高知特 (CTSH) 2013 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions third-quarter 2013 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, and good morning, everyone. By now, you should have received a copy of the earnings release for the Company's third-quarter 2013 results. If you have not, a copy is available on our Web site, Cognizant.com.

The speakers on today's call are Francisco D'Souza, Chief Executive Officer, Gordon Coburn, President, and Karen McLoughlin, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call, and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties that are 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, please go ahead.

Thank you, David, and good morning, everyone. Thanks for joining us today.

Cognizant's third quarter performance was strong, with revenues of $2.31 billion, a sequential increase of 6.7%, and an increase of 21.9% year-over-year. Our non-GAAP operating margin was slightly above our target range at 20.4% for the quarter.

On the back of our strong second-quarter performance, we're extremely pleased with this solid third quarter. As a result, for the second time this year, we are raising our full-year revenue guidance. We now expect 2013 revenues of at least $8.84 billion, which would represent industry-leading growth, year on year, of at least 20.3%.

Growth was broad-based across our portfolio of industries, services, and geographies, showing once again, that we are staying relevant to changing client needs. The results also validate our strategy. Our singular focus in the market around helping clients running better and running different is working, and our discipline of internal focus, embodied in our Three-Horizon model is also working.

With solid execution against our strategy, this quarter, we were able to grow market share in new discretionary programs, and drive faster-than-expected ramp-up in a number of outsourcing deals won in prior quarters, resulting in quarterly performance, which was stronger than we anticipated. Gordon will provide an update on our Three-Horizon model in a few minutes, including our progress in new markets, new technologies, and new delivery models.

I would like to now spend some time on the running better, running different client strategy. Clients are looking for service partners who can address their dual mandate of driving greater performance from the current business, while improving the positioning of their businesses for the future. We are hearing this on the ground in our engagements, and we have also heard it during the various Cognizant community client events that we have hosted around the world this year.

We remain well-positioned to address this dual mandate. On one side of the dual mandate, we are working to aggressively reduce clients' total cost of ownership and generate higher levels of productivity, by leading many of our clients to best-in-class delivery models, with corresponding managed services and output-based commercial models.

Our ability to drive results in our traditional areas of business has attracted good recognition amongst research analysts, sourcing advisors, and consultants. For example, recently, Gartner positioned us in the leader's quadrant of the 2013 magic quadrant for CRM service providers worldwide.

The Everest Group recently recognized Cognizant as a global leader and star performer in their peak matrix for health care payer IT outsourcing for 2013, and IDC recognized Cognizant as a leader in life sciences, sales and marking, IT services, in the IDC MarketScape. These forms of recognition demonstrate our ability to help clients on important business and IT issues.

On the other side of the dual mandate, we continue to engage with an increasing number of CIOs and other C-level executives who are struggling with the pace of change in their industry, or who want to rethink their business models. Transformation is high on their agenda.

At the core of many of these client conversations is SMAC. SMAC, as you know stands for social, mobile, analytics and cloud.

While SMAC provides a challenge to some clients' business models, it also creates tremendous opportunities for them to generate business value. For example, there is growing interest in using SMAC technologies to develop better one-to-one relationships with customers, or leverage smart connected products. These opportunities to generate business value go beyond the IT of SMAC into other Horizon 3 areas such as new delivery models, like Cognizant Business Cloud Solutions, which Gordon will elaborate on later.

These are innovative solutions to clients' transformation needs, and we are pleased with our ability to help clients on these topics, and meaningfully impact both their bottom and top lines. I would like to hand it over to Gordon to discuss our performance, and then to Karen to provide more financial details. I will return later on for the Q&A. Over to you, Gordon.

Thank you, Francisco. Our Horizon 1 and Horizon 2 businesses continued to perform quite well. The third quarter saw solid growth in both outsourcing services, including application maintenance, business process services, and IT infrastructure, as well as consulting technology services, including our traditional application development work.

Our Horizon 2 services, including consulting, IT infrastructure, and BPO, once again performed well during the quarter. Cognizant Business Consulting, or CBC, continues to be a critical differentiator for us, as we compete, win, and execute transformational engagements across various industry segments.

With a view to expanding our consulting portfolio, at the beginning of October, we completed the acquisition of Equinox Consulting, a specialist financial services consulting firm based in France. Besides providing management consulting across investment banking, asset management, retail banking, and insurance, Equinox brings to Cognizant deep regulatory consulting expertise, including Basel 3, Solvency II, and Dodd-Frank. With a talented team of consultants from Equinox now part of Cognizant, we are well-positioned to provide consulting expertise, not just to marquee financial services firms in France, but also leverage those capabilities across Europe.

BPO saw continued traction during the quarter, largely on the ramp-up of a number of wins in prior quarters across financial services, insurance, and health care. These wins were primarily across vertically-aligned business processes, such as enrollment, claims, clinical and safety operations, mortgage processing, provider credentialing, and newer opportunities around regulatory changes in the context of health insurance exchanges, and TRICARE, which is the health care program of the Department of Defense military health system.

