高知特 (CTSH) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome today to the Cognizant Technology Solutions third quarter 2008 earnings call. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to David Nelson, Vice President of Investor Relations at Cognizant. Please go ahead.

Thank you and good morning, everyone. By now you should have received a copy of the Company's third quarter 2008 earnings release. If you have not, the release is available on our website, Cognizant.com or by calling our offices at 212-850-5600. The speakers on today's call are Francisco D'Souza, President and Chief Executive Officer and Gordon Coburn, Chief Financial and Operating Officer of Cognizant Technology Solutions.

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

Thank you, Dave, and good morning, everyone. Thank you all for joining Gordon and me today for Cognizant's third quarter 2008 earnings call.

We're pleased to report solid results for the third quarter 2008 which exceeded guidance and demonstrated continued industry-leading growth despite an economic environment which deteriorated substantially over the quarter. Our performance this quarter and year-to-date demonstrates that despite the limited short-term visibility and turbulence caused by the economy, the fundamentals of our industry remain strong and Cognizant is well positioned to capture that opportunity.

I'll cover four topics in my comments today. First, I'll provide some highlights on our third quarter results. Second, I'd like to discuss the state of the economy and the implications that this has for our sector. Third, what I'd like to do is talk about Cognizant's performance, our opportunities for growth, and the investments that we are continuing to make to maintain that growth and, finally, I'll provide our thoughts on the outlook for the rest of the year.

Starting with our financial and operating results for the quarter, we generated $734.7 million in revenue, versus our previous guidance of at least $723 million. This is an increase of 31% over the third quarter of 2007 and 7% versus the second quarter of 2008.

During the quarter, our non-GAAP operating margin was 20.8%, which is above the Company's targeted 19% to 20% range. Non-GAAP operating margin excludes stock-based compensation expense and stock-based India fringe benefit tax expenses.

In our financial services sector, we logged stronger sequential growth than the Company average with a quarter-over-quarter increase of 7.9%. This is the second quarter in a row where our financial services business unit has outperformed the Company average on a sequential basis and reflects the fact that the current economic environment actually carries opportunities for Cognizant. I'll touch on that point in particular in greater detail later in the call.

Industry sectors beyond financial services also showed healthy growth. Health care improved over last quarter and recorded 6% sequential growth and 34% growth year-over-year. Retail manufacturing and logistics grew 8% sequentially and 33% year-over-year. The other segment which includes communications, information, media and entertainment, and high technology grew 6% sequentially and 31% year-over-year.

In terms of geography, North America grew 26% year-over-year and 8% sequentially representing 79% of total revenue. Reported revenue growth in Europe was lower this quarter partly due to currency translation and grew 54% year-over-year and 4% sequentially and accounted for approximately 20% of total revenue.

Overall, we had a strong quarter which virtually all of our operating metrics were strong. What I'd like to do now is put our strong performance into context by giving you our thoughts on the current macro economic environment and our preparedness to perform well in these uncertain times.

As we had anticipated and discussed on our last call, the world economy has worsened considerably since we last spoke to you. If we're not already in a recession, it certainly looks as if we will soon be in both the United States and Europe.

There are three aspects of the environment which are specifically relevant to our business. First, government actions and activity in the BFS activity around the globe are fundamentally reshaping that industry, both in terms of industry structure and also in terms of the capabilities that financial services institutions need in order to run their businesses. This has placed financial services firms under tremendous pressure to drive efficiencies, deal with merger integration, and deploy new capabilities in areas such as risk management.

Second, the impact of the credit crisis is clearly spreading to industry sectors beyond banking and financial services. Main street is now feeling the impact of dramatically slowing consumer spending and lower housing prices.

And finally, what started at a US phenomenon has very quickly spread to other parts of the world across all industry sectors.

So when you put these trends together, what we are seeing is that our clients are going through a process of rapidly rethinking business priorities and as a consequence, reprioritizing their technology and related spending.

As a general statement, to-date we have not seen clients significantly reduce overall IT services spending. What we are seeing, though, is a reallocation of spend to different areas in line with revised priorities of the client's business. As clients go through this process of reassessment and reprioritization, we tend to experience some lack of short-term visibility which can lead to lumpiness in demand for our services. Despite this short-term lack of visibility, the fundamental drivers of demand remain strong.

In response to the economic cycle, companies are increasingly resorting to offshoring to cut costs by adopting services such as application maintenance, IT infrastructure services, and BPO. At the same time, many of the industries that we serve are in periods of rapid secular change which require extensive technology deployment. Finally, it's worth recalling that demographics and skill shortages in many parts of the world require access to global talent pools.

With that background on the economy and on our sector, I'd like to now discuss some of the reasons for Cognizant's consistently strong performance. A large element of this is due to our strategy of reinvestment. As we have said for several quarters, our recent investments have widened our geographic reach, broadened our services portfolio, extended our leadership position in key industry verticals, and enhanced our domain, consulting and relationship management capabilities. As a result, we are well positioned to benefit as the market drivers I discussed earlier continue to play out.

Our clients are looking for further opportunities offshore as exemplified by the growth in application outsourcing and new services lines like BPO and IT infrastructure services. For example, during Q3 our BPO and KPO offering grew 14% sequentially while IT infrastructure services grew 12% sequentially.

We've continued to invest in relationship management over the years, which we believe is central to maintaining and growing our client base, particularly in this economic climate. We believe that our relationship management capability is at the very top of our peer group. To provide you some context, we currently have approximately 700 account managers and client partners globally focused on expanding our relationships with existing clients. We also have an additional 74 account executives who are primarily focused on new wins for Cognizant.

