高知特 (CTSH) 2012 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions second quarter 2012 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 Treasurer at Cognizant. Please go ahead, sir.

Thank you, Brandy and good morning, everyone. By now you should have received a copy of the Earnings Release for the Company's second quarter 2012 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, Chief Executive Officer; Gordon Coburn, President; and Karen McLoughlin, Chief Financial Officer.

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 that's described in the Company's Earnings Release and other filings with the SEC.

I would now like to turn the call over to Francisco D'Souza. Please go ahead.

Thank you, David, and good morning, everyone. Thank you for joining us. This morning, Cognizant released second-quarter results and I am once again very pleased with our performance. Revenue grew to $1.795 billion, a 5% sequential increase, and a 21% increase over the same quarter last year. Our non-GAAP operating margin remained at the top of our guided range at 20%.

We achieved these results in spite of headwinds from the unexpected and significant depreciation in European currencies that has occurred since we last spoke with you. Our performance is also particularly notable against the backdrop of a tenuous global recovery that has shown further signs of weakness over the last three months. European volatility persists, GDP forecasts have been cut across developed and developing economies, and a looming fiscal cliff in the United States prompts a cautious investment environment. Yet amidst this turmoil, demand for our services remains strong.

We continue to capture market share, as reflected by another quarter of industry-leading revenue growth. Clients continue to turn to us, not only for the operational improvements in efficiency and effectiveness that they have always known us to deliver, but increasingly to help them reinvent their business models in the face of secular industry changes, changing demographics, and a new stack of social, mobile, analytics and cloud technologies. This quarter, we closed a number of significant transformational engagements, including ING US and Philips. In both examples, clients embrace our unique value proposition that combines domain expert consultants, intimate on-the-ground client engagement teams, proven large-scale program governance expertise, and a robust global delivery network. Gordon will with speak to these engagements in more detail shortly.

Turning to the future. Our pipeline remains robust across industries and services. Our approach of reinvesting in the business has given us the deep client relationships and leading-edge service offerings to help clients embrace the changing future of work. As a result, we are comfortable with our ability to deliver revenue of at least $1.875 billion for the third quarter, and at least $7.34 billion for the year. It's important to note that we have maintained our guidance for the full year despite the currency headwind which, based on current exchange rates, has resulted in a negative impact of over $20 million for Quarters 2 through 4 compared to rates when we last provided guidance in early May. In addition to this strong revenue outlook, we are pleased to increase our full year EPS guidance by $0.02.

Let me now hand it over to Gordon who will discuss our operating results in our core business. I'll then come back and provide some commentary on our emerging service offerings before handing the call over to Karen to cover our financial metrics. And as always we'll leave time at the end of the call for questions. Gordon.

Thank you, Francisco. We had a solid quarter. Despite the uncertainty and volatility in the markets, clients continued to act on their dual mandate of cost savings and operational efficiencies, combined with innovation and transformation. Demand patterns within our industries played out as anticipated and we continue to see opportunities across all areas of our business, including our core IT services, which we call Horizon 1, as well as our Horizon 2 services, which include BPO, infrastructure management, which we refer to as ITIS, and consulting. And we are also seeing increased interest around our next generation of offerings which we refer to as Horizon 3.

This market downturn, as with those before, is serving as a catalyst for clients to embrace a broader range of Cognizant services. As part of this trend, large, complex and transformational multi-service line deals are becoming more common. Clients see us as a credible transformation partner and we are well positioned to execute on these opportunities. We are one of only a handful of firms that possess the unique combination of deep domain expertise and management consulting strength, coupled with the operational capabilities of large-scale program management, change management and ability to seamlessly integrate client staff transfers. We deliver all this to our clients using a global delivery model that makes the complexities of managing large-scale global transformation programs seamless and transparent to our customers.

The great example of our strength in this area is our recently-announced deal with Philips, a global leader in healthcare, lighting and consumer lifestyle solutions, where we will provide a comprehensive range of consulting and application services globally. These services will help Philips consolidate, rationalize and enhance its IT landscape and transition the IT organization to an output-based managed services model across multiple business lines and corporate functions. This in turn helps create a variable cost environment, drive structural savings, and free up resources to create higher-value business capabilities.

Horizon 1, which consists of our core IT services, including application development and maintenance, testing, data warehousing, and ERP, continues to present significant growth potential through deeper penetration of the global delivery model and expansion into emerging geographies. As we have said before, the market remains underpenetrated. And our Horizon 1 opportunities and partnerships continue to open doors for newer areas of collaboration with clients due to our strong demand-based relationships.

Within Horizon 2, which includes BPO, ITIS and consulting, we continue to see strong growth. This is particularly true in our core industry-focused BPO offerings such as membership, claims management, clinical data management, and annuities and retirement services. Our strong IT and BPO capabilities are increasingly allowing us to convert traditional BPO work to comprehensive end-to-end managed services opportunities. This has allowed us to create a compelling value proposition for our existing IT clients.

