高知特 (CTSH) 2015 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Cognizant Technology Solutions third-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, and good morning, everyone. By now you should have received a copy of the earnings release for the Company's third-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 are described in the Company's earnings release and other filings with the SEC. I would now like to turn the call over to Francisco D'Souza. Francisco, please go ahead.

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

We delivered another strong quarter, continuing the momentum we saw the first half of the year. Q3 revenue of $3.19 billion was up 3.3% over Q2, which exceeded our guidance for the quarter by over $45 million. Non-GAAP operating margin of 19.4% was within our target range of 19% to 20%.

Much like the first half of this year, we saw strong demand across our business this quarter. And as a result, we are pleased to raise our full-year guidance for the third time this year, for revenue to at least $12.41 billion, and for non-GAAP EPS to at least $3.03.

Our continued momentum reflects a healthy demand environment for Cognizant services that drive innovation, growth, and efficiencies in the digital era. The strong relevance of our services portfolio to clients is reflected in our results this quarter, our guidance for the full year, and the above-Company-average growth in our consulting and technology services.

For a while now, we've used these calls to talk about how we are at the cusp of a once-in-a-decade shift in technology that will drive a sustained the period of technological a transformation for our clients. Our clients recognize that becoming a digital enterprise is now a necessity, a matter of survival, as businesses, products, people, and devices become more connected.

Therefore, they are looking for innovative ways to combine of their traditional business models and product sets with the new and continuously evolving digital technologies. This is leading to a significant change in the way IT and operations budgets are allocated. Clients are recalibrating their spending, moving dollars from keep-the-lights-on maintenance and operations projects to new digital initiatives that can create competitive advantage by enabling new levels of business performance.

We've talked about IT being strategic for years, and that is perhaps more true today than it's ever been as management teams are looking to technology solutions to propel their businesses forward. Clients are traditionally thought of IT as a means to drive productivity and efficiency, or what we refer to as run better.

Today, the role of IT has evolved beyond that, to reimagine organizations and business models for future growth, or what we call run different. This dynamic, where our clients have to simultaneously run better and run different is what we refer to as the dual mandate.

Against this backdrop of changing client needs, the approach that services companies like ours need to take is also revolving. Effectively addressing the dual mandate for clients requires partners that can combine strategy, technology, and business consulting in one integrated model. However, equally importantly, serving the dual mandate requires a partner that has a deep understanding of clients' legacy environment and business processes so that these can be leveraged and integrated into new digital backbones. Our strength in the market comes from the fact that we've built of this breadth of capabilities at Cognizant and we've integrated these together in our Digital Works methodology for maximum client impact.

Let me give you an example of a large Financial Services client of ours. I'll refer back to this client example periodically during my remarks to illustrate the key investments we're making and the results we are seeing in the market. We've been working with this client for over a decade now, supporting many of their mission-critical platforms, infrastructure, and business operations.

Recently, we restructured our engagement with them where we will be taking them to a best-in-class operating model for their existing business with us. As a result of this transition to best-in-class efficiency, we were able to commit to considerable savings to them on our traditional application management business. This is the run better part of the dual mandate.

They, in turn, committed not only those savings back to us in the form of a long-term contract, but also increase their discretionary spending with us considerably. This is the run different part of the dual mandate.

The result is that we have a 10-year contract with them for an annual contract value that's almost 50% higher than their current annual spend with us. This extended partnership also presents opportunities for Cognizant and the client to develop and sell joint go-to-market solutions, leveraging our deep expertise and market presence.

Last quarter we outlined our investments in four areas, to fully address the needs of our clients to help drive both efficiency and transformation. Let me update you on the progress we've made since then.

First, we are building capabilities to enable our clients to drive digital transformation at scale. As I mentioned last quarter, Cognizant is among the few companies that can provide comprehensive digital innovation at an enterprise scale. We do this with our Cognizant Digital Works accelerated methodology, which comprises three elements: the Idea Lab, where we work with clients or to identify big themes and prioritize opportunity areas; the Collaboratory, a physical space where we design prototype and iterate specific solutions so clients can visualize the impact on their end users and businesses; and the Foundry, where we take these pilot programs and switch them to enterprise scale by utilizing new technology options and integrating them with existing legacy systems.

Our clients appreciate of this interdisciplinary approach, and across of the industries we serve, we are finding great traction for our Digital Works framework. We recently engaged the Financial Services client I mentioned a few minutes ago in a custom workshop at the Collaboratory for their business and technology leaders. We jointly identified a set of potential opportunities and long-term strategic initiatives that digital is presenting to this customer's business.

Second, consulting is a critical component of our services portfolio. Increasingly, consulting has become an integral part of a comprehensive approach to helping clients drive digital transformation, as over 60% of our consulting pipeline is focused in this area. Our matrix structure deeply integrates our Consulting Team with our technology and business process services delivery organization. This synergy between our consulting and delivery organizations helps the Teams work closely together, driving business model change, the reengineering of business processes, and organizational change management for our clients' businesses.