In addition to that, several quarters ago we created a strategic engagement team to focus on sales pursuits across the largest and most complex new business opportunities and our advanced solutions practice is dedicated to successful delivery of these large-scale programs. In addition, Cognizant business consulting is now in excess of 1,700 full-time dedicated consultants. All of these facets of our relationship management capability have allowed us to increasingly engage our clients at the [C-suite] level due to our domain expertise and knowledge of their business issues.

Our relationship team is central to our ability to respond quickly in the current demand environment, which, as I mentioned before, is characterized by a degree of volatility and rapid reprioritization of spending by clients. In this environment, through our relationship management team, Cognizant is able to serve as a true partner with not only a deep understanding of the cyclical pressures and secular forces on our clients' industries, but also with intimate knowledge of our clients' organizations and, thus, the very specific and unique paths that they will each need to take in reacting to this economy. As such, we are able to help our clients proactively drive further cost savings while, at the same time, investing to capture new growth opportunities.

During economic downturns, partners stay and vendors go and we are witnessing clients increasingly turn to us as a trusted adviser to help them through this difficult time. By having these types of relationships, we are able to get better insight into the issues that are top of mind with our clients and can figure our offerings to match the opportunities that evolve.

Let me spend a moment specifically commenting on our performance in banking and financial services. Our growth performance in banking and financial services over the past two quarters, that is above Company sequential average, demonstrates the strength of our strong, on the ground presence across all our key BFS clients. A new landscape is rapidly emerging in the BFS industry as a result of consolidation and government actions within the sector.

As banks rethink their business model, our global BFS team is actively participating in the dialogue in order to translate this into concrete opportunities for Cognizant. As an example of this, in the past few months, we have experienced a surge in demand for our consulting services in the BFS sector as these clients are turning to us to help them in reprioritizing their IT plans to determine areas where Cognizant can further help them.

Cognizant's exposure to the troubled areas within the BFS industry to-date has been limited and Gordon will give you details of our exposure to impacted BFS institutions in a few minutes. It's interesting to point out that in a few instances in recent large M&A situations in the banking industry, we have found ourselves in the position of being a very substantive provider to both the acquirer and the acquired entity. In these situations, we tend to have a deep knowledge of the applications portfolio of both organizations. This puts us in a very strong position to participate in the post merger integration work.

We are well qualified to play a role in post merger integration, having participated significantly in the post merger integration of two large securities processing firms over 2007 and 2008. In fact, during the third quarter, we began working on post merger integration work with a major BFS client of ours who has recently completed significant M&A activity. There are significant opportunities in the sector in areas such as merger integration, data and real-time risk management technologies, and new compliance frameworks. Because our relationship management team is on the ground, side-by-side every day with these clients, we are well positioned to keep our ears to the ground, offer support and opinion and in the end capture new areas of opportunity.

Let me now give you some examples of how these trends are playing out by citing a few customer examples and wins in our health care segment this quarter. As you know, health care is another sector where Cognizant has focused on building a market-leading presence. Cognizant currently ranks as the 11th largest provider of health care information technology in the United States by health care magazine.

Earlier this year, we announced a BPO agreement with AstraZeneca where we partnered with them to provide greater efficiencies in the area of clinical data management in a BPO contract spanning five years. In addition, through our marketRx capability, we provide AstraZeneca with a range of consulting and KPO services in the space of sales and marketing effectiveness.

This quarter, we further expanded our relationship with AstraZeneca to provide a wide spectrum of application maintenance services and, yet, another contract spanning a five-year period. As a consequence, we are now a full service provider to AstraZeneca across IT, BPO, consulting, and knowledge process outsourcing. Our relationship with AstraZeneca will allow them to streamline operations efficiency, raise standards, and deliver world,class services. More importantly, teams of Cognizant associates around the globe working on our AstraZeneca relationship are proud to be making significant and meaningful contribution to AstraZeneca mission which is to make the most meaningful difference to patient health through great medicines.

Another example of our ability to leverage our leadership position in health care is a contract which was announced this quarter between Cognizant and HealthNet. HealthNet is one of the US's largest, publicly traded managed health care companies. Cognizant has been a provider of services to HealthNet for several years. This quarter we extended our relationship with them to provide application development testing and monitoring, application maintenance and support services, and project management services under a large multi-year contract. HealthNet expects revenues to Cognizant under agreement to exceed $100 million over the term of the contract. This is a great example of an opportunity in this difficult economy where clients make transformational decisions using global sourcing as a key lever.

Yet, another example in health care is our relationship with Emdeon. Emdeon is a leading provider of revenue and payment cycle solutions that connect payers, providers, and patients. The firm has grown quickly via multiple acquisitions in the past few years. Cognizant is a primary services partner for Emdeon, focusing on both IT and BPO in key areas such as quality assurance, data center integration, system's operations, and application development and maintenance. Emdeon CIO initially selection Cognizant as his primary focus was a basic transformation of the IT function. He needed a provider with deep industry expertise and relationship management. Recently he was quoted in the press highlighting the success of the relationship stating that across all of our joint complex work streams, there have been virtually no issues and that it all has to do with management of the relationship.

These detailed client examples continue to demonstrate that our strategy of reinvestment and our client-first culture are proving more relevant than ever. I want to emphasize one point very strongly. We do this environment as an opportunity for growth and remain committed to reinvest strongly throughout this period to enhance our position of strength. We have the financial strength to invest in order to capture market opportunities. Our investment priorities remain clear and were further demonstrated in the third quarter. We continue to build out Cognizant business consulting, which, as I said, is today in excess of 1,700 consultants.