Our recently-announced $330 million relationship expansion with ING US is a perfect example of several of the trends we are seeing. It is a large transformational deal, built on an existing Horizon 1 relationship, and a truly industry aligned opportunity. We will provide a comprehensive array of insurance business process services, such as enrollment, policy administration, account maintenance and servicing, and claims management to support ING's retail and institutional clients. Also, by hiring over 1,000 ING US employees and establishing two operations centers in the US, we will create a world-class US-based center of excellence to provide similar services to other Cognizant financial clients. This will be an important component of Cognizant's on-shore delivery backbone which already includes delivery centers in Arizona, Florida, New Jersey and Arkansas.

Cognizant business consulting continues to grow well. Our strong business performance and pipeline in this area is an indication of the growing demand for consulting work related to clients' dual mandates of cost and innovation, and it is a validation of our approach to building our consulting practice. Not only are we able to deepen existing client relationships with consulting services, but these services are now also enabling us to win new clients based on the strength of our consulting value proposition. Cognizant was among the vendors to recently receive the highest possible scores from Forrester Research for vision, business organization, management credentials and case studies. According to Forrester, and I quote -- Cognizant has a very strong vision. Its client references were superb, both in the business and technology slide. And it is clear that it deeply understands technology-enabled transformation.

Looking at our performance from an industry standpoint, growth was broad-based. We saw solid growth in both banking and insurance as our Financial Services segment grew 6.1% sequentially and 20% year-over-year. Banking has begun a modest rebound and our outlook for the rest of 2012 remains cautiously optimistic. Despite the sluggishness during the first quarter, in Q2 we saw growth with both our larger clients, as well as our mid-sized clients. Cost optimization continues to be the primary focus for these clients and we continue to win market share. Additionally, there's significant restructuring activity in this industry, enhancing our opportunities for collaboration as banks attempt to consolidate, re-engineer and transform operations.

Discretionary spend is on the rise in the insurance industry and we are seeing strength in virtually all service areas of both our Horizon 1 and Horizon 2 activities within this industry. Healthcare grew 3.6% sequentially, and 25% year-over-year. The pharmaceutical portion of our business returned to sequential growth despite continued constraints on discretionary spend. However, for the remainder of the year, we expect pharma growth prospects to continue to remain weaker than Company average.

Retail and manufacturing had another strong quarter, growing 7.1% sequentially and 22% year-over-year, with several top tier wins and new logos. Within retail, demand remains strong as the growing use of e-commerce is driving fundamental shifts in consumer buying behavior. Cost agility remains a big driver in this space, but clients are also increasing their focus on transformational initiatives, including how these clients interact with their consumers and drive their top line. For example, a British retailer has engaged us to enable what is known as a retail refresh, involving redesigning and relaunching its stores, merchandising and pricing through the enhancement and overhaul of existing IT systems. Another big win in this space was a large managed services engagement with one of the world's largest franchisers of convenience stores.

Moving on to our performance by geography. Growth in our major geographic theaters of North America, Europe and the Rest of the World played out as we anticipated. As expected, growth remained weak in Europe, with revenues up 2% year-over-year and down 0.4% sequentially. Significant currency pressures, coupled with continued economic uncertainty, will limit growth opportunities in Europe for the remainder of the year. That said, our European pipeline remains strong and several recent wins will begin ramping as we move towards the latter part of this year.

As we have said before, Europe remains a very attractive long-term market for us. And we continue to focus heavily on building our front-end capability, particularly in France and Germany where we are seeing an increasing number of opportunities. The economic turmoil is certainly curtailing spending but we are starting to see an upward shift in pipeline as clients look for ways to run their business more efficiently, and we are seeing a shift in business mix from discretionary projects to larger end-to-end outsourcing deals. Our growth in the Rest of the World remained very strong, with a revenue increase of 16% sequentially and 45% year-over-year. We were particularly pleased with our performance in Singapore, India, and Australia.

I'll now hand the call back to Francisco to comment on our investments in our Horizon 3 emerging offerings.

Thank you, Gordon. Cognizant has long differentiated itself by investing substantially back into our business to stay relevant during changing times. I want to highlight our progress in some of the emerging, or Horizon 3, service offerings in which we have been investing. We remain focused on three areas within this Horizon. The first area is new markets, which includes new geographies like Latin America and new industries like the government. The second area is new delivery models including platform-based services that break linearity between revenue and headcount. And the third area is new technologies, especially the emerging corporate IT stack based on social, mobile, analytics and cloud, or what we're calling SMAC.

Let me give you some examples of the traction we're seeing in each of these Horizon 3 areas. In our new markets area, we are actively expanding our presence in Latin America by complementing our existing delivery center presence with senior client-facing relationship and consulting teams to serve clients in the region. Our ability to leverage our deep domain expertise and global scale is proving attractive to clients. For example, in Brazil, which represents the largest market for our services in Latin America, we've established a strong local leadership team, built out a local delivery center to cater to domestic clients, and invested to bring our global capabilities to the market. As a result of this focus, we've won a number of new clients in Brazil which we expect will ramp up over the coming year.

