高知特 (CTSH) 2007 Q4 法說會逐字稿

Welcome to the Cognizant Technology Solutions fourth quarter and full year 2007 earnings conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks, there will be a question and answer session. (OPERATOR INSTRUCTIONS). Thank you. I would now like to turn the conference over to Scot Hoffman with Financial Dynamics. Please go ahead, sir.

Thank you, operator and good afternoon, everyone. By now you should have received a copy of the company's fourth quarter 2007 earnings release. If you have not, please call our offices at 212-850-5600 and we'll be sure to send a copy 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 remained you some of that some of the comments made on today's call and some of the responses to your questions may contain ford look 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 afternoon, everyone. Thank you all for joining us today for Cognizant's fourth quarter and full year 2007 earnings call. On the call this afternoon, I will provide an overview of our fourth quarter and full year results, discuss the key drivers of our performance, and outline our outlook and strategic priorities for the year ahead. My comments will focus on three main themes. First, a snapshot of Cognizant's business today. Second, the key areas of focus and the flexibility of our business model. And third, Cognizant's long-term strategy and our priorities for 2008. I am 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 in a few moments.

I would like to begin today's call by discussion highlights of the fourth quarter and full year 2007 and providing you with an update on what we are seeing in the business and the market overall today. Our fourth quarter and full year 2007 financial results mark another year of exceptional growth for Cognizant across our business segments, service offerings and geographies. Our results also reflect execution of key company-wide strategic initiatives that we laid out at the beginning of last year, Specifically, building truly distinctive capabilities in each of the markets we serve, Secondly, expanding our platform globally to capitalize on the growth opportunities ahead for the company. Thirdly, focusing on enhancing the environment at Cognizant where the best talent in the world can thrive. And finally, making the investment in the infrastructure processes and intellectual capital that enable to us to scale the business.

Looking at our financial results, I am pleased to report that we surpassed the $2 billion annual revenue milestone, exceeding our internal forecast by recording close to $2.14 billion in revenue for 2007, an increase of 50% from 2006. This is a tremendous achievement for Cognizant, especially when considering that we took 12 years to record our first $1 billion in annual revenue and just one additional year to cross the $2 billion revenue mark.

Turning to fourth quarter results, we generated $600 million in revenue which represents a 7% sequential increase from the third quarter. Revenue in the quarter included approximately $5 million from the marketRx acquisition which closed during the quarter. The integration of marketRx into our business is progressing well. We continue to see a significant opportunity to expand the software-based analytics platform that marketRx brings to Cognizant. We also continued to achieve strong operational performance in the fourth quarter.

We added a net of 6500 employees during the quarter, bringing our total employee base to approximately 55,400 worldwide at the end of December. Our hiring plan during the year underscores our commitment to investing in our people and infrastructure ahead of demand. Employee attrition decreased significantly to 12.4% for the quarter compared to 16.9% in the fourth quarter of 2006. In addition, we recently completed our annual employee satisfaction survey, which is conducted by an independent third party. The result of the survey indicate that our overall employee attrition at Cognizant increased over 2006, representing the third consecutive year of employee satisfaction improvement.

The progress that we've made in reducing our attrition rates and improving satisfaction is consistent with our commitment to creating a work environment at Cognizant where the best talent in the world can thrive. In December, we announced the appointment of John Fox as an independent director to Cognizant's board. The board is now comprised of five independent directors out of a total of seven, consistent with maintaining the highest standards of corporate governance. John served most recently as Vice Chairman of Deloitte and Touche and as Global Director of strategic clients for Deloitte Consulting. His more than three decades of consulting and outsourcing experience and understanding of the challenges and opportunities of building a global company are tremendous assets to Cognizant.

During the fourth quarter, we also completed the repurchase of approximately 3.39 million shares of Cognizant stock for $105.4 million at an average price of $31.10 per share under the share repurchase program authorized by the board and announced in September. Our decision to buy back Cognizant stock underscores our confidence in the strength of the fundamentals of our business and our ability to leverage our strong balance sheet to deliver value to shareholders. As we report our Q4 results, we do so against a backdrop of economic uncertainty in the world.

I'd like to now make some comments on our current view of the implication of this environment on our business and the steps which we are taking to manage the business prudently in the near term while investing to position Cognizant for the strong growth that we continue to anticipate. First, it is important to note that despite the economic uncertainty, the majority of IT budgets are expected to stay the same or increase modestly in 2008. This is borne out by our own qualitative and quantitative assessments, along with many studies that have been conducted by financial and industry analysts over the last few weeks.

Secondly, while most studies point to a degree of belt tightening within IT groups, they also indicate that spending on offshoring will increase as clients seek to be more effective with their IT spending. We have seen this pattern of behavior with our client base, and finally, we recently completed a survey at our global field sales kickoff meeting, asking our client partners responsible for Cognizant's top 50 customer relationships for feedback on client budget plans for 2008. The survey confirmed that over 80% of our top 50 clients have finalized their 2008 budgets at this point, a statistic that is consistent with feedback we've received in prior years at this point in the year, and which indicates clarity and spending plans going into 2008. When we look at all these factors together, we believe that today's market conditions present an opportunity for us to capitalize on demand for our new and traditional services.

