高知特 (CTSH) 2014 Q1 法說會逐字稿

Ladies and gentlemen, welcome to Cognizant Technology Solutions first-quarter 2014 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I would now like to turn the conference over to David Nelson, Vice President of Investor Relations and Treasurer at Cognizant. Please go ahead, sir.

Thank you, Rob. Good morning, everyone.

By now, you should have received a copy of the earnings release for the Company's first-quarter 2014 results. If you have not, a copy is available on our website at cognizant.com.

The speakers we have on today's call are Francisco D'Souza, Chief Executive Officer; Gordon Coburn, President; and Karen McLoughlin, Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties, as described in the Company's earnings release and other filings with the SEC.

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

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

Cognizant's first-quarter revenue came in right where we guided at $2.42 billion, a sequential increase of 2.8% and an increase of 19.9% year over year. Our non-GAAP operating margin at 20.8% was higher than our target range for the quarter.

So this morning, I'll provide an overview of our performance, the demand environment and the long-term outlook before turning the call over to Gordon and Karen to provide further details on the quarter and our outlook for the rest of the year.

We remain confident in the overall demand environment and in our revenue guidance of at least $10.3 billion, which translates to growth of at least 16.5% for the year. And we're increasing our non-GAAP EPS outlook for the full year 2014. Our Q1 performance reflected the strength of our portfolio across industries, services and geographies. Our investments in Europe and SMAC yielded good results and counted some softness in parts of the North American market, which Gordon will address in his comments in a few minutes.

Based on our client discussions and our sales pipeline, we expect to have a strong year. We've ramped up hiring across many of our service lines and we continue to invest in growth. I'm optimistic because the fundamentals of the business remain strong. An increasing number of CEOs around the world are asking questions about how new technologies can be leveraged to build competitive advantage. Technology is clearly a CEO level agenda item today.

We've spoken to you before about being in the midst of a once in a decade shift in the technology landscape, driven by things like social, mobile, analytics, cloud and other digital technologies. In fact, technologies are redefining industries and their prevalence is throwing up vast amounts of rich data and information around people, devices and organizations.

At Cognizant, we call this digital information the Code Halo. Extracting information from Code Halos and using that for driving strategy and new business models has become the basis for competitive advantage in many industries. We have recently published detailed findings of -- from our research and our client engagements on Code Halos and this has served as an additional catalyst for our digital business offerings.

But even as companies build new models for a digital economy, they have to stay focused on their core business by driving greater efficiency and building scale in their existing operations. It's typically the core business that provides the resources to invest in new systems, processes, and business models that will create market differentiation and fuel growth. The two simultaneous trends are what we call the dual mandate. We'll continue to drive market demand for the rest of 2014 and into next year.

Let me explain this in some more detail. First, where clients are looking to run better by becoming more efficient, we continue to see demand for our core application, IT infrastructure and outsourcing services. CIOs and other business leaders are demanding better performance and cost effectiveness. They often need talent, tools, and processes to further optimize areas of their operations that are mature and standardized.

The second part of the dual mandate is where clients are looking to run different by reimagining and redesigning part or all of their business models. This is fueling demand for Cognizant business consulting and many of our Horizon 3 offerings related to SMAC.

As clients move legacy IT systems and applications to the cloud, we expect to see more demand for these services. Demand will also come from new applications, services and products built around the SMAC stack. The investments that we have made across our three horizons of services has put us in a strong position to address each of these different set of demand drivers.

We've invested to build consulting services, industry-specific business knowledge, and scalable models for technology and service operations, which combined with our culture of customer focus and entrepreneurial spirit, have made us a strong partner for our clients.

And with that, I'll now hand it over to Gordon to share more about our performance and to Karen to provide financial details. I'll be back for the Q&A. Gordon?

Thank you, and good morning.

We had a solid start to 2014. During the quarter, we accelerated our recruitment, with 7,200 net hires, the strongest hiring we've experienced in any quarter during the last 2.5 years. This strong hiring is a testament to our continued confidence in the demand environment and our ability to continue to post industry-leading revenue growth.

We're also pleased that our annualized attrition during the quarter, including BPO and trainees continued to trend down to 14.1% annualized. As mentioned in our prior earnings calls, we've put in place a series of employee engagement programs that are paying off nicely.

We achieved our Q1 growth and prior guidance despite facing some headwinds in North America. There's no single cause for these headwinds. Rather, it was a confluence of several factors, none of which are particularly impactful or concerning on their own.

There were major structural changes that took effect from many of our healthcare-related clients at the beginning of the year. This contributed to a slow start in spending for the sector as they adjusted to changes occurring both in the commercial market and through the Affordable Care Act. As an example, true consumption of healthcare services was down in January and February as people adjusted to the evolving healthcare reimbursement structure.

