高知特 (CTSH) 2015 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions first-quarter 2015 earnings conference call.

(Operator Instructions)

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

Thank you, Jessie, and good morning, everyone.

By now you should have received a copy of the earnings Release for the Company's first-quarter 2015 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. Good morning, everyone. Thanks for joining us today.

We had another great quarter and a solid start to 2015. Our first-quarter revenues were $2.91 billion. This represented a sequential increase of 6.2% after a negative currency impact of 1.1%.

Our sequential growth was well ahead of our previous guidance and was driven by strong organic growth in our core business, coupled with solid in line performance in the TriZetto business. Non-GAAP operating margin was 19.8%, at the higher end of our target range of 19% to 20%.

Based on our current visibility and strong sales pipeline, we're pleased to increase our full-year revenue guidance to at least $12.24 billion and non-GAAP EPS guidance to $2.93, which reflects our strong over-performance during quarter one. Our results this quarter and our guidance for the full year are a clear reflection that we're well positioned to serve the needs of our clients.

As I've said in the past, we are in the midst of a once in a decade shift in the technology landscape, which is creating significant opportunities for services firms that have the right portfolio. Our results demonstrate that our strategy, investments, and solutions are strongly aligned with the evolving market demand.

Today more than ever, our clients are grappling with the dual mandate, and are run better, run different value proposition is resonating well with them. On one side of the dual mandate, the shift towards digital is front and center for our clients. Our digital offerings are seeing strong traction in the market.

In addition, as clients deploy digital technologies, it's creating demand for our traditional services in areas such as legacy modernization and integration. Gordon will give you examples of some of our leading edge digital work in a few moments.

On the other side of the dual mandate, clients continue to drive down costs in their core operations. We see this manifested in two ways. First, clients are adopting our traditional service offerings more broadly and driving demand for integrated multi-service deals, and second, we're seeing clients exploring new frontiers of cost and operating efficiency through new, as a service utility models.

As we saw this scenario unfold over the past few years, we embedded in the Company a systematic capability in the form of our three-horizon model to rapidly identify changing market demands and capitalize on them. As a result, we now have a solid comprehensive portfolio of services for the current needs of our clients, as well as a robust mechanism to ensure that we have the organizational agility to make the right investments to remain relevant to clients going forward.

On the digital front, our differentiated approach that we call digital works has seen great traction, and recent digital acquisitions like Cadient, Odecee, and Itaas have helped to round out our digital services and geographic footprint. Beyond digital, we have a number of other high growth businesses. Our investment over the past several years in business process, infrastructure, and consulting services has paid off, and these practices continue to be solid drivers of growth.

Each of these practices has the potential to be a multi-billion dollar revenue source for the Company. This quarter, I'm particularly pleased with the growth of infrastructure services, which crossed the $1 billion annual run rate mark. And finally, I'm very excited about our portfolio of as a service utility offerings that we've built through acquisitions like TriZetto and SourceNet, client transactions like Health Net, and our own organic efforts with clients such as TranCelerate.

Let me spend the next few minutes providing more detail around the key trends that we see shaping demand. I'll then turn it over to Gordon to provide deeper insights on what we see across our business segments and to Karen for details on the financials.

The first key trend shaping demand is a shift towards digital, which is a priority for our clients because it's a priority for their customers. Having worked with clients on hundreds of digital projects, it's very clear to us that winning in the new digital era requires a new engagement model.

Clients need a partner who can bring new capabilities in design, data science, and digital technology, in addition to a deep understanding of a client's business, operating model, and technology landscape. Clients recognize that they often do not have in-house capabilities in all these areas and are looking to deepen relationships with partners who have invested for the digital landscape. Furthermore, what's interesting and important to note is that the shift to a digital enterprise is in turn driving demand for our traditional services.

No digital transformation is complete without integration with the enterprise's legacy systems and business processes. Existing IP infrastructure, systems and applications, and business processes often need to be retooled to accommodate the explosion of users, data, devises, and sensors that often accompany digital deployments. Clients continue to look for new ways to drive down the cost of operations in their core business in order to remain competitive and to fund their digital transformation.

As I mentioned, we're seeing clients broadening and deepening their use of our services, often through multi-service solutions. In these situations, our broad portfolio of services is critical to provide a comprehensive solution to a client. We're also pushing beyond traditional delivery models in creating as a service utility -- industry utilities that provide clients a low-cost, high-efficiency shared capability and variable cost structure.

By bringing together applications, cloud, and business process services to create industry utilities, we're helping clients by distributing high fixed costs across multiple customers in an industry. These are clearly exciting times in our industry, and we believe that Cognizant is well positioned to be the partner clients will turn to in transforming their businesses.

With that, I'll turn it over to Gordon and I'll be back to take your questions. Gordon?

Good morning, Francisco, and thank you.