We continue to invest in both people and capabilities to deepen our industry strength and have over 5,500 consultants globally as of today. For the Financial Services client that I talked about, our consulting practice played a critical role in driving thought leadership into the 10-year deal. Our consultants worked with the client to identify existing assets that could be extended to address significant business opportunities in an adjacent industry where they currently don't have a presence. This will potentially drive substantial revenue upside for the client.

Third, we are optimizing traditional services to enable our clients and to achieve higher levels of operational efficiency. Today, digital technologies are driving changes in the traditional outsourcing business. The focus in core traditional IT services business, what we call our Horizon 1 services, has shifted from people and processes to people, process, and automation.

These services are important because clients rely upon them each day to run their businesses. These services are also integral to our ability to drive digital transformation and legacy integration for clients. This means we have to solve today's problems differently by applying innovation and creativity to reorganize and run core processes at an enterprise-wide scale. Sometimes, it also means it moving clients' radically different operating model to improve their costs, and at the same time, ensure a high-quality accelerated delivery.

For the Financial Services client that I've been talking about, we will convert our existing arrangement to an end-to-end managed services engagement to streamline their various customer-facing platforms and processes. At the same time, we will transform and digitally enable their core platforms, processes, and infrastructure to support digital business, while managing their existing IT platforms for optimal efficiency.

And fourth, we are building platform-based solutions and industry utilities that enable clients to achieve new levels of efficiency, and at the same time, deploy digital technologies more quickly. Last year, we took a very definitive step toward strengthening our platform-based solutions portfolio by up a TriZetto. We're pleased with the pace of integration of TriZetto and Cognizant capabilities. The combined stack of software products and services from TriZetto and Cognizant have helped open new market segments, allowing Cognizant to bring an integrated solution to the healthcare market.

We've also seen good traction with our internally developed platform solutions. One such example is a cloud-based big-data analytics platform called BigDecisions that brings together our clients' traditional enterprise data and digital data, such as voice, device, sensor, social, and mobile under a single umbrella. BigDecisions includes business applications across multiple industries, which help our clients use analytics when making key business decisions. In the case of the Financial Services client referenced so far, we anticipate leveraging BigDecisions to enable this client to monetize their data assets by delivering actionable insights to their clients.

In closing, I'd like to say that Cognizant's culture of innovation and adaptability, coupled with our commitment to continuous investment in the business, has positioned us to be the partner of choice for our clients as they navigated this tremendous period of change. With that, let me hand the call over to Gordon to discuss our performance, and then to Karen to provide more financial details.

I'll be back later, as always, to take your questions. Gordon?

Thank you, Francisco.

We had another solid quarter and saw a strong demand across the business, with particular strength in consulting and technology services, as clients continue to focus on implementing digital technologies to drive business transformation. Let me now provide additional color on our performance across industries, Horizon 2 businesses, and geographies.

Our Banking and Financial Services segment grew 2.7% sequentially and 18.6% year over year, driven primarily by strength in banking. Growth continues to be broad-based across our banking clients, who remain focused on cost optimization, vendor consolidation, regulatory compliance, and cyber security. We are seeing increased interest in managed services deals with both banking and insurance clients as they continue to look for ways to increase efficiencies in their operations.

In addition, there is an increased focus on automation and digital, particularly in areas that improve customer experience and customer self-service, often through harnessing data and analytics to drive real-time decisions. For example, during Q3, Cognizant was chosen to help one of Asia's largest private banks manage the future road map for a consolidated digital platform to sell personal loans, credit cards, auto loans, and mortgages, all of which are currently being managed on separate platforms. The consolidated platform is expected to significantly increase conversion, reduce platform costs, and empower the bank with better customer insights.

Another good example is the work we're doing for the National Stock Exchange in India, one of the world's largest exchanges by transaction volumes, to transform its futures and options derivatives trading platform. Given the complex nature of exchange environments, new regulations and business requirements must be quickly absorbed and integrated to eliminate failures in transaction processing. The platform that Cognizant developed and deployed for tasks such as order matching and message transfers allowed the exchange to successfully process an unprecedented 1 billion orders in a single day.

Our Healthcare segment, which consists of payer, provider, pharmaceutical, biotech, and medical device clients, grew 4.7% sequentially, and, including the impact of TriZetto, grew 43.3% year over year. As the healthcare industry shifts from fee-for-service to value-based care models, healthcare organizations are looking for new ways to deliver customer-centric care, while simultaneously looking for ways to drive operational efficiency.

We recently announced that the New England Healthcare Exchange Network, NEHEN, a consortium of regional players and providers in the Northeast, selected Cognizant and TriZetto to digitally transform and manage its technology infrastructure. NEHEN consists of over 55 hospitals, 8 health insurance plans, and tens of thousands of practitioners. Cognizant and TriZetto are enabling NEHEN to deploy an infrastructure that allows members to share costs and approve administrative and clinical processes.

