高知特 (CTSH) 2011 Q3 法說會逐字稿

Ladies and Gentlemen, welcome to the Cognizant Technology Solutions third quarter 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session.

(Operator Instructions)

Thank you. I would now like to turn the conference over to David Nelson, Vice President, Investor Relations and Treasury at Cognizant. Please go ahead, sir.

Thank you, and good morning, everyone. By now, you should have received a copy of the Earnings Release with the companies third quarter 2011 results. If you have not, a copy is available on our website, cognizant.com. The speakers we have on today's call are Francisco D'Souza, President and Chief Executive Officer, and Gordon Coburn, Chief Financial and Operating Officer of Cognizant Technology.

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 companies Earnings Release and other filings with the SEC. I would now like to turn the call over to Francisco D'Souza. Please go ahead, Frank.

Thank you, Dave. Good morning, everyone. Thank you for joining us. I'm pleased to announce that Cognizant has delivered another strong quarter of industry leading revenue growth and non-GAAP operating margins within our target range.

Third quarter revenue was more than $1.6 billion an approximately 8% increase sequentially and 32% increase year-over-year. Growth continued to be broad based across our portfolio of industries, services, and geographies. As we look at the marketplace today, we continue to see a robust pipeline.

Our clients are not slowing down their decision-making processes. As is customary at this time of the year, we're engaging with clients as they go through annual budgeting cycles. And, while it's still early in that process, our view is that clients 2012 IT and Operations budgets will remain somewhat flat with perhaps a slight upward bias.

Our clients are clearly indicating that they will continue to ship work to global delivery models and as a result like in past years, we expect our growth to continue to be fueled by the ongoing share shift of budgets to the global model. In spite of volatility driven by factors such as the economy, the advent of new disruptive technologies, new government regulations, and continued globalization of markets, we find that our clients are continuing to invest thoughtfully and strategically in their businesses.

In fact, it is because of this persistent uncertainty and volatility of the new normal that our clients are working hard to protect investments that are directed towards building agility into their businesses. In a volatile environment, agility becomes the key attribute of success and the global delivery model becomes a key lever that clients can use to release trapped budget dollars to protect investments in strategic initiatives.

By helping clients build agility into both the revenue and cost sides of their operating models, we help them capitalize on volatility and create competitive advantage. On the revenue side, being agile means clients are developing capabilities that enhance their customer responsiveness, identify and capitalize on market trends and drive top line growth.

On the cost side, agility means the ability to rapidly adjust capacity and underlying operating costs in response to changes in market demand while continuing to drive efficiency and effectiveness. An interesting leading indicator of this trend comes from the growing body of work we are currently doing in Cognizant business consulting, our Management Consulting Group.

Over half the consulting work we are doing for clients is oriented towards strategic growth while the balance is related to cost containment and cost flexibility. Our strong results and ability to capture market share quarter after quarter demonstrate our own agility. Cognizant has consistently shown that we are able to quickly sense and respond to client need and build new solution offerings to meet those client needs.

Supported by our core strengths, this value proposition positions us as our clients partner of choice to drive agility throughout their businesses. First, our intimate client relationships, deep domain knowledge, and seasoned consulting team enable us to quickly identify trends in our client industries. The lens through which we view clients problems is not purely technology or operations based.

Our team brings a business lens that aligns technology and operations with business value. And, our inside out knowledge of the unique nature of each client's business increases the magnitude of value we provide and decreases the time to provide it. Second, Cognizant is at the vanguard of the key technology drivers in the market because of investments in areas such as analytics and mobile, social, and cloud computing.

As a result, we can advise our clients on the best business uses of these new platforms, provide perspectives on the right approaches, and then implement its scale. Third, our expansive delivery network, coupled with the social collaborative power of our Cognizant 2.0 delivery platform, means we can assemble an expert team when and where clients need it.

And, finally and perhaps most significantly, our ability to rapidly invest ahead of the curve across our services portfolio ensures that we stay current with client's needs. While this view is shared by the clients I speak with around the world, it resonated particularly well with European executives at our annual European customer conference last month, Cognizant Community.

Record turn out, more than 200 registered clients and prospects, showed European companies are actively searching for ways to manage through the uncertainty and are increasingly looking to Cognizant for that support. While attendee feedback showed that macro trends prompt short-term concern, it also reinforced our view that Cognizant is extremely well positioned to help clients through it and to continue to capture market share and mind share.

I'd like to spend the next few minutes giving you some client examples that illustrate the nature of the demand that we're seeing as clients seek agility on both the revenue and cost side of their businesses. I'll then comment briefly on our outlook for the remainder of the year, before turning it over to Gordon who, as always, will take you through the details of this quarters results an our outlook for the fourth quarter.

As presented last quarter, Cognizant aligns a unique reinvestment approach across three horizons of growth opportunities. Within Horizon 1, our core application development and maintenance business, growing acceptance of the offshore model as a necessary lever to be competitive is driving deeper penetration within existing clients as well as giving us an entry to clients in newer geographies.

At the same time, more mature relationships are making a push to convert time and expense based models to manage services or other variable price models in order to drive agility through variable costs. Horizon 2, the trench of offerings around areas like business process outsourcing and infrastructure services, or IT IS, also benefits from acceptance of the offshore model as clients become agile by redefining and focusing on their core business.