IT infrastructure services continued to grow nicely. Within this service, our clients increasingly recognize our global scale and competitiveness.

This is evident from our recent wins in providing clients with end-to-end infrastructure management services, data migration, and operation support. The rising interest in this service area is fueling our strong growth, and continues to keep our pipeline robust.

Our Horizon 3 offerings continue to gain significant traction, with our clients and serve as a good illustration of our strategy of reinvestment for the long term. As we have said previously, we expect $500 million of SMAC revenue this year, and we continue to invest in building out our SMAC capabilities.

In addition, we continue to invest in other areas within Horizon 3, including newer markets and industries. We're currently leveraging our broad range of existing service offerings to enter and grow these newer markets.

One example is the public sector, which includes government and quasi-government agencies across the US, UK, and other regions. Similar to the private sector, many governments are facing significant transformational challenges. They are under cost pressures, while at the same time, need to run different to address changes in policy, customer expectations, and new technology architectures.

A core part of our government strategy is to take advantage of the overlap between government and existing practices, such as health care and financial services. This year, we won over a dozen public sector engagements globally, and see good opportunity for further growth.

Earlier this year, Frank touched upon Cognizant Business Cloud solutions, another critical investment area within Horizon 3. This is our growing portfolio of platforms and solutions that enable clients to quickly deploy a range of on-demand business and IT solutions, without large capital outlays, and long implementation time lines.

Our business cloud portfolio includes offerings that leverage two models. Software-as-a-Service, or SaaS, which hosts softwares and associated data on the cloud, and Business-Process-as a-Service, or BPaaS, which integrates a SaaS platform with our people and process capabilities to deliver an end-to-end business or technology outcome.

We have already rolled out 15 platforms and solutions to over 150 clients. Although revenue is still quite modest, these solutions are gaining traction in the market.

One advantage to our clients is that these solutions run as utilities. This utility model provides a common platform accessible to clients on a pay as you go basis.

While we shared examples of Cloud360 and assetSERV on our prior calls, let me touch base on two more examples. Order-Management-as-a-Service, or OMaaS, and TruMobi.

Designed to be a multi-channel subscription-based platform for order management in the telecommunications market, OMaaS can be configured to the specific needs of service providers and resellers, integrating web and in-store customer experience for shopping, ordering, fulfillment, social and care, and provides realtime analytics and reporting capabilities for improved decision making. We recently deployed our OMaaS platform for Go Wireless, a Verizon wireless premium agent, to help launch their online commerce capability and enhance business performance through innovative service offerings to their customers.

TruMobi, another Cognizant Business Cloud solution, is a unified end-to-end mobility suite for application provisioning, security, integration, and life-cycle management of mobile devices. As an example of a TruMobi deployment, recently, Cognizant was selected by Max Life Insurance, India's largest non-bank-owned private life insurer, to leverage next-generation mobile technologies for transforming the way its agents do business and engage with customers.

Moving on to our performance by industry, our financial services segment grew by about 5% sequentially and 21% year-over-year. Within this segment, we continue to see strong focus on cost optimization, initiatives around regulatory compliance and risk management, and the adoption and integration of SMAC solutions to align with shifts in customer preferences.

Health care, which consists primarily of our payer, pharmaceutical, and medical device clients, had a very strong quarter, registering growth of 11% sequentially and 24% year-over-year. Growth within this segment was driven by our payer clients, including preparation for the launch of the new health insurance exchanges. Our work included strategy consulting, systems readiness assessments, connecting payers to the exchanges, and quality assurance, as well as ramping up BPO operations to handle ongoing customer queries, enrollment, and claims.

Manufacture, retail and logistics grew 6% sequentially, and 24% year-over-year. Demand within this segment was driven by multi-channel e-commerce implementations and integration efforts, supply chain consulting and implementation initiatives, and increased adoption of SMAC solutions. Our other segment, which includes communications, information media and entertainment, as well as high technology, grew 5% sequentially, and 17% year-over-year, primarily driven by growth in the high-tech segment, due to an increase in discretionary spending.

From a geographic standpoint, North America grew 6% sequentially and 19% year-over-year. Europe saw 7% growth sequentially, and 37% year-over-year.

While Cognizant has traditionally been strong in the UK, Switzerland, and the Netherlands, we're quite pleased with the results we are seeing from targeted investments in Germany and France. In these regions, we are seeing our win rates go up in strategic deals, and the acquisition of six companies of the C1 Group and most recently Equinox Consulting, provides us even greater leverage to compete in such deals. The C1 integration is playing out well, and our combined capabilities have already resulted in multiple new logo wins.

Growth in the rest of the world continued to remain strong, growing 12% sequentially, and 28% year-over-year. Rest of world demand continues to be fueled by strategic investments and enterprise-level transformation programs.

For example, Global Foundries, an independent semiconductor foundry, with fabrication plants located in Singapore, Germany, Malta and the US, selected Cognizant as its partner for application services. Another noteworthy engagement is with the Singapore-based NTUC FairPrice, the region's largest supermarket chain, with over 270 stores, to provide improved customer experience through e-commerce channels for product ordering and delivery.