To that end, we recently brought on-board a key senior hire to lead up our business consulting and to take it to the next level. Mark Livingston joins us from AT Kearney where he spent 13 years as a senior partner playing multiple roles including leading the global technology practice for that firm.

We also continue to build out our presence in key geographies. Over the last several months we've enhanced our local country management teams in Switzerland, France, Japan and Australia. We view this as an important evolution of our presence in local geographies around the globe.

We further built out our global delivery network by formally launching a new development site in Budapest. Our center in Budapest is already serving a number of clients providing both IT and Business Process Outsourcing services. Lastly, we continue to emphasize operational excellence which includes a continued focus on high levels of utilization in order to be able to protect and fund the investments I've just discussed. We are confident that our strategy, areas of focused investment, and operating model will continue to drive industry leading results.

Now let me turn to guidance. Despite the up-side to our third quarter results, we've maintained our guidance for the full year. Though the third quarter was a very strong one for Cognizant, we want to maintain some caution on expectations for growth next quarter. We make the following observations - - due to the current environment, we certainly do not anticipate a Q4 budget flush as we have seen in certain prior years. Also, strengthening European currencies have hurt revenue when converted into US dollars. We started to see this in Q3 and it continued during the first month of Q4. Finally, we expect that 2009 client budgets will take longer to finalize this year when compared to prior years. As a consequence, projects which normally might get started in Q4 in expectation of a Q1 budget approval are unlikely to kick-off during Q4.

With those comments, I'd like to summarize by saying that as we draw close to the end of 2008, we are pleased with our performance to-date given the circumstances and we are optimistic about the opportunities for our business. First, our industry is set to continue to benefit from the pressures on companies to adjust to the new environment and embrace cost savings. Secondly, we have confidence in our capability to capture the market opportunities. We have the depth, breadth, expertise, and strong client relationships needed for continued growth. Our strong performance during the past few quarters in outperforming our peers validates our operating model and business strategy. Thirdly, we are viewing this environment as an opportunity to invest in order to further strengthen our position.

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

Thank you, Francisco, and good morning to everyone. During the third 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 46.1% of revenue for the quarter. Health care grew by almost $44 million and represented almost 24% of revenues. Retail manufacturing and logistics grew by about $29 million, representing 15.7% of revenues for the quarter. The remaining 14.4% of our revenues came primarily from other service-oriented industries in communications, media, and new technology which grew by almost $25 million compared to Q3 of last year.

For the quarter, Application Management represented 53% of revenues and Application Development was 47%. Both services continued to grow significantly in Q3. Application Management grew 36% year-over-year and 8% sequentially. Development grew 26% year-over- year and 6% sequentially. The sequential strength in Application Management we believe was driven by clients seeking to optimize efficiency on nondiscretionary spending due to budget concerns.

During the quarter, over 78% of revenues came from clients in North America. Europe was approximately 20% and 1.7% of revenue came from the Asian market. Our European business grew over 4% sequentially and 54% year-over-year for the quarter, the result of our continued investment in that region. European sequential growth was negatively impacted in the third quarter by approximately 300 basis points or $4.5 million of sequential growth due to a 4% depreciation for the quarter and the average rate of the pound, Euro and Swiss Frank versus the US dollar.

We had a gross addition of 63 new customers during the quarter. We closed the quarter with approximately 550 active customers. During the quarter, the number of accounts which we considered 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 6, bringing the total number of strategic clients to 124. This increase in strategic accounts crossed geographies as well as industries.

Turning to costs. On a GAAP basis, cost of revenues, exclusive of depreciation and amortization ,increased about 28% for the quarter compared to the third quarter of 2007. Third quarter cost of revenues included approximately $4.4 million of stock-based compensation expense as well as $200,000 of noncash expense related to the accounting for India, fringe benefit tax expense recovered from employees related to the exercise of stock options.

The increase in cost of revenues compared to last year was primarily due to additional technical staff both on-site and offshore required to support our revenue growth. We increased our technical staff by approximately 9,600 compared to the third quarter of last year. However, head count was essentially unchanged compared to the second quarter of this year as we began to build the college graduates hired late last year and increased our utilization rates as planned and discussed on prior calls. We ended the quarter with approximately 55,500 technical staff. Our annual salary adjustments became effective at the beginning of the third quarter.

Third quarter SG&A, depreciation, and amortization expenses were $186.2 million on a GAAP basis, up from $140.4 million in the third quarter of last year. GAAP SG&A expense in Q3 of 2008 included approximately $5.1 million of stock-based compensation expense and $460,000 of India fringe benefit tax expense.

GAAP [operating income] for the quarter increased 41% to $142.6 million from $101.1 million in the third quarter of last year. On a non-GAAP basis, which excludes the impact of $9.5 million of stock-based compensation expense and $660,000 of fringe benefits expense, operating income for the third quarter was $152.8 million, up 38.6% from last year. Our stock-based compensation expense was lower than prior quarters due to a reduction in the expected payout of performance share units. In addition, our fringe benefit tax, which as we've previously discussed is a noncash item was also lower than anticipated due to the weak stock price during the quarter resulting in lower than assumed number of option exercises.

Our GAAP operating margin was 19.4% for the quarter and our non-GAAP operating margin which excludes stock-based compensation and fringe benefit tax was 20.8% for the quarter. Our non-GAAP operating margin was slightly above our target range of 19% to 20%, primarily due to the significant strengthening of the dollar versus the Rupee in September as well as significant increases in utilization rates during the quarter, partially offset by annual salary increases which went into effect at the beginning of the quarter. The average rate for the Rupee was approximately 43.7 in the third quarter versus 41.6 in the second quarter of 2008.