Management consulting, another Horizon 2 offering, further drives agility for clients. For example, top line growth for a Fortune 100 telecommunications provider was constrained by the speed at which they could bring new offerings to the market. An assessment from our consulting team revealed an opportunity to cut the cost of their approach by nearly 80%, thereby reducing their capital constrains and increasing their ability to rapidly expand network availability for their customers.

In another example, our joint team of consultants and technical architects built a global platform combining both business process and IT architecture to enable a Fortune 500 apparel retailers rapid organic expansion throughout Asia, Europe, and North America. Initial rollout of this platform has lead to a sharp 15% increase in sales with further growth expected through deployment in additional markets this year and next.

While these consulting projects are significant in their own right, the growth oriented nature of them is a harbinger of optimism for pull through of our core offerings. We will continue to invest in Horizon 2 offerings both organically and through strategic tuck-under acquisitions. This quarter, we acquired Zaffera, an SAP consulting and development firm focused on the retail industry.

Zaffera's consulting expertise, innovative software solutions, and deep retail expertise complement and bolster our already robust systems integrations offerings and strengthen our ability to help clients tackle complex Supply Chain Management merchandising, eCommerce, and store management challenges. I'd like to take this opportunity once again to welcome our new associates from Zaffera to the Cognizant team. The third horizon is comprised of a class of emerging services.

For example, our practices around engineering and manufacturing services, analytics, mobile, cloud and social computing. In today's fast paced always on world, capabilities in these areas are urgently becoming requisites for keeping up with changing customer behavior. Within mobility, clients are showing strong interest in the thought leading solutions that we're bringing to the table, and for good reason.

For most of us, a Smartphone or tablet is the first thing we pick up in the morning and the last thing we put down at night, and that isn't going to change. Industry analysts believe that by 2015 there will be over 7 billion mobile devices in the world, an average of 1 per person. Clients clearly see the need to be in front of this trend and while most of us just see the icon on our Smartphone, mobile is far more than the application.

Indeed, an engaging user experience and elegant interface design are important, but for companies to drive business value they must deploy mobility in the right places and integrated with the right processes and systems. Cognizant's mobile consulting team is helping clients do just that. For example, as part of an effort to help a manufacturing client evaluate the importance of mobility to their business, Cognizant's comprehensive approach surfaced more than 100 different mobile enabled transformational opportunities.

In another example, we saw the tablets that our client used to make their sales force more mobile as an opportunity to address a different pinpoint around pushing product training out to their field. Our joint team of mobile professionals and user experience experts are now creating a platform through which new training materials and an existing catalog of courses are being made mobile ready for easy reference.

Through this channel, our clients will ensure that their sales teams have the most relevant and up-to-date information they need to be effective. Shifting to another area of focus for our clients, I'd like to talk about how our enterprise analytics factors are helping clients with big data. The term given to the ever expanding volume of information with which businesses contend.

Whether a banks early detection system for identity theft or a utility optimizing power generation based on realtime usage data, gleaning insight, and more importantly foresight, is a driver of business agility. When product sales unexpectedly faltered through one of our clients primary retail channels we were brought in to help analyze what was going on.

Rather than waiting for months of point of service data to detect a trend, Cognizant mined realtime social information from sites such as Facebook, Twitter, and Amazon. We diagnosed the problem was the retailer and not our clients product. Armed with this insight, our client is not only able to address the Supply Chain issue before it gets out of hand, they can now help an important business partner resolve a yet unrealized issue of their own.

This type of realtime agility completely changes Supply Chain dynamics. These are just a few of the examples where we are helping clients build stronger businesses by infusing agility in the face of economic uncertainty. Turning now to guidance for the fourth quarter. We remain optimistic given the positive trends I presented today.

We recognize of course the volatile environment in which we work and will continue to follow our proven approach of staying close to our clients and monitoring for changes. As a result of strong third quarter performance and outlook for the rest of the year, we are providing guidance for the fourth quarter of at least $1.66 billion which brings our full year guidance to at least $6.11 billion.

I'll now turn the call over to Gordon to review our detailed financial and operating metrics. After which, we will open the floor to questions and I'll end with a few closing remarks. Gordon?

Thank you, Francisco, and good morning to everyone. Q3 was a very solid quarter for us. We saw broad based growth across our industries and service lines. We were particularly pleased with our performance of Financial Services and Healthcare.

During the third quarter we experienced continued growth in our Financial Services segment which includes our practices in insurance, banking, and transaction processing. This segment grew 7% on a sequential basis and 26% year-over-year. It represented 41% of revenue for the quarter.

The significant growth within Financial Services was driven by growing demand for IT infrastructure services and high-end BPO services, ongoing focus on cost optimization, initial activities related to regulatory requirements, and greater demand for customer relationship management work. Healthcare continued its growth during the quarter with 11% sequential growth and 42% year-over-year. This segment represented 26% of revenues.

The strong growth within this segment was driven by increasing traction for our newer offerings including cloud based CRM, mobile technology, and business process as a service offerings, continued ramp up of consulting work with key pharmacy benefit management clients as well as work related to ICD10, and increased focus on consumerization of health plans and expectation of market opportunities resulted from healthcare legislation.

Manufacturing retail and logistics continued its growth during the quarter and grew 5% sequentially and 35% year-over-year. It represented 20% of revenues.