We have seen evidence that in times of uncertainty more than ever clients will turn to a partner like Cognizant that has the range of service offerings necessary to help them both run their business more efficiently and drive top-line growth through innovation. We anticipate that demand for these services will continue as companies pursue strategies for rationalizing their cost structures in order to invest in strengthening their businesses. We have seen accelerated demand for our expanding range of services like IT infrastructure services, business process outsourcing and testing as companies focus on managing their core businesses more effectively. These are service area where Cognizant has made steady investments over the last several years. We continue to see clients outsource increasing mission critical and support to ensure they keep their businesses up and running through an SLA-driven delivery model. At the same time, many clients are engaging our consulting services to develop technology road maps, drive business process rationalization and consolidate systems to drive further efficiencies.

Companies are also seeking to use technology to automate more back office functions and finally we are seeing increased demand for our transforming while performing solutions, which enable companies to lower their operating costs while freeing up resources to make significant process improvements and to drive innovation. As an example, in the BFSI business segment, insurance companies are seeking to use technology to automate more back office functions such as agents of service portals, automated underwriting and commission systems so that they can redeploy their resources in the front office to drive revenue in an increasingly competitive environment. In the banking area, we see banks with large offshoring programs continue to increase their offshoring plans.

In some cases, asking Cognizant's consulting team to help them reassess their portfolios and find new ways to lower costs through additional offshoring. And mid-size banks which previously have not utilized offshoring in a meaningful way are now aggressively exploring large-scale offshore programs. In the healthcare and life sciences business segment our customers are increasing their focus on lowering their costs while more closely aligning IT with their business objectives. For example, we are working with a number of global pharmaceutical clients to move a broader range of business processes into the global delivery model and create shared services centers of excellence to allow them to benefit from the synergies amongst their divisions.

Finally, as we have emphasized to you in previous quarterly calls, we've invested heavily in client facing teams with deep domain knowledge and vertical industry expertise, and have built one of the best sales forces in the industry. Our client teams are continually assessing the changing needs of our customers and acting quickly to cross-sell the service areas that fulfill those needs. We therefore believe that we are well positioned to drive the business forward through our broad services portfolio, our robust marketing channel, and our strong management team. Based on this confidence in the underlying strength of our business, we have provided strong baseline guidance for 2008 which Gordon will cover in greater detail during his comments.

Our geographic footprint also provides flexibility for growing the business in markets where demand continues to escalate, especially in Europe. During the fourth quarter, Cognizant's performance in Europe was strong, marked by 15% sequential and 89% year-over-year revenue growth. Growth in revenue in Europe came from a broad range of industries and service lines, a trend which we expect to continue throughout 2008. One new client, a large bank based in the U.K., exemplifies how this trend has accelerated. The bank engaged us in an enterprise-wide software testing initiative in May 2007. In just five months, we built a world-class testing team comprised of about 250 Cognizant testing professionals for the client.

More importantly, the investments we have made in expanding our business in Europe over the last several years give us the scale and flexibility to capture short and long-term growth opportunities in this market. Europe comprised 16.1% of revenue in 2007 up from 12.9% in 2006. We are confident that we have a strong base of clients in Europe growing brand recognition as a top tier provider and the right management team to capitalize on the European opportunity. Going forward in 2008, our emphasis in Europe will be to continue to build out each of our horizontal lines of service and deepen our penetration in newer markets like France and Germany.

While it's important to understand how we managing the company in today's environment, I would again like to emphasize that we remain focused on building our core business with the long-term goal of achieving distinct positions across the market segments that we serve. Our performance in the fourth quarter both in our vertical industry segment and across horizontal service lines illustrates the success of our strategy and lays the groundwork for achieving our growth objectives in 2008. In the fourth quarter, revenue from banking, financial services, and insurance customers grew 9% sequentially and 42% year over year, Further enhancing Cognizant's industry leadership position in the vertical.

Earlier in the call, I mentioned several areas where we are seeing demand for a broad range of our services from BFSI clients. This provides further evidence that financial services companies continue to turn to the proven outsourcing model for IT outsourcing and business process outsourcing services. We anticipate continued demand from this vertical throughout the year particularly as clients turn to Cognizant to help them drive more costs out of the their businesses and create greater operating efficiencies.

The success of our strategy for building out healthcare and life sciences was most evident in our ability to win several major engagements during the fourth quarter. Including the contribution from marketRx, revenue from health care and life sciences customers grew close to 12% sequentially, and 35% compared to the fourth quarter of 2006. We also closed three deals, each with anticipated revenue of approximately $100 million or more over a multiyear period. These engagements represent a broad range of service offerings including applications, IT infrastructure services and clinical DPO. In the life sciences vertical, we are seeing increased demand for our transforming while performing solutions, which enable companies to lower their operating costs while freeing up resources to make significant process improvements, drive innovation and invest in R&D and pipeline development., This value proposition was a major catalyst for the multi-year engagement with Merck that we announced in December.

Our strong position in the healthcare industry is an illustration of our ongoing commitment to building distinctive positions in each of our market segments. In addition, we continue to score successes in our other industry verticals, such as retail and manufacturing and communications media and entertainment. In our retail manufacturing and logistics business segment, where revenue was up slightly sequentially and grew over 52% year over year, we are seeing significant interest in adopting offshore outsourcing strategies from consumer packaged goods companies following our ongoing work with Kimberly Clark around the world. Our investment in building and integrating domain consulting capabilities across our communications media and entertainment vertical are also bearing fruit. Cable operators, for example, are aggressively focused on reducing their operating costs to overcome competitive pressures driven by convergence in telecommunications and media, which is forcing them to drive innovation and service in delivery, and they are turning to Cognizant to help them meet this challenge.

