高知特 (CTSH) 2014 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions fourth-quarter 2014 earnings conference call.

(Operator Instructions)

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

Thank you, Rob, and good morning, everyone. By now you should have received a copy of the earnings release for the Company's fourth-quarter and full-year 2014 results. If you have not, a copy is available on our website, Cognizant.com. The speakers we have on today's call are Francisco D'Souza, Chief Executive Officer; Gordon Coburn, President; and Karen McLoughlin, Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the Company's earnings release and other filings with the SEC. I would now like to turn the call over to Francisco D'Souza. Francisco, please go ahead.

Thank you, David, and good morning, everyone. Thanks for joining us today. We finished 2014 on a strong note.

Our fourth quarter revenues were $2.74 billion, a sequential increase of 6.2%, including revenues from TriZetto. Excluding the impact of the TriZetto acquisition, we posted sequential growth of 3.1% in Q4, which includes a negative currency impact of 1.1%. For the full year 2014, including TriZetto, we delivered $10.26 billion of revenue, which represented growth of 16.1% over 2013.

As you are aware, we revised our full-year guidance, growth guidance at the time of our Q2 earnings release, on account of client specific issues and delayed ramp-ups in some projects. As is clear from our strong performance during Q3 and Q4, both client and project-specific issues are now behind us, and as we enter 2015, we are encouraged by the strength of the demand environment, and how well-positioned we are to capture the market opportunity.

For the full year 2015, we expect to deliver at least $12.21 billion of revenue, which represents full year growth of at least 19%, after a 2% currency headwind. Adjusting for the impact of TriZetto and currency movement, this guidance reflects strong revenue growth in our underlying business, and is roughly in line with our 2014 growth. Karen will provide you with full details of our expected financial performance shortly.

I'd like to spend the next few minutes providing you a perspective on the trends that we saw last year, and how these are impacting the he demand environment going forward, and how Cognizant is positioned to address the market opportunity. Let me start with the demand environment.

For many quarters, we've been talking to you about a once in a decade shift, driven by digital technologies that are putting industries and businesses at a crossroads. While there have been big technology shifts in the past, the current digital era is different in two very fundamental ways:

First, technology has moved from automating transactions to instrumenting all aspects of our lives. Sensors are being embedded everywhere, which implies that physical environments are becoming more intelligent, and almost everything is becoming a source of data.

It's estimated that by 2020 there will be 50 billion connected devices, generating 50 times the data that is being generated today. The only way to harness this ecosystem is through advanced forms of automation and technology.

The second difference is that the pace of change is like nothing we've ever seen before. In the past, technology evolution was characterized by brief periods of very intense innovation, followed by long periods of incremental improvement. Today, innovation cycles have compressed so dramatically that business leaders around the world have to think of innovation and improvement simultaneously.

This challenge, to achieve both efficiency and innovation, is what we call the dual mandate, and we believe companies must simultaneously focus on both of these. On the one hand, large parts of the world economy are yet to return to robust and sustainable growth, which means we have to help our clients conserve capital by providing efficiencies a and productivity, while also helping them build variable cost structures, so that they are better able to match their costs with revenue and demand. On the other hand, we have to help them reinvent and reimagine their businesses, and build the skills and capabilities required to make digital come alive.

This is driving a significant demand for newer services, in areas such as mobility, data and security. A McKenzie study highlights this demand, indicating a potential shortage in the US of up to 190,000 data scientists by 2018. Clients need a partner who has the ability to integrate and execute end-to-end transformations, driving both efficiency and innovation, and I'm confident that Cognizant is that partner for our clients in 2015 and beyond.

Now let me explain in some more detail how we're bringing all our capabilities together to help our clients on both sides of the dual mandate. The first thing we're working on is driving best-in-class delivery across all of our service lines. We're continually improving each and every one of our services to bring capital and operating efficiencies to our clients.

We have a relentless focus on bringing in tools and techniques to measure and improve delivery across the life cycle so clients can benefit from best-in-class operations. And we continue to drive efficiencies by investing in our delivery network, tapping new sources of talent, and also driving process automation by applying advanced technologies across our lines of service.

The second area in which we are focused is the end-to-end productivity achieved by bringing multiple services and service capabilities together. For example, we are increasingly packaging application and infrastructure services together, to take advantage of the synergies from managing these layers of the stack, in combination.

Our engagement with Health Net announced last year is an excellent example of an end-to-end solution, which includes applications and infrastructure, as well as business process services. Our ability to extract end-to-end synergies will allow us to reduce Health Net's G&A spend, and improve quality of service.

Another example of the work we are doing to drive end-to-end productivity is our work in developing shared industry platforms. We're increasingly bringing together applications, cloud, and business process services to create industry utilities, benefiting multiple customers in an industry.

