高知特 (CTSH) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Cognizant Technology Solutions first quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks will there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

I would now like the turn the call over to Hannah Sloane, from Financial Dynamics Please go go ahead.

Thank you operator, and good morning everyone. By now you should have received a copy of the company's first quarter 2008 earnings release. If you have not, please call our offices at 212-850-5600, and we will send you a copy. The speakers we have on today's call are Francisco D'Souza, President and CEO, and Gordon Coburn CFO and COO of Cognizant Technology Solutions.

Before we begin I would like to remind you that some of the comments made on today's call, and some of the responses to your questions, may contain forward-looking statements. These statements are subject to the risks and uncertainties, as described in the company's earnings release, and other filings with the SEC. I would now like the turn the call over to Francisco D'Souza. Please go ahead.

Thank you Hannah, and good morning, everyone. Thank you all for joining us today, for cognizant's first quarter 2008 earnings call. This morning I'll provide highlights of our first quarter results, and discuss the key drivers of our financial performance. I'll also discuss our outlook for the remainder of 2008, and the key focus points for the company in order to drive the business forward in the coming months and years. As always, I will be joined on today's call by our Chief Financial and Operating Officer, Gordon Coburn.

We are pleased to report our first quarter 2008 financial and operating results, during which particular geographies and verticals have demonstrated significant growth, despite pockets of weakness, and uncertain economic conditions. Our performance is a result of the diversification of our business across multiple industries and geographies. Starting with our financial and operating results in the first quarter, we exceeded our guidance for revenue, generating $643.1 million during the quarter, which represents an increase of 40% from the first quarter of 2007, when we recorded $460.3 million in revenue, and an increase of 7.2% sequentially, from $600 million in the 2007 fourth quarter.

During the quarter, our non-GAAP operating margin remained solidly within our target range. We continue to see demand for our services across a range of industries, geographic markets, and solution offerings. We experienced strong performance in the health care sector, which grew 45% year-over-year, and 10% sequentially. Manufacture, retail, and logistics, which grew 40% year-over-year and over 12% sequentially, and our other segment, which includes communications, information, media and entertainment, and technology business areas, which grew 11% sequentially and 41% year-over-year. And despite turmoil in the financial markets during the quarter, our financial services sector showed growth of 3% sequentially, and 37% year-over-year. I will provide further color on the market environment in financial services in a few moments.

Geographically, Europe continued the strong trend we have seen for several quarters, growing 87% year-over-year, and 12% sequentially, and comprised 19% of our revenues, compared to 14% of our revenues in the first quarter of 2007. It is worth noting that our significant growth in Europe, five full percentage points of total company revenues, over a one year period, is the result of our focused efforts to increase our presence in this geography. Our growth in Europe has come across service lines and countries, and is a testament to Cognizant's ability to hire and develop strong local teams across the world, and to seamlessly integrate these teams with colleagues in our global delivery centers. We believe that this ability to build strong multi-cultural teams around the globe is a core strength of the company.

On the client front, we had a gross addition of 56 new customers during the quarter. The number of accounts which are considered strategic, increased by six to 113, meaning these clients have the potential to generate between $5 million to $50 million or more, in annual revenue for Cognizant, over the long term. We recently completed our 2007 annual customer satisfaction survey. A formal and exhaustive survey conducted by a third party. This year we had over 1,300 of our clients provide feedback on their experiences with Cognizant. Customer satisfaction at Cognizant remains extremely high, with 89.3% of respondents, indicating that they were either satisfied or extremely satisfied. An increase of 9% from the prior year. Furthermore, when we question our clients more specifically about our individual core offerings, we saw levels of satisfaction increase year-over-year, with the number of our solution areas including IT infrastructure service, SAP services, our customer solutions practice, and our data warehousing and business intelligence practice. We were able to increase customer satisfaction in a year when we grew revenues by 50%, and expanded our services portfolio and geographic footprint. Fully two-thirds of these clients said that Cognizant treated either better, or much better than our competitors, and in particular, they gave us very high scores on relationship management, and project management, and quality. At Cognizant customer satisfaction stands as our true north, and has been the key element in our consistent growth.

During the quarter, we increased head count with the net addition of approximately 2,600 employees around the world, ending the quarter with approximately 58,000 employees. Our annualized employee attrition during the quarter remained flat compared to Q4 at 12.4%. I am also pleased to report that based on our 2007 annual revenues of over $2.1 billion, Cognizant was recently added, for the first time, to the Fortune 1,000 list, where we now rank number 859. I would like to take this opportunity to thank all the Cognizant associates around the globe, who have played an integral part in making this accomplishment possible.

