高知特 (CTSH) 2012 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions fourth quarter 2012 earnings conference call. All lines have been placed on mute to prevent 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. Good morning, everyone. By now you should have received a copy of the earnings release for the Company's fourth quarter and full year 2012 results. If not, a copy is available on our Web site, 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. Please go ahead, Francisco.

Thank you, David. Thank you for joining us today. This morning Cognizant released strong fourth quarter results that capped another year of industry leading performance. Revenue grew 3% sequentially and 17% over the year ago quarter to $1.95 billion. This brings full year revenue to $7.35 billion, or 20% growth over 2011.

As I look back on 2012, I am proud of our results. Our continued track record of market leading revenue growth and stable margins fueled further reinvestment in the deepest client relationships, the most robust portfolio of services and the strongest pool of talent we have ever had. We increased the number of strategic clients by 23 to 214 at the same time, raising the results of our annual third party customer satisfaction survey to the highest level in four years. One mark of the strength of our client relationships is that we finished with 16 clients, each contributing more than $100 million in annual revenues. And nearly 19,000 net new associates joined our team while we maintained attrition rates that are amongst the lowest in our industry. We recorded the highest employee satisfaction survey results in our history and were recognized as one of the happiest places to work.

I would now like to turn to our expected financial performance in 2013 and give you some color around the significant market opportunity we see ahead of us. For the full year 2013, we expect to deliver at least $8.6 billion of revenue which represents full year growth of at least 17%. Karen will provide you with full details of our expected 2013 financial performance shortly. As we look to 2013, we see a market shift that is reaching a level of importance that I would like to share with you. For several quarters, we have been speaking to you about the secular shifts in both the economy and with technology itself. These shifts are now forcing clients to reexamine how they operate, moving from merely incremental levels of performance efficiency to building new digital business capabilities.

For years you have come to know us as helping our clients manage their businesses better and helping them run their operations better, faster and cheaper. However, in the context of today's secular business and technology changes, our clients are turning to us for more. In short, not only do they wish to run better, they now need to run different. In order to maintain their market leadership, our clients are increasingly turning to us to conceptualize, architect and implement new and increasingly different capabilities.

With each passing quarter, our clients' dual mandate of running better and running different comes into sharper focus. As a result, we continue to deepen our client relationships by challenging status quo, driving fundamental innovation and unleashing new potential across their organizations by uniquely addressing this dual mandate from one global platform. In looking at the industries that we serve, this is a natural evolution of demand. After all, across financial services, healthcare, life sciences, retail, manufacturing, media, information services and high-technology, the combination of economic shifts and technology transformation, driven by the SMAC stack of social, mobile, analytics and cloud technologies, it's creating game changing opportunities across the markets we serve. These clients all continue to feel the ongoing pressure of cost containment and efficiency. However, in the past two years, the mandate to build new and different capabilities based on the back of SMAC technologies has continued to gain momentum. Thus, with these types of clients, the fee suite agenda is now a combination of run better and run different.

It's in response to this dual mandate that we institutionalized our three Horizon model over a year ago. This approach has proven particularly effective to manage this demand, as Horizon 1 significantly helps clients to run better and Horizons 2 and 3 help clients to run different. In our Horizon 2 services, with our business consulting, we saw significant progress over the course of 2012, both quantitatively in the growth of our practice as well as qualitatively in the types of engagements we typically deliver. Similarly with our business process outsourcing group, our vertical orientation has proven effective in helping clients transform key processes. Within our IT infrastructure practice, we saw strong growth as clients looked to transition away from old ways of managing their IT footprint and embracing the move towards public, private and hybrid cloud models. In Horizon 3, we continued our progress in delivering new solutions. As we took inventory at the end of last year, we found that we were delivering SMAC-related work for more than 60% of the top 100 customers, as our clients seek new business opportunities through mobility, big data and the cloud. More significantly, these Horizon 2 and 3 services remain on a steep growth trajectory that is higher than the Company average.

In summary, clients continue to partner with us not only for operational improvements and efficiency and effectiveness that they have always known us to deliver, but increasingly to help them stay relevant in the marketplace by helping them reimagine their business models in the face of secular industry changes, changing demographics and new technologies. This will help ensure our clients remain relevant in the marketplace and their business models viable for the future. Finally, the enterprising spirit needed to identify new opportunities for our clients and quickly and collaboratively implement these new capabilities is a core part of our values here at Cognizant. Cognizant is helping companies run better and run different. It's a trend that has picked up significant momentum over the course of 2012 and we anticipate continuing in 2013.

I would like to now hand the call over to Gordon to give you some color around our operating results and Karen to review our financial results. We will then open the floor to Q&A. Gordon?