We also remain focused on expanding our market leadership position in key horizontal service offerings. For example, our testing business is now one of the largest in the industry, with more than 7500 dedicated testing professionals, compared to 5,000 at the end of 2006. Throughout 2007, we experienced broad based growth in testing services, including customers in the financial services industry in Europe, and in the healthcare and retail industries in the United States. We also continued to invest in our BPO capabilities, building industry specific solutions in our vertically integrated BPO solution offering. I'm pleased that our vertical BPO strategy is beginning to show traction across a broad range of industry verticals which is illustrated by key recent wins. For example, building on the work in clinical data management that we have been doing for Pfizer for several years, we have now been selected as a partner to provide CDM services to four additional life sciences companies, including a fourth quarter win to provide full CDM outsourcing to a major global pharmaceutical company.

In BFS, we are providing a range of services from deposit administration and trust administration to fund accounting. And finally in our manufacturing practice during the fourth quarter, we were selected to provide sales order processing services for a large manufacturer of heavy equipment. We are also optimistic that we can leverage our acquisition of marketRx to extend our knowledge process outsourcing capabilities beyond life sciences into other industry verticals.

Our recent investment in our ITIS practice, our IT infrastructures services practice resulted in a number of new client wins and enabled to us continue to expand relationships with other existing customers. A trend which we believe will continue in 2008. In a study released earlier today by Nascom and conducted by McKenzie & Company, the total addressable market for remote infrastructure management is estimated to be between 96 and $104 billion U.S. globally. The study points out that between 26 and $28 billion of the opportunity can be realized by 2013 representing a compound annual growth rate of over 30%. And also India is well positioned to capture between 13 and $15 billion of this global opportunity by 2013.

We continue to invest in growing this business as we see significant opportunities to capitalize on growing demand for outsourced IT infrastructure services through our global delivery model. Two IT infrastructure services wins in the fourth quarter are notable. Large provider of networking products selected Cognizant to provide networking and IP telephony services to them, over the next three years, and a large client in the healthcare industry engaged Cognizant to provide complete range of infrastructure outsourcing services. Again, over a three-year period.

Finally, we continue to invest in our established practice areas such as SAP. During 2007 we extended our partnership with SAP, working with them across a number of initiatives. We broadened our work with SAP Labs to build and test new leading-edge SAP products. By working with SAP during the development phase of key product and technologies, we have a natural head start once these products are brought to the market. We have also significantly strengthened our alignment with SAP's field, where we have jointly identified four specific SAP product areas where Cognizant will work closely with SAP to sell and implement SAP solutions to common clients.

We see these developments as very positive for our SAP practice and expect to see continued growth in our SAP business during 2008. As we move forward in 2008, the entire management team and I are focusing on four key strategic priorities that we believe will enable us to expand our growth platform around the world and further strengthen our ability to expand the business significantly in the years ahead. Our first priority is maintaining our industry leading growth. To achieve this, we are focused on expanding the scale of service offerings like ITIS and BPO, strengthening our market presence in Europe and winning large deals from customers. Secondly, we are focused on building a leadership talent pool to capitalize on new and existing growth opportunities. Thirdly, we are committed to expanding global delivery network to enhance the breadth and depth of services that we can offer our global customers. Finally, we are focused on preserving the culture that has made Cognizant successful as we invest in the infrastructure and processes necessary to continue our industry-leading growth. We look forward to discussing our progress in each of these areas with you throughout the year.

In summary, I'm very pleased with our financial performance in 2007, and I'm confident that the demand environment and the strategic priorities we have laid out for the business will enable us to drive significant growth for Cognizant in 2008. As we wrap up our results for 2007, I would like to add a word of thanks to all the Cognizant employees around the globe and to our customers for their continued support. Now I will turn the call over to Gordon, who will walk you through our financial and operating results in greater detail. Gordon?

Thank you, Francisco. Good evening to everyone.

I'd like to provide some additional information on our 2007 results, then discuss our financial expectations for the first quarter as well as full year 2008. Revenue for the fourth quarter exceeded our prior guidance and expectations due to continued strength in Europe and the earlier than anticipated closure of the marketRx acquisition. Quarterly revenue grew 7.4% sequentially and 41% year-over-year. marketRx contributed $5 million of revenue in the fourth quarter. For the full year 2007, revenue was up 50% compared to 2006. Throughout 2007, we continued to see healthy volume growth across a broad range of services and industries.

During the fourth quarter, our financial services segment, which includes our practices in insurance, banking, and transaction processing, grew by over $84 million year-over-year and represented 47% of revenue for the quarter. Healthcare grew almost $38 million and represented 24% of revenues. Retail manufacturing logistics grew by over $29 million, representing approximately 15% of revenues for the quarter. The remaining 14% of revenues came primarily from other service oriented industries of communications, media, and new technology, which grew by over $24 million compared to Q4 of last year. During the quarter, financial services grew 42% year-over-year and about 9% sequentially. Healthcare grew 35% year-over-year, and almost 12% sequentially. Growth in our healthcare segment was driven by continued expansion of work we do for our life sciences clients as well as earlier than anticipated closing of the marketRx acquisition. Retail manufacturing and logistics grew by over 50% year-over-year, and was up slightly sequentially and our other segment grew 40% year-over-year and 4% sequentially.

