高知特 (CTSH) 2007 Q1 法說會逐字稿

Good morning. My name is Julie Ann and I will be your conference operator today. At this time I would like to welcome everyone to the Cognizant Technology Solutions first quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Hoffman, you may begin your conference.

Thank you, operator, and good morning, everyone. By now you should have received a copy of the company's first quarter 2007 earnings release. If you have not, please call our offices at 212-850-5600 and we'll be sure to get a copy sent to you. The speakers we have on the call today are Francisco D'Souza, President and Chief Executive Officer; and Gordon Coburn, Chief Financial and Operating 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 Francisco D'Souza. Please go ahead, Francisco.

Thank you, Scott, and good morning, everyone. Thank you all for joining us today for Cognizant's first quarter 2007 earnings call. This morning I'll provide an overview of the highlights of our first quarter results and discuss the key drivers of our financial performance. I will also discuss several investments that we have been steadily making in the business to ensure that we meet the needs of our clients, effectively manage our growth, and deliver strong financial performance to our shareholders. I'll be joined on today's call by our Chief Financial and Operating Officer, Gordon Coburn.

We are pleased with our strong first quarter financial and operating results, which are a testament to the consistent, successful execution of our strategy and reflect our ability to further expand our growth platform. In the first quarter, we exceeded our internal forecast, generating $460.3 million in revenue, which represents an increase of 61% from the first quarter of 2006. GAAP EPS was $0.50 for the quarter, up 56% from the year-ago quarter. Non-GAAP EPS, which excludes stock-based compensation expense of $0.04 was $0.54 in the first quarter compared to $0.36 in the first quarter of 2006. We also increased our number of active clients by 25 in the quarter, including five of which are considered strategic, meaning these clients have the potential to generate between five million and $40 million or more in annual revenues for Cognizant over the long-term. Our growth was driven by strong performance across vertical sectors, including our largest sector,BFS, or banking and financial services.

I'm also pleased to report that during the quarter we continued to make investments in our people and infrastructure on a global scale. We increased our head count by close to 12% sequentially, with the net addition of approximately 4,600 employees around the world. During the quarter our annualized employee attrition declined to 15% from 17% in Q4. While we are pleased with our sequential progress in this area, attrition remains above historical levels and we continue to monitor employee attrition carefully and take necessary short and long-term steps to manage it. Our more than 43,000 employees are a testament to Cognizant's reputation as an employer of choice in the Global Services industry and we are continuously focused on maintaining and enhancing our ability to recruit and retain the best talent to grow the company around the world. As we look forward to the rest of 2007, based on our strong demand pipeline, we've increased our revenue guidance for the full year by $30 million to $2.07 billion. During the second quarter, the recent appreciation of the Rupee, a new tax on real estate rentals in India, and our Q2 compensation increase, will create some pressure on our cost structure. In order to offset this, we are proactively taking steps with the goal of maintaining operating margins within our target range of 19 to 20%, excluding equity compensation expense, for the remainder of the year. It is important to note that our strategy has always been and remains today to balance the needs of our shareholders with the need to continually invest in the business to generate industry-leading growth and capture market share. Gordon will take you through our numbers in greater details in a few moments.

Turning to our growth in the quarter, our strong performance continues to be driven by the strategic investments we have made in the business over the last several quarters. Specifically, we continue to expand and globalize our business, invest in attracting and retaining the best talent around the world, keeping our technology expertise and horizontal lines of service ahead of the curve, cultivate market-leading domain expertise in each of the industry segments we serve, and build a strong brand for Cognizant. We continue to see affirmation of the strong demand for our services, both in our client relationships, and in the on-going opportunity for new business, coming to us from an expanding range of industries across geographic markets. This was reflected in our first quarter results as we once again saw broad-based strength across our vertical segments and solution offerings. Our five strategic clients during the quarter spanned industries, banking and financial services, health care, and retail, and geographies with key strategic wins in the United Kingdom and the U.S. And our pipeline of business across the company is strong.

We have also been benefiting from a trend toward unbundling of large deals in the global IT services market, as customers increasingly opt for unbundled deals with the goal of selecting best of breed service providers based on their particular expertise across service areas ranging from application outsourcing, and IT consulting, to infrastructure management and business process outsourcing. This trend plays to the strength of our business model, compounding the value of our investments both in our vertical industry expertise and the expanding range of our horizontal service offerings. On our last earnings call, I discussed globalizing our business as a key strategic priority in 2007. During the first quarter, we made progress both in growing our presence in key customer markets, particularly in Europe, and in building out our global delivery platform. On the demand side, we saw sustained momentum in Europe during the quarter, both in continental Europe and the United Kingdom as a result of our investments.

Revenue from European clients grew 84% from the first quarter of 2006, continuing to outpace the company average. During the quarter, Europe represented 14% of total company revenues. Over the last several quarters, we have invested in building out business development teams around industry verticals and strengthening our marketing efforts in Europe. I am pleased to report that our industry-centric organization in the U.K. is leading to stronger relationships with clients, where we are seeing signs of accelerated growth. For example, during the quarter we signed a major U.K. retailer as a strategic client, where we were implementing a complex Oracle ebusiness suite, integrating the client's supply chain and customer relationship management processes. During our last earnings call, we discussed the signature of a letter of intent under which Ordina, one of the fastest-growing and largest IT services providers in the Benalux, and Cognizant will collaborate in providing a broad range of technical design, software development, and testing services to Rabobank Group. Rabobank is the largest banking group in the Netherlands.