This win highlights the synergy opportunities brought by the combination of Cognizant and TriZetto. Together, we've won a number of similar deals across payers and providers, combining TriZetto's products and platforms with Cognizant's capabilities in IT, BPO, and hosting.

As we approach of the one-year anniversary of the TriZetto acquisition, we could not be more pleased with how the integration is progressing. TriZetto employee retention remains high, and we have a strong pipeline of opportunities leveraging the synergies between Cognizant and TriZetto.

Moving on to our Life Sciences business, we had a strong quarter, as drug pipelines and product launches have improved for pharmaceutical and biotech companies. Additionally, we saw continued strong demand among our medical device clients. We see an increasing interest in deals which combine cloud technologies and platforms, including our proprietary MedVantage, a cloud-based integrated complaint management solution we built on the Force.com platform. We've had a number of our medical device clients implement MedVantage this year to improve efficiency, reporting, and overall service level for their customers.

At the recent Dreamforce event, Salesforce named Cognizant the recipient of the 2015 Salesforce Partner Innovation Award for Healthcare and Life Sciences for our work with Johnson & Johnson. Cognizant helped J&J Medical launch their customer digital engagement model. This digital platform focuses on driving value to J&J's sales team through omnichannel and business function integration, empowering them with the information they need to better understand their customers' and patients' needs.

Our Retail and Manufacturing segment was up 4.8% sequentially and 13.7% year over year. Clients are focused on modernizing their technology environment, particularly around supply chain and omnichannel commerce solutions.

On the Manufacturing side in particular, we are seeing strong demand around product transformation. For example, we're helping a global packaging equipment manufacturer to transform the packaging equipment they manufacture into smart and connected products, leveraging sensors and the Internet of Things and connecting them with a big data analytics platform. This engagement involved organizational change management, business model innovation, and machine-to-machine connectivity, and will help our client reduce operating costs and deliver new value to their customers.

Our Other segment, which includes high-tech, communications, and information, media, and entertainment clients was down 0.5% sequentially and up 15.2% year over year. We saw a pause in spend with clients in the communication sector on the back of a wave of M&A deals in that space.

Let me now turn to our Horizon 2 service lines. We continue to be pleased with the above-Company-average growth we are seeing across these three businesses, Cognizant Business Consulting, Cognizant Infrastructure Services, and Cognizant Business Process Services. As Frank mentioned earlier, Cognizant Business Consulting continues to be a critical competitive differentiator for us. As clients undergo enterprise-wide transformation our consulting practice plays an important role through capabilities such as technology, business, and digital strategy, operational improvement, program and change management, and process redesign.

Cognizant Infrastructure Services continues to see strong growth, primarily in solutions that drive simplification, predictable operations, and accelerated delivery. Increasingly, there's a strong focus on automation and IT operations, driving business agility through deploying cloud solutions.

Cognizant Business Process Services saw continued success during the quarter, led by work with our high-tech insurance and banking clients. Infusing technology and automation in core business processes is critical to helping clients achieve greater levels of operational efficiencies while also enhancing business outcomes through data analytics.

Let me now shift to geographies. From a geographical standpoint North America grew 3.6% sequentially and 26.7% year over year. Europe was up 1.4% sequentially and 7.8% from last year, after a 10.4% negative currency impact. The UK grew approximately 1% sequentially and 8.3% year over year. Continental Europe grew 2.2% sequentially and 7.2% over prior year.

Finally, we saw continued strong traction in the rest of the world, which was up 5.3% sequentially and 31% year over year. Growth was driven primarily by strength in our key markets in Asia, such as Singapore and Australia.

I'll now provide some color on our business operations. Similar to last quarter, quarterly annualized attrition remained at 20%, which is above our desired range. We are committed to improving our retention levels through various employee engagement initiatives. Faster Company growth, well-defined career paths, unique learning and reskilling opportunities, and our practice of sharing the rewards of our strong Company performance with our employees continues to make Cognizant a very highly attractive employer.

Delivering strong revenue performance this year, combined with our continued success in driving higher operational efficiency, was only possible through the efforts of our incredible staff around the globe, and we believe that they should share in these accomplishments. Our performance during the quarter enabled us to increase our year-to-date bonus accrual to levels well above last year. In fact, our brand, which is a reflection of our attractiveness as an employer, has never been stronger.

This was validated by the success we've seen in our global campus recruiting program this year. We've expanded our campus footprint, recruiting now from over 30 leading universities and business schools in the United States, as well as another 30 top schools across Europe. This campus hiring program has helped us expand our in-country and near-shore centers.

In India, this year we saw tremendous success in our campus hiring across premium engineering campuses. On campuses where students receive multiple offers from Cognizant and other Tier I companies, on average, 75% of those students chose Cognizant over others.

Throughout this call, we've highlighted how we're winning in digital, driving leadership and industries in markets we serve, and how we are seeing good traction for our platforms and as-a-service models. We're proud of our performance and are pleased that this is being recognized by leading industry analysts, sourcing advisors, and other influencers. In the past few weeks Cognizant has been recognized by these industry analysts as a leader in Internet of Things, business intelligence consulting, robotic process automation, and insurance as a service. With that, let me turn the call over to Karen to review our financial results.

