is extremely high; we have not had any significant projects slip up, so we are pretty pleased.

It sounds like there is some scale benefit in being able to continue to grow as your base grows. And, it is not just each specific deal of being as challenging to grow as it may be (multiple speakers)

Sure. I think it's very important to point out that as these deals get into 10, 15, $20 million range for a single client, those are a lot easier to manage than 20 or $30 million deals. So, that does make it a lot easier for us to grow the business.

Right. And then maybe just a natural follow-up there -- if you look at the results this quarter, and maybe the quarter before -- the June quarter -- kind of qualitatively, if you looked at the apps management business, if you looked at the points of growth that were going on there, what might be attributable to existing customers versus new customers that ramped in that specific quarter -- just kind of at a general high level --?

The vast majority would be from existing customer, especially in apps management. If you win a customer during the quarter, it has very low impact that quarter. Development could be different because development can ramp much faster. But, it would almost all be customers we had won prior to coming into the quarter.

Okay. And then, just finally -- any thoughts on the share count? I mean, it has continued to grow at a -- for various reasons, one being the stock price. Any strategic thoughts as to (indiscernible) now that cash balance continues to grow and your top vendor and the like?

Having a healthy balance sheet, I think, is very important. As customers are looking to enter into a multi-million dollar long-term relationship with us, they want to know what -- we are going to be a player. We don't need the cash for customer acquisition. But, just having it there certainly makes our clients more comfortable. Obviously, the big driver of the share count, though, has been depreciation of the stock and the impact of the option calculation. And one of the things we are very pleased about, even as the stock has went up substantially, we've been able to continue to deliver healthy EPS growth and consistently exceeded even our own expectations.

Very good. Terrific quarter, again. Thanks.

Ashish Thadhani (ph), Brean Murray.

You talked about strategic relationships and the ramp up on those as being a differentiator. It appears that you have added about 30 strategic clients since the beginning of last year. How many of those are, say, above a $10 million revenue run rate?

I have not done that calculation --

Just, you know, a broad figure that you might have --

It would be -- remember, these relationships takes a couple of years to ramp up. I think there is certainly a handful that have ramped up very quickly. And then there are a lot that are probably in the -- let's call it the 2 to $8 million range right now.

Okay. Let me ask it a little differently. What is the most rapid ramp up that you have seen of late?

The most rapid ramp up is a customer in about six quarters -- is now approaching 10 percent of our revenue base.

Wow! Okay. And second question --when could we hear about something definitive on the BPO front, either way?

I should say the BPO area is something we think is interesting, but is not something we are necessarily rushing into. We are looking at specific verticals. And things like healthcare, claims processing, where we have a strong base in the technology, and an extension of that. We are not really interested in getting into a lot of commodity areas in the BPO world. And I think our focus on the software services business and the strong execution -- that actually has resulted in our growing much faster than many of the other competitors who diversified into areas like BPO. So, again, we are not ruling it out; we probably will get into. But, we are not viewing it as top priority.

So, it would seem to appear that you are probably not interested in the voice side. And that your priority, based on the growth that you are seeing on the IT services side, is focused there.

Yes, our strategy, as always, is extremely customer-driven. So, we will be guided by our large clients. We want to build those relationships. So if a large client said to us "hey, we would like you to bundle IT services with BPO and here are the areas in which we want you to be in BPO," we will do that. And we're looking at a bunch of different options there, including acquisitions, joint ventures, etc. But, we're not about to go out and acquire a $100 million BPO company just to be in BPO.

Sure. Sure. Thank you very much, and great results.

Mayank Tandon, Janney Mongomery Scott.

A couple of brief questions. Gordon, you talked about the turnover in (indiscernible). And I wanted to get your sense from the much-documented fact that the multinational firms who are expanding in India are now paying a good 30 to 50 percent higher, particularly at the entry-level, and also at a level where consultants have 2 to 5 years experience. How are you battling that pressure? And is that a pressure at all, to begin with?

Yes, it is. And I am not sure they are doing that across the board, because, clearly, if they were paying 50 percent more (indiscernible) for all of their employees, they are not going to be very competitive at the end of the day. But, clearly they are going after certain skill sets and paying a significant premium for that, at least in the near-term. And that is, I think, part of the reason for the slight pickup in turnover that we have seen. But, at this point, it is really not a significant issue. We hire people out of these global firms all the time, as well. There are a lot of people who are unhappy with the fact that they don't have opportunities to come on-site in the U.S. with these companies; that the offshore operations are sort of disconnected from the U.S. operations; they are sort of a factory off on the side. So there's a lot of unhappiness also with people who go into these firms. Several of my employees who have joined them have come back. So, at this point -- although, clearly, no one is going to sneeze at a 50 percent salary increase, it has not gotten to the point where we think that the turnover is a problem.

