高知特 (CTSH) 2007 Q2 法說會逐字稿

Good morning. My name is Cynthia, and I will be your conference operator. We'd like to welcome everyone to the Cognizant Technology Solutions 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). I would now like to turn today's call over to Scott Hoffman of Financial Dynamics. Please go ahead, sir.

Thank you, operator. Good morning, everyone. By now you should have received a copy of the company's second 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 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. Good morning everyone. Thank you all for joining us for Cognizant's second quarter 2007 earnings call. This morning I will provide an overview of our second quarter results, and discuss the key drivers of our financial and operating performance. I'm joined on today's call by our Chief Financial and Operating Officer, Gordon Coburn, who will take you through our financial and operating results in greater detail.

I'm pleased to report that the steadfast execution of our long-term strategy has enabled to us surpass an annualized $2 billion revenue run rate during the quarter, just six quarters after surpassing the $1 billion annualized run rate in the fourth quarter 2005. Our rapid achievement of this milestone is a testament to the strong fundamentals of our business, the success of our long-term strategy, our dedication to client satisfaction, and our commitment to delivering value to our shareholders. Cognizant's tremendous growth was also recently recognized by BusinessWeek, which once again named Cognizant among the Info Tech 100, BusinessWeek's annual ranking of the top technology industry performers. Cognizant outpaced all of its competitors in this year's InfoTech 100 and placed 9th overall on the fastest growing sub list with a 62% year over year revenue growth rate for the 12 month period measured by BusinessWeek. These achievements are the result of our approach and culture of partnering with our customers every day to build stronger businesses and deliver a tangible return on their IT investment. Our ability to maintain this results-oriented client-centric culture while scaling the business rapidly is central to our ability to maintain industry leading growth which was again evident in our second quarter results.

Turning to our second quarter financial results in more detail, we once again exceeded our internal forecasts and our guidance, generating $516.5 million in revenue, an increase of 12% sequentially and 53% from the second quarter of 2006. As in recent quarters, our strong performance this quarter was the result of broad-based growth across our business. As we have said in the past, we believe that the majority of our strategic accounts still have considerable growth potential, and this was evident in the growth of our largest client relationships during the quarter.

Revenue from our top five clients grew by 9% sequentially and revenue from our top 10 clients grew by 11% from the first quarter. We expect these relationships will expand further as the needs of our customers evolve over the long term, and we continue to expand the range of solution offerings that help strengthen our customers' businesses. We also generated significant new business potential during the quarter, increasing our number of active clients to over 430. In addition, the number of accounts that we consider to be strategic, which means that they have the potential to generate between $5 million and $40 million or more in annual revenue for Cognizant over the long term, increased by five during the quarter, bringing our total number of strategic clients to 97. Strategic clients span broadly across industries, banking and financial services, healthcare and retail, as well as geographies, including the U.S. and Europe.

Revenue growth across all of our business segments was strong, including growth in our two largest segments, financial services and healthcare. Revenue from our financial services segment customers increased 13% sequentially, and 49% year-over-year, as we continue to leverage our leadership position in the market and develop deep -- sorry, leverage our leadership position in the market, and deep domain expertise that we bring to the world's top banking, financial services, and insurance companies. We had a very strong second quarter in our healthcare segment, growing 62% over the second quarter of last year and adding two strategic clients.

Turning to the cost side of the business, GAAP EPS was $0.54 for the quarter, up 46% from the year-ago quarter. Non-GAAP EPS, which excludes stock-based compensation expense, was $0.59 compared to $0.41 in the second quarter of 2006. We achieved this strong performance while proactively addressing several challenges facing the entire offshore outsourcing industry. During the quarter, we executed on the plan we outlined on our last conference call to offset anticipated pressure on our cost structure stemming from the Indian rupee's appreciation as well as seasonal wage increases. We addressed these headwinds through a combination of increasing utilization of our staff by approximately 2% as well as taking advantage of SG&A scale efficiency savings.

As a result of better utilization and other scale efficiencies, our operating margin for the second quarter, excluding equity-based compensation expense was a solid 19.4%, slightly above our guidance for the quarter, and well within our historical target range of 19 to 20%, which also excludes equity-based compensation expense. The successful execution of our plan demonstrates our flexibility to quickly pull operating levers to effectively offset macroeconomic head winds to enable to us meet our financial and operating targets. Our execution in the quarter also underscores our focus on delivering consistently strong bottom line results, while upholding our commitment to reinvesting in the future growth of the company.