Thank you, Francisco. We are very pleased with our fourth quarter and full year 2012 performance. A couple of quarters ago we talked about the trend of large, complex and transformational multi-service line deals becoming more common. This trend continues across Horizon 1, as well as Horizon 2. This morning I will spend a few minutes focusing on our Horizon 2 services and then touch base on our industry and geographic performance. Horizon 2, on an aggregate basis, continues to grow faster than the Company average. As we mentioned on the last quarter's earnings call, our Horizon 2 businesses represent approximately 20% of revenue. This portfolio best illustrates how we are leveraging our client partnerships which are infused with domain expertise and industry insight to help clients run different through a set of solutions that move beyond traditional delivery models.

Our core BPO offerings continue to show strong growth across industries. Clients are increasingly relying on us to deliver industry aligned process outsourcing that integrate domain expertise, new technology and innovative commercial models to unlock value. It is important to note that a key part of our BPO strategy and value proposition is to go beyond traditional business process outsourcing, which has been focused principally on helping clients run better. And move to using process outsourcing as a key enabler to help clients run their processes differently. The Everest Group recently named us as a leader in capital markets BPO, validating our efforts to help investment banks, brokerage houses, asset and wealth managers and pension trusts evolve rapidly to the changing market and regulations, as well as changing needs of their sophisticated client base. This recognition comes on the heels of earlier recognition we received in pharmaceutical social media analytics by IDC Health Insights, as well as finance and accounting from Gartner.

We continue to invest in Horizon 2. As an example, to further augment our focus and range of services offered within healthcare BPO, in mid-fourth quarter, we closed the acquisition of MediCall, a US headquartered medical management services firm with operations in the Philippines. MediCall, which is staffed by licensed nurses, physicians and pharmacists, delivers customized medical management solutions to US-based healthcare payer organizations including group health and workers compensation insurance companies, and helps them enhance patient satisfaction, improve clinical outcomes and reduce cost of care. This small but strategic acquisition adds approximately 600 employees to our headcount and is expected to contribute an incremental $15 million in revenue in 2013. As part of this acquisition, our healthcare business process services operations has been accredited by URAC. This accreditation enables us to offer specialized clinical services in the areas of group health and workers compensation utilization management.

Last quarter, we talked about the evolution of the infrastructure services market, resulting in significant transformation of traditional delivery models. In connection with this, we also provided an update on our data center strategy within our IT infrastructure services practice. I am pleased to report that we are seeing clients accelerate their adoption of new variable cloud based infrastructure environments and we believe that the investments that we have made in our practice positions us well to capitalize on this trend in 2013. Our infrastructure business is having a real impact on our clients today. For example, we are doing work for a global pharmaceutical company by leveraging Cognizant's transformational themes, including technology simplification, standardization and virtualization. This client has been able to implement a rationalized and updated infrastructure footprint that utilizes automation and self help to further streamline delivery. These measures have simultaneously provided cost relief while improving the effectiveness of service delivery, and have further optimized technology to align with the business outcomes.

Our consulting business, which has shown dramatic growth over the last three years, has become a key component in our ability to develop and execute a road map to show clients how they can run better and run different. Consulting is truly enabling us to engage with clients in discussions around how a transforming macro environment, industry-specific secular changes and evolving demographics are creating opportunities for them to rethink their business models. Additionally, these consulting partnerships are paving the way for larger opportunities and more complex transformational deals.

Our pipeline is strong and we continue to expand our portfolio of consulting capabilities and client relationships. As an example, we are assisting a consumer goods client on a complete redesign of their supply chain strategy. The program includes assessing best practice compliance, benchmarking best agreed competitors, conducting capability and process maturity assessments, and understanding time to market demands for retail customers. The outcome of the program with identification of reengineered customer fulfilment capabilities, reassessment of inventory requirements and the definition of new business capabilities to reduce time to market. This client has now committed to the next phase of the program with Cognizant around detailed business process definition and software selection.

Looking at our performance from an industry standpoint, in Q4, financial services grew 3.4% sequentially and almost 20% year over year. Growth was stronger than anticipated, particularly within banking, both with our larger and mid-size clients. Although regulatory work is showing an uptick, it's not necessarily resulting in an increase in overall IT spending. The focus on cost optimization remains strong and there is continued push for productivity benefits. Insurance remains strong, both in terms of revenue growth as well as mix of services. This is a notable focus -- there is a notable focus on improving customer experience and, therefore, a continued demand for customer-facing solutions that leverage our CRM capability. There remains a strong interest in managed services in both existing and new clients, particularly outcome-based business partnership models.

Healthcare, which includes our payer and pharmaceutical clients, as well as others in the healthcare ecosystem, grew 3.5% sequentially and about 10% year over year. Breaking down healthcare into its two major components, growth was broad based across our pharmaceutical clients based on a modest increase in discretionary spend. This is a pattern that we have seen in the past. Spend remains conservative in the first half, accelerates in the back half of the year. We also saw focus on short term analytics and consulting projects that will help clients set the context for 2013 strategy. The industry continues to go through significant transformation due to a large number of drugs coming off patent. From a payer perspective, the political climate did create some uncertainty as it relates to healthcare reform and its implications on budgets. However, as clients refined their plans for secular changes to their business, we did see an increase in consulting assignments focused on transforming business models and IT strategy within the segment. Retail manufactures grew 3.1% sequentially and about 28% year over year. Q4 is traditionally a slow quarter for this industry segment due to IT lock downs around the holiday shopping period. And the quarter played out as we anticipated.