Finally, let me provide some color around our business operations for the quarter. We're quite pleased with our efforts in driving best-in-class execution across key delivery and operating parameters, and are happy to have received external recognition for many of these initiatives.

On the talent side, we continue to hire some of the best talent globally, both in the open market, as well as from campuses in 18 countries. We provide these hires with world-class training and career growth opportunities, to help support rapid career advancement.

Let me highlight two achievements during the quarter. First, Cognizant was ranked number one by the American society for Training and Development, for excelling in creating an innovative and vibrant learning culture. And second, Cognizant was identified as the number-one recruiter by The Economic Times for attracting the highest number of talent from top management schools in India, competing with the world's best management strategy consulting, consumer goods, and investment banking firms.

As we have discussed in the past, we ramped up hiring towards the end of last year, and early this year, allowing us to meet the increased demand that we have witnessed during the second and third quarters, by consciously taking up our utilization. During the third quarter, we started on-boarding the graduates from the class of 2013. Given the current pace of on-boarding, we will have all of the 2013 graduates who accepted our offers on-boarded by the end of this year, well ahead of our original plans.

Finally, let me touch base on attrition. Annualized attrition, including BPO, was about 19% for the quarter. As we stated last quarter, attrition tends to pick up during the second and third quarters, as a result of the timing of bonus pay-outs, performance management actions, as well as associates leaving for higher education.

In response to higher-than-expected attrition during the second quarter, we have put in place a number of employee retention programs, starting in August. Though these programs have a lag effect, they are now paying off quite nicely, as we have witnessed a downward trend in our attrition numbers for the months of September and October. We anticipate that this positive impact will be reflected in our fourth-quarter attrition numbers.

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

Thank you, Gordon, and good morning to everyone. As detailed in our press release, our third-quarter revenue grew 6.7% sequentially and 21.9% over last year, to $2.31 billion, ahead of our guidance of $2.25 billion from last quarter.

Our non-GAAP operating margin, which excludes stock-based compensation expense and acquisition-related expenses, was 20.4%, slightly ahead of our target range of 19% to 20%, while our GAAP operating margin was 19% for the quarter. We generated $1.13 of non-GAAP EPS and $1.05 of GAAP EPS for the quarter. The overperformance in non-GAAP operating margin was primarily the result of increased utilization during the quarter, and the impact of the Rupee depreciation, net of our hedge losses, partially offset by promotions and wage increases, which were effective July 1.

Turning to some of our other performance measures. Consulting and technology services, formerly known as application development, represented 50.8% of revenue, and outsourcing services, formerly known as application management, was 49.2% for the quarter.

Consulting and technology services grew 20.9% year-over-year, and 7.3% sequentially. Outsourcing services grew 23% year-over-year, and 6.1% sequentially.

34.9% of our revenue came from fixed price contracts during the third quarter, and grew by 15% sequentially and 27% year-over-year. As expected, on a sequential basis, our pricing was stable during the third quarter.

We closed the quarter with 1,133 active customers, and the number of accounts which are considered to be strategic increased by 7. This brings our total number of strategic clients to 236. 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 fully-diluted share count for the quarter was 304.3 million shares, a decrease of approximately 171,000 shares from Q2. To date, 15.7 million shares, at a cost of $998.2 million, have been repurchased under the current share repurchase authorization of $1.5 billion.

Turning to our balance sheet, our balance sheet remains very healthy. We finished the third quarter with approximately $3.36 billion of cash and short-term investments, up by approximately $460 million from the quarter ending June 30.

During the third quarter, operating activities generated approximately $478.9 million of cash, financing activities generated approximately $28.3 million of cash. This was comprised of net proceeds of $35.2 million related to option exercises and related tax benefits, offset by expenditures of $6.9 million toward stock repurchases made in connection with our stock trade compensation plans. We spent approximately $31.8 million for capital expenditures during the quarter, and during 2013, we expect our capital expenditures to total approximately $300 million.

Based on our $1.89 billion receivable balance on September 30, we finished the quarter with a DSO, including unbilled receivables, of 75 days, at the same level as the second quarter. The unbilled portion of our receivables balance was approximately $254 million, up from $224 million at the end of Q2. Approximately 62% of the Q3 unbilled balance was billed in October.

Net head count increased by approximately 2,100 people during the quarter. 59% of gross additions for the quarter were direct college hires, while 41% were lateral hires of experienced professionals. We ended the quarter with approximately 166,400 employees globally, of which approximately 155,900 were service delivery staff.

Utilization increased on a sequential basis during Q3. Offshore utilization was approximately 75%. Offshore utilization excluding recent college graduates who are in our training program, was approximately 81%. On-site utilization was up to approximately 94% during the quarter.

I would now like to comment on our growth expectations for the full-year 2013. For full-year 2013, we expect to continue delivering industry-leading revenue growth.