Thank you, Gordon, and good morning, everyone. As Frank mentioned, we are pleased to have delivered another strong quarter. Third-quarter revenue of $3.19 billion exceeded our prior guidance by over $45 million, and represented growth of 3.3% sequentially and 23.5% year over year. On a year-over-year basis, we had an approximately $72.4-million negative currency headwind, which impacted revenue growth by 280 basis points.

Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition-related expenses, was in 19.4%, within our target range of 19% to 20%. As expected, the non-GAAP operating margin declined from Q2 as we absorbed the impact of compensation increases beginning July 1. Non-GAAP EPS of $0.76 exceeded guidance by one penny.

Consulting and technology services and outsourcing services represented 58% and 42% of revenue, respectfully, for the quarter. Consulting and technology services increased 4.6% sequentially and 34.2% year over year. Outsourcing services were up 1.5% sequentially and grew 11.1% from Q3 a year ago.

During Q3, we saw a continuation of the trend we have seen in recent quarters, whereby clients are shifting spend from legacy application maintenance towards project-based work, including digital and other transformational programs. During the third quarter, 37% 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 292.

During the quarter, we had approximately 1,300 net employee additions, and we ended the quarter with approximately 219,300 employees globally. Approximately 205,000 of our employees were service delivery staff.

As expected, utilization was up on a sequential basis. Offshore utilization increased by almost 300 basis points sequentially, to approximately 76%. Offshore utilization, excluding recent college graduates who are in our training program, was approximately 81%, and on-site utilization was approximately 94% during the quarter, up 100 basis points from Q2.

Our balance sheet remains very healthy. We finished the quarter with just over $4 billion of cash and short-term investments, up a by approximately $484 million from the quarter ended June 30, and down by approximately $568 million from the year-ago period. Total receivables were $2.6 billion at the end of the quarter, and we finished the quarter with a DSO, including unbilled receivables, of 70.6 days. This is down from 71.9 days in Q2.

The unbilled portion of our receivables balance was approximately $421 million, up from $387 million at the end of Q2. We billed approximately 55% of the Q3 unbilled balance in October. The increase in unbilled receivables was primarily due to the timing of certain milestone deliverables and ramp-up of certain fixed-bid contracts. Our outstanding debt balance was approximately $950 million at the end of the quarter, and during the quarter we repaid the $100 million outstanding balance on our revolver.

Turning to cash flow, operating activities generated approximately $818 million, financing activities during the quarter were approximately a $249-million use of cash, and capital expenditures were approximately $65 million during the quarter. During the third quarter, we repurchased 2.5 million shares, for a total cost of $156 million, and our fully diluted share count decreased approximately 1 million shares to 612.7 million shares for the quarter. To date, we have repurchased approximately 40.5 million shares, for a total cost of approximately $1.5 billion, under our stock repurchase authorization of $2 billion, and have a $480 million remaining unutilized.

I would now like to comment on our outlook for Q4 and the full year. As Frank mentioned, we are increasing our full-year revenue and non-GAAP EPS guidance to reflect the healthy demand environment and the over performance during quarter three. We are increasing our full-year revenue guidance to at least $12.41 billion, representing revenue growth of at least 21% over 2014. Our guidance is based on the current exchange rates at the time at which we are providing the guidance and does not include additional potential currency fluctuations over the remainder of the year.

For the fourth quarter of 2015 we expect to deliver revenue of at least $3.23 billion, representing sequential revenue growth of at least 1.3%. As is the typical pattern in the fourth quarter, client furloughs, seasonality of our retail practice, and fewer billing days will have an impact on sequential revenue growth.

During the fourth quarter and for the full year, we expected to operate within our target non-GAAP operating margin range of 19% to 20%. For Q4, we expect to deliver a non-GAAP EPS of at least $0.77. Non-GAAP EPS excludes and net nonoperating foreign currency exchange gains and losses, stock-based compensation, and acquisition-related expenses and amortization. This guidance anticipates a share count of approximately 613 million shares.

We are raising our full-year non-GAAP EPS guidance by three pennies to at least $3.03. This guidance anticipates the share count of approximately 613 million shares and a tax rate of approximately 25.5%.

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

(Operator Instructions)

Edward Caso, Wells Fargo.

Hi. Good morning. Can you just clarify for us with the organic growth was in the quarter when you back out TriZetto and the ODC acquisition? And also, the impact on the quarter year over year and the benefit to the full year for 2015. Thank you.

So, Ed, on a quarter-over-quarter basis, TriZetto is about 7 points of growth -- or year-over-year, sorry -- year-over-year basis for the quarter. And what was your second question regarding full year?

And then the same question but for the full year.

So for the full year, if you remember, we had said that TriZetto was about $720 million of revenue last year growing low single digits.

Okay. Thank you.

Ed, just as a reminder, there was a small portion of TriZetto revenue last year --

Yes.