That said, interesting trends are emerging within this segment as clients look to partner with us on their transformation journey. For example, within retail, investment in e-commerce is gathering a lot of momentum. The trend towards digital marketing is making the chief marketing officer an increasingly important IT user and stakeholder. And they are turning to Cognizant to help them enable their vision. For example, we're helping a leading national retailer deliver a unique and consistent brand identity and experience to customers across all channels including stores, online, mobile, social and through an e-commerce initiative, while also simultaneously improving operational efficiencies and time to market.

Moving to our performance by geography. In general, demand patterns played out as we anticipated in North America and the rest of the world. Europe had a good quarter. It appears that the worst of the economic instability in the region is over. However, it is clear to us that long-term structural challenges remain in the business environment. We believe that these long-term challenges will serve as a catalyst for existing new clients to look to Cognizant to help them transform their operations in technology, to run better and run different. And we are already beginning to see this trend. Of note is our expanded partnership with Rabobank for whom we will deliver a portfolio of application development, maintenance and testing services by leveraging our consulting capabilities and our proven financial industry expertise.

We continue to focus heavily on building out our front end capability in Europe and strengthening our local presence. We recently announced our intent to acquire six companies of the C1 Group, an independent consulting and IT services firm based in Hamburg, Germany. Which together, provide enterprise application services and high-end testing services to clients in three major industry segments, manufacturing and logistics, energy and utilities, and financial services. Under the agreement, about 500 professionals in Germany and Switzerland are expected to join Cognizant. The combination of these acquired companies with Cognizant will help our clients in Europe address the duel mandate of running their businesses better by leveraging Cognizant's global capabilities and scale to drive costs and operational efficiencies, as well as running their businesses differently through intimate client, local client relationships infused with innovation and business transformation. We continue to receive recognition for investments already made in Europe. KPMG's Outsourcing 2012 study of service provider performance across Europe ranks Cognizant as number one in general satisfaction and relationship management, both strategic and operational, with scores significantly higher than industry average. Although we are optimistic for our prospects in Europe over the coming years, the trajectory will be lumpy as individual clients move from planning to action.

I will now hand over the call to Karen to comment on our financial performance and guidance.

Thank you, Gordon. Good morning to everyone. As detailed in our press release, our fourth quarter revenue grew 3% sequentially and 17.1% over last year to $1.948 billion, ahead of the our guidance of $1.94 billion from last quarter. Our non-GAAP operating margin, which excludes stock based compensation expense, was 19.7%, within our target range of 19% to 20%, while our GAAP operating margin was 18.3% for the quarter. Overall, 2012 was a strong year for us. We grew by 20% year-on-year while maintaining stable margins and a healthy balance sheet.

Consulting and technology services, formerly known as application development, represented 50.4% of revenue. Outsourcing services, formally known as application management, was 49.6% for the quarter. Consulting and technology services grew 15.2% year-over-year and 1.5% sequentially. Outsourcing services grew 19.1% year-over-year and 4.6% sequentially. For the full year, consulting and technology services represented 51.1% of revenue and grew 20.4%, while outsourcing services represented 48.9% of revenue and grew 19.6%.

34.2% of our revenue came from fixed price contracts during the fourth quarter. For the full year 2012, 33.1% of revenue came from fixed price contracts, up from 31.7% in 2011 reflecting further acceptance of the managed services model of engagement by our clients. As expected, on a sequential basis, our pricing was stable during the fourth quarter. We closed the quarter with 821 active customers and the number of accounts which we considered to be strategic increased by 6. This brings our total number of strategic clients to 214. We continue to see a trend towards our newer strategic customers embracing a wider range of Cognizant services at an earlier stage in the relationship.

Our diluted share count for the quarter was 303.8 million shares, an increase of approximately 645,000 shares from Q3. During the fourth quarter, we repurchased approximately 400,000 shares at an average price of $65.17 for a total cost of approximately $26 million. As of December 31, 13.7 million shares have been repurchased at a cost of $866.4 million under the current share repurchase authorization of $1 billion.

Turning to the balance sheet, our balance sheet remains very healthy. We finished the quarter with approximately $2.9 billion of cash and short term investments. During the fourth quarter, operating activities generated approximately $362 million of cash. Financing activities generated approximately $24 million of cash. This was comprised of net proceeds of $50 million related to option exercises and related tax benefits, as well as our employee stock purchase program, partially offset by expenditures of $26 million towards our share repurchase program.