Based on current conditions and client indications, we are pleased to revise our revenue guidance upwards to at least $8.84 billion. This represents full-year growth of at least 20.3%. This guidance includes $10 million of expected revenue from the recently-closed acquisition of Equinox.

During Q4, we expect to operate close to the high end of our target non-GAAP operating margin range of 19% to 20%, but for the full year 2013, we expect to be slightly above our target non-GAAP operating margin range of 19% to 20%. For the full year 2013, we expect our non-GAAP EPS to be at least $4.37, excluding estimated stock-based compensation expense and acquisition-related expenses of $0.36. Our GAAP EPS will be at least $4.01.

This guidance anticipates the full-year share count of approximately 305 million shares, and a tax rate of approximately 27%. It also excludes any Q4 non-operating FX gains or losses.

We would now like to open the call for questions. Operator?

(Operator Instructions)

Our first question is coming from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.

Outstanding quarter. I will ask just the implied fourth-quarter revenue growth at 2%, it seems a little below trend. How much of that is, let's say, conservatism, versus some pull forward of work in the third quarter? Maybe something a little weaker you saw in October. Any color on that would be great. Thanks.

Sure, happy to do so. First of all, keep in mind, we're going to grow at least 20.3% this year, which is an acceleration from last year's growth, even though it is off of a higher base. No different than the prior years, Q4 tends to be seasonably slower.

We clearly do not anticipate a budget flush this year, and as our retail practice continues to grow, as you well know, retail tends to be quite slow in the fourth quarter, due to the lockdown of systems around the holiday. So there is nothing unusual in Q4 for us. If you look historically, this guidance is generally in line with what we tend to do, but certainly, we see no budget flush. But I wouldn't read that, anything into that, other than it is a normal seasonal Q4.

Makes sense. Quick follow-up. Should we expect your disclosure 2014 growth targets linked to the equity compensation in early December? Is that still the practice that you plan to put out?

Sure, it is something that we have put a lot of thought into it. As you know in, recent years, we have reported our PSU Grant in a 8-K filing in early December. Prospectively, we do not plan to file an 8-K for ordinary grants to our officers. Obviously we will continue to comply fully with all 8-K disclosures.

The reason we're doing this is clearly, in the last couple of years, there has been the trend among most companies not to disclose this information, and there is no requirement, obviously, to do so. Disclosing the revenue targets for the awards has taken on a bit of a life of its own in recent years, in terms of people extrapolating the PSU targets to be a proxy for subsequent year revenue guidance. Given that we haven't completed our budgeting process at the time we do the PSU grants, we think it is more appropriate to provide our thoughts on 2014 in February, when our budgeting process is complete.

But let me be very clear on this, so there is no confusion. Our expectations regarding next year's growth prospects had no bearing whatsoever on our decision to no longer disclose the PSU metrics. And we fully intend, as part of our normal practice, in February, to give 2014 guidance.

Understood. That totally makes sense. Congrats again on the growth.

Sure thing. Thank you.

Thank you. Our next question is coming from the line of Steve Milunovich with UBS. Please proceed with your question.

You mentioned that your fixed price contracts increased 35% of the total. Where has that been? Where do you think it is going? What are the margins on that? And are there particular kinds of business you do where fixed price makes more sense?

The trend towards fixed price is a long-term trend, and it is one we believe strongly, and as the overall business model moves away from traditional input-based structures, to more of output-based, and managed services and SOA base, so we like moving toward fixed price contracts and we push our clients toward that. Obviously you have a wider scattergram of results by definition, but on average we're certainly pleased with the profitability on it, because it gives us the ability to share in the productivity gains that we can deliver and the efficiency gains.

So it won't be a steady movement up, obviously quarter to quarter, but over time, I would certainly expect it to move up, and something we're pushing for. It is a win-win for us and our clients.

Thanks.

Thank you. The next question comes from the line of Sara Gubins with Bank of America - Merrill Lynch. Please proceed with your question.

Two quick questions. First, I just wanted to check your earlier comment about not anticipating a budget flush. Is that because you're not seeing it, and you're getting indications that it won't happen or you're just not forecasting it?

And then secondly, I think I heard that the CapEx guidance is down about $100 million versus what you had been expecting last quarter. Can you talk about what is driving your expectations for CapEx for the year and if there is anything that is being pushed back. Thank you.

Sure, let me comment on budget flush and then Karen can comment on CapEx. It is not that we're not forecasting it. We're not seeing it. It is early November. If we're seeing it, it would be happening at this point.

So part of it is clients spent their budgets as they went along during the year rather than being conservative and holding money back to the end of the year. So I don't view as a lack of a budget flush as a negative. I actually view it as clients had the confidence to spend as they went through the year. Karen, do you want to comment on the CapEx?

Good morning, Sarah. In regards to CapEx, obviously what we have looked at as we have taken utilization up across the Company, we have realized that has allowed us to better optimize our facility usage offshore.

