高知特 (CTSH) 2012 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third 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)

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 operator, and good morning everyone. By now, you should have received a copy of the earnings release for the Company's third 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 as described in the Company's earnings release and other filings with the SEC. I would now like to turn the call over to Francisco D'Souza. Francisco?

Thanks Dave, and good morning everyone. This morning, Cognizant released third-quarter results, and I'm once again pleased with our performance. Revenue grew to just over $1.89 billion, a 5.4% sequential increase, and an 18% increase over the same quarter last year. We maintained our non-GAAP operating margin at the top of our guided range, at 20%. Our results reflect broad-based growth across nearly all sectors, services, and geographies, with out-performance primarily driven by a stronger-than-expected quarter in banking and financial services and continental Europe. Gordon will provide additional color around this during his remarks.

Our ability to deliver another quarter of industry-leading growth is continued validation of the strength of our approach and the uniqueness of our value proposition. For several quarters, we have been speaking of the dual mandate with which we see our clients grappling. The dual mandate refers to the fact that clients need to drive efficiency and effectiveness on the one hand as they cope with cyclical economic pressures, and they need to invest in innovation and growth on the other hand as consumers, employees, and other stake holders increasingly demand ever-greater digital experiences based on new technologies. Our results this quarter once again show that our intimate client relationships, deep industry and technology knowledge, and robust global delivery network position Cognizant to anticipate and deliver the services that clients need to tackle this dual mandate.

Our ability to respond to market needs is the result of our focus across three horizons of investment. Within horizon one, our core application development, maintenance, system implementation, and testing services continue to show solid performance as clients embrace managed services models that allow them to create a variable cost structure that more closely matches their business demand. Within horizon two, we saw growth rates that exceed the Company average. In fact, this quarter, horizon two offerings are approaching 20% of Cognizant's total revenue. In business process outsourcing, or BPO, and IT infrastructure services, or ITIS, growth is driven by clients recognizing our global scale and competitiveness, and turning to us for more complex and often larger engagements. We are further strengthening our position in ITIS, as evidenced by the data center expansion we recently announced. In Cognizant business consulting, or CBC, we continue to differentiate ourselves as thought leaders, evidenced by a number of new local wins and further penetration of Cognizant's existing strategic accounts.

Across both horizon one and two, we are continuing to see a trend towards larger transformational engagements, like those with Phillips and ING, about which we have previously spoken. The trend is driven by clients' need to achieve significant and rapid impact on their business, in response to the pressures brought about by the dual mandate. Our pipeline of these larger engagements remains strong. Within horizon three, we continue to develop offerings in three areas, new technologies, new delivery models, and new markets. We have spoken about the significant mind-share impact that these offerings are having with clients. We are also now beginning to see a revenue impact. This is particularly true within the new social, mobile, analytics, and cloud technologies that comprise the SMAC stack.

At our annual US Cognizant community event that we held last month, nearly 400 client executives joined us to discuss the impact these technologies are having and will continue to have. What emerged from our 2.5 day conversation is continuing consensus that this wave of technology is having a transformative impact on businesses across industries. Plans recognize the significant disruption that book retailing, music, movies, photography, et cetera, have already seen, and understand that these technologies will have an impact to varying degrees across all industries. They also agree navigating this transition requires a strong partner who can bring to bear a combination of leading-edge capabilities and a deep knowledge of the specifics of their business and existing technology landscape. Our horizon three investments have prepared us to be that partner. We also continue to see strong progress in our other horizon three areas of focus; new delivery models, including platform-based services that break linearity between revenue and head count and new markets such as government and Latin America.

Looking forward, we remain confident in our ability to deliver revenue of at least $7.34 billion in 2012. Our discussions with clients at Cognizant community, so focused on longer-term transformation, also gave us a view into more immediate demand. Clients indicated that though their budget cycles are just kicking off, suggestions are that overall IT funding will remain flat in 2013. They also echoed the dual mandate, suggesting that the benefits that they accrue from the continued adoption of global delivery models will be used to fund innovation in new capabilities. With that, I'd now like to hand the call over to Gordon, who will provide context on our operating results, and Karen will provide details on our financial results. As always, we will leave time at the end for questions. Gordon?

Thank you, Francisco. We're very pleased to have delivered another strong quarter of industry-leading growth that was broad-based across our portfolio of services and geographies. We continue to solidify our position in horizon one. These services are an essential strength that we leverage in order to penetrate existing clients, new clients, as well as new geographies. Our industry-leading position in this horizon has been recognized time and again by analysts. Most recently we were named a leader in Gartner's Magic Quadrant for customer relationship management consulting, and solution implementation services worldwide. Our positioning in this quadrant speaks to our deep understanding of, and vision for, developing best-in-class CRM solutions for our clients. Also, the (inaudible) group recognized Cognizant as a leader in their matrix for health payer application outsourcing. When evaluated on performance, experience, ability and knowledge, we scored exceptionally high on the success we have had in this market. Our scale and scope of services, investments in domain expertise, and our global footprint.