In addition, a few of our clients experienced leadership transitions. When companies go through such transitions, they typically conduct a review of their strategic priorities and associated spending, which can delay some programs or cause a shift in balance of outsourcing and development work. Finally, there was some general economic and weather-related distractions in the US as we started the year that had some minor impact.

In spite of this sluggishness in North America, we're generally pleased with the growth across most of our industry segments and a solid growth in Europe and rest of world. We remain well-positioned to harness opportunities in this dynamic market environment. Our confidence stems from the strength across all three of our growth horizons, driven by our investments and differentiated value proposition.

Within Horizon 1, we saw good traction, particularly in consulting and technology services, due to the ramp-up of deals we won in the latter part of 2013. Specifically, we saw a good traction in testing, enterprise application services, and complex development projects. Across Horizon 1, in addition to helping clients run better, we are clearly enabling clients to run different, or to reimagine and redesign their businesses to deal with a broad secular technology-driven shifts across their industries.

As an example of a recent Horizon 1 win, Cognizant entered into a multi-year agreement with a leading biotech company to support its information systems organization and meeting the needs of its expanding product lines and geographic footprint. We're providing application maintenance and support services across the entire life sciences value chain from research and development, and manufacturing and supply chain to commercial operations and other enterprise solutions.

Within Horizon 2, we continue to see good traction across business consulting, business process services, and IT infrastructure services. Cognizant Business Consulting, or CBC, saw a strong quarter. We are increasingly incorporating consulting advisory work as a key driver for larger transformational deals.

For example, recently CBC brought thought leadership and served as the lead business architect for a benefit adjudication modernization project at a large healthcare payer. Cognizant Solutions will provide core adjudication functionality to support the client's next generation products. This is an example of how we are building stronger and more strategic partnerships with our clients.

Our BPS practice continues to show healthy growth, driven by cross-selling our vertically-aligned business process solutions into our existing customer base, as well as winning new logos. Ongoing investments in financial services and healthcare have recently resulted in a number of strategic wins, including work in claims and end-to-end back office processing and new business underwriting in property and casualty insurance, mortgage services and banking, and pharmacological vigilance services in life sciences.

IT infrastructure services also had a good quarter, with wins across multiple industries, including insurance, banking, healthcare, and retail. Our IT IS value proposition of simplifying, optimizing, and automating our client's IT infrastructure is compelling and is allowing us to capture client demand for integrated deals, such as applications plus infrastructure and the shift towards new enterprise IT models aligned with the SMAC stack.

There are three subsegments within Horizon 3: new technology architectures driven by SMAC, new industry in markets such as public sector, and new delivery models that drive non-linearity continued to gain traction. Awareness and investment in SMAC has clearly gone mainstream across most of the industries we serve and is an investment priority for many of our clients. Our ability to offer 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.

From an industry perspective, our Banking and Financial Services segment grew by 2.7% sequentially and 19.7% year over year, driven primarily by strength in banking. The key drivers of growth in this industry span regulatory compliance, real-time risk monitoring, stress testing, and fraud and trade surveillance. In addition, as indicated in prior quarters, our financial services clients are embracing SMAC-driven solutions for strategic differentiation and growth.

Healthcare, which consists primarily of our payer, pharmaceutical and medical device clients, was relatively flat sequentially, but up 20.8% year over year. While our payer clients are looking for ways to get costs under control, as we have discussed in the past, a number of our key pharmaceutical clients are going through challenges related to the patent cliff and their drug pipelines.

Despite these business challenges, we are seeing these clients becoming more active around multi-channel marketing and utility-based cloud solutions supporting everything from clinical trials to commercial operations. This is partially offsetting some of the short-term sluggishness that I mentioned earlier due to the uncertainty in the healthcare market.

We continue to further strengthen our leadership position in the healthcare space. During the quarter, IDC positioned Cognizant as a leader in the life sciences solutions for IT and BPO services and for strategic consulting. These services span the entire life sciences value chain including research and development, manufacturing and supply chain, and sales and marketing.

Our Retail and Manufacturing segment was up 4.4% sequentially and 20.2% year over year. Retail showed a nice sequential improvement following the soft holiday season. Manufacturing and logistics benefited from client demand to enhance supply chain management. Our other segment, which includes communications, information, media, and entertainment, and high tech, also recovered to 6.3% growth sequentially and 18% growth year over year, primarily driven by technology and telecommunications.

Finally, we continue to broaden our portfolio with tuck-in acquisitions. We just completed a small acquisition of a digital video solutions company, itaas, which will help extend and complement our existing capabilities serving the communications, media, and high technology industries. The expanded capabilities will also support other industries, such as banking, retail, and healthcare, which are rolling out advanced customer and business platforms centered on video.

From a geographic standpoint, North America had a slow start to the year, growing 1% sequentially and 16.1% year over year. Europe, overall, grew 9.6% sequentially and 35% year over year. The UK saw a strong 12.8% sequential growth and 28.2% growth year over year, hitting the $1 billion run rate for the first time.