For the full year, financial services grew 47%, healthcare 52%, retail manufacturing and logistics 53%, and our other segment grew 52%. As you can see, very well balanced growth across our entire business. For the quarter, application management represented 51% of revenues and application development was 49%. Both services continued to grow significantly in Q4. On a quarterly sequential basis, management grew 6% and development grew 8%, Reflecting continued demand for our entire service offerings including our discretionary development work. For the full year, management grew 51% and development grew 48% and represent 52 and 48% of revenue respectively. During the quarter, 81% of revenue came from clients in North America. Europe was 18% of total revenue. The remaining 1% of revenue came from the Asian market.

As Francisco mentioned, our European business grew 15% sequentially and 89% year-over-year for the quarter as we continued to invest in that region. For the full year, Europe grew 86% and represents slightly more than 16% of total revenue compared to 13% of revenue in 2006. We had a gross addition of 82 new customers during the fourth quarter, about half of which were from our acquisition of marketRx. We closed the quarter with an active customer base of close to 500 clients. During the quarter, the number of accounts which we considered to be strategic and had the potential to ramp up to at least $5 million to more than $50 million in annual revenue increased by 5, bringing our total number of strategic clients to 107.

Turning to costs, on a GAAP basis, cost of revenues exclusive of depreciation and amortization increased about 47% for the quarter as compared to the fourth quarter of 2006. Fourth quarter cost of revenues included approximately $4.8 million of stock-based compensation expense as well as $2 million of noncash expense related to the accounting for Indian fringe benefit tax expense recovered from employees which is related to the exercise of stock options.

I want to stop for a minute and explain this new noncash tax expense in more detail. The total India fringe benefit expense of $5.9 million recognized in the fourth quarter, part of which is in cost of goods sold, part of which is in SG&A, represents the accounting impact for the last nine months of 2007 of the conversion of a portion of the taxation in India of employee stock option gains from the employee tax to a company-paid fringe benefit tax which is then recovered from the employee. Final clarifications on the administration of this new taxation process were issued in late December. Based on the initial regulations, and the December clarifications, we are treating the tax payments made by Cognizant as an operating expense and the equivalent amounts recovered from the employee as option exercise proceeds which are booked directly to equity. So, therefore, the expense goes through the P&L, but the cash proceeds that come in go straight to equity. It's very important to note that there's no cash impact and no economic impact from this new taxation.

It's purely an accounting entry. Now, I will return to discussing our cost of revenues. The increase in cost of revenues is primarily due to additional technical staff both on site and offshore required to support our revenue growth as well as impact of the strengthening rupee. We increased technical staff by more than 6,200 during the quarter, and ended the quarter with approximately 52,100 technical staff. This is a net increase of almost 15,700 technical staff from December 31, 2006. For the full year, cost of revenues exclusive of depreciation and amortization increased 53% as compared to 2006. Full-year cost of revenues included approximately $17.2 million of stock-based compensation expense and the $2 million of noncash stock-based fringe benefit tax expense which hit cost of goods sold.

Fourth quarter SG&A depreciation and amortization expenses were $152.3 million on a GAAP basis, up from $115.5 million in the prior year. GAAP SG&A expense in the fourth quarter included approximately $5 million of stock-based compensation expense and $3.2 million related to fringe benefit tax. For the full year 2007, SG&A depreciation and amortization were $548 million compared to $377.4 million. Full year SG&A included approximately $18.7 million of stock based compensation expense and $3.9 million of fringe benefit tax. So once again the total fringe benefit tax that hit in the quarter was $5.2 million, all noncash with no economic impact.

GAAP operating income for the quarter increased 39% to $106 million dollars from $76.4 million in fourth quarter of 2006. On a non-GAAP basis, which excludes the impact of $9.8 million of stock based compensation expense for the quarter and $5.9 million of fringe benefit tax, operating income for the fourth quarter was $121.8 million, up 44% from last year. Our GAAP operating margin including the fringe benefit tax was 17.7% for the quarter. Our non-GAAP operating margin which is the target to which we manage our business which excludes stock based compensation expense and the fringe benefit tax was 20.3% for the quarter, slightly above our target range of 19 to 20%, due to slightly stronger than anticipated revenue for the quarter, and the lack of a need to utilize contingencies due to continued healthy demand for our services during the economic turmoil during the fourth quarter. During the quarter, operating income continued to be impacted by the appreciation of the Indian rupee. The average rate for the rupee was approximately 39.3 in the fourth quarter versus 40.4 in the third quarter of 2007.

Interest income for the fourth quarter increased to $8.5 million, compared to 5.5 in the fourth quarter 2006. Interest income increased due to higher global cash and short-term investment balances, as well as during the fourth quarter, an increase of short-term rates compared to the fourth quarter of 2006. We had a $43,000 foreign exchange loss during the quarter. Our GAAP tax rate for the fourth quarter was 16.1%, bringing our full-year GAAP tax tax rate to 15.5%. As a reminder, the full year tax rate includes the previously reported favorable settlement of certain tax uncertainties during the third quarter. We expect the 2008 tax rate to be around 16.5%. As has been previously discussed, certain of our tax holidays ended March of 2009, based on current operational plans, we expect our 2009 tax rate to be between 23 and 27%. This could vary -- this could vary based on the extent of the Indian fringe benefit tax expense which I discussed earlier since such expense is noncash and therefore is not eligible for tax deductions.