On the operational side of our business during the quarter, we continue to make investments in our people and infrastructure. We added a net of over 2,000 employees during the quarter, bringing our total employee base to approximately 45,500 worldwide. Employee additions during the quarter were low compared to historical levels, given our goal of increasing utilization from Q1 levels. During the second half of the year, we expect to return to a more normalized pattern of hiring and are on track to end 2007 with our previously stated goal of approximately 55,000 employees. This is consistent with our expectations and intention to increase utilization throughout the year and manage the business within our target operating margin range of 19 to 20%, excluding equity compensation expense.

Employee attrition increased slightly to 17%, which is consistent with seasonal trends in attrition for the second quarter. This increase was due primarily to the seasonal tendency for certain employees to leave during the second quarter to pursue higher education. We continue to monitor employee attrition closely and take necessary short and long-term steps to manage it. In terms of infrastructure, as demand for our services escalates around the world and our client base grows, we are focusing on building infrastructure to capitalize on these growth opportunities. As we announced this morning, Cognizant's Board of Directors has approved plans to make an additional $100 million investment in our previously announced infrastructure expansion program across India. This brings our total real estate platform to $300 million. Gordon will provide more details on this initiative later in the call.

Before turning the call over to Gordon, I would now like to comment briefly on some broader industry trends and highlight the investments that we are making to drive our ongoing growth. First, we continue to see broad-based demand for our services, including our newer service offerings. This is evidence of Cognizant's ability to expand our relationships with our customers, and to bring innovative new services to our markets. Our growth platform continues to expand across industry verticals, driven by the investments we've been making in cultivating market-leading expertise in each of the industry segments we serve. In our core business segments of financial services and healthcare, we continue to demonstrate a market leading position.

For instance, in June, Cognizant was named to the Healthcare Informatics 100, a list of the industry's leading IT and services providers based on revenue growth. Cognizant has been named to this distinguished list for several years, and this year we moved to the top 20, affirming our leadership in this key industry. Similarly in financial services, our growth continues to be strong as we continue to make investments to solidify our position in that industry segment. We have been able to effectively extend our financial services practice to Europe where we are now doing work for 11 strategic clients in the financial services area. During the second quarter, we also experienced growth across our range of horizontal service offerings, with articularly strong performance in ERP, data warehousing and business intelligence, testing and infrastructure management.

As an example, our testing group has experienced remarkable growth, and today we are an acknowledged leader with over 6,000 career test professionals serving more than 200 customers, driven by our ability to provide best in class solutions such as enterprise-level managed test centers. We are also seeing very strong demand for our testing offering in Europe where we have engaged with several large banking financial services, insurance and retail customers. Second, as we said in the past, European clients continue to aggressively adopt offshoring strategies, and as a result, we continue to see strong returns on our investments in expanding and globalizing our business. European revenues grew 17% sequentially and 79% from the second quarter of 2006, driven by expansion of our business with European companies, and where two of our strategic client wins during the quarter are domiciled.

Growth was particularly strong in Continental Europe year-over-year, demonstrating that the investments we've been making in expanding our business across Europe are paying off for us. Our success in Europe was also evident in attendance at our annual Cognizant community event in Europe during the second quarter, which wrings together clients and prospective clients to discuss the benefits, challenges and opportunities of global service delivery. Turnout this year more than doubled from last year and consisted of CIO level leaders representing a broad range of industries along with an impressive assortment of Europe's leading companies.

Another key trend that we've been observing is the willingness of clients to engage Cognizant much earlier in the lifecycle to play a role in defining solutions, not just implementing them. This is the trend which Cognizant is particularly well positioned to capitalize on given our historically strong investments in front-end client facing teams. Cognizant's ability to engage in a consultive fashion very early in the lifecycle is validation of these investments and allows us to build deeper, longer lasting relationships with clients. Last quarter I talked about our domain consulting group within banking, which is comprised of experts across nine industry subsectors. Our success in financial services is increasingly driven by our MBAs and industry experts who enable to us capitalize on higher demand for higher value consulting services. Our strategy is to invest in replicating that consulting business model within our other business areas.

Telecommunications is an example of a newer vertical in which we have focused on replicating our consulting model. The success of this strategy evident in our strong revenue growth and expanding list of marquee clients. Revenue in the second quarter increased by 29% from last quarter, and 73% compared to the second quarter of 2006. This growth is a result of the successful acquisition and integration of Fathom Solutions, a telecom consulting firm that strengthened our communications domain consulting capabilities. Since the acquisition of the business two years ago, our combined offering has attracted major industry players who choose Cognizant for our unique ability to integrate high-end consulting capabilities with efficient global delivery. They are also attracted by our thought leadership and next-generation industry issues that can help take their businesses to the next level.