I'm pleased to announce that today we signed definitive agreements on this engagement. As part of the engagement, Rabo has committed to outsource at least 3.8 million hours of work over the next seven years. Portions of this work will be executed by Cognizant using our integrated on-site offshore delivery model. This win marks the expansion of an existing relationship we have been building with Rabo bank since 2003 and further underscores our ability to translate our recent investments in Europe into revenue opportunities for Cognizant.

During the first quarter, we continued our approach of making investments in our global delivery platform to meet future demand. Expanding our global delivery operations is a critical component to our long-term strategy, as clients continue to turn to Cognizant to help them strengthen their businesses in key markets where they operate around the world. We launched Cognizant's delivery operations in South America during the first quarter, selecting Buenos Aires as the location for our initial development location there. Opening a delivery center in Argentina is a first step to building out our presence in the region. Cognizant will initially provide applications-related services to Kimberly-Clark Corporation from Buenos Aires as part of the engagement we announced last quarter.

We have incubated our presence in Buenos Aires,in close collaboration and partnership with Kimberly-Clark, which has a long operating history in Latin America. Kimberly-Clark is providing Cognizant with assistance, ranging from temporary office facilities to local operating insight in the region. This is just another example of the depth of the relationships we have with our clients who are willing to assist us with jump-starting key strategic initiatives, which benefit Cognizant's long-term business. Our strong performance was also driven by our ability to leverage our market-leading positions in the vertical industries we serve, especially in financial services, health care, and life sciences, and retail and manufacturing. I want to spend a few minutes on financial services in particular, since we saw strong growth in this vertical during the quarter.

Our financial services vertical, which includes our banking insurance and transaction processing practices -- practice areas grew seven percent sequentially from a strong fourth quarter and 58% year-over-year. Performance in the vertical was driven by growth both from many of our larger banking and financial services customers and also from our well -- from our well-diversified portfolio of BFSI customers at various stages of offshore adoption, across our key geographic markets. Today we serve six of the top U.S. banks and four of the top European banks. In addition, we are serving seven of the top U.S. property and casualty insurance companies, and seven of the top U.S. life insurance companies. The growth across the vertical also illustrates the effectiveness of our efforts to add significant depth to the solutions we provide to our clients, so that our services remain relevant across the life cycle of our customer relationships, from early-stage offshoring relationships, to sophisticated transformational relationships. Over the last several years, we have strengthened our financial services market leadership position and continue to win business because of the deep domain expertise that we bring to the world's top banking, financial services, and insurance companies.

One example of the investments we are making in our banking -- is our banking domain consulting group, or DCG, as we call it at Cognizant. The group is comprised of 400 consultants with deep banking expertise across nine subdomains: consumer lending, online banking, credit cards and payments, asset and wealth management, investment banking and brokerage, security services, corporate services, and enterprise risk management. These consultants are an integral part of the banking and financial services vertical and provide strategic input on major client initiatives from conceptualization to implementation, combining a deep understanding of the business challenges that our clients face with the technical expertise of our delivery teams. The group has been instrumental in driving revenue opportunities from complex large-scale projects, including a derivatives trading platform for one of the world's top banks, Basel II and reference data frame works for another global bank, and a large scale reference data and investment accounting platform for large asset management firms. For clients who have been aggressive adopters of offshore outsourcing, the BFS domain consulting group allows us to scale relationships beyond the limits traditionally associated with offshore outsourcing, driving new growth opportunities and further strengthening Cognizant's leadership in the vertical.

Our first quarter results were also driven by growth across key horizontal service offerings, including ERP testing, IT infrastructure services, and BPO. ERP is an area in which our strategic investments have been driving significant growth over the last several quarters. As we have said in the past, we enjoy a strong relationship with SAP and have cultivated a deep knowledge of the next generation NetWeaver platform at our NetWeaver Test Center. During the first quarter, we continued to win ERP business from customers in the banking and financial services retail, manufacturing, health care, pharmaceutical, and technology industries across the U.S. and Europe, enabling revenue from ERP solutions to roughly double from the first quarter of 2006.

We are also seeing significant opportunity from major ERP implementation and upgrade initiatives beyond SAP. To this end, during the first quarter we achieved Oracle-certified alliance partner status and now have over 3,000 Cognizant associates registered with the Oracle partner network. More importantly, in-line with our focus on technical excellence, over 250 Cognizant engineers are now certified as Oracle consultants. We opened our Oracle fusion center of capability and innovation in Kolkata in the first quarter. Cognizant now offers customers with a full range of ERP solutions from consulting, to the implementation and upgrade cycles, regardless of which platform they adopt. We expect to see further growth opportunities from our strategic investments in ERP. Our IT infrastructure services practice continued to record strong growth, more than doubling in size from the first quarter of 2006. Since we acquired AimNet Solutions last year, we have seen significant demand for our IT infrastructure services offering, particularly our integrated onshore/offshore network operations center, which went live during the first quarter in response to strong demand from our clients for a truly global infrastructure management delivery model.