And so what we -- essentially all this is, is movement of the timing of the spend, so we are continuing on the same plan for our real estate expansion. We have just been shifted some of the timing of those payments into next year.

Thank you.

Thank you. Our next question comes from the line of Joseph Foresi with Janney Capital Markets. Please proceed with your question.

Mr. Joseph Foresi, your line is now live. You may proceed with your question. Again, Mr. Joseph Foresi, your line is live. You may proceed with your question.

Our next question comes from the line of Ashwin Shirvaikar with Citigroup. Please proceed with your question.

Gordon, in your prepared remarks, you talked about a couple of areas and focused less in the past, infrastructure was one, public sector was another. Could you provide some more details as to what you're doing in these areas, and particularly in regards to infrastructure? Will that offering over time potentially increase the capital intensity or is this more of a software-based solution?

Ashwin, it is Frank. Why don't I take that question.

We have been talking for quite some time now about the infrastructure business. It is one of our, what we call our Horizon 2 businesses, along with business process and our management consulting business. And for some time now, it has been growing at a healthy rate, faster than Company average, and we continue to see good growth from that business, and in fact, from our entire Horizon 2 portfolio, going forward.

As we have said in the past, our approach with infrastructure services is primarily an asset-light approach. That is not to say that we don't have some infrastructure and some hardware and physical capabilities, data center, and otherwise, within the infrastructure business, but by and large, our approach is to focus on what we think of as next generation infrastructure management, which is around asset-light and cloud-based offerings, which tend to be much less asset-intensive, and therefore much less capital-intensive than the traditional infrastructure business.

As it relates to the public sector business that Gordon talked about, that is one of our new Horizon 3 initiatives. It falls into the bucket of new markets that we have been pursuing. And we have been quite pleased with our progress there.

As Gordon said, we won a number of new clients over the last 12 or 18 months in that space. And what we're really focusing on there, as an entry point, is to focus on areas of the public sector, in the US and other parts of the world, that are adjacent to other parts of Cognizant's core business, particularly health care and financial services.

As you know, governments around the world have different initiatives around health care and financial services, and because of our commercial experience in those areas, we find those are good opportunities for us to leverage that knowledge into serving the public sector. So we continue to expect to see growth in that, it's still emerging in a relatively small part of the overall business, as most of our Horizon 3 offerings are, but one that we think has tremendous growth potential going forward.

So the infrastructure -- it's the enhancement of the infrastructure offering that you used to have.

Yes, I think that's right.

Okay. So on 3Q healthcare vertical, obviously really strong, was there any kind of one-time quote-unquote budget flush because of the ObamaCare implementation that was coming up at that time, and something that might affect next year's 3Q growth rate?

I would not think of it as a budget flush, but there was a one-time surge. But a lot of that surge will be ongoing, because the work that we're doing is not just put it in place and walk away, but it is the ongoing support. Definitely, there was a surge that kicked in, in Q3.

Okay. Thank you.

Thank you. Our next question is from the line of Joseph Foresi with Janney Capital Markets. Please proceed with your question.

I was wondering, could you -- do you think health care will outgrow the consolidated business next year? And if you could give us any updates on any changes you made kind of with the immigration building a little bit more dormant in your business model? Thanks.

Sure. Let me touch base on health care. We're not finished with the planning cycle. Clearly, the payer side will be healthy next year.

The question will be, what does pharma look like, as some of the companies are dealing with patent cliffs. So too early to know, is it going to grow faster than the Company average or not. We will certainly, as we get into February, have a better view on that.

Would you like to comment on immigration?

I don't think there is anything new for us to say on the immigration front. We continue to track the issue carefully, to participate actively in the conversations in Washington.

There has been some new activity in the House of Representatives, and we're continuing to track and follow and participate in that. As we said in the past, we think that -- obviously, we are supporters of immigration reform.

We think that things -- that immigration reform will be good for the country, we hope that the bill will come out in a place, or if there is legislation that comes out in a place that is good for the country, good for our clients, and therefore will be good for Cognizant. We will continue to update you as things go along, but I don't have much new information to give you this quarter.

If you look over the last six months or so, clearly, there is a far greater understanding in Washington related to some of the clauses that were a concern to us, a far greater understanding of how it could hurt American competitiveness. So the tone of the discussions have changed a bit, and we certainly view that as a positive.

Thank you.

Thank you. The next question is coming from the line of Edward Caso with Wells Fargo. Please proceed with your question.

Congrats. There has been several articles in the mainstream press since the Infosys settlement the other day that said the US Attorney's office is looking at other service providers. Are you able to comment whether you're on that list or not, or what you have been asked for?

Sure. I'm happy to. Obviously, it is not appropriate for us to comment on another company.

But as we have said many times in the past, we have an extraordinarily robust process for our visa integrity. We have separate groups that do visa processing and visa compliance group reporting to the General Counsel so we have multiple layers of checks and balances to make sure we are both following the letter and the spirit of the law. And no, we have not been approached in any way related to this topic.