Gordon will take you through our financial and operating results in greater detail in a few moments, but first I would like to provide some context on the current market environment, and our outlook for the remainder of 2008, and our key focus areas. During the later part of Q1, we saw a further weakening in the U.S. economy, particularly in the financial services industry, over the past six to eight weeks, we have seen project delays, and IT spending cutbacks with our banking and capital market customers. As a result of the environment, we are adopting a more conservative approach to Q2, and full year 2008. In the first quarter, growth in all of our segments outside financial services was strong. All growing approximately 10% or greater. Europe was also strong. Our current guidance for Q2, is based on a similar pattern as we saw in Q1, with our usual risk adjustments. We assume that sequential financial services growth will be in the single digits during Q2, we expect to see continued healthy growth in Europe, and across other industry segments. We believe that this is a reasonable, but cautious approach to take, given our current visibility to sold business, and our April results.

As we look to the full year 2008, we expect an increase in our sequential growth in the second half of the year, based on several factors. First our pipeline of new business with existing and new customers continues to be strong. The general trend toward spending more with offshore providers still remains in tact, as clients under pressure seek additional ways to do more with fewer dollars. As a result, our pipeline of large deals is extremely strong. We are currently tracking 50 large opportunities, at various stages in our pipeline. Each having a revenue potential of many million dollars over several years. Several of these deals are with our existing clients, while looking to move additional work to an offshore model more aggressively. This category of pipeline opportunities tends to have shorter sales cycles, since our existing clients are experienced in working with us. We have also recently won a number of large deals that are expected to begin to ramp up during June, and beyond. As I mentioned, the number of strategic customers increased by six during Q1, another data point demonstrating that robust demand continues.

Current economic conditions are driving demand for our services, focused on improving client efficiency, as companies feel the need to invest in cost rationalization in order to compensate for the pressures on their businesses. We saw solid growth in our business lines focused on efficiency during Q1, with maintenance services increasing 10% sequentially and 37% year-over-year. Similarly during the quarter, other practices such as BPO, testing, and ITIS, IT infrastructure services, continued to show robust growth. Overall we are seeing the cyclical slow down drive a greater desire amongst clients to do work, using an offshore model. We also expect to see continued growth in Europe. Our pipeline of new business there remains strong, as offshore services are relatively underpenetrated in Europe. In addition, our recently announced alliance with T-Systems provides us with additional access to the German market, a previously under leveraged source of opportunity for Cognizant.

Finally, it is worth noting that in parallel with the cyclical economic changes, many of the industries we serve are in periods of rapid secular change. This provides Cognizant with an opportunity to partner with our clients, to provide services to help navigate these industry level structural changes. Within clients facing these types of pressures, we are engaged at a much higher consultative level, with a very specialized set of services. Often these engagements identify significant technology and out sourcing opportunities, that we are then well positioned to undertake. The investments that we have been making in building deep industry expertise through Cognizant business consulting, or CBC, enable us to provide services that help our clients to identify and make sense of these industry level structural changes, and to operationalize new approaches to drive results.

As we move forward in 2008, we see client demand being driven by the-- by two trends that I have already mentioned, a cyclical trend related to the current macro economic environment, and a secular trend resulting from different structural pressures within the industries we serve. It is at the confluence of these two trends, one cyclical and the other secular, that we feel Cognizant is exceptionally well positioned. Life sciences companies for example, are facing pressures from declining pipelines of new drugs, and increased regulatory scrutiny. During the quarter, we began work on our previously announced agreement with AstraZeneca to help drive greater R&D efficiency in clinical data management, through improved process standardization, consistency of delivery, economies of scale, and cost savings. This agreement is one of the largest such contracts within the pharmaceutical industry, and will deliver economies of scale and cost savings, that is will help AstraZeneca R&D deliver its commitments to improving effectiveness.

Similarly, banking and financial services, health care payers, communications companies, media and entertainment, all face periods of rapid structural change in their respective industries. Let me give you an example of work we are doing in the communications area. We recently worked with a North American, tier one ILEC, or incumbent local exchange carrier, that was seeking to rapidly add new features and functionality, in order to differentiate their services, to compete effectively with other ILECs and cable providers. Continuing problems with application performance, and stability issues, had impacted their ability to meet their revenue growth targets. Over a six month period, we worked closely with the client executives, business operations leaders, and IT leaders, to identify more than 2,300 improvement opportunities, spanning business processes, technology, and change management, in order to stabilize the operations and delivery capabilities. These improvement opportunities were further assessed and prioritized in terms of value, effort, risks, and dependencies. As a result of these, the client was most recently able to maintain greater than 99.9% of time, across the major core applications, and improve key metrics such as auto order flow through by 45%. These results have directly supported the clients revenue achievement goals, and improved market position through higher levels of customer satisfaction.