Cognizant's ability to deliver an IT infrastructure services solution integrated with our vertical industry expertise is evident in a recent win in our information media and entertainment vertical. In March we announced that Simon and Schuster, the major publishing house, selected Cognizant to provide end to end infrastructure management and data operation services, encompassing 200 servers, 1400 desktops, and Simon and Schuster's mission-critical applications. Business process outsourcing is another service area where we saw substantial growth in the first quarter.

Today we are seeing robust BPO activity across a broad spectrum of sectors, demonstrating how we have coupled Cognizant's market leadership across our industry vertical businesses with our vertically-focused BPO service offerings to drive new revenue opportunity for the company. We have grown our BPO strength through approximately 1200 associates, including doctors, lawyers, statisticians, chartered accountants and MBAs through a BPO strategy focused on integrating our system offshore process, support model with technology and domain expertise. As a result, we won several notable BPO client engages in the first quarter across banking and financial services, insurance, health care, life sciences, and teleco.

For example, a leading Medicare payer organization has engaged Cognizant to provide claims processing adjudication and provider credentialing. In the financial services vertical, Cognizant is providing back office fixed income accounting for one of the world's most prominent private equity firms. And a leading cable provider has engaged Cognizant to deliver Triple Play accounting for its cable, telecom and internet services. Overall, we are pleased with the progress we are making across our horizontal solution offerings.

Finally, as I said at the beginning of the call, we continued to invest in enhancing the Cognizant brand to support our growth strategy around the world. Our efforts in this area were evident in several industry recognitions that Cognizant received during the first quarter. First, we were delighted that Forrester Research has named Cognizant as a top offshore provider in their report entitled "The Forrester Wave: North American Applications Outsourcing Q1 2007." Cognizant was one of only a select number of companies chosen to participate in the research. And we are happy that Forrester awarded Cognizant with, and I quote, "The highest overall grade for cultural fit while remaining price competitive," end quote, among the top offshore firms.

Second, our investments in enhancing our horizontal solution offerings also continued to receive industry recognition. In particular, Gardner recognized both our CRM and data warehousing solutions by placing both service offerings in their respective Gardner magic quadrants during the first quarter, underscoring how the Cognizant brand is increasingly associated with top solution offerings in the industry.

Thirdly, we are honored that Cognizant was ranked 12th on business week's 50 best-performing companies in the March 26th issue of the publication, building on our earlier recognition of one of "Business Week's" top ten hot growth companies. The rankings represent "Business Week's" selection of the best in class, from each of the ten sectors that make up the S&P 500, where top companies in each sector are rated based on sales growth, average return on capital, total return, profitability, and rank within industry sector.

During 2007, we are accelerating our focus on building strong brand recognition for Cognizant through strong thought leadership roles in major industry and trade organizations. As you know, Lakshmi Narayanan has taken on much of this responsibility in his new role as Cognizant's Vice Chairman. Lakshmi was recently elected Chairman of Nazcom for the 2007-2008 term, where he's also representing Cognizant's voice in addressing broad industry issues such as innovation, talent development, and data security. Overall, we are very pleased with our performance for the first quarter and continue to be confident in our growth strategy for 2007.

Now I'll turn the call over to Gordon to walk you through our financials in greater detail. Gordon?

Thank you, Francisco, and good morning to everyone. I'd like to provide some additional information on the first quarter and then discuss our financial expectations for the second quarter as well as full-year 2007. Revenue for the first quarter exceeded our prior guidance and expectations due to continued strength in Europe, strong year-over-year growth in health care, life sciences, and financial services, as well as an improvement in manufacturing, retail, and logistics. Quarterly revenue grew eight percent sequentially and 61% year-over-year. As the quarter proceeded, we continued to see healthy volume growth across a broad range of services and industries. Our core businesses remain vibrant and our pipeline is robust. During the quarter, our financial services segment, which includes our practices in insurance, banking, and transaction processing grew by over $78 million year-over-year and represented 47% of revenue for the quarter. Health care grew over $47 million and represented 24% of revenues. Retail manufacturing and logistics grew by almost $25 million, representing approximately 15% of revenues for the quarter. The remaining 14% of our revenues came primarily from other service-oriented industries, including telecom, media, and technology, which grew by over $24 million. During the quarter, financial services grew 58% year-over-year and 7% sequentially.

Health care grew 76 year-over-year and two percent sequentially. Retail manufacturing and logistics grew 55% year-over-year and 22% sequentially. Growth in our retail manufacturing and logistics segment was driven by several new retail accounts that we have won and are now ramping up, including the previously-announced transaction with Kimberly-Clark, and our other segment grew 57% year-over-year and ten percent sequentially. Growth in our other segment benefited from growth in our information and media operations. For the quarter, obligation management represented 53% of revenues and application development was 47%. Both services continued to grow significantly in Q1. Application management grew 73% year-over-year and 12% sequentially. Application development grew 50% year-over-year and five percent sequentially, reflecting a healthy demand environment for our entire services offering. The shift towards maintenance revenue during the quarter was driven in part by several high-growth accounts, focusing initially on application management. During the quarter, 85% of revenue came from clients in North America, Europe was 14% of total revenue. The remaining one percent of revenue came from the Asian market. Our European business grew 12% sequentially and 84% year-over-year as we continue to invest in that region.