As well, so be sure to adjust for that.

Q4 of last year had about $80 million of TriZetto revenue.

Next question, operator.

Tien-Tsin Huang, JPMorgan.

Great. If thank you. Good quarter here, and no big surprises. Just the fourth quarter, I know fourth quarter is a little tricky. Karen, you mentioned a few things like the client furloughs and the billing days. Maybe can you quantify some of those factors and what makes 4Q unique? And any considerations around budget flush, et cetera?

So the big thing is really the billing days, Tien-tsin, so it's about almost 3.5% fewer billing days in Q4 versus Q3, which roughly translates to about a $75-million sequential negative revenue impact. That's the biggest component. And then obviously, as you mentioned, some furloughs on top of that, and then the typical seasonal pullback in retail, but those are less impactful than the bill day impact.

Right. So it's really just the billing days. And just a -- maybe as a quick follow-up, just thinking about visibility in general. I know we're all going to be thinking about 2016 here pretty soon. Just given the bigger mix of consulting versus outsourcing, do you feel like the visibility has changed or improved or gotten tougher?

Hi, Tien-tsin, it's Frank. I would say it's about the same. We're going through clients' budget cycles at the moment. We feel like those conversations are right about where they would typically and traditionally be at this time of the year, so we don't either quantitatively or qualitatively feel like there's any difference in that process this year.

Great. Thanks, as always.

Ashwin Shirvaikar, Citi.

Thank you. Good morning. Congratulations on the solid results. So we've had this view for some time that the two-speed economy, which translates to you dual mandate, has an inherent assumption that a large portion of the Europe initiatives are partially paid for by savings on the cost optimization side.

So while companies can indicate a good growth on the digital side, you've got a temperate optimism with what needs to be done to deliver productivity gains. The question really is what pressure are you seeing on revenue growth on the traditional side? Can your Horizon 2 and 3 traction, which is great, continue to safely offset Horizon 1 pressure, if there is any, and how does it change your notion of revenue visibility and impact on margins?

Hey, Ashwin. It's Gordon. I think you're right that clients are trying to fund spending on innovation and on digital by optimizing the cost on run the business, which a lot of is that, is the traditional outsourcing, and you've seen that in our numbers now for many quarters where our technology and consulting business is growing faster than the outsourcing business.

But let's be clear. We continue to do very well and take market share on the maintenance side. What customers are looking for is they're interested in how can we become more efficient, lower their cost of ownership on maintenance, so they can free up those dollars to move elsewhere.

And Cognizant just has this incredible track record of delivering a very high-quality services while continuously delivering productivity and efficiency. So I think we're probably better positioned than most others in the market in terms of lowering cost of ownership on maintenance, while delivering high-quality services and then capturing because we can assert both sides into the dual mandate, and capturing that free up spend over on the technology and innovation side.

And so when you lower the cost, are you using your new tools like RPA, and what impact does that have?

It's Frank. I would say there's a lot of conversation right now about these, what I would bucket together in the category of advanced automation tools. But I would say that the bulk of the productivity that we drive in the core business is through traditional means of driving productivity and efficiency that includes process things like a lean and Six Sigma and so on, and also more traditional tools and automation.

I think that the promise of artificial intelligence and machine learning of robotic process automation is certainly substantial, but it's early days in that area. And I think we are making very solid investments. I think you heard Gordon say in his prepared remarks that we've been recognized by industry analysts in areas like robotic process automation as being leaders. So we continue to drive that aggressively but I think it's -- this is a longer-term journey to really see the impact of those technologies on a broad basis across our business.

Understood. Thank you for the comments.

Brian Essex, Morgan Stanley.

Hi. Good morning, and thank you for taking the question. I was wondering if you could touch on a little bit in terms of capital allocation and how you think about growing the businesses, particularly in areas of focus such as healthcare and digital. And with that in mind, perhaps with competitors in mind, as we've seen quite a bit of capital markets activity ramping this year, so that from the perspective of investing organically, versus perhaps pursuing acquisitions, how do you think about growing the business and what you expect heading into next year?

Hey, Brian. It's Gordon. We're continuing with the strategy that we've been executing successfully on, which is making long-term organic investments is the key, the core of our business.

We've said we're a 19% to 20% margin business. We reinvest everything above that. And as result of that, we should deliver revenue growth well above industry average, and we've deliver that year in year out, and so that's working.

We will always supplement our organic growth with acquisitions, either to strengthen a geographic presence, industry strength, or technology and service line. These largely are tuck-under acquisitions. Obviously, the TriZetto acquisition was a outlier. But we continue to look at tuck-under acquisitions to supplement that.

From a capital allocation standpoint, as you've seen, both this third quarter and second quarter, each quarter we repurchased about $150 million worth of stock to target share neutrality. We'll continue to target share neutrality. One of our challenges is the majority of our cash is overseas. So we have a little -- we have some limitations here, but we are -- the capital allocation strategy we're doing is resulting in industry-leading results, so we're going to stick with it.

