高知特 (CTSH) 2013 Q4 法說會逐字稿

Welcome to the Cognizant Technology's fourth quarter 2013 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Nelson, Treasurer and Vice President of Investor Relations. Thank you, Mr Nelson, you may now begin.

Thank you, Rob. Good morning, everyone. By now, you should have received a copy of the earnings release for the Company's fourth quarter and full-year 2013 results. If you have not, a copy is available on our website Cognizant.com.

The speakers we have on today's call are Francisco D'Souza, Chief Executive Officer and Karen McLoughlin, Chief Financial Officer. Gordon Coburn, President, will not be able to join us on the call today, as he had a minor surgery yesterday and is today at home recovering. This timing around earnings is unfortunate but Gordon will be back to full speed within a week or so.

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. Good morning, everyone. Thanks for joining us today. Cognizant's fourth quarter performance played out as we anticipated, rounding out a very strong year for the Company. Our fourth quarter revenues were $2.36 billion, a sequential increase of 2.2% and an increase of 20.9% year over year. Our non-GAAP operating margin was higher than our target range at 20.7% for the quarter.

For the full year 2013, we delivered $8.84 billion of revenue which represented industry leading growth of 20.4%. The year played out better than we originally expected, as we saw an uptick in spending on innovation and discretionary projects particularly towards the middle of the year. Consequently, we delivered full-year revenue which was about $250 million over our original revenue guidance.

I'd like to provide a perspective on the state of the market, the demand environment and Cognizant's positioning for the future. Then I'll hand it over to Karen to provide further details on our performance.

It's very clear that we're now in the midst of a once-in-a-decade shift in the technology landscape. This shift, we are experiencing, is propelled by a confluence of technologies, social, mobile, analytics and cloud or SMAC to use the term we have coined. In addition, developments in areas like sensor technologies, the internet of things, machine learning, and 3D printing promise to further disrupt the status quo in many industries.

These technologies are enabling our clients to reimagine and redesign part or all of their businesses -- part or all of their business models. In other words, SMAC technologies are enabling our clients to become digital businesses. The implications of SMAC are far reaching.

For several years, we've been calling this the future of work. But over the past several quarters, it has turned into the present of opportunity. In terms of the specific areas of opportunity, our clients are rethinking how they interact with their customers by driving better customer engagement allowing anytime anywhere customer interaction and creating new tailored products and services.

In terms of their business partners, our clients are seeking to improve interaction in collaboration to streamline supply chains and better integrate partners upstream and downstream. In considering the impact of SMAC technologies and employees, our clients are looking to create better experiences by empowering fieldworkers, allowing teams to bring their own devices to the workplace and creating more interactive and engaging collaboration spaces.

Finally, as more industrial and consumer devices become internet aware, clients are seeking to find value in new machine-to-machine and machine-to-business connections. I'm excited about the opportunities that these big technology shifts represent for our clients and for Cognizant.

Gordon and I have just returned from the World Economic Forum meeting in Davos. It was clear there, that technology is now a CEO level agenda item. While our clients clearly realize the tremendous potential of these new technologies, they are also mindful of the continued volatility in markets and demand around the world.

As a result, they are grappling with a dual mandate of improving current business performance while investing in technology-based innovation for future growth. In 2013, our run better run different approach helped clients address this dual mandate and was central to many of our digital transformation engagements with clients. Going forward, to continue working with clients to design, build and operate digital businesses, Cognizant and other services companies must have a range of integrated capabilities.

First, insight and advisory consulting services to evaluate a clients' competitive position and the potential sources of business value from both improvements to current operations and growth opportunities from new technology-enabled products, services and business models. Second, a deep knowledge of industry specific business processes, as well as changing industry trends in areas like customer demand, regulatory changes and the growth in data.

Third, at scale technology and service operations to deliver those improvements, including familiarity with both in-house legacy systems and the myriad of new technologies available in the market. This is important because building a digital business requires integration of new technologies with legacy applications and critically, legacy data. Finally, a culture of innovation and agility to allow rapid investments in new technologies and evolving delivery models.

All of these exemplify an expansion of our market opportunity as well as increasing C-level relevance from firms such as ours. The capabilities we have worked hard to build at Cognizant over the past decade both in key industries -- excuse me, depth in key industries, business consulting capabilities, large scale program delivery and leadership in SMAC technologies have come together to position us uniquely to meet the demand in the marketplace. I'm confident that those capabilities coupled with our rapidly expanding global footprint and our three horizon approach to innovation will continue to position us as a strong transformation partner to our clients in 2014 and beyond.

Clearly, our three horizon model is working well. It is enabling us to: optimize our core, Horizon 1, IT businesses; build momentum and scale in our new, Horizon 2, offerings; and incubate new technologies, markets and delivery models through our, Horizon 3, initiatives.