We added approximately 45 new customers during the first quarter. We closed the quarter with an active customer base of approximately 420. During the quarter, the number of accounts that we consider to be strategic and have the potential to be significant revenue sources for us in the future increased by five, bringing the total number of strategic clients to 92. We ended work for approximately 20 clients during the quarter, almost all of which were very small.

Turning to costs, on a GAAP basis, cost of revenues exclusive of appreciation and amortization increased 61% for the quarter compared to the first quarter of 2006. First quarter cost of revenues included approximately $3.3 million of equity-based compensation expense. The increase in cost of revenues was due to additional technical staff, both on-site and offshore required to support our revenue growth. We increased our technical staff by over 4,300 during the quarter and ended the quarter with approximately 40,800 technical staff. This is a net increase of almost 15,750 technical staff from March 31, 2006. For the first quarter, SG&A, including appreciation and amortization expenses was $121.7 million on a GAAP basis, up from $73.7 million in the first quarter of 2006. GAAP SG&A expense in Q1 2007 included approximately $4.2 million of equity-based compensation expense. GAAP operating income for the quarter increased 57% to $83.6 million from $53.2 million in the first quarter of last year.

On a non-GAAP basis which excludes the impact of $7.4 million of equity-based compensation expense, operating income for the first quarter was $91 million, up 50% over last year. Our GAAP operating margin was 18.2% for the quarter and our non-GAAP operating margin for the quarter was 19.8%, in-line with our target range of 19 to 20%.

Interest income for the first quarter increased to 6.7 million compared to 3.4 million in the first quarter of 2006. Interest income increased due to a higher global cash balance on cash and short-term investments, as well as increase in short-term interest rates. We had a $17,000 foreign exchange loss during the quarter. Our GAAP tax rate for the first quarter was 16.4%. Turning to the balance sheet, our balance sheet remained very healthy. We finished the quarter with over $673 million of cash and short-term investments, up over $250 million from March 31, 2006, and up about $25 million from December 2006. During the quarter, operating activities generated over $12 million of cash compared to a use of about four million dollars of cash in the first quarter of 2006. The NIC activities, primarily the exercise of stock options and related tax benefits generated approximately $40 million of cash in the quarter. These amounts were partially offset by slightly over $28 million in capital expenditures. In addition, we generated approximately $360 million of cash due to currency translation adjustments.

For 2007, we continue to expect to spend approximately $180 million in capital expenditures, substantial majority of which is related to the construction program and equipping of additional development facilities to support our growth, which we have previously announced. Our collection of trade receivables improved slightly from the first quarter of 2006 based on our $347.8 million balance on March 31, we finished the quarter with a DSO, including unbilled receivables, of 68 days compared to 69 days for the same period last year. On a quarterly sequential basis, the number of billing days as well as our daily volume during the first quarter was skewed towards March, negatively impacting our DSO compared to the fourth quarter of last year. In Q1, excluding unbilled receivables, our DSO was approximately 59 days.

The quality of our receivables portfolio remains very strong. Our unbilled receivables balance was approximately $46.6 million at the end of the first quarter, up about $13 million, or 40%, from March 31 of 2006 and up about seven million dollars from Q4 of last year. Approximately 50% of our March 31 unbilled balance was billed in April. During the first quarter, overall 25.3% of our revenue came from fixed contract, up from 23.7 in the first quarter of 2006 and down from 25.9 in the first quarter of 2006. When we look at the mix by solution type during the first quarter, 30% of our development revenue and 21% of our maintenance revenue came from fixed price contracts during the quarter.

Turning to head count, at the end of the first quarter, our worldwide head count, including both technical professionals and support staff totalled approximately 43,450. This represents a net increase of approximately 4,600 during the quarter and 16,700 since March 31, 2006. Slightly more than 50% of our Q1 hires were recent college graduates who will enter our training program. The remainder were lateral hires of experienced IT professionals. Turnover, both voluntary and involuntarily, was approximately 15% during the first quarter on an annualized basis. As discussed during our February call, we have launched a global initiative to ensure that our employees receive appropriate rewards, recognition, and personal and professional growth opportunities across their entire life cycle with Cognizant. We believe this initiative is already contributing to the improved retention rates we have experienced since the third quarter of last year.

On-site utilization declined slightly to around 84% for the quarter on a sequential basis. Offshore utilization, excluding recent college graduates who were in our training program during the quarter, was approximately 69%, including trainees, offshore utilization was approximately 54% for the quarter. We had well over 5,000 unbilled people in our training program at the end of the quarter.

I would now like to comment on our growth expectations for the second quarter of 2007 as well as the full year. The investments we are making are producing results. They're allowing us to differentiate ourselves in the marketplace, both in terms of winning and growing new clients as well as expanding our service offering. This has resulted in stronger than expected results for Q1 and provides with us a strong foundation for continued growth in 2007. During Q2 and the remainder of 2007, we face three challenges to our operating margins. I will explain them first and then I will outline the steps we are taking to mitigate these challenges.

First, as planned, we face the impact of our raises and promotions, which become effective during Q2. Annual raises came in roughly where we planned, with an average increase of approximately 16% offshore and modest on-site increases of very low single digits.

Second, the recently-proposed India budget includes a provision to tax the rental of commercial real estate. Assuming the taxes is enacted as proposed retroactive to April 1, it will cost us approximately 15 to 20 basis points each quarter.