It is our intention to continue to fund investments in the business in order to generate growth and to position us well for when the economy recovers. Accordingly, we would expect our non-GAAP operating margin to return to the target range of 19% to 20% in the fourth quarter.

Interesting comps for the third quarter was $5.3 million compared to $7.9 million in the third quarter of 2007 and $4.9 million in the second quarter of 2008. The decline in interest income compared to the third quarter of last year was due to lower short-term interest rates in the United States as well as a slight decline in the average cash and investment balances compared to last year.

We had a $14.8 million of nonoperating foreign exchange losses during the quarter due to the strengthening of the US dollar against the pound, Euro and Swiss Frank as well as Indian Rupee. Specifically these losses were primarily attributed to the US dollar denominated intercompany payables from our European subsidiaries to Cognizant India for services performed by Cognizant India on behalf of our European customers as well as the remeasurement on India Rupee's net monetary asset on Cognizant India's books for which the US dollar is the functional currency.

Our GAAP tax rate for the second quarter was 15.3%, down from 16.3% in Q2 of this year. The decline in the third quarter tax rate was primarily due to approximately $830,000 in net one-time discreet tax benefits resulting from the expiration of the statute of limitations on certain tax contingencies. In accordance with FIN 48, the results of these were required to be recognized as a discreet item during the quarter. Assuming no further discreet items for the remainder of the year, we expect our fourth quarter tax rate to be 16.1% and our full year of 2008 tax rate to be approximately 16%. Our diluted share account for the quarter was 299.8 million shares, up slightly from the second quarter.

Turning to the balance sheet - - our balance sheet remained very healthy. We finished the quarter with just $757 million of cash, short-term and long-term investments up from $713 million at the end of June. During the third quarter, operating activities generated approximately $140 million of cash.

Financing activities resulted in a $18 million use of cash. Financing activities including approximately $28 million of common stock repurchases, partially offset by the proceeds of option exercises and related tax benefits ,as well as our employee stock purchase program. We spent approximately $61 million on capital expenditures during the third quarter. In addition, cash was reduced by $14.3 million due to currency translation adjustments.

Based on our $599.9 million balance on September 30, we finished the quarter with a DSO including unbilled receivables of 75.1 days compared to 70.5 days in the same period of 2007 and 77 days in the second quarter of this year. We were pleased to achieve a sequential decline of two days in our DSO given the current challenges in the economy.

During Q3, excluding unbilled receivables, our DSO was approximately 66 days. The quality of our receivables portfolio remains strong. Our unbilled receivables balance is approximately $71.3 million at the end of the third quarter, an increase of $13.6 million from June 30. Approximately 59% of the September 30 unbilled balance was billed at the end of October.

During the third quarter, overall 26.3% of our revenues came from fixed price contracts, a slight increase from 25.7% in the second quarter of 2008 and up from 23.9% in the third quarter of last year. When we look at the mix by solution type during the third quarter, 32% of our development revenue and 21% of our maintenance revenue came from fixed price contracts.

Turning to head count, at the end of the third quarter, our worldwide head count included both technical professionals and support staff totaled 59,500, up 165 people from June 30 and up over 10,600 from Q3 of last year. As previously planned, sequential head count growth was minimal as we convert last year's college hires into billable consultants and raise our utilization rates.

Turnover including both voluntary and involuntary was approximately 17.6% annualized during the third quarter. Attrition increased slightly from Q3 of last year. During the third quarter we experienced a spike in attrition in July and August. Attrition declined in September and that trend continued in October.

As you may remember, we hired a large number of new college graduates at the end of Q4, 2007 which caused a decline in our utilization rates at the beginning of this year. As we absorb these new college graduates into our practices during the second quarter, our offshore utilization rates began to improve, increasing to 55% in the second quarter from 53% in the first quarter. This trend continued in Q3. The offshore utilization was 61% for the third quarter. Offshore utilization, excluding recent college graduates who were in our training program at the end of the of the quarter, was in the low 70%. On-site utilization was approximately 89% during the third quarter.

At the end of Q3 we had over 4,400 people remaining unbilled in our training program, down from 7,000 at the end of Q2. During the fourth quarter we expect to slightly further increase our offshore utilization rates to take it back to scale economies and to leverage our historically heavy investment in bench resources and large number of trainees we had on-board coming into the year.

I would now like to comment on our growth expectations for the remainder of the year. Prior to drawing doubt into our guidance, as Francisco mentioned earlier, I'd like to provide some additional color around our exposure to the banking industry. Our exposure to the most impacted institutions and BFS industry to-date have been limited. Within our BFS sector, which represents approximately 46% of total Company revenues, approximately one third comes from insurance and the remaining two thirds coming from financial services which includes banks, market infrastructure providers, and transaction processors, fund managers and brokers. When we consider BFS firms in the United States that have been taken over by the government, our exposure is limited primarily to one client, IndyMac, which represented less than 1% of total Company revenue in the first half of this year. We did a small amount of work for Lehman, but the amount was immaterial.

When we look at BFS firms in the United States that have been sold or are in the process of being sold during 2008, our exposure to that group represents approximately 2.5% of total Company revenues during the first half of this year, primarily Washington Mutual and Wachovia. We did a small amount of work for Bear Stearns, but the amount was immaterial.