We spent approximately $126 million for capital expenditures during the quarter. Our full year capital expenditures for 2012 were approximately $334 million. This was below our original expectation of $370 million, primarily due to the timing of some of our construction projects. During 2013, we expect our capital expenditures to total approximately $400 million.

Based on our $1.53 billion receivable balance on December 31, we finished the quarter with a DSO including unbilled receivables of 72 days, down by almost 5 days from the third quarter and down by a day from 73 days in the fourth quarter of last year. The unbilled portion of our receivables balance was approximately $183 million, down from $214 million at the end of Q3. Approximately 63% of the Q4 unbilled balance was billed in January.

Net headcount increased by over 6,300 people during the quarter. 39% of gross additions for the quarter were direct college hires, while 61% were lateral hires of experienced professionals. We ended the quarter with over 156,700 employees globally, of which 146,300 were service delivery staff. During 2012, we added approximately 19,000 net new employees worldwide. Attrition in the fourth quarter was 10.7%, lower than our Q3 attrition of 13%. 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 included all departures including BPO and employees in our training program.

Utilization decreased slightly on a sequential basis during Q4. Offshore utilization was approximately 68%. Offshore utilization excluding recent college graduates who are in our training program was approximately 74% and onsite utilization was down slightly to 93% during the quarter.

I would now like to comment on our growth expectations for the first quarter of 2013 as well as the full year. For the first quarter of 2013, we are projecting revenue of at least $2 billion. For the full year 2013, we expect to continue delivering industry leading revenue growth. Based on current conditions and client indications, we are projecting revenue of at least $8.6 billion. This represents full year growth of at least 17%. Our revenue guidance includes $90 million of expected revenue from the recently closed MediCall acquisition and the C1 Group acquisition, which we anticipate will close late in Q1, but excludes the impact of any further acquisitions that may be closed during the course of the year.

From 2013, we are prospectively expanding the definition of our non-GAAP operating margin and EPS. We will exclude amortization of purchased intangibles and other acquisition-related charges, in addition to stock based compensation, when calculating non-GAAP operating margin and EPS. We will focus primarily on non-GAAP numbers when discussing results. We believe that the expanded non-GAAP definition will provide consistency with the financial statements used for internal management reporting and budgeting, thus providing enhanced transparency into the operational results of the company. Second, this change will provide greater flexibility for us to ensure that the objectives and resulting incentives for key employees of acquired companies are designed to maximize the long term success of future acquisitions. Finally, this expanded definition is consistent with many of our global competitors and will enable better peer-to-peer comparisons.

Our non-GAAP operating margin for 2012 per our expanded definition was 20.2%, which is 20 basis points higher than the non-GAAP operating margin reported under our previous definition. During Q1 and for the full year 2013, we expect to operate within our target non-GAAP operating range of 19% to 20%. Therefore, we are currently comfortable with our ability to deliver in Q1 non-GAAP EPS of $1.01, which excludes estimated stock based compensation of $0.08 and acquisition-related expenses of $0.01, and translates to GAAP EPS of $0.92. This guidance anticipates a Q1 share count of approximately 305 million shares and a tax rate of approximately 25%. Our guidance excludes any non-operating FX gains or losses.

For the full year 2013, we expect our non-GAAP EPS to be at least $4.31, excluding estimated stock based compensation expense of $0.30 and acquisition-related expenses of $0.06. Our GAAP EPS will be at least $3.95. This guidance anticipates a full year share count of approximately 306 million shares and a tax rate of approximately 25%. It also excludes any non-operating FX gains or losses.

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

Thank you. We will now be conducting the question-and-answer session.

(Operator Instructions)

In the interest of time, we ask that you limit yourself to one question.

Rod Bourgeois, Bernstein.

One quick clarification, and then a question on the demand environment. In your Q1 guidance, can you clarify if there is any acquisition revenue content in that? The big question -- can you just give us an update on the client budget closing process? And more specifically, as budgets are being finalized, what is the pace of deal ramp-ups as new deals get started in the calendar year to set you up for your important Q2? Are you seeing a good pace of deal ramp-ups this year as you set up for the important Q2? That would be very helpful, thanks.

Rod, it's Karen. I will take the first part of that around the guidance for Q1, and then I'll turn it over to Gordon and Frank to add some color on the demand environment. In terms of the guidance for Q1, there is less than $10 million. Obviously, the MediCall acquisition closed in Q4, that is small, $15 million incremental for the full year, so that is a couple million dollars in Q1. Then we expect to see one acquisition to close late in the quarter. So, in total, the two will be less than $10 million for the quarter.

Rod, on your question of the pattern of demand and ramp-up, we are pleased with what we are seeing. Client budgets are tracking the way we want. When we look at the momentum of stuff that is kicking off, how we come out of Q1 for the important Q2 -- you are highlighting important -- it's tracking the way we would like to see it at this point of the year.