Horizon two, which includes business process outsourcing, IT infrastructure services, and Cognizant business consulting, continues to grow faster than Company average, and is now approaching 20% of our total revenue. We have achieved global scale and competitiveness within these offerings, and our pipeline remains strong as the addressable market continues to grow. The value of our vertical focus is particularly evident in our core BPO offerings, which are continuing to show strong growth, both with existing and new clients. Our clients want providers that understand their industries and businesses. Our deep knowledge of the industries we serve drives our competitive strength in this area, and further -- and is further enhanced by two factors, the quality and capability of the talent we hire, and our focus on continuous productivity improvement. Our BPO work force of over 17,000 professionals includes over 1,700 doctors, nurses, clinicians, and biostatisticians focused on our health care practice, and over 5,000 capital markets and financial services specialists. We provide support to our clients in eight languages across 15 delivery centers throughout the world.

IT infrastructure services also had a strong quarter, driven primarily by deals we closed in the second quarter, and significant growth from existing clients. Our ITIS practice now has over 10,000 professionals, and the potential for growth in this sector remains strong, and our pipeline is robust. The infrastructure services market has undergone a significant evolution as a result of new cloud technologies and associated delivery models. As a result, the market is now demanding infrastructure services which are more agile and allow on-demand consumption. Clients want to modernize their IT infrastructure in order to bring consumer IT models to their users, while simultaneously virtualizing their infrastructure, rationalizing their costs, and improving productivity through flexible and nimble as-a-service business models. To more fully capitalize on this opportunity, we recently announced that we are expanding our ITIS capability through the creation of a data center cloud services organization, which will offer private and multi-tenant cloud offerings. Cognizant's proprietary enterprise-class cloud management solution, Cloud360, will serve as the front end for provisioning and policy management.

Highlights of our data center offerings include -- an infrastructure-neutral environment to meet a variety of client needs and support multiple platforms across hosting, storage, and network services; tight integration with our existing remote infrastructure management delivery platform; leveraging, as well as enhancing, our existing horizon three cloud offerings; and finally, we're drawing on our traditional strengths in systems integration and professional services by offering true end-to-end infrastructure management solutions. This initiative requires capital, operations, and development investment up front, but the investment is reasonable and phased. Working with our partners, our initial focus is on setting up four world-class tier three cloud-based data center facilities in the US and Europe, which will form the backbone of Cognizant's infrastructure cloud. As needed, we will then leverage these partnerships to extend our reach to meet specific client requirements. This hub-and-spoke approach enables us to control investments while reducing time to market.

Looking at our performance from an industry standpoint, financial services grew exceptionally well in Q3, 7% sequential and 20% year over year growth. Growth was stronger than anticipated, particularly among our larger banking clients, which continue to expand their partnerships with us for traditional application outsourcing services, as well as newer technologies such as analytics and mobility. Insurance was, as expected, a success story in Q3, due to existing clients driving demand across virtually all service areas. Cost optimization remains the over-arching theme in financial services. Meanwhile, health care grew 12% year over year but was essentially flat sequentially. In the short term we expect this segment to remain volatile, but demand longer-term should accelerate due to a variety of factors.

First, the impact of some M&A activity in the sector is clearly contracting discretionary spend, as dollars are diverted to deal-related activities. However, we also believe that the very same M&A activity creates a long-term driver for demand as companies restructure themselves and reassess their IT strategy. Second, consumerization of health plans also appears to be driving demand for customer management solutions, including the growing use of analytics. Finally, regulatory changes should continue to be a factor longer-term, either to address compliance with the affordable care act, or in advance of the go-live date in 2014 for ICD10. As expected, our retail and manufacturing segment delivered strong results in the third quarter, growing 11% sequentially and 28% year over year. Our other business segment also performed as expected during the quarter.

Moving on to our performance by geography, growth in North America and the rest of the world played out as we had anticipated. Growth in Europe was marginally better than expected, this was driven by a number of large deals we closed throughout the year, such as a pharmaceutical client in continental Europe where we recently won work in the area of application outsourcing, BPO, and IT infrastructure management. Banking is also seeing good traction in Europe, both with newer clients as well as existing, established relationships across a wide range of services. The ongoing economic challenges in Europe are beginning to act as a catalyst for longer-term outsourcing opportunities and broader acceptance of the global delivery model. Our European clients must run their businesses more efficiently, while simultaneously investing in innovation. We clearly expect to be a beneficiary of this trend.