Finally, when we look at BFS firms in Europe that have been or are in the process of being sold in 2008, our exposure to that group, primarily HBOS, represented approximately an additional 1.5% of total Company revenue during the first half of 2008.

It is very important to note that we continue to provide services to all of the clients mentioned above and that the firms mentioned above that have been sold have been sold to existing Cognizant clients. In total, therefore, our exposure to the most impacted BFS institutions is about 5% of total Company revenues in the first half of 2008.

Returning to our guidance. For the fourth quarter of 2008, we are projecting revenue of at least $746.7 million. This represents sequential growth of at least 1.6%. As previously discussed, we are taking a prudent and cautious approach to our revenue expectations for Q4 given the current economic environment. It is important to note that fourth quarter sequential revenue guidance of 1.6% includes approximately 200 basis points of negative sequential revenue growth impact due to the further weakening of the British pound, Swiss Frank and Euro that has occurred through the end of October versus Q3, as well as the fact that there are 3% fewer billing days in Q4 versus Q3. For the full year of 2008, we continue to expect industry leading revenue growth. Based on current conditions and client indications, we expect revenue of at least $2.81 billion.

As has been typical in past years, we expect the majority of our growth through the remainder of 2008 to come from customers ramping up that we've won over the last couple of years. During the remainder of 2008, we expect our operating margin to remain in the 19% to 20% range before the impact of equity compensation and fringe benefit tax expense in line with our historic margin goals.

With this expected level of revenue growth and our expected operating margins, we are currently comfortable with our ability to deliver in Q4 GAAP EPS of at least $0.38 and non-GAAP EPS of $0.43, excluding estimated stock-based compensation and fringe benefit tax expense of $0.05. This guidance includes the anticipation of a Q4 share count of approximately 300 million shares, a tax rate of 16.1%, and an operating margin within our 19% to 20% range excluding compensation expense.

For the full year 2008, based on current business trends, we currently project our EPS to be at least $1.45 and non-GAAP EPS to be at least $1.61 excluding estimated stock-based compensation and fringe benefit tax expense of $0.16. This guidance includes the anticipation of a full year share count of approximately 299.6 million shares and a tax rate of 16%.

Due to the current volatility in the currency markets, our Q4 and full-year EPS guidance excludes any fourth quarter nonoperating foreign exchange gains or losses. With that, Francisco and I would now like to open the call to questions. Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Adam Frisch with UBS.

Thanks, good morning, guys. Can you provide some color on deal ramp ups from strategic customers sign in, let's say, the past four to eight quarters and maybe some spending trends of your top 20 customers?

Let me start with spending trends at the top five and ten because those are the numbers that historically we've given out. The top five represented 19% of revenue during the quarter, which translates into 2% sequential growth. That 2% includes a reduction in revenue at one of our health care payer clients that we talked about on our last call. We actually saw growth at all of our other top five clients on a sequential basis. And our top ten represent 29.7% of revenue, which was 4% sequential growth. Francisco, you want to give some high level comments on any changes in ramp ups?

Yes. We have not seen any changes to projected ramp ups of deals that we won over the last few quarters. Those continue on track. As we've said in the past few calls, given the current economic environment, the demand tends to be shifting more towards application maintenance, IT infrastructure services, and BPO and that type of service offering, but we haven't seen ramp ups get pushed out or delayed of clients that we've won, let's say, over the last two or three quarters.

Even in the strategic area, correct?

With the large clients, no. They continue to ramp, yes.

Okay. What areas do you expect to grow the most over the next several quarters assuming the economy is weakening and will stay weak for a while? Do you expect BPO and ITO to be bigger growth areas going forward? Is that a potential opportunity to you given the environment.

I think Application Maintenance will continue to grow in excess of Application Development. I think BPO and IT infrastructure services will continue to show healthy growth, but you have to keep that into perspective that they'll still represent a relatively small percent of total Company revenue and we're growing off a small base. And then I think that outside of the impact of the currencies that we talked about, I think that they are still large parts of Europe, particularly continental Europe, that are relatively underpenetrated from an offshoring standpoint.

On M&A , you guys have been real conservative just doing small [talk], assuming with the environment right now and the importance of a cash balance. Is there any reason to think that you would get any bigger or more with your M& A

Our focus continues to be focused on acquisitions that achieve one of three goals, either geographic expansion, domain expertise, or industry expertise. I think that strategy continues. Size - obviously we're getting to be a bigger Company so what the definition of small starts to change. Never say never on bigger things. We remain very focused on acquisitions that we believe we can successfully integrate.

One housekeeping, Gordon, you said the 4Q guidance, EPS, at least, does not include any gains or losses from FX. Is that primarily in the other income line?

Yes, that is specifically in the other income line. Basically balance sheet - - the impact of FX gains or losses from balance sheet revaluation with the currencies bouncing around so much, we don't want to have to run the business to offset those or vice versa.

So just to clarify, FX is included in your revenue and operating income guidance, but just nothing below the line?

That is correct.

Okay, great.

FX is included down to operating income, but not in nonoperating expenses.

Great. Okay guys, thank you.

Your next question comes from the line of Tien-Tsin Huang with JP Morgan.

Hi.

Hi, good morning, thanks. I had a question on the margin side. If the Rupee trend persists here going into 2009, do you plan to reinvest all the Rupee margin up side which sounds like it could be significant?