In our new delivery models area, we continue to invest in proprietary platform-based solutions, including business process as a service, or BPaaS, and software as a service, or SaaS, that allows us to deliver entire service stack -- that is, infrastructure, applications and processing -- to clients. Platform-based solutions reduce clients' capital exposure to IT assets and the costly associated maintenance in exchange for variable outcome-based pricing. An example of this is an engagement we recently closed where we will provide assetSERV, our hosted digital asset management platform, to over 14,000 global users at one of the world's largest automotive manufacturers. assetSERV is targeted at any client that needs to catalog, transform, store or distribute large volumes of digital assets, such as marketing materials, product documentation, video files and so on. By choosing a hosted platform, clients not only take advantage of our best-in-class tool to manage their proliferation of media files, they do so in a way that allows them to focus their resources on strategic marketing services rather than on the complexity of supporting technology. assetSERV is one of a portfolio of 10 platform-based solutions which we have in the market with active customers.

In addition, we have a number of additional platforms in various stages of development. In our new technologies area, clients are accelerating towards new business and operating models, leveraging social, mobile, analytics and cloud infrastructure and applications. An example of this is Cloud360, a SaaS platform that brings together best practices from our years of experience deploying, provisioning and supporting business applications. Cloud360 is effectively a cloud operating system to manage multiple virtual private and public cloud platforms and instances from a single consolidated management console. Cloud360 is now licensed by over a dozen leading corporations, including a recent agreement with a global pharmaceutical company to develop a new business intelligence platform leveraging Cloud360 to manage the underlying infrastructure.

Our Horizon 3 offerings, while in their early stages, lay a solid foundation for Cognizant's long-term growth. At the same time, we are primed to capitalize on the ample growth opportunity in our core Horizon 1 and 2 services that Gordon just highlighted.

Let me now turn the call over to Karen to review our financial performance and guidance. Karen?

Thank you, Frank, and good morning to everyone. As detailed in our press release, our second-quarter revenue grew 4.9% sequentially and 20.9% over last year, to $1.795 billion, ahead of our guidance of $1.79 billion from last quarter. For ease of reference, we have included a fact sheet with the Earnings Release to provide key data on revenue by industry and revenue by geography, which has already been discussed by Gordon.

Now let me discuss some of our other results. I will begin with revenue and customers. Application development represented 51.6% of revenue and application management, 48.4% for the quarter. Development grew 22% year-over-year, and 5.3% sequentially. Application management grew 20% year-over-year and 4.4% sequentially. We saw fairly balanced growth between development and management as clients expanded outsourcing projects to address their 2012 savings initiatives. 33.4% of our revenue came from fixed-price contracts during the second quarter. We are pleased that the proportion of fixed-bid revenue has increased from 31.3% in Q1 of this year. As expected, on a sequential basis, our pricing during the second quarter was stable. We closed the quarter with 815 active customers and the number of accounts which we consider to be strategic increased by 6. This brings our total number of strategic clients to 202.

Turning to cost. On a GAAP basis, cost of revenues, exclusive of depreciation and amortization, was approximately $1 billion, and included $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 4,200 during the quarter and ended the quarter with approximately 136,000 technical staff. Second-quarter SG&A, including depreciation and amortization expenses, was $432 million on a GAAP basis and included approximately $22 million of stock-based compensation expense. Our GAAP operating margin was 18.5% for the quarter and our non-GAAP operating, margin which excludes stock-based compensation expense, was 20%, at the high end of our target range of 19% to 20%. We have further extended our Indian rupee expense hedging program. As of June 30, we have over $3.8 billion in outstanding hedges of our rupee expenses, which will mature each month through 2016 at an average rate of approximately 52.9.

We had approximately $10 million of interest income. In addition, we had $6.9 million of other non-operating losses comprised almost entirely of FX losses. Our GAAP tax rate for the quarter was 24.8%. Our diluted share count for the quarter was 307.3 million shares, down by about 1.9 million shares from Q1. During the second quarter, we repurchased approximately 6 million shares at an average price of $59.50 for a total cost of approximately $358 million. Since the end of the second quarter, we have purchased an additional 947,000 shares at a cost of approximately $53 million, at an average price of $55.56. As of August 3, 13.2 million shares at a cost of $834 million have been repurchased under the current share repurchase program authorization.

Turning to the balance sheet. Our balance sheet remains very healthy. We finished the quarter with over $2.3 billion of cash and short-term investments. During the quarter, operating activities generated $324 million of cash. Financing activities used approximately $348 million of cash. This consisted of expenditures of $358 million towards our share repurchase program, partially offset by net proceeds of $10 million related to option exercises and related tax benefits, as well as our employee stock purchase program. We spent approximately $78 million for capital expenditures during the quarter, and for the full year we continue to expect our capital expenditures to total approximately $370 million.

Based on our approximately $1.5 billion receivable balance on June 30, we finished the quarter with a DSO including unbilled receivables of 76 days, essentially flat with last quarter, and up slightly from 75 days in the second quarter of 2011. The unbilled portion of our receivables balance was approximately $208 million, up from $187 million at the end of Q1. Approximately 62% of the Q2 unbilled balance was billed in July.