We're also very pleased with our performance in Asia-Pacific, where we're seeing solid traction, both with existing customers, as well as new logo wins across the region, particularly financial services, retail and manufacturing, and life sciences. In India, we recently won a three-year application management deal for a large private-sector bank and a marquee consulting deal with a leading India-based pharmaceutical company. In the Middle East, we have seen new logo wins across financial services and retail and manufacturing, involving a variety of service lines, including data warehousing, SAP, and testing. Australia and Singapore have also seen key wins in the areas of application development, CRM, and IT infrastructure management. We are continuing to strengthen our capables and investments in the Asia-Pacific regions, and are quite pleased with the early results we are experiencing from these investments.

Finally, I'd like to take a moment to talk about our sustainability efforts. Sustainability is an important issue for all companies. At Cognizant, we are driving this effort through a strong focus on environment and education as essential sustainability issues for the ongoing health of our business and industry. This morning I will touch on our environmental achievements.

I'm pleased to share that in this year's recently released Newsweek Green rankings, Cognizant is now ranked number 13 in the US and number 50 globally. We have reduced our per capita carbon emissions since 2008, and are on track to hit our goal of 40% reduction by 2015. We recycle 22% of water we use, and reduced our paper consumption last year by 60%. All of this implies cost savings of over $18 million to date. I will now hand the call over to Karen to comment on our -- the financial performance and guidance.

Thank you Gordon, and good morning to everyone. As detailed in our press release, our third-quarter revenue grew 5.4% sequentially and 18.2% over last year to $1.892 billion, ahead of our guidance of $1.875 billion from last quarter. Application development represented 51.2% of revenue, while application management represented 48.8% of revenue for the quarter. Development grew 18.4% year over year and 4.6% sequentially. Application management grew 17.9% year over year, and 6.2% sequentially. 33.5% of our revenue came from fixed-price contracts during the third quarter. Fixed-bid revenues have grown by 27.8% over last year, reflecting further acceptance of the managed services model of engagement by our clients.

As expected, on a sequential basis our pricing during the third quarter was stable. We closed the quarter with 821 active customers, and the number of accounts which we consider to be strategic increased by six, this brings our total number of strategic clients to 208. Turning to costs, on a GAAP basis cost of revenues, exclusive of depreciation and amortization, was approximately $1.1 billion, and included $3.9 million of stock-based compensation expense. The increase in cost of revenues is primarily due to additional staff, both on-site and off-shore, required to support our revenue growth. We increased our technical staff by over 4,600 during the quarter, and ended the quarter with approximately 140,500 technical staff.

Third quarter SG&A, including depreciation and amortization expenses, was $424.4 million on a GAAP basis, and included approximately $18.4 million of stock-based compensation expense. Our GAAP operating margin was 18.8% 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 September 30, we have approximately $3.7 billion in outstanding hedges of our rupee expenses, which will mature each month through December 2016 at an average rate of approximately 53.7%. We had approximately $12 million of interest income, and in addition, we had a net $3 million loss in non-operating income, comprised almost entirely of FX losses. Our GAAP tax rate for the quarter was 24%.

Our diluted share count for the quarter was 303.1 million shares, down by about 4.2 million shares from Q2. During the third quarter, we re-purchased just over 1 million shares at an average price of $56.33 for a total cost of approximately $59 million. As of today, 13.3 million shares have been re-purchased at a cost of $840.4 million under the current share re-purchase program.

Turning to the balance sheet, our balance sheet remains very healthy. We finished the quarter with over $2.6 billion of cash and short-term investments. During the quarter, operating activities generated $384.9 million of cash. Financing activities used approximately $25.6 million of cash. This consisted of expenditures of $59 million toward our share re-purchase program, partially offset by net proceeds of $39.4 million related to option exercises and related tax benefits, as well as our employee stock purchase program. We spent approximately $70 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 $1.58-billion receivable balance on September 30, we finished the quarter with a DSO including un-billed receivables of 77 days, essentially flat with last quarter. The un-billed portion of our receivables balance was approximately $214 million, up from $208 million at the end of Q2. Approximately 60% of the Q3 un-billed balance was billed in October. Net head count increased by over 5,100 people during the quarter. Approximately 35% of growth additions for the quarter were direct college hires, while approximately 65% were lateral hires of experienced professionals. We ended the quarter with approximately 150,400 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 quarter was 13%, slightly higher than the Q2 attrition rate of 12.1%, but slightly lower than the attrition rate of 13.4% in the third quarter of last year. As a reminder, we report 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 Q3 for offshores. Offshore utilization was approximately 70%; offshore utilization excluding recent college graduates who were in our training program was approximately 77%; and on-site utilization was 93% during the quarter.

I would now like to comment on our growth expectations for the fourth quarter of 2012, as well as the full year. For the fourth quarter of 2012, we are projecting revenue of at least $1.94 billion. This represents a sequential growth rate of 2.6%. Our guidance for the fourth quarter reflects our view that there will be no meaningful budget flush this year. 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, re-affirming our guidance from last quarter. This revenue represents a full-year growth rate of at least 20% compared to 2011.