The strength in UK revenue came from multiple clients across several industries, including financial services and high technology. Continental Europe saw a 5.2% sequential growth and a 46% growth year over year, partially attributed to our 2013 acquisitions.

We're encouraged by the structural trends we have seen over the year as clients are increasingly engaging us in larger, multi-year programs spanning service lines. The rest of the world showed good sequential growth, up 6.4% sequentially and 28.4% year over year.

Before I hand the call over to Karen to comment on our financial performance and guidance, let me conclude by saying that I believe Cognizant is well-positioned to benefit from clients' need to simultaneously run better and run different. This is a direct result of the strategy we have followed since our initial IPO of investing for the long term and evolving our capabilities and service offerings in anticipation of changing client demands.

Now let me turn the call over to Karen to provide details on our numbers.

Thank you, Gordon, and good morning, everyone.

First quarter revenue of $2.42 billion represented growth of 2.8% sequentially and 19.9% over last year. Non-GAAP operating margin, which excludes stock based compensation expense and acquisition-related expenses was 20.8%, above our target range of 19% to 20%, while our GAAP operating margin was 19% for the quarter.

Our non-GAAP operating margin was up 90 basis points year over year, in part due to improvements in utilization executed over the past year, which bodes well for our ability to continue hiring and building capacity throughout 2014.

In the quarter, we generated $0.62 of non-GAAP EPS. Consulting and technology services and outsourcing services represented 51% and 49% of revenue respectfully for the quarter. Outsourcing -- consulting and technology services was up 5.5% sequentially and 23.7% year over year. Outsourcing services was essentially flat sequentially, and up 16.1% from Q1 a year ago.

As we have said, clients are facing a dual mandate of how to run better and simultaneously run different. This is particularly true in Q1, where we observed certain customers optimizing their run better spend to further invest in their run different initiatives. Additionally, during Q1, we continued to see expansion of application development work in our public sector services business.

During the first quarter, 36% of our revenue came from fixed price contracts. As expected, pricing was essentially stable during the quarter. We closed the quarter with 1,223 active clients and added seven strategic customers, bringing our total number of strategic clients to 250.

Adjusting for the two-for-one stock split completed in March, our fully diluted share count for the quarter was 612.9 million shares, an increase of approximately 2 million shares from Q4. In Q1, we repurchased 600,000 shares for a total cost of $29.3 million. We expect to accelerate the opportunistic repurchase of shares throughout the year. To date, we have repurchased approximately 32 million split-adjusted shares for a total cost of just over $1 billion under the current share repurchase authorization of $1.5 billion.

Our balance sheet remains very healthy. We finished the first quarter with approximately $3.86 billion of cash and short-term investments, up by approximately $118 million from the quarter ending December 31, and up by approximately $1.1 billion from a year ago.

During the first quarter, operating activities generated approximately $157 million of cash. We utilized approximately $7 million of cash and financing activities and capital expenditures were approximately $43 million during the quarter. Receivables were $1.97 billion and we finished the quarter with a DSO, including unbilled receivables, of 73 days, essentially flat from last quarter.

The unbilled portion of our receivables balance was approximately $267 million, up from $226 million at the end of Q4. We billed approximately 64% of the Q1 unbilled balance in April.

Let me now provide some color on our business and operational metrics for the quarter. Our key delivery and operating metrics are improving due to our efforts to drive best-in-class execution. Our focus on optimizing operations continues to free up resources for longer-term investment in the business.

Despite the ramp up in hiring during the quarter, utilization improved slightly on a sequential basis. This is primarily due to the fact that the onboarding of new hires was skewed towards the back half of the quarter. Offshore utilization was approximately 76%. Offshore utilization, excluding recent college graduates who are in a training program, was approximately 83% and on-site utilization was approximately 92% during the quarter.

We ended the quarter with approximately 178,600 employees globally, of which approximately 167,300 were service delivery staff. 44% of our new hires were direct college hires, while 56% were lateral hires of experienced professionals.

I would now like to comment on our outlook for Q2 2014 and for the full year. Based on current conditions, and client indications, we expect to continue delivering industry-leading revenue growth of at least 16.5% for the full year and generate revenue of at least $10.3 billion in 2014.

In addition, we are increasing our full-year non-GAAP EPS guidance by $0.03. For the second quarter of 2014, we expect to deliver revenue of between $2.5 billion and $2.53 billion. We are providing a range for our second quarter outlook to better align expectations for the anticipated quarterly pattern of revenue growth in 2014, reflecting our strong pipeline of deals across our three growth horizons particularly for the second half of the year.

During Q2 and for the full year 2014, we expect to operate within our target non-GAAP operating margin range of 19% to 20%. For the second quarter, we expect to deliver non-GAAP EPS of $0.62. Our non-GAAP EPS guidance excludes net non-operating foreign currency exchange gains and losses, stock-based compensation and acquisition-related expenses and amortization.