I provided these two examples to give you some color around the types of works that Cognizant is now routinely asked to perform. These case studies build into the bigger picture, to which I would now like the speak. As we look to the year ahead, we remain committed to ensuring that our services, industry vertical segments, and geographies, continue to service our clients in the best and most efficient means possible, ensuring that we continue our industry leading growth. To us, this means building the capabilities at Cognizant, which enable clients to navigate through difficult economic times, and also to cope with secular industry level challenges.

With these objectives in mind, I would like to turn to the goals we have set for the remainer of the year and beyond, which the entire management team is focusing upon achieving, and which we believe will drive our continued expansion. First, in the short term, we have focused on the areas where we are seeing core market strength such as health care and life sciences, retail and manufacturing, and media and entertainment. In addition we will continue to focus on growth in Europe. Second, we continue to see the benefits of deepening our knowledge of the industries that we serve. Having deep industry expertise, positions us well to help clients navigate structural changes in their industries. We expect to be active in strengthening our vertical expertise during the course of the year. Third, in addition to focusing on growth opportunities, we will continue to examine our own internal cost efficiencies, and maintain a focus on higher utilization to optimize efficiencies in our own business, to maximize our ability to invest in such areas as developing our leadership talent, and building out our global delivery networks, to support the long term growth of the company.

And finally, we believe the key to long term growth in the current environment, is to maintain our focus and culture, and being the partner of choice to companies seeking help in navigating economic uncertainty and secular disruptions in their industries. We are focused on expanding our range of service offerings, and we will aggressively focus on securing higher value relationships, that encompass a range of our offerings, across a number of geographies and contribute financially to Cognizant, through direct engagements and downstream pull through. We look forward to discussing our progress in each of these areas throughout the year.

Now I will turn the call over to Gordon who will walk you through financial and operating results in greater detail. Gordon.

Thank you, Francisco, and good morning to everyone. I would like to provide some additional information on the first quarter, and then discuss our financial expectations for the second quarter, as well as the full year. Revenue for the first quarter grew 7.2% sequentially, and 39.7% year-over-year. During the first quarter, our financial services segment, which includes our practices in insurance, banking, and transaction processing, grew by over $78 million year-over-year, and represented 45.5% of revenue for the quarter. Health care grew over $49 million and represented almost 25% of revenues. Retail manufacturing and logistics grew by almost $28 million, representing just over 15% of revenues for the quarter. The remaining 15% of our revenues came primarily from other service oriented industries, of communications, media, and new technology, which grew by over $27 million.

For the quarter, application management represented 52% of revenues, and application development was 48%. Both services continued to grow significantly in Q1. Application management grew 37% year-over-year, and 10% sequentially. Development grew 43% year-over-year, and 5% sequentially. The sequential strength in application management, we believe, was driven by clients seeking to optimize efficiency, and nondiscretionary spending, due to budget concerns. During the quarter, almost 80% of revenue came from clients in North America, as Francisco, mentioned approximately 19% were from Europe. Just over 1% of revenue came from the Asian market. Europe grew 12% sequentially, and 87% year-over-year, as a result of our continued investment in that region.

We had a gross addition of 56 new clients during the first quarter. We closed the quarter with 505 active clients. During the quarter, the number of accounts which we consider to be strategic, and have the potential to ramp up to at least $5 million to more than $50 million in annual revenue, increased by six, bringing our total number of strategic clients to 113. Turning to cost, on a GAAP basis, cost of revenues, exclusive of depreciation and amortization, increased by 44% for quarter, as compared to the first quarter of '07. First quarter cost of revenues included approximately $5.5 million of stock-based compensation expense, as well as $400,000 of non-cash expense, related to the accounting for Indian fringe benefit tax expense, recovered from employees related to the exercise of stock options. Due to the weak stock price during the first quarter, the number of options exercised was unusually low, resulting in a lower than anticipated fringe benefit tax expense for the quarter.

As I discussed during our call in February, the Indian fringe benefit tax expense, represents the accounting impact of the conversion of a portion of taxation in India, from employee stock option gains, from an employee income tax to a company-paid fringe benefit tax, which is then recovered from the employee. We are treating these 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. There's no cash impact to the company from this taxation.

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, offset slightly by the impact of utilization and some relative factors. We increased our technical staff by more than 2,300 people during the quarter, and ended the quarter with approximately 54,400 technical staff. First quarter SG&A, depreciation and amortization expenses were $165.1 million on a GAAP basis, up from $121.8 million in the first quarter of 2007. GAAP SG&A expense in Q1 of '08 included approximately $7.5 million of stock-based compensation expense, and $500,000 of non-cash expense related to the Indian fringe benefit taxes, which I mentioned earlier.