Before I provide more detail on our industries, services, and geographic segments, let me offer some color on how the shift to a digital enterprise is driving greater demand for our traditional services, and is, in many cases changing how we deliver these services. Clients are reconsidering how they manage their traditional investments in technology and business processes as they are keen to drive higher levels of efficiencies and fund their transition to digital enterprises. Often this is manifested in integrated multi-service line deals.

As Francisco said, we're seeing a stepped-up demand for new business models such as a service utility or platform based models, which help clients create variable cost structures, enhance efficiency, and drive agility and time to market. Let me explain this a bit further with some recent examples. Integrated multi-service solutions typically include a combination of consulting, IT services, BPO services, and infrastructure services to drive higher levels of efficiency, agility, and innovation.

We recently entered into a strategic partnership with CNO Financial Group to transform its IT capabilities for its insurance subsidiaries, enhancing agent and customer experience. These subsidiaries include well known brands like Banker's Life, Colonial Penn, and Washington National. This deal encompasses multiple IT functions, spanning applications maintenance, application development, testing, and select IT infrastructure services.

In addition to delivering annual expense savings to CNO, this partnership will innovatively help CNO Financial to better compete in the underserved middle market. Another example is how we're combining our finance and accounting automation and enterprise analytic capabilities for Tryg Insurance, a leading insurer in the Nordics, to drive end-to-end accountability for data compliance, as well as financial reporting, thus improving risk assessments and governance.

Lastly, as Francisco mentioned, we are increasingly bringing together applications, infrastructure, and business processes to create industry utilities benefiting multiple customers in an industry. This approach of helping clients from setting strategy to transforming business operations to managing technology needs is helping us establish even greater mind share and market leadership.

Let me now move to a detailed commentary of our individual industry practices. Our banking and financial services segment grew 3.6% sequentially and 13.4% year over year, driven primarily by continued strong growth in our insurance practice.

Within banking, clients remain focused on cost optimization and vendor consolidation, regulatory compliance, and cyber security. In addition, there's an increased focus on newer technologies in digital and automation, particularly in areas to improve customer experience and drive digital customer self-service.

An example of our work in digital is the program for children investments in India. We are helping this client to digitally transform its entire video group finance business by reengineering business processes, digitizing work flows, and developing multi-channel applications to drive realtime decision-making, improve customer experience, and enhance operational efficiencies. And for a leading bank in the US, we're helping build the branch of the future by providing a seamless multi-channel integration and in-lobby digital applications, so it can provide customers with a compelling realtime personalized experience.

Our healthcare segment, which consists primarily of our payer, pharmaceutical, biotech, and medical device clients, grew 13.8% sequentially and 42.7% year over year, including the impact of TriZetto. Our payer clients continue to take a cautious approach to spending. Cost optimization is still the key driver, while clients are also looking to leverage analytics to drive profitability and improve customer retention.

The payer sector is undergoing fundamental changes driven by a changing regulatory environment, increasing focus on medical costs, and the consumerization of healthcare. We believe these changes create longer-term opportunities that we're well positioned to capture. The integration of TriZetto is on track and our combined offerings are clearly resonating with clients. We've moved aggressively to increase staffing. We've added 500 consultants who are either already deployed or trained and ready to deploy to assist in driving revenue synergies.

In addition, we've added 300 people to our global delivery centers to accelerate product development on TriZetto platforms. This action is already paying off. In the first quarter alone, we were selected for synergy deals with a total contract value of $200 million with a number of additional deals in our pipeline. We are in active discussions with a number of payers about integrated solutions leveraging TriZetto's platforms and our service capabilities. As you can see, we are well on our way to generating the $1.5 billion of revenue synergies that we spoke about at the time of acquisition.

Moving on to our pharmaceutical business, we continue to see a trend towards multi-service deals across infrastructure and IT services, leveraging cloud technologies and platforms. Additionally, we're seeing steady demand driven by vendor consolidation and cost optimization across many existing and new clients. We're quite pleased with the traction we're seeing from our acquisition of Cadient, where we've added nine new logos since closing the acquisition late last year.

Recently, Otsuko Pharmaceutical, a US pharmaceutical research and development company, publicly highlighted the work Cadient delivered in helping it develop and deploy a highly innovative approach to communicating with clinical trial investigators using iPads and large format touch screen technology. Additionally, we're proud that Cadient recently won a prestigious life sciences industry marketing award that is further validation of the value we're providing to clients.

Our retail and manufacturing segment was up 2.7% sequentially and 7.2% year over year. We are seeing early signs of improved demand following a soft 2014, particularly in areas of modernizing supply chains, as well as digital and eCommerce engagements. For a large retailer in Southeast Asia, we're implementing a digital eCommerce platform to deliver a seamless omnichannel shopping experience for their customers. This will allow more efficient retail management and a better understanding of customer preferences and purchasing history.