This guidance anticipates a share count of approximately 613 million shares and a tax rate of approximately 26.5%. We are raising our full-year non-GAAP EPS to at least $2.50 for the full year. This guidance anticipates a full-year share count of approximately 613 million shares and a tax rate of approximately 26.5%.

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

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

(Operator Instructions)

Our first question comes from the line of Edward Caso of Wells Fargo.

Hi, good morning. There has been a series of acquisition announcements in the pharmaceutical industry. Has that or do you expect that could have an impact on your outlook? And I think pharma is about 10% of total revenue; is that right? Thanks.

Hi, Ed. It's Gordon. Historically, acquisitions have been fine for us because we tend to, because we work for most pharmaceutical companies, we tend to be on both sides of the transaction. We pick up the integration work; we tend to displace others.

So we've got, obviously, we did very well as all the acquisitions happen in the banking industry. Acquisitions have happened to date in the pharmaceutical industry have been positive for us so based on what we're seeing, we're not particularly concerned about acquisitions at this point. It may actually be an opportunity but longer term.

The next question is from the line of Jason Kupferberg of Jefferies.

Thanks, guys. Just a two-part question. First off, just on the second quarter guidance, you're calling for sequential growth of about 4%, maybe not much better than that. Kind of limited acceleration versus the Q1 sequential growth so if you can just comment on the reasons for that?

And then just a relating question. Do you feel that the probability of you delivering upside to the full-year revenue outlook is any less than it would have been a quarter ago when you first issued the full-year outlook?

Sure. So this is Karen. I'll take the first part of that question and Gordon will answer the second part. In terms of the Q2 guidance, as you said, the middle of the range is about 4% growth and that's primarily driven by the fact that we saw such strong discretionary spending or consulting and technology services growth in Q1.

Typically, we wouldn't have seen that pattern until later towards the end of Q1, going into Q2, but this year, in fact, we saw some early discretionary spending, which obviously then didn't lead to as big an increase as we move into Q2. So that's really what's driving the shift in the seasonal pattern from that perspective. And right now, as we've talked about, we see a very strong pipeline as we move into the back half of the year and some recovery in the outsourcing growth.

And let me hit the second part of your question. Q1 clearly started a little softer than we wanted. Now, obviously, we still hit our guidance. We still feel very comfortable with our full-year guidance but the simple math is it does take away some of the upside opportunity for the year given we started a little bit slower.

The next question is from the line of Tien-Tsin Huang with JPMorgan.

Great, thanks. Good morning. I was glad to hear that pricing is stable, but I'm curious, a lot of your peers on the pricing in the quarter thinking about IBM and Accentures and others, what's the delta there? What are you seeing on pricing globally amongst your peers?

I think you have to be careful with the pricing question. Customers want to lower their cost of ownership.

They are far less concerned about what is the rate card, so if we, through operational excellence, through productivity, through automation, can provide the services for less without impacting our rate card, customers are very happy. So as a result, we're seeing relatively stable pricing.

Clearly, we're reducing cost of ownership and what's happening is and you saw it in our numbers, even in Q1, people are taking the savings coming from the outsourcing work but -- and lower cost of ownership there and taking those dollars and spending it on running -- what we refer to as the running difference, the innovation top line growth. So the key is to make sure that, for us, is to make sure we have the capabilities to deliver on where customers are shifting their spend and that's a meaningful shift. It won't be a steady shift every quarter, obviously, but it's a meaningful shift that's happening so be sure to separate rate card from cost of ownership.

The next question is from the line of Steve Milunovich of UBS.

Hi, this is Peter Christiansen in for Steve. Thanks for taking my question. I was just wondering if you could talk a little bit about any pattern changes that you're seeing in the decision-making process outside of healthcare?

And also talk about how you talked about how discretionary spending is a bit early this year. Is that going to affect the normal spend cycle on the discretionary side?

It's Frank. Look I think we've covered the changes that we saw in the quarter. There was -- it was some slowdown as we said in healthcare as our clients adjusted to the structural changes in that industry. We had some seasonal stuff related to the economy, the weather in the Northeast, nothing that I would be overly concerned about for in a structural way.

And then I think the one that Gordon alluded to a minute ago is probably the most important is that we are seeing this balancing that we talked about as clients redeploy dollars from what we think of as the run better initiatives to the run different initiatives, right? So kind of optimizing on core operations and using those savings to invest in these digital technologies and new capabilities that we've been talking about for some time.

That shift is happening. We saw that happen in the first quarter, which is why we saw, what we call, consulting and technology services grow faster than outsourcing in the quarter. It's also not a typical Q1 pattern for us. In typical Q1, we tend to see outsourcing grow a little faster than consulting and technology services.