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 Q4 GAAP EPS of $0.91 and non-GAAP EPS of $0.97, which excludes estimated stock-based compensation expense of $0.06. This guidance anticipates a Q4 share count of approximately 304.5 million shares, and a tax rate of 24.5%. 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 $3.42, and our full-year non-GAAP EPS to be at least $3.69, excluding $0.27 of estimated full-year stock-based compensation expense. This guidance anticipates a full-year share count of approximately 306 million shares, and a tax rate of approximately 24.4%. It also excludes any future non-operating FX gains or losses. Now I would like to open the call for questions. Operator?

(Operator Instructions)

Brian Keane with Deutsche Bank.

Hi, guys. Congratulations on the solid quarter. Francisco, I just wanted to ask -- I think you said that preliminary conversations you had with some clients talked about flat spend in fiscal year 2013. Can you just remind us how that's going to end up comparing to spend this year, this fiscal year?

Yes Brian, thanks. We had about a month ago, give or take, we got -- we ran our annual customer conference, Cognizant Community, where we had 400 or so of our clients, or individuals from across our client base, together for two and a half days. We covered a wide range of topics. Most of what we covered was sort of longer-term, but we also did have an opportunity to talk to them about their plans and views for 2013. Most of them came back and said while it's still early, the budget cycles are just in the process of getting kicked off, they expect overall IT budgets to be somewhat flat going into next year. Let me clarify that this is mostly a North American sample. This was our North American Cognizant Community.

That's largely consistent with the trend we've seen in past years, where IT budgets have been flat with in past years, perhaps, with a slight moderate upward bias. I think what's really important in -- that the trend with budgets, and we heard it again this year -- was this continuing share shift to the global delivery model. We heard that again this year, where clients were telling us that as they looked to budget to next year, because their overall budget will remain flat, they're going to look to move an increasing amount of work to the global delivery model -- not just IT work, but now also increasingly business process kind of work, and take the savings that they achieve from that shift and re-deploy those or re-invest those back in innovation and new technology and investments that they need to make to keep their businesses competitive.

Okay. A quick follow-up. Originally you guys stated the revenue growth would likely be fairly evenly split sequentially between second through fourth quarters. After having a solid 5.4% sequential growth this quarter, you guys are now guiding to a little bit of a slowdown to that 2.6%. Is there anything to read into that change?

If you look historically, Q4 has been weaker than Q3 sequentially. Last year, Q4 grew by about half the pace of Q3. There are some real seasonable stuff. We have holidays and vacations. Retail in particular, which was a very important growth driver for us in Q3, we do not expect to be a growth driver in Q4 due to the holiday shutdowns that are normally in the retail business. Most importantly, we got clarity at our Cognizant Community that there's not going to be a budget flush. When we look at our guidance, we had a very solid Q3. We're pleased we will continue to have good sequential growth in Q4, but it will clearly be at a slower pace, which is not unlike prior years.

Okay. Thanks for the color.

Chris Hickey, with Atlantic Equities.

Good morning, thanks for taking my question. The composition of the operating margin was a little different to our expectations, with gross margin down quite sharply, offset by SG&A. You mentioned hiring, but were there any other drivers of this? Could you perhaps help us separate out currency from any other dynamics within the OpEx and COGS profile this quarter?

Sure. Chris, it's Karen. I'll try to answer that. FX wasn't actually a huge impact between Q2 and Q3. The real impact came particularly in COGS, with the timing of our wage increases. We have two rounds of wage increases over the summer. The first round kicks in in May, so you had the full-quarter impact of that first round kicking in in Q3, and then we also do a second component which kicks in in July, so that's the primary driver of the movement in COGS. Down in SG&A, frankly it's actually primarily the timing of payment for visas, so immigration costs. A lot of our immigration filings are done in the early part of the year, and so the SG&A decline that you saw from Q2 to Q3 was the timing of those payments.

Just to be clear, the May versus July salary -- it's not the same people getting a second increase, it's a portion of the population gets it in May, and the remainder of the population gets their increase in July.

Great, that's very helpful, thanks. Gordon, you mentioned that $0.08 of spending will be phased over time. To what extent does this change the CapEx profile we should expect over the next few years?

I don't think it has any material CapEx impact. This build-out of four centers is costing us around $25 million or so, with a CapEx budget of $370 million -- it's reflected in that $370 million. I don't think it has any material impact on the overall capital intensity of the Company.

Operator, next question? Operator?

Rod Bourgeois, Bernstein.