During the fourth quarter, our core, Horizon 1, services including enterprise application services, enterprise information management and testing did quite well. In addition, our, Horizon 2, services comprised of management consulting, business process services, which we refer to as BPS and IT infrastructure services continued to grow faster than Company average.

Cognizant business consulting or CBC saw a strong quarter with several new marquis management consulting engagements in healthcare, retail and the high-tech segment. While we continue to win standalone advisory work, we see a definite trend where consulting is a key driver of large more transformational programs. Our pipeline is strong and we continue to expand our portfolio of consulting capabilities and client relationships.

Our BPS practice continues to show solid growth driven by cross-selling our vertically aligned business process solutions into our existing customer base as well as winning new logos for Cognizant. This quarter, for example, saw some good wins around mortgage servicing, clinical operations and provider services.

IT infrastructure services had a robust quarter with new wins across multiple industries including financial services, healthcare, retail and communications. This quarter, we also saw solid wins in remote infrastructure management and service desk solutions, a trend that gets accentuated with every passing quarter. Within ITIS, we are seeing solid growth in Europe driven by Germany, the Nordics and Benelux.

In, Horizon 3, we're extremely pleased with the accelerated growth we experienced in 2013 across the three sub segments: new technology architectures driven by SMAC; new industry and markets such as the public sector and Latin America; and new delivery models that drive non-linearity. In 2013, our SMAC revenue exceeded $500 million.

Our public sector and Latin America businesses began to gain traction. We successfully deployed our 18 SAS and BPAS platforms under the Cognizant business cloud solutions umbrella at more than 150 clients.

Our ability to offer our clients an integrated value proposition by combining the capabilities across the three horizons of our business is emerging as a critical differentiator for Cognizant in the marketplace. Recently Forrester recognized our client value proposition and awarded us the highest score for strategy as evaluated in application outsourcing wave study for both North America and EMEA.

Now, I'd like to take a moment to recognize a significant milestone in our history. This quarter marks our 20th year as a Company.

Cognizant has come a long way since our founding as the technology arm of Dun & Bradstreet in 1994. In that time, we've grown from 200 associates helping one client to over 170,000 associates having the privilege of serving more than 1,000 of the world's leading organizations.

During this period, we have successfully navigated several economic and business cycles and seamlessly transitioned between several technology shifts. We have done this through an expansion of our services and geographical footprint but more importantly, by developing enduring characteristics and values such as our client first approach, empowered teams and an ability to keep challenging the status quo by reinvesting and reinventing for the future.

These entrepreneurial characteristics have helped us predict, [scent], and adapt to market changes, understand client needs and help clients keep challenging their own status quo to navigate the changes in technology and markets to build stronger businesses.

Our success is a testament to all of our clients, the Cognizant leadership team, associates and other stakeholders. I extend my thanks to all of them today.

I'd like to hand it now over to Karen to discuss our performance and provide more financial details. I'll return later for the Q&A. Over to you, Karen.

Thank you, Francisco. Good morning, everyone. Overall, 2013 was a strong year for us. Our revenue grew by more than 20% year-on-year, while we maintained stable margins and a healthy balance sheet.

The fourth quarter played out just as we anticipated, with revenue growth of 2.2% sequentially and 20.9% over last year to $2.36 billion. Non-GAAP operating margins, which excludes stock based compensation expense and acquisition related expenses, was 20.7%, above our target range of 19% to 20%, while our GAAP operating margin was 19% for the quarter.

We generated $1.15 of non-GAAP EPS and $1.06 of GAAP EPS for the quarter. On a full-year basis, we generated $4.38 of non-GAAP EPS and $4.03 of GAAP EPS, which were both above our previous guidance.

Let me now touch upon our performance across industries and geographies and also the key highlights of our operational performance. From an industry perspective, our financial services segment grew by 4.5% sequentially and 22.3% year-on-year with strong growth in both banking and insurance. The trends that we saw during the first part of 2013 continued to play out during the fourth quarter.

The key focus area for our clients were cost rationalization, regulatory and compliance driven initiatives and a growing demand for SMAC-related services particularly analytics and mobility. As a reminder, we completed the acquisition of Equinox, the Paris-based financial services consultant [firm] during the first week of October. Equinox has deep expertise in risk and compliance consulting and services some of the marquis financial services clients in France. While it's still early days, we are happy to share that the integration is progressing well.

Healthcare, which consists primarily of our payer, pharmaceutical and medical device clients registered a growth of 2.2% sequentially and 22.6% year-on-year. Growth in this segment for the quarter was primarily fueled by ongoing work related to Affordable Care initiatives including extended support for member enrollment and the implementation of direct-to-consumer programs through mobile platforms. In the pharmaceutical segment, as anticipated, growth continued to be slow because of the impact of the patent cliff.