Great. Then, just real quick on that, in the healthcare vertical, you ran a little bit of a lull in the latter part of last year, in terms of the demand progression there. Are we still in that lull, or are you starting to see a turn in that? You had reasonable sequential growth in healthcare in Q4, and I'm wondering if that sector or that vertical is getting back on track.

Rod, it's Frank. Look, I was pleased with what we saw in healthcare in the fourth quarter. But I'm still cautious. I don't think one quarter makes a trend yet, so I still watch it for another couple of quarters. My hope is that we might be at somewhat of a bottom. But let's wait a couple of quarters before we make a call on whether we are seeing sustained recovery there.

Rod, also remember, in the pharma side of the business, Q3/Q4 tends to be stronger than Q1/Q2, so you do have some lumpiness there. Obviously, that's all baked into our guidance.

Thank you, guys.

Thank you. Edward Caso, Wells Fargo.

Thanks. Another solid quarter. I would love to learn a little bit more about your infrastructure business and your efforts. How much of it is greenfield opportunity versus an in-house solution, and how much of it is take-away work from, call it, IBM, [EDS], CSC, where you are just coming in with a more attractive solution than they historically had offered as they renew?

I don't have the exact proportions, but I would say that, approximately half of the work would be where we are going into a situation where the client is running their infrastructure in-house, and we are transforming that in some way. Taking the infrastructure management, the management layer to a global remote infrastructure management approach, or taking the actual physical infrastructure to a cloud-based approach. In many cases, when a client is -- in a client's infrastructure environment, some parts of that will be done with a traditional provider that is running their infrastructure, and what we think of as a traditional asset-heavy model. In those cases, which is about the other half of the business, we would be taking that and restructuring it to the new cloud-based model, adding a layer of global delivery on top of that for the infrastructure management capability.

There is a third category in there, which sort of straddles both of those, which is where we are combining apps and infrastructure together, particularly in our application maintenance business, Ed. We are seeing that, when we are maintaining an application, there are a lot of synergies to also being responsible for some portions of the underlying infrastructure for those applications. So, that is a different cut where, in many cases, what our value proposition becomes is the ability to run the apps and the infrastructure together in a combined way, and drive further efficiency and effectiveness for the client around that portfolio of applications. Those are the three big sort of approaches or themes as we go to market with infrastructure.

Related, is there a bias of success on a different vertical, particularly your two big ones, finance and healthcare? And is there a geographic bias as well? Also, how many of these deals are advisor-involved deals?

If I look at the infrastructure business, I would say that, of the two big verticals at Cognizant, it's probably I would say roughly equally split between our pharma clients and our financial services clients. Particularly when you look at this trend I talked about of infrastructure combined with applications, that's a trend that banks and pharma clients are recognizing as important.

In terms of advisor based, I don't think it's any more or less intensive than the rest of our business. I don't have the stats, but I would say off the top of my head, one-third of our deals generally tend to be advisor lead, and the rest are deals that either the client is running themselves or that we proactively have gone out and created. Where there isn't an advisor or there wasn't an RFP, but we created the demand through a piece of proactive selling.

Thank you.

Thank you. Darrin Peller, Barclays.

First question was -- in the fourth quarter we just saw the consulting growth rate actually at a little bit of a lower pace than the full year growth, as well materially lower than outsourcing. When we think about 2013, Gordon, or maybe Frank, what are you implying is going to be consulting? What kind of driver is consulting going to bring to your growth rate for the full year, just because you are saying Europe is getting better, and discretionary might be, in general, better. I just wonder if there's any upside if consulting comes back in a little more force to your full-year 16% organic or 17%-plus outlook?

Sure. Similar to what we have done historically, we are always fairly cautious on the, what you referred to as consulting, which is also AppDev, which is all a proxy for more discretionary work. So, where we ultimately land the year will probably depend on that discretionary work. We certainly take a more conservative stance going into the year. Our guidance would assume that growth of that is probably a little bit slower than the outsourcing work. At this point, we are seeing good demand in that. It tends to be lumpy, and you certainly don't want to count on it until it's all done.

Good, so that has been conservative already baked into your guidance, and then --.

Absolutely. We learned our mistake last year.

One follow-up then, on the financial services vertical, I know we talked about healthcare before, but you mentioned banking being strong. Can you give a little more color on that? More importantly to me, is that sustainable? Is that something we can have confidence is going to last through the year, because obviously the financial services sector could be volatile?

Let me say I'm cautiously optimistic. I think that we saw, as you know, an environment over the last few quarters where financial services cut or pulled back quite significantly on spending. I think that created a little bit of pent-up demand in some places. As I look to 2013, I am seeing signs that some of that pent-up demand in financial services is being released.

Of course, the other side of our financial services segment is the insurance business, which has been doing very well last year, and we think continues to do well this year. When I put those two things together, I think financial services as a whole should have a pretty solid year this year. I remain cautiously optimistic about financial services.

I think this is the third quarter in a row where it has come in a little better than you probably expected as well. Is that right?