GAAP operating income for the quarter increased approximately 34% to $111.7 million, from $83.6 million in the first quarter of 2007. On a non-GAAP basis, which excludes the impact of $13 million of stock-based compensation expense and $900,000 of fringe benefit tax expense, operating income for the first quarter was $125.6 million, up 38% from last year. Our GAAP operating margin was 17.4% for the quarter, and our non-GAAP operating margin which excludes stock-based compensation expense and stock-based non-cash Indian fringe benefit tax expense was 19.5% for the quarter, within our target range of 19% to 20%. The average rate for the Indian rupee was approximately 39.7 in the first quarter, versus 39.3 in the fourth quarter of 2007.

Interest income for the first quarter was $6.2 million compared to $6.7 million for the first quarter of 2007, and $8.5 million in the fourth quarter. Sequential interest income decreased primarily due to a lower average lowable cash balance in the first quarter, resulting primarily from the full quarter impact of our Q4 share repurchase, and Q4 acquisition of MarketRx, as well as a very significant decline in short-term interest rates in the United States. We had a $3.9 million foreign exchange gain during the quarter, primarily due to the impact on the intercompany balances, from the strengthening of the Swiss franc, and Euro, against the U.S. dollar.

Our GAAP tax rate for the first quarter was 16.4%. We expect the 2008 tax rate to be around 16.4%. As has been previously discussed, some of our tax holidays are currently scheduled to end in March 2009. In the last few weeks, the Government of India has proposed extending the current STPI holiday by one year, ending in March 2010 instead of March 2009. We are monitoring the situation, and expect formal approval of this extension, in the very near term. Our GAAP tax rate can vary based on the extent of the India fringe benefit tax expense which I discussed earlier, since such expenses are non-cash, and therefore not eligible for tax deduction.

Our diluted share count for the fourth quarter was 299.1 million, down from 302.2 million in Q4 of '07. This decline from our Q4 share count, was due to the full quarter impact of our repurchase of approximately 3.4 million shares during Q4, as well as a lower average stock price in Q1 as compared to Q4 of '07, which impacts the diluted share calculation.

Turning to the balance sheet, our balance sheet remained very healthy. We finished the quarter with just over $645 million of cash, short-term, and long-term investments. During the quarter approximately $170.4 million of auction rate securities were reclassified as long-term investments. During the quarter, operating activities generated approximately $22 million of cash, financing activities generated approximately $17 million of cash, and the proceeds of option exercises and related tax benefits, as as well as our employee stock purchase program. In addition we spent $53 million on capital expenditures in the quarter, and approximately $9 million toward the book value purchase of the T-Systems, India operations. For 2008, we continue to expect to spend approximately $250 million in capital expenditures, the substantial majority of which is related to the construction and equipping of additional development facilities, to support our long-term growth.

Based on our $452.7 million receivables balance on December 31-- on March 31, we finished the quarter with a DSO including unbilled receivables, of 73.5 days, compared to 68 days for the same quarter of 2007, and up from 67 days, in the fourth quarter of 2007. During Q1, excluding unbilled receivables, our DSO was approximately 64.1 days, the quality of our receivables portfolio remains strong. Our unbilled receivables balance was approximately $66.7 million at the end of the first quarter, an increase of $20 million from March 31, 2007 and up approximately $13 million, from Q4 of '07. Approximately 54% of the March 31 unbilled balance, has already been billed.

During the first quarter overall, 26.8% of our revenue came from fixed-price contracts, up from 25.6% in the fourth quarter of 2007, and up from 25.3% in the first quarter of 2007. When we look at the mix of solution-type during the first quarter, 32% of our development revenue and 22% of our maintenance revenue, came from fixed-price contracts during the quarter. We were pleased with this upward trend and the percentage of revenue, coming from fixed-price contracts, this is a long-term strategy that seems to be starting to pay off.

Turning to head count, at the end of the first quarter our worldwide head count, including both technical professionals, and support staff totaled 58,000 people. Turnover, as Francisco mentioned, including both voluntary and involuntary, was approximately 12.4% annualized in the first quarter. First quarter attrition represented an 265 basis point improvement, versus the first quarter of 2007, and was essentially flat with the fourth quarter of 2007. Due to the very large intake of college graduates, during the latter part of the fourth quarter of last year, our average offshore utilization, including these trainees, declined as we had planned, during the first quarter to approximately 53%, from 56% in the fourth quarter. Offshore utilization, excluding recent college graduates who were in our training program during the quarter, was approximately 70%. On site utilization remained at 88% during the quarter.

Throughout the remainder of 2008, we will be increasing our utilization rates to take advantage of scale economies, and to leverage our historically heavy over investment in bench resources, and the large number of trainees we had on board coming into the year. We strongly believe this is the right thing to do for the business, providing several benefits including; more challenges for employees through faster deployment, and more frequent assignment rotations, which in turn, positively impacts morale and attrition, freeing up additional dollars to invest in client facing activities, and long term growth initiatives, and creating desired flexibility in our business model, given the current environment.