And for many other retailers around the world, we're helping them exceed customer expectations with the latest digital technologies. For example, we're partnering with a major US clothing manufacturer to redesign their stores. We're helping a prominent retailer in Asia Pacific to provide a seamless multi-channel shopping experience. And we're supporting a leading US discount retailer in using the cloud to deliver superior services at its 8,000 stores.

Our other segment, which includes high-tech, communications, and information, media, and entertainment clients, was up 2.6% sequentially and 19% year over year, driven primarily by improved discretionary spending at our high-tech clients. Partnering with Google, we're helping a major workforce solutions and servicing company reengineer how they approach, search, and match talent against demand, creating a new paradigm around finding the right candidate. As transactions increasingly become video enabled, we are seeing strong demand for services provided through our Itaas acquisition with our communications and media and entertainment clients, as well as a growing demand among clients in other industries such as banking and retail.

Let me now turn to our Horizon 2 service lines. We continue to be pleased with the market traction we're realizing here. Our business process services, or BPS practice, saw a continued success 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 in bringing operational efficiencies to our clients. Increasingly, this is delivered through solutions leveraging technology and robotic automation. Through the acquisition of TriZetto, we gained a strong robotic automation platform with artificial intelligence and machine learning capability.

This platform is now part of our suite of automation platforms within our robotics process automation practice. This practice focuses on automating both technology and business processes where physical labor is replaced with digital labor. The business outcomes include faster processing times with fewer errors, virtually unlimited scalability, and lower cost of ownership, along with the ability to make more timely business decisions through automation enabled analytics.

Let me give you an example. We used this platform to help a major US healthcare payer in their claims processing organization. The client was initially expecting a six-month project to clear claims backlogs, primarily by using additional people for processing. We were able to implement a robotic process automation solution in six weeks, and clear the backlog in just one additional week.

Cognizant infrastructure services had another strong quarter. Clients are looking for solutions which drive simplification and predictable operations to accelerate their IT transformation. Increasingly, this is being delivered through multi-service solutions, often combining applications and infrastructure as well as the use of newer technologies such as our hybrid, cloud, and mobility solutions.

Cognizant was recently named a top IT infrastructure transformation consulting provider by Kennedy Consulting Research and Advisory. The report highlighted our strong capabilities and IT infrastructure transformation strategy and road map development, advisory services across data center and storage transformation, workplace transformation, business continuity, and disaster recovery, and IT infrastructure security. Cognizant Business Consulting, or CBC, continues to take a lead role in many of our transformation deals, helping architect the deals and drive change management in our clients' businesses.

As we mentioned last quarter, over 60% of CBC's pipeline has the digital component. For example, we're helping a major US hotel and casino operator utilize big data and analytics to speed up and improve decision-making across all aspects of their business. From a geographic standpoint, North America grew 7.4% sequentially and 24.8% year over year. Our European operations recorded strong growth when viewed from a local currency perspective.

As you know, the European currencies have declined significantly again the US dollar during the first quarter. Revenue from Europe was up 2/10 of 1% compared to the fourth quarter after a 4.8% negative currency impact. Continental Europe declined 2.9% sequentially after a 6.3% negative currency impact. We expect solid growth in the continent over the coming years as we increasingly benefit from the structural shift towards larger, multi-year outsourcing programs.

Finally, we saw good traction in the rest of the world, which was up 7.6% sequentially after 2.8% negative currency impact. Growth was driven primarily by strength in key markets, such as India and the Middle East. We're pleased with the strength of our performance across industries, service lines, and the geographies we serve.

With that, let me have Karen provide more color on the financial details of this strong performance.

Thank you, Gordon, and good morning, everyone.

First-quarter revenue of $2.91 billion represented growth of 6.2% sequentially and 20.2% year over year. On a sequential basis, we had a $30 million negative currency headwind, which impacted revenue growth by 110 basis points. Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition related expenses, was 19.8%, within our target range of 19% to 20%.

Non-GAAP EPS of $0.71 exceeded guidance by two pennies. Consulting and technology services and outsourcing services represented 56% and 44% of revenue respectfully for the quarter. Consulting and technology services increased 10% sequentially and 32% year over year. Outsourcing services were up 1% sequentially, and grew 8% from Q1 a year ago.

During the first quarter, 36% of our revenue came from fixed price contracts, and as expected, overall pricing was stable. We added seven strategic customers in the quarter, defined as clients that have the potential to generate at least $5 million to $50 million or more in annual revenue bringing our total number of strategic clients to 278.

During the first quarter, we repurchased 400,000 shares for a total cost of approximately $25 million. To date, we have repurchased approximately 35.6 million shares for a total cost of approximately $1.2 billion under our share repurchase authorization of $2 billion and have approximately $789 million remaining unutilized.