Demand within this segment was driven by ramp up of our consulting services, particularly analytics, as retail customers drive towards enhancing the consumer experience, growth in multi-channel eCommerce integration efforts including mobility pilots and intelligent store concepts, and continued growth in large strategic clients as we expand relationships into newer functional and service areas.

The remaining 13% of revenue came primarily from other service-oriented industries of communications, entertainment, media, and high technology, which as a group grew 7% sequentially and 26% year-over-year.

We were particularly pleased with the growth within our telecommunications industry practice which was driven by ramp up of key wins related to mobile technology and building of front end consumer interfaces covering functions such as order management. As well as growing traction of consulting, driven by thought leadership and domain knowledge with specific focus on technologies associated with mobility and customer care.

Application development represented 51% of revenue and application management 49%. Development grew 35.5% year-over-year and 7.5% sequentially. Management grew 27.7% year-over-year and 8.1% sequentially. After several quarters of higher sequential growth in development work, we saw a more balanced growth between development and management as clients expanded outsourcing projects to address their 2012 savings objectives.

A common theme we are seeing is clients further leveraging Cognizant for application management, infrastructure management, and BPO activities to free up budget to protect and continue spend on strategic development initiatives. During the quarter, 78.1% of revenue came from clients in North America. North America grew 8.3% sequentially and 32.2% year-over-year.

Europe was 18.2% of revenue and 3.7% of revenue came from our clients in Asia Pacific, the Middle East, and Latin America. For the quarter, Europe grew 5% sequentially and 26.5% year-over-year. Continental Europe reported slightly higher growth at 6.4% sequentially while the UK grew 4.2%.

European revenue was negatively impacted by currency movements of approximately $800,000 compared to the second quarter. On a constant dollar basis, Europe grew 5.3% sequentially and 19.3% year-over-year. The macroeconomic issues in Europe are resulting in some constraints on discretionary spend, largely offset by increased focus on leveraging global delivery for maintenance, infrastructure, and BPO activities.

As expected, on a sequential basis our pricing was flat during the third quarter, as most of our 2011 price increases were reflected in our run rate coming into the quarter. We had a net addition of 56 customers during the quarter and closed the quarter with 777 active clients.

During the quarter the number of accounts which we consider to be strategic increased by 6. This brings our total number of strategic clients to 185. We continue to see a trend towards our newer strategic customers embracing a wider range of Cognizant services at an earlier stage in the relationship.

Turning to costs. On a GAAP basis, cost of revenues, exclusive of depreciation and amortization, was approximately $925 million and included approximately $4 million of stock based compensation expense. The increase in cost of revenues is primarily due to additional staff both on site and offshore required to support our revenue growth.

We increased our technical staff by over 10,000 people during the quarter and ended the quarter with over 122,000 technical staff. Third quarter SG&A, including depreciation and amortization expense, was $383 million on a GAAP basis and included approximately $20.5 million of stock based compensation expense.

Our GAAP operating margin was 18.3% for the quarter and our non-GAAP operating margin, which excludes stock based compensation expense, was 19.8%. This was within our target range of 19% to 20%. The average rate of the Rupee was [INR45.7 versus INR44.7 in the second quarter and INR46.4] in Q3 of last year.

$195 million of Rupee denominated operating expense cash flow hedges were settled during Q3. This resulted in a $7 million gain which is recognized in operating expenses. We have further extended our India Rupee expense hedging program with over $3 billion in outstanding hedges of our Rupee expenses which will mature each month through 2015 at an average rate of approximately [INR50].

We have $10 million of interest income. In addition, we had a net loss of $15 million of other non-operating expenses. This included a net foreign exchange loss of $16.1 million. This was primarily due to the re-measurement of certain India and European balance sheet accounts offset by gains of certain balance sheet hedges.

As has always been the case, our Q3 guidance excluded any Q3 non-operating foreign exchange gains or losses. Our GAAP tax rate for the quarter was 21.1%. Our tax rate came in lower than previously anticipated primarily for the following reasons.

First, the weakening of the India Rupee in the quarter lowered the tax provision for our Indian operations on a US dollar reported basis by about $6 million. And, second, we recorded a favorable discrete items of approximately $3 million as a result of the lapse of statute of limitations on certain FIN48 provisions. We expect our full year tax rate will be slightly over 24% and continue to model a 2012 tax rate of approximately 25%.

Our diluted share count for the quarter was 309.3 million shares down slightly from Q2. During the quarter we repurchased 2.6 million shares at an average price of $62.00 for a total cost of $163 million. Within our currently authorized $600 million share repurchase program, we have purchased a total of just over 5.6 million shares at a cost of $378 million.

Turning to the balance sheet. Our balance sheet remains very healthy. We finished the quarter with about $2.3 billion of cash and short-term investments. During the quarter, operating activities generated $329 million of cash. Financing activities used approximately $147 million of cash.

This was comprised of expenditures of $163 million towards our share repurchase program partially offset by net proceeds of $16 million related to option exercises and related tax benefits as well as our employee stock purchase program. We spent approximately $74 million for Capital Expenditures during the quarter and $56 million in acquisitions.

As previously announced, in 2011 we expect to spend approximately $285 million on Capital Expenditures, the majority of which will support our current wave of facility expansion. Based on our approximately $1.3 billion receivables balance on September 30, we finished the quarter with a DSO, including un-billed receivables, of 73 days, down from 75 days in the second quarter and down from 81 days in the third quarter of last year.