Finally, we are being negatively impacted by an unexpected appreciation in the Indian Rupee. During the first quarter, the average rate for the Rupee was 44, a two percent appreciation compared to the average rate in the fourth quarter of last year. The Rupee has continued to appreciate. Assuming that the average rate for Q2 equals the current exchange rate of approximately 41, we will experience a seven percent appreciation in the average rate for Q2 compared to Q1. As a reminder, every one percent movement in the Rupee results in 20-basis point impact on the operating margin. Assuming no additional movement in the Rupee in Q2, the sequential impact for Q2 would be approximately140-basis point reduction in operating margin.

We have already begun implementing actions to offset the planned compensation increases the and the unplanned planned appreciation in the Rupee and the tax real estate. These actions seek to balance our goal of investing for industry-leading growth while delivering operating margins within our historic target range of 19 to 20%, excluding stock-based compensation expense. One of the actions we are implementing is the targeted increase in our global utilization rates. As we have discussed on prior calls, we've been running the business with historically low levels of utilization and we actually brought down a little bit more in Q1. Therefore, we believe we have room to increase these rates. We believe that our scale efficiencies allow us to do this while still having the right skills available to meet client demand.

This is why we have reduced our head count goal for the year while increasing our revenue guidance. We roughly reduced our head count goal by about 1.5% and increased our revenue guidance by about 1.5%, which equates to on a year-over-year basis we're targeting roughly a three percent increase in utilization and obviously on a sequential basis, it will be more than that since we brought utilization down in Q1. Every one point improvement in global utilization results in approximately a 50-basis point improvement in operating margin.

In addition, as we work to gain the benefits of increased utilization, we are closely monitoring our larger discretionary spending items, such as travel as well as growth of nonbillable support staff, a significant cost item for us where we have opportunity to leverage prior investments. In addition, based on the Rupee movement, we will push for rate increases beyond the average realized increase of two percent, which is currently factored into our guidance. For the second quarter of 2007, we are now projecting revenue of at least $500 million. This represents roughly 8.5% sequential growth and more than 48% year-over-year growth. We continue to have significant revenue visibility due to our 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% of our second quarter revenue guidance.

For the full year, based on the strong demand environment for offshore services and our favorable experience with ramp-up rates, we are pleased -- we are pleased to increase our guidance to at least $2.07 billion, a $30 million increase from our prior guidance for 2007. This revised guidance represents growth of at least 45% and an increase of more than $645 million compared to 2006. As has been typical in prior years, we expect the majority of our growth for 2007 will come from the ramp-up of clients we have won over the past few years. Assuming no further material appreciation of the Rupee, our guidance assumes we will be near the midpoint of our targeted 19 to 20% non-GAAP -- once again, before the impact of equity-based compensation -- of our non-GAAP range for operating margin for the year and at the low end of the range for the second quarter. As we work to absorb the impact of the Rupee, the new real estate tax, and wage inflation, our goal is to balance shareholder value with a desire to continue to invest in the business to maintain long-term industry-leading growth, and we are taking a very proactive stance in achieving these two goals.

With this expected level of revenue growth and our expected operating margins, we are currently comfortable with our ability to deliver in Q2 GAAP EPS of $0.51 and non-GAAP EPS of $0.56,excluding equity compensation expense of $0.05. This guidance includes anticipation of a Q2 share count of approximately 152.8 million shares, a tax rate of 16.4%, and an operating margin towards the lower end of our historic guidance range of 19 to 20%, excluding equity compensation costs, as well as a nonoperating foreign exchange balance sheet translation loss in the second quarter due to the movement of the Rupee in April. And once again, that would be a below-the-line loss, which we typically have either a small gain or loss each quarter.

For the full year 2007 based on current business trends, we currently project GAAP EPS to be at least $2.13 and full-year non-GAAP EPS to be at least $2.34, excluding equity compensation expense of $0.21. This guidance includes the anticipation of a full-year tax rate of 16.4%, a full-year share count of approximately153.3 million shares and an operating margin on a non-GAAP basis towards the middle of our guidance range. Please note that our guidance assumes no negative impact from the proposed fringe benefit tax on the exercise of stock options in India. Based on our current understanding of the anticipated final rules which will be issued later this spring, we currently believe that the rule change will be neutral to Cognizant and its employees, since our employees already pay full personal income tax in India at the time of exercise since our plans are not registered in India.

In conclusion we are very pleased with our industry-leading revenue growth for Q1 and are quite optimistic about our market position for the future. We believe that we understand the margin-related issues currently being faced by the industry and that we are taking appropriate and proactive short-term and longer-term actions to effectively manage these issues.

Now we'd like to open the call for questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] Your first question is from the line of George Price with Stifel Nicholaus.

Good morning and congratulations on another very nice quarter. I guess in terms of the 2007 outlook, clearly you're expecting continued strong demand, although I think some may have been hoping for a little bit more of a raise for the '07 guidance overall. Is there anything out there in the market that concerns you from a demand perspective, makes you more cautious? Any macro, any impact to client spending, patterns or indications based on macroindicators, any .concerns given the trends away from application -- development to application maintenance, anything like that?

Hi, it's Francisco, George. Actually, at this point while there is mixed economic news out there, we have not seen any slowdown in demand. Our informal channel checks continue to indicate that demand is healthy and that was reflected, I think, in our strong performance in Q1 and also in our increased guidance for the full year. So at this point we don't see any of the mixed economic news that's out there translating into a slowdown in demand.