In this process, we have created new commercial models where we can charge clients on the outcome or output we deliver to them. The platform from TriZetto and Health Net will enable us to offer these new delivery models in healthcare at scale.

Third, where best-in-class delivery and multi-service integration and industry platforms help us drive efficiency for our clients, on the innovation front, we made significant investments and saw great traction for digital solutions this past year. Business transformation at scale in the digital era requires approaches, skills and capabilities that are different from traditional IT services.

For several years, we've been working with our clients on new solutions, driven by social, mobile, analytics and cloud technologies. This experience has helped us create a comprehensive, integrated approach to transform our clients' businesses into digital enterprises. We've been working with CEOs to strategically rethink business models, with business leaders to digitize business processes, and with CIOs to create the foundational technologies and security for the digital age.

We have multidisciplinary teams that bring together consultants, digital technologists, designers, business process experts, and data scientists, to create cohesive digital solutions for clients. We're organically building on our heritage of data, industry expertise, knowledge of SMAC technologies, and legacy systems, complemented by digital acquisitions like Itaas, Cadient, and Odecee.

And finally, to further enhance our offerings to clients, we continue to invest in new capabilities to make sure that we stay well ahead of the curve. We're particularly focused on the next generation of game-changing technologies, such as instrumentation with ultra low cost sensors, embedded software, 3D printing, advanced cyber security, and many areas of artificial intelligence.

These are exciting times to be in the technology industry. The pace of change and innovation is breath-taking.

Over the next decade, organizations around the world will race to deploy new technologies for competitive advantage and better service. The world is becoming more technology-intensive, and I'm excited about the opportunity that this represents for our clients, and for Cognizant.

In closing, let me say that 2014 was a significant year for us. We completed 20 years of strong growth, expanding to over 200,000 talented associates, and now have operations in more than 40 countries globally. We've created a solid platform for growth, and I'm confident that given our entrepreneurial culture and our ability to adapt to change, we're well-positioned for the next stage of our journey.

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

Thank you, Frank. Before I get into the details of the quarter, I'll first discuss the status of the integration and revenue synergies of the TriZetto acquisition, and then provide some additional color on the current demand environment.

As announced previously, we closed the $2.8 billion acquisition of TriZetto on November 20. At this point, client account teams have been integrated, and detailed plans are in place to begin to drive revenue synergies this year. We have a team of people dedicated to the integration and the various synergy tracks we outlined several months back.

We have identified at a granular level the path to achieving the $1.5 billion of synergy opportunities over the next five years, and remain confident in our ability to deliver that result, based on the many exciting opportunities we see. First, we anticipate picking up incremental projects, integrating TriZetto's platforms for payer clients. Second, we think there's an opportunity to cross-sell our BPS, hosting, and consulting services into the TriZetto clients, where we currently don't have relationships.

Finally, the longer term opportunity goes beyond that. The combination of TriZetto's platforms with our services and program management capabilities will allow us to create end-to-end platform based solutions for payer clients. At a time of significant disruption in the healthcare industry, regulatory reform, aging populations, increasing price competition, demands for transparency and new technologies, these end-to-end solutions are gaining traction.

We are receiving numerous inquiries from CEOs and COOs at our clients. They are proactively reaching out to us, starting conversations about combined Cognizant and TriZetto solutions. These clients are intrigued by how these comprehensive platform-based solutions can create compelling value propositions for their companies.

Let me now comment on the overall demand environment, and our performance across industry segments and geographies during the fourth quarter. We're pleased with the strong revenue performance during the fourth quarter, despite unfavorable currency movement.

As Francisco mentioned earlier, excluding the impact of TriZetto, revenue grew 3.1% over quarter three, which includes a negative currency impact of 1.1%. The demand environment remains strong, as reflected in our strong order pipeline, and the pickup of deal activity over the past couple of quarters, and reflects clients' growing demand for achieving both efficiency and innovation on one platform.

From an industry perspective, our banking and financial services segment grew 3.6% sequentially and 12.4% year-over-year, driven primarily by continued strong growth in our insurance practice, where there's a growing interest in end-to-end managed services. On the banking side, underlying demand drivers remained consistent through 2014, cost optimization and vendor consolidation, regulatory compliance, real-time risk monitoring, and fraud and trade surveillance. We expect many of these drivers to continue in 2015, but with the increased focus on newer technologies in digital and automation.

Our healthcare segment, which consists primarily of our payer, pharmaceutical, biotech, medical device clients, and now our TriZetto business, grew 17.9% sequentially, and 26% year-over-year. Excluding TriZetto, the healthcare segment grew 5.6% sequentially.

As we've discussed over the course of 2014, our payer sector took a more cautious approach to investment during the year. Longer term, the payer sector is undergoing fundamental change, driven by a changing regulatory environment, increasing focus on medical cost, and the consumerization of healthcare. We believe this fundamental change creates longer term opportunities, for which we are well positioned to capture.