Our fully diluted share count increased slightly to 613.9 million shares during the quarter. Total receivables were $2.1 billion at the end of the quarter, and we finished the quarter with a DSO, including unbilled receivables, of 73 days. The unbilled portion of our receivables balance was approximately $388 million, up from $325 million at the end of Q4. We billed approximately 51% of the Q1 unbilled balance in April. The increase in unbilled receivables was primarily due to the timing of certain milestone deliverables.

Our balance sheet remains very healthy. We finished the quarter with approximately $3.35 billion of cash and short-term investments, down by approximately $425 million in the quarter ending December 31, and down by approximately $515 million from the year-ago period. Our outstanding debt balance was approximately $1.1 billion at the end of the quarter, including approximately $100 million outstanding on our revolver.

Financing activities were approximately a $557 million use of cash during the quarter, with almost all of this going to reduce borrowings under our revolving credit facility. Operating activities generated approximately $189 million, and capital expenditures were approximately $58 million during the quarter.

Let me now provide some color on our business and operating metrics. During the quarter, we added approximately 6,200 employees, and we ended the quarter with approximately 217, 700 employees globally. Approximately 204,000 of our employees are service delivery staff. Annualized attrition of 14% during the quarter, including BPO and trainees, improved by 10 basis points year over year.

Utilization was essentially flat on a sequential basis. Offshore utilization was approximately 70%. 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.

I would now like to comment on our outlook for Q2 and for the rest of the year. As Frank mentioned, we are increasing our full-year revenue and our non-GAAP EPS guidance to reflect the strong overperformance during quarter one. Therefore, we are revising our full-year guidance to at least $12.24 billion, representing revenue growth of at least 19.3% over 2014. Our guidance is based on the current exchange rates at the time at which we are providing guidance, and does not include additional potential currency fluctuations over the course of the year.

For the second quarter of 2015, we expect to deliver revenue of at least $3.01 billion. During the second quarter and for the full year, we expect to operate within our target non-GAAP operating margin range of 19% to 20%. For Q2, we expect to deliver non-GAAP EPS of at least $0.72. Non-GAAP EPS 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 613.5 million shares and a tax rate of approximately 26.6%. We are raising our full year non-GAAP EPS guidance by two pennies to at least $2.93. This guidance anticipates a share count of approximately 613 million shares and a tax rate of approximately 26.4%.

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

Thank you.

(Operator Instructions)

Our first question is coming from the line of Tien-tsin Huang with JPMorgan.

Hi, thank you. Great results.

I just want to ask I guess your results here were quite strong relative to peers. How would you explain difference versus what we hear from your peers? Any commentary would be great, thank you.

Hi, Tien-tsin, it's Frank. Look, we were pleased with our Q1 results. I think though it's just a manifestation of what we've been saying to you for some time now. I think we're doing well because we're winning in digital. We've got a great portfolio of services in the digital space.

We've got this unique approach to helping clients with digital transformation, what we call Digital Works. It's a fully integrated company-wide approach to helping clients with digital transformation. And on top of that, as the trend towards digital picks up momentum, it's driving demand for our core traditional services, which is in turn fueling growth again for us.

And it's very important that we are able, and I think a driver of demand for us, that we are able to offer that to the client this end-to-end ability to do digital transformation and then pick up the demand on the other side with the traditional legacy modernization, so I think it's strong performance in digital. We feel like we've got a great position in the industry that we serve. We've been investing for a long time, as you know, in things like consulting and deep domain expertise, so you put all of that together and we feel like we're very strongly positioned in the marketplace.

Great, thank you.

Thank you. Our next question is coming from the line of Ashwin Shirvaikar with Citibank.

Hi. Congratulations on the good solid quarter. My question was on the cadence of 2Q versus 3Q. Normally these are your two really strong quarters. When do you expect the contribution from Health Net to begin, and Gordon you mentioned the TriZetto synergy. That's a great start but when do they actually start hitting revenues?

Sure. Hi, Ashwin. We continue to expect Health Net to be approved and go live in the mid year, so we would expect the benefits from that to start to kick in in the third quarter of this year. So things are right on track for Health Net. Ashwin, what was the second one you were asking about?

Yes, the second question was on TriZetto. You mentioned TriZetto synergies. When do they actually start hitting revenues?

Sure, so that ramps up over time. We've been awarded about $200 million worth of deals. Some of that is consulting work, which kicks in fairly quickly. Other that is more associated with implementations so that takes a bit longer.

Okay, thank you.

Thank you. Our next question is coming from the line of Darrin Peller with Barclays.

Thanks. Nice job in the quarter. I just wanted to jump in real quick on guidance. You raised by about the [beat] and it looks like things are going a little bit better than even expected for us on the synergy side with TriZetto. When we just talk about that for a moment.

Any element of conservatism in the guidance? in the past, you've said things like discretionary might come up more through the year, what you're waiting to see. So what kind of color can you give us on that?

What are you still waiting to see through the year before potentially illustrating guidance for even a better raise? And then in terms of synergies, are you seeing more than you thought or is it in line? Thanks a lot.