By using the same domain experts to drive both consulting service work and the ensuing systems implementation, Cognizant becomes a full lifecycle solution partner with the upstream idea that know-how and the downstream accountability for implementing an effective solution. For example, we recently partnered with a major U.S. telecom provider to lead an evaluation of every major system within their new strategic platform that enables Triple Play Voice Over IP, IP TV, and high-speed data offerings. Cognizant's analysis focused on determining functional and technical readiness for future phases of new IP services -- of new IP service introductions, which we are now entrusted to implement. The success of our consulting model is not limited only to our industry vertical areas. In many of our horizontal service offerings, we are observing the same trend of clients willing to engage Cognizant much earlier in the lifecycle.

For example, in our data warehousing business intelligence and performance management business, we are seeing demand for a range of consulting services, including business case development, IT strategy, governance and performance management. Our customers see us as a partner who recommends practical and implementable strategies and solutions. They also see us as a partner who is willing to engage across the lifecycle from up-front consulting to implementation and post-implementation to measure delivery against originally outlined results and objectives. We have built specific business benefit assessment tools to help our customers track their ROI as related to their strategy.

Finally, as the growth of the industry places demands on the talent ecosystem in India, we continue to find innovative ways to enhance our ability to attract and retain talent. Our efforts to hire entry level engineers from campus have produced strong results this recruiting season. The key message that resonates with newly graduated engineers is one of fast career growth resulting from the rapid growth of Cognizant as a company. We are reaching deep into the educational ecosystem in order to secure our position as an employer of choice.

Through a formal program, we bring together the principals, deans and placement directors of the more than 150 campuses from where we recruit. We use this forum to discuss collaboration opportunities in areas such as curriculum development, employability enhancement, and faculty-industry linkage programs. This forum has helped us engage very closely with academic institutions and policy makers at the highest levels. We continue to push forward with programs designed to enhance employability of recent graduates.

In addition to our work with finishing schools such as Three-Edge we work closely with mass-com initiated programs. We are also working with the I ITs and NITs to support their finishing school initiatives. Further, as part of a consortium formed by the Confederation of Indian Industry, C I I, a premier trade body, Cognizant is working closely with the University of Madras to define the curriculum for soft skills that will be taken to science colleges under the aegis of this university. Such programs and many more institution-specific initiatives have helped us to secure slot one or slot two in the majority of the over 150 campuses that we target for recruiting, thereby considerably improving our average slot rating this year and allowing us to increase the average number of offers made per college in 2007.

Likewise, on business school campuses, Cognizant continues to enjoy a premier position for recruiting, competing with global strategy consulting organizations, investment banks and FMCG enterprises. In many premier B-school campuses Cognizant is considered the first choice among students aspiring to join the IT industry. Cognizant has a solid reputation because of the career options that we provide to B-school graduates in business consulting, business analysis, opportunity assessment, relationship management, and corporate development. As an example, the Indian School of Business is one such premier business school in India, with academic alliances with the Kellogg School of Management at Northwestern University, the Wharton School at the University of Pennsylvania, and the London Business School. At the Indian School of business this year, Cognizant had 35 accepted offers, the highest number of acceptances ever for any company in the history of the Indian School of Business.

And finally, in terms of continuing education of our existing associates, we continue to push forward with innovative programs that further our goal of establishing market-leading positions in the markets that we serve. For example, in the area of life sciences, we recently entered into an association with Manipal University to offer a two-year Master of Science degree in clinical research and regulatory affairs for associates in our life sciences practice. A leading private university in southern India, Manipal University also runs one one of the country's most successful hospital chains. This is the first of its kind industry-academia-led program, designed for professionals interested in pursuing their careers in the life sciences industry in the field of clinical research, medical writing, clinical data management, drug development, biostatistics and regulatory affairs. Cognizant has been working actively with the University to design the course, bring together the best in industry knowledge case studies and experience of Cognizant professionals. Cognizant will also help deliver some of the modules of this course.

With those comments, I'd like to continue by saying that overall we are very pleased with our performance for the second quarter, which was driven by growth across all dimensions of our business. Vertical industry segments, service areas and geographies. We continue to be confident in our growth strategy for 2007 and beyond. 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 second quarter and then discuss our financial expectations for the third quarter as well as full-year 2007. Revenue for the second quarter exceeded our prior guidance and expectations due to continued strength in Europe, strong year-over-year growth in our healthcare segment, as well as all three of the industry verticals within our other segment. Quarterly revenue grew 12% sequentially, 53%. year-over-year. As the quarter proceeded, we continued to see healthy volume growth across a broad range of services and industries. Our core business remains 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 $80 million year-over-year and represented 47% of revenue for the quarter. Healthcare grew over $45 million and represented 23% of revenues. Retail manufacturing and logistics grew by almost $25 million, representing approximately 15% of revenues for the quarter. The remaining 15% of our revenues came primarily from other service-oriented industries of telecom, media, and technology, which grew by over $29 million compared to the second quarter of last year.