Our diluted share count for the fourth quarter was 302.2 million shares. This was a decline from Q3 share count primarily due to the repurchase of approximately 3.4 million shares during the fourth quarter. Our balance sheet remained healthy. We finished the year with over $670 million of cash and short-term investments, up over $22 million from the beginning of 2007, and down approximately $139 million from September 30th, 2007. During the fourth quarter, operating activities generated approximately $150 million of cash. Financing activities used $80 million of cash, primarily the repurchase of $105 million of stock, partially offset by the proceeds of options exercised and related tax benefits.

In addition, we spent approximately $72 million for capital expenditures during the quarter, Bringing our full-year capital expenditures to about $182 million, essentially on plan with our target coming into 2007. And finally, we spent approximately $135 million in Q4 for the purchase of marketRx. For the full year, operating activities generated over $344 million of cash. For 2008, we expect to spend approximately $250 million of capital expenditures. The substantial majority of which is related to the construction and equipping of additional development facilities to support our growth. Our collection of trade receivables during the quarter rebounded beyond our expectations, based on our $436.5 million balance on December 31st, we finished the quarter with a DSO, including unbilled receivables, of 67 days compared to 65 days in the same period of 2006, and down from 71 days in the third quarter of 2007.

During Q4, excluding unbilled receivables, our DSO was approximately 59 days. The quality of our receivables portfolio remains very strong. Our unbilled receivables balance was approximately $53.5 million at the end of the fourth quarter. Up about $14 million or 36% from December 31, 2006 and down about $2.9 million from Q3 of 2007. Approximately 57% of our December 31st unbilled balance was billed in January. During the fourth quarter, overall 25.6% of our revenue came from fixed bid contracts, up from 23.9 in the third quarter of 2007, and up from 24.7 in the fourth quarter of '06. When we look at the mix by solution type during the quarter, 33% of our development revenue and 19% of our maintenance revenue came from fixed price contracts.

Turning to headcount, at the end of the fourth quarter our worldwide headcount, including both technical professionals and support staff totaled approximately 55,400. This represents a net increase of over 6,500 people during the fourth quarter and over 16,500 people for the full year. Approximately 75% of our Q4 additions were recent college graduates who will enter our training program and the remainder were lateral hires of experienced IT professionals. For the full year 2007, 63% of our hires were recent college graduates.

Turnover, including both voluntary and involuntary was 12.4% annualized during the fourth quarter. The fourth quarter attrition represents a significant improvement that was 450 basis points lower than in the fourth quarter of 2006 and 430 basis points lower than Q3 of 2007. On a full-year basis, total attrition dropped to 15% from 15.7% in 2006. As we discussed previously, we are increasing the company's utilization levels due to scale economies and historically heavy overinvestment in bench resources. This is a process that will continue throughout 2008 as we continue to see significant operational benefits from this program.

Due to the very large intake of college graduates during the fourth quarter, our offshore utilization, including these trainees, declined, which is exactly what we had planned, and -- to approximately 56%. Offshore utilization excluding the recent college graduates who entered our training program during the quarter was in the high 60s. We had roughly 8,700 unbilled people in our training at the end of the our quarter compared to just under 5,000 at the end of September 2007. On site utilization increased to 88% during the quarter, as we serve the higher than planned revenue.

I would now like to comment on growth expectations for the first quarter 2008 as well as the full year. The investments we are making continue to produce results. It is allowing us to differentiate ourselves in the marketplace both in terms of winning and growing new client as well as expanding service offerings, and strengthening our geographic presence. In addition, our clients and employee satisfaction levels remained at a level at which we are very proud. This is result of strong results in Q4 and provides with us a strong foundation for growth in 2008. For the first quarter of 2008, we are projecting revenue of at least $640 million. This represents sequential growth of at least 7%.

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, we have customer commitments for well over 90% of our first quarter revenue guidance. For the full year 2008, based on the strong demand environment for offshore services and our continued favorable experience with ramp-up rates, we are pleased to provide guidance of at least $2.95 billion. This represents growth of at least 38% and an increase of well over $800 million compared to 2007. As has been typical in prior years, we expect a majority of this growth in 2008 will come from the ramp-up of clients we have won over the past few years. Our revenue guidance is based on the economic trends and industry implications that we have seen over the past weeks and months.

As Francisco mentioned, we are seeing an environment of belt tightening around IT budgets with increasing focus on managing costs without sacrificing business performance. Our clients continue to invest in discretionary projects as well as ongoing maintenance work. And they are solving this inherent economic conflict by turning to Cognizant to help them broaden their use of the global delivery model. During 2008, we continued to monitor our spending assuming no material appreciation in the rupee we expect our operating margin to remain in the 19 to 20% range, obviously before the impact of equity-based compensation and the new fringe benefit tax expense that I discussed earlier. This 19 to 20% range is in line with our historic margin level goals.

With this expected level of revenue growth and our expected operating margins, we are currently comfortable with our ability to deliver in the first quarter GAAP EPS of $0.32 and non-GAAP EPS of $0.36 excluding estimated stock-based compensation and noncash stock-based Indian fringe benefit tax totaling approximately $0.04. This guidance includes the anticipation of a Q1 share count of approximately 303.7 million shares, a tax rate of 16.5%, and an operating margin within our target range of 19 to 20%, once again excluding stock-based compensation and fringe benefit tax. For the full year 2007, based on current business trends, we currently project GAAP EPS to be at least $1.50, and non-GAAP EPS to be at least $1.67, which excludes estimated stock-based compensation and noncash India fringe benefit taxes of totaling $0.17. This guidance includes the anticipation of full year share count of approximately 305.2 million shares.