Net headcount increased by over 4,700 people during the quarter. Approximately 40% of gross additions for the quarter were direct college hires, while approximately 60% were lateral hires of experienced professionals. We ended the quarter with over 145,000 employees globally. As we have shown previously, our business model is flexible allowing us to align hiring and the pyramid to growth. Annualized attrition in the second quarter was 12.1%, higher than the Q1 attrition rate of 10.6%, but significantly lower than the attrition rate of 15.2% in the second quarter of last year. As we have discussed in the past, there is 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. Utilization increased slightly on a sequential basis during Q2. Offshore utilization was approximately 68%. Offshore utilization excluding recent college graduates who are in our training program was approximately 78%, and on-site utilization was 93% during the quarter.

I would now like to comment on our growth expectations for the third quarter of 2012, as well as the full year. For the third quarter, we are projecting revenue of at least $1.875 billion. This represents sequential growth of at least 4.4%. For the full year, we continue to expect industry-leading revenue growth. Based on current conditions and client indications, we expect to deliver revenue of at least $7.34 billion, reaffirming our guidance from last quarter. This revenue represents growth of at least 20% compared to 2011. We expect the majority of our growth for the remainder of 2012 will come from the ramp-up of clients that we won over the past months and years, including recent transformational engagements such as ING US, Philips and others.

We are particularly pleased to be able to maintain our guidance for the full year despite the FX headwind which, based on current exchange rates, has resulted in a negative impact of over $20 million for Quarters 2 through 4 compared to rates when we last provided guidance in early May. During the remainder of 2012 we intend to closely monitor our spending, while continuing to invest in our Horizon 1, 2 and 3 businesses. We expect our non-GAAP operating margin to remain in the range of 19% to 20%, excluding the impact of stock-based compensation expense. Therefore, we are currently comfortable with our ability to deliver in Q3 GAAP EPS of $0.86, and non-GAAP EPS of $0.92, which excludes estimated stock-based compensation expense of $0.06. This guidance anticipates a Q3 share count of approximately 304 million shares, and a tax rate of 25%. Our guidance excludes any future non-operating FX gains or losses.

For the full year, based on current business trends, we expect our GAAP EPS to be at least $3.38, and our full-year non-GAAP EPS to be at least $3.64, excluding $0.26 of estimated full-year stock-based compensation expense. This is an increase of $0.02 of EPS versus our previous guidance. This guidance anticipates a full-year share count of approximately 306 million shares and a tax rate of approximately 24.8%. It also excludes any future non-operating FX gains or losses.

Now I would like to open the call for questions. Operator?

(Operator Instructions). Rod Bourgeois with Bernstein.

Your 2012 guidance now implies 4.4% quarter-to-quarter revenue growth in both Q3 and Q4. And I think many will view this growth as more back-end loaded than normal. Interestingly, we've been assuming in our model that growth rates would be less seasonal across quarters this year, partly due to the trouble you had in ramping discretionary deals in Q2, but also because it seems more of the growth is coming from outsourcing and maintenance type deals. And even transformational deals that tend to be longer-term programs.

These programs tend to be less seasonal, it seems. And that would then create logic that your quarter-to-quarter growth rates this year should be less seasonal or less lumpy than normal. So, the question here is, is it correct to assume that a less lumpy quarter-to-quarter revenue growth projection is normal, given the type of demand that you're experiencing? Or are you feeling that your guidance for 2012 is contingent upon a Q4 set of revenue drivers that are more back-end loaded than normal? Do you need an abnormally strong Q4, in other words, to hit your 2012 growth guidance?

Thanks, Rod. It's Gordon. Clearly, it's the former. This year we are more dependent on maintenance and you don't have the same level of seasonality on that. Our guidance does not, let me repeat this, does not assume any sort of Q4 budget flush. The other piece of the puzzle, Rod, is we've won some large deals that are already in our pocket that ramp up in Q4. So, we also have some momentum from that. So, a combination of the nature of work we're seeing and some deals that we've already won, is what results in us expecting sequential growth in Q4, equal to that in Q3. So there's no hockey stick but it's equal to the Q3 growth rates.

So, the Q4 growth that you're assuming in your guidance right now is more weighted towards outsourcing and maintenance type work than what would be normal in the past years?

I'm not sure normal. We're not counting on any surge in development work in Q4, certainly. And we're not counting on any budget flush. But this year maintenance is an important driver for us. In Q2 development was a little bit stronger than maintenance, which you always have because of the start of the new budget cycle. But as we look at the rest of the year, maintenance will be a an important driver. We obviously have a lot of visibility into that, both broad-based across our clients, and, in particular, for some of the large deals that we've won.