Okay. And on the pipeline, it seems at though at least you've been quiet year to date on the M&A front. Is that pipeline accelerating, or might we see more activity as we head into next year and you digest the TriZetto acquisition? Hey, Brian. It's Frank. As you know, it's very hard to predict timing and volume of M&A activity. I would say the pipeline is as robust as it's ever been, maybe even a little stronger. We're looking at different kinds of deals. There's a lot of digital stuff we're looking at. We're looking at some geographic stuff in other parts of the world to give us presence in markets, geographic markets where we feel like we needed a stronger presence.

But I'd hate to predict because it's just inherently difficult to predict timing of M&A. But we haven't slowed down. We continue to look at as many, if not more, transactions. And I would say that if you look over a long period of time, I wouldn't expect to see any material slowdown, maybe a little bit of an acceleration in the pace of us doing things as we become bigger and we are able to move faster on multiple fronts as we -- particularly in the area of tuck-in. Okay. Helpful color. Thank you for the insight.

Jim Schneider, Goldman Sachs.

Good morning. Thanks for taking my question. Gordon, I was wondering if you could maybe comment on the bookings environment over the past couple of months, and specifically address the financials vertical.

I think you talked about banking being relatively strong for you but is that -- do you think that's still the case in the next couple of quarters and especially relative to what some of your peers have called out in terms of incremental weakness in financials? I was wondering if you could also maybe address any of the incremental sub verticals where you've got more strength or more weakness relative to what you've seen in the past couple of quarters.

Yes. So, yes, bookings across the business are solid. We're seeing solid interest in banking, and a lot of that is because we can serve the dual mandate, because we have deep expertise in banking, we feel good about that. There'll always be an anomaly here or there, but when I look at the overall portfolio of our Financial Services segment, we certainly feel good.

I don't know if I would point to that has greater strength than other business units because I think, and you saw it this quarter, other than the little bit of weakness in the communications sector. Solid growth. So it's very well-balanced right now, and we are pleased with of the bookings, and particularly on the technology and innovation side because there's really only a handful of companies that can serve that dual mandate. So there's a lot of people fighting for the maintenance side of the business, but on the development side, there's only a few of us who can really deliver, and I think we're very well positioned there and our investments have paid off.

That's helpful, thanks. And then maybe as a follow-up, can you maybe addressed your hiring plans short term over the next quarter or two and what you plan to do specifically to address the attrition rate and get the headcount back up to the extent you think it needs to over the next couple of quarters?

Yes. So the slow growth in net headcount is not driven by attrition. That's driven by a very conscious decision we had this year to significantly improve our operational excellence and take our utilization up, which we successfully did while maintaining customer satisfaction, so -- and we're largely done with that process. I think we're, give or take, pretty much at the utilization levels that we want as we go into 2016. So we don't guide to quarter-to-quarter headcount growth. I think we still have a little bit of room offshore on utilization, which you might see in Q4, but then it starts to level out over that.

On attrition, attrition being up is not just us, as you know. It's the industry. But it's one where when I look at the opportunity for us, clearly, we should have lower attrition given we have unparalleled career opportunities for our employees, given the success we have on the digital side, the overall growth rates. So we're redoubling our efforts there to make sure that employees have the career growth, that we share the rewards, as I have said.

And I'm sending a note out to our entire Company right after this call saying because of what they've delivered on revenue growth, what they've delivered on operational performance, we're going to share those rewards and pay out bonuses well above last year. So we'll keep working on it. I'd be concerned if we were an outlier, but we're not an outlier on the attrition.

Thank you.

(Operator Instructions)

Sara Gubins, Bank of America Merrill Lynch.

Hi. Thank you. Some questions on the pricing environment. There's been some discussion of cases of competitors being aggressive. Could you talk about what you're seeing in the market?

And then maybe a bigger picture pricing question which is, you're seeing an evolution of your pricing models towards more fixed-price contracts and plan to do more transaction-based pricing over time. How do you see pricing models and maybe pricing mix evolving?

Sure. Let me comment first on the pricing environment. We've spent a lot of time looking at what's going on. We are clearly seeing a bifurcation in the market, and that's that leading competitors who can compete on both sides of the dual mandate and those who can't compete on both sides of the dual mandate and therefore are focused more on price.

What we've seen, and I'm sure some of you have heard about it, there been some isolated incidences of irrational pricing in the market. But let me be clear, overall pricing remains stable. This spots of irrational pricing is consistent with what we've seen historically in the market as there have been big technology shifts, and some players are having trouble with that shift and therefore act irrationally in their core market. We also want to be very clear, we believe this is a short-term phenomenon.

The fundamentals of the industry -- input costs, facilities, travel -- have not shifted enough to warrant this change. And we're also seeing some of the competitors make considerable assumptions about productivity gains driven by new automation technologies, which we don't think are yet enterprise reality.

Frank has touched base on that earlier. We think some people out there are making assumptions that we scratch our head a little bit about. Will they be able to achieve that, or is it wishful thinking?

