高知特 (CTSH) 2005 Q1 法說會逐字稿

Good morning. My name is Michelle and I'm be the conference facilitator today. At this time I would like to welcome everyone to the Cognizant Technology Solutions first quarter 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. ( Operator Instructions ). Mr. Schmidt, you may begin the conference.

Thank you and good morning everyone. By now you should have received a copy of the Company's first quarter earnings release. If you have not, please call me at my office at 212-850-5600 and we'll be sure you have a copy. On the call today, we have Lakshmi Narayanan, President and CEO, and Gordon Coburn, Chief Financial Officer of Cognizant Technology Solutions. Before we begin, I'd 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'd now like to call the turn over to Lakshmi. Lakshmi, please go ahead.

Thank you, Peter. Good morning, everyone, and thank you for joining us today for Cognizant's first quarter 2005 earnings call. As usual, I'll provide an overview of the highlights of the quarter, some detail behind the key drivers to our performance, and our view on emerging industry trends and their impact on Cognizant. I'll then hand over to Gordon, who will take you through our numbers in greater detail. Year 2005 started strongly, and very much as we expected.

Our new service offerings are gaining traction, our customer satisfaction levels continue to remain high, and we are continuing to ramp up our ability to manage highly complex, large-scale programs. We also announced an important strategic acquisition of an IT consulting firm. Coupled with our broad base of strategic clients, many of whom are currently in the ramp-up phase, we believe we have the pieces in place for 2005 to be a very exciting year of strong growth for Cognizant. Before I go into the details of the first quarter, I'd like to just say a few words about our recent acquisition of Fathom Solutions, which we announced just last week. Fathom Solutions is an award-winning Chicago-based IT consulting company and it gives us the ability to combine industry-focused IT consulting, with our top tier onsite/offshore offshore models, specifically in the telecom [inaudible.]

Fathom Solutions was founded in 1999 by former Accenture executives and brings differentiating strengths in IT strategy, process design, program management, and systems integration to Cognizant. More importantly, through this acquisition, we are gaining complementary offerings on expertise to strengthen our consulting expertise, with the addition of Jeff Lee, one of Fathom's founders, as managing director of North America of Cognizant's telecommunications practice.

Fathom attracted us in large part because its own corporate culture so closely resembled our own, with successes regarding high customer attention, low attrition among the staff of 120 employees. Over the past two years, repeat business has accounted for over 90% of their revenues. Fathom's strong industry consulting expertise will help us build deep partnerships with leading telecommunications services customers, an important and expanding [inaudible] for us and we're excited about the possibilities arising from Fathom joining us at Cognizant.

Now, turning to the first quarter, we continue to capitalize on the three growth drivers that we identified in 2004. We deepened our relationship with key customers through the cross selling of new service offerings to meet growing demand for a broad range of services. We expanded our knowledge expertise in service offerings in additional industry sectors, as companies beyond financial services increasingly recognize the value of broadly adopting offshore enabled IT and business outsourcing. And, we have broadened our geographic percents on international executive management team to cater to the increasing demand from non-U.S. -- especially European customers that increasingly interested in adopting large-scale offshore outsourcing.

I'm happy to report that Cognizant had a strong first quarter, delivering solid performance in our key financial and operating metrics. Our approach to global delivery, with its unique onsite/offshore approach and organization of our business around distinctive industry practices, continued to be clear differentiated for us, and the demand for Cognizant services remains strong. During the quarter, we experienced healthy interest for a broad range of our offerings across all of our key verticals and geographies.

Moving to our financial highlights for a moment, we ended the first quarter with revenue of $181.7 million, up 5% sequentially compared with $172.8 million in the fourth quarter of 2004, and up 52% from the first quarter of 2004. Earnings per diluted share were $0.22, compared to $0.21 for the fourth quarter of 2004 and [inaudible] $0.14 first quarter of last year. Our operating margin remained strong, at 20.5% for the quarter, compared to 19.8% a year ago. These consistently solid margins are due to the healthy demand environment we're experiencing from new and existing longterm clients, and also the continuing benefits of our prior aggressive investment in the Company's infrastructure and domain expertise.

Our ability to provide premier IT solutions from the onsite/offshore models continues to be highly attractive to both new and existing clients. This approach has been effective not only in expanding our existing client relationships, but also winning strategic clients across a range of industries. This includes our traditionally strong segments in the financial services and health care, as well as our newer verticals, such as retail, manufacturing and logistics. We plan to continue the investment of the development of additional best-of-breed service offerings, enhancing our ability to meet existing and potential clients' growing demand for a strategic partner. We've also driven growth through acquisitions and also our partnership to provide customer relationship management offerings. Not only does our old [inaudible] foundation of proven outsourcing solutions remain as strong as ever, but we have demonstrated our dedication to providing clients with new, innovative and effective outsourcing strategies. Reflecting the strong demand, we're pleased by the number and diversity of our new client wins for the quarter.

We added approximately 30 new customers during the quarter, five of which represent strategic wins across several sectors, including financial services, health care, and retail, manufacturing and logistics. In an important sign of increasing presence outside of North America, two of these five strategic clients are outside of the U.S.A. This brings our current strategic client gross total to 53. As previously explained, we define a strategic client as one offering the potential to generate between five and 40 million or more in annual revenues for Cognizant over the long term.