What would you attribute the -- for a couple quarters now, we've been seeing application maintenance really ramp up faster than development. And obviously development had a trend for probably a couple years, if memory serves. What would you attribute that to?

George, this is Gordon. Obviously we saw very strong sequential growth in maintenance. That was driven in part by a couple of the newer clients who were in the high ramp-up phase, ramping up on the maintenance side of the business. But our development business obviously did very well this Q4, so the sequential comps were a little difficult, but, yeah, we continue to have nice growth in development. The other thing to remember, development tends to be impacted a little bit more in Q1 than maintenance because it is a little more discretionary. A lot of times, clients won't start their development activities for the new budget year 'til the budget's already finalized and released, versus maintenance they'll start without it.

Okay. And then, is it fair to say that in terms of your action on the hiring, which I'd noted is pretty modest relative to some others of your competitors, does that -- is that really incrementally, Gordon, driven by where the Rupee is? I mean, I guess if the Rupee was a more neutral impact, would you have taken that action?

Absolutely it's driven by the Rupee. Our philosophy is to be very transparent about it. We clearly were not expecting a seven percent appreciation in the Rupee. What we decided is we wanted to balance it, that we wanted to continue to invest, but we needed to cover a -- certainly cover a portion of it. Obviously we have adjusted our guidance to be at midpoint of our range. But in order to do that, we need to take utilization up. One of the nice things about our business is, we've been running with utilization well below the industry average, which gives us the ability to pull those levers without impacting the operations of the business.

Okay. Last thing, just a couple of housekeeping items. I missed the on-site utilization and wanted to confirm that you said one percent rise, it was in the overall utilization is 50 bips in operating margin?

On-site utilization was 84% for the quarter and you are correct on the second point.

Okay. And then, D&A, did you give D&A in the quarter?

No, but hang on a second. It was 12.26 million.

Great. Thank you.

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

Hi, there. Could you just go over head count goals. I understand that given the increased utilization to offset the Rupee that you're able to generate even more revenue growth this year without the extra thousand people, but why not hire the extra thousand people anyhow, if demand is so strong? Isn't, you know, the hiring season right now for college campuses? Isn't sort of the second quarter kind of a key quarter that you set your pace for hiring?

The hiring that will be impacted by this is more the lateral hiring. The offers with college kids went out last year and obviously we honor all those. We're always accelerating, decelerating lateral hiring. In the end, why are we slowing down hiring, because we want to stay within our target margin range, which we feel we can do without disrupting the business at all because we are running such low utilization today.

I got it. That makes sense. And then, also, call you give any sense for intraquarter trends? How did the quarter shape up as you look January, February, March?

It was a solid quarter. As is typical in every first quarter, certainly because of billing days, March is by far the biggest month, but if you equalize for that, we had volume growth as -- daily volume growth as we continued through the quarter.

Okay. Just to square away the hiring question, you are doing hiring now, right now this spring, which people will come on next year. So you're affecting next year's hiring at this time. Are you holding back at all in that on campus hiring?

We constantly adjust -- the on campus hiring happens over essentially a nine-month period, so you bring them on -- you can't bring everyone on at once, you couldn't train everyone, so you always stagger it out.

Okay. Thank you so much.

Your next question is from the line of Christine Pezino with JPMorgan.

Good morning. Just a couple questions. First on the competitive environment, I'm just wondering if you've seen any change there specifically with the tier two firms that seem to be improving their growth. Are you seeing them in deals more often, or is it kind of the same players?

Hi, Christine. It's Francisco. No, I think I would characterize it as unchanged. We're continuing to see a strong bifurcation between the tier one and tier two. In the majority of the situations in which we compete, we're competing against the three top tier India -- the other top three India players and one or two of the multinationals will be in the mix. We almost never or very rarely see a tier two player.

Okay. And then, one thing you didn't mention in Q2 as impacting the margin is visa costs. Should we expect something along those lines in Q2 as well?

No, remember, we use a combination of H visas and L visas, so the costs in Q1 and Q2 tend to be a little bit higher, but I don't expect a spike in Q2.

Okay. And then just my last question. On the mix of strategic customers, have you seen any trend in terms of vertical of what kinds of customers are coming online? I would presume that BFSI was the early bulk of those strategic customers and now maybe you're seeing some in other verticals, like retail. Would that be a fair summary?

Christina, if you look across strategic customers, the overall portfolio of strategic customers is well diversified. The five that -- the increase of five that we had this quarter, again, as I said, was diversified across industry segments. We're starting to see -- we had good growth in the number of financial services customers -- strategic financial services customers that we added earlier over the last 18 or so months. We added a number of and continue to add a number of health care and life sciences customers. And now, increasingly in the last, I would say, two quarters or so, we've seen good traction in retail manufacturing as well as we're adding strategic customers in those verticals.

Great. Thanks.

Your next question is from the line of Julio Quinteros with Goldman Sachs.

Hey. Real quickly, Gordon, can you just give us the metrics on the account percentage contributions, top account, top five, top ten?

Certainly. Top five is 26%; top ten is 36%, and if you do the math you'll see that the top five is -- on a sequential basis is down slightly, that's not unusual. We saw the same exact phenomenon last year where the top five was down in the first quarter, the top ten was roughly flat. We do not see any of the top five as mature, so we continue to see opportunities there.