Sure. I think you hit it exactly right. Because the strength is coming from the discretionary side of the business in digital, it is a little bit tougher to predict that, so we are clearly still being conservative in our guidance and that's why we use the terminology of at least. So we let Q1 flow through and then we'll continue to watch at what level of strength do we have in digital going for the rest of the year. But we'd rather be conservative than get out ahead of ourselves.

Darrin, it's Frank. On the TriZetto synergies, I would say that we've been pleased with -- we always knew that there was a strong synergy case here. We told you that when we did the acquisition. I think we've been pleased with the momentum we've seen. It's been a little faster than we expected.

As Gordon mentioned in his prepared remarks, we've added 500 consultants to the business at this point already in what's a little over 90 days effectively. Not all of those folks are billing yet, but a large number are billing, and we expect that the rest will be billing relatively quickly, so that's already kicked in. That's showing results right away.

We also have a healthy pipeline and also deals that we've been awarded that are longer-term synergy deals. I think I would say we've done a lot in 90 days that's exceeded my expectations a little bit, and so I'm optimistic that the revenue synergies will start to manifest themselves in our results a little bit faster than we had originally expected.

That's great. Thanks.

Thank you. Our next question will come from the line of Bryan Keane with Deutsche Bank.

Hi. Just a clarification of the guidance. 1Q organic constant currency revenue growth sequentially ex-TriZetto; my math was about 4%. Q2 2015 guidance sequentially is about 3.4%, and then I know typically, 2Q sequentially grows faster than 1Q, but it doesn't appear to be the case there.

Just curious on your thoughts on that. And then secondly, outsourcing only increased 1% sequentially. A little surprised it didn't grow faster. Any help on that, too. Thanks so much.

So Brian, this is Karen. Your calculation of the 4% organic on a constant currency basis is right. That's about the right number for Q4 to Q1.

We did see strong growth obviously in the quarter, both on an organic as well as a consolidated basis. I think as Gordon just talked about, given the level of digital and discretionary spending that we're seeing in the portfolio right now, we've been prudent, we think, in our guidance for Q2, and for the rest of the year. And as you said, we've guided to about 3.4%.

Currency rates obviously have stabilized this past week. The first few weeks of April, obviously they were moving quite a bit, but based on where we are now, rates are generally back in line with where they were when we provided guidance back in February. But we think we've been prudent in our guidance for the quarter and for the full year. In regards to our question about outsourcing, I think, Frank, you wanted to comment on that.

Look, as we've said in the past, we've won a bunch of outsourcing programs. We expect them to ramp up in the coming quarters. We talked to you a quarter or two ago about these three large deals that will all be in the outsourcing space, including Health Net, and that will start to ramp up. But I think what's important here also is to understand the underlying trend of what's going on.

As we -- as clients go through this big investment cycle around digital and start to focus a lot of energy and attention on implementing new digital capabilities in their organizations, there's a natural shift a little bit away from doing what I consider to be the more discretionary aspects of maintenance work. So you're not going to invest substantially in supporting or enhancing rather an existing application if it's going to be replaced or supplanted by a new digital capability, and so you're going to see a little bit of that I would suspect as we go through this, which may manifest itself in a little bit more lumpiness in discretionary versus outsourcing in the coming quarters.

I think it's important to understand what's driving that. In the net, I view it as a very positive thing because it says to me that we're winning in digital, we're helping our clients transform their businesses. Clients may be investing a little bit less than that in maintaining or enhancing existing systems, and that's okay because we're picking it up on the digital side.

Okay, great results. Thanks for the help.

Thank you. Our next question is coming from the line of Sara Gubins with Banc of America Merrill Lynch.

Good morning, thank you. Could you talk about growth at your largest top 5 and top 10 customers in the quarter? Give us what percent they represent of revenue and what the tone has been there?

Sure. Sara, this is Karen. Good morning. So top five for the quarter represented 11.2%, and top 10 were 19% for the quarter, so down a little bit from where they were in Q4, which we would expect, obviously, as the business continues to move and expand. From a sequential basis, our top five grew 2% for the quarter and our top 10 grew just under 1% for the quarter, on a reported basis.

Great, thank you.

Our next question is coming from the line of Lisa Ellis with Bernstein.

Hi, good morning. Frank and Gordon, you talked a lot about the demand on the client side for more as a service models. Can you talk a bit about the pricing environment you're seeing there and the willingness of clients to adopt outcomes-based pricing?

Sure, so let's talk about clients' willingness to adopt. I think, put into three buckets: input-based pricing, output-based pricing, and outcome-based pricing. Clearly, clients are comfortable on the shift from input to output based, so moving to fixed price to managed services and so forth. What we're finding quite intriguing is, as clients are now starting to think about outcome-based pricing, we did this in the large healthcare deal that we announced where the client's going to pay per member per month regardless of what are the volumes involved in supporting those clients.