Makes sense. And, now Wipro increased salaries 12 percent in the current quarter. They mentioned that on the conference call a few days ago. What is Cognizant's plans in terms of wage hikes?

Have not figured that out yet. Our cycle is a little different. Wipro does (indiscernible) I believe on October 1st and ours is typically April 1st. But, almost certainly, there will be significant wage increases in there next year. But, we think it is really very manageable, given that the price trends we are seeing and the other cost structure -- things I alluded to.

Is it fair to say that a 5 to 10 percent corporate-wide wage increase would be a good number to model? Or would that be a little high --? (multiple speakers)

In India, that is probably a good -- I don't think it will be that high in the U.S.

Okay. And Gordon, I just had a couple or more questions on the metrics. Can you give us the top 5, top 10 in repeat business?

Sure. Top five was 35 percent of revenue. There were no customers above 10 percent. Top 10 was 54. And revenue from customers who have been with us at least one year was 84 percent of revenue.

Okay. And what was the technical headcount again? I think you had given that before.

We ended the quarter at 7,000.

Okay. Great. Thanks very much.

Clint Finley, Wachovia.

Congratulations on the quarter. I guess, historically, we have seen some resistance from Europe for some of the Indian-based service providers. I wondered what has changed to make you more optimistic on Europe.

It is mostly the deals we are seeing -- I think, really, what is changing is -- the CSF media, for example, we had (indiscernible) CSFB at our customer conference a year ago. And he was just --(indiscernible) Let me correct myself, its Credit Suisse Financial Services, which really has not done a lot of outsourcing in the past. This is the (indiscernible) of Credit Suisse in Switzerland. And we had the (indiscernible) over at our customer conference a year ago. And he was quite amazed at the extent to which the U.S. financial institutions were using offshore to improve their cost structures and become more competitive. But, I think, as we have seen, the U.S. financial institutions do this. They realize that they have to do it in order to be competitive. So the more forward-thinking leading-edge institutions in Europe are starting to do that. We have seen a very large insurance -- some of the largest insurance companies in Europe develop the very large deals. And there are several others emerging. So, I think it is really a reaction to competitive pressure, particular from the U.S. companies in a global marketplace.

Okay. And the announcement was a bit non-traditional for you guys. Did CS retain any rights to purchase the BPO maintenance system that you will be building?

Sorry, I did not hear the second half of that question.

Did they retain any rights to purchase the BPO maintenance system at all? (multiple speakers)

It is not a BPO dealer; it is really a software development and maintenance deal. You know, at this point, Credit Suisse will retain the intellectual property rights.

Thank you.

Brian Kinstlinger (ph), Sidoti & Company.

Two questions -- First of all, when you are talking about your pipeline being about 50 to 60 percent large or whatever the number is, are you talking about the total number of deals? And are you also talking about the size of the deals as well? As a percentage are more of those deals strategic than not, now?

I was talking about the number that comes out of our sales force automation system. And basically, what we do is -- when we have a deal, we try to estimate the first-year revenues on that deal. As I say, it is extremely hard because many of these deals -- you really do not know how quickly they are going to ramp up and how big they are going to be. But, given that uncertainty in the estimates, when we add the dollars up, they are significantly larger. But again, I am not suggesting that this is a scientific process.

Sure. But, would you say that more are strategic, as a percentage, than they may have been last year?

Yes, I would say that on average -- the average deal sizes are bigger -- yes. People are trying to do larger programs. And relative to last year, I'm not sure. But, certainly relative to two years ago, yes.

Of the (indiscernible) new deals you won, how many were exclusive? And how many for the year have been exclusive -- of the 14 you have won? If you have any idea?

I don't know that offhand. Generally, there are two types of strategic deals -- or three types. One, where it is the first time the client is picking a strategic vendor and they will either pick one or two, depending on how large the program is. Another type is where they are already using one strategic vendor and they are growing the program -- want to bring in a second. And we have won deals in all three of those categories. (multiple speakers)

I think it's more typical these days to have two vendors. Although very often, clients will start with one vendor, ramp it up to a certain point, and then bring in the second vendor.