The retail and manufacturing segment was flat sequentially but up 20% year-on-year. As we had indicated last quarter, Q4 is traditionally a slow quarter for this industry segment, especially retail, due to the lock down of IT systems for the holiday season. Having said that, we are seeing some interesting trends within this segment as clients look to partner with us on their transformation journey across their supply chain, omni-channel commerce and SMAC-related initiatives.

Our other segment which includes communication, information media and entertainment and high-tech declined slightly on a sequential basis, as we saw a seasonal tapering in discretionary spend during the fourth quarter. The industries in our other segment tend to have a greater weighting towards discretionary activities with us. On a year over year basis, our other segment grew 13.7% during the quarter.

From a geographic standpoint, North America grew 1.9% sequentially and 18.3% year over year. Europe grew 3.5% sequentially performing better than Company average. While sequential growth in the UK was flat this quarter, Continental Europe saw a solid 8.8% sequential growth.

Excluding the impact of the Equinox acquisition, Continental Europe grew 4% sequentially. Overall Europe grew 31.5% year over year. This growth includes our revenue from the acquisitions of the C1 Group and Equinox Consulting.

We are encouraged by the structural trends we have seen over the year, as clients are increasingly engaging us in larger multi-year programs spanning across our service lines. In addition to the strong organic growth we saw through the year, the acquisition of the six companies of the C1 Group and Equinox position us well into 2014.

Rest of the world showed modest sequential growth up 1%. This segment grew approximately 26.6% year-on-year.

Now, turning to some of our other performance measures. Consulting and technology services and outsourcing services each represented 50% of revenue for the quarter and for the full year.

In Q4, consulting and technology services grew 20% year over year and 1% sequentially. Outsourcing services grew 22% year over year and 4% sequentially. For the full year, consulting and technology services grew 18% and outsourcing services grew 23%.

During the forth quarter, 35% of our revenue came from fixed price contracts and grew 4% sequentially and 25% year over year. For the full year 2013, 34% of our revenues came from fixed price contracts up from 33% in 2012, 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 quarter. We closed the quarter with 1,197 active customers. The number of accounts, which we consider to be strategic, increased by 7 bringing our total number of strategic clients to 243.

Our fully diluted share count for the quarter was 305.4 million shares, an increase of approximately 1.2 million shares from Q3. 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 million.

Now turning to the balance sheet. Our balance sheet remains very healthy. We finished the fourth quarter with approximately $3.7 billion of cash and short-term investments, up by approximately $387 million from the quarter ending September 30 and up by approximately $884 million from the year-ago period.

During the fourth quarter, operating activities generated approximately $506 million of cash. Financing activities generated approximately $30 million of cash.

We spent approximately $107 million for capital expenditures during the quarter. Our full-year capital expenditures for 2013 were approximately $261 million, slightly below our previously communicated expectations of $300 million due to the timing of certain payments.

Based on our $1.88 billion receivable balance on December 31, we finished the quarter with a DSO including unbilled receivables of 73 days, down 2 days versus last quarter. The unbilled portion of our receivables balance was approximately $226 million, down from $254 million at the end of Q3. Approximately 62% of the Q4 unbilled balance was billed in January.

Let me now provide some color on our business operations for the quarter. Our continued efforts to drive best-in-class execution have resulted in further improvements in our key delivery and operating parameters. During the year, we focused heavily on taking up utilization and optimizing our operations, freeing up resources for longer term investments.

We entered 2013 with a 71% utilization rate and exited the year 9 points higher at 80%. We did this while concurrently improving our service delivery to clients. Sequentially, utilization was down slightly as we ramped up hiring at the end of the year and saw an improvement in the attrition rate.

Offshore utilization was approximately 74%. Offshore utilization, excluding recent college graduates who were in our training program, was approximately 80%. On site utilization was approximately 93% during the quarter.

The results of our annual third-party customer satisfaction survey remained high, a good validation that we managed to drive greater efficiencies while sustaining high levels of client centricity, a hallmark of Cognizant. We are equally pleased that our annualized attrition during the quarter, including BPO and trainees, was down significantly to 14.5% annualized.

As mentioned in our prior earnings calls, we put in place a series of employee engagement programs mid last year and these have paid off nicely. Net headcount increased by approximately 5,000 people during the quarter. 48% of additions for the quarter were direct college hires while 52% were lateral hires of experienced professionals. We ended the quarter with approximately 171,400 employees globally, of which approximately 160,600 were service delivery staff.

The strides that we have made in 2013 have positioned us well to harness opportunities in the market in 2014. We have significantly expanded our market presence with revenue outside of North America approaching $2 billion for 2013. We have evolved our people strategy and policies to address the needs of the millennial generation, like introducing a bring your own device policy and implementing TruMobi, our homegrown enterprise solution for mobile devices.