Okay. Great. And then one final question on demand. There's widespread evidence out there that outsourcing interest in Europe is on the rise. That's clearly true across a number of competitors, as well. You echoed that by talking about your European pipeline. But in the past, in Europe, it's often that you see interest, and then that interest takes a long time to convert into actual revenues. And so the question I have is, is it feasible, based on what you're seeing, that your European growth rate could be better in 2012 versus 2011, just based on what you're seeing in the pipeline and the propensity of clients to actually move forward and to convert that pipeline into real revenues?

I fully agree with you on that, Rod. We are seeing a good pipeline in Europe but absolutely it takes longer to convert into revenue because of all the regulatory and cultural issues. But it does set us up favorably for 2013 in Europe. And certainly compared to 2012, the comparables are pretty easy for Europe.

Excellent. Thanks, guys.

Darrin Peller with Barclays.

First of all, you showed nice growth both year-over-year and sequentially in the financials vertical, which came in pretty nicely above our estimate. You mentioned in your remarks that I think banks are showing restructuring and cost optimization now, yet financials was definitely one of the weaker areas for the past couple of quarters, either in the US or Europe. It seems like it's turned a corner. Can you just provide some color on what exactly is going on underlying this change? And if you think it's going to be sustainable?

Hi, it's Frank, Darrin. Let me try and address that. If you separate our BFSI segment between banking and insurance, we did see modest rebound on the banking side. I think that that was driven largely because for the last couple of quarters, as banks were reassessing their priorities, a lot of stuff got put on hold. And I think what we're now starting to see is some of those things that were put on hold are now starting to come back on the docket and we're starting to win some of that business going forward.

Insurance has had a good year, year-to-date, and that trend continued. So, when you put those two things together, a modest rebound on the banking side, combined with strong performance, relatively strong performance, in insurance over the course of the year, the segment as a whole had a strong quarter, a little stronger than we would have anticipated when we last talked to you a few months ago.

That's great. Just one quick follow-up. On the life sciences side, obviously that was also one of the points of contention last quarter. Is that showing a little bit more stability now?

I think the word stability is right. We had sequential growth this quarter, in the second quarter. When I look at the remainder of the year, we're not out of the woods yet. Our guidance assumes that pharma grows slower than Company average. I think that's the appropriate assumption. But it looks like the worst of it is over.

Good to hear. Thanks, guys.

Tien-Tsin Huang with JPMorgan.

Good results here. I had one questionm, just on pricing. Karen, you said it was stable but has your outlook on pricing changed at all since last quarter? I ask given the variance seen at some of your peers. And, of course, all the FX volatility.

No. At this point we're continuing to see pricing be stable. We're seeing good discipline in the industry. So, we're not really anticipating any changes at this point.

All right. Terrific. Glad to see the buybacks too. I'll jump off. Is that a new attitude here towards buybacks going forward?

Tien-Tsin, it's Gordon. As we've said, we want to keep balance sheet flexibility. The industry is changing quickly. Clearly we're positioned to take advantage of that industry change. So we want to make sure we have all the flexibility that we need.

That being said, we do have a fair amount of cash and we do try to opportunistically return it to shareholders in ways that are accretive. Obviously with the stock price where it was during the second quarter, we took advantage of that to accelerate the share repurchases. We still have $170 million left in the program. We still have some time to finish up the existing program.

Glad to see it. Thank you.

Keith Bachman with Bank of Montreal.

I wanted to return to the implicit Q4 guidance for a second, if I could. In '11, your quarterly growth was about 3.9%, and you're guiding to about mid-4%s, call it, for this quarter. And yet in '11, pharma in Europe was probably stronger. So, I wanted to see if you could just give a little more color on Q4. And particularly you mentioned banking's returning in some of the big deals. Is there any way to rank order the importance, or give a little more color about why the sequential growth is stronger, anticipated to be stronger, in this year versus last year, despite some weaker background?

Sure. So, there are a couple things going on. Last year we grew 3.9% sequentially in Q4. This year the implied guidance would be 4.4%. So, really pretty close in my mind. That's kind of noise. When you peel it back a little bit, first of all, last year we were coming off an extraordinarily powerful Q3 driven by development. It grew almost 8% so it made the sequential comps a little bit tougher.

Also, this year we have two things going on, first. One, banking. Financial services is a bit more stable than it was this time last year. And we have several deals that are wrapping up, known deals. So the combination of the two of those plugged that gap. That gap is 50 basis points. Really pretty small.

Okay. Then just if I could ask a follow-up then. In terms of the industry verticals, other is growing weaker than the Company average. If you could just call out your expectations going forward, what was drawing that down a little bit? More importantly, your expectations for that category as we look out over the next couple quarters. Thanks.

Sure. Other tends be a little bit more weighted towards discretionary development work. That's where our high tech business is. It's just the nature of the economy. That other category tends to be a little bit more volatile. That's all baked into our guidance.

But as you look forward, though, would that be above, in line or less than the Company growth rates?

I'm not sure there will be material differences. Our assumption is discretionary spending stays modest, which would mean that would have a drag on other.

Okay. Thanks very much.

Ashwin Shirvaikar with Citi.