So I think that's probably the most interesting change, or now -- we saw it in one quarter. I'm not sure that one quarter makes a long term trend but that's something to keep an eye on as we go forward.

Our next question is from the line of Bryan Keane of Deutsche Bank.

Yes. Hi, guys. Just kind of a two-part question here. I guess, first, on headcount growth. Good to see that accelerate a little over, I think it was 4.2% sequentially. Year over year, I think the number is still at about 10% so just trying to make sure I understand the delta sequential headcount and year over year? And does that continue to ramp up to match closer to the year over year revenue guidance of 16.5%?

And then secondly, just on the EPS raise of a few pennies, or I think it was about $0.03, what caused that raise in guidance? Thanks.

Let me touch first on headcount. The reason that year over year number looks odd is last year, we took our utilization up quite significantly so we were able to deliver revenue with a slower headcount growth. Obviously, you saw us accelerate our headcount growth in Q1.

We don't provide future-looking headcount guidance but you certainly would not see as big a delta between revenue growth and headcount growth that you did last year because last year was the year where we materially increased our utilization. There's still some tweaking we'll do and it will be variable quarter to quarter but it's -- we're more in a stabilized range of utilization now. Karen, do you want to touch base on EPS?

Sure. Bryan, it's Karen. Regarding the EPS guidance, the raise by $0.03 is really due to the overperformance in Q1 so you'll remember our original full-year guidance on a non-GAAP basis of $2.51, we exceeded our Q1 guidance by $0.03 and so we've added that to the full year.

The next question comes from the line of Sara Gubins with Bank of America.

Sure, this is David Ridley-Lane in for Sara. Could we get an update on Cognizant's expansion into data centers? A little over a year ago, you announced a $25 million investment to build, I think about four data centers.

How many do you have up and running today? How's the client's perception been, and most importantly, do you feel that owning the data centers is a competitive advantage in winning cloud services work? Thank you.

So infrastructure services, what we refer to, as ITIS, is a very important strategic area for us. And as I mentioned in my prepared comments, we're making really good progress. A component of our infrastructure services is to have some data center capacity for clients where they want that capacity along with other services within infrastructure management so we've brought four data centers online.

They are up and running. We are -- clients are utilizing them as part of broader ITIS deals so the strategy is generally working. We'll continue to tweak a little bit, obviously. The market is shifting quickly in some of those areas. The investment I think we have sized for people before is not massive. It's -- I think it was $25 million, $30 million. That investment is essentially all done at this point.

Our next question comes from the line of Moshe Katri of Cowen & Co.

Hi, thanks. Another two-part question. Going back to your Q2 guidance, it's definitely softer than usual in terms of the sequential uptick you usually see from March to June. Can you -- I think some color on that would be helpful in terms of what's embedded in that.

Is that further weakness in North America, healthcare, discretionary, all of the above? And then the UK had a huge sequential uptick in growth. Can you comment on that? Thanks.

Sure, so Moshe, I think as we've talked about, consulting and technology services, which is typically the driver of growth going from Q1 to Q2 actually kicked in a little earlier than we expected. So we saw strong sequential growth in Q1 and so to some extent, that limits the ramp-up as we move into Q2 and that's really what's driving the change there.

And then as we talked about, we do think there's a little bit of a shift in the way outsourcing is performing this year where it had to slow Q1, relatively speaking, 1% sequential growth. But we expect to see increase in growth there as we move into the back half of the year, so that was really the only change there.

And on Europe, at a macro level, Europe is embracing our model, a lot more. The catalyst, the economic crisis and continental Europe served as a catalyst for people to think very differently about how they acquire and utilize technology and business process services. In the UK, our brand has become very strong.

Obviously, I don't think we're going to have this sort of sequential growth in Europe that -- every quarter going forward. But clearly, we're feeling good about our position in Europe, our customers in Europe. And I think Europe, particularly Continental Europe, is ready to embrace a global delivery model.

Moshe, you'll get three of us answering your question here. Let me just jump in as well. It's Frank. Look, I think one of the things about this quarter is it just speaks to the strength of the portfolio, right?

We've got a really good portfolio that we've been investing in. We've been talking to you over many years about the investments we're making across industries, geographies and services. And I think you saw that play out this quarter.

We had some softness in some parts of North America. It was offset very nicely by things like discretionary spending and SMAC, Social Mobile Analytics and Cloud, and it was nicely offset by the performance in Europe both in the continent and the UK. As we mentioned in the prepared comments, the UK hit $1 billion run rate in the quarter, which is terrific.

And we have several other businesses including the SMAC business, Continental Europe, and really all of the H2 services, BPO, IT infrastructure services and consulting. All of those are, in general, growing faster than Company average and are well on their way to becoming billion dollar businesses in the coming years. So I feel good about the portfolio that we've built.

Our next question is from the line of Glenn Greene of Oppenheimer.