Can you also talk about the size of your wage increase? I believe it kicked in July 1, particularly in the context of that higher attrition, and what the margin impact was in the quarter?

The wage increases were roughly what we anticipated, and had been indicating to the market for a while. Low single digits on-site, upper single digits offshore. So it landed right where we expect that. I don't have the exact calculation of the gives and takes because obviously you have attrition and PR initiatives and so forth. But no surprises on wages.

Okay. Thank you.

Thank you. Our next question is coming from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question.

Could you update us on your thinking as it relates to acquired growth? You mentioned that you're happy with C1 and Equinox, and how they look to be adding. If you think about CY14, could you just update us on how investors should be thinking about the opportunities for acquired growth, and specifically perhaps detailing, you see it as a couple points of growth on whatever your organic basis might be?

We have said several times in the past that our approach -- it hasn't really been a change in our overall approach and philosophy, and that we look to do acquisitions to add specific capabilities, to expand in new geographies, or to deepen our experience or expertise in a particular industry. Those are the three screens we use. Ideally a company, a target that we look at, would have several of those attributes.

We have also said that our approach to acquisitions is to look at tuck-in acquisitions. Obviously, as we get bigger, our definition of what constitutes a tuck-in acquisition gets bigger correspondingly. The C1 acquisition, for example, this year, was a little bit bigger than what we've done in the past.

I think you will start to see that -- or you will see that trend continue, for us to continue to do tuck-ins, but they will be a little bit bigger. I also think that given all of the changes in social, mobile, analytics and cloud, our focus on the Horizon 3 areas and so on, you will see us focusing as we go into 2014 in those areas.

So I would say that there may be a modest uptick in the number of transactions that we would do as we go into next year, to respond to some of the changes that going on in the marketplace. But the philosophy of what we do and how we approach acquisitions will remain consistent as it has been in the past.

And let me just add to that, we are really getting quite good at integration of these acquisitions, and capturing the revenue synergies. I look at C1. Within a matter of months, we were winning new logos that we would not have won without them, for a broad range of services. So we are learning how to really capture the value from acquisitions in terms of both strength in the core business and strength in the business of the acquired company.

Okay. That's great, thanks. Good luck.

Thank you. The next question is coming from the line of Mayank Tandon with Needham & Company. Please proceed with your question.

Frank and Gordon, recent industry data suggests that the market is seeing higher volume of contracts with shorter time frames, and these contracts are expiring more rapidly than in the past. And these contracts are being broken up and then taken away from the incumbent at times, and awarded to best-of-breed providers. Are you seeing that trend in the market, and how does that affect your business, especially your win rate versus the competition?

I don't think this is something that -- to the extent it is happening, I don't think it is something that is new in the marketplace. I think that the data you're referring to is -- refers to this trend that we have seen for some time now of these very, very large mega deals getting broken up into sort of what I think of as smaller best-of-breed types of deals, and that is a trend that we have seen going on for a long time.

So we play very well in that trend, because as you know, we are very focused in certain areas of the market, whether those are industries or service lines, and we compete very well, so as these big deals get broken up and get re-bid out, as smaller piece parts deals, that tends to benefit us. Again, I want to make sure that I am clear here.

I don't view that as a new trend. It is something that has been going on for several years now. We are seeing a number, perhaps more of those deals coming up for rebid, because typically those large deals were 5 to 10-year life deals, and so I think you will see more of those come up for re-bid in the coming years, and I think that will continue to benefit firms like Cognizant.

Thank you.

Thank you. The next question is coming from the line of Arvind Ramnani with BNP Paribas. Please proceed with your question.

Clearly, you're seeing robust demand for your SMAC services, but can you provide some more color on the cloud competing business? And after you help your clients move from on-premises solutions to a cloud solution, how does it impact your maintenance related to revenues?

I think it is a good question. I think the easiest way to think about this is that, while in general there are some parts of our business where a movement to cloud creates lower total cost of ownership for the client, and therefore, a potentially smaller revenue opportunity for Cognizant, over the life of that client system.

What is also happening is that as businesses become more IT-intensive, the number of units is going up. So you sort of think it of as in some parts of our business, we see contracts perhaps getting smaller, but numbers of contracts getting larger. And so in the net, we think that the market is actually growing, and you know, we think that as we look to IT spend for next year, based on the early indications that we have had talking to clients, we think that IT budgets will have a slight upward bias going into next year.

So we don't see a material reduction in the size of the opportunity available to us, as a result of the cloud. We just think that the complexion changes a little bit from what it has been in the past.

Great. That makes sense. And one other question here, some of your competitors have increased the acquisitions, partly focused on the SMAC business. Conceptually, are you looking to increase your spend on acquisitions, as it relates to the SMAC business?

As I said earlier, our acquisition approach remains the same as it has been historically. As we look at new capabilities which has always been one of our acquisition screens, certainly SMAC is one of the important areas there, that we continue to look at.