During the quarter, financial services grew 49% year-over-year and over 13% sequentially. Healthcare grew 62% year over year, at about 8% sequentially. Retail manufacturing logistics grew 48% year-over-year and 11% sequentially. Growth in our retail manufacturing 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 60% year-over-year and 17% sequentially.

Growth in the other segment benefited from strong growth in our information and media operations as well as technology and telecommunications. For the quarter, application management represented 52% of revenues and application development was 48%. Both services continued to grow significantly in Q2. Application management grew 57% year-over-year, and 11% sequentially. Application development grew 50% year-over-year and 14% sequentially, reflecting a healthy demand environment for our entire service offerings.

During the quarter, 84% of revenue came from clients in North America. Europe was approximately 15% of total revenue. The remaining 1% of revenue came from the Asian market. Our European grid business grew 17% sequentially, and 79% year over year for the quarter as we continue to invest in that region. We added approximately 66 new customers during the quarter. We closed the quarter with an active customer base of over 430. During the quarter, the number of accounts which we consider to be strategic and have the potential to become significant revenue sources for us in the future, increased by five, bringing our total number of strategic clients to 97. Turning to costs, on a GAAP basis cost of revenues exclusive of depreciation and amortization increased 55% for the quarter compared to the second quarter of 2006.

Second quarter cost of revenues include approximately $4.8 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 as well as impact of the strengthening rupee and wage increases that were effective in Q2. We increased technical staff by 1900 during the quarter, and ended the quarter with approximately 42,700 technical staff. This is a net increase of close to 15,000 technical stay from June 30th, 2006. Second quarter SG&A, including depreciation and amortization expense, was $133.5 million on a GAAP basis, up from $87.8 million in second quarter 2006. GAAP SG&A expense in Q2, 2007, included approximately $4.7 million of equity-based compensation expense.

As a percentage of revenue, SG&A was down slightly as we are able to leverage our scale efficiencies. GAAP operating income for the quarter increased 49% to $90.7 million from $60.7 million. On a non-GAAP basis which excludes the impact of $9.5 million vehicle-based compensation expense, operating income for the second quarter, was $100.1 million, up almost 49% from last year. Our GAAP operating margin was 17.6% for the quarter and our non-GAAP operating margin for the quarter was 19.4%, in line with our target of 19 to 20%. During the second quarter operating negatively impacted by a significant appreciation in the Indian rupee. The average rate was approximately 41 in the second quarter versus 44 in the first quarter of 2007 and 45 in the second quarter of 2006.

Interest income for the second quarter increased to $6.5 million compared to $3.9 million in the second quarter 2006. Interest income increased due to a higher cash -- global cash balance including short-term investments as well as increase in short-term interest rates. We had a $530,000 foreign exchange gain during the quarter. Our GAAP tax rate for the second quarter was 15.7%. During the quarter, we had a favorable settlement of certain tax uncertainties. In accordance with FIN 48, the results of the settlement were required to be recognized as a discrete item during the quarter. This reduced second quarter tax rate from our normalized tax rate of 16.4% to 15.7%. Assuming no further discrete items in the second half of this year, we expect our second half tax rate to be 16.4% resulting in a full year tax rate of approximately 16.3%.

Turning to the balance sheet, our balance sheet remained very healthy. We finished with over $710 million of cash and short term investments, up over$ 240 million from June 30th of last year, and up over $37 million from March of this year. During the second quarter, operating activities generated over 52 million of cash, financing activities primarily the exercise of stock options and related tax benefits generated approximately $26 million of cash. These amounts were partially offset by over $42 million in capital expenditures. In addition we generated approximately $670,000 of cash due to currency translation adjustments. For 2007, we continue to expect -- expect approximately $180 million incapital expenditures, a substantial majority of which is related to the construction and equipping of additional development facilities to support our growth as we have previously announced.

Today we also announced a $100 million expansion of our current construction program in India, bringing the total value of the program to over $300 million. This program now encompasses the construction of approximately 4.5 million square feet across five cities. All of the construction is planned for special economic zones to allow us to participate in tax holidays well into the future. In addition, we are op poor you opportunistically leasing facilities with SEC status. So far this year we have leased over 800,000 square feet of space in special economic zones, all of which will become available for use by year end. Our collection of trade receivables improved slightly from the second quarter of 2006, based on our $403.6 million balance on June 30th, we finished the quarter with a DSO, including unbilled receivables, of 71 days, compared to 72 days for the same period last year. During Q2, excluding unbilled receivables, our DSO was approximately 61 days.