Financial services, which includes insurance, remained a strong performer, with approximately 46% year-over-year growth for the quarter. Retail manufacturing and logistics grew over 70% and we saw a significant drop among health care customers. Stemming in part from CIO's continuing emphasis on using technology to improve efficiency and standardization. As we said before, we see the retail industry, in particular, as a significant opportunity as it has one of the largest basis of back office legacy systems in need of modernization. Our successes in this vertical are thanks to our earlier investment in the retail sector, which we believe are beginning to come to fruition. Turning to Europe, in the last quarter of 2004, we noted increasing interest in offshore outsourcing from companies in the U.K. and in continental Europe. As evidenced by a steady growing number of inquiries and visits from potential clients. That trend has continued and during the first quarter our operations in the U.K. and continental Europe had several key wins for application development and re-engineering services.

Our European operations saw an increase in revenue percentage, rising to 13% of total revenue. We believe that we're just beginning to see the start of real momentum growing in Europe. We are confident that Cognizant is poised to take full advantage of the opportunities developing in Europe and other geographies. One consistent theme and primary area of focus for us at Cognizant is, and always has been, customer satisfaction. It is our ability to quickly form strong working partnerships with clients, that allows us in turn, to ensure customer satisfaction remains consistently high. That satisfaction lays the foundation for longterm and broader relationships over time, with clients having the confidence to work with us on a wide range of increasingly complex projects.

That this approach works is demonstrated in our financial results; however, we're always pleased when this is also confirmed by the findings of our annual customer satisfaction survey. This is a survey conducted among all of our customers and indicates that satisfaction levels still remain at very high levels. This is a remarkable accomplishment because of the addition of many new customers and, also, in the record response rate to the survey that we got this year of over 255 respondents. The survey rates technical competence of our people, our responsiveness, our ability to deliver quality solutions within budget, and our flexibility as among the highest value. The survey also showed that our customers now expect us, as a matter of course, to provide additional value-added services, requiring us to be able to innovate and provide new solutions that address business needs and also to offer the ability to anticipate their future technology requirements.

We are very excited about this as we've been building these capabilities in our global technology organization and in our business technology consulting group. Cognizant is well-positioned to meet those expectations of adding value and we are proud that the customers, once again, believed, and I quote, we exceeded expectations and blew the others away. As I mentioned earlier, Cognizant's expansion into comprehensive CRM solution space has also been augmented through our recently announced partnership with Inforte Corporation to deliver a comprehensive customer relationship management, a CRM offering to global organizations. Inforte's industry leading and thorough understanding of companies' customer facing operations have been coupled with Cognizant's system integration capabilities to provide clients with an end-to-end CRM offering. We will use our unique global delivery model, including the robust CRM double up integration capabilities, to offer clients a customized system that specifically meets their business and IT goals.

Our CRM practice has currently delivered systems for more than 80 customers and we anticipate steady growth over the next several quarters. This new ability to provide a total solution to our clients is wholly unique in the industry and given the budget pressures currently being felt by CIOs, we believe the cost advantage found in our offshore model have created a powerful solution for the future. Cognizant is also maintained its position as the top-rated offshore partner for Seattle solutions (ph.) according to Gardner.

We're also now beginning to leverage our domain and IT expertise across vertical markets to offer vertical business product outsourcing. [Inaudible] solutions to our customers. As a result of our application development and maintenance engagements, we often acquire a detailed and thorough understanding of our customers business processes. Our [inaudible] offering builds upon this understanding to enable customers to outsource entire high-value business processes to Cognizant, which we can then improve over time. Our focus on [Inaudible] we believe will allow us to award the low-margin call center business, which is typically what term [Inaudible] come to mean in the outsourcing of services offshore. Furthermore, through continued systems and process re-engineering, we offer a greater value proposition to potential [inaudible] customers that many pure-play BP organizations (ph.) would have difficulties matching. One recent example of a company working with us in this regard is Pfizer, the pharmaceutical company, Pfizer's India biometrics division. Where we provide them with high-end business process outsourcing solutions in the area of clinical data management and biometrics.

Again, this is another clear demonstration of the strength of our vertical industry knowledge and expertise.

While on the topic of developing additional services to meet clients' needs, last year we introduced several new services, including testing -- testing our quality assurance, QS services, which is focused exclusively on supporting our clients' testing needs through independent verification and validation of their internal software. Testing represents the fastest growing business within Cognizant and an increasing portion of customers' offshore I.D. spent and our key differentiator is the high-level of automation we're able to achieve through significant investments and testing tools, glad forms and processes.

In a report to be published by a leading industry analyst, Cognizant has been rated among the leaders in the area of testing, with a differentiated model. Through the launch of these types of new services, we are meeting increased customer demand for services that help them better align with their business goals. With the continual introduction of new services, we anticipate a substantial opportunity for Cognizant to capture an even greater percentage of our clients' IT budgets.