We strengthened our delivery footprint to include many new in-country near-shore and global delivery centers, including Cebu in the Philippines, [Baiyin] in China, newer centers in Germany and France through acquisitions, Tampa and College Station in the US and most recently Costa Rica. Last fall, we expanded our executive and senior leadership ranks to strengthen our foundation for continued growth. We continue to focus on our client's needs helping them to build stronger, more global and competitive businesses.

Before I jump into guidance, I would like to draw your attention to our announcement this morning that the Board of Directors of Cognizant has declared a 2-for-1 stock split of our common stock in the form of a stock dividend. This underscores our confidence and the strength of the business model and in our prospects for 2014 and beyond.

I would now like to comment on our growth expectations for the first quarter of 2014 as well as for the full fiscal year. Based on current conditions and client indications, we expect to continue delivering industry leading revenue growth in 2014. For the first quarter of 2014, we expect to deliver revenue of at least $2.42 billion.

Our full-year revenue projection of at least $10.3 billion represents growth of at least 16.5%. During Q1 and for the full year 2014, we expect to operate within our target non-GAAP operating margin range of 19% to 20%. Starting in 2014, we are prospectively revising the definition of our non-GAAP EPS to exclude net non-operating foreign currency exchange gains and losses in addition to the previously excluded stock based compensation and acquisition related expenses and amortization.

As you know, net operating at foreign exchange gains and losses have always been excluded from our guidance. So we believe that this change will better align our EPS guidance with our reported results and provide better insight into the operational performance of the business. For reference, net non-operating foreign currency exchange losses negatively impacted both our non-GAAP and our GAAP EPS by $0.15 in 2013.

As you know, net non-operating FX gains and losses are challenging to predict, making it difficult to provide a complete financial outlook in accordance with GAAP. We will therefore prospectively focus our guidance on non-GAAP EPS. While both GAAP and non-GAAP information will be reported in our press release and filings, we will continue to focus primarily on non-GAAP numbers when discussing results.

For the first quarter, we are comfortable with our ability to deliver non-GAAP EPS of $1.18. This guidance anticipates a Q1 share count of approximately 306 million shares and a tax rate of approximately 26.5%.

For the full year 2014, we expect our non-GAAP EPS to be at least $5.02. This guidance anticipates a full year share count of approximately 306.5 million shares and a tax rate of approximately 26.5%. Please note that all of our EPS guidance is before the stock split which we announced this morning and will be effective later this quarter.

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

(Operator Instructions)

Darrin Peller, Barclays.

Just coming out of the quarter, your top line growth trends are obviously showing some very good strength in the financials vertical and the healthcare vertical, both on a sequential and a year-over-year basis, overall growth being almost 21%. Yet, when we look at your guidance for 2014 at 16.5%, it obviously implies at least some deceleration, I would think, in some of the key areas. Healthcare it seems like it had the Obamacare working. Correct me if I'm wrong, but there's more incremental work from that as well as the ICD-10 coding, which probably weren't even in the numbers yet. So can you just touch on why any of those might show that level of deceleration? Or is it just conservativism in the numbers?

Darrin, it's Frank. Look -- let's take it in two places. First of all, let's look at our 2013 performance overall. We're very pleased with the way 2013 played out. The fourth quarter came in right where we expected. A lot of the over-performance that we saw in 2013 was driven by, as we said through the year by discretionary spending that picked up in the middle of the year. We expect to see a continuation of that going into 2014.

As I said during the prepared comments, we see a tremendous opportunity. We see that opportunity continuing. We caught that trend early, we think, in 2013. We see that opportunity continuing as we go into 2014 across the segments. Our initial guidance for 2014, if you adjust for an acquisition that we had announced at the beginning of 2013 but hadn't closed, is actually a little bit stronger than our initial 2013 guidance.

So coming out of 2014 on a bigger revenue base as a Company, we're feeling a little bit better than the same time in 2013. So overall, we're feeling good about the continuation of demand. We saw a strong demand pick-up for us as discretionary -- the work picked up in the middle of 2013. We think that will continue going into 2014 really across the segments.

All right. (multiple speakers) Go ahead, Karen, sorry.

Sorry. But just to add to what Frank was saying, if you remember last year, we guided to originally 17%. But as Frank said, that did include the $90 million of acquisition revenue from the C1 acquisitions which did not close and the MediCall acquisition. So like-on-like, you're actually a little bit ahead.

Sure. All right. That's helpful. Just one quick follow-up. Europe obviously showed acceleration -- or continues to show very good trends. Is there any reason to think that can continue to accelerate or at least show this type of growth? From what you're seeing in demand in the secular and structural changes there, do you have enough pipeline there to give us confidence for 2014 again?

I think, Darrin, we feel good about Europe overall for a couple of reasons, as we've done a couple of acquisitions there, as you know, during 2013. That's positioned us well in key markets like Germany and France. We expect to see continued upside there. We see overall -- as we've been saying for a long time, the penetration of the global delivery model in Europe is lower than it is in North America and other parts of the world, particularly in the Continent.