Within the pharmaceutical segment, we've seen another quarter of strong sequential growth, driven by cost optimization and vendor consolidation, as well as increased traction in BPS, especially with clinical and commercial operations. Finally, our acquisition of Cadient is helping drive the digital agenda with our pharmaceutical clients, as Cadient is seen as leading the market in digital marketing solutions.

Our retail manufacturing segment was essentially flat when compared to the third quarter, and up 9% over Q4 of 2013. Q4 is typically a slow quarter for this segment, given the lockdown of IT systems during the holiday season, and the number of furloughs that occurred at year-end. However, we're seeing improved demand, particularly in areas of modernizing supply chains, as well as digital and e-commerce engagements.

Our other segment, which includes high tech communications and information, media and entertainment clients, was up 1.2% sequentially and 23.3% year-over-year. Primarily driven by further penetration with our existing clients. We are seeing good traction through our Itaas acquisition with our communications and media and entertainment clients, as traditional cable, broadcast, and telecom network environments move towards a wide range of digital video services.

Let me now turn to a discussion of our Horizon 2 service lines, where we continue to be pleased with the market traction we're realizing. Our BPS practice saw continued traction during the quarter, largely on the ramp-up of a number of wins in prior quarters across financial services, insurance, and healthcare.

BPS is a critical component of bringing operating efficiencies to our clients. Increasingly, this is delivered through solutions leveraging technology and advanced automation. Demand for our vertically aligned business processes such as membership enrollment and revenue cycle management in healthcare, and claims processing and mortgage services in insurance and financial services remains strong.

Cognizant Infrastructure Services had another strong quarter. We're seeing solid demand from clients looking to simplify and automate their infrastructure through newer delivery models, often incorporating highly automated managed services and newer technologies such as our hybrid, cloud and mobility solutions. Additionally, solutions integrating infrastructure and applications management are gaining traction.

Cognizant Business Consulting, or CBC, continued its pace of above-average growth as transformational engagements, which require clients to rethink and reimagine their strategy and operating models, are driving strong demand. Within today's environment, clients are expecting consulting to grow beyond strategy and to be included within integrated solutions incorporating design, technology, and implementation.

CBC is on the front lines of our digital engagements, with over 60% of deals in their 2015 pipeline having a digital component, focusing particularly on three key areas; enhancing the customer experience, modernizing and simplifying supply chains, and transforming underlying technologies for the digital environment.

Our Horizon 3 offerings include new technologies and new delivery models, as well as new markets. A new area seeing especially strong traction is our public sector practice. This strength is driven by leveraging our commercial expertise, particularly in banking and healthcare, and offering our full suite of services across all three horizons.

From a geographic standpoint, North America grew 7.7% sequentially, and 17.4% year-over-year. Excluding TriZetto, North America was up 3.6% over the third quarter.

Revenue from Europe was up 0.6%, compared to quarter three, including a negative 4.4% currency impact. Revenue was up 10.7% over a year ago.

Continental Europe was up just under 1% sequentially, including a negative 4.7% currency impact. We expect solid growth in the continent over coming years, as we increasingly benefit from the structural shift towards larger, multi-year outsourcing programs.

The rest of world continued to show good growth, up 4.5% sequentially and 22.3% year-over-year. Growth was driven primarily by strength in key markets such as Australia and the Middle East.

2014 was a strong year from a business operations perspective. In our 20th year, our reputation of being an employer of choice was further strengthened across the globe. We crossed the 200,000 employee mark. We continue to recruit and hire some of the best talent from around the world, both from the lateral market and from leading universities in 17 countries.

With newer skills needed to address opportunities fueled by digital, we have aggressively expanded recruitment into areas such as analytics and digital solution design. Additionally, the acquisition of TriZetto, Itaas, Cadient, and Odecee in 2014 have brought in world-class talent in areas of product engineering, video engineering, mobility, digital marketing, and other skills critical to transformations that clients are seeing.

We saw a downward trend with attrition during the year, evidence of our ability to engage, train, develop, recognize, and retain our associates. We were pleased that Cognizant was ranked number one for the second year in a row in the Association For Talent Development's 2014 Best Awards Program. Additionally, our annual business effectiveness survey of employees showed results improving from the prior year, a validation of our sustained focus on employee retention, while driving high levels of customer-centricity.

As we enter 2015, I believe that we're well-positioned to capture the evolving market opportunities. Our investments in expanded capabilities in markets, combined with the strongest workforce in our history, gives us confidence in delivering strong growth, despite the current currency headwinds.

Now let me have Karen provide more color on the financial details of our performance. Karen?

Thank you, Gordon, and good morning everyone. Fourth-quarter revenue of $2.74 billion included approximately $80.6 million associated with TriZetto, and represented growth of 6.2% sequentially, and 16.4% year-over-year. Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition-related expenses was 19.4%, within our target range of 19% to 20%.