The un-billed portion of our receivables balance was approximately $163 million. Approximately 66% of the Q3 un-billed balance was billed in October. During the third quarter 31% of revenues came from fixed bid contracts. Net headcount increased by over 12,000 people during the quarter. 52% of gross additions for the quarter were direct college hires while 48% were lateral hires of experienced professionals.

Excluding the impact of acquisitions, 59% of our additions during the quarter were direct college hires. We ended the quarter with over 130,000 employees globally. Approximately 4,000 of the Q3 additions were due to the acquisition of CoreLogic's India operations during the quarter.

We're very pleased with the balance we achieved between direct college hires and experienced professionals. Attrition in the third quarter was 13.4%, lower than Q2 attrition of 15.2%. As we have discussed in the past, there's no consistent methodology in the industry to report attrition.

We have historically reported attrition by annualizing the turnover which occurred within the quarter including both voluntary and involuntary. Our attrition statistics include all departures including BPO and employees in our training program. As expected, utilization increased slightly during Q3. Offshore utilization was flat on a sequential basis at approximately 70%.

Offshore utilization excluding recent college graduates who are in our training program was approximately 81%. On site utilization increased to about 94% during the quarter. Now, I'd like to take a few minutes to comment on our progress in the important operational area of talent management. We're very pleased with our continued success in winning the war for talent.

This includes attracting, retaining, and motivating a quickly growing and increasingly complex global talent pool to support our ever expanding range of services, industries, and geographies. On a prior earnings call, we highlighted several initiatives we were launching around performance management, rewards and recognition, and employee engagement to ensure that we would continue to attract and retain the millennials and the millennial minded associates.

The results of these efforts are clearly evident in the success we are experiencing in hiring both the college and experienced talent across industries. Our attrition this quarter of 13% continues a trend of very favorable industry leading attrition and we believe is a strong affirmative vote for our employee value proposition.

In India, we continue to enjoy the top slots at the campuses where we recruit. An interesting statistic we recently saw in campus is that in situations where a student has offers from Cognizant as well as other leading firms, over 70% of the time the student chooses to join us over their other choices. In the United States we have launched our second year of campus recruiting and are expanding the program to 17 campuses based on the success of this initiative over the past year.

But, we also recognize that we must continually sharpen our focus to further cement Cognizant's reputation as the employer of choice by driving initiatives to attract and retain associates who view the success of Cognizant and its clients as a key driver for their own personal growth and ambitions. These initiatives include evaluating and enhancing our associates career planning to provide additional opportunities and more flexible and accelerated growth paths.

This is increasingly important as career options expand due to the increased complexity of our business. Second, creation of enhanced on-boarding programs to support our continued headcount growth, thereby improving satisfaction and productivity of our associates.

Given that we hire an average of 20 professionals per business hour, this initiative can drive significant savings and productivity gains, and finally, refreshing our employee value proposition. This is the set of attributes that our associates and potential recruits perceive as the value they gain by being part of Cognizant.

I'd now like to comment on our growth expectations for Q4 and full year 2011. We believe that our business is well positioned for continued industry leading growth. This is supported by a healthy pipeline and a stable sales cycle. For the fourth quarter of 2011, we are projecting revenue of at least $1.66 billion. For full year 2011, we continue to expect industry leading revenue growth.

Based on current conditions and client indications, we are raising our revenue guidance to at least $6.11 billion. This represents full year growth of at least 33%. For the coming quarter and the full year, we expect to operate within our target operating margin of 19% to 20%, excluding the impact of equity based compensation expense.

Therefore, we are currently comfortable with our ability to deliver in Q4 GAAP EPS of $0.76 and non-GAAP EPS of $0.82 which excludes estimated stock based compensation expense of $0.06. This guidance anticipates a Q4 share count of approximately 311 million shares and a tax rate of approximately 24.5%. It excludes any Q4 non-operating foreign exchange gains or losses.

For the full year 2011, we expect GAAP EPS to be $2.83 and we expect our full year non-GAAP EPS to be $3.05 excluding $0.22 of estimated full year stock based compensation expense. This guidance anticipates a full year share count of approximately 311 million shares and a tax rate of 24.1%. It also excludes any Q4 non-operating foreign exchange gains or losses. Now, we would like to open the call for questions, operator?

Thank you.

(Operator Instructions)

Your first question comes from Edward Caso of Wells Fargo Securities.

Hi, good morning. Congratulations. Can you talk a little bit about what was in the guidance for Q3 and the events that you -- the acquisitions, and so forth, you did during the quarter? Was any that in guidance or did that come later?

There was about $8 million of acquisition revenue, virtually all of it was from CoreLogic. And, that was in our guidance because by the time we released earnings we had already announced the acquisition.

And, my other question is around the BPO business. Can you size it for us as a percent of revenue, the growth rates, what strategy you're using maybe to differentiate? And, where you're having traction and maybe who you're seeing most often?

Sure. Let me start with the first part of the question and then I'll hand it over to Francisco. We're very pleased with the growth we're seeing in our newer service offerings, both BPO and infrastructure management, which are newer offerings that are now --have hit the inflection point and are in the hyper growth phase. Both grew well above company average during the quarter. And, we continue to make very good progress in both those sectors.