Quality of our receivables portfolio remains strong. Our unbilled receivables balance was approximately $54.7 million at the end of the second quarter, up about $16 million or 43% from June 30th of last year, and up about $8 million from Q1 of this year. Approximately 54% of our June 30th unbilled balance was billed in the month of July. During the second quarter overall 24% of our revenue came from fixed price contracts down from 25.3% in the first quarter of this year, and down from 25.2 in the second quarter of 2006. When we look at the mix by solution type during the second quarter, 29% of our development revenue and 20% of our maintenance revenue came from fixed price contracts during the quarter.

Turning to headcount, at the end of the second quarter, our worldwide headcount included both technical professionals and support staff, totaled approximately 45,550. This represents a net increase of approximately 2100 people during the quarter and 15,900 people since June 30th of last year. Slightly less than 50% of our Q2 hires were recent college graduates, who will enter our training program. The remainder were lateral hires and experienced IT professionals.

Turnover, including voluntary and involuntary, was approximately 17% annualized during the second quarter. As discussed previously, we've launched a global initiative to ensure that our employees receive appropriate rewards, recognition, and personal and professional growth opportunities across their entire lifecycle at Cognizant. Q2 attrition was roughly in line with second quarter attrition in both 2004 and 2005. It was about two percentage points higher than attrition in the second quarter of 2006. As you will recall, we experienced lower than normal attrition tup first half of 2006 then a spike in the third quarter of last year.

As we discussed back in May, as part of our strategy to offset the impact of appreciation of the Indian rupee, we are increasing the company's utilization level due to scale economies and historical heavy overinvestment of bench resources, we were able to successfully begin to increase our utilization rates during the second quarter. During the second quarter we executed according to our plans towards this goal. On-site utilization increased slightly to over 85% for the quarter. Offshore utilization excluding recent college graduates who were in our training program at the end of the quarter was approximately 68%, as many of our fall 2006 trainees graduated from our training program. Including trainees, offshore utilization was approximately 56% for the quarter. We had over 4,000 -- 4,300 unbilled people in our training program at the end of the quarter.

I'd now like to comment on our growth expectations for the third quarter of 2007 as well as the full year. The investments we are making are producing results. They are allowing to us differentiate ourselves in the marketplace both in terms of winning and growing new clients and expanding our service offerings. This has resulted in stronger than expected results for Q2 and provides us with a strong foundation for continued growth in 2007. For the third quarter of 2007, we are projecting revenue of at least $550 million. This represents more than 45% year-over-year growth. We continue to have significant revenue visibility due to our high level of recurring revenue and the long-terminate of our customer relationships. In fact, today we have customer commitments for well over 90% of our third quarter revenue guidance.

For the full year 2007, based on the strong demand environment for offshore services and our favorable experience in ramp-up rates, we are pleased to increase guidance to at least $2.110 billion, , a $40 million increase from our prior guidance given in early May. This revised guidance represents growth of at least 48%, an increase of more than $685 million compared to 2006.

As has been typical in past years we expect the vast majority of our growth in 2007 will come from ramp-up of clients we have won over the past few years. Assuming no material appreciation of the rupee, no further material appreciation of the rupee, our guidance assumes that we will continue to be near the midpoint of our targeted 19 to 20% non-GAAP which is before the impact of equity compensation range for operating margin for the year. And for the third quarter.

With this expected level of revenue growth and our expected operating margins we are currently comfortable with our ability to deliver Q3 GAAP EPS of $0.56, and non-GAAP EPS of $0.62 excluding equity compensation expense of $0.06. This guidance includes the anticipation of the Q3 share count of approximately 153 million shares, a tax rate of 16.4%, and an operating margin towards the middle of our historic guidance range of 19 to 20%, excluding the cost of equity compensation. For the full year 2007, based on current business trends, we currently project GAAP EPS to be at least $2.20, and full-year non-GAAP EPS to be at least $2.40, excluding equity compensation expense of approximately $0.20. This guidance includes the anticipation of a full year tax rate of 16.3% and full-year share count of approximately 152.7 million shares, and an operating margin towards the middle of our guidance range.