So we think there's a large underpenetrated market in Continental Europe. Finally, as clients in Europe continue to face economic volatility, the need and the pressure to continue to run their businesses better, more efficient, I think will continue to drive further examination of what portions of work can be moved to a global delivery model. So net-net, we feel good about Europe going into 2014.

All right. Very helpful guys, thank you.

Thanks, Darrin.

Bryan Keane, Deutsche Bank.

Just wanted to follow-up on the fourth quarter. How would you characterize it? It didn't seem like there was really any budget flush. It was pretty close to your guidance. So just trying to figure out, was the pick-up in discretionary spend that you guys are talking about, did that really continue in the fourth quarter? Or did you see it take a pause?

Bryan, I would say Q4 played out exactly as we expected it. Historically, our fourth quarter, if you look back has been a slower quarter. That happens for a couple of reasons. Typically, the retail sector doesn't begin any new discretionary projects during the peak season. Discretionary spending overall tends to slow towards the end of the year for obvious reasons as projects come to an end and new ones don't necessarily pick-up.

I think this year, a couple of things accentuated the Q4 trend a little bit. We had a very strong Q3 as you know. So the comparable was a little more difficult. In addition to that, because so much of our over-performance in 2013 overall was driven by innovation and discretionary spending, the tapering off of discretionary spending that you typically see and traditionally see in Q4 was a little bit more accentuated this year.

But I'd be very clear, as we go into 2014, we see that strong trend that we benefited from during the middle of 2013 to continue going into 2014. I'm very, very optimistic about this new wave of technologies and what it represents for our clients and the opportunities that it will bring for our clients to build stronger businesses and for Cognizant to participate in that.

Okay. Thanks. Then just two more questions. On the consulting side, you noted a pick-up there. But it didn't show up in, really, in sequential revenue growth. So does that bode well I guess for future revenue growth in 2014 on the consulting side? Then just secondly, just an outlook on pharma, obviously with the whole patent cliff situation being curious, how you guys are feeling about 2014 for that?

Sure. So, Bryan, I assume you're referring to the pure consulting practice, not the overall consulting and technology services piece. But in consulting -- certainly, the pipeline has been quite strong. Obviously the Equinox acquisition will continue to help drive consulting revenue. Some of those projects initially -- if they're standalone consulting projects are not necessarily significant dollars but then they obviously lead to the pull-through revenue typically as what you would expect. That's where you'll start to see the larger revenue pick-up.

So I think we're feeling very good about the way the consulting practice has integrated into the broader organization and is helping to drive that revenue. On the pharma side, certainly, obviously 2013 continued to be slow for pharma. I think at this point, we would expect that 2014 will continue to be slower than Company average, certainly baked into our guidance. We have not assumed any significant strengthening in the life sciences or pharma segment at this point.

Okay. Thanks so much.

Katy Huberty, Morgan Stanley. Miss Huberty, your line is open for question.

Tien-Tsin Huang, JPMorgan.

Just wanted to ask on the SMAC revenues, I think, at 7% of revenue now, which is great. What's the target for 2014? Frank, would you consider SMAC spend as discretionary? Just trying to think about definitions here.

Yes. Tien-Tsin, it's really hard to -- SMAC has become so pervasive across the business, that it's very difficult to quantify and to forecast exactly where it's going to land or whether it's discretionary or not. Let me put some color around that. It used to be the case when 2.5 years or so ago, when we started talking about SMAC, that we had discrete social or mobile or analytics or cloud engagements. It typically tended to be smaller pilot projects where clients were trying to get their arms around what the implication of the technology was.

Today we're seeing that SMAC is really woven into the fabric of virtually everything we're doing, particularly on the development side. Mobile becomes the front-end, analytics becomes tied to a large scale data warehousing or enterprise information management projects. So it becomes very hard to split out SMAC. So I'm not going to actually try to give you a number for how much revenue we expect from SMAC for this year.

I think in terms of thinking about whether it's discretionary or not, I would think now that a good proxy is, it's probably still about 60%-ish. Although this is just a guesstimate on my part, about 60%-ish discretionary. I would say 30%, 40% has become more business as usual or built into the regular upgrades and maintenance that we do. Because as this stuff gets out into the field, then there's the regular upgrade maintenance cycles that kick in.

Great. Yes. No, that makes sense. Then just -- Karen, question for you on the margin front. I know that SG&A has been trending down. Just for modeling purposes, as we think about 2014, the mix or the trend on SG&A versus gross margin? Any help there would be great.

Yes. So, from a modeling perspective, Tien-Tsin, I would not expect any significant changes in gross margin in 2014. Then obviously, we do want to continue to invest in the business. The vast majority of those investments do take place in the SG&A line. So we fully intend to bring our margins within the 19% to 20% on a non-GAAP operating margin basis and will continue to invest in the business accordingly to drive the growth.