And, I think, Ed, just to give you some color around the -- we focused our BPO business on what we think of as industry or vertical specific BPO. So, our approach to the BPO marketplace is to work with clients on processes that are not horizontal in nature but are really specific to the industries where we're strong.

Because there's a multiplier effect in doing that. We can leverage our consulting group to do process design, process redesign, we can leverage our historical deep domain expertise and our knowledge of IT around key business processes.

And so, we tend, in that space, to compete to some extent with our traditional competitive set, the global outsourcing and systems integration firm, the India based firms. But, also depending on the segment we're in there might be some specialized providers depending on the particular business process that we're competing in. So, the competitive landscape is, to some extent, common with our past competitive base, but also new competitors there.

Great. Thank you.

Your next question comes from Ashwin Shirvaikar of Citi.

Congratulations on a good quarter. Gordon, could you comment on or provide further details? You started out saying that clients are ramping up their core application management and savings to make it work.

And, you said it was to make room for FY '12. And so, I guess that brings up the question that's probably on everyone's mind which is how are your current clients starting to think about FY '12, how is the budget process going, and please, if you can provide on that?

Sure. It's playing out just the way we would anticipate it in a challenging economic environment. As Francisco mentioned, it looks like overall IT budgets will be flat to up a little bit. But, clearly we're hearing clients say they are going to shift more work to the global delivery model because they have to get more done within those budgets.

Part of the way they're doing that is they're being very aggressive in moving application management work to global delivery. What that does, is that frees up dollars so they can continue to spend on development projects. Because one theme we're constantly hearing from clients is unlike the 2008 cycle they cannot slash and burn their discretionary development projects.

So, they're saying we have to find ways to protect that discretionary spend. The way they're doing that is by freeing up dollars in their management budgets by moving that work offshore. So, it's playing out exactly the way we would like it.

And, Francisco, based on your own comments, are you better prepared, I would say, to perhaps capture more of that freed up dollars for discretionary spend and consulting now in terms of your capabilities?

Yes, I think without a doubt, Ashwin, that we're better prepared. I think we're prepared on multiple fronts. The first is that as these -- the traditional application management engagements become larger and clients look to outsource a wider range of services, our acquisition of PIPC from a high end program management standpoint and our build out of the Management Consulting Group really helps with the transformational aspects of those kinds of initiatives.

I'd also add to what Gordon said, in that when clients are looking to make that tradeoff between saying how do I move more to a global delivery model in order to protect strategic investments, that conversation very often leads to an application maintenance conversation. But, also increasingly now is leading to a conversation around things like business process outsourcing and IT infrastructure services which are also good levers that clients can use to free up budget dollars.

So again, because of the investments that we've been making, and as Gordon pointed out, our BPO and IT infrastructure services business is now hitting that point of inflection. We're seeing the conversations not just be about application maintenance but also about -- equally about BPO and IT infrastructure services.

Great, thank you for that.

(Operator Instructions)

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

Hi, thanks. Good quarter here. My question is on, I guess, fourth quarter guidance. Just looking at that relative to the peers, it looks, I guess, a touch lighter than usual. Anything to read into or call out as a relative headwind in the fourth quarter?

I don't think there's anything remarkable, positive or negative, in Q4 guidance. We guided to at least 3.7% growth. Some of our competition guides to a range instead of at least. So, some of that may be semantics. Obviously, retail is an important growth driver for us. And, as every year we would expect, retail locks down their systems for the fourth quarter.

Not seeing any signs of a budget flush. Though certainly, we've assumed there's no budget flush in Q4. But, as you can tell from the tone of the call the business remains very solid, customers continue to spend, we are not seeing disruption in Europe. So, we're not particularly concerned about Q4. But, you do have some normal seasonality if you look historically for Q4.

That totally makes sense. If I could a quick follow-up to that then. You mentioned retail. Which other verticals, or regions, should we look to potentially grow a little bit below average in the fourth quarter because obviously it sounds like everything here is pretty normal.

Certainly, you would expect weak retail. Our assumptions in Europe, particularly Continental, being modest for Q4. And then, the other one is banking is obviously coming off a very strong quarter and just given its size, I would always expect that to grow slower than company average.

Very good. Very helpful, thank you.

Your next question comes from Rod Bourgeois of Bernstein.

Yes, guys, hi. Gordon, I just want to talk about the operating margin in the quarter. I think with the Rupee depreciation that occurred, in prior years when that's happened, you've actually had operating margins sometimes go above your target range.

And, we didn't see that in this quarter. So, I guess I'm wondering if you found ways during the latter stages of the quarter to reinvest any upside from the Rupee, reinvest some back in the business for growth.

It seems like it might have been tough to do that given that a lot of the Rupee depreciation occurred in the last month of the quarter. But, it would be helpful if you could provide some color on the margins, it looked like pricing and utilization were pretty solid. So, did you find some other investments?

Yes, thanks, Rod. The Rupee had really very little impact in Q3. And, remember it only moved in the back half of September. So, our average rate for the Rupee was [INR45.7] during the quarter, obviously the Rupee is now sitting at [INR49] and change. So, the bigger benefit of the Rupee is actually a Q4 benefit, not a Q3 benefit. And, also remember we have a very aggressive hedging program.

So, as the Rupee depreciates, the impact on us is mitigated just as when it appreciates because of our extensive hedging. So -- but particularly in Q3, due to the movement late in the quarter, the impact was nominal. We get a little bit bigger impact in Q4 net of hedging. But, obviously we'll take advantage of that to accelerate some of our 2012 investment.