We think that is the way of the future and particularly these end-to-end solutions that we're talking about where we provide everything from the applications to the infrastructure to the business process services, so it's taking software as a service one step further and actually providing the transaction services around it. In the end, there will be a continuum.

Some people will still want on-premise custom applications and we'll continue to do that in our traditional business. Some clients will want a SaaS model. Clearly, TriZetto supports that. Some will want a full end-to-end solution. We'll have that through the Health Net platform, as well as the TriZetto platform. So we're feeling quite good about how the migration is happening across this spectrums of ways to engage.

Pricing on the end-to-end solutions and SaaS, obviously there's scale efficiencies there. So when you first start out with a new offering until you gain scale, even if your pricing is fine, there'll be some pressure on margin and that's normal. That's exactly the way that should work, where you're making that up front investment but then as you gain scale, we feel pretty good about it. So overall, as Karen mentioned, pricing is stable, which is in this environment, I think, is good.

Clients are focused far lesson on the rate card, much more on what is the cost of ownership. So if we can demonstrate best-in-class delivery, constantly lowering the cost of ownership through productivity through automation, clients are very happy, and I think that's one of the reasons on the traditional side of the business, we continue to do quite well.

Terrific, thank you.

Thank you. Our next question is coming from the line of Jim Schneider with Goldman Sachs.

Good morning. Thanks for taking my question.

I was wondering if you look at your healthcare financials internal plan versus one quarter ago, can you maybe talk about what the movement there has been either to the positive or the negative and maybe call out any sub-segments that were particularly strong or weak on an incremental basis during the quarter?

I'm not sure there'd be any big changes. We were, obviously, quite optimistic coming into the year. We provided industry leading revenue growth guidance. I think we're one of the very few who are actually increasing guidance in this environment. So I think we called it right when we started the year on that.

We have stability in healthcare, stability in financial services. We see clients looking for vendor consolidation. We're seeing them look for best-in-class delivery, and clearly we're seeing them interested in digital.

And our services capabilities and most importantly, in the investments we've made in a number of years in our consulting capability, and our domain expertise has become critically important and I think that's one of the reason why you're seeing the body language that we're providing today.

That's helpful, thank you.

Thank you. Our next question is coming from the line of Mayank Tandon with Needham & Company.

Thank you, good morning. Gordon, you gave us color on the healthcare segment of what the drivers are. We want to get a sense from you in terms of what's changed because last year, the drivers were still in place, but then you had a weak healthcare segment. Maybe just give us a better sense of what's changed from last year versus this year in terms of the catalyst on the healthcare side

I think there's several things. You have to break it down by sub-segment. In the pharmaceutical industry, last year was very tough because the drug pattern cliffs that clients were facing. This year, you are seeing movements in the pharmaceutical space towards vendor consolidation, towards shared services, so even though it's still a tough economic environment, we are seeing clients make very thoughtful and transformative decisions and we're just incredibly well positioned to assist them in that.

On the payer side, obviously TriZetto was a game changer. We already had a strong practice. Now we have just an incredible practice that payers across the board look to Cognizant to solve some of their toughest problems, whether it be on the cost side or on the innovation side, controlling medical management costs. So I think we're incredibly well positioned to help those payer clients and have a material impact on the delivery of healthcare in America and the cost of healthcare delivery in America.

Great, thank you.

Thank you. Our next question is coming from the line of Brian Essex with Morgan Stanley.

Good morning, and thank you for taking a question. I was wondering if you could comment a little bit on what you've seen on the -- what your posture is on M&A now that you're got a little bit better integration now with TriZetto and we're looking into 2015. What's your posture on M&A?

I see you have been able to pay down a little bit of debt, but we've seen a little bit of consolidation in the industry as well, but just looking for your view going into 2015, how that might have changed or maybe be more aggressive on that front.

It's Frank.

Look, I think I would say our posture is unchanged. We continue to look at, as we historically have, at small tuck-in acquisitions. I expect that our pipeline of small tuck-in acquisitions continues to be strong and healthy, and we will -- I expect we will do as we have in past years. Assuming we find the right ones, we'll do some of those this year.

Our screen is the same as it's always been. We're always looking for acquisitions that help us with new -- or geographies where we're under penetrated, deepening our industry skills, our expertise, or new technology areas. I'd expect with digital being such a big theme at this point, we'll continue to look at that very closely as a potential space for M&A across geographies and particular technology of skill areas in the digital space.

And then as we've said, I'm very pleased with how the TriZetto acquisition has gone. It was our first large-scale acquisition, and we feel like we still need to integrate that, digest it, make sure that it's on the solid footing before we'd consider doing something else of that size and scale and magnitude.

Very helpful, thank you.

Our next question is coming from the line of Edward Caso with Wells Fargo Securities.