All right. Got it. Good stuff. Gordon, if you're listening, hope you get a speedy recovery there. Thanks.

Thanks, Tien-Tsin. I'm sure he's listening. But I spoke to Gordon last night. He's doing fine. I'm sure he will be back in a week or so, well recovered from his little surgery yesterday.

Ashwin Shirvaikar, Citigroup.

I wanted to delve a little bit more into the trends you're seeing in Europe, particularly with regards to the economic situation in the UK picking up, would you expect your UK growth rate to pick-up correspondingly? I just want to delve a little bit more into that 4Q trend. Was that a blip? Or what happened there?

I think --

(technical difficulty)

(Operator Instructions)

(technical difficulty)

Sorry about that. We seem to have a bit of technology trouble here with the snowstorm outside on the East Coast here. Apologies. Ashwin, I don't know where we dropped. But I was just going through our situation in the UK.

If you don't mind repeating, because I think the very beginning it dropped off.

Okay, apologies. So look, as I was saying, we feel good about our -- I broke it down by the UK and the Continent -- let me start with the Continent. The Continent, I think, we feel good about our position there given that there's continued economic volatility. I expect that the bulk of our conversations in 2014 and the work we'll do will be more on what we call the run better side of the business. The acquisitions of C1 and Equinox have built strong front-ends in France, Germany, Switzerland and so on.

That gives us additional opportunity to capture market as that becomes available. Of course, as we've said for some time, the global delivery model is under penetrated in Continental Europe. So that provides a good runway ahead for us on the Continent. In the UK, I think, as the economic pictures improve there, we're starting to see initial conversation -- we're having initial conversations about new SMAC-related discretionary work. But I think, Ashwin, it's too early to call that a trend yet. I'll certainly watch it carefully over the course of 2014, but it's too early to call that a trend yet.

Okay. With regards to M&A, I guess two sub questions. One, what's the ongoing impact in 2014 from part [year] impact? Then given that you have $12 per share of cash on the balance sheet, any thoughts on stepping up in any transformational deals out there? How are you thinking about that?

Sure. Ashwin, this is Karen. Let me take those questions. So in terms of the acquisition impact on 2014, it's very minor. Because, if you remember, we closed the C1 acquisition actually in the middle of -- or beginning of March last year. So there's about two months of incremental there. So that's less than $20 million of revenue. Then Equinox on a full-year basis is about $40 million of revenue. So that's about $30 million incremental. So it's very small, the incremental impact this year. So that's your first question.

On the second question regarding cash, we continue to evaluate our cash needs for the coming years. Clearly, we are interested in continuing to acquire organizations, if we can find the right organizations at the right value that we think makes sense for Cognizant to help us drive long-term growth. We will continue to evaluate our needs for cash with the Board and provide guidance on that at the appropriate time.

Okay, thank you.

Sara Gubins, Banc of America.

Is there anything that would suggest that your out-performance versus the market might narrow in 2014?

Look, we feel comfortable that we can maintain our industry leading growth rate going forward. Our market opportunity, as we outlined during the prepared comments, we feel very good about. We think that this once-in-a-decade technology shift we're going through driven by these new technologies creates significant opportunity for us. We continue to invest, as you know, substantially to capture those market opportunities.

If you think about the opportunities that are available to us, there's the new technologies, that's one access on all of the work that we've talked about relative to social, mobile, analytics and cloud. So that's one growth vector. There's a second growth vector that relates to new geographies where we feel we're under penetrated. So if you think about our geographic footprint, we think that there are still opportunities for us. In an earlier question, I addressed the European opportunity, but we continue to believe there are opportunities for us in other parts of the world and we're investing there. We've talked to you about the rest of the world -- we call the rest of the world, which is Asia, the Middle East.

We made some good strides -- early strides, the good strides in Latin America last year. So we think there's opportunity to grow from a geographical standpoint. Then of course, when we look at the industries that we serve and new industries where we don't have a presence, we think that the opportunities there continue to be significant. The existing industries continue to represent good growth avenues for us. But then we have new opportunities, for example, we touched briefly during the prepared comments on the public sector.

Again, a place where we made good strides last year, in 2013. We expect to continue to grow in those, in that industry as well -- in that sector as well. So if you think about it, across three growth vectors -- new geographies, new technologies and new industries or the markets -- we think there's still a lot of upside here and since we're investing ahead of many of our competitors because of the way we maintain our operating margins we think we have an opportunity. We'll continue to maintain industry leading growth as we go into 2014.

Thank you. Then following up on that, given the plans to stay in the 19% to 20% non-GAAP margin range and the benefit of repeat appreciation. Can you talk about the areas of incremental investment that you will be making in 2014 that will keep profitability in that target range, but also focus on driving growth? Thank you.