I just wanted to inquire a little more about how your revenue outlook has changed over the last three months. Three months ago, it seems you were expecting sequential growth in Q4 of about 4.5%. I'm wondering if anything happened in Q3 that alters your view on Q4's growth prospects. I know you earlier on the call cited holidays, vacations, retail seasonality, and the expectation of no budget flush, but it seems these factors were clearly known three months ago. I'm wondering if Q3, the strength in Q3, essentially pulled forward some revenues that you were previously expecting in Q4, or if you're now starting to assume that some of the Q4 revenue growth prospects are being pushed out into 2013, either because of the need to be conservative here, or because you're actually seeing things not ramp as quickly in Q4 as maybe you thought? Can you clarify any of that?

Sure, it's Frank, Rod. I think it's mostly reflected in the fact that revenues that we were expecting in Q4 were pulled forward a little bit into Q2 and into Q3. It's hard to -- as we look out two, three quarters, we have a general sense of what work clients need to get done over the next two or three quarters, but to actually predict exactly how that lays out over the -- on a quarter-by-quarter pattern, there's obviously some variability with that. We had a pretty good sense two or three quarters ago of how the year was going to -- or what the year was going to look like. We still feel comfortable with that, but how that exactly lays out quarter by quarter, there's always going to be some variability. This quarter, we saw some of the Q4 work actually getting executed in Q3.

One other factor I will point to, it's relatively small, but I will also mention that we do expect some impact to the business from the superstorm or whatever, Sandy. We feel comfortable that we can absorb that into our guidance, but that also does take out some of the potential upside that we had for the fourth quarter. I think it is a combination of largely those factors in addition to the seasonal factors that Gordon talked about earlier in the Q&A.

Okay, is the Sandy impact roughly maybe a half a point? We had tried to do some back-of-the-envelope math on that. I mean is it a half a point, or could it be more than that?

It would be less than half a point. It would be measured in millions of dollars, but certainly not tens of millions of dollars.

Okay, great. It sounds like, though, that there was nothing meaningful that happened in Q3, other than you perhaps pulled forward some Q4 revenues. You were able to book it faster than you thought. There were no other meaningful changes in the demand trends that causes you to think about a different outlook for Q4? Am I reading that right?

I think that's right. I think as I said, we pulled forward revenue, or revenue came in in Q3 that we were expecting in Q4. I will point out though, I think there are two important elements of demand that we saw in the third quarter that are important. First of all, as Gordon and I both mentioned in our comments, we continue to see good traction in IT infrastructure services, BPO and consulting, the so-called horizon 2 service offerings, and those represented just under 20% of revenue during the quarter. I think that was an important indicator of the strength of those service offerings.

The other point I would talk about with respect to demand in the second quarter -- excuse me, in the third quarter -- was that financial services, the core banking part of our BFS segment, and continental Europe were a little stronger than we anticipated when we gave you guidance the last time. I think those were -- all of those were net positives in demand for the quarter.

Francisco, just to complete that thought, earlier in the year when you reduced your guidance, it was due to banks and pharma. Are you also feeling better about pharma/life sciences, or is that still in a similar position as it was earlier in the year, from a demand outlook standpoint?

Clearly, pharma and health care general remains soft. As I mentioned, it was flat sequentially, similar to where we had stronger-than-expected results in banking and continental Europe, certainly health care under-performed even our adjusted expectations. We would expect that trend to continue for the remainder of the year.

All right, great. Thanks, guys.

Sarah Gubins, Bank of America Merrill Lynch.

Maybe just to follow up on the question about health care. Can you talk about where it was under-performing your expectations? I know that you've talked about patent cliffs being an issues this year, but was there anything more that drove the weaker performance in the third quarter?

Sure. If you split the payers from life sciences, on the payers, we were impacted by M&A. There was -- M&A occurred with several of our large customers. That did impact near-term discretionary spending. We think it may set us up well for the future once we get through the M&A work, but clearly right now, that's a distraction that had an impact on some of the programs.

On life sciences, the patent cliffs are real now. Obviously, the life sciences companies knew they were coming, but now that they've hit, and in some cases as drugs have come off patent the revenue decline is faster than anticipated. That is impacting IT spend in a significant way. This is one that we knew was coming. I think it's probably hit the life sciences industry a little harder than anticipated. That sector is going through a tough patch right now. Will it come back? Yes, of course it will come back but right now it's a tough sector.

Okay, thank you. One last question. Sequential growth in the other category picked up, although it was still weaker than financial services and the manufacturing segment. I know that you've talked about that being more discretionary development work. Can you discuss what you saw there in the quarter?

I think, Sarah, as you said it was -- sequential growth in the quarter was about 3.8%, so it's still below Company average. Because it does have a higher concentration of discretionary spending, it tends to be a little bit more volatile. We are seeing -- we've got some very good nice new logo wins, particularly in the high-tech sector, and starting to see some good traction there.

Okay. Thank you.

Julio Quinteros, Goldman Sachs.

Good morning. Looking at the -- actually, real quickly, can I just get the additional metrics that you guys usually provide on the top accounts and on-site offshore mix real quick?