Please note that our GAAP EPS guidance for the third quarter and full year assumes no P&L impact from the recently enacted fringe benefit tax on the exercise of stock options in India. The accounting treatment for this new tax is yet to be finalized by the accounting industry. In conclusion, we were very pleased with our industry leading revenue growth in Q2 and are quite optimistic about our market position for the future. We believe that we understand the margin related issues currently faced by the industry and are taking the appropriate short term and longer term actions to manage these issues.

We would now like to open the call for

(OPERATOR INSTRUCTIONS). Your first question comes from Julio Quinteros from Goldman Sachs.

Good morning. Just to get a couple things out of the way how much mortgage exposure do you have in your BFSI segment as a percent of revenue?

In terms of subprime it's negligible. Overall mortgage, that, I'd to have check on, but very low exposure in the subprime market.

looking at the model, the way that it's shaped up for the quarter, obviously we were expecting utilization to go up. How much further can you take utilization from current levels, in other words, how much is left in terms of cushion from utilization? Then can you walk us through pricing for the quarter as well?

Starting with utilization as you said last call our goal is to take utilization up around four points or. So because of the way the averaging works it takes two quarters to get there so we're -- we still have more increasing utilization planned and that's obviously baked into our headcount guidance and that's just simply a fact of it takes two quarters to fully see the impact. What's other question? Pricing?

Pricing.

pricing is coming right about where we expected for the full year we expect to be up about 2% on an apples to apples basis compared to last year sequentially we had a very modest increase in pricing year-over-year we're running about 2%.

Great. The four percentage points, I think there was a little confuse last quarter. I just want to make sure that I understand, When say four percentage point increase are you talking about offshore, blended, including, excluding, just to make sure we have the right number?

Sure, that's global.

global total including trainees. Yep.

Got it.

Your next question comes from Rod Bourgeois with Bernstein.

Nice to see the growth continuing. I wanted to ask about the capex outlook with all the plans to expand the facility. Presumably a lot of the movement into the special economic zones is geared toward optimizing the tax rate after the tax savings expire. Can you talk about what these investments might do to your sort of capital expenditures compared to the run rate that we've seen in recent history?

Sure. Whether the SEZs existed or not we'd probably still be doing construction just because the economics are better than renting. This expansion does not impact our 2007 capex budget. We still expect that to be $180 million. Haven't worked out 2008 yet but if you look over the last couple of years as a percentage of revenue it's been remaining fairly constant. So that's probably as good an assumption as any at this point.

great. Clearly there's been a lot of attention focused on the headcount kind of growth outlook over -- in recent periods. I wanted to ask a scenario. You've guided up again on revenues. If the revenue growth outlook continues to improve and you are able to take your revenue growth guidance up again later in the year, would you then be in a position to take your headcount growth guidance up at that point in time or do you have enough headcount in place right now to hit a range that goes even higher than where your current revenue growth guidance resides?

With 55,000 people we can certainly deliver more revenue than we've guided to. Even with our increasing utilization we'll still be well below the industry. Would we need to take headcount up? Absolutely no. Would we want to? Maybe yes, maybe no. When we look at ending the year with around 55,000 that gives us room to meet demand for this year and positions us quite well for next year.

Just to finish the thought, Rod, part of the reason why, we have been run sog low historically. We just have a lot of buffer in there.

Right.

Then with the expansion plans into the special economic zones and the related investment, does that have implications for the type of headcount growth you're planning for the 2008 time frame, or is it too early to give us a read on that? Just presumably with all this investment being planned you've got some idea of the type of headcount you're hoping to achieve in 2008. A lot of this construction. Some of it starts to come on-line at the beginning of 2008 but some of it doesn't come on line until late 2008, early 2009.

It's sort of a constant process of continuing to expand. The fact that we've expanded the program clearly means that as we look into the future, 2008, 2000 nine, beyond, we still see a lot of runway in terms of growth opportunity. Just to complete all this thought, the -- I'm assuming that your continued plans to take utilization up, I'm assuming you are ear still arguing that the higher utilization will not create any trade-offs with respect to your growth rate. At the level that we're targeting to take it up to we're very comfortable that it does not impact our ability to deliver services. Once again that comes back to we have been running quite low. There are scale efficiency with bench resources, and even with where we're increasing utilization to we'll still be below industry standards.

All right, thanks guys very much.

Your next question comes from Ed Caso with Wachovia Securities.

congratulations on another great set of numbers. You haven't talked much about your BPO business. Can you give us a sense of percent of revenue, growth rates, focus areas what the plans are for the future?