Yes, that is our plan. Obviously we exceeded our margin goal in the third quarter for two reasons, one the Rupee movement started to really happen later in the quarter. You can see in our SG&A line we had got ahead - - accelerated investments in the second quarter, so we were able to moderate our investments in the third quarter and then the Rupee moved in our favor. By the time we turned that back on, it was a little too late. Plus we had that big nonoperating FX loss because we had not forewarned investors about it. We wanted to cover a little bit about that. But I would fully expect our margins to be in the 1%9 to 20% range on a go forward basis.

Any change in what you're reinvesting given the upside? I'm curious, are you changing your reinvestment strategy? What are you investing in and what kind of return do you expect to get out of those three investments?

Francisco, do you want to talk about investments itself? It's a fairly wide, long list.

Yes, I think that it really continues to be focused on the areas that we've spoken about for some quarters now that we think represent good growth opportunities and are still relatively underpenetrated.

First of all, geographies around the world. We continue to invest in Europe, building out the sales force, as I mentioned, putting local country management into the various countries in Europe. We have a good footprint in some of the countries of continental Europe. We still have work to do in some of the other countries, for example in the Nordics and so on and so forth.

We have a priority to continue to invest - - continue on the geography access into Asia. We've put country management teams into Japan and Australia. We will continue to build out our footprint in Asia and then start to turn our attention to some of the emerging markets of the world, Latin America and the Middle East where we have some presence, but we think those are significant opportunities and we are underrepresented in those geographies.

We continue to invest in -- on the service line side. We think that BPO and IT infrastructure represent strong growth opportunities and, for us, are still in invest and ramp up mode. So those are probably the major areas that we would continue to invest in from a priority standpoint.

Okay. A few more questions. Just first on pricing, can you give us an update there? Any change in trend or competitiveness, particularly in September or October?

Pricing has remained relatively flat. We've not seen significant change over the last couple of months.

Good. And then lastly, how big is BPO and ITO today? I guess, also, if you can give us a margin profile of each in relation to your corporate average, that would be helpful.

Both are relatively small. BPO, we're starting to get some traction and winning some decent sized deals, but obviously it's heavily offshore and billing rates are lower than for IT services. So that's still a relatively modest piece of revenue where it's in the low single digits. ITIS - - that's in the mid-single digits, but both of these, once again, are growing at a very healthy basis.

Then the margin profile?

Once they get critical mass, I'm not sure you can see any meaningful difference in margin profiles. Obviously when you're first starting out and you hire all the management until you get the revenue, margin profiles will be lower.

Thanks for the detail.

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

Thanks. Gordon, when you were talking about some of the bank consolidation and mergers, just to be clear, it sounds like you don't expect really much change in those relationships going forward, you think you'll still do the same amount of work with the potential to do more?

I'm not sure I'd go that far. If you look at some of these acquisitions where we were doing work both for the acquirer and the acquiree, do we expect some of the work to go away on a long-term basis? Absolutely. There will be discretionary stuff that they might have been working on that will go away. You might have some one-time pops on integration, but that on a long-term basis, you now have one firm instead of two. So, no, I would not expect it to be status quo, but we're also certainly not seeing I think fall off the face of the earth. W have gotten very lucky in that the companies doing the acquiring, we have healthy relationships with. So far it's been okay.

Okay. Just a couple of clarifications. The $50 million in nonoperating FX loss this quarter - if currency stays about the same, are we going to have these types of sizable losses going forward?

They're generated by the tremendous fluctuations in the currency on a monthly basis. It's all generated by what the change in the spot rate at the end of the month versus the prior month. So if you have major gyrations - we had movement of 10% in a month during the third quarter. If you have those sorts of gyrations, yes, you will have big gains and losses. When the currency was moving a couple of points in a month, it was kind of noise.

Anything we should be modeling for fourth quarter?

It's bouncing around so much, it's tough to tell. For October, we haven't closed our books yet, but just given where the currency moves, that certainly generate a loss. For the first couple of days in November, we have a bit of a gain. Where it all settles out, I don't know. Things are bouncing around so much, we just don't want to give any guidance on that other than to say it will definitely be a number and it could be material one way or the other.

Okay. Just on pricing, it's relatively flat today. Francisco, I guess, given the market conditions, do you expect that to deteriorate in 2009 or do you think it can hold the line?

At this point we haven't - - we are holding the line. We believe that the demand environment is strong and as we've been out talking to customers, we've been holding the line on pricing.

All right. And then final question, visibility for the first quarter '09 and then for the rest of 2009, what percentage visibility do you have and how does that compare to previous years?

Along with every other Company that's public in this market, we, at this point, are not making any comments on next year until our clients are further along in their budget cycle. One of the interesting things and fortunate things we've done, our annual global customer conference this year is actually at the beginning of February for a bunch of logistical reasons rather than in November, which we had scheduled this before all the turmoil happened. But that's actually very fortunate for us because by early February, obviously clients will have a much better view on '09. I'm not sure it's realistic that clients have a good view on '09 at this point.

Okay. Thank you very much.

Your next question comes from the lines of Mark Marostica with Piper Jaffray.

Give us some color on the spike in attrition in the quarter and perhaps comment on the trend that you saw in voluntary attrition versus nonvoluntary and then just an add on to that, where you think things will head in Q4 on attrition./

Sure. No big movements on voluntary versus nonvoluntary. If we look at -- I only have year-to-date in front of me here. Year-to-date, where 15% annualized attrition, about 9 of those points are voluntary or people going for other opportunities and the other 6 points are involuntary or people going back to grad school and so forth. So the mix is tracking about where we want.