Often when you see these sorts of unrealistic assumptions about productivity built into bids, what you see is players shore up their profitability by cutting corners, and historically, this has resulted in unhappy clients. And we're already beginning to see that in the market. In some instances where there's been irrational pricing, that client is actually pretty unhappy now as they are getting service from one or more of our competitors, and that competitor is cutting corners. And also impacts employee morale because of how you have to squeeze the employee.

So when we step back and look at it, when we look at our overall book of business, things are very stable, and we feel fine about pricing. We're watching these pockets of irrationality, but we're not particularly worried about it because what we're seeing is very quickly the customer understands you get what you pay for and we're seeing dissatisfaction where customers have gone with someone who's bid irrationally.

So we got to watch it, but at this point, we don't think it's a long-term trend. We don't think it's impacting our book of business, and ultimately, I think it may be good for our reputation as clients has dissatisfaction with some of the other competitors.

Let me just follow up with the second part of your question, just building on what Gordon said a minute ago. It is absolutely true that on the run better said of our business, clients are still looking for greater levels of efficiency and effectiveness, and so we're focusing clients are looking at total cost of ownership and looking at the output and the outcomes that we deliver and driving output and outcomes to best-in-class, world-class levels.

And so as a result of that, you will see a continued shift in our business towards more output and outcome-based models, and the fixed-price metric that we report to you, I suspect will creep up over time as a result of that trend. We think that that's the far better, more thoughtful approach to working with clients is to focus them on the total cost of the outcome that we're providing as opposed to the comment Gordon has about somewhat irrational pricing on the input side, which is really a zero-sum game.

Bryan Keane, Deutsche Bank.

Hi, guys. Just want to get an update on the healthcare sector. We've seen some volatility there. Your results seem fine this quarter, but what's the outlook in healthcare going forward?

I'll let Karen comment, Bryan. It's Frank. I think at the macro level, I think we should break it into the two large component pieces. We feel pretty good about Life Sciences going into next year. Drug pipelines are healthy again, or across the industry we're seeing good traction, so we feel pretty good about the Life Sciences side of the business.

When I think about the Healthcare business, as you saw, we had a reasonable quarter in that -- actually, a strong quarter in that business, and I think the fundamentals continue to be strong. The one cautionary note I would have there is, as you know, there have been a number of mega mergers that have been announced but yet to be approved by the government in that sector, and so as we go into next year, as we've seen in other M& A environments, you could see a pause in spending depending on the -- I can exactly predict when that'll be because it will depend on when the government approves it and so on and so forth. But that's the one thing that I'm keeping an eye on.

But fundamentals are strong. The need for change in that industry continues to be very, very strong. Lots of opportunity for technology to bring competitive advantage to the industry to drive greater degrees of efficiency. So over the long run, I continue to be very optimistic about Healthcare, both sides of Healthcare, and particularly so because we've got a very strong set of assets with the TriZetto acquisition combined with the traditional Cognizant strength. So we are well positioned in the industry.

Lisa Ellis, Bernstein.

Hi. Good morning, guys. I would like you to talk, if you don't mind, a little bit about the growth challenge as you go into next year and how you are thinking about that and addressing that, both -- I'm just observing that to maintain your organic growth rate, you are starting to push adding $2 billion in revenue a year. So how are you thinking about that, both on the labor side as well as on the customer acquisition side, or expansion into new vertical side? How are you thinking about that? Thanks.

Hey, Lisa. First of all be careful with the $2 billion number. That includes TriZetto obviously. So it's -- if you look at organic, yes, Karen gave some of the numbers earlier. It'd be less.

So from a supply side, I think we're in good shape. We've taken utilization up, but as I mentioned in my prepared comments, our brand for recruiting across the globe both in college and lateral is the strongest it's ever been. There are always going to be pockets where supply is constrained, like on digital right now, but even there, we're getting more than our fair share of people wanting to work for us. So I feel good from the supply side.

From the demand side, obviously, clients have to finish their planning cycles and all that, but I think we are well positioned in terms of assuming that clients continue to shift more towards innovation. That's all the good news. The bad news is the law of large numbers. As you get bigger each year on a percentage basis, the growth number becomes more challenging even if you're growing similar dollar amounts and so forth.

So the math long term works against us, but as I've said many times, that's not a straight line. You have some years where you go up in growth rate, some years where you go down and so forth. But we feel good about supply. We feel good about our pipeline going into the year. But we do have the headwind of the law of large numbers.

And as Frank mentioned, there's been some M&A that may close next year, and we've just got to keep an eye on that, and we'll certainly plan for the worst, hope for the best. And historically, the best has happened for us, but you always want to be cautious on that so you know the best is going to happen.

Keith Bachman, Bank of Montreal.

Hi. Thank you very much. I was hoping you could comment on the puts and takes associated with operating margins as you look at Q4 and perhaps even a bit further. And included in your response, does the desire to lower the attrition rate by, it sounds like, taking up the bonus levels, does that suggest that the 19.5% might be a level that you seek over the next couple of quarters as you try to combat attrition? In other words, might it be an impact over the next couple quarters?