Ed, it's Frank. We continue to make good progress on the BPO business. We've -- I think a call or two ago I spoke about -- I gave examples of some clients waiting there as I said in the past. We're focused on would we think of vertical BPO, industry specific, what we're calling V BT oh. We're pleased with the progress we're making also looking at the synergies between our IT business and our BPO business. Couple things. It's important to right now revenue from our BPO business is relatively small. It's also important to remember that he revenue per head in significantly lower than it is in the IT business. So the BPO business today is not a material significant part of the overall revenue stream.

Great. Gordon, can you remind us, your goal in the short run through two quarters is to raise global utilization four points. How many more points of flexibility do you have beyond that?

We certainly have flexibility beyond that. The question becomes at what point does it start to create a skills mismatch. I think we still probably have a little -- it's growing at a decelerated rate. What we know, by four points, we're not at that point yet. As you -- if you keep going up at some point you hit it but we're pretty comfortable with how the model is working as we've taken utilization up so far this quarter it's actually been a good thing for the business. We probably -- the reality is we probably let it get a little bit lower than it needed to be.

Can you talk a little bit about H 1 Bes, how done the lottery, any issues, how you're thinking about scenarios long term? As you know, a lot more applications are filed than visas are issued. We certainly understood the process and failed our visas appropriately and got -- received the Visas we need to run our business. We continue to monitor the situation in Washington. Obviously it's fluid the immigration legislation heating up, and then slowing down. So we'll continue to keep an eye on it.

Thank you.

Your next question comes from Julie Santoriello with Morgan Stanley.

Good morning. I wanted to ask about the tax rate going forward. I think part of the construction plans are moving into SEZs so what contained of tax rate can we expect post-March of 2009? Can you completely offset the effect of the expirations with SEZ activity or how much might you be able to offset? Is.

You're absolutely right. And we're leasing stuff in SEZ. We recently signed leases for almost 800,000 square feat of leased SEZ space. So it's a combination of lease and building. The way the rules work, you cannot move any existing stream -- so what our tax rate will jump to two factors. How fast does the business grow and how much of that growth cain put into special economic zones. We'll after better feel for that later on this year when we start to understand what 2008 looks like. We'll start to give a range for the tax range 2009 but I would certainly expect a material increase in the tax rate in 2009 because all the stuff, you know, the vast majority of existing volume starts to become fully taxed.

So would it be fair for us at this point to look at a tax rate some where in between the 16% now and the 33% or so kind of global rate?

We haven't given any guidance but, the way the range is so wide, I'm not sure it ends up being that helpful for people. Obviously it will be more than 16% now. When we were fully taxed and didn't recognize the benefit of the tax holidays we were at 37%. Obviously we're not going to be at either of those extremes.

Okay. And question on the consulting business. You mentioned some good traction there. Can you give us an update on the number of people you have now in consulting and just a little bit more on the strategy there? Should we be looking toward specific consulting related revenues from Cognizant, or is the consulting practice more geared just driving the rest of the services?

We've taken the deliberate approach of putting our consulting business, if you will, into our -- into the core businesses. We think that that's a -- an effective way to grow a consulting practice but also really creates tight integration between the consulting business and the rest of the business, if you will. So I don't plan to sort of look at consulting revenues or split them out separately what. Will say is that we're see going traction and a lot of interest from clients engaging us, helping us -- inviting us in to help understand and see the business problem before engaging us on the downstream work as well.

Does that have positive margin implications?

I think it's neutral. I think from a margin perspective, but I think it certainly has significant implications in terms of our relationships with clients, the depth of our relationship, the kind of dialogue we're having, then of course the ability to drive downstream revenues.

Okay. Thanks. Just lastly, any discussion internally on hedging strategies or plans to put a more formal program in place?

As you know, Julie, today we don't hedge at all. Am I looking at it to sea does it -- in may mind the only way it would make -- doesn't create a lot of benefit for shareholders so we are looking at it but no near term plans, certainly no decisions. It's unclear whether all the pieces work for the instruments that we would need.

Okay. Thank you.

Thanks.

Your next question comes from Mark Marostica with Piper Jaffray.

Good morning. Quick question on the SG&A line. Could you be a little bit more efficient on the scale efficiencies appear whether we condition -- a broad range of stuff, certainly has scale efficiencies sees. scale efficiencies sees in communications and some of the marking related activities and back office activities. So the scale efficiencies see, question of when do you lever those, you know, and when don't you, and, yes, remember the way we run the business is we target operating margin and we look at SG&A as something we accelerate or decelerate depending on where cost of goods sold is coming in. Okay. Just one other question as it relates to attrition. Could you just remind us of what the components were that 20% spec that you had last year and sort of how that compares to where we are or where we are be in 3Q this year?