It looks like a good performance here in a tough situation. I want to talk about Europe. As I look at the data, UK seemed to do well, Continental Europe declined. Is there a way to break out the currency impact, UK versus Continental Europe? And also, understanding that near shore outsourcing is a pretty good driver nowadays in Continental Europe. Do you feel [a pressed] need to acquire or significantly grow those kind of assets to do better in Continental Europe?

I'll take the first part of that, Ashwin, in terms of the constant currency growth. So, the pound Q1 to Q2 actually moved very slightly. About 1.57 in Q1 versus 1.58 in Q2. So, essentially the constant currency growth is about the same as reported growth in UK, so it's up slightly, about 1.5% quarter-over-quarter.

The FX impact was primarily on the continent between the Euro and the Swiss franc which had significant movement in the second half of the quarter. And so, on a reported basis the group was down 0.4%, and 0.2% on a constant currency basis. But most of that was continental Europe or other.

Ashwin, it's Frank. Let me take the second part of your question. Clearly, delivering in Europe requires two things. At least two things. One is a very strong in-country local presence, teams on the ground that can face off with their counterparts at the client. And then the other is, to some extent, what we think of as local or near-shore delivery centers. Both of those are important and we're focusing on building on both of those sets of capabilities.

So we've got near-shore centers in Hungary, we've got a near-shore center in France. We're looking at other near-shore centers around Europe and we'll continue to build those out. And when it comes to building out local teams in their respective countries, we have looked at doing that both organically and through in the past tuck-in acquisitions in different countries around Europe. So we've done three, four small acquisitions across Europe in different countries over the years. And we'll continue to look actively at both organic and inorganic options to build out the local in-country presence, given that we think Europe in the long run is a very strong opportunity going forward.

Okay. And with regards to the growth of your transformational work, do you feel looking at your pipeline and sales cycles, do you think it can close a few more ING or Philips type deals this year? Can you comment also on the related growth of your consulting practicing?

Sure. Let me take the first part and maybe Frank can comment on consulting. We have a good pipeline of transformational deals. Obviously, when you close those, given the size and complexity of those deals, is a little bit more erratic. So I don't know if we'll close more this year or next year, but clearly we will close more going forward. Typically they don't kick in day one. They take several months to kick in.

We're not counting on that in the current guidance. But we feel very good about the deals we've won and equally feel good about a robust pipeline of additional transformational deals. You want to mention consulting?

I think, Ashwin, the transformational deals in consulting in some senses are very related. When you think about transformational deals, we feel very good about how we're positioned to address the transformational deals because we think we've got this very unique set of capabilities under one umbrella. That is management consulting, deep domain expertise. From a technology standpoint, a very strong footprint in enterprise architecture. And then we talk about the intimate on-the-ground client engagement teams and our ability to do very large-scale program management and change management. You put all that under the umbrella with the global delivery network, and it creates a very strong set of capabilities to do transformational deals.

So along those lines, we continue to focus on building out Cognizant Business Consulting, or CBC. I'm actually very pleased with the progress we've made. But we'll continue to push toward there because consulting becomes very pivotal to being able to both sell and solution but also execute on these large transformational engagements.

Okay. That's good to hear. Thank you, guys.

Edward Caso with Wells Fargo Securities.

Great results here. Can you talk a little bit about pharmaceutical as opposed to the whole healthcare? I'm just trying to get a sense for how the relative importance pharma is to the healthcare category.

Sure, Ed. As you know, the two together are about 27% of revenue. Healthcare represents a bit more than pharma. And as you said, pharma is the one that has been challenged for the last couple quarters. A lot of it is due to the patent cliffs and the reality hitting that. That those cliffs, that have been planned for a while, are now hitting the customers.

We had a tough Q1. Q2 we returned to sequential growth, which we were pleased about. But we still have modest expectations for pharma. And obviously, since pharma's a meaningful part of the healthcare segment, that will keep the growth rates of the overall healthcare segment down. But essentially playing out about as we expected. No surprises there.

Can you give us an update on the visa situation and the denial rates that you're seeing on both the Hs and the Ls? And if there's any change or is that unlikely before the elections?

There's not really been any change in Washington. A little noise on how per country caps would be handled, but nothing significant beyond that. In terms of denial rates, once again, really no change there. Clearly, for the industry, as you're aware, denial rates for L visas have been higher for the industry for quite some time now.

When we look at our balance of visa use and the increasing importance of local hiring, we've not seen any business disruption. One of the things we're proud about is we continue to expand our US college recruiting in the US. This year we did 17 campuses and close to 200 students. We continue to, where we can find the people, hire locally. The challenge, as you know, it's still very difficult to find US It workers. So visas are an important part of our ability to deliver world-class services to our clients.

Thank you.

Bryan Keane with Deutsche Bank.

I was pleasantly surprised to see the banking business modestly rebound. Do you guys think we've seen an inflection point there? And separately, is there more discretionary work at risk there in the future as you see it evolve into 2012 and into '13?