That's right, yes. So, I think we sort of started to see the turn-around middle of last year. The fourth quarter was nice, and as we look to the first quarter, it seems to be shaping up well, as well.

Nice job. Thanks.

Tien-Tsin Huang, JPMorgan.

Great, thanks. Good morning, thanks for the details. Frank, any change in competitiveness across your peers? Looks like the growth, at least in the fourth quarter and perhaps in 1Q, looks like some of the growth is converging amongst some of the bigger players.

I don't see any particular changes in competitiveness. I think that we compete with a set of very good, solid players. I think we hold our own, and win our share -- certainly sometimes more than our fair share -- I see that win rate continuing. I feel very, very good about our portfolio of services.

I come back to my opening comments. As this trend of our clients sort of embracing the duel mandate of run better and run different, I think that is where our differentiation is really coming through relative to the competitive set. We think that what we are able to do is offer clients the ability to address both of those, the run-better and run-different sides of their business from one global platform, versus some of our other competitors that are either focused more on the run-different piece or more on the run-better piece. We think we do both pretty well for our clients. That is really why we think we are winning in the marketplace.

Great, understood. Quickly then, on Europe, I know that was [off] strong, certainly better than our expectations. Trying to understand -- is it limited to a few clients, or is it a little bit more broad based than that, and maybe what type of work are you doing exactly? Can you give us just a couple details? I'm just trying to get a sense of how sustainable obviously that could be. Thanks.

Sure. We are clearly seeing, in Europe, a shift that we were talking about for a while. The last year we've been talking about the economic turmoil in the continent is causing clients to think differently about how they use companies like Cognizant, and we talked about we're starting to win the deals that take a little while for those deals to kick in. Those deals are now starting to kick in. It's probably more focused on the run-better aspect, and we actually saw our outsourcing business or the non-discretionary piece grow faster in the continent than the discretionary piece, which historically had not been the case.

So, you are seeing that market open up for the application outsource and application maintenance work. It will still be a bit lumpy. To be clear, it's still not a large number of clients. So, you have a little lumpiness in the ramp-up. Clearly, I think as I said in my remarks, the -- when there is instability in Europe, it was tough for clients to make decisions. Now they are making decisions. And because of the long-term structural changes that they see in their industries and their markets, they realize they have to run their businesses more efficiently and more effectively, and we are part of that solution.

Right. Gordon, you are confident you could lock in and retain the C1 employees you are acquiring in the region?

We sure hope so. We have spent a lot of time with them. We have a great team on the ground at Cognizant. The people that we are picking up from C1, from everything we see, are very excited about the opportunity to work with Cognizant and to play a really critical role of being that local presence. We are picking up some just terrific people. I think they are going to be great leaders in our European business.

Terrific. Thank you so much.

Thank you. George Mihalos, Credit Suisse.

Thanks for taking my question. Just to go back on the healthcare segment, nice to see the sequential growth over there. Can you talk a little bit about how you feel about the pharma business now going into '13? You guys were quite cautious on the last call. Do you feel a little bit better about it? And maybe on the healthcare changes, any way to quantify what the benefit from spending there can be to Cognizant?

2013 is a tough year for the pharmaceutical industry. For many companies, it's a low point in the drug pipeline. As we are out talking to our clients, they think '14/'15 will actually be pretty good, but '13 is going to be hard. We are well positioned, certainly compared to others in the industry, to work with pharmaceutical clients, but I don't view 2013 as going to be a banner year for growth of our pharmaceutical practice.

I think it is a year we will continue probably to take share from others, but when you look at the contraction in IT budgets in pharma, it's fairly significant. That is all baked into our guidance. But I'm not sure I would take the Q4 strength as a pattern that you want to project out. Q4 tends to be good for the industry, but '13 will be a tough year.

Any thoughts on benefits from spending on the healthcare changes?

We are doing consulting work. Certainly we think there is opportunities, both with payers as well as with government work, related to exchanges. How much of it is incremental spend is the real question versus shifting in spend. I view the healthcare reform as neutral to positive for us. It's really a question of -- does it trigger incremental spend or not?

Last question from me -- you've got 17% revenue growth. You are guiding EPS up, on a GAAP basis, 15% or 16% on the adjusted basis. What is sort of accounting for the delta over there? Is that a little bit more investment spend somewhere, or maybe kind of help us think through that? Thank you.

Very simple, we exceeded our margin target a bit in 2012. We were at the extreme high end or slightly over our margin target. Our guidance for next year assumes we are well within our range actually on the newly adjusted non-GAAP basis at the high end of the range. But if you go back to what it would have been under the old thing, sort of upper end. So, it's getting margin back to where it should be.

Thank you.

Thank you. Ashwin Shirvaikar, Citi.

Good quarter, guys. And good morning. When you say that clients are adopting more of the offerings earlier in the relationship, is there any way to quantify that maybe in terms of your growth rate for strategic clients, or provide some color how to quantify it?