Turning our staff, I'm pleased to report that Cognizant remains an employer of choice, allowing us to recruit and retain the best and brightest graduates and experienced employees alike. The resulting quality of Cognizant's staff at every level is another aspect of our differentiation. Based on our anticipated future demand for Cognizant's expanding business, we increased total staff by another 11 persons on a sequential basis, adding more than 1,700 associates during the quarter. We currently have just over 17,000 employees at Cognizant, and reflecting our belief in Cognizant's constant growth over the remainder of the year and owing to the strong demand for our diverse outsourcing solutions we're also increasing our anticipated headcount for the end of 2005 to 23,000 employees. In terms of our physical infrastructure, we also remain on track with our expansion plans for India.

The 830,000 square feet of expected space in Chinai (ph.), Poonay (ph), Calcutta, and Bangloo (ph), as well as the education space for Cognizant Academy in Chinai (ph) is moving forward rapidly. We continue to anticipate the first of these facilities to come online this summer. As previously mentioned, compared to the use of our current release facilities, these new facilities are expected to generate significant annual operating savings. On our strong growth has not gone unnoticed by others, either. Earlier in the quarter, we are delighted to report Cognizant was chosen by Forbes as one of the magazine's 25 fastest-growing technology companies. Ranked 21 on the list, Cognizant is the only global consulting technology services and outsourcing company on the list. In closing, our first quarter proved an excellent start to what we expect to be another exciting year for Cognizant. We have a robust and satisfied client base of industry and world-leading companies, and we are dedicated to investing in the development of additional best-of-breed service offerings, enhancing our ability to meet our existing and potential clients' growing demand for a truly strategic offshore partner. We believe this will provide a solid platform for Cognizant's future growth as clients move toward a partnership that will entail a broader and more comprehensive range of increasingly complex projects within all levels of their organization. With that I'd now like to turn the call over to Gordon for a more detailed look into the financial performance and guidance going forward.

Thank you, Lakshmi. And good morning to everyone. I would like to provide additional information on the first quarter and then discuss our financial expectations for Q2 and full year 2005. Revenue for the first quarter slightly exceeded our prior guidance due to continued application management ramp-up of clients won over the past few years, and continued greater than anticipated strength in discretionary development spending, a trend that started for us in the second quarter of 2003. Revenue grew 5% sequentially and 52% year-over-year. The recent Fathom acquisition closed in mid-April and, therefore, did not contribute to Q1 results. As anticipated, and previously discussed, sequential growth in the first quarter was slightly muted due to the unusual strength of Q4 of last year, resulting, in part, from some clients accelerating the start of planned projects or completion of a project in Q4 to utilize remaining 2004 budgets.

In addition, we experienced an accelerating revenue pattern within Q1 of this year as clients finalized their 2005 budgets during the quarter and released new projects to us for 2005. Although this pattern muted quarterly sequential growth for Q1 it resulted in very strong momentum coming out of Q1 and into the remainder of the year. Our core businesses remained solid and performed well and our pipeline is robust. For the quarter, application management represented 52% of revenue and application development integration the remaining 48%. Both services grew in Q1. On a year-over-year basis, application management grew 42% and application development and re-engineering grew 64% during the quarter.

The largest growth driver in the first quarter, in terms of gross dollars, was financial services, which includes our practice in insurance, banking, and transaction processing. It grew $28 million, year-over-year, and represented 49% of revenue in the quarter. Retail manufacturing logistics was our fastest growing segment in percentage terms, growing by approximately $15 million, or 70% plus, year-over-year, and representing 20% of revenue for the the first quarter. Health care grew over $12 million and represented 19% of revenues. The remaining 12% of our revenues came primarily from other service-oriented industries, as well as our alliances.

During the quarter, 86% of revenue came from clients in North America. We continue to see an increasing interest level in Europe for offshore services, both from European divisions of our global clients, as well as from an increasing number of local clients. European revenue was 13% of the total in the first quarter, up 60% year-over-year and 11% sequentially. We added around 30 new customers during the quarter. Our active customer base remained at 233. During the quarter, we were selected the offshore partner in five accounts, which we considered to be the strategic and have the potential to become significant revenue sources for us in the future.

We handed work for approximately 30 clients during the quarter, almost all of which were very small clients, which, when combined, generated less than one half of 1% of our 2004 revenue. Turning to costs. Costs of revenues increased the 51% for the quarter, as compared to the first quarter of 2004. 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 1,600 during the quarter, and ended the quarter over 15,800 technical staff. This is an increase of approximately 6,000 staff from March 31 of last year. Our gross margin was 46.1% for the quarter, an increase of 85 basis points sequentially, and an increase of 35 basis points compared with first quarter last year.

Gross margin in Q1 benefited from our decision to implement our annual offshore compensation revisions in April of this year in order to align our timing with the rest of the industry. During the first quarter we accrued bonuses at a level well above 100%, though at a level slightly lower than in 2004. We're pleased to continue to have the opportunity to share a portion of our success with our employees. SG&A expenses, including depreciation, were $46.5 million, up from $31 million in the first quarter of 2004. As a percentage of revenues, SG&A was 25.6% for the first quarter, down 35 basis points from the first quarter of 2004 and up 80 basis points sequentially from the fourth quarter of last year.