So top five for the quarter, Julio, was 14% of revenue. The top 10 accounts for the quarter are 25% of revenue. The on-site offshore ratio is just below 79%. It is about 78.9%.

Okay.

A slight movement towards on-site this quarter, primarily due to the ING transition.

More towards on-site. Got it. Looking at the metrics into next year, if you think about the drivers for the business, obviously head count growth and pricing, and utilization mix, all these things are important to the way we think about the bottom build of the model. Any one of those in particular that you guys can call out as you think about strength or weaknesses for drivers that we should be considering into 2013?

Let's hit those one by one, Julio. Head count will simply be a driver what revenue is. As you know, our model is a mix of the longer-term, longer-cycle college hiring, as well as just-in-time lateral hiring, so we can move that up and down very quickly. Rather than us -- rather than that being a driver of growth, it is a result of what demand is. Pricing is stable, which is good. I wouldn't expect any big overall price increases next year, but we're certainly in a stable environment. I think ultimately, revenue growth will largely be driven by volume next year.

Do you guys have a number or a target for head count in the fourth quarter, relative to the revenue guidance?

We stay away from giving specific head-count growth guidance, but certainly we will continue to add people in the fourth quarter. Our business is continuing to grow. We had very good head-count additions in the third quarter. We don't give specific guidance for the fourth quarter, but certainly there will be head-count growth.

Got it. Okay, great. Thank you.

Sure thing.

Katie Huberty, Morgan Stanley.

(audio missing) The cloud and analytics software companies missed numbers this quarter. Just curious if you're seeing in the horizon 3 business any delay of projects. I know it's very small from a revenue perspective, but anecdotally, have you seen any delay of those transformative deals in the uncertain macro and fiscal environments?

I wouldn't -- I don't think we've seen a significant trend that I would point to. I think that as with the horizon 1 business, where it's a systems integration business in horizon 1. I think our projects in specifically in cloud and analytics tend to be less dependent on short-term movements in how those -- how licenses of those, or sales of the SaaS companies, or the analytics companies tend to be do. Our projects tend to be longer-term, they tend to be more focused on implementation of those technologies. We haven't seen any meaningful change that leads me to have any degree of concern.

Thank you.

Mayank Tandon, Needham Securities.

Good morning. I had a question, Gordon, Karen and Francisco, on sort of the mix between the head count additions. I think you said 35% freshes and 35% laterals. That seems to be not consistent with prior years, when freshes would make up a larger percentage of recruiting. Can you talk about that impact?

It is a point of issue we're working through Julio. We on-boarded a lot of -- or Mayank, sorry about that, Mayank. We on-boarded a lot of freshes late in 2011, probably more than we should have at that time, because obviously we thought revenue growth for 2012 would be stronger than anticipated. It's taken us a bit to work through all those people that we on-boarded very late last year. That's impacted the timing of on-boarding the 2012 class. You're absolutely right that the -- when I look at the gross hires in 2012, the mix is not as heavily towards college grads as I would have anticipated. But that's largely driven by -- I had a very large pipeline, or people in training, in the classroom, at the end of 2011.

Should we expect that to shift back to more freshers versus laterals in 2013?

I think it should be more balanced, yes.

Finally, as these different services evolve, horizon 3, 2, and 1, as they sort of change the mix, do you expect to change the types of people that you're recruiting. Does that have any implications on your operating model over time?

Let me talk about horizon 2, and then Frank can talk about horizon 3. Certainly for horizon 2, there's a big impact, and it's at both extremes. In consulting, it's a very different profile than our typical engineer. In BPO, it's also a different profile -- not necessarily a lower end profile. As I mentioned, we have 1,700 doctors, nurses, and statisticians. We have 5,000 financial services specialists, but those are very different than engineers. ITIS is obviously closer to the engineers, but it's a broader range of people. Frank, do you want to talk a little bit about horizon 3?

I think you have a very similar dynamic in horizon 3. We've got a range of businesses in the horizon 3 portfolio, ranging from the new delivery models which are the platform services we're working on, where we're tending to bring in folks more from the traditional ISV or software background. We've got new geographies which tend to be largely a similar people profile to the core business. Then we've got the new technologies, which again tend to be largely similar, but obviously focused on the new -- these new technology areas. Within horizon 3, again, a broad range of talent we're bringing in. I think that I don't see any of this horizon 2 or horizon 3 meaningfully changing the operating model. We've been dealing with a changing mix of work force for a decade now, and I don't see that these will change -- these in the short term will change that dramatically.

Thank you.

Joseph Foresi, Jane Montgomery Scott.

I just wanted to get, I guess, full clarity on the health care question. Are you expecting the head winds to leak into 2013? I mean, how should we think about that? I know you said that it's going to come back. I'm just trying to get a general sense, without obviously getting any kind of guidance, on just what the trajectory of that business would be?