Ashwin, I don't have a clear way that I can give you an easy quantification of it. I think if you just look over the -- if you look at a couple of different -- triangulate on it in a couple of different ways. One is obviously the -- if you look at just the raw growth rates of our newer service offerings, those are growing much faster than the Company average. And certainly much of that growth is coming from existing clients. So, that is one data point that supports that assertion.

The second is that if you look at our newer practices, and you look at how quickly they get to certain revenue milestones. If you look at Horizon 2, as you know, in last quarter we said that those were approaching 20% of revenue. If you look at the period of time in which we have been able to achieve that, it is obviously a lot quicker than many of our traditional services that might have taken us a decade to get to the same size and scale where these are today. We are seeing the new service lines ramping up much more quickly.

Again, it's a sign that, with the portfolio of clients that we have, the strength of our client relationships, the relationships that our field maintains with our clients, that we are able to take essentially new service offerings, get them into the pipeline very, very quickly and ramp them up fast. That's why, as we add new capabilities, both in Horizon 3, and through organic and inorganic acquisition, we feel very confident that we can take those capabilities rapidly to the clients.

The last data point that I will maybe point to is that, as you know, throughout last year when we talked about Horizon 3, we talked to you about the fact that these were long-term investments that we were making, and that we expected good adoption but we were being sort of more modest in our assumptions about rates of adoption. When we took inventory at the end of last year, we found that, particularly as it relates to the SMAC portion of Horizon 3 -- social, mobile, analytics and cloud -- we were already doing work for 60% of our top-100 clients. Again, another data point that shows that adoption is happening -- of our new services -- is happening much faster than traditionally would have expected.

Okay. That's useful. Is there a target maybe for what Horizon 1 versus 2 versus 3 will look like in terms of percentage of, say, one year out?

We don't have a specific target other than we clearly would expect Horizon 2 and 3 to grow faster than Horizon 1. How much faster? Obviously, we hope it will be material. We don't set specific targets.

Okay. The last question really is more of a clarification -- should we read something into your commentary on non-GAAP presentation being changed? Does it maybe indicate more of a focus on M&A going forward?

I would not read a whole lot into it. It aligns with what a lot of other tech companies does. It gives us a little more flexibility to make sure when we do earn-outs, we do it to optimize shareholder value. Clearly, as we move more into Horizon 3, there will be more IP-based acquisitions, which may have a little bit more intangible amortization. I would not -- I clearly would not view this as a signal of a fundamental change in strategy. Our acquisition strategy remains quite consistent.

Thank you.

Julio Quinteros, Goldman Sachs.

This is Paul Thomas for Julio. Thanks for taking my question. Following up on that last question about M&A -- with the C1 acquisition and your commentary in Europe, might we see any more focus or acquisitions targeted at that region?

The short answer is -- if we could find the right things, absolutely. We think, if you look at particularly the continent, it's less than 10% of revenue for us. Obviously, when you look at global IT spend, it's a lot more than that. Certainly we think there is untapped opportunity there. But we always, and will continue to be highly selective in the acquisitions that we do.

Any color on headcount, hiring plans for 2013 in light of a little more acquisitions this year? What are your plans for the upcoming year?

We will continue to hire. We give revenue guidance, we don't give headcount guidance. The great thing about Cognizant is, because of our brand, we have just a tremendous pipeline of people who want to work for us. How many we hire will depend on demand, and equally important what skills we need. We will hire based on demand.

Thanks, guys.

Thank you. Moshe Katri, Cowen and Company.

Good quarter, guys. When you are looking at your (inaudible) pipeline and your backlog today, can you give us a feel on how does it compare versus the same time last year? I think that is going to be an important proxy for us to get a good feel on visibility down the road. Thanks.

Moshe, it's Karen. Good morning. So, I think, based on where we are today versus where we were last year, we actually feel very good about both the backlog and the pipeline. It's up a little bit. I think, as Frank alluded to earlier, our win ratios continue to be strong. I think at this point, obviously client budgets are just getting finalized and so forth now, but right now the pipeline is very robust and we are feeling very good about that.

Can you talk a bit about the UK market, and is it still roughly about 15% of revenues today?

So, the UK is -- total Europe is about 17% of revenue. UK is about two-thirds of that. And we saw very good sequential growth in the UK this quarter. And actually very strong development, or consulting and technology services growth in the UK.

It's kind of interesting, Moshe, you are seeing a divergence between the UK and the continent. UK, historically there have been a lot of maintenance work and so forth. Now we are seeing the development work kick in. In the continent, it's almost the exact opposite story where, because of all of the cultural issues, labor issues, there is more focus on the discretionary work historically. Now we are seeing the maintenance work kick in, in the continent. Different drivers in those two regions.

Is that still mostly retail and financial services?

It's going beyond that now.

Great, thanks.