Hi, good morning, and congratulations on the quarter. You've mentioned vendor consolidation several times. Can you talk a little bit more about the process like how many vendors shrinking down to how many? And I assume this is a volume for price arrangement, so could you give us sort of a sense on how that whole vendor consolidation works? Thanks.

Hi, Ed. It's Frank. Let me try and take a stab at it. I think usually, what you'll see is clients looking at -- the typical client scenario is that they would have, of a larger client, that they would have four or five sizeable scale players working for them and then a very long tail of smaller providers that are each individually relatively small, but collectively make up a significant amount of the clients' spend.

And so what we typically see is clients saying, you know, from that we'll go down to maybe three, sometimes two suppliers, and importantly of the big ones, and importantly we'll cut the tail substantially, and so there's a lot of emphasis across our clients on consolidating what's been called a long tail of suppliers, so the smaller suppliers that have an ecosystem at the client.

I would say, Ed, that sometimes and obviously there's an economic component to this, which is clients looking at better total cost of total ownership, and I think that's important, because very often, we get confused between the pricing versus the total cost of ownership. But clients really are realizing that this is a total cost of ownership game. Very often when we see these vendor consolidation kinds of conversations with clients, they are accompanied with conversations about moves to managed services, and that is, I would say, a very, very common theme.

So it's not just a pure we'll give you more volume and reduce price in some way, shape, or form. The clients recognize that we need to have levers like the move to managed services, which allows us to drive greater productivity across the greater volume and therefore, protect our margin and improve our service quality for them.

And then the last thing I would say, Ed, is that it's not just a question of volume and price. There are other considerations that clients look at, particularly around things like security and the idea that dealing with a smaller number of players allows them to manage the security environment a little bit more tightly so that they have less exposure from that standpoint.

Thank you.

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

Hi, thank you. On the last call, you indicated that TriZetto closed 2014 at $720 million, and I shouldn't -- was mid-single-digit growth rates and margins that were neutral to the business. Could you just update us on your thinking?

You've added a number of consultants related to that. It sounds like growth could actually be a little bitter in TriZetto and/or are margins a little bit more of a headwind if you're adding all of those consultants. Thank you.

So Keith, this is Karen. So the numbers that we talked about before, the $720 million that you referred to, that's the core TriZetto business. So TriZetto on its own, we would argue would have still been a single-digit grower. The growth that we're adding is really to take advantage of the synergy revenues that we talked about back in September when we announced the deal. so really pushing towards that $1.5 billion of revenue synergy over the next five years.

In terms, again, of the core business, core business continues to be margin neutral to us, but as we talked about in Gordon's comments, we've obviously added about 500 people to really help drive those revenue synergies and another 300 people to work on the development of the platform, so little bit of impact to margin there. It's not material though, and obviously that was baked into our utilization rates that you saw were essentially flat on a sequential basis.

Okay, great. Thanks, Karen.

Our next question is coming from the line of Lou Miscioscia with CLSA.

Great. Maybe we could circle back a little bit to just so many of your competitors and expectations, they talk about pricing. Obviously, heard everything here on the call. Were you one of the price leaders that were causing one of the problems, and maybe you could also just tie in that you've done a lot in the consulting area and obviously in digital. How do you feel that you're positioned in comparison to the others?

Do you feel you're a material number of steps ahead? Some comments there would be really helpful.

Sure.

I certainly would not view us as a driver of price declines in the market, by any stretch of the imagination. Where we're positioned is the value that we're delivering to the clients for the price that we charge. Clients look at that and say it's an extraordinarily compelling proposition, where we have industry leading security capabilities, industry leading consulting, industry leading domain expertise, best-in-class delivery. When clients look at all that and they say the value of what they get for the price we charge makes it a compelling proposition. I think that in the end is what's driving our industry leading growth.

And let me add, this is Frank. Let me talk a little bit about digital. As I said in my prepared comments, as we've done hundreds of digital projects at this point, it's very clear to us now that truly being successful in digital is not just about applying traditional approaches and methodologies to a new paradigm. It requires a whole new engagement model. And what I mean by that is that you need to really truly build the digital businesses.

You need to bring together a new set of skills and capabilities, and these are typically in areas like data science, design, and of course, the digital technology skills. You've got to bring those new capabilities together with traditional capabilities in consulting and strategy and deep domain expertise, and you've got to be able to bring these talents together, people with these talents together to create very short cycle rapid bursts of innovation so that you can respond to the changing market demands very, very quickly.

That requires a new engagement model, and that is what is embodied in our digital works approach and methodology that we've now infused across the Company. And so we feel like we are several steps ahead of key competitors on building out the methodology, on having a real approach that we've tested, road tested with many, many clients, and of course, building out the core fundamental capabilities in these new areas that you need to be successful in digital.

Can you give us any type of sizing you have for this in comparison to the rest of your Business?