Sure. I think it's a little too early to tell for the payer side of health care, but for pharma I think the answer is clearly yes it will leak into 2013. 2013 is going to be a tough year for pharma. When you talk to most of them, 2014 actually looks okay, as they have some new drugs come online. But 2013 is a trough year for them.

Okay. The same question, sticking with the regulatory theme, financial services obviously seems to have rebounded. Have we hit a level of stability in that business? How do you view the IT budgets next year given the regulatory requirements?

We've had a couple of quarters now where financial services have been a little stronger than we expected. I'm still cautious to call two quarters a trend, but I do have a greater degree of optimism with financial services than I had say three or four quarters ago. I'd like to watch it another quarter or two, to make sure that we can continue to drive the performance that we have seen over the last two quarters. I think that when we talk to banks in terms of budgets for next year, I think it's largely consistent with the commentary that we gave earlier on budgets overall. Most of our banking clients are seeing sort of flat budgets next year, with a share shift to the global delivery model. I think that continues.

We said -- we've also started to see the mid-sized banks -- we talked about this last quarter -- starting to adopt a global delivery model a little bit more actively and aggressively than they have in the past, so that's also contributing to overall performance in that sector. I would also say that as we look to that industry sector, we continue to feel that there is a lot of growth that we're driving because of the deep industry knowledge that we have in financial services that we continue to invest in, and I think that clearly positions us well. I feel cautiously optimistic but I'd like to watch it for another quarter or two to make sure that the trend continues.

Okay. Finally, just for clarity in financial services, is there still weakness in capital markets? On the regulatory side of the spending, do you expect that to just be part of the budget, or could that provide upside in 2013?

Clearly, capital markets, there is a fundamental restructuring going on there in overall IT budgets, and the capital markets space is coming down. Now, we have less exposure to pure-play capital markets firms than others. We tend to have more exposure to the money center, the capital markets divisions of money center banks. I think what you're seeing there is they're pushing the envelope on outsourcing, and use of global delivery, and open to look at much more broader opportunities in the context of needing to reduce their budgets.

Regulatory change for next year, obviously the election just happened last night, and so forth; but in the end, it's going to be neutral to positive for us, as regulatory spend may pick up. It's not going to all be incremental spend, clearly. A portion of it hopefully will be. I think we're well-positioned to capture regulatory spend, but how much happens and how quickly, and how much of it is incremental, those are questions that I think we'll get clarity for over the coming months or so, now that the election's out of the way.

Great. Thank you.

Darrin Peller, Barclays.

(inaudible -- audio missing) discretionary consulting trends playing out. Development's actually been relatively similar to your outsourcing growth rates in the past couple of quarters, perhaps due to implementation around horizon 2 offerings. If you can give a little more color on what you see as being drivers underlying more discretionary consulting trends and it was a little weaker earlier in the year, it seems to have come up a little bit now. How do you see that playing out? Then just a quick follow-up.

I think at a macro level, what's driving discretionary spending is the so-called dual mandate that I spoke about. We have this -- and we spend virtually all of our time at Cognizant Community discussing this with clients. We have this wave of new technologies, the so-called SMAC Stack -- social, mobile, analytics and cloud -- and these we think truly represent, and our clients agree, truly represent in some senses the next generation of IT architecture.

The impact that these technologies are having and will have on businesses is probably as profound, if not more profound, than the impact that the Internet had a decade or so ago. We expect that a big driver of discretionary spending will be sort of adoption of these new technologies as clients look to say how do I take social, mobile, analytics, and cloud and apply them across our businesses. We feel like we're very well positioned because of our horizon 3 offerings in that space. That's sort of the macro commentary.

If you sort of take it down to a quarter-by-quarter play, discretionary spending tends to be stronger in the middle of a calendar year, because that's the time when clients have -- they're past the budget cycle, budgets have been approved, and you tend to get in Q2 and to some extent in Q3, the full impact of those budget approvals. As we go into Q3, the back half of Q3 and Q4, discretionary spending tends to slow down as clients go into the budget process. At a more micro level, that's, I think, the trend that we'll see playing out this quarter and next quarter, and going into next year.

All right. That's helpful. One quick follow-up. Again, one of the most notable attributes of Cognizant is its ability to consistently maintain leading growth rate on the top line, again as evidenced by this past quarter. While this has been achievable in your horizon 1 offerings for a while, again back to the horizon 2 and 3, I'd just be curious to hear how you expect to continue to differentiate yourselves in these offerings when you really do see just about every other company in the industry investing heavily in a lot of these same areas?

I think that when we talk about -- if you think about the strength of the Company across all three horizons, I think what underpins our differentiation, and what has allowed us to drive the industry-leading growth, is the fact that we -- I think we truly have a unique and differentiated approach to building domain expertise, creating deep intimate relationships with our clients, and making that all feasible in a very seamless way to the client through a world-class global delivery model.