Okay. And then the top account itself, are we still looking at around a nine percent number? Or has that changed?

We don't see any customers over ten percent.

...over ten percent. Okay, and then I guess to -- for Francisco, can you talk a little bit about clients where you're seeing multiservice providers, so we have more than one offshore guy doing the work. What is the nature of the competitive environment at some of the largest accounts. At least from some of the things that we've heard is that there's more competition amongst the offshore providers going after each other at some of the larger accounts. Are you guys seeing that and how is that expected to play out over the next couple of quarters for you guys?

A couple things I'll say, Julio. First of all, you know, I think there has been an increase in the amount of dual sourcing that we're seeing out there that's becoming -- as customers look at offshoring more strategically and it becomes a bigger part of their overall IT portfolio, they're looking at dual sourcing to mitigate risk across at least two providers. So there's clearly a trend towards dual sourcing. We're also seeing that where maybe two years ago you'd see some customers adopting a dual sourcing strategy of one tier, one player and then perhaps a tier two player or a smaller player, you see that happening less in the market place today. It generally tends to be dual sourcing amongst the two tier one players. In general, though, I would not characterize -- once the customer has made a selection, I wouldn't characterize the competition as any intense in the recent past than it's always been.

We always have healthy competition for clients, but once we've won a client, we tend to coexist with the other provider at the client because essentially we're both in there and of course we compete for business within that, but to some extent, the client tries to manage the portfolio as well between the two vendors so that there is a balance of work. So I would say it's -- I don't think it's gotten anymore competitive than it has in the past.

Okay. And then, Gordon, can you comment at all on the EDS business itself post the emphasis BFL acquisition? Where are we, exactly, on that alliance, in terms of revenue contribution or anything else you might be able to provide on color there?

Yeah. As we said when we announced the partnership, yeah, we view them as a value partner. The emphasis acquisition was not a surprise. They were very up front when we originally formed the acquisition that they were going to acquire something.They continue to be a value partner of ours and we have a healthy relationship. It would really be for them to talk about the size of the relationship, but it's healthy and it's continuing.

So you're still generating revenue through that relationship?

Absolutely, sure.

Okay. And then, finally, the math on the Rabobank deal, I think I heard you guys say something in the neighborhood of three-point-something million hours contracted out already with Rabo bank?

Right. Not all of that comes to us, though. That's the total amount they're outsourcing, a portion goes to Ordina, and then a portion will come through to us.

Okay, but you didn't say exactly what was your contribution?

No, we haven't.

Okay. It looks like that deal could be in excess of $100 million at 3.8 million hours, right, total?

You mean total over the seven years?

Yes.

It would certainly be substantial. And in the end, the question is what's the mix between us and Ordina.

Okay, great, thank you.

Your next question is from the line of Greg Smith with Merrill Lynch.

Hi. Just quickly on the -- when we tax affect the options expense, do we just use the GAAP tax rate for that?

We use -- no, it's not quite the GAAP tax rate. The difference becomes a rounding error. Offline I can explain the difference, it gets a little technical, but it's a little different than the GAAP rate.

Okay, but it's essentially lower? That was...

It gets lower. It bounces around from quarter to quarter. That's the way the math works. Sometimes it's higher, sometimes it's lower.

I'll follow-up. And then, just when we model the interest income, should we just assume for '07 that the cash on the balance sheet continues to grow?

Yeah, that it grows slowly, yes.

Okay, and then, just thinking --

I'm sorry, also remember as we mentioned, in Q2 we do expect to have a below-the-line FX loss. We always have a gain or loss each quarter, in Q2 it will be a loss.

Okay, good. And then, just bigger picture question. If, let's say the Rupee continued to depreciate or you had higher wage inflation. Would you sacrifice ultimately revenue growth to stay within the 19 to 20% operating margin band?

I think when you talk about sacrificing revenue growth, it's not I take an action and it impacts revenue tomorrow. It's at what point do you start impacting long-term revenue. We're in the fortunate position of heavily overinvesting the business today. Running at relatively low utilization. So unlike others who might already be running at a pretty high margin, we have the luxury, we believe of having a bunch of levers to pull. If it keeps appreciating at seven percent a quarter, then it gets serious.

Yeah, but -- I guess that sort of alludes to my next question then. Because you're sort of taking down your head count growth a little bit and increasing utilization, do you still have some nice cushion, or does this push you into a little bit of a different profile?

The way to think about it, we're using some of our cushion, not all of it.

Okay, great.

By definition taking utilization up uses some of the cushion. We're still investing heavily in the business.

Okay. And then, just got to throw it there. Any guesses on where the tax rate goes in '09 and 2010?

A little too early to know. Once I get a little bit better sense of how quickly my SEZs will come online, I'll be able to answer that.

Okay, thanks a lot.

Your next question is from the line of Sandra Notardonato, with Robert W. Baird.

Great, thank you. I have two questions. First is, it looks like some of your peers hedged to manage the Rupee fluctuation, and I believe the last time you guys hedged was back in July of '04. What are your thoughts on that for the future?