Look, I think we've got a -- we had a very early -- we had a head start. We started early in the SMAC area, in fact I think we were one of the first firms to talk about SMAC as a concept, so I don't really think we're going to need to acquire our way into what I think of as the bread and butter SMAC business. I think we've got very strong positions in those businesses at this point, and I think we're competitively well-positioned there.

But of course, we are continuing to push forward. We look at, as Gordon talked about, the business cloud platforms, we are looking at advanced analytics capabilities, we're looking at third and fourth generation mobile technology, and as we look at those, we clearly look at acquisitions where they make sense to bolster our capabilities there. But I feel very strongly that the core of our SMAC offerings are solid.

Thanks. And thanks for deciding to yank the 8-K in early December. That is helpful.

Thank you. The next question is coming from the line of Bryan Keane with Deutsche Bank. Please proceed with your questions.

I just wanted to ask about head count growth again. Sequentially, it is the second quarter in a row, we have only had about 1% sequential head count growth. So I guess, should we expect a pickup there to revamp up on the head count growth, or is there more room on utilization, expected utilization, to continue to increase enough to fill the demand?

Sure, we're pretty much where we want to be on the utilization now. It took us a couple of quarters to get to where we wanted to be.

We had a big jump in Q3. So I would expect that it would level off now. With the timing differences because of when college kids join, because obviously you can't bill right away, but on a more steady state basis, we're roughly where we want to be on utilization.

So therefore, we should see head count growth probably pick up to fulfill the demand?

Head count growth should align more with revenue, quarterly revenue growth, yes.

Okay. Super. So just quickly for Frank, just a big picture question, the pickup in discretionary spend, does it feel more temporary, or does it have some legs to it as we head through the calendar year? In particular, just curious on if the government shutdown had an impact on the client's thought process and spending?

I think with the caveat that we have the normal Q4 seasonality that we see every year, I think that demand, the discretionary demand appears to be sustainable going forward. When you look at the markets in which we operate, the US, the Europe and now increasingly the Middle East and Asia, the economies in these parts of the world have stabilized. Clients are turning their attention back to this dual mandate that we have talked about, the idea of continuing to drive cost savings, while investing in innovation and growth.

And as I said earlier, the early indications and the conversations that we have had with clients around 2014 budgets appear to indicate that budgets will have a modest upward bias going into next year. So overall it feels to me that the demand environment is stable. I would say it is stronger than it was a couple of quarters ago, and I think that as best as I can see, that will continue to be the case for the coming quarters.

Okay. Congrats on the results.

Thank you. The next question is coming from the line of Rod Bourgeois with Sanford C. Bernstein. Please proceed with your questions.

So I just wanted to ask about market growth and share gains, and then a clarification question. What is Cognizant's current view on how fast its overall market is growing? And do you see anything going forward related to your business mix or law of large numbers that would slow the amount of share gains that you have been reaping? Thanks.

I think the overall market is growing low single digits. IT and operations, budgets, are growing, depending on which part of the world you're looking at, in the 1% to 3%, 4% range. If you look at the big market, that's how I would characterize it.

Of course, the trend from which we have been benefiting over several years now has been a greater shift of that existing spend to the global delivery model, and that continues to be a strong trend in North America and in Europe, and in the other parts of the world where we operate. So I think from the standpoint of movement to a global delivery model, penetration rates remain relatively low still, and so we continue to expect healthy growth in that respect. And so, we continue to expect that there will be good solid growth in the business.

Now, when I look at the second part of your question, obviously we have said before, when you look at the law of large numbers, clearly, percentage growth rates will come down over time. That's just an outcome of the law of large numbers.

But when you look at absolute opportunity for us to gain share, I think the Company is still extremely well positioned. I think we have a strategy of reinvestment that we have had of keeping our operating margins within a stable range, and reinvesting back into the business for growth, continues to pay off, and for the foreseeable future, I expect that to continue to be the case.

And I will add one or two things, Rod. On gaining share, as we have achieved critical mass in the Horizon 2 businesses with BPO infrastructure and consulting, we can actually compete in larger deals. So that actually helps us accelerate our gain share there.

And on Horizon 3, a lot of the platform businesses, as we're now starting to bring those to the market, that is really starting to tap an entirely new market for us. So we certainly think there is opportunities for us to continue to outperform the market. And that's how we set our measures of success, is are we growing materially faster than the market?

Okay. And then I don't think you specified, but in terms of the offshore market growth rate, where do you peg the offshore markets growth rate right now?

I think NASSCOM has it at 12%, give or take.

But that's not necessarily the relevant market for you. I'm just trying to get a sense for what you think your addressable market is growing.

I think that is probably relevant. We think we're growing, and materially faster than our addressable market. We're growing 20% this year. And NASSCOM's number is 12%, that doesn't seem unreasonable.

Just a clarification on the 8-K. Some investors will view that as pulling back some on disclosure. The question is, I know you addressed this a bit earlier, but what was the factor that changed your mind to not release the 8-K?

There was a lot of consternation about the 8-K, particularly last year, and there arguments last year that you shouldn't release the 8-K, and then you decided to. I am just inquiring what was the factor that changed your mind to not release the 8-K this year?