Finally, please note that the accounting for the non cash India fringe benefit tax expense has a level of complication in forecasting GAAP operating expenses, since this GAAP expense is driven by employees decision to exercise his or her options, which is obviously difficult for us to either predict or control. We have put a place holder in our GAAP guidance but actual levels of option exercises are dependent on many factors including our stock price in a given quarter and employee desires. With that, we'd now like to open the call to questions.

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q-and-A roster. Your first question comes from the line of Joseph Vafi of Jefferies & Company.

Great results here this afternoon.

Thanks, Joe.

If we could just circle back to the guidance here real quick for '08 as we kind of look at the visibility for the year, versus other years, and obviously the guidance here for '08 is pretty important relative to the way people are looking at the stock right now, if could you comment on the year-long visibility, that's one thing, and then secondly, at your user event this year your client event, I know Francisco commented about a lot of customers have their budgets in place, but maybe any commentary at a macro level at least on how they're viewing Cognizant in '08 and and if they're going to be spending more with Cognizant. That would be great.

Sure, Joe. I will say a couple things. On the outlook for '08, the outlook that we provided today is based on a number of factors. Detailed conversations with our clients. I've been out and about and the management team has been out with clients for the last month and a half, having detailed conversations. We've done a thorough review of our pipeline. We've done our own assessment of the macroeconomic environment, and factored that into our thinking as we've provided you with our outlook for 2008. And all that, of course, is supported by the usual process we go through coming into any year which is a very granular level, bottoms-up forecast, from our feel on would we think we can do with each of our clients in the upcoming year. So we feel very confident that we can achieve our outlook for 2008 tax we provided with you -- to you today.

And let me just add one other thing there that's probably important. The baseline full year revenue guidance that we've provided today includes assumptions that some client-specific unexpected issues will arise due to the economy. So we're -- the guidance we've given assumes not everything is going to go perfect.

And then Joe, the other part of your question was around client budgets. As we said, we did a couple of things to get a little bit more clarity around this issue. The first is that about two weeks ago, when we did our global field kickoff meeting, our sales kickoff meeting, we pulled -- we polled the client partners who represent the top 50 accounts as Cognizant, and we asked them about the status of client budgets, have the budgets been finalized, are they locked down at this point, and over 80% of our -- of the clients essentially represented by these client partners budgets were locked down so that points to minimum ambiguity in spending plans going into 2008. That's very consistent with what we would have expected and would we've seen at this point in the year in prior years. And then, of course, we expect and have already started to see that offshoring has become more of a lever that clients are pulling to achieve their goals as they go into 2008 as budgets are flat to modestly up offshoring becomes a great way to do more with smaller or same set of dollars.

Okay, great. And then just on the BPO front real quick, how many points of revenue would -- if you can break it out in Q4 was BPO?

We don't break out revenue by vertical. BPO as a revenue contributor is still relatively small. On a headcount basis it's starting to, as we go into 2008, it's starting to ramp up. We're focused not on the lower end activities. We're focused on the pretty high end stuff. So you don't see 1,000-person deals at a time, but what we're very excited about is we're starting to win some real high quality sustainable BPO where it's differentiated work, and with high switching costs, and high value add. So the market for what we can't to go after is finally there and we're capturing our fair share of it it.

Just a housekeeping question. How many cents in '08 is the fringe benefit tax?

The combination of the normal 123R cost. And fringe benefit tax is $0.17. I will have to get back to you off-line. I don't have the breakdown here. I apologize.

Thanks a lot.

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

In your tax rate assumption for 2009 that you have offered up can you tell us what percentage of work is being done within SEZ's tax advantaged locations at the high end and low end of that assumption range?

Yes, we're not breaking that out, but clearly that -- you're hitting on key issues, how much of the work do we get into, SEZs, we're bringing very significant facilities on line this quarter. So, we certainly expect a material portion a very material portion of our growth in -- for the remaining three-quarters of this year and for '09 as well as a portion of our growth from late last year in Q1 of this year to be going to SEZs, our construction program both owned facilities as well as leased facilities, and SEZs are coming on line nicely at this point.

Do you have a sufficient SEZ based locations either under lease or ownership to cover your potential revenues during 2009? Is it already earmarked today?

With the exception of one location today, still one location we're working on.

Great. Finally, once you have a location up and built, how long, in your -- how long do you anticipate it taking to populate it and get the kind of full revenue run?

It depends on the growth in that area, because you're not -- you don't move people existing people over, so it really is for the growth of -- purely dependent on the growth in that city.

Do you consider your attrition rate unusually low, and is it sustainable? The last time we saw a number this strong I think it was unsustainable and you admitted so later on.

Our goal has always been to have an at tradition in the low teens. We're -- down 12% is probably a little better than normal. I'm not sure I would set the expectation on a full year basis we'd be down there but clearly we fixed some of the issues that we had so we're sort of back to, you always have some seasonality. Q2, Q3 are bigger quarters for attrition than Q1 and Q4 because of bonus payouts, but it feels like we're kind of back in the right range again.

Great. Thanks. Good job.