Yes, the only thing we've ever hedged is the balance sheet. So when I mentioned in Q2 we'll have a below-the-line loss, from time to time I'll hedge against that. Normally I can just do that with the timing of when I move cash around the world and even now I can keep it within sort of a reasonable risk range. We've never actually hedged operating expense. Some of our competitors hedge revenue. Obviously, we don't need to do that since our functional currency is not the Rupee. So if we were to hedge something, it'd be expense. And my philosophy is, you know, there's a cost to that and if I hedge it, it just puts off the inevitable for whatever period you're hedged for. And given that we're running the business with a bunch of levers to pull that I can pull, I believe, fairly quickly. The cost of hedging for us probably doesn't make sense at this point.

Okay. And then, my next question, I was wondering if we could just talk about the relationship of wage rate increases in pricing. If you were to hold utilization steady at the lower level that you reported back in Q4 and over the last couple years, what percentage increase in bill rate do you need to offset the 15% wage increase -- or the 16% wage increase that you passed this year?

Give me one second here. I think I would need about three -- three or four percent.

Okay, great, thank you.

Your next question is from the line of Abhi Gami with Banc of America.

Hi, thanks. A couple quick questions. First off, you mentioned earlier the EDS relationship is healthy. Is that relationship actually growing?

Due to the nature of it, yeah, I'll leave that for EDS to comment on.

Okay. Second, there's been a lot of speculation around slowdown in spending by the financial services sector in the U.S., particularly within banking. Your growth seems to counter that fairly well. Has there been any change in the nature of demand from within BFSI? So, is banking perhaps slowing as insurance is picking up? Any other color you can provide within that group?

No, Abhi. I think that -- you know, we haven't seen any shift in pattern sort of across the sectors of banking insurance transaction processing. I think that what's driving our growth, as I said, is really two things in financial services. One is the breadth of clients we serve. We have actually a very broad range of banking and insurance customers that we're serving today. I gave some color around that during the comments and the second thing is that we've been investing over a long time now to continually deepen the service offerings that we have for financial services. So what we're able to do is continue to stay relevant over the life cycle, so as customers become more comfortable with offshoring and start trusting increasingly more sophisticated engagements to an offshoring model, we are there with the capability to be able to match that demand. So I think that those are the two things that are continuing to drive our BFS growth, the broadening of the portfolio and the deepening of our service offerings, particularly our BFS specific service offerings.

Okay, great. Thanks, Fransico.

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

Your final question is from the line of Adam Frisch with UBS.

Thanks, guys for squeezing me in here. I just wanted to clarify the point, because it's the only real issues that's impacting your stock this morning. It has to do with the head count, the downtick of growth there by a mere thousand people, which on a percentage basis isn't that much, but it is a downtick. Can we say with some certainty that that downtick is in no way shape or form a reflection of your being less bullish on demand and growth, it's purely to offset the Rupee situation?

Let me be crystal clear here. We're getting hit with 140 basis points of margin impact from the Rupee. I have a choice, I can let it all flow through or I can pull some levers to not let it all flow through. When we looked at it, we said we want to balance the two. So we're letting a little bit of it flow through, and we're taking our operating margin at the midpoint of our range and we're absorbing the rest. Primarily the tool I'm using to absorb it is the margin. At the same time, that -- is the utilization. At the same time that took head count down, that took revenue growth up, which if you do the math it works out, I want to take utilization up about three points. So it's purely a function of it's one of the levers I can pull to offset the Rupee appreciation.

Okay. But it's not any reflection of a downtick in your assessment of the demand environment or your ability the grow?

Absolutely not.

Absolutely not. Okay. So then the next question becomes what was the rationale of not letting margins go below that 19% if it was solely due to the Rupee, if it could ensure that you could grow at the rate that the street has become accustomed to.

Because I don't think -- I think because of the scale efficiencies and so forth, we looked at and said, yeah, we can take utilization up a little bit without hurting the business. And we've made commitments to our investors that our goal is to stay in the 19 to 20% range. Given that we do run that business at a much lower margin than others, we thought that's the right balance between near-term shareholder value and long-term revenue growth.

So what you're doing today is -- it really does not impact -- it certainly doesn't impact revenue growth in '07, negatively, because you're increasing your guidance, but should we take it as negatively or positively impacting growth in '08?

I think what we're saying is we think we can run the business at a little higher utilization and support the needs of our clients.

Okay. And still generate the kind of business metrics that we've become accustomed to?

I don't think head count -- head count has never been a constraint to our growth and I don't think changing utilization by a couple points is going to all of a sudden make head count a constraint to growth.

Okay, okay. Do you see -- obviously you spoke real favorably about demand, discretionary spend seems good. Is there any supply constraint in the marketplace right now? You guys have always been real strong on the college campuses and so forth. Is there any supply constraint right now?

In general, we don't see supply constraints across the industry. There are always pockets of supply constraints as certain skills become more in demand and less in demand and supply and demand imbalances show up in little pockets here and there. As a I look at macro level, we don't see supply demand imbalance.

Okay, Great stuff. Thanks, guys, for clarifying.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers Are there any closing remarks?

Thank you again for joining us on our call today. In conclusion, we're very pleased with our financial and operating performance if the first quarter across the company. We're excited about the opportunity ahead for Cognizant as we execute on our long-term growth strategy, continue to globalize our business, and meet the growing demand for our services across industry vertical segments. We look forward to talking with you again next quarter. Thank you.

This concludes today's conference call. You may now disconnect.