I think it is several things. One we have really become an outlier in doing so, and there is obviously no requirement to, and we have become one of a small number of companies that do so. Some of it is investor feedback.

And I think a very important part of it is, we're not done with the budget cycle yet. As it started to take on a little bit too much of a life of its own, in terms of it was a marquee event, and I'm not sure that was healthy.

But as I said, let me reiterate it, don't view us as not providing that information anyway in any way shape or form, a comment on our growth prospects for the future. We just think it is more appropriate to give guidance in February, which is in line with virtually everyone else in the industry who gives guidance.

Understood. Hey, thanks.

Thank you. Our next question is coming from the line of Katy Huberty with Morgan Stanley. Please proceed with your question.

Do the investments that you've made in Europe, allow you to block market share in a country like France and Germany up to the levels that have you seen in the UK, Switzerland, Netherlands over the next year or two, or is that market share ramp much longer, and requiring more acquisitions?

Clearly, it doesn't happen overnight. What Equinox has gotten us in France, and C1 has gotten us in Germany is, we now have a solid local presence of nationals in each country, and that is very important in those two countries. Equinox, obviously, we just closed. C1, we are starting to win deals, so you don't become a market leader overnight. So it is a path that takes many, many quarters.

Do we need to do additional acquisitions in those countries? That's not clear. Certainly, I think with what we have now, it gives us the platform to work off of.

Will we always look for additional things? Absolutely. But we don't want to bet our business on we have to find something.

Okay. And then just a quick follow-up. Where do you expect attrition levels to settle out post the retention plans that you rolled out in August?

From everything I'm seeing at this point, I would expect Q4 attrition to be below Q3. Certainly, September and October were much better than July and August.

Okay. Thank you. Congrats on the quarter.

Thank you. Our next question is coming from the line of James Friedman with SIG. Please proceed with your question.

Let me echo the congratulations. I had one question in two parts, if I could get them in.

First, Gordon, when you look at the verticals, with the lens of consulting versus outsourcing, do you notice any differentiation? For example, is health care particularly consultative?

And then the second one is I think that in prior quarters, or prior years, you had given the relative growth of Horizon 2 versus the corporate average. Any update in that metric? Thank you.

Sure. On consulting, we are seeing value creation across all of our industries. We have invested very heavily in consulting. These are industry-specific consultants, so we are really quite proud of what we're seeing in virtually all of the industries. So I'm not sure I would hold up one as consulting is more important than others.

We have never given growth rates for Horizon 2. I think last year, we mentioned it is now about 20% of revenue. From time to time, we may give an update. That business in aggregate, over time, we certainly expect to grow faster than Company average.

Thank you very much.

And I think operator, we have time for one final question.

Thank you. Our final question is coming from the line of George Mihalos with Credit Suisse Group. Please proceed with your question.

Congrats on another nice quarter. Just wanted to circle back on Europe. You made some very positive comments about the discretionary spending environment. Does that apply to Europe as well? Are you seeing more green shoots there, specifically in Continental Europe, over the last couple of months?

It is Frank. I think that the short answer to your question is yes, we are starting to see discretionary spending pick up in Europe, the UK and the continent. Probably a little stronger in the UK than over in the continent, but still good signs, promising signs in the continent.

I think though, given the environment in the continent, both from the perspective of what is going on in the economy and also the penetration rates question, where companies in Continental Europe are on average -- have moved less work to the global remodel, we continue to also see healthy demand in the sort of traditional outsourcing types of businesses on the continent.

The last thing I will say about Europe is, and I think just to reiterate a point Gordon made earlier, that the C1 Group acquisition has really significantly improved our competitiveness in Germany, both on outsourcing and on discretionary development kind of work. And so I think that gives us a platform to capture some of this discretionary, and more business kinds of demand that we're seeing out there.

Okay. That's great. And just last question. Can you actually quantify what the attrition rate is, or has been in September and October? And has the higher rate of attrition caused you to rethink wage increases going forward, or the rate of wage increases going forward, long term?

Sure. We don't break out monthly attrition but clearly there was a nice downward trend in September and October, because remember, there is about a one-month log effect when we put programs in, for people in the pipeline to leave would have left, so we're certainly feeling that we are headed in the right direction.

Remember, this is not the first time we have had a spike in attrition over the years. We understand how to deal with it. I think we did the right level of wage increases. It was in line with the industry.

We had some work to do on communications. We had some work to do to make sure we're sharing the success of the Company. And our belief is our employees should share in the success of the Company, both in revenue, and in terms of optimizing the business. So I think we have gotten that message across clearly to our employees.

Okay. Thank you.

Thanks, everybody. And thanks for joining us today, and for your questions.

I think it is fair to say that we are happy with this quarter's performance and our prospects for the remainder of the year, and we look forward to seeing you again next quarter. Thanks.

Thank you, ladies and gentlemen. This concludes today's Cognizant Technology Solutions third-quarter 2013 earnings conference call. You may now disconnect.