During the quarter, we continued to strengthen our vertical expertise, and we aggressively hired client partners to manage and grow our customer base, a key differentiator for Cognizant. In addition, we continue to expand operations in Europe to position ourselves for the emerging opportunities in that region. Operating income for the quarter increased 57%, to $37.2 million, from $23.7 million in the first quarter of last year. Our operating margin of 20.5% was up 5 basis points sequentially, and up 70 basis points compared with the first quarter of 2004. During the first quarter, we exceeded our target operating margin goal of 19%-20%. This resulted from the stronger than expected revenue during the quarter and the decision to implement our annual offshore compensation revisions in April.

We expect to return to our target operating margin range for the remainder of 2005, as planned annual compensation increases impact us starting in the second quarter. Interest income for the first quarter increased to $1.8 million compared to $840,000 in the first quarter of last year. Interest income increased due to higher global cash balance and an increased portion of our cash held in foreign currencies, which earn slightly higher interest rates, as well as an increase in U.S. short-term interest rates. We had a $125,000 foreign exchange loss during the quarter.

Our tax rate for the first quarter was 17.8%, slightly below our original expectations. For the full year, we currently expect a tax rate of 17.8%. Turning to the balance sheet. Our balance sheet remained healthy. We finished the first quarter with over $314 million in cash and short-term investments, essentially flat with our ending 2004 balance. Q1 cash flow was negatively impacted by the pay-out of a significant portion of the 2004 bonus and a sequential increase in DSO, partially offset by proceeds and tax benefits on the exercise of stock options. During the first quarter, operating activities used approximately $800,000 in cash. Financial activities, primarily the exercise of stock options, generated an additional $11 million in cash. These amounts were partially offset by $9 million of capital expenditures, including expenditures on our India construction program. In addition, we used $1 million in cash due to currency translation adjustments.

Our collection of trade receivables during the quarter was healthy, given certain Q1 seasonality. Based on our $131 million balance on March 31, we finished the quarter with a DSO, including unbilled receivables of 65 days, compared to 64 days in the same period last year. The number of billing days during the first quarter was skewed towards March, negatively impacting our DSO compared to the fourth quarter of last year. During Q,1 excluding unbilled receivables, our DSO was approximately 56 days. The quality of our receivables portfolio remains very strong. Our unbilled receivables balance was $18.7 million at the end of the first quarter, up $4.6 million from December last year. The increase in unbilled receivables resulted primarily from the timing of several billing milestones and the volume associated with our continued revenue growth. We expect over 50% of the March 31 unbilled balance will be billed this month.

During the quarter, overall 26% of our revenue came from fixed-bid contracts, up from 25% in the fourth quarter of 2004, and up from 23% in the first quarter of last year. When we look at the mix by solution types during the quarter, 30% of our development revenue and 21% of our maintenance revenue came from fixed-price contracts.

Turning to headcount. At the end of the first quarter, our worldwide headcount, including both technical, professionals and support staff, totaled 17,050. This represents a net increase of approximately 1,700 people during the quarter, and over 6,500 compared to March of last year. Approximately 60% of our first quarter hires were recent college graduates who will enter our training program and the reminder were lateral hires of experienced IT professionals. Based on our 2005 revenue expectations and our ongoing success in recruiting, we now expect to reach 23,000 employees globally by the end of 2005. Turnover, including both voluntarily and involuntarily, was 14% annualized during the first quarter, in line with our previously stated longer-term expectations. The vast majority of Cognizant's turnover occurs in India, resulting in onsite annualized attrition rates in the single digits.

In addition, the attrition once again is heavily weighted towards the most junior members of our staff. Going forward, we continue to target an attrition rate in the low teens, in line with our historic levels. Onsite utilization was around 86% for the quarter. Offshore utilization, excluding recent college graduates who are in our training program during the quarter, was around 64%. Including trainees, offshore utilization was approximately 54% for the quarter. We had approximately 1,700 people unbilled in our training program at the end of the quarter. I'd now like to comment on our growth expectations for the second quarter of 2005 and for the full year. We're projecting revenue for the second quarter of at least $206 million. This guidance assumes a second quarter contribution from our recently completed acquisition of approximately $6 million. We continue to have significant revenue visibility due to our high level recurring revenue and long-term nature of our relationships. In fact, today we have customer commitments for over 90% of our second quarter revenue guidance.

For the full year, based on the very strong demand environment for offshore services and favorable ramp-up rates we've been experiencing with recent and older strategic accounts, we now expect revenue to be at least $870 million. This guidance assumes a contribution from our recently completed acquisition of approximately $20 million for the full year -- from the date we acquired through the end of the year. As has been typical in prior quarters, we expect the majority of growth in 2005 will come from the ramp-up of clients won over the past few years. During 2005, we intend to continue to closely monitor our spending and expect our operating margin to remain in the 19%-20% range, in line with our historic margin level and prior guidance.