Here is the challenge. I know lots of people put out size of their digital practice. It's very difficult at this point to separate what's digital, what's not, because it's so fully integrated, and it needs to be integrated.

So the answer is we could give you a small number or massive number; both numbers would be right depending on the definition, but what we are seeing is the digital component that there's a digital component in more and more of the projects. And I think the part of what clients like about us is how its integrated back into their systems across our entire service offering. So when I look at what touches digital in our business, it's a very high percentage.

Okay, thank you.

Thank you. (Operator Instructions)

Our next question is coming from the line of Moshe Katri with Cowen and Company.

Thanks, good morning. Gordon or Karen, can you give us the organic revenue growth number sequentially from the healthcare vertical, and then was there any FX impact on EBIT margin, the non-GAAP EBIT margin during the quarter? Thanks.

Sure, Moshe. This is Karen. Let me talk about margins first. Really no impact on margins due to all the currency movements during the first quarter. It's fairly neutral at the margin level; it's more of a top line issue for us.

In terms of the healthcare segment excluding TriZetto on a reported basis, it grew about 2.6%, a little bit faster on a constant currency basis, or the healthcare component of that, our payer business is primarily North America business so that doesn't have any FX impact. But our life sciences business does have some FX impact, so it would have grown a bit little faster than the 2.6% reported.

Thanks.

Thank you. Our next question is coming from the line of Steven Milunovich with UBS.

Thank you, good morning. This is Peter in for Steve.

Frank, I'm going to follow-up on a previous question as it relates to the digital skill set. As digital gains momentum with the industry, I mean there's a concern that competition for digital talent could intensify and potentially be a bottleneck, given the scarcity for some engineers and data scientists and consultants with the know how and the experience.

Do you see this level of tightness today or beginning to emerge or is there, do you perceive a risk in the future that competition for these skill sets could materially intensify?

Look, I think that it's something that's on our radar, something we are concerned about. We think that we've got a terrific engine to both recruit talent in the marketplace and to train talent and scale up in certain areas. Let me talk a little bit about both of those. I think you know first of all, in terms of our ability to recruit around the world, as you know, it's always been a core competency of Cognizant's, but I think the fact that our brand is extremely strong around the world in the recruitment market, the fact that the Company performance has been solid over the last several years, and the fact that we are winning in digital creates a great platform for us to recruit the best talent in the world.

And I think we've built a phenomenal set of leadership in digital in these new areas in all of the new areas that I mentioned, and I'm confident that that leadership team will in turn be able to attract and scale their respective teams. In addition to that in the digital technology areas, we think that our traditional consultants we can retrain and reskill, and in fact we already are, particularly with those that we need. Where the real scale is is on the integration between the new digital world and the traditional environment. And so in that space, where a lot of the scale requirement is, we are both recruiting, but we're also retraining and cross training. So I feel good that we've got a road map going forward to be able to address the skills issue.

Do you see digital as primarily as an agile effort compared to what it has been in the past, more of a waterfall approach?

Yes, clearly, it's a little bit more than -- I would characterize it a little bit more than traditional agile development compared to waterfall. It's a whole at what I think of as agile business process capability, so a business new functionality capability. So it's sort of end-to-end from being able to understand what your customer's customer is looking for all the way through creating a digital capability.

That end-to-end process has to be agile in the broader sense of the word agile which is that you've got to be able to do rapid iteration, you've got to be able to very quickly bring new functionality to market. You've got to have the ability to test that in real time and make sure that it's meeting the needs of the client and if not, backtrack out of that to be able to change course. All of that has to happen in very short cycle.

That requires the traditional agile development. It requires a new approach to the processes we use for development and testing, and so there's a lot of underlying plumbing that needs to change, but I would say it's an overall end-to-end much more agile process, yes.

We have time for one final question.

Thank you. Our final question will come from the line of Joseph Foresi with Janney Montgomery Scott.

Hi. Thanks for sneaking me in there at the end. I was just wondering, are the margins lower in the digital business? And is there less visibility than traditional outsourcing? And maybe you could give us an update on where you stand on the regulatory side with Health Net. Thanks.

Sure, let me touch base first on the regulatory side. Things are on track. We still expect to, subject to regulatory approval, that the expectations would still go live mid year. So far so good there. Obviously, we don't have the final approvals yet. When you look at margins for digital, it is high value work so we think it should be healthy margins.

Clearly, they tend to be shorter cycle projects, so like all of our discretionary work, the visibility is not the same as it would be on maintenance and as I said, that's one reason why we remained conservative in our guidance for the year, just because you do have more volatility there. But as you can tell, we're feeling quite good about our positioning in digital, and, more importantly, the demand that we're seeing in digital today.

Thanks.

With that, I think we can wrap up. Thanks, everyone, for joining us on the call today and for your questions. We look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, this concludes today's Cognizant Technology Solutions first-quarter 2015 earnings conference call. You may now disconnect.