During the quarter, we adjusted our estimate of 2014 incentive compensation downward, to reflect the margin impact of accelerated hiring and other investments. This revision positively impacted our Q4 operating margin by approximately 2 percentage points. Non-GAAP EPS of $0.67 exceeded our previous guidance by $0.04.

For the full year 2014, revenue of $10.26 billion represented growth of 16.1% year-over-year. Non-GAAP operating margin was 20.2%, and non-GAAP EPS was $2.60.

Consulting and technology services and outsourcing services represented 54% and 46% of revenue respectively for the quarter. Consulting and technology services increased 8% sequentially and 26% year-over-year, while outsourcing services were up 5% sequentially, and grew 7% from Q4 a year ago.

During the quarter, $45 million of revenue from TriZetto was included in consulting and technology services, and $35 million was included in outsourcing. For the full year, consulting and technology services and outsourcing services represented 53% and 47% of revenue respectively. During the fourth quarter, 36% of our revenue came from fixed price contracts, and as expected, overall pricing was stable.

As part of the TriZetto acquisition, we added both payer and provider clients, including more than 245,000 providers. As such, the customer count is no longer as relevant a metric for measuring our core performance, so we will no longer be providing that going forward. We will, however, continue to provide the number of strategic accounts, which we have defined as clients that have the potential to generate at least $5 million to $50 million or more in annual revenue. We added seven strategic customers in the quarter, bringing our total number of strategic clients to 271.

During the fourth quarter, we repurchased 1.1 million shares for a total cost of approximately $58 million. To date, we have repurchased approximately 35.2 million shares for a total cost of approximately $1.2 billion, under the share repurchase authorization of $2 billion, and have approximately $814 million remaining unutilized. Our fully-diluted share count increased slightly to 612.8 million shares for the quarter.

As a result of the TriZetto acquisition, we are modifying our DSO calculation. The DSO formula will continue to include total accounts receivable, but will now be net of the uncollected portion of deferred revenues.

Total receivables were $2.3 billion at the end of the quarter, and we finished the quarter with a DSO including unbilled receivables of 70 days. Under the previous calculation, the DSO for Cognizant excluding TriZetto would have been 75 days, a decrease of approximately 2 days from the last quarter.

The unbilled portion of our receivable balance was approximately $325 million, down from $338 million at the end of Q3. We billed approximately 56% of the Q4 unbilled balance in January. The decrease in unbilled receivables was primarily due to the timing of certain milestone deliverables.

Our balance sheet remains very healthy. We finished the fourth quarter with approximately $3.8 billion of cash and short-term investments, down by approximately $844 million from the quarter ending September 30, and up by approximately $27 million from the year-ago period.

As mentioned previously, we closed the acquisition of TriZetto during the quarter. The funding for this acquisition came from a combination of cash on hand, and debt priced at LIBOR plus 100 basis points. At the end of the quarter, our outstanding debt balance was approximately $1.6 billion, including approximately $650 million which was drawn on our revolver to fund inter-Company payments at the end of the year.

Including this debt, financing activities were approximately $1.6 billion worth of cash during the quarter. During the fourth quarter, operating activities generated approximately $324 million of cash.

Investing activities were a use of cash of $2.53 billion. This included $2.68 billion for acquisitions, and capital expenditures of approximately $75 million for the quarter. Capital expenditures for the full year were approximately $213 million.

Let me now provide some color on our business and operating metrics for the quarter, and for the rest of the year. During the quarter, we added approximately 11,800 employees, including approximately 3,770 associates from the acquisition of TriZetto, and we ended the quarter with approximately 211,500 employees globally. Approximately 198,000 of our employees were service delivery staff.

Excluding the TriZetto associates, 33% of our new hires were direct college hires, while 67% were lateral hires of experienced professionals. Annualized attrition of 14.5% during the quarter, including BPO and trainees, improved 110 basis points from Q3 of this year. Attrition levels are something that we continue to monitor very closely, and we are pleased by the sequential decline in this metric.

Utilization declined on a sequential basis as we on-boarded our new hires. Offshore utilization was approximately 69%. Offshore utilization, excluding recent college graduates who are in our training program, was approximately 76%. And on-site utilization was approximately 92% during the quarter.

As we spoke about last quarter, there have been significant fluctuations in global exchange rates this year. For example, as of February 3, the Euro had depreciated roughly 18% against the US dollar, versus where it was a year ago. The guidance that we provide is based on the exchange rates at the time at which we are providing the guidance, and does not forecast for potential currency fluctuations over the course of the year.

Based on current exchange rates versus the US dollar, our guidance includes a 2% headwind to 2015 year-over-year growth. With that in mind, for the full year 2015 we expect revenue to be at least $12.21 billion, which represents growth of at least 19%. For the first quarter of 2015, we expect to deliver revenue of at least $2.88 billion.