As mentioned earlier, our annual compensation increases take effect this month. With this expected level of revenue growth and our expected operating margins, we're currently comfortable with our ability to deliver EPS of $0.23 in Q2. This guidance includes the anticipation of a Q2 share account of approximately 147 million shares, a tax rate of 17.8%, operating margin within our guidance range, and the absence of further non-operating foreign exchange gains or losses. Based on current business trends we currently expect EPS for the full year of approximately $0.99, a $0.03 increase from our prior guidance. This guidance includes the anticipation of a full year share count of approximately 148 million shares. In addition, this guidance assumes a tax rate 17.8%, operating margins slightly above the mid-point of our guidance range, and the absence of further non-operating foreign exchange gains or losses.

We remain on track to spend approximately $79 million on capital expenditures this year. We expect the vast majority of our second quarter growth to come from existing clients, particularly the numerous strategic deals we have won during the past few years. Based on the feedback we have been receiving from these clients about their intention to leverage the advantages of offshore, combined with the strongest pipeline in our history, we are quite optimistic but the outlook for Q2 and for all of 2005. Now, Lakshmi and I would like to open the call for questions. Operator? Operator?

[Operator Instructions]. We'll pause a moment to compile the Q and A roster. Your first question comes from the line of Moshe Katri with S.G. Cowen.

Hey, good morning. I want to talk a bit about the fact that Gordon and Lakshmi, some of your peers experienced a slow down in their top line growth during the quarter, and they blame a number of factors here, including the U.S. economy, softening and, [Indiscernible] in terms of bookings due to Sarbanes-Oxley compliance issues. Can you talk a bit about what differentiates Cognizant from its competitors, given the fact that based on your feedback of non-environment actually hasn't really changed much?

Yeah. I mean, I'd like to address that, Moshe. We haven't seen any significant change in the outside of the demand, as far as the clients' behavior pattern is concerned. If you take a look at the Sarbanes-Oxley thing, that's something that's been mentioned. Our customers have been preparing for Sarbanes-Oxley compliance the last two or three quarters. We're been experiencing some activity, in terms of the project work we do, in order to bring them some compliance work like single sign-on and things like that.

We haven't come across in our customer base any change in the demand department due to Sarbanes-Oxley. If you look at the general trend in terms of sales cycles, in terms of demand, in terms of customer research, in terms of [inaudible] and inquiries we don't see any change in the pattern at all. It continues to be the way it was two or three quarters back and the interest and demand level continues to be very strong.

Most of that, Lakshmi's comments really apply across our industries. We're seeing healthy demand across our industries, both for traditional services and customers seeking to do a broader range of services with us. So what we really see is a very healthy demand environment today.

And, then, the two strategic client wins outside of the U.S. Should we assume they're both out of Europe?

No. I mean they're outside of the U.S., and both are large corporations of significant potential for ramp-up and both have global operations, headquarters in different locations.

Moshe, one of them is in Europe, one's headquartered in the Far East, but these are both companies that work globally.

Okay, and finally, you haven't really said much, Gordon, about pricing. Can you comment on that as well?

Comments are very similar to my comments throughout all of last year. It's a stable pricing environment. We're getting price increases here and there. We're obviously moving up the value chain a little bit, and that partially gets offset by a continued shift in our business mix towards large customers, so we're not losing sleep over pricing. It's a stable environment.

Thanks.

Your next question comes from Julio Quinteros with Goldman Sachs.

Hey, Gordon, good morning. Just want to double check on the operating cash flow and the cash flow metrics for the current quarter. It sounded like you said that 50% of the unbilled balance in the current quarter would actually be collected in the current month. Is that correct?

50% of the unbilled balance from March will be billed in April. Not collected, billed in April.

Okay, so what does that imply for your full year operating cash flow targets then?

We've never set full year operating cash flow targets, but I would remind you, historically, Q1 is always a very weak cash flow quarter for operating cash flow because that's when we pay off the vast majority of our bonuses. So this pattern, I don't think, is materially different than what we, assuming, no different than what we expected and really not materially different than what we've seen historically.

Okay, and then just one other point regarding the, sort of, the timing on the payments or the accruals for payments. Did you say that was pushed out to April, so we didn't see that reflected in the current March quarter?

Not the accruals, the actual pay salary increases.

Oh, pay increases?

Right.

I'm sorry, can you just repeat that point again.

Sure. Let me clarify. Offshore we -- the annual salary increases are effective April 1. And that allowed us to align with the rest of the industry, which, obviously, means that in Q1, we did not have the impact of the pay increases. That will hit in Q2. That has nothing to do with bonus accruals or accruals in anyway, though.

Understood. Can you just talk to the magnitude of the pay increases offshore versus onsite?

Things are coming in exactly where we planned, exactly where we budgeted. It's going to be low double-digit offshore and very low-single digit onsite.

Okay. And then maybe just a maintenance questions. Can you also provide some of the specific metrics that you normally do around the effort mix onsite or offshore and the actual billing rates for the quarter?

Sure. Hold on one second. Onsite/offshore mix 26% and 74%, and billing rates were essentially flat. Maybe up a tick, but, yeah, I call that rounding or essentially flat.

Okay. Great, thank you.

Your next question comes from Adam Frisch with UBS.

Thanks, good morning, guys. Gordon, the headcount number is something we've been focused on more in the past few months due to its correlation with future revenue growth, and first quarter hiring was stronger than expected and you increased your full year outlook. Is that a number that could increase further if demand is there, or are you at all constrained by infrastructure limitations and if you could also explain where the seasonality comes in, that would be great.