Glenn Greene, Oppenheimer.

Wanted to follow-up on some of the Europe questions because your commentary sounds very consistent with at least one of your peers. Wonder if you can get more granular with your growth expectations, at least relative to the Company average for Europe. Is this a sustainable outsized growth mode you are in, or you are seeing in Europe at this point?

So, let's not talk quarter to quarter because Europe, as I said, will be more lumpy. But when you look at it on an annualized basis and so forth, clearly when you think about the continent, penetration rates are lower, you don't have the law of large numbers, and you have this meaningful secular change towards increased comfort without offshore. So, when I look out over the coming years, certainly we would expect the continent in particular to grow faster than Company average. But as I said, I'm not sure I would have that expectation quarter to quarter. You are already going to have some lumpiness just because the number of clients is still relatively small.

Gordon, I wanted to drill down on what you are now calling consulting and tech services. Could you help us piece-part how much of that is consulting versus the up development side? Also, curious why you are changing the definition. Is that anything we should be reading into?

Let's start with the definition. Our old definition of development and maintenance was reflective of what our Business was five years ago. As we launched consulting, as we launched BPO, all that kind of stuff, we forced them into those two categories, and we started talking about those categories as discretionary and non-discretionary. We started this year to change the name, not what is actually in each bucket but changed the name to reflect what is really there. So, I wouldn't read that as anything other than our old definitions were five years old, and generally reflect the business.

When you look at consulting and technology services, clearly it's heavily weighted towards the technology component. But consulting is a growing piece of it, and strategically incredibly important, but certainly a small piece of revenue compared to the core technology.

Is it sort of getting up to the 10% type of revenue, or is that too high?

It would still be less than 10%.

Total.

Of total Company.

Got it. Thank you.

George Price, BB&T Capital Markets.

Good morning. Thanks very much for taking my questions. I wanted to focus a little bit more on the margins, and EPS a little bit. The 2013 GAAP EPS guidance probably viewed as a little light, relative to expectations. When I ran the numbers quickly, it seemed like you were implying in the middle of your non-GAAP operating margin target, 19% to 20%. I know that's changed; I didn't really have a chance yet to fully factor that in, but just a few questions around that. That range is still 19% to 20%, if I heard you correctly? If it changes radically as a result of what the impact in 2013 is from the add backs, if you gave that, I apologize that I missed it. And where do you sit within that range? What is implied in your 2013 EPS guidance?

This is Karen. Basically, in the guidance, historically under the old definition of non-GAAP operating margin, we would have assumed non-GAAP operating margin target of about 19.6% going into the beginning of the year. This year we have actually taken that up to 19.9%. Clearly still within the range of 19% to 20%, but because of the adjustment we've made to the non-GAAP operating margin definition, we did take that up about 30 basis points to 19.9% to offset the acquisition amortization adjustment. So, it's essentially equivalent year over year.

Is the new range then higher? Is that in the middle of the new range for 2013?

The range will continue to be 19% to 20%, so that we can obviously continue to make the appropriate investments in the Company.

Okay. And if I could just quickly, on Cognizant Business Consulting, which I think is really a key part of the business going forward. I wonder if you can give a little bit of an update perhaps on the number of consultants, how that capability is evolving relative to some of the large M&Cs out there, and any more detail maybe on how that CBC factors into your plan for the year? Thank you.

Let me try to address the qualitative aspects of that. At this point, CBC -- let me just say that if you look over the last couple of years, we are very, very pleased with how CBC has grown and evolved, and the fact that I believe it is having really outside impact in our client relationships and to our business relative to the size of revenue it represents. Gordon gave some case studies and some qualitative data points around the kind of impact we are having with CBC, which I think is very significant, particularly as we engage more and more with our clients on this notion of running differently. CBC becomes a very key enabler.

CBC now is about 3,000 consultants, give or take. And I think it's worth pointing out that we take a relatively pure definition of consulting. So, when I talk about 3,000 consultants, these are pure, what I think of as management consultants. These are not folks that are doing blueprinting for technology implementation, and so on and so forth. This is really management consulting work that we are doing for clients.

We are building this out across all of the industry verticals we serve. The 3,000 folks are aligned by the industries that we serve, and we are also building out broad capabilities that go across each of the industries that we serve that are more generic in nature. We expect to continue to invest in consulting. We are continuously looking at ways to accelerate the growth. I think that we are pleased, but we still feel like we have work to do in certain areas, particularly when I look at geographies around the world, to ramp up consulting even more strongly in those parts of the world.

That was really all that we had time for. So, let me wrap up by thanking you all for joining us today. Just to summarize, I think we are very pleased with our 2012 results, and we are looking forward to a strong 2013. We are very encouraged that our clients find our value proposition increasingly relevant in the midst of changing market dynamics, and that they continue to turn to us, not only to help them run better but also to help them run and adapt and change to run differently.

Thank you, everyone, for joining us today. Have a great day.

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