As you probably noticed we are no longer providing year-end head count objectives, as we continue to increase utilization levels, it is our desire to have flexibility in our staffing decisions, in order to determine the optimal level of utilization. Furthermore, as we continue to diversify our services mix, there is a corresponding change in the talent mix that we require in the business. We are not concerned about our ability to staff up for upcoming growth in the business, since we are currently-- have a very strong pipeline of trainees due to the significant trainee on-boarding in Q4, and the economic softness in our financial services business in the front part of this year. At the end of Q1 we had close to 9,000 unbilled people in our training program. We believe that our pipeline of trainees, combined with unbilled resources, is an important indicator of our capacity to meet demand. Going forward we plan to continue to provide you with visibility into our pipeline of trainees, and unbilled resources to provide you with visibility on our ramp up capacity.

Finally, I would like to remind you that we have the ability to adjust our head count needs in real time, as the year progresses, through adjustments to the rate of lateral hiring, off campus hiring, and timing of on-boarding the class of 2008. For example in 2006, when demand for our services turned out to be significantly higher than we anticipated at the start of the year, we were able to quickly respond, through a combination of the levers I just mentioned.

I would now like the comment on our growth expectations for the second quarter of 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 clients, expanding our service offerings, and strengthening our geographic presence. In addition, our client and employee satisfaction levels remain at a level of which we are proud. This is a result in strong Q1 results, and despite the economic uncertainty, continues to provide us with a strong foundation for growth in 2008. That said, we have adjusted our full-year guidance to reflect the increased economic uncertainty over the past two months, particularly in the financial services industry. Our pipeline remains robust, and we continue to win significant projects. However, this is muted by a tighter IT spending environment, than we saw just three months ago. We continue to focus on working with our clients to leverage the advantages of our business model, to help them in these challenging economic times.

For the second quarter of 2008, we are projecting revenue of at least $680 million, this represents sequential growth of at least 5.7%. We continue to have significant revenue visibility ,due to our high level of recurring revenue, and long-term nature of our customer relationships. Today we have customer commitments for over 90% of our second quarter revenue guidance. For the full year, we continue to expect industry-leading revenue growth, based on current conditions and client indications, we expect revenue of approximately $2.95 billion. This represents growth of approximately 38%, compared to 2007. As has been typical in past years, we expect the majority of our growth in 2008, will come from the ramp up of clients won, over the past several years. During 2008, we intend to continue to closely monitor our spending, and assuming no material movements in the rupee, which actually has moved in our favor in the last few days, we are expecting operating margin to remain in the range of 19% to 20%, before the impact of equity-based compensation, and non-cash fringe benefit tax expense on the exercises of stock options in India. This margin expectation 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 Q2 GAAP EPS of $0.34 to $0.35. And non-GAAP EPS of $0.38 to $0.39, excluding estimated stock-based compensation, and non-cash stock-based Indian fringe benefit tax expense of $0.04. This guidance includes the anticipation of a Q2 share count, of approximately 301 million shares, a tax rate of 16.4%, and an operating margin within our target range of 19% to 20%, on a non-GAAP basis. For the full year 2008, based on current business trends, we currently project GAAP EPS to be approximately $1.50, and full year non-GAAP EPS to be approximately $1.67 excluding stock-based compensation and Indian fringe benefit taxes expense of $0.17. This guidance includes the anticipation of a full-year share count of approximately 301.3 million shares. Finally, please remember that the accounting for the non-cash stock-based Indian fringe benefit tax expense, adds a level of complication in forecasting GAAP operating expenses, since this GAAP expense is driven by an employees decision to exercise his or her options, which is obviously difficult to predict or control. We put a placeholder (inaudible) in our full year GAAP guidance, of $10 million for the full year, but the actual level of option exercises are dependent on many factors, including our stock price in a given quarter. With that Francisco and I would now like to open the call for questions. Operator?

(OPERATOR INSTRUCTIONS). We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Rod Bourgeois, with Bernstein.

Rod Bourgeois here. gordon, I wanted to inquire about the full year guidance of approximately 38%. This is somewhat new language, in terms of the way you have given guidance in terms of the past. I was wondering if you can give us more specificity on what approximately 38% means. Is there anyway you can give us kind of the low end of the realistic range for 2008, versus the upper end of the realistic range that you are looking at?

You know, obviously, we changed the words, as we mentioned in our script, from at least 38%, to approximately. The reason we did that is, the economy has clearly worsened, particularly in the last six to eight weeks. Where we, in our, at least guidance we had built in cushion for the weakening economy, we view, we feel that we have used up a good amount of that cushion. There's no specific range that the 38% means. I don't, I think what it indicated is, we don't expect it to be dramatically higher or lower than that, based on what we see today.