During the first quarter and for the full year, we expect to operate within our target non-GAAP operating margin range of 19% to 20%. For the first quarter, we expect to deliver non-GAAP EPS of at least $0.69.

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 612.9 million shares, and a tax rate of approximately 25.6%.

We expect to deliver non-GAAP EPS of at least $2.91 for the full year. This guidance anticipates a full year share count of approximately 612.9 million shares, and a tax rate of approximately 26.4%.

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

(Operator Instructions)

Thank you. Your first question comes from the line of Darrin Peller of Barclays. Please proceed with your question.

Nice end to the year. Just wanted to start off first with your outlook for the 2015 year. You talked about an organic growth rate that's similar to 2014 levels, which were nearly roughly 14%, 15% now. I guess 15% is what you called out.

The first question is, just touching on the dynamics of the $80 million run rate from the last quarter, seemed a little higher than we would have thought from -- really just December and a little bit of November from TriZetto. Can you talk a little about what you're actually including in your 2015 outlook for that?

Given Health Net's not closed yet is that actually included in your guidance, and maybe talk a little about the underlying healthcare drivers beyond TriZetto? Looks like they have accelerated pretty nicely in the fourth quarter.

Darrin, this Karen, I'll start with the first part about the guidance and I'll let Frank and Gordon talk a little more about the industry side of this. For TriZetto, keep in mind that obviously, their primary revenue is software. Q4 tends to be very, very strong for them. It is by far their strongest quarter of the year.

I think when we talked about the acquisition previously, we mentioned that they were about a $720 million run rate, which is essentially where they landed for 2014. But a lot of that revenue is back-ended. So think about them as give or take about a $720 million Company growing mid single digits, has been historically their growth rate, and that would let you back into what our guidance is.

In terms of Health Net, I'll let Frank talk a little bit about the actual contract and what's happening there, but in terms of guidance, as we had talked about previously, we expect that we will get regulatory clearance by about the middle of the year, and so we do have baked into our full-year guidance what the increase in the Health Net revenue would be from that point forward.

Just to add to that, we're well into the process of regulatory approvals. At this point, our expectation is that things would be in line with the timing that we had expected mid this year to be able to go live.

And I'll just add to that, Darrin. Look, it's Frank. At a big picture level, if you recall the strategic rational behind the TriZetto acquisition, was premised on the fact that the healthcare landscape is undergoing very strong, significant structural shifts, due to not just reform law but associated cost pressure, shifting responsibilities between payers and providers, and we think all of these things together create great growth opportunity for us.

I think you saw some of that in the fourth quarter. I was very encouraged by the level of activity and dialogue that we saw in Q4 around the combined Cognizant-TriZetto proposition with interest from clients, and clients talking to us about the combined opportunities. So I think a great start to the combined relationship, and I expect to see increased momentum as we go into 2015.

Thank you. Our next question comes from the line of Edward Caso with Wells Fargo. Please go ahead with your question.

Congrats on the quarter. I was more curious about hiring and training as the whole digital phenomenon takes off here. As your peers are facing the same opportunity as well, so are you hiring people with the skills? Have you developed new training programs? Is this an added burden, or is this just a different kind of training? Thanks.

Ed, its Frank. I think it's a little bit of both. When you look at the digital opportunity from a skills standpoint, there are, I would say, two tracks in a sense. You've got a set of foundational technologies that you need to deploy for clients, and building out some foundational technology skills, I would say, follows a similar process to what Cognizant has historically done when it comes to building out new technology capability areas.

So we have great partnerships and alliances with technology providers, very deep partnerships. We've got Cognizant Academy that recruits, trains, cross-trains, cross-skills our teams on foundational technologies.

But equally importantly, what we find in the digital world is that it's not just about technology. To really make digital come alive, you have to bring together these cross-functional, multi-functional teams that include consultants, technologists, data scientists, designers, and of course folks who understand the client and the client context.

And the skills like designers and data scientists are skills that we are both building organically internally, but also recruiting heavily for in the marketplace. And also as you've seen from some of the acquisitions that we did in 2014, we're also looking at inorganic ways to grow those capabilities. And I think you'll continue to see us pushing forward on all those fronts that I just mentioned as we go into 2015, and we continue to build out the digital capabilities at Cognizant.

Ed, one thing to add to that. As Cognizant's brand awareness continues to strengthen, the quality and the breadth of people that we're attracting is at an all-time high. We're able to attract the technologists, the designers. People recognize our brand, and they see we are clearly positioned as a leader in the space. We are really quite pleased with our recruiting capability right now, as well as we've always been terrific at training capability.

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

Thanks. Let me add my congratulations on the year as well as good guidance. I guess two questions. One was the timing of TriZetto synergies. Just wanted to clarify, 2015 guidance, is there anything there?