And Karen I just want clarification, could you also comment on what you see FX impact given current rates in calendar year 2016 so as the analysts can adjust their models as they get prepared for what will presumably be the guidance in the January quarter?

Sure. Let me take the first part a little bit. Then Karen will pick up on it. Very importantly, remember, 19% to 20% is the range. Okay? So we're right smack in our range.

And the other thing to remember for Q3, we delivered the midpoint of the range with two things happening. One, our annual salary increases kicked in July 1. So Q3 is always the most challenging quarter because that's when your salary increases kicked in. And we did a year-to-date increase in the bonus accrual, so with both those things happening, we were still at the midpoint of our range.

Yes. And then in terms of FX, Keith, obviously, for 2016, we'll be planning based on the current rate environment, which in terms of revenue has been fairly stable lately, right? The pound and the euro are the two biggest currencies that impact us, and they moved a little bit but not enough to be material.

The big impact to us is really been the 2014 versus 2015 growth, which we talked out, is about 280 basis points this quarter. But sequentially, the last couple of quarters, the pound and the euro haven't really had much of a top-line impact for us, and so we wouldn't, at least right now, based on rates, wouldn't expect a huge FX impact going into next year. Does that answer your question?

Lou Miscioscia, CLSA.

Okay. Thank you. When you look at digital programs, it seems like there's some discussion about whether -- the way companies both have to approach that, which you are obviously doing, but also implement that is changing materially in that the programs are getting smaller with a lot more on-site help. How are you positioned for that given, obviously, you've got a very attractive but big staff over in India, and would you possibly end up needing more resources on site locally in the US or Europe? Thank you.

Hey, Lou. It's Frank. I would say that it's actually -- in some senses, the more things change, the more they stay the same.

If you think back to other big technology shifts, when there are big changes in technology, you tend to see two things happen. First, a wave of, as you correctly pointed out, smaller projects that are more pilot and prototype in nature, which, in the digital world, also have the characteristic of requiring more than just technology skills. They require design. They require strategy. They require data science skills, and of course, deep consulting and domain expertise. And those also by their nature tend to be more, if you will, on-site in nature.

But after this initial phase of prototyping and piloting, those then have to be switched to enterprise scale. And when you get to enterprise scale, that's when you actually have to do the heavy lifting of integration with legacy scale to hundreds of thousands or millions of users, very high transaction throughputs, some significant amount of performance testing, and so on through the life cycle. And that part of the engagement very much lends itself to the traditional on-site, offshore delivery model.

So we feel very good about the fact that we have such a strong on-site presence and capability in those new areas like strategy, like consulting, like design, like data science. And we're able to actively and very seamlessly combine that with our offshore delivery model so that we can take a client through all three phases of the digital works methodology, from what we call Idea Lab, through Collaboratory, and then through Foundry to create a seamless end-to-end scale experience for clients.

Operator, we have time for one more question.

Darrin Peller, Barclays.

Thanks, guys. Look, the Healthcare segment was obviously strong, and just as a follow-up question on the integration of deals next year, just what would you expect we should look for in terms of impact when you have a number of clients going to integration like that?

And on a related topic, TriZetto, again, you said it, great example of that. Where are we on synergies now? And then to have a pipeline of other types of deals like that that can make up for the -- what could be potentially maybe slightly slower trends on integration in Healthcare for 2016?

It's always difficult. I wish I had a crystal ball -- I don't -- on M&A. But if you think about historical M&A patterns, Darren, traditionally, M&A creates a substantial amount of technology and business process integration opportunity for us. And I feel like, in many cases, in the big mergers that have been announced, we serve both sides of the mergers, and so we are extremely well-positioned to be able to help with the technology and business process integration when those mergers come to pass.

And so, I think you might see -- my best assumption is that you might see a temporary pause during the phase of integration planning. But then I think it'll result in significant M&A integration work for us once integration kicks off and is in full swing. That's my best hypothesis at this point. Again, no crystal balls here.

I would say that the pipeline of synergy opportunities between Cognizant and TriZetto is very strong. There are -- I would say the synergies largely fall into a couple of different categories. We have a great opportunities to take the TriZetto clients to -- and offer them a broader range of Cognizant services around, for example, things like Business Process Services on top of the TriZetto a platform, Cognizant infrastructure services to host and run the TriZetto platform.

And then in the medium and longer term, we also have opportunities around Health Net-style deals, utility-type deals where we can work with TriZetto clients to take full end-to-end responsibility like we ha proposed to do with Health Net some months ago. So we feel very good about the pipeline of opportunities that we have in around the TriZetto synergies.

And with that, I think we have to bring the call to a close, so I just want to thank everybody for joining us today, and thank you for your questions, and we look forward to speaking with you again next quarter.

This concludes today's Cognizant Technology Solutions third-quarter 2015 earnings conference call. You may now disconnect.