I think I would mirror what I said a minute ago. In fact, if you look at our, Horizon 3, investments, Sara, they are largely in those areas. So we're investing in new technologies, all of the SMAC capabilities, but as I mentioned in my prepared comments going beyond that. So we're looking at new areas like the internet of things, sensors, artificial intelligence and machine learning. So, we think those all represent new technology areas that have considerable opportunity.

Then we are looking at new markets particularly Latin America. We have to continue our focus into pushing into new geographies. As our clients globalize their businesses, we need to be there side by side with them and then of course new industries. The one other area that we are also investing quite heavily in is in platforms and the new -- what we call new delivery models to drive non-linear revenue growth. As I said during my prepared comments, during 2013 we launched 18 Cognizant business cloud solutions, these are our SaaS or BPaaS platforms. We'll continue to invest to build out both new platforms like the 18 that we launched and also deepen our penetration for the existing 18 that we've launched during 2013 so that's I think the bulk of our investment.

Thank you.

Thank you.

Steve Milunovich, UBS.

Regarding North America, growth has slowed the last couple years from 34% to 22% to 18% last year. Do you expect growth to further decelerate? Given your guidance, I assume you do. So maybe 15% or so? Just curious what's behind that?

So Steve, obviously we don't provide guidance for the geographies. But I think certainly, we continue to think that North America is a very robust market and will continue to have good penetration. The big question mark, obviously, will be around discretionary spend this year. That's typically what provides upside for us in the guidance. So a lot of that will depend upon the strength of the US economy.

Obviously, what you're starting to see is North America is a more mature market than particularly Continental Europe or rest of world for us. So they do have the law of large numbers a little bit. So we would expect that some of our emerging geographies will grow faster than North America. But clearly, we think there continues to be a significant expansion opportunity in North America particularly as our service offerings expand.

So what we've seen over the years is obviously the, Horizon 1 business -- so core application, maintenance and development -- were really the legacy of the Company. But as we've added in the new services -- BPO, consulting infrastructure and now, ultimately, our Horizon 3 service offerings -- that opens up a whole new market within our customers. So we continue to see that expansion of market opportunities both here in North America as well as across the world.

That's great. Karen, do you have any thoughts on how healthcare growth is going to play out by quarter? Your compares are much easier in the first half of the year, but on the other hand, I would think the underlying business itself might actually be stronger in the second half.

I think again, with healthcare particularly on everything about the payer side of the business -- separate pharma from payers, we do expect that the payer side of the business will continue to have nice growth going into 2014. We've talked about the fact that there's still a lot more work related to the Affordable Care Act as we move into 2014 and potentially beyond there as well. I think it will be really a question as to when some of that work starts.

There will be work with both our traditional payer clients as well as we would expect some work helping the various states as they continue on their transformation journey around the Affordable Care Act as well. So I think typically, you see that type of spending start to pick-up, as you mentioned, into Q2 and into the middle part of the year just as people release budgets and so forth. So I don't think that would be any different in this year. Pharma, as we've talked about, I think we will expect to continue to be slow in 2014 at this point.

Thank you.

Moshe Katri, Cowen and Company.

I just want to go back to the topic of the UK. Francisco, I think it would be really helpful if we could get some more color on why did we get the slowdown during the quarter? Maybe by verticals? Was it one vertical in terms of the actual impact that we had during the quarter? Then should we expect -- again, it is a bit unusual for you guys to have it. Then should we expect the UK to recover during at least the first quarter of this year and after that? Then was there any FX impact on numbers during the quarter? Thanks.

So Moshe, I would say that what we saw in the UK largely paralleled what we saw in other parts -- in North America for example, as it relates to the discretionary spending and the impact therefore in Q4. You just really have this phenomenon where discretionary spending really tends to slow in the fourth quarter, as clients wrap up the year, as budgets come to an end and clients start to think about the new budget year and so on and so forth. Because 2013 was a year where so much of our over-performance was driven by discretionary spending during the middle of the year, you just saw a natural tapering of that towards the back half of the year particularly in Q4, the last quarter.

So I don't think there's anything more to read into the UK than that, frankly. In terms of where I see the UK for this year, as I said, we continue to believe that the UK will perform well in 2014. As I said earlier, early signs that discretionary spending may pick up in the UK. But I'm not ready to call that a trend yet. But I feel like, if you look at our positioning, we're well-positioned there in the key industries in which we serve.

We're extremely strong in financial services, in retail, in -- of course, insurance is part of financial services. So I feel that we've got good market position. We've taken our thought leadership around SMAC and the new technologies into the market. I think that we'll benefit from that during 2014. So I feel good about the UK for 2014. But too early to call the trend on discretionary spending there yet.

Okay. Karen, any FX impact for the quarter?

It was very small, Moshe. So there was a little bit of pick up in revenue because of the movement in the pound and the euro during quarter. But it was just a few basis points, so nothing material.