Those core underlying strengths underpin our differentiation across horizon 1, horizon 2, and horizon 3. I think that it is because we're building horizon 1, 2, and 3 on top of those three core underlying strengths that we will be differentiated across all of those horizons, and which in turn will allow us to drive industry-leading growth across all of those areas of investment.

Okay. Thanks, guys. Nice job.

Jason Kupferberg, Jefferies and Company.

(inaudible - audio missing) turns on the top line, so I'll switch over to margins here. I guess the non-GAAP operating margins have been at or slightly above your target range for I think for the past four quarters or so. Does it still make sense for 19% to be the low end of your range? I think it's been forever since you've even been below 19.5% in any given quarter. Maybe as part of that, can you just talk about what you would attribute the great margin performance to, being at or above the top end of the range, because the rupee you're largely hedged on -- and it does seem like you're continuing to reinvest in the business. Is it pricing utilization? Some economies of scale emerging, or what would you attribute it to?

Let's start with your first question, is 19% to 20% the right range, and our belief is absolutely yes. We have tremendous opportunities for investment. We're continuing to investment in Europe. You're seeing the results of the investment we're making in Asia right now. It's incredible. We're going to continue to accelerate that investment. We're starting to invest down in South America now. We're investing in Horizon 2 and Horizon 3 simultaneously. We're not in the business of selling a one-off piece of software and then moving on. These are long-term relationships with green-field opportunities, so we want to take as much market share as we can, rather than pop margin.

The strategy is working. We're growing materially faster than the industry this year. Our brand is the strongest it has been in our industry. Our recruiting statistics are the strongest that it has been in our history. This strategy of reinvestment is clearly working. This year, we had been running at the upper end of the range, and part of that is driven by -- yes, we did have to take our revenue guidance down during the year, and we wanted to try to minimize the impact on EPS of that change in guidance earlier in the year. As long as the investment strategy is working, we're going to stick with it.

Okay. As a follow-up to talk about the balance sheet, obviously the cash, the cash balance, continues to grow tremendously. I think you're almost up to about 15% of your market cap. I think the Street realizes you guys need a big cushion on the balance sheet to compete for larger deals against bigger competitors, but should investors be looking for larger share buy-backs, or some other form of return of cash going forward, just to try and enhance total shareholder returns?

A couple things. First of all, remember not all that cash is sitting in the US and it's not all accessible for dividends or buy-backs. That's a very important point.

How much of that?

Of the -- over half of it is outside the US, or it needs to be outside the US. When we look at the strategy, we've been opportunistic on share re-purchases. Obviously, when the stock was down, we were quite aggressive on the share re-purchases. We still have some gunpowder left in that program. Near term, I think the strategy will continue of opportunistic share re-purchases, making sure we have plenty of gunpowder for acquisitions. That being said, acquisitions we expect to continue to be our strategy of either for geography, industry, or technology capability. The definition of tuck under continues to grow as we get bigger. Longer term, we'll have to look at what do we do with cash, but also part of that is working on our strategies for where will the cash be and how is it accessible, and we need to figure out some of those things first.

Thanks. Nice quarter.

James Friedman, Susquehanna.

Hi, thank you. I wanted to ask first, I know you don't give explicit guidance, but just qualitatively how we should think about the composition of application development versus maintenance in the Q4? What typically happens in a Q4 in that regard?

I think, as we saw a little bit in Q3, we wouldn't -- Q4, very few clients tend to start application development projects, unless it is something small that could be completed in the quarter. I think we would expect to see maintenance growth slightly faster than the development, as it did in Q3, as we go into Q4 as well. That trend typically starts to reverse as you get into the middle part of next year.

Thank you, that's helpful. Karen, I want to check, could you just remind us what you include in application development in a general way?

It's all of our software implementation, testing, consulting, all of the front-end type work that goes along with development and implementation projects.

Thanks, and then lastly from me, Gordon you have this impressive health care practice, and you stated repeatedly on this call and in other calls the deep domain expertise of those professionals -- nurses, doctors, clinicians, et cetera. In the instance that health care doesn't come back -- and I don't mean to split hairs with you, because it was a great quarter -- but in the instance that health care doesn't come back, at least in the near term, how do you move those people into other parts of the organization to make sure they're utilized? Thank you.

Let's be clear. Health care not coming back does not mean health care is negative sequential growth. Health care not coming back means that it doesn't -- it isn't a driver of growth, so therefore it's growing well below Company average. I don't see a scenario where in 2013 health care has negative growth over 2012.

Thank you.

I think we're just about out of time here, so let's wrap up. I want to thank all of you for joining us for this quarter. We're obviously pleased with our performance this quarter and we look forward to talking to you again on our Q4 call and full year. Thanks very much.

This concludes today's Cognizant Technology Solutions Third Quarter 2012 Earnings Conference Call. You may now disconnect.