Good morning. Wanted to go back to the headcount ramp in the quarter. If I heard Karen right, it sounded like it happened right at the tail end of the quarter and it seemed to be skewed toward the laterals as well. Is that, was that sort of a suggestion of sort of a pick up in demand that maybe takes a little bit of awhile to sort of build on and convert? Or is there any way to read into that?

So let me start first of all with the laterals versus ELTs. Not heavily skewed towards it. That's actually kind of a normal mix so I wouldn't view that as, in any way unusual. The mix, that's exactly what we want.

In terms of the timing of when people join, what I wouldn't read a whole lot into that either, that part of that is when the college kids want to come and so forth. I think the key thing to read here is, one, we -- last year, we took utilization up quite a bit and now it's -- we're kind of at the right level where we want to be so you'll see it more stabilized.

We're able to attract and recruit just absolutely great talent. Our brand is probably the strongest it's ever been, not just in India, but in North America and Europe as well so we're getting the people and they're staying so attrition has come down nicely.

So we're feeling very good in terms of our resourcing capability. The fact we added 7,200 people obviously means that we think there are growth opportunities for us.

The next question is from the line of Joe Farisi of Janney Montgomery Scott.

Hi. Can you quantify the headwinds in 1Q? I know you talked about them. Are they fully behind us and can you give us an update on the SMAC stack as a percentage of revenue and expectations for this year?

Sure, so I'm not sure I'd say the headwinds are fully behind us. When you think about what's happened, clearly, the weathers behind us but once again, I don't want to point to the weather as a material. There's still people are worried about the economy; no question about that.

Healthcare, there's still uncertainty but I think the uncertainty has settled down a little bit from where it was in Q1 and the leadership changes for the ones that happen. Those are largely behind us.

I'm sorry, Joe, what was the second part?

I just want to get an update on the SMAC stack as a percentage of revenue and your expectations for this year. I want to see if that had changed at all?

Sure, so as you know, we did about $500 million of SMAC revenue last year. We have not given -- we don't give guidance on what it will be for this year but certainly, SMAC is a growing area.

Our next question is from the line of Keith Bachman, Bank of Montreal.

I wanted to ask about how do you get there for calendar year 2014? You've given guidance for the June quarter after the March quarter and it calls for some September to be, call it, 5.5% to 5.7% and maybe December to be 2.5% to 2.7% sequential growth. It seems like a little bit -- calling for a little bit of a revenue acceleration compared to what you've just delivered and guided to for June.

Is the assumption that the US, which had very weak sequential growth that, that comes back to more normal sequential patterns? I was wondering if you could speak specifically to the US and what you're assuming there? And then also if you could just provide any dimensions around what Horizon 2, what you anticipate, particularly in the consulting and BPO areas on how you see it filling or providing the guidance for the balance of 2014? Thank you.

Sure. So at the macroeconomic level, it assumes no improvement, basically things stay the same. A lot of the seasonality is based on stuff we won last year and stuff we've recently won. That takes a little while to kick in so it's more the -- that tends to be a little bit more client-specific but it is not based on miraculously GDP growth will increase. We're assuming status quo from a macroeconomic environment.

I'm sorry. And the second part of your question?

Well, just to come back, you're assuming that North America specifically returns to more for Cognizant more normal growth patterns as you look at the second half of the year. So those headwinds are gone, you think in North America specifically for Cognizant?

Yes, so specifically for Cognizant, we would expect the sequential growth to be better in the second half of the year than the first and some of that's related to specific stuff that we've won and will be ramping up.

Our next question is from the line of Ashwin Shirvaikar with Citigroup.

Thank you. So I guess a two-part question also. On the run better side, when you talk of flattish outsourcing and you just mentioned some of the leadership issues transitions are behind you. Can you talk about when your consolidation, how much of an impact that is? And typically you guys do tend to have either 2Q or 3Q or both and obviously in this case, 3Q should be a good ramp.

Is that based on the wins that you had that you can start ramping, so if you could talk about the ramps as well? And then separately on the run different side, is that more inherent quarter over quarter volatility in this part of the business?

So Ashwin, it's Frank. I'll try to address several of the points you made and if I omit some, I'll come back.

Look, in terms of the broad vendor landscape, vendor consolidation and so on, clearly, we're seeing a little bit of that going on. We've talked about this for awhile. In general, we tend to be the beneficiaries in those situations and the reason for that, Ashwin, is that as you may know, historically, we've had a very explicit and deliberate strategy with our clients focusing on a small number of clients, a small number of industries and serving our clients very, very deeply.

And so we tend to have strong positions with our clients. We tend to be, in general, the after -- obviously after a client has reached some level of maturity, we tend to be one of the larger providers in our client's ecosystem. And so when there's a vendor consolidation exercise that takes place, we tend to generally benefit from a consolidation exercise. So overall, I think that when vendor consolidation is taking place, there's a little bit of benefit to that.