Certainly we had a spike in July and August. Part of that may have been due to the fact that we moved our cycle to - - our promotion cycle from April to July as we had previously announced and you always have people who wait to see if they get promoted to make decisions. But as I mentioned, we clearly came back in the right direction in September and that trend continued favorably in October and obviously that's in part due to the economy. We're not seeing or hearing anything in our workforce that gives us any concern.

And then in regards to utilization, you've obviously been taking that up with the hiring plans being shelved. But I'm curious, what's the practical limit to that metric, the offshore utilization metric given the capabilities of your bench?

Break it down to two pieces, for on-site, I think we're pretty close to it. We're pretty close to where we want to be and you only saw a very small movement on- site versus last quarter. Offshore, there, if you include the trainees, you can have seasonality because this year a lot of our trainees are going to be joining in Q1 and early Q2. So, you'll see some reversal of offshore attrition including trainees as all those people come on board so you have some seasonality. But if you average that all out, we have some room still to move up utilization from where we are. But it won't be a straight line up.

Okay. Great. And then one last question, I'm curious as you talked to your customers, when do you get a sense that they will have their budgets, quote, unquote, finalized or at least at a level where they have some conviction in the budgets?

Our best view at this point is it will be towards the end of Q1.

Okay. And typically it's when? November timeframe?

December or early Q1.

Early Q1.

My guess is it will move three months out, two to three months out.

Will you be changing in any way how you give guidance on an annual basis as you look at next year?

We haven't put any thought into that. Obviously a lot of it will depend on by the time we report our earnings and whatever, mid-February, do we have a pretty good handle on what customers are saying. As I mentioned, fortunately, we will probably be reporting earnings just after we've held our global customer conference. So a lot of it will depend on how far customers are into their budget cycle. They don't have to have it finalized for us to have a view, they just have to be well enough into it.

Fair enough. Thank you.

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

Yes. Hi, guys. Gordon, is it possible to get what - - just an organic revenue growth rate year-over-year for the quarter, X foreign currency and X a little bit of acquisition revenue?

Yes. Catch us off-line and we'll give that to us.

Okay. On your balance sheet, you have cash obviously and short-term investments and also long-term investments. Can you just remind us what is in the short-term and long-term?

The long-term is one thing, it's auction rate securities that are with UBS. So those will be sitting there for a while through the settlement with the Attorney Generals, they - - we can sell those back in June of 2010. The good news is we're - you get the premium interest rate on them so as long as you don't need the cash, it's actually not that bad a thing. 95% of that is guaranteed by the US government. Short-term investments - - that's just fairly liquid stuff that just has a duration of over a year and most of that stuff is between a year and two years.

And obviously no concern about --

No. Our cash management, other than we're expected to margin rate securities, extremely high credit, just go liquid, our cash management is extraordinarily conservative.

And then the -- just as we have -- modeling 2009, just a best guess on the tax rate to use?

I would use something around -- yes, at this point 16.2%, 16.3%. Probably 16.2% is as good a guess as anything.

As we think about the wage cycle next year, given change in demand environment, should we think it will be quite different than prior years?

Obviously a lot of it is going to depend on what the other tier one players do, most of whom will go before us. I would certainly -- assuming the economy stays weak, I think one would expect that wage inflation in '09 will be less than '08. What it really is will depend on what some of our key competitors do, but I would have difficulty understanding why any competitor would not have lower wage inflation next to it than this year.

Okay. Great. Thank you.

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

Hello. I was wondering if you could tell us what your campus offers look like for next year and maybe the timing of their joining the Company?

Let's first start with the offers we made for people who graduated last past summer. Those people, obviously, we pushed out the joining dates on a lot of those people. Those people, most of them will be joining Q1, Q2. Some will join Q4, but the big chunk is Q1, Q2. So for the people who graduate next summer, we haven't set the dates and obviously the reality is it gets spread over time. I think you will have some that will join immediately, some that will take a little while. We have not disclosed the specific number for competitive reasons.

And just as far as the timing of visibility for budgets next year - - I know you said it's happening towards the end of the first quarter you think. Are you seeing -- is that atypical of what usually happens? In other words, is it taking longer for that visibility to materialize compared to this year or do you expect it to be consistent with prior years?

Oh, no, no. It's definitely different. People are starting later. I think a lot of companies are - - normally people start Labor Day. I think there's so much turmoil people are starting a little bit later or dragging out the process just so they can understand better what's happening with the economy. So when budgets get wrapped up for '09, I certainly expect it to be later than '08.

And just one last one here, what typically do you walk into a year, what type of visibility do you walk into a year with and what do you - - any expectations for that being potentially different heading into '09?

In terms of -- let's come at it a little bit different way. In a typical year, well over 90% of revenue will come from customers who are with us on January 1. Based on everything we're seeing now, there's nothing that leads us to believe that this is going to be any different. The business model is when you win a new customer it takes a little while for it to kick in. The key is, the customers that we have won this year, last year, or the year before that, at what rate do they ramp up? The good news is we continue to win customers at a healthy rate. Just in third quarter, the number of strategic customers increased by 6.

Okay. Thank you.

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

Good morning. Maybe another conceptual question on guidance. We can even go to past years if certain clients hadn't had their budget put in place, how do you kind of approach their contribution relative to what they had the previous year in guidance if they haven't -- if they don't really have their budget in place?

We have hundreds of account managers out there who are really good at being part of the CIO's inner circle, so they're out talking to the CIO, to the project manager every day of the week. So they can get a feel as the client starts to get a feel for what they think their budget will be.

The difference this year is I think it will be later than in prior years before the customer has a good sense of what their budget will be. They certainly can talk about what their priorities are going to be, but especially on the discretionary side the - - it will be a little bit later before they know what will be funded.