August is -- has to be a swing month but last quarter, third quarter last year, was unusual in terms of spiking to 20% and then -- because we had been running actually well below normal for the first half of last year, spiked up in the third quarter, then started to come back down. Part of it may have been in 2006 we tried to sort of set the market on wage -- keeping wage increases modest. Others didn't follow that lead so we ended up a little behind market last year on (inaudible) and that may have caused that third quarter spike. Obviously we fixed that this year so there wasn't any one item that caused it.

Okay. Just in looking at that time last three-quarters you've had an up tick year-over-year. That trajectory, you know, sort of expected, if we look out over the next couple of quarters, or should that reverse itself?

It's a little difficult to predict. Would I like to the? Are we still running a little higher than I would like? Absolutely, yes. Are we running -- but it's only a little built higher. The one that concerned me was third quarter last year when it was a significant spike. Now we're running a point, two points higher which is kind of noise in my mind.

Thanks.

Your next question comes from Ashwin Shirvaikar of Citigroup.

I wanted to talk about your -- the growth of your European business. You signed two strategic clients there. Is that something different European clients look for than U.S. clients? Could you delve into that?

It's Frank. I think that the -- I would point to a couple of things that we're doing in Europe that, I wouldn't say different but requires to us to focus in a different way in Europe. Because of, -- particularly language issues and differences across continental Europe, we're having to build out local teams in each of the countries in Europe in which we are operating. And so that's, , probably the first -- we can't rely obviously on English as the language of business in these countries even though many of our multinational clients operate in English, you still need to have a local language capability in each of the countries. So that requires us to invest, that requires us to build local teams in each of these countries and really get the local teams deeply integrated with the rest of Cognizant and our global delivery model so on and so forth.

The other thing that we're seeing to some -- we tend to see interest in applications, development and systems integration work perhaps earlier than in other parts of the world where you might see a lead with application maintenance in the U.S. It tends to be a little bit more focused application development in Europe. And that sometimes has to do with the labor laws and other regulations in Europe which limit or prevent the displacement of existing workers

Okay. And I guess last question, aus line up clients that are strongest today with your capabilities, do you feel a need to invest in anything organically or are you pretty well set for the next 12 to 18 months?

We're -- our acquisition program is ongoing. We're always lacking for strategic fits. We've said that we continue to look for acquisition that will extend our capabilities in really three areas. We're looking for acquisitions that are complimentary in terms of the industries that we serve, looking to deepen our industry expertise.

I talked about consulting as an increasing area of interest so we're looking for acquisitions in the industries that we serve that can add that capability. The second acts that's we're logging for and continue to always keep our eyes open for are technology based acquisitions. Good example of that was the acquisition we did some years ago of ASICs that got into the CRM space. The third screen we use is geographic screen. So we're continuing to look at acquisitions in end markets in Europe that would extend or deepen our presence in those -- in the markets if we want to serve in Europe.

Thank you and congratulations once again.

Thanks, Ashwin. Operator we have time for one more call.

Your final question comes from Joseph Vafi with Jefferies & Company

Hi guys, great results, good morning. just one real question but first a housekeeping. Did I miss what the salary hike was for the year that you had in the quarter?

The salaries -- salary increases went into effect at the beginning of the second quarter. We averaged about 16% in India and very low single digits on site.

Okay. Very good. So the real question is now that we've taken the salary hikes for the year, we have some utilization levers coming, and assuming the rupee stays stable here in Q3> Is there anything I'm missing? Should we not have the capacity to have higher margins in Q3 if those three things have occurred and or are stable at this point?

I'm not sure I'd set that expectation. Remember, we had promotions in October, and, promotion cycle has always been twice a year, so you have some cost impact from that. And we -- we don't want to disrupt our long-term investments. So as I said, our goal is to be around the midpoint of our range.

Okay. So just given some normal business development expenses, we're going to this quarter, but otherwise, it seems like the salary hikes weren't too big and, here's clearly leverage off those moving forward.

The big things for the year are under our belt. The big negative things for the year are under our belt. Those all hit in Q2. Be we are very committed to and it's still early in the game for offshoring, and so we're committed to investing for the long term, and given where the rupee has moved, we think being at the midpoint of the range is the right thing in terms of balance of short term and long term.

Great. Thanks so much.

Thanks, Joe.

Well, thank you, everyone, for joining us on our call today. In conclusion we're very pleased with our strong financial performance in the second quarter and our success in maintaining operating targets while reinvesting in the growth of the business. Moving forward we're confident that the steadfast ex caution of our strategy and our commitment to expanding global platform will continue to drive our industry leading growth. We look forward to talking to you all again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.