In terms of the looking at the pattern of outsourcing for this year, as Gordon said, a lot of our outlook is based on stuff that we've won and we expect to ramp. The -- I think that you're starting to see, you're seeing, we're seeing and we've seen this for about the last year or so is that outsourcing deals are also becoming a little bit larger.

As clients tend to bundle things together, we're starting to see the bundle applications and infrastructure deals happening out there. Those take a little bit of time to win if the sales cycles are a little bit longer, but obviously, revenue is also larger and so it has that dynamic, as opposed to, say, five years ago when our outsourcing contracts were more sort of penetrate and expand kind of contracts where we'd win a small deal with a client and then expand from there.

And then on your third point, yes, I think you will see that on the digital work, or more generally, the discretionary work in the consulting and technology services area. That has always been and will continue to be somewhat more volatile quarter to quarter because it is more discretionary. It is more subject to client's annual budgeting process, annual budgeting cycle.

And I think that volatility might be a little bit more pronounced this year and next year because you have this period when clients are really adjusting to these new digital technologies and you'll see starts and stop in spending related to that perhaps a little bit more than you would have seen, say, five years ago when technology was a little bit more stable. Gordon, do you want to add anything to that?

I think you covered the key things, Frank.

The next question is from the line of Darrin Peller of Barclays.

Thanks, guys. You mentioned that you saw structural changes around the healthcare as there's a pause from both companies and consumers adjusting to the change, legislative changes. And obviously there's also patent cliffs remaining.

However, Obamacare does seem to be still in the early stages of rolling out across states. And I guess as the market is accustomed to these changes, should we expect to see this still become a more meaningful tailwind in maybe the second half of the year given that the insurance payers still need to get connected to the news feed coming on?

And I guess just to follow on that point, if what you're saying about the management changes as one the headwinds in the US was also completed and healthcare were to come back, is that just upside to what you're incorporating in your outlook now?

Let me start with the management changes and Frank can touch on healthcare. On the management changes, those are pretty much flushing out the system at this point so we understand where those are. And that's part of the reason why we've guided to the timing so that's built in to the guidance because the confidence level on that selection is quite high.

Frank, do you want to just mention on healthcare?

Look, I think you're potentially right. I think as you look long-term healthcare is going through -- healthcare is going through a period of structural change and I'm referring -- we've talked about the structural change going on in life sciences for many quarters. I'm referring to the payer provider ecosystem now.

If you look at that space, there's clearly the Affordable Care Act. There are other changes going on as well if you look at the commercial markets, for example, in the United States, we're seeing more and more employers moving to high deductible plans and so on, which is changing consumption patterns for healthcare in the United States.

In the first quarter, if you look at consumption, true consumption metrics for healthcare services in January and February, they were down, true healthcare consumption in the United States came down in many places in the first month of the first quarter, so you're seeing this structural adjustment. My guess is that what will happen is that it will take some time for us to reach somewhat of a new normal in healthcare and through that, there will be opportunities for us at Cognizant to capitalize on opportunities.

But I don't want to be too bullish on this because the reality is, I don't know how long this industry takes to adjust and that's hard to predict at this point, so we're watching it very carefully. As you know, we're extraordinarily well-positioned in the healthcare.

We feel like we've got the leading franchise out there serving healthcare, payers, providers, and the global pharma companies and the medical device companies. So we feel like we've got a very, very strong play in healthcare. Our position is strong. Competitiveness is great.

Our teams are out there every day talking to our clients and so as these opportunities arise, I feel very, very good about how we're positioned to capitalize on them. But as industries go through these periods of change, it's hard to get a good fix on exactly how things play out quarter by quarter so we'll watch it very carefully and obviously keep updating you as our views change.

Our next question is from the line of Katy Huberty of Morgan Stanley.

Hi, good morning. It's Brian Essex for Katie. Thanks for taking the question. I was wondering if maybe you could dig into Europe a little bit.

52% growth on a trailing 12-month basis year over year, how much of that is organic? And what is your outlook in terms of how you think about this sector, where you're investing for headcounts? Is there any concentration with vertical or product line that would give us some kind of read into the sustainability of growth, although that's pretty impressive growth, both in Continental Europe as well as the UK?

Sure, let me take the second part of the question. We are trying to just see if we have handy the first part and if not, we'll get it back to you with it offline. We feel good about Europe, quite simply. Part of it is our execution and part of it is the market. In terms of our execution, we've really built out our teams in the continent, both through some acquisitions that we've done as well as organically.

We now have the model that works in terms of the combination of local presence and multinational capability, so and the type of services that we're providing, the combination will run better, run different are resonating. So that's happening at the same time that the market is becoming more open to global delivery, to outsourcing in general.