So, as a follow-up on the question. You'll get the benefit from the Rupee in Q4. Should we expect margins to be at the very high end of the target range or are there specific investments that we should be looking for you to make in Q4?

Our guidance assumes we're at the upper end of the 19% to 20% non-GAAP range. It will be able to accelerate investments and still be in the upper end of that range in Q4 in part due to the net impact of the Rupee.

Okay, great. Thanks guys.

Your next question comes from Nathan Rozof of Morgan Stanley.

H, thanks for taking my question. Gordon, you recently mentioned that the sales process this year didn't experience a significant Summer lull, essentially as investors were ramping up now in order to begin capturing some benefits in their investments for 2012. So, as a result I wanted to ask whether or not you have -- how visibility looks at this point in the calendar as you look into 2012 versus what visibility would normally be like at this time of the year.

Why don't I take that. I think that as we've said, instead of reiterated on the call today, our pipeline remains strong and we're not seeing clients slowing down decision making. We had a good, strong Summer with the pipeline. I think you saw some of that reflected in our Q3 results. This was only the fourth quarter I think in the history of the company where we've had incremental revenue addition of over $100 million.

So, we feel good about the pipeline and also our ability to close on that pipeline and translate that into revenue. As we look forward, this time of the year there's always a little bit of uncertainty as our clients go through the budget cycle. Clients are not quite sure where budgets are going to land. And so, they tend to be somewhat more cautious in terms of starting up new projects.

So, I would characterize our visibility -- our overall view of the marketplace as very strong and feeling good about the pipeline and where we are given the seasonality and this time of the year as normal for the budget cycle at this point in the year. So, I think it's a very normal year and we are not seeing any signs that things are slowing down at this point.

Okay, thank you. And then, just one quick follow-up. Given how much you guys see in the BFSI vertical I was wondering if you could give us any sort of a break down between the sub industries there or whether or not you were seeing divergence in demand patterns between insurance or banking or the like? Thanks a lot.

In the third quarter, on a sequential basis, both Financial Services and Insurance did quite well. The sequential growth between the two was fairly equivalent.

Thank you.

Your next question comes from Bryan Keane of Deutsche Bank.

Yes, hi, good morning. I guess my question is just on -- Gordon, I think you made a comment that there were some constraints on the discretionary spend in Europe. Has that popped up recently and is it across-the-board in each vertical or is that in a particular vertical?

Europe is interesting. We're clearly seeing the economic challenges as a catalyst for application outsourcing, no question about that. On development, it's a mixed bag. People are trying to protect development projects. And, part of the way they're doing that is accelerating application management.

And, where they're doing development projects they're looking more to leverage offshore. But, are you seeing flood gates open for new development projects in Europe due to the economy? No, but for the stuff they're doing -- we just came back from our European Community and we were actually surprised at how many of the CIOs said we are going to figure out how to protect our development spend.

We may not grow it but certainly we need to protect it. So, it's a fairly progressive view. And clearly, CIOs are looking to use -- look at the economic challenges as a mechanism to fundamentally change the way they get their IT work done. And, I think we're well positioned to capture some of that as they transition.

Okay, and then, just to follow on to that. Is it mostly, the weakness that you do see, is it in the Financial Services area? And, the last question I had which is CoreLogic, $8 million in revenue in the quarter. When did that close and how much acquisition revenue will be in fourth quarter? Thanks.

Sure, so it closed middle of the quarter. So, we had $8 million in Q3. Obviously, CoreLogic will therefore be about $15 million in Q4. So, there's incrementals of $7 million give or take. And then, we also acquired Zaffera, which will be another $7 million. So, the incremental acquisition revenue in total in Q4 will be about $15 million versus the incremental $7 million or $8 million in Q3.

Okay, helpful, thanks.

Your next question comes from Arvind Ramnani of UBS.

Hi, thanks for taking my question. Can you provide a little bit more color on the pipeline? Can you touch upon probably the type of work, the size, and the number of deals? And also, are there any large deals that you're looking to close in the next couple of months that could have an impact on how you guide for 2012?

I think -- let me start with some high level comments that's built on what I said during the prepared comments. As we look at the marketplace, and Gordon alluded to this also, this environment of volatility that we find ourselves in, whether that's economic volatility or volatility driven by other factors like advent of new technology and so on and so forth, has been now a prolonged period that our clients are dealing with this volatility.

So, what we're seeing is that clients are, in some sense, coming to think of this volatility as the new normal. And, they're looking to, in many way, take advantage of that volatility. And, I think one of the -- as we look at our pipeline, our pipeline reflects the fact that the value proposition Cognizant has in the marketplace is that on one platform, Cognizant can help clients drive both innovation and efficiency on one platform and that's a very unique capability that we build in the company.

Our pipeline reflects that. When I look at our pipeline, it's evenly balanced between what I think of as new development growth oriented work and work that I think is more focused on cost containment, driving efficiency and effectiveness type of work. As I said during the comment, we see that trend also reflected in the consulting work we're doing, our management consulting work.

When we look at the management consulting that we're doing about half the work is focused on initiatives that clients are looking at that will drive their top line growth and about half of the work we're doing is focused on work that is somehow focused on cost containment.