Is it reasonable to assume that the mid single digit growth rate can accelerate to maybe a low double type number over the next 12 to 18 months? And then secondly, on your operating margins, the last time you were below 20% was, I think, 2007. My question was if you include TriZetto, ramping Health Net, the investments you're making in digital and automation, is this the year you get down to the 19%, 20% range.

It's Gordon. A couple things. As we said in our prepared remarks, we remain quite confident of achieving our $1.5 billion of revenue synergies over the next five years. As we said, when we did the acquisition, that is back-end loaded, because the biggest piece of that comes from selling the integrated deals and obviously there's a long lead time on that. But also, as we said, we're actually seeing quite a bit of interest in that, so the pipeline is building.

Going forward, you will not see us break out TriZetto revenue, because what's TriZetto, what's Cognizant, very quickly becomes blurred, particularly when you think about services revenue and BPO revenue. So we are managing as part of our healthcare practice going forward. Obviously we want to break it out as people understood what organic growth was for 2015.

Revenue synergies for 2015, as we said when we did the deal, are certainly more modest than they'll in future years. It will be heavily weighted towards services work, which even prior to the acquisition, we had the leading practice. And obviously that's further strengthened now, and we certainly feel good about the pipeline there.

Thank you.

Sorry, on the operating margins, our target remains 19% to 20%. We have bounced above 20% a little bit. Each time we did that, we did reaffirm that we do not want to be above 20%, so certainly our expectation is we would be in the 19% to 20% range for 2015, and our guidance assumes that, and I would certainly encourage people in their models to assume we're in the 19% to 20% range.

Thank you. The next question comes from the line of Tien-tsin Huang with JPMorgan. Please go ahead with your questions.

Good results here. Just wanted to ask on the top 5, top 10 client growth, I think the composition of those clients changed, excluding TriZetto. Also, maybe I missed it. Just the outlook for technology versus outsourcing revenue for the year? Thank you.

Sure. So top five for the quarter was 11.6%. And top 10 was 20.1%, Tien-tsin. So it's coming down as a percentage of revenue, as you would expect it to. No material changes this quarter in terms of the customers that make that up.

So obviously we did have some overlap with TriZetto in terms of customers, but their revenue per customer is obviously a little bit less than ours. So no material change there.

We did not provide specific guidance around the outlook for consulting and technology services versus outsourcing, but I think as we had said previously, with the ramp-up of some of the new contracts we signed this year, including Health Net and then the big insurance contract and the [rollover] contract and others that we talked about earlier in the year, we would expect outsourcing revenue to recover a little bit, as we go into 2015.

Thank you. Our next question comes from the line of Lisa Ellis with Bernstein. Please proceed with your question.

I had a question around the TriZetto road map. Can you provide -- maybe this is for Gordon -- a bit more color around what -- how you're thinking about the product road map for the underlying TriZetto product, and how you're thinking about incorporating, owning and managing a software platform into your overall business operations?

Lisa, it's Frank. Let me address that. As we said when we did the TriZetto acquisition, the TriZetto business that we acquired has become part of the Cognizant healthcare business, but continues to operate as a relatively standalone unit within the healthcare business. Now, obviously we're focused on the synergy opportunities from an execution standpoint, and as Gordon said, those synergy opportunities in the short run are around the services business and the BPO business that we can generate together.

But the core product, the TriZetto product set, that capability remains a separate unit, run by the management team that came to us when we did the TriZetto acquisition, and they continue to execute against the product road map that they had laid out for their customers, and now for our customers, before the acquisition. So we are keeping the platform very much as a standalone unit. We will continue to invest in it as we had -- as the plan had been in the past.

If anything, we feel like we might be able to accelerate some aspects of the product roadmap because of our development capability and so on and so forth. But we clearly recognize that the rhythm of a software business is different from the rhythm of a services business, and so we're keeping it as a standalone unit within the bigger healthcare business unit, so that we protect that culture, and we continue to create the necessary focus, I would say, around the software product business.

Thank you. The next question comes from the line of Sara Gubins with Bank of America. Please go ahead with your question.

As you're thinking about 2015, what are your expecting client budgets to be doing? There's been some discussion from competitors that US bank IT budgets are down in 2015, because of regulatory costs. I'm wondering if you're seeing that?

Hey, it's Frank. Let me jump in, and then Gordon can add to it. I don't think we're seeing budgets down overall. We are actually seeing sort of flat to modestly up budgets. I think Gartner predicted, or Gartner's projection from January of this year was 2.4%, 2.5% increase in budgets. That's consistent with what we're seeing.

Clearly, there's a shift going on within budgets. I think that's really the more important trend to focus on. What we are seeing is that this dual mandate that we've been speaking about for so long is really playing out in budgets, where because overall budgets are call it flat to modestly up, the pressure that it creates for organizations is to really get more done with those essentially same budget dollars.