Okay. Gordon, is there any more color you can give on, what caused the uncertainty over the last couple of months, that you are wrestling with in financial services, can you give us some examples of the nature of disruption that might have occurred on some of your projects? And then as you look at that going forward, what assumptions are you making about the-- that type of project disruption going forward? Are you assuming that the uncertainty that was created in last couple of months, do you assume that gets rectified as the year progresses, or are you continuing to assume that, that type of activity might continue?

Let me hit the first part of the question, then Francisco will pick it up. Obviously in early March, the world for financial services changed a bit with, the announcement from Bear Stearns, and both the reality and perception that, that triggered throughout the financial services industry, and that clearly had an effect on people's decisions, and their outlook on the health of their businesses for the year. So there was a very real event that happened, really right around early March. That's when we saw a change in attitude, but let me have Francisco comment both on, more specifics, about what we are seeing, and more importantly, what our sense is, on how people can be acting in the medium term.

Great. You know, as Gordon said, things did change significantly during March, and we saw clients as a result of that, step back and say we want to reassess our spending plans going forward. So we certainly saw some project delays during March in particular, and some cutbacks as a result of that.

Now, looking forward, I will tell you what we are seeing and then I will also tell you what we have assumed as we looked at Q2 guidance. What we are seeing is that clients in financial services are beginning to digest the news, they are sort of refactoring their plans, and I would say, beginning to start to spend again, having digested the economic news of March. Now, in our guidance for Q2, we have been somewhat conservative on that front, and what we have assumed is that financial services, our growth in financial services is in the single digits, sequentially in Q2. So I think that's a proven and conservative approach at this point, given what we are seeing. It is possible that our clients will have factored in the economic news, and will start to spend again, and ramp up in Q2, but at this point we are not comfortable assuming that in our guidance.

That's very helpful. On a more positive note, can you give us an update on how the early stages of the T-Systems relationship is going, and when might we see some benefit from that relationship? Is that a 2009 event, where that helps your growth in Europe? Or are you starting too see, new revenues come into the pipeline pretty soon in Germany? Thanks a lot.

Sure. We have been in the T-Systems thing now for about two months or so, on the ground transition, rebatching people. That has been going very well, and that process is essentially done. The other important part of the relationship obviously, is jointly going to market in Germany. We are starting to do that. There's lead time for when that stuff hits. You are right, in assuming for joint opportunities for new clients, there's some lead time. We also-- leveraging T-Systems in certain situations where we need hosting capabilities, and we have already won our first joint deal on that, and have some others in the pipeline. But you know we we are in the process of building that joint sales pipeline. So far it is looking good, but I think your assessment is right, for the new stuff it takes a little while to kick in.

Thank you, guys.

Your next question comes from the line of Moshe Katri, Cowen and Company.

Hello, thanks, good morning. Can you hear me?

Yes. Go ahead.

Are you assuming any contributions from T-Systems in your '08 guidance, gordon?

Absolutely. That's part of winning that relationship, we took over responsibility for their offshore operations. So their--

Can you remind us the contribution by a couple of hundred basis points, is that kind of a good number for the year?

We took over about 1,000 people that includes some support people, and so forth. So it is-- I don't have the exact number in front of me, but it is certainly one of many new customers, that will help drive growth during this year.

Understood. Then you didn't talk about revenue concentrations, usually talk you about, I don't know if you mentioned top one, but you do talk about top five, and top ten. When you talk about the deferrals that you've seen during the quarter, was it concentrated in the top five? Especially, obviously, our focus is on your largest client, that's more on the banking side.

Let me first give you the statistics, and then answer the question. In the first quarter, the top five were approximately 20.5%, and the top ten were approximately 31% of revenue, if you do the math, you will see that in terms of sequential dollars, the top five was down in Q1. The same exact trend that we saw in Q1 of last year, the top five in dollar terms was down, and then it picked up, so you always have some gyrations. So do the top five contribute to that, certainly, was it just the top five? No.

Can you talk, can you comment on your largest client, is there-- if at this point, if you have seen a slow down there, and what you are expecting to see from this client throughout the year?

We don't comment on specific clients but you know, among our larger clients, we still believe there's meaningful growth opportunities, but gyrations absolutely, just like we had gyrations last year, and the year before that.

Okay. Finally, what's your expectation should we have for application development growth during the second half of '08? I am hesitant to, to set expectations for that. As we are talking to clients, they are still talking about discretionary development stuff, but when I think about where exactly the year settles down, the ultimate answer will be more dependent on that. So clearly we expect growth, how much growth, I would be hesitant to give a specific number.