So, our traditional service lines of application maintenance and new service lines like BPO and IT infrastructure services are the ones that are benefiting from one side of that trend and service offerings like the traditional application development service lines. But, newer service offerings like analytics, data warehousing, CRM, are benefiting from the other side of that trend.

When I look at the pipeline of large deals, again, we felt good about the pipeline of large deals across the last several quarters. We feel good about our ability to close those deals, we are closing them. They are reflected in our results, but if I look forward over the next quarter or two, I don't think there's a single large deal or one or two big deals that I would point to that would say it would have a significant impact on our -- how we think about guidance going into 2012.

Great, thank you. Good luck for the rest of the year.

Thank you.

Your next question comes from Sachin Jain of Kaufman Brothers.

Hi, guys. You've increasingly talked about investments in mobile, social, and cloud. Can you give us a sense of what these areas are as a percentage of overall revenues? And, where do you expect it to be over the next 2 to 3 years? Just trying to get a sense of it.

When we think about the 3 horizons of service offerings that we talk about, the social, mobile, and cloud are the Horizon 3 offerings. These are offerings which are nascent, but where we're making significant investments because we think they are going to be significant growth drivers going forward. Today, those represent collectively a very small percent of revenue, a very small portion of revenue.

Our goal there is not necessarily short-term revenue. Our goal is to build mind share, to build capability, so that we stay ahead of our clients and when our clients start to adopt, we're there and ready. There's an incredible amount of work that we're doing, for example, in mobile this year alone in the first half of the year we did over 100 mobile projects.

And, we've got, I think, 50 or 70 currently in flight. So, there's a tremendous amount of work we're doing. But, collectively the revenue represents -- is very small. In terms of when I think these will have meaningful impact on revenue, I think it's still several years we're looking at the next 2 or 3 years before these will start to become sizeable.

And, we'll point to them and say these are having a significant impact on revenue. But, that's a very normal cycle. When I think back to investment that we made in BPO and IT infrastructure services it took a few years of investment before those started to move the needle at an overall company level in revenue.

Fair enough. And, one final question before I turn it over. You talked a bit about BPO earlier. Can you also talk about the traction and investments you're making in platform based BPO solutions or even BPAS, if you could talk about it?

Yes, we consider it -- when we talk about the BPO business, we think that platform based BPO is just the way that things will happen going forward. And, a large part of that business, we continue to invest in building our platforms. I think it was last quarter or the quarter before we talked to you a little bit about the platforms we built in life sciences for Commercial Operations. And, our win with Eli Lilly, that continues to ramp up very nicely.

And, exhibit the kinds of characteristics that we expect out of platform based BPO businesses. And, we continue to look at a range of options including organically building platforms, doing small tuck in acquisitions to acquire platform capability, and also looking at monetizing client assets as ways to build out platforms. So, we expect to continue to build out a platform -- a portfolio of platforms to underpin all aspects of delivering our BPO business.

Great. Thanks for taking my questions.

Thank you.

Your next question comes from Jason Kupferberg of Jefferies.

Thanks, guys. So, I just wanted to talk a little bit more about Q4 and try and take your temperature qualitatively a bit. The numbers are what they are. The sequential growth may be a little bit less than people were expecting.

But, is it the kind of situation where you guys feel the need to inject a little bit of extra conservatism into this years Q4 guide, perhaps versus a quote-unquote normal year just given some of the macro uncertainty? Because it sounds like all of the underlying trends are still positive. But, I wanted to try and get a concrete sense of whether or not there's a little bit of extra conservatism that you guys are building in here just given some of the macro unknowns.

Yes, as I said, we consider this to be a normal year. We're not seeing the budgets cycles slow down. We think budgets are right on track. As I mentioned during my comments, budgets, we think are -- will be -- our best view right now, although it's early in the process, is that budgets will be flat with an upward bias going into next year which is the way its been for some years now.

The share shift to a global model clearly will continue and so we expect that will fuel our growth. We don't see -- the one thing is we don't see a budget flush this year as in some prior years. So, that is built into our guidance for Q4. But, I would say that, all things considered, I think this is a normal Q4 and our visibility is as it is in a traditional Q4 at this point.

Okay, and just as a quick follow-up, obviously your model is evolving more towards domain expertise and consulting which I think is absolutely the right strategy. And, I wanted to get a sense of how that has impacted your approach to employee training and development. Are you having to invest more in these areas as part of your move up the value chain and is there any way to quantify that?

The answer is absolutely yes. It has changed how we attract, how we train, how we retain people. We have a much more complex workforce today. From our very high end consultants through to our technology specialists through to BPO people, infrastructure management folks. So, a very broad range of workforce.

So, as this has evolved we've been making sure that we have multiple career tracks because that's one of the most important things is not so say one size fits all but to recognize the variations in the workforce. So, we feel good about it. We have always invested very heavily in technical training. Clearly, we've beefed up our, I'll call it our domain training, as well as our leadership development.

But, that investment is all well under way and it's in our run rate. And, you can see it in our attrition rates. Our attrition rates are well below an industry average when you put it on an apples-to-apples basis. So, we're feeling quite good about it.

Sounds great. Thanks, for the comments.

Your next question comes from Julio Quinteros of Goldman Sachs.