And so what that means is that on one side, clients continue to look for ways to drive greater degrees of efficiency and effectiveness, what we call the run better side of the equation, so that they can invest those dollars in deploying new digital and other capabilities, that's the run different side of the equation. Clearly, in financial services, regulatory compliance initiatives are consuming a significant amount of our clients' budgets.

I think, this is anecdotal, I would say that the most intense period of that was probably last year. I think as we go into 2015, when I look at our financial services institutions, it's not to say that the regulatory compliance spend goes away but I think it's -- I would I say it's become more stable. I don't see it increasing as a percent of overall budgets.

So that started to create a degree of stability within our financial services clients, where I start to see more focus and attention being turned to digital initiatives and initiatives that I consider to be ones that will drive competitiveness and top line growth for financial services. So I actually am seeing a positive shift in financial services, more towards innovation and growth, as regulatory compliance stabilizes and becomes a better and well -- a more understood level of spending. I don't know, Gordon, if there's anything you want to add to that?

I think you covered that well. The only thing I might add, in Europe, obviously, the economy's a little softer. We're seeing that actually serve as a catalyst for people to shift their spending and look at services such as Cognizant to help reduce their cost of running the business, so they can still invest in innovation.

Thank you. The next question comes from the line of Keith Bachman with Bank of Montreal. Please proceed with your question.

Good morning, team. I had a question either for Karen or Gordon on operating margins. A, you had two quarters of non-GAAP operating margins in the 19.5% range, call it. How much did TriZetto impact December quarter operating margins?

As a follow-on, we don't yet have the 10-Q yet for the December quarter. At least in the September quarter, industry segment level operating dollars of profit actually declined year-over-year. Was hoping you could flush out why is that, and will that continue?

And as my follow-on question, Karen, if you could talk about some of the puts and takes in the CY15 operating margin guidance, and specifically including how much is TriZetto and/or FX impacting the guidance you provided. Thank you.

Sure, so let me start with TriZetto, Keith. So TriZetto's operating margin is roughly in line with Cognizant's. In terms of the impact on overall margin percent, it's nominal. It's really just about the revenue growth there. That's obviously on a non-GAAP basis.

On a GAAP basis, because of all the acquisition amortization, obviously that would be dilutive. On a non-GAAP basis, think about it as being roughly in line with Company average margin going forward. FX has a little bit of an impact on margin, but fairly nominal. It's mainly a revenue issue with the FX headwinds that we had both in Q4, and that we're forecasting as we move into 2015.

In terms of the segment margin, obviously we have done a lot of hiring in the last six months and that obviously puts pressure on margin until those folks become fully -- full utilization ticked down both in Q3 and Q4. We would expect for that to stabilize in 2015, as we've talked about, utilization will go up and down a little bit based on hiring and based on growth opportunities that we see in the Company. But we would expect utilization to stabilize, and margins to stabilize accordingly with that.

So then as we move into 2015, really nothing unusual. It really is about stabilizing utilization, integrating TriZetto. As we said, that generally runs in line with Company average and continuing to ensure that we're driving for industry leading growth.

Thank you. Our next question comes from the line of Jim Schneider with Goldman Sachs. Please go ahead with your question.

Two, if I may. First, on the guidance you're providing, excluding the effect of TriZetto and FX for 2015, as you look at 2015 versus where you were at the same point last year, how have you adjusted your guidance for the year underlying that, to be either more conservative, the same, or potentially more optimistic than you were last year?

And then secondly, with respect to offshore cash, there's been some talk about potential legislation there to allow low rate repatriation of cash. If that were to go through, how would you think about your cash strategy differently?

Sure, this is Gordon. Let me start with the question on guidance and essentially how conservative we have been. Clearly, we have built meaningful risk adjustments into our guidance, compared to the targets that our field organization has.

Certainly, we do not want to end up in a situation similar to last year. So we think we have built in the appropriate risk adjustments, taking into account the experience that we had last year.

And then in terms of cash repatriation, obviously we're supportive of anything that the US government does, to help multinational companies be successful, and to ensure that we can make the right investments around the world. So if something happens, obviously, we will take the appropriate steps and actions, but we'll wait and see what happens at this point.

I would remind you, for the cash that we have in India, even with a tax holiday or a reduced tax for repatriation in the US, there still is a tax for taking the cash out of India.

Thank you. The next question comes from the line of David Togut with Evercore. Please go ahead with your question.

As you look across each of your three horizons of services, could you quantify unit price changes year-over-year, 2015 versus 2014? And then for the employees who are working in each of those three horizons, what do the unit changes year-over-year in wages look like against the price changes? Thanks.

Sure. So pricing over the past couple quarters has been stable. I think that's a reasonable assumption, going forward. You may see some divergence, certainly pricing in digital will be higher than in traditional apps maintenance, but the people cost more there as well. When you net it all out, I think a reasonably stable price environment is the way to think about it.