Sure. To hire 23,000, we're not constrained by infrastructure or recruiting ability and, if the demand were there, yes, we could hire in excess of 23,000. The constraint ultimately becomes the ability to integrate people onto project teams, but that would be at a number substantially higher than 23,000. I'm sorry, Adam, the second part of your question?

Whether there were was -- first quarter was a lot higher, about an extra 1,000 people higher than we were expecting. Is that due to seasonality? How do you expect hiring, I guess, to flow throughout the course of the year.

Starting last year, we tried to smooth the hiring somewhat just because the numbers were getting larger; and prior to that you saw hiring be very back end loaded in 2003 and prior. If you look last year, you saw a pattern of your Q2, Q3 tend to be the strongest quarters. Q1 and Q4 tend to be lesser than Q2 and Q3. So a little bit of a bell curve, but nothing like you would have seen in 2003 and beyond. More in line with what we experienced last year. Obviously, the ultimate numbers will depend on exactly where revenue ends up. We guided to a revenue using words "at least". If demand is stronger than we're anticipating, then obviously we'd turn on the lateral hiring as we go along.

Okay. Speaking of that I know if I joke with you privately, you're becoming kind of like the Alan Greenspan of the services world, in the sense that investigators look at the words preceding your guidance numbers, and I notice you change it from "right around" to describe last quarter to "at least" this quarter. What's making you feel more comfortable about potential upside, not only for Q2 but also for the year?

I think it's several things. As you heard my comments and I think as I talked about earlier, January was not particularly strong for us. Clients were finishing up their budgets for 2005. March was a very, very good month for us. So we're coming into Q2 with a lot of momentum. And, you know, what we will still need to see is how much of that momentum continues. If we continue to see the kind of momentum we had in March, then, you know, I think, this year will be very good. the -- that's why we use the words "at least" because we're -- we had great momentum in March and know some of it will continue, the question is how much will continue?

Okay. Then a couple of house cleaning items if I could just kind of rapid fire these. I'm assuming the accrues were down sequentially because of the bonus payouts?

Absolutely. A significant majority of our 2004 bonuses were paid in Q1 and that drove the decline in the accrued liabilities.

Okay. Then the utilization rates were down on the offshore. Are you concerned about that at all? Or do those bounce around a lot from quarter-to-quarter?

I actually think it's great. It provides us with the bench to meet the potential demand that's out there. We have a lot of people in training right now, so, you know, it gives us a lot of comfort with our positioning to have the resources available as the year goes on. We're very comfortable with where utilization was. The answer is, yes, it does bounce around depending on demand.

Further strengthening the top line growth story?

Yes.

Okay, then final question, impact from the RPI in the quarter?

Impact from the RPI appreciated on average for the quarter about -- hold on one second here. About 2 1/2%. The average rate in Q1 was 43.6, so right around where it is right now and we haven't seen any change from Q1. Q1 compared to Q4 cost me about 50 basis points in margin, based on that RPI appreciation and it's been stable since then.

Great. Okay, thanks, guys.

Thank you, Adam.

Your next question comes from the line of Julie Santoriello with Morgan Stanley.

Thanks, good morning. I wanted to ask a little bit more about the onsite/offshore mix that continues to trend higher. I think in some cases not what would be expected given the mix in revenues. So, Gordon, could you comment a bit on the sustainability of that mix, that 74/26 and what we could expect to see going forward? Thanks.

Yeah. I mean, traditionally our onsite/offshore mix has been around 30% onsite, 70% offshore. And that's some of these services like the testing and the infrastructure services that we announced, and as customers get comfortable with the model, they are very comfortable moving some of those type of activities offshore because of which the activities -- I mean you see that ratio to be 26 and 74. I think that's what we reported in this quarter. Going forward, we think it will be -- I mean the ratio would be, you know, around 30 to 70. Both are a little in the range 25-30 onsite; 70-75 offshore. Our model focuses on doing a significant amount of work offshore.

Thanks. And can you, also, just comment on the operating margin being a bit above the typical range that you tend to manage to? Was it because a lot of the quarter's performance was more backend loaded and you didn't have a chance to, basically, spend the money that was coming in?

It's a little bit because of the revenue, a little bit because of the offshore mix. And a big part of it is because we decided to do the salary increases in India in April. So some of the expense, obviously that expense did not hit in Q1 and that's why we expect to be right back down in our normal range starting in Q2.

Okay. Thank you.

Thanks, Julie.

Your next question comes from the line of Bryan Keane with Prudential.

Good morning. I'm hoping you guys can talk a little bit about the competitive environment and how Cognizant is doing versus other tier ones. I don't know if you quote a win rate, but how that's progressing?

In terms of the significant shift that this happened, we get invited to more parties these days because of our ability and the reputation we enjoy in the marketplace. More opportunities for us. And we get into consideration and a greater number of deals. Our win rate in the areas of strength that we have has been very good. We don't publish win rates, but, then, you know, just looking at the number of customer additions that we announced in Q1 of this year, that's been very, very strong. Our competitive positioning, in terms of the application management and re-engineering services, has been particularly strong and rated well by the analysts.