Just a very quick macro commentary on that. In my comments, there really are two things are going on in the, in our market place right now. You have got the cyclical trend, which is driven by obviously the slow down we are seeing, and then you have got a secular trend in each of our industries. Each of those trends actually drive a different kind of demand for us. So, the cyclical trend tends to drive demand for services that are focused on helping customers reduce cost. So the cyclical trend drives application outsourcing, drives things like certain types of BPO IP infrastructure services, our testing services, and so on and so forth.

On the secular side as customers look to cope with fundamental structural changes in the industry, that tends to drive more of the application development, and new system implementation type of work, because the structural changes in the industry are generally requiring clients to do things in new and different ways. That tends to drive a demand for new systems in some form. It really depends, as you go through 2008, which of these trends going be a stronger trend. Both of them are going to play into the mix, which is why it is difficult to predict.

Give than I want to officially call the 9:30 for the market opening for everyone, let go on to the next question. Operator.

Your next question comes from the line of Joseph Foresi, with Janney Montgomery.

Hi, guys. In the essence of keeping it quick, I will just ask two quick questions.

Go ahead.

First in talking to the clients, what was the reasoning for the quick pull back, if you could kind of give us an idea of that? And conversely, the pick up in strategic clients, maybe you could talk about they're reasoning to potential out source more?

You know, for the pull back, Joe, I think the increased level of uncertainty, clients-- there's uncertainty out there. We are not sure what this means, and we are going to reassess our current spending to see if it aligns with the new view of the world. That's actually very, I don't know, I think I would say it is expected behavior, given what we saw in March in the broader economy.

In terms of strategic customers, clearly what we are seeing is the comfort level with sourcing at broader range of services, using a global delivery model, is expanding very quickly. That's why as Francisco mentioned, the pipeline of large deals, is the strongest it has ever been, and we are winning larger deals. That's all tied to, people are now saying, lets look at, sending a broad range of stuff offshore. We understand offshore model works, lets make the decision, and get going. So that is part of why, when we look at the back half of the year, we're saying, based on what we are winning, it actually looks pretty good.

So there's a-- guidance of approximately, does that, are you factoring in an improvement from the economy, or are you expecting it to be stable or down?

Our guidance assumes the economy is stable, stable with current conditions.

Okay. One last quick one, two part here. Obviously you are de-linking hiring from revenue growth, by not giving a guidance here. We have heard from sort of other vendors that, the ability to pick up employees, just in time, has improved. Is that something you are seeing, and also if you could give us, what your annual wage increases for this year would be? That's be great, thanks.

Sure. In terms of ability to resource people, yes, it has improved. There's no question about that. Also, we are sitting with a very healthy resource pool right now, a combination of both lateral people, who are ready to go onto projects, as well as we hired a lot of trainees late last year. So we are very comfortable with both our ability to meet demand with people we have, and then, and plan to hire, and if it turns out we need more, we can easily get them in the market. That's not a concern.

What we don't want to do is set a number that, and then strive to hit that, even if it is not operation, the right thing for the business. In term of wage inflation, clearly it is coming in below last year offshore. Our competitors, most have announced results, and have indicated sort of 10%, 11%, offshore wage inflation, the devil is in the details on that. We are just watching to make sure what exactly happens on the ground. My expectation is when it all settles down, it will be at that level, or maybe a little bit below that when you calculate the real number.

Okay. Thank you.

Your next question comes from the line of Bryan Keane, with Credit Suisse.

Hi, Brian. Operator, go to the next one.

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

I think everyone went home. Adam, are you there?

Can you hear me?

Yes, go ahead.

Okay. Thanks. The June-quarter guidance implied some stronger results, or at least some stable results in the second quarter, to get to the full year. Again, is that, my call got chopped up a little bit in between, but I think Francisco was going through that. Is that a measure of what you have now in the pipeline, and what the project that are already ramping are telling you, or does that anticipate deal flows moving through the cycle as anticipated? Does that take account into any potential delays?

You know, Adam specifically, I missed the first part of your question because you cut out a little bit there, but at is relates to Q2, we have taken a somewhat cautious approach with financial services, assuming that financial services will grow in the single digits sequentially in Q2, and then, we still expect healthy growth in Europe, and some of the other industry segments. Our Q2 view is based on our current visibility into sold business, and also April revenue results, which is we have in at this point. As we look the full year, that is based on a combination of deals we have in the pipeline, as I mentioned, we are tracking 50 large opportunities. We have won a number of deals, that will start to ramp up in June. And it is also based on existing business with clients, that we see in the third and fourth quarters.

Okay. On the 38% guidance, obviously still close to 50% better, than your largest competitors, yet the multiples are the same, we think that provides some opportunities for the stock to achieve some upside, but what could happen to threaten the 38% on the year, would it have to be something catastrophic, or would it just be further deterioration?

If there's a significant further deterioration in the economy, clearly that's not factored in, there has been a lot of deterioration already, so we are assuming the economy and industries we play in are stable from here on out.