Great. Gordon, just real quickly, on the -- if you go back to the beginning of the year and look at Europe in terms of some of the slips you guys had seen, a lot of that was supposed to have come back in the third quarter. Can you just characterize, how much of that came back? Did you get all of the pieces of the European revenues back in the third quarter as expected?

Certainly not all of it. If you had asked me in the earlier part of the year in the back half of this year I would have expected Europe to grow faster than the company average. Obviously, it's growing a little bit slower. But, obviously, we also didn't anticipate there would be as much turmoil in the -- particularly in the Euro zone.

But, given the turmoil however we're feeling pretty good about things. We still had nice sequential volume growth. But, is it as robust as we would have anticipated 6 months ago? Certainly not. But, is it holding up well?

Yes, and probably most importantly, when we sat down with 200 of our clients and prospects a couple weeks ago and talked about what their spending plans were, they were not slashing and burning things. They were saying, yes, we still -- our budgets going to be tight but we still have to get thus work done.

So, there's probably increased interest in how do they leverage us going into 2012. But so, kind of a mixed bag but not as good as we anticipated for this year but probably better than we would have expected given what you read in the newspaper for what clients are planning to do.

Okay, just one quick follow-up on metrics. Can you just give us the top 5, top 10 clients and then the effort mix and billing rates as always?

Sure, so top 5 clients were 16.3%, all of our 5 largest clients grew sequentially, and top 10 was 27.8% and what was your other question, Julio?

Effort mix and billing rates, the change?

Oh, sure, hang on one second. We shifted a little bit offshore, so not significantly. We were about 79% offshore, 21% on site. So, a slight shift towards offshore. And, billing rates were, on a sequential basis, essentially flat. It moved a couple pennies here and there.

Thanks guys, good luck.

Thanks.

Your next question comes from Mayank Tandon of Needham.

And, this is our last question, thank you. Go ahead, Mayank.

Thank you, good morning. Gordon, just -- you mentioned you saw the early kick from regulatory work in Financial Services. So, I'm just trying to figure out is that going to be more for driver in Fiscal '12? What's your best read talking to customers?

Hi, Mayank, it's Frank. Listen, we did start to see some early work in Financial Services around regulatory reform. And, that's driven by a broad range, it's not just dot frank. There's new Financial Services related regulations across the world. And, actually, some clean up work from Basal II. I anticipate some stuff for Basal III, new FSA regulations in the UK.

So, we're starting to see consulting work, we've been doing consulting work around the new Regs for some time and we're now just beginning to see that translate into early IT work. And, interestingly, even some conversations with clients around some of this translating into BPO work as clients say the new activities that they have to perform perhaps are best not done in house but done by a third party provider like us.

So, we're starting to see the signs that this is translating into downstream work. I think it will be somewhat of a driver for next year, but I think it's probably too early for me to characterize exactly how strong the driver will be. I think certainly more than we saw this year, but I don't know if I'm yet ready to say it's going to be a significant driver going into next year.

And, on the healthcare side is that helping some of the growth that you've seen in the last few quarters in terms of further regulatory work helping? Or is that really just more an under penetration so you're seeing strong growth on the back of that?

Oh, clearly, in healthcare, we're benefiting from regulatory work, both direct work on some of the new code sets that have to be done as well as work related to our clients preparing for increased volumes that they anticipate happening out of US healthcare reform.

And, as I said, our healthcare business was on fire in the third quarter. It grew 11% sequentially. So, we're really feeling very good about healthcare. Part of it is directly due to regulation, but big part of it is just the long term changes in the industry and people wanting to adjust their business models.

Got it. Just a couple of quick housekeeping items, Gordon. What is the average FX rate you're using for the Rupee and for the Euro and the Pound for the quarter in terms of guidance?

For the -- It's spot rates for everything, current spot rates.

Got it. And, finally, you mentioned on pricing that you've already seen the impact that you had built in. I didn't quite get the comment around pricing. So, maybe you could help clarify in terms of what you're seeing on the pricing front and what do you expect going forward.

Sure, so the way it works is you negotiate price increases 6, 9 months before they kick in. So, in 2010, we were very successful in negotiating price increases that kicked in in the first half of 2011. The reason we were so successful is had been a number of years since we had a price increase so everyone was eligible.

And, you saw that in our average rate is up about 4% or 5% year-over-year. Virtually all that kicked in the first and second quarters. So, there was nothing -- there was almost nothing left from the 2010 negotiations to kick in Q3. And, that's why it was flat which is exactly what we would have anticipated.

We're talking to clients now about 2012 rate increases. Clearly, we will not have the same order of magnitude as we did in 2011 for the very simple reason not all customers are eligible. So, the pool of who we can get price increases from will be smaller than it was than last year because not every client gets a price increase every year.

The way I'd characterize pricing, it's stable with an upward bias. So, we're feeling fine about pricing, not seeing anything that's causing alarms. But, certainly, not every customer will contractually be eligible this year versus last year. Most customers were eligible.

Excellent. Thanks, very helpful. Thank you.

Thanks, Mayank, and thanks, Gordon. So, we'll just wrap up. And, as we said, despite persistent market uncertainty, our clients continue to make targeted investments with trusted providers to build agility into their business models through lower, more variable cost bases and new capabilities.

The close alignment of these objectives with our services portfolio leaves us optimistic that we're making the right investments to remain the partner of choice for our clients over the long term. Thank you, again, for joining us and we look forward to speaking with you in 2012.

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