To add to that, we're very pleased with the fact that we added five strategic accounts in Q1, that compares to three in each quarter of last year. So not only are we having success in ramping up our existing client base, and I think really differentiate ourselves from many of the other players in the market there, but we're also -- a lot of success in winning new clients, which will drive growth both in 2005 and more importantly the growth drivers for 2006 and beyond.

Is directionally win rate up as you guys are getting bigger and a little more credibility? Can you say that, at least?

Directionally, I would say yes. You know, if we were to ask this question some time back I would say that, you know, pretty same. But now, in the last two quarters, we have seen our win rate go up.

Okay. And just the pipeline on strategic clients, obviously, the five new adds, and you mentioned at the end there the pipeline seems like an all time high. Does that continue to look robust going forward? The amount of people or large clients inquiring about Cognizant services?

Yeah. The pipeline continues to be strong and the reason for that is two-fold. One, if you look at our pipeline, the adoption of outsourcing in other industry verticals like retail, manufacturing, telecom is increasing. Earlier, it used to be predominantly financial services; now it's more secular. That adds to our pipeline. Two, in Europe, and other areas, the interest in offshore outsourcing has increased significantly, and that adds to our pipeline, too. As we mentioned, the opportunities you're looking at in Europe is considerably higher now than it was a couple of quarters ago. These are the two significant factors that add to our pipeline of opportunities.

Okay, and finally, just where in Europe is the demand highest?

It is both in U.K. and continental Europe. In continental Europe, more specifically, Holland, Switzerland and France.

Okay. Great, thanks.

Thanks, Bryan.

Your next question comes from the line of Joseph Vafi with Jefferies & Company.

Hi, guys. Good morning. If we could focus on the top 10 accounts for a second. You know, what do they contribute in the quarter? How do you see those accounts moving forward? You know, in terms of their ability to still uptake new services and grow? Obviously, they're big, so, you know, maybe their growth won't be as strong but kind of the prospects for continuing to grow those larger accounts at this point.

All right, Joe. Top five accounts were 35% of revenue and let me give you the top 10. The top 10 was 47%. During Q1, we did not have any additional strategic accounts mature.

Okay. And how many now do you think are, overall of those top 10, are you kind of considering mature at this point?

I don't have -- the -- we view five of the 53 strategic accounts as mature, and those are largely the ones that used to be afilliated with us when we were originally owned by Dunn and Bradstreet and some of the real early players.

Okay. Fair enough. A question on the development revenue, I mean, it's clearly grown a lot here over the last six or so quarters and it's continuing to kind of grow here pretty nicely. Are you seeing any kind of change in the behavior patterns of that revenue from your clients? Is it becoming, you know, kind of a more recurring-based business than maybe it used to be? Is there any change to, you know, that -- any kind of change to the characteristics of that service as it relates to how it becomes revenue that we might be interested in?

Yeah. I'd just like to throw a few indicators in that regard. If we look at most of the customers seem to have a good handle on the maintenance part, the traditional portion of where the money is spent. And the savings that accrue out of managing that, is redeployed in a whole lot of development activities. The development activities are two-fold: One, new development that supports new revenue streams; and two, more increasingly in the enterprise solution space, in terms of integrating packages and products and driving greater value out of them. So we see that trend to continue. We believe that it would be roughly about 50% of our portfolio. And that's -- more and more customers look to using technology to do business transformation. We believe this trend will continue to increase, probably get to something like 55 to 45% in that ratio, 55% development and perhaps about 45% of maintenance in some of the, you know, aggressive technology-oriented companies.

Okay. That's helpful. Then on Fathom. Should we read anything into their -- obviously, they're very strong in the, you know, financial services vertical. I know Fathom has, you know, some strength here in Telco, as well. Should we read anything into where their vertical markets are and why that was an interesting or strategic pick up for you?

No. Fathom is clearly a strong player in the telecommunications vertical. They're, as we indicated earlier, more than two-thirds of their revenues are from the Telecom vertical, and they have some deep relationships with strong players in the telecom space and, as you all know, what's happening in the telecom space in terms of convergence is phenomenal. Technology is really being applied by all these Telecom service providers to provide audio, radio, and all kinds of services through the telephone lines. That we believe is a big opportunity in terms of IT services. And that's the space that Fathom has been providing IT consulting and strategy services in. It's those capabilities that we want to leverage and deploy solutions, execute the solutions in the onsite/offshore model.

Okay. Good. And then one final question. How should we view the overall acquisition strategy of the company moving forward? Are we looking at, kind of, any change or are we still opportunistic and, you know, with pick-ups here and there? Or as the Company gets bigger, should we expect to see more acquisition activity?

We'll continue to be opportunistic in that space. We keep looking at opportunities, small acquisitions, like the ones we have made, where there's some complementary capabilities, in terms of IT consulting and specific verticals that they bring in. It's those type of opportunities that we would be looking at.