So the combination of those two factors together make us feel good. When you look at it by industry, obviously the one big difference from North America is you don't have the same spend levels on the payer sectors due to nationalized healthcare over there. But certainly financial services, insurance, pharma, retail, manufacturing, telecom. We're feeling quite good about it.

It's -- now obviously, some of the continent is growing off a small base which makes the percentage growth numbers a little bit easier to tackle but even when you look at it in terms of dollar growth and as its increase in percentage of revenue, clearly, we think there's continued opportunities, both in UK but more importantly, in the continent and the Nordics. So we'll keep investing there; the strategy is working.

Now part of what we're doing is we're expanding that investment strategy. We're increasing our investment in the markets in Asia. We're starting our investments now in the Markets down in Latin America. So similar to what we did in Europe, we're now going to other parts of the world and the good news is as we do that, we now better understand the model between local and foreign nationals and how to act locally while at the same time, having global delivery. So I think we've got the model down pretty well and we'll continue to roll that out.

This is Karen regarding the organic growth in Europe. So in the continent for the quarter, it grew about 46% year on year on a reported basis, about 30% growth was organic growth so about 15 points was due to the C1 and the Equinox acquisitions that we closed last year.

Our next question comes from Dan Perlin of RBC.

Thanks. I wanted to just go back to this comment earlier about the rate card versus cost of ownership, but I also wanted to add mix a bit into that discussion as you've talked a lot about these investments going into run better and then different from your client's budgeting side. But reconciling that with the margin profile of 19% to 20% in the back half of the year.

So is the message here that it really is a function of incremental investments, as you were somewhat highlighting in Europe or is there a mix issue as well that we need to be mindful of as you go into these other markets and technologies? Thanks.

So there is a mix issue but the mix takes you both ways so as we're shifting more to run different, people are less price sensitive and the only rates tend to be a little bit better. But at the same time I'm growing my BPO business where just the nature of it is more heavily offshore and obviously rates in general are lower for that because the costs are lower.

So when you mix it altogether and you look at the average blended rate across the Company, you have a couple things to take in opposite direction, which is the way it should work.

Our next question comes from the line of David Togut of Evercore.

Thank you. Financial services put up a pretty solid 20% year over year growth in the quarter but that's below the trend we've seen actually over the last two to three years which has been materially higher. Can you flesh out some of the underlying drivers of financial services growth in the quarter and in particular, did anything change significantly versus what we've seen over the last 6 to 12 months?

The main change during the -- last year, insurance was a bit stronger than banking. We actually -- in parts of last year. In Q1, banking, the core banking did quite well and for some of the reasons I articulated in terms of the spend that they have to do on compliance, on regulatory, on risk management, while at the same time, they are investing to run things different and interact different with their customers. So you'll see some back and forth.

Obviously, the Financial Services segment is our biggest segment so the law of large numbers says it should not grow materially faster than the overall Company. And I certainly would not have that expectation, so it will be a little different quarter to quarter but core banking in Q1 did nicely.

I think, operator, we have time for one more question.

The next question is coming from the line of Mayank Tandon of Needham & Company.

Thank you. Good morning. Frank, you talked about some of the large multi-year type outsourcing contracts where you're competing. I just wanted to get a sense, are you seeing different players than you have seen in the past on some of these opportunities and also would it require you to change your capital intensity if you want to be competitive on some of these large infrastructure-type engagements?

Mike, let me answer the last part of your question first and I'll come back to the beginning, so clearly not. We're not playing and in fact, candidly, the market generally moving away from the traditional large scale, capital intensive what I think of as more traditional hardware and asset-heavy infrastructure deals, so I think that's somewhat the model of the past at this point.

We're playing in what I think of as bundled outsourcing deals where you're seeing clients bundling together. Applications and infrastructure management are quite common to see that bundle happen but we're also starting to see BPO and apps and infrastructure or some combination of all three of those being bundled together. And so that's really the bundling I'm talking about.

When we look at those bundles, I think we've proven out time and time again at this point that there are true synergies that you can drive, that we can drive on behalf of our clients when we combine those things together. When you're combining BPO and IT, for example, you do get technology and operation synergies.

When you combine infrastructure, management and applications, you do get technology synergies that you can leverage. And so those are the kinds of things of transactions that I'm talking about when I refer to these bundled deals.

Having said that, we continue to work on the traditional single tower deals as well and that's a very healthy part of the business, so we're competing across all of those. I think in terms of competitive set, I don't think it's changed.

We compete against the usual suspects here in the space-, including the folks that would traditionally have done the bigger, what you might think of as the bigger outsourcing deals, and of course, also the global services player so that competitive set hasn't changed meaningfully.

I think that was really all we had time for, so let me just close by thanking you all for joining us today and for your questions. We're looking forward to a good 2014 and we look forward to seeing you next quarter to discuss our results. Thank you.

This concludes today's Cognizant Technology Solutions first quarter 2014 earnings conference call. You may now disconnect.