It's Frank, Bryan. I think, clearly, as I said before, we do think banking has begun somewhat of a modest rebound. As we said, we still expect to see banking for us grow double digits this year. We did see this quarter growth return to some of our largest banking clients. You may recall that last quarter our growth was more amongst the mid-tier banks in the segment.

Candidly, I think it's a little early to call discretionary spending coming back in a significant way in banking. I would wait a quarter or two before I made that determination. I think it would be driven a lot by the budget cycle and what we see happening with banking budgets going into next year. But at this point, based on what we're seeing, I think we are feeling a little bit better about banking for the rest of this year. And we'll watch and see how the budget cycle plays out going into next year, which will be a big determinant of what discretionary spending will look like in that industry in '13.

Okay. Just one quick follow-up. On pricing, there's a lot of worry out there that some peers might get irrational on pricing. Have you seen that? And then, if that does happen, what is typically the response that Cognizant has to that? Do you guys have to move on pricing right away, or are they usually just one-off deals and you guys hold price? Just some color on that. Thanks.

Generally we've seen our competitors be quite disciplined, especially the competitors that are doing well in the markets today. You've seen this [bifurcation], even among the tier one players. And among those that are doing well in that sector, they're very disciplined.

I think the only place we see a little bit of noise is in some of the infrastructure management deals where there may be one or two players who are trying to gain market share in that space. But overall, we continue to be very pleased with the thoughtfulness of our competitors, in terms of it's a zero sum game and if they cut price I think very quickly the whole market would move. And everyone's been quite disciplined in the areas that are of primary focus to us.

Thanks. Great quarter.

Jason Kupferberg with Jefferies & Company.

Thanks, guys. I just wanted to talk a little bit more about the year, just in terms of making sure expectations are appropriately calibrated. Because, obviously, you're continuing to say that you'll do at least 20% this year, which is encouraging. But based on where we are at this point in the year, is the lower end of that really the more realistic scenario -- IE, right around 20%, as opposed to there being any material amount of upside? Just because, obviously, historically people are accustomed to you guys using the at least label, and then delivering an ample amount of upside to that.

I would not expect any material upside. Part of the reason why, Jason, is currency. Remember what happened and the guidance we just gave, we maintained our guidance despite getting hit with over $20 million of currency movement since our last earnings call. Essentially, on a constant currency basis, we really just took our guidance up by $20 million. I would not want people to have expectations that there's any meaningful over-performance to these numbers, particularly given what we had to absorb on currency already.

Good. That's exactly what I was getting at. And then just as a follow-up, obviously all the commentary around Horizon 2 and 3 continues to be interesting in terms of your differentiation. Are there any metrics or statistics you can give us just to get people comfortable with the secular tailwind that you think will continue to benefit the business over the next few years? Because obviously it's great to see you maintaining the guidance for this year, but some folks continue to have concerns about post-2012 top-line growth profile, which seems to be reflected in your valuation multiple. So any quantitative statistics you might be able to share with us?

I think the way to think about it, Jason, is that the Horizon 2 businesses -- that is, business process outsourcing, or BPO, IT infrastructure services, and our business consulting business -- today are growing as a group faster than Company average. And our expectation is that over a period of time they will continue to do that. And today are already, and will over time become an increasingly more important part of our overall growth story.

And I feel l that all three of those businesses represent very large opportunities. And in the case of BPO, in some senses, that opportunity is bigger than the macro IT opportunity. So I think these are very large opportunities and have the characteristics that we like, significantly underpenetrated, lots of opportunity to drive efficiency and effectiveness, lots of need for transformation, and so overall, I think, play very well to Cognizant's core strengths. And so that group as a whole, I think you can assume will grow faster than Company average going forward.

The Horizon 3 stuff is today a relatively small portion of revenue. It's not a growth driver yet. And I think it will take several years for that as a group to become a significant driver of growth. But I think what's very important around Horizon 3 is that Horizon 3 drives mind share for us with customers. Customers want to work with a partner that is involved and engaged in leading edge thinking on the newest technology and business model topics out there. And so, Horizon 3 for us is much more about mind share than it is about market share. So Horizon 1 and 2 drive market share for us, and Horizon 3 drives mind share for us.

Horizon 2 would be what? About 15% of total revs now.

Yes, it's between 10% and 20%.

Okay, thank you, guys.

Julio Quinteros with Goldman Sachs.

Just a couple of quick ones on the end-of-period share count. Do you have that for the end of the June quarter?

I will grab that for you. Give me two seconds.

We'll get back to you by e-mail right after the call, Julio.

Okay, no problem. And then just real quickly then, in terms of the effort mix, do you have the percentage mixes there?

Of offshore?

Offshore, yes.

Headcount or revenue?

Typically, the effort mix. I think you guys were giving it to us on a --.

Very minor shift, Julio, on-site. We were just over 20% on-site for the quarter. So, essentially no material change.

And then the stable pricing commentary, is that on a year-over-year basis or on a quarter-over-quarter basis?

That's looking sequentially. Price has really been quite stable.

Okay. And how does that look year-over-year, then?

It's up slightly.