Joe, three types of acquisitions we focus on: One is technology capabilities, such as the Seebo (ph) and SAP acquisitions that we did a couple years ago. Second, is the geographic footprint, such as the acquisition we did in Benolux (ph), and third, is industry expertise, such as the Fathom acquisition. So we'll continue to look for small tuck under things, but we still view this as it has always been, as an organic growth story.

Good. Thank you very much.

Your next question comes from the line of Andrew Steinerman with Bear, Stearns.

Hi, Lakshmi. When you look at the strategic wins class of 2003, versus class of 2004, which class is contributing more to growth today? How has the ramp-up time from sort of initial win to the hyper growth phase of the best ramping clients been relative to your expectations?

I mean, let me answer this question before I turn it over to Gordon. There's no significance difference between the customers of 2003 and 2004. The advantage that we enjoy with customers of 2003 is that we can take a broader set of offerings to them now, compared to the initial engagement that we started with. And for customers of 2004, for them to adopt the complete set of services that we offer it will take a little more time. Apart from that, in terms of preferences and growth potential -- very little difference between the customers 2003 and 2004.

I think Lakshmi hit the key point. It takes multiple years for a strategic account to ramp up. Obviously, as you get further into the ramp-up, you can sell a broader range of services. So, you know, the quality and the characteristics of the accounts in '03 and '04 were both very good and, I think '03, as Lakshmi said, we're just further along in the adoption cycle with them and looking at a broader range of services and we're very pleased with both the accounts we won in prior years and the five accounts that we won in Q1.

Thank you very much.

Your next question comes from the line of Ed Caso with Wachovia Securities.

Good morning, thank you. Can you get to the 19%-20% operating margin for the full year, does that suggest maybe we're going to be below 19.0% in one of the quarters?

That's certainly not part of our business plan. Our business plan is to stay in the 19%-20% for the remaining quarters of this year.

The other question is on the Indian budgets, can you get us updated on where the approval process stands and what you're hearing as far as potential, positive or negative impact?

As far as the Indian budget is concerned, there is only one item that would, you know, impact us and the outcome is not clear, this is about the fringe benefit tax that the government wants to additionally levy. This represented to the government that some of these things are far and wide and haven't come back, although the ministry of the government has accepted our proposition, they haven't come up with revised guidelines. So we believe we have a good chance, they they will not levy in the manner which we expected in the beginning. The Impact of that, if any, would be very, very marginal.

That's important to note, because of our business model we're not a significant user of onsite allowances. Obviously, we do a lot more of our marketing spent from here. So the impact on us, even as proposed, is quite minimal. I think it's more material to some others. But, yes, we're keeping an eye on it but we don't see it materially changing the business.

And I missed the total number of clients added this quarter?

We added approximately 30.

Thank you.

Operator, we have time for one more question.

Okay. Your final question comes from the line of Cynthia Houlton with RBC Capital Markets.

Hi, good morning. Just maybe a little bit more color on the Fathom acquisition? Next quarter, in terms of, you said a lot of their customers are recurring. What are they going to add to kind of your customer base? Then maybe a little discussion on bill rates and how, if we're looking at who their customers are currently, is there already a link in terms of those customers wanting to move services offshore. If you could discuss that a little bit more that would be great.

Just to give some broad views on that. The customers that Fathom is working with, they provide the top end IT strategy consulting-type of solutions. Now the opportunity for us to is participate in the execution of those strategies. You know, as the work that Fathom is doing with the customers is over, then there's a development phase following it, which is something that Fathom did not have the capability to do earlier and that's where we come in, and where we wait for that project and take over the development and implementation the work, in terms of the soft play that's required to do that. That's the added opportunity that we look to on the -- this is a growing opportunity. We're in the initial stages. That's what I can say about the Fathom acquisition.

Cynthia, that's why we asked the Fathom management team to run the North American Teleco practice because we want to fully leverage the opportunity to cross sell our core services into their customer base and, obviously, they have a very good customer base. We're optimistic about the growth opportunities it creates for our core business of selling management development services.

Could you provide any quantitative numbers, in terms of how many customers they're going to add, and what their average bill rates are? Because, obviously, I assume they are a much higher than some of your onsite bill rates?

Clearly, their bill rates substantially higher -- more in line with the kind of bill rates we get for our technology consulting practice. The number of clients, I don't have handy, and we'll certainly update people on that on the next call. You know, overall it's not a huge company, so it's not a dramatic number of clients.

Okay. Great. Then did you just give the technical staff? I know you gave onsite versus offshore.

Sure. Technical staff was over 15,800 at the end of the quarter.

Thank you.

Thank you, Cynthia.

Thank you very much and thank you all for joining us on today's call. In summary, we anticipated that 2005 was going to be an innovative and exciting year for Cognizant and, after the first quarter, we feel just as confident we'll -- that will be the case. We not only delivered a strong set of financial results, but we also deepened important existing client relationships and one new strategic client across a broad range of industries. Our clients have the confidence to turn to us for a broadening range of best-of-breed services. As such, we believe that we have a strong platform for growth and we anticipate continued strong performance for the remainder of the year. I look forward to updating you all on our continuing progress. Thank you very much.

Thank you ladies and gentlemen. This concludes today's Cognizant Technology Solutions first quarter earnings conference call. You may now disconnect.