Thanks.

Katy Huberty, Morgan Stanley.

How would you describe your visibility into IT budgets this year? Is that pointing to any type of an inflection point? Or just stability versus 2013?

I think I would characterize it as, at this point in the year, we are right where we would expect to be for what I would consider to be a normal year. IT budgets are close to being finalized in most cases with our clients at this point. When we look at the trends, I would say overall in North America, IT budgets are modestly up, which is somewhat different than it has been in past years, maybe a little bit better.

In the recent past, we've seen flat to modestly up budgets. This year, I would say budgets are up a little bit more than they have been in past years. But having said that, Katy, I think that the important point here, what's really important, has always been the case that our opportunity is driven somewhat by growth in IT budgets. But it's in a sense more importantly being driven by what we call the dual mandate, where clients are saying, look, I've got to be more efficient and more effective to be able to free up a disproportionate amount of dollars to reinvest in innovation and growth.

So what we are benefiting from and what we expect to benefit from is this continued drive towards the dual mandate or driving efficiency and effectiveness on the one hand to free our budget dollars so that those dollars can be invested in innovation and growth. So our focus is really as much as it is on -- the increase in the budget is to figure out, with our clients, how we can drive greater degrees of efficiency and effectiveness, move to managed services and other kinds of opportunities to be more effective in the work we're doing for them or in the work that they may not have yet chosen to use a provider for. So that we can help them to free up those dollars to invest in discretionary projects.

Okay. Are you seeing any impact on deal sizes from the increased penetration of SaaS?

I'm sorry, from the increased penetration in SaaS?

Software as a service, yes. Are the deal sizes smaller when you're integrating a SaaS project versus a legacy application project?

Yes. I think if you look specifically at SaaS implementation versus the corresponding on-premise implementation -- while in some spaces the deal sizes are smaller particularly from what I would think of as the more standard implementation. I think it's also the case that we're seeing a greater number of transactions. So net-net, we think that the market opportunity expands as a result of SaaS. Because what we're seeing is that our client's businesses are becoming more technology intensive, not less technology intensive. So while some transaction sizes may be becoming smaller, we see a greater number of transactions. Because of that, we think it's an overall expansion of our market opportunity in our markets and the addressable market.

Just lastly, I know it's really early, but what verticals are most interested in internet of things?

I would say that we see a lot of interest in the industrial space. Anybody that has a machined equipment where you can think about asset optimization or operations optimization. Those tend to become -- so you see that in healthcare with medical devices. You see it in traditional manufacturing. You see it in heavy industrials. I think that's a good immediate opportunity set because the ROIs are large and immediate on that.

I think we are a little bit beyond call time, but given that we had a little technical glitch, we'll stay on for another last question. Operator, we'll take this as our last question.

Edward Caso, Wells Fargo.

In your conversations at Davos, did you get the sense that -- obviously, the CEOs are getting the opportunity, but do you sense that they are really fully understanding it and therefore willing to deploy dollars against it in the near term?

I think so, Ed. I have to say that I was surprised by the strength of the conversation in Davos around these new technologies. I was also surprised, pleasantly, that the conversation has moved on quickly beyond social, mobile, analytics and cloud to some of these new areas like the internet of things and sensors and machine learning and so on and so forth. I think in a sense, the events of the last few years with the financial crisis and so on and so forth -- a Euro-zone crisis and so on, perhaps CEOs attention was focused on issues around those things.

This wave of technology got less focus and attention. I think that's now starting to change. I think there was a broad recognition that these new technologies do really represent a once-in-a-decade opportunity to change the rules of the game in many industries. So I sense that there is the willingness to invest. I sense that we'll see a significant change in that mindset or it's already started to change. I think you'll continue to see that as we go into 2014.

The other question is on the BPO business, can you quantify the size of it? Growth rates? Maybe what trends you're seeing? We're getting mixed signals from some of pure plays. Thank you.

Let me comment on the size and growth. Frank can add in any color. But I think as we've talked about, Ed, we look at the Horizon 2 businesses as a group. As a group, they are approximately 20% of revenue. So that's consulting, BPO and infrastructure services. They're all about equal in terms of revenue size. So they are all in that 6% to 7% revenue range. They continue to grow significantly faster than Company average.

Our BPS pipeline at this point is very robust. I think the big trends that we're seeing particularly in that space is notion of integrated solutions. So typically, when we have a client who is looking to do BPS work, they are also looking to be able to have a partner who can provide other services, particularly around the IT and/or the consulting services and really bring that integrated solution to them, which obviously plays very well into our strengths.

Great. Thank you.

Thanks. I think on that note, we have to wrap up. Listen, I apologize for the technical glitch on the call today. I thank everybody for joining us and for your questions. I'm really delighted with our performance in 2013. We look forward to another strong year of industry leading growth as we go into 2014. We'll talk to you again next quarter. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.