Just since you have announced the -- the Credit Suisse deal -- Are you the sole provider right now on that one?

On that one, yes -- on that project. And I don't think Credit Suisse has done a lot of offshore outsourcing, although CSFB certainly has -- in the past, to my knowledge. So I think it's the early stages for them as well.

All right. Thanks, guys.

George Price, Legg Mason.

Just to confirm, I missed it -- there's obviously been a lot of discussion on it -- turnover, was it 17 percent annualized?

In the quarter, it was 17 percent annualized. And that is a combination of voluntary and involuntary.

Okay. And any way that -- not to focus to fine a point -- but, any way to kind of handicap how much of that was as a result of the Accentures of the world coming in versus, I guess, with a more, kind of consistent trend?

About -- you know, if you take the 17 percent, about half of it was people going to other companies. So let's say 8 percent, 8.5 percent. I would say less than a third of that was people going to the global excise (ph). So, if you, I guess -- if it probably gets down to 2 or 3 percentage points, possibly of people going to other -- the global excises, as opposed to domestic competitors.

Okay. That is very helpful.

And one important thing to note, we have had a fair amount of experience where people have gone to the global competitors and then actually came back ; where they realized that life is actually much better working for a company like Cognizant.

(laughter). I am sure. I guess, in terms of the Credit Suisse deal -- maybe this is not a shift in deal structure, but it seems like it. So, if you could confirm that in terms of this being a onetime larger build-and-run. Is there sort of a shift in the structure of deals to more of that nature? And, if so, does that signal a new trend for offshore, in terms of things that might have more typically gone to the traditional providers?

With this deal, the two finalists were ourselves and one of the global excise. So, I think, as a result, the deal was structured more like a traditional SI deal. I don't see that as a universal trend in offshore. But, as you have said, this is a situation where we have a set of billed activities, followed by a maintenance contract. And if we complete the initial set of bills (indiscernible) deals, we will get more.

And the initial set of bills is the 2 million you referred to?

Exactly. Right.

Okay. What is the time period for the billed?

It is about two years.

Okay. Just curious in terms of the competitive trends. You just discussed the different natures of the strategic deals. One of the trends, I guess, with clients that are a little more offshore-savvy is kind of having a corral of a small number of preferred strategic vendors. Have clients, at all, been -- are they continuing to focus on the big names -- yourselves, the Infosyses, etc.? Are they broadening in any meaningful trend to include some of the Tier 2 players as well, either for pricing reasons or for supply reasons?

You know, we still see a very strong preference, vertically, for the larger deals in going with the -- you know, Cognizant, Infosys, Wipro, I would say, seem to be winning the lion's share of the new deals. But, clearly, as I mentioned, Cognizant has not been able to field some of these. I mean, we literally cannot respond to all of the (indiscernible) fees that we are getting. So clearly, there will be a number of deals which do trickle down to others. And we are also not being particularly aggressive on price. So we will undoubtedly lose some deals on price, although it has not been a significant number to this point.

And, I guess -- where is Europe now, relative to the U.S.? If you could maybe put it in terms of a year ago, two years ago --?

I would say two years ago, because it is at a point where clients have started to look at offshore strategically. So, it has moved from being a project manager in the corner to the CIO driving the process. However, I am not sure when the rubber meets the road how impressive they will be in ramping up. It took some time in the U.S. before we saw the very aggressive ramp-ups, and it may take another year or so before it happens in Europe. And I think it that is on-track and will happen.

Last quick question -- if you could give us a little bit of color, maybe, on the early signs of improvement in the telecom sector in the U.S. Exactly, what are they doing, and what is driving them to start spending again?

Well, this is just based on a couple of our telecom clients who sort of went away a year and a half ago because they had business difficulties, have come back to us with new business, and we've also seen an increased level of RFPs in that sector. So, you know, I would not (indiscernible) a qualitative trend, but it is after two years of near-death experience, I guess, it is nice to see that happening.

Great. Thank you very much.

Operator, I think we have time for one more call -- one more question.

David Garrity (ph), American Technology Research.

All my questions have been answered. Thank you very much.

I'd like to thank everyone for joining us today and we look forward to talking with you all again on our next quarter conference call. Thank you.

This concludes today's Cognizant Technology Solutions third quarter 2003 earnings call. You may now disconnect.