Okay. Got it. And then just lastly on the headcount plan for the rest of the year, the headcount ramp. The headcount came in a little bit lighter than where we were, not too much. Just curious on what the expectations are for headcount going forward.

That's exactly the way we want the model to play out, Julio. Remember, part of what we did, we onboarded a lot of freshers late last year. Obviously, revenue growth for this year is not what we thought it would be coming into the year. So, we're absorbing a lot of those. So, that's why you saw headcount is a little bit lighter than revenue growth because as we're bringing the freshers into billable positions. We don't give headcount guidance, clearly, but certainly we will want to maintain our utilization rates going forward.

Got it. And then the two new deals, the Philips and ING, those are both expected to ramp in the fourth quarter?

The answer is yes. Phillips ramps over a period of time, ING kicks in right away, and we have pretty much the full benefit in the fourth quarter.

Great. Thanks, guys. Good luck.

Moshe Katri with Cowen and Company.

(inaudible) second half, maybe looking at Q3, you're one month into the quarter --.

Moshe, the beginning of your question was cut off. Can you start again?

Can you comment on visibility for the second half? Looking at Q3 you're one month into the quarter. Is there anything changed in terms of visibility in terms of what you have typically when you start a quarter? And then, Karen, can you give us the revenue metrics by top 1, top 5 and top 10 customers? Thanks.

Let me hit the visibility question. The answer is, we're the same visibility with the same methodology that we always have in the past. Obviously we have July results in when we're giving guidance today. So we have very strong visibility into Q3. And Q4, given the time of year and the nature of the type of work that's ramping, particularly in some of the larger deals, our visibility's quite healthy.

The top 5 for the quarter was 14.8% versus 14.5% in Q1. And top 10 was just under 26% -- 25.9% for the quarter.

Thanks. Nice quarter.

George Price with BB&T Capital Markets.

First, just going back to healthcare and particularly the non-pharma part of healthcare. I wondered if you'd talk about demand that you're seeing in that part of the segment now through the second half. And is the healthcare debate that's going on right now having any material impact on demand there, what clients are looking for, timing, that sort of thing?

I think that it's somewhat early on the healthcare debate. I think over time, as health plans, which is the bulk of the work that we do in healthcare, but the whole health ecosystem in the US starts to implement some of the provisions of the new healthcare reform, I think that will start to translate into revenue for us. But it's still early. We are having those conversations with clients. But I think it's still early days and I would say it's still a few quarters before I can -- if I can point to that to be a meaningful revenue driver.

Okay. And just a high-level question. Gordon, you referred to the current environment as another market downturn. And certainly Europe's having its issues. The US is sluggish but stumbling along. How are your clients likening the current situation to the prior recessions that we've seen? How's that impacting the mix of their spend, their mindset? And in particular, going to your comments on Cognizant Business Consulting, you indicated that it continues to grow well. It's got a strong pipeline. So I was wondering if you could talk about how the macro environment, how that part of your service offering is fitting into this current macro environment.

Let me take that, George. This economic environment, we're not seeing client behavior this time around as we did during 2007, 2008 time frame where basically clients stopped everything. There was a little bit of a deer-in-the-headlights syndrome back then. But what we have seen, if you go back even to 2000, 2001 and so on, is that every period of economic turmoil has, in some sense, served as a catalyst for our types of services. Because clients tend to focus on efficiency and effectiveness. They tend to focus on how they become more productive. And then of course if there's a big technology shift going on, as there was in 2000, 2001 with the Internet, or as there is now with this SMAC stack that we talk about, there's also the need to innovate and deploy new technologies.

And so what we're seeing right now is clients focusing on this dual mandate, saying how do I cut costs on the one side and how do I innovate on the other side. And in that equation, Cognizant Business Consulting becomes extremely important because it's our vehicle to be able to work with the clients to understand, on the one side, how they need to innovate, to take advantage of these new technologies and new shifts in their industry. And at the same time, how we can help them to drive greater degrees of efficiency and effectiveness. So very critical role for us.

And just quickly, how are you finding that offering in terms of competitive position? Obviously you have some large competitors out there with very established consulting businesses with a lot of industry and domain expertise. Can you maybe talk about how CBC has done in terms of penetrating and getting more brand recognition in the market?

Yes. Let me address that and then we'll have to wrap up. We're a couple minutes over. The most important factor that I'll point to there is that we're now starting to see CBC being a lead for Cognizant with new clients. So we're winning new clients based on our CBC offering. And I think there can be no stronger testament to the strength of CBC when we win a new client against the best competitors in the world, with CBC being our lead service offering at that client. We're starting to see more and more of that. So I think that speaks to the strength of CBC overall.

Thank you.

I think we'll have to wrap up with that. Thanks, everybody, for joining us. Despite the significant volatility in the macro environment, I'm actually very pleased that we continue to deliver industry-leading performance. Thanks to the exceptional execution of our differentiated strategy. Thank you all for joining us and have a good day.

This concludes today's Cognizant Technology Solutions second quarter 2012 earnings conference call. You may now disconnect.