Okay. And then last question, and I will get off. The maturity of your strategic client base, that has always been to me, the secret sauce here, for the continued growth. Where are you in that maturity cycle for your key clients?

This is part of what I think is a core part of the story. Because of the range of services people want to do offshore keeps expanding, now infrastructure management, business process out sourcing, the higher end consulting, clients that in theory should've have matured by now, still aren't maturing, because all of a sudden we can tap additional budget pools. When I look at our 113 strategic clients, overall, we are 20%, 30% penetrated. That number just hasn't changed a lot, because the denominator keeps getting bigger, as the numerator increases.

Thanks, guys.

Your next question comes from the line of George Price, with Stifel Nicolaus.

Hello. Thanks very much. I guess, just you mentioned financial services in the single digits, quarter-over-quarter for Q2. Are we talking low single digits again, and typically given that 2Q I think, tends to be your strongest seasonally quarter in terms of quarter-over-quarter growth, and guidance is basically in the mid single digits, is there anything else pressuring revenue outside of financial services going into the second quarter?

The primary thing is financial services. Have we added a little bit of conservatism on other areas, yes. We would be crazy not to, but the big driver of why Q2 has not been, we are not forecasting to be at the same strength as it has historically been, the primary driver is financial services.

You have mentioned that you have the April numbers, and you have looked at them. What are they telling you, can you give us a little detail, and maybe how things progressed, sequentially in March and April?

Yes, we don't really break out sequentially, but what it tells us is, that the basic guidance that we laid out, that the business continues to be healthy, even at the base of our guidance, of at least 680, we are still guided to sequential growth well above the rest of the industry is guiding to. And you know, we need to watch financial services. We built that into our guidance.

Okay. Maybe let me ask one more on pricing. Given what you are seeing-- you have talked previously about expectations of around 2%. You have tended to be you know, less aggressive at least in commentary, than many of your peers. Where wha do you see now for the year, are you seeing clients backing off of price increases, are you seeing any ask for concessions? What are you seeing competitors doing?

Do people always ask for concessions and lower prices, yes, it has happened for the last ten years, but have we seen anything that changes my view on where pricing will end up for the year? No, there's no change in my pricing expectations.

Thanks very much.

We have time for one more call operator.

Thank you. Your next call is from the line of Bryan Keane, with Credit Suisse.

Yes, I'm not sure what happened there. I guess is the weakness just in financial services, or are there other verticals that are weak as well?

When you look-- I think the primary thing is financial services, that's a big piece of the pie for us. When you look at where things really changed during the quarter, obviously the financial services industry had a pretty big shock as we went into March. So when we look at the overall business, the-- do you have to keep an eye on everything because of the economy, yes, but the one we are keeping a close eye on is financial service.

The T-Systems deal I thought it was about 35 million on annual basis? Is that-- am I close Gordon?

You broke up. You thought it was what?

About 35 million in annual revenues.

We haven't broken out the exact number for confidentiality reasons, but we picked up about 1,000 people offshore. That includes a bunch of support people and some bench folks. So it is one where we got revenue from winning that deal, and someone asked a question earlier, as we look out the the potential to jointly sale, particularly in the European and German market, we think medium term and long term, the part that's most exciting about the deal is the upside opportunity from winning new customers.

Is there any other acquisition in the revenue guidance?

No.

Okay. Then I guess just finally, guiding double digit sequential third and fourth quarter revenue growth. I am wondering how realistic that is, considering you are talking about project delays and IT cut backs, and I know throughout the quarter people are going be pushing you guys on why not take the guidance down.

The you, I think we-- you know we looked at that as you can imagine, long and hard, and we looked at it from multiple different perspectives, and we went out in March, and then again in April, did a bottoms up reforecast of the business from the field. When we looked at all of the data, and layered on top of that, our pipeline of large deals that I mentioned, the business that we've won and expect to start ramping in June, we felt that the guidance we provided of approximately 38% felt reasonable.

Okay. Then lastly, Gordon 16.5% for '09 tax rate, is that probably where we are going to come out?

Give or take, I don't expect any big movements from this year's rate. Will it be up a little, or down a little, I don't know, but for modeling, for right now, that's a good assumption.

Great. Thank you guys.

Okay. Thanks everyone again for joining us. In conclusion, we are pleased with our financial and operating performance in the first quarter across the company. We remain excited about the opportunity ahead for the company as we execute on our growth strategy, both in the short and long term, we remain absolutely committed to ensuring our leading edge services, industry vertical segments, and geographies, continue to to service our clients in the best and most effective way possible, ensuring we continue our industry-leading growth. We look forward to talking to you again next quarter.

Thank you. This concludes today's Cognizant Technology Solution's first quarter 2008 earnings conference call. You may now disconnect.