Cognizant Technology Solutions Corporation (CTSH) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Now, I would like to turn the conference over to David Nelson, Vice President, Investor Relations and Treasurer of Cognizant. Please go ahead, sir. David Nelson - Vice President-Investor Relations & Treasurer: Thank you, operator, and good morning, everyone. By now you should have received a copy of the earnings release for the company's second 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. Please go ahead, Francisco. Francisco D'Souza - Chief Executive Officer & Director: Thank you, David, and good morning, everyone. Thank you for joining us today. This was a tremendous quarter. In fact, in dollar terms we have the strongest sequential revenue growth in our history, exceeding both our expectations and our guidance. This comes on the heels of strong performance in Q1. We have got a great portfolio of offerings, and as a result, we're seeing robust demand for services, a trend that has continued to accelerate from the first quarter. Our Q2 revenue was $3.09 billion, up 6% or $174 million over Q1. Non-GAAP operating margin of 20.2% slightly exceeded our targeted range of 19% to 20%. Similar to Q1, we saw very robust underlying demand across the geographies and industries that we serve. Our pace of hiring throughout 2014 and during the first quarter of 2015 ensures that we were prepared to capture this demand as it emerged. This was a clear reflection of the strength of our business model that enables us to make investments in anticipation of evolving demand. I'm pleased to say that we are increasing our full year revenue guidance for the second time this year to at least $12.33 billion and our full year non-GAAP EPS guidance to at least $3. Our performance in the first half of this year gives us strong confidence in this guidance despite the restructuring of our contract with Health Net. The underlying drivers of our revenue growth in Q2 remain consistent with the trends that we've seen in prior quarters. As we've said before, market dynamics are creating a dual mandate whereby clients continue to push hard for operational efficiency while driving digital transformation and innovation at scale. Our run better/run different value proposition continues to resonate well with clients, and as a result, demand for our services remains strong. Dual mandate is also driving a fundamental change in the way IT and operations budgets are allocated. Clients are recalibrating their spending, moving dollars from lights on maintenance and operations projects to new digital initiatives. This shift is good for us because we're in a strong position to capture the enormous opportunities that are emerging from the transition to digital business. To grow our investments in new solutions and services, we're enabling clients to enhance efficiencies and productivity while simultaneously reimagining their businesses and building new capabilities to succeed in the digital era. To fully address the run better/run different needs of our clients, we're investing in four key areas. First, we are enabling our clients to be best-in-class when it comes to running and operating their core systems and business processes. As such, we're constantly optimizing our traditional services as well as investing in new services to enable clients to achieve higher levels of operational efficiency. We are doing this by finding new ways to simplify and automate clients' core processes, IT applications, and IT infrastructure. Across our applications Infrastructure and Business Process Services, we are creating new delivery models such a shared services and industry utilities. To help us enhance these delivery models, we're deploying automated software engineering, artificial intelligence, and other tools for advanced automation. Our home grown automation tools like ad pod and automatica (4:58) combined with tools that we obtained from the acquisition of TriZetto placed us in a strong competitive position to deliver these new models. The second area where we're investing is in capabilities that enable our clients to drive digital transformation at scale. As digital technologies become mainstream, organizations must continuously innovate to deploy these technologies to drive market differentiation and performance. For Cognizant, digital is more than just technology. Digital for us means the ability to connect technology, data science, devices, design, and business strategy to change a business process or a customer experience. And given the pace of technology change, our clients not only want single point digital solutions, but have a need to innovate on a continuous basis and make innovation a part of the organization's DNA, what we refer to as innovation at scale. 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 is comprised of three elements. The first is the Digital Works' idea lab where we work with clients to create an approach to imagine the digital future of a business process or a customer experience and to identify a series of specific digital opportunities or ideas based on their vision of the future. Once the ideas have been prioritized, the second step is to design and prototype specific digital solutions in our Digital Works' laboratory which is a physical space where Cognizant works directly with clients to bring together designers, strategists, and technologists to visualize, plan, and prototype the new digital initiatives. And finally, in the Digital Works foundry, we work with clients to scale up their digital initiatives by re-architecting legacy environments, connecting new solutions to existing systems, and creating supporting capabilities in areas like rapid software engineering and security, which are necessary to bring digital ideas to enterprise scale. We find that our integrated Digital Works approach combining design, strategy, technology and industry expertise, coupled with the physical space for co-innovation plays