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

When you're thinking about your overall growth ambitions for this year, do you feel like the financial services vertical could keep up with average growth rate?

I think that the financial -- the BFSI segment of our business is -- because of the law of large numbers it might be a little lower than the overall company average growth rate, some of the newer verticals, and the less penetrated verticals will probably grow faster as will Europe as a geography.

And that's a trend we've seen for a number of years.

that's a trend we've seen over several quarters at this point, so that's not new for 2008. What we are seeing, though, as I mentioned during the call, is that the -- we really are starting to see a relook, if you will, by existing financial services customers at both new lines of services that can move offshore and also expanding their existing offshore programs to do more within those programs. The reality is that the financial services industry is probably facing one of the most difficult competitive times in many years, within that industry, so they're looking at ways to tighten their belts, and offshoring is a great lever for them to execute on.

Right. So maybe if I could try the question just one other angle, if you think about the work that was awarded over the last two months, January, February does the financial services vertical stand out as growthy?

I'm sorry, stand out as --

Growthy.

I'm not sure I would distinguish it from the rest of the business. It's sort of give or take in line with what we're seeing for the rest of the business. No differentiation of trend there. They're running into some unique problems.

So it feels pretty normal.

Yes.

Okay. Thanks so much.

Our next question comes from the line of Rod Bourgeois of Bernstein.

I know this may sound odd, but instead of talking about demand, I wanted to talk about margins for a second. Looks like your revenue guidance is great and it's normally conservative so on the margin side, just to clarify I'm assuming when you guided last the fringe benefit tax was not included in your guidance.

Yes, the fringe benefit tax is the new thing and the way you really should think about it is, let's break it into two pieces. We run the business with a non-GAAP margin target of 19 to 20%. That's how we're going to run the business. The 123R costs, that we can predict pretty well. The fringe benefit tax, the reality is I can't control -- I can mathematically predict it, but I can't control it because there's a bunch of people decide to exercise options I get hit with a cost. As investors think about it they really to have think about it without that fringe benefit tax, which is totally and completely non cost. It's just because of the way the law was written, one side hits equity, one side hits the P&L but our guidance includes an assumption for the fringe benefit tax, but the reality is I might be high or low, it's -- pick a number. But we're not going to run the business to try to either spend the extra money in fringe benefit tax comes in low or save money if it comes in high because in our view it's completely and totally non economic, and it's just kind of an archaic accounting entry.

Right. I guess what I'm trying to clarify, you beat consensus by $0.01 with your GAAP number.

So we really beat it by more, because the GAAP guidance we gave was without fringe benefit tax, the reported GAAP number included the fringe benefit tax.

So your upside for Q4 in '08 is even greater than it appears when you account for the fringe benefit.

Sorry, if that's the question you're asking, absolutely, yes. The upside for Q4 of '07 was greater because there's $5.9 million of fringe benefit tax in there, which has no tax benefit so it all goes to the bottom line.

Which means margins are coming in clearly above your plan and above what the Street was expecting here, and so can you talk about why margins are strong? I'm assuming utilization has something to do with it, but maybe a little bit of the revenue upside, but is there something going on with margins that gave you a tail wind in Q4 that may also carry into '08?

Let's separate the two. For Q4, it's very simple. Revenue came in stronger than we expected on the discretion development side, so given we had the people, that flowed through pretty well. Economic uncertainty, we decided to be a little careful in SG&A spending because we didn't know where that in range we were going to come in. So we ended up coming in at the high end so we held back a little bit on real discretionary SG&A stuff and that's the reason we came in at 20.3%. To be very clear, that is not our goal. That was just a fluke in the quarter. Our goal is to be 19 to 20%, and our guidance is based on the assumption it will be in that back in our normal range.

Right. But it looks like you have plenty of capacity to invest pretty aggressively even though people are worried about the slowdown because your margin run rate is at the high end of your range and unless there's something that's going to reverse next year, you've got a pretty good margin.

Rod, I think you hit a really important point there. Unless there's a material movement in the rupee, and I stress the word "material," we're not losing a whole lot of sleep our margin.

Pricing is remaining positive on both an average basis and also like for like deals?

I think that's the way to think about it. The average realized rate for '07 basically came in where we expect. We expect the average realized rate for '08 to go up slightly. But there's been no change in our pricing expectations for '08 from a few months ago until now due to all the economic uncertainty.

You're not seeing customers push back on price and that -- the pushing back on price building up as the year wears on?

Are we seeing customers push back on price? Of course. We've seen that for ten years. Really the important question is are we seeing any difference in behavior than we've seen in the past. The answer is no. Do you always have challenging pricing discussions? Of course. But that's nothing new.

One other question on the margin front. There's been some chatter that wage inflation could attenuate over the course of the next year, particularly there is a slowdown from a demand perspective. How do you weigh in on that topic?

Let me give you our very direct and clear thoughts on this. As you know, we make our wage decisions in the -- for the second quarter of each year. So we haven't made our decisions yet. However, based on our current view of the labor market in India, we expect wage inflation to moderate from 2007 levels. Or the 2007 increased levels, I should say. Now, the actual wage inflation will depend on the actions of our key competitors. If any of them seek a competitive advantage based on compensation, we will certainly not allow that to occur. However, we certainly do not plan to seek a competitive advantage based on compensation since we do not believe such advantage would be sustainable, either in the long term or in the short term.

And why do you think wage inflation is going down? Is it -- is most of the competitors are signaling that it's possible, so you guys will all follow suit?