In terms of wage inflation, we do our wage increases later in the year, and certainly we'll make sure that we're competitive with what others do. But I would expect, given the strong supply, that wage increases will be relatively modest compared to prior year. In the end, we will certainly match what others do. But I would expect others to be fairly disciplined in their wage increases.

Thank you. Next question's from the line of Bryan Keane with Deutsche Bank. Please go ahead with your question.

Just want to get an update on the large deal pipeline. Any other chunkier, larger deals that you're working on, that could come in throughout the year? And then just secondly, just the outlook in Europe, do you expect a pick-up in demand in Europe? Thanks.

Sure. So large deal pipeline is healthy. You're absolutely right, it's chunky. You don't have one every month. But we're certainly working on a number of large deals. When they'll hit, you never know with larger deals.

But the good news is, we are clearly competitive in the large integrated deals that include BPS, that include infrastructure, that include core IT. So we've achieved critical mass in infrastructure and business process services, and that's very important. We are quite competitive in the larger deals.

In terms of Europe, pipeline's healthy. Obviously, the economy is a bit lumpy over there. What we're seeing, certainly in some of the more traditional outsourcing, it serves as a catalyst for people to move forward, because they have to reduce their run cost. Little too early to know exactly what the impact will be on innovation spend.

Certainly there's lots of interest. We'll see what sort of projects kick off. But overall, we continue to invest heavily in Europe, because we think the window for outsourcing is very active right now.

Thank you. The next question is from the line of Joseph Foresi with Janney. Please go ahead with your question.

You had mentioned before that I think you were looking for at least $200 million in incremental revenues from large deal wins next year, being this year, 2015. Is that still the case? And can you wrap some numbers for us around SMAC as a percentage of revenue, growth rates and margins? Thank you.

Sure. So on the large deals, that $200 million number was related to the three large deals that we talked about on the prior earnings call. I think that is still an accurate assumption, assuming everything continues on track the way it is currently.

In terms of SMAC, we don't -- SMAC has been folded into the broader digital initiatives, and within digital, what we're seeing is it crosses all of our businesses, all of our accounts. So it becomes very difficult to say it's in a specific amount, because it touches everything. So we don't have any further update on that, other than to say clearly there's healthy SMAC demand within digital, and digital we're seeing permeate across all three horizons, currently.

Thank you. The next question is from the line of Brian Essex with Morgan Stanley. Please go ahead with your question.

I was wondering if we could dig in a little bit on TriZetto. I think when you announced the deal we talked about the potential opportunity for some halo deals around it, using kind of Health Net as an example of a referenceable deal. I wonder if you could talk a little about conversations that you're having with customers in the pipeline, and are there any potential Health Net-like wins in the pipeline?

And understand that those sales cycles are a little bit longer. How near term might some of those deals be, if there are some in the pipeline?

Let me take that. Let me start by saying that I think that, and as I said in my prepared comments, one of the trends that I'm quite excited about is this notion of clients looking to us in various forms to create these large integrated deals that include apps, infrastructure, and business process services.

And sometimes those, like in the case of Health Net, those are relatively standalone. In other cases, we see migrating potentially to a shared industry utility type of model, which I think TriZetto and Health Net will enable going forward. After the announcement of the TriZetto acquisition, I would say that we've seen an increase in conversations with clients about the potential of those kinds of deals.

I would characterize the pipeline of those deals as relatively early stage at this point, but certainly an active set of conversations going on right now with prospects around what those kinds of deal structures might look like. I would remind you that the Health Net deal, the sales cycle was probably in the order of -- Health Net has been a Cognizant client for 10 years, close to 10 years, and the sales cycle on this particular transaction was close to three years.

My hope is that when we look at the TriZetto opportunity, that we're not looking at three-year sales cycles, but I would still set the expectations that it's 18 to 20 months before we start to see those kinds of transactions. These are large, complicated deals that involve a lot of structuring, and a lot of groundwork with clients.

But I think all of the elements are there. I feel very good about how we're positioned to do those deals. And I think that the Health Net transaction serves as somewhat of a beacon that others will emulate.

Operator, we have time for one more call, one more question.

That question is coming from the line of Steven Milunovich with UBS.

A quick question, Karen. Could you go over the discussion of incentive comp again and the impact?

Sure. So in Q4, we adjusted down our incentive comp accrual. As you know, that's obviously variable compensation and we tie that to the performance of the business, which is both based on revenue and margin. We did adjust that down in Q4 to offset the margin impact of the strong hiring and some of the other investments we were making in the quarter, and that had a 2 point impact on the quarter.

Very good. I think with that, we will wrap up the call. I want to just thank everybody for joining us today, and for your questions, and I look forward to speaking with you again next quarter. Thanks for joining us.

Thank you. This concludes today's Cognizant Technology Solutions fourth-quarter 2014 earnings conference call. You may now disconnect.