I guess the real question is if some of the clients really push out some of their real decisions to a point that, say, for example, you announce your Q4 results and you still don't have as much information as you'd like from clients, I was wondering how that might affect your view and decision making process on what guidance might look like for '09?

Sure. That's just too hypothetical at this point. As I said, the good news is we'll be coming right out of our global customer conference when we release fourth quarter earnings. But without having a crystal ball for what the economy is doing over the next three months, do things stabilize at whatever level it will be or is it just continued turmoil. It's tough to say. The good news is we have very tight information with our clients, so they share information as they have it. A lot of our revenue stuff, as Francisco mentioned in his talk, are things that help clients to reduce their costs and obviously that's very good in this environment.

Okay. That's fair. Then maybe just one final question. Going back to Adam's question on customer ramps from recent strategics and Francisco's response was not really too much of a change in the pace of those ramps. I was wondering if you could reconcile that commentary to the fact that obviously we are seeing some slowing in the business model and if it's not coming from new customer ramps, where it's coming from.

Sure. A couple of things. Obviously the European currency which was in our favor and helping sequential growth for a long period of time. You swung back in Q3 and big time in Q4 against us, so you have that. And you have anomalies. Use the example of the health care client we talked about last quarter. It's unusual for us to have a client that contracts. But in Q3 and continuing into Q4, we had - - that's an example of a client that's actually contracting. So you have some of that. Ramp ups as robust as it was a year ago? No. But are ramp ups still healthy? Yes. You saw that in Q3. But is a little bit of the edge off of it? Of course.

Great. Thanks so much.

Your next question comes from the line of Arvind Ramnani with Banc of America Securities.

Hi. Financial services, can you provide some color on strength in terms of the size of the clients or the geographies or the type of work?

Sure. I don't think there were any specific geographic trends in the fourth -- excuse me, in the third quarter in financial services. We saw good growth from both European and US Financial Services clients. I think that from a revenue standpoint, the skew is toward Application Maintenance services, towards - - to some extent BPO and IT infrastructure services, but I would say that it's mostly being driven by increased application outsourcing. I'm sorry, was there another part to the question?

I have just a couple of other questions.

Sure.

So in terms of your large health care account, do you have kind of a road map into what's going to happen with that account in 2009?

I think like with all of our customers, they're going through their 2009 planning process and we're certainly participating in that and getting visibility into that as we move forward. But at this point I can't give you much more than that.

Sure. Final question -- do you have any specific solutions to address the short-term needs of your clients based on recent events?

Sure. I think that we are more than short-term specific solutions. What we're doing is emphasizing solutions that already exist within our portfolio of services that are specifically relevant in this environment. So at the highest level, you have services that generally will help clients reduce operating costs. Those are basic things like application maintenance, IT infrastructure services, BPO. These are services that take an operation that a client already has, typically a higher cost operation, moves it to a lower cost operating model. But then there are also service offerings like post-merger integration that I spoke about. We have quite a lot of intellectual capital around post-merger integration. How do you approach the whole process both from a systems standpoint, but also from a people and from a business process standpoint through our consulting group. So, post-merger integration is another example of a kind of service that we're specifically emphasizing with our clients.

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

Yes, sir. Your next question comes from the line of Rod Bourgeois with Bernstein.

Yes, Rod Bourgeois here. Gordon, can your flat sequential head count growth imply anything about your growth plans for 2009?

No, I don't think it can read anything one way or the other about it from the head count. Just remember, especially in this market, we have the ability to turn on or off lateral hiring in two minutes notice. We still have over 4,400 people who have essentially finished training and are waiting to go be billed of the pressures. I won't read into it anything one way or the other.

Just to elaborate on that, I mean if clients started making decisions again at a normal rate and your deal flow ramped up, how quickly could you turn on the hiring engine to meet the potential surge in demand that that could happen?

Yes. So let's -- that's purely hypothetical. Demand spikes in Q1, I would turn -- I have, as I said, still a healthy bench, including 4,400 people pressures who are fully trained as well as my bench of experienced professionals. I can very quickly go out into the market for lateral hires which take two weeks of training. So it's - - when you think about it next year, it's a question of what's demand going to be, it's not a question of what supply will be. Supply will be able to meet demand.

One more hypothetical on the pricing front. There are certainly one off accounts where price comes under pressure and sometimes you have competitors that break rank and try to win a deal with aggressive pricing. If you extrapolated a ugly case scenario through 2009 on pricing, on deals that come up for grab and where pricing gets renegotiated on new deals, is it feasible that pricing could drop by 5% over the next year or is that a highly unlikely scenario based on the pricing dynamics and the basic math in your average price?

Fortunately the market in many ways has consolidated to a handful of tier one players and two multi-nationals, all of whom are showing very healthy discipline in terms of pricing because I think everyone realizes it's a zero sum game and no one's going to gain market share through pricing. So as Francisco said, at this point we see a stable environment. To get to the account numbers you're talking about, you would have to see a collapse in pricing. I can't imagine how any rational competitor would trigger that.

Great. Thanks, Gordon.

Okay. Operator --

Let me just thank everyone for joining us on the call today. Just to finish up, I think we're very pleased with our financial and operating performance during the third quarter across the Company which exceeded our guidance and I think, more importantly, proved our ability to maintain industry-leading growth despite a tough economic climate. Despite our caution in the near term, we're confident in our ability to grow and that our strategy to-date has been effective and will continue to be. We look forward to talking to you again next quarter. Thanks very much.

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