You're hearing from other competitors, you're seeing in the market, very importantly this bifurcation between tier 1 and tier 2 occurring. I'm not sure I'd make the same claims or expectations if I wasn't a tier 1 player, but people want to work for the tier 1 players, which means there's probably less wage inflation. Still too early to know but this is our current expectations.

Thanks, guys.

Your next question comes from the line of Adam Frisch of UBS.

Thanks, guys, for rewarding the faithful here. Got a little lonely in the bunker during the quarter, but very, very nice results. Three things I want to talk about. One, in terms of the mix of your business, the slowdown in the more mature or challenged areas, I know you set's not really all that different from the rest of the business but I wanted to highlight, is it the slowdown there in those areas? Is it more or less or equal to the growth that you're seeing in new geographies, verticals, services, end clients that you sign? So if people are worried about the mature businesses, the new stuff coming on line faster.

I think -- I want to be clear. At this point we don't see demand in any specific area of our business slowing. If you look at growth in financial services in the fourth quarter, we grew 9% above company average in financial services, which is probably, from a macro economic standpoint, the most challenged sector of the economy right now. So we have not seen demand slow, even in the most challenged of our sectors. In fact, as I mentioned, what we are seeing is customers coming to us and looking at additional ways of offshoring within their IT portfolios, even in those sectors. So we have banks and -- coming to us saying we're working with you for awhile in application outsourcing, application development, let's look at business process outsourcing, let's look at IT Infrastructure Services, let's look at testing, so looking at the broader portfolio of services that we have to offer these clients. When I look at emerging areas, for example, our growth in Europe, growth in Europe is very, very strong. What's driving that is across industry sectors, Europe is relatively underpenetrated, particularly in the continent.

The offshoring has not hit most of the sectors of the continental European economy. That's starting to change. We're starting to see a lot of interest not just in financial services but across the range of industries that we serve. So I think those two -- you've got sort of different drivers, but a similar trend. And I want to emphasize that at this point, I wouldn't characterize any aspect of our business as being one of slowing demand.

Okay, great. And then, Gordon, I don't know if you said in this your comments, but the utilization target for '08 for offshore, including trainees, where do you expect that to be? We've kind of seen a flip now. Headcount always outpaced revenue growth. This past year headcount growth was lower with increase in utilization what. Are you expecting for '08 and what does that ultimately say about the future growth in maybe '09?

It's very important to separate what our headcount growth will be in '08 from what our revenue will be on in '09. The vast majority of the headcount we're adding in '08 will be to support '08 revenue growth, plus obviously we have a bench of 8600 people in training plus a bench of qualified people. Through the year we'll decide how many laterals to bring on, and that's why there's a range that we gave. We strongly expect to increase utilization compared to '07. There's some seasonality, obviously, and you saw in that Q4 because you have a lot of pressures come in so, with trainees, utilization went down, totally expected, but we'll bring utilization up for two reasons.

One, the financial benefits, but much more importantly, the business is running better. It's one of the key things that helped with attrition. We're hiring all these really smart kids from the best schools, and we run through this great training program and they want to go do some really good stuff. They don't want to be sitting on the bench. So taking that up in'07 was I think one of the big contributors to attrition going down. So we'll take up some more, the exact number we'll see as we go through the year. But be very careful in taking '08 headcount growth and projecting it to '09 revenue growth, because only small portion of those '08 hires are for '09 revenue.

Just to add to that, a different way of saying what Gordon -- the point that Gordon made, the market is going to dictate what our growth prospects in '09 are, not the headcount that we had in 2008. I want to make that clear.

Your next question comes from the line of Tien-tsin Huang of JPMorgan.

This will be the last question so everyone can get home to dinner. Go ahead.

The questions on cash, plans on use of cash, including appetite for share repurchases. Curious how much cash do you need to run the business?

Sure. We currently have about $95 million left in our current share repurchase authorization, and that's good through, I think, third, fourth, probably fourth quarter of 2008. We finished the year with $670 million of cash. We continue to look for small acquisitions. We'll probably use some cash for that. Having a healthy balance sheet is very important. We're doing mission-critical work for very large corporations. They want to know we are here for the long term. So we will clearly continue to maintain a healthy balance sheet the speed at which we might use the remaining authorization on the share repurchase, haven't made any specific decisions, but our goal is to continue to have a very healthy balance sheet.

Can you remind us what your revenue expectations are for marketRx again?

We don't guide to the future, but if you do the math we had them for half the quarter. They did $5 million. As we said, when we acquired them they were roughly a $40 million run rate business.

Got it. Last one I had, I think in the past on the K's you disclosed how much revenue you achieved from your new customers added in the year. Do you actually have has that metric handy?

I don't have that handy but I believe it will be similar to last year. I don't have it handy unfortunately.

Very good. We'll follow up. Thanks, congrats.

Well, thank you all again for joining our call today. In conclusion we are very pleased to with our strong financial performance for the fourth quarter and full year 2007 Moving forward we will continue to focus on managing our business model to generate long-term value for our shareholders while investing in the business to further differentiate Cognizant for our customers. We are confident that our focused strategy will ensure we continue to perform well during 2008 and grow faster than the industry overall. We look forward to speaking with you again next quarter. Good evening.

Thank you. That does conclude today's Cognizant Technology Solutions fourth quarter and full-year 2007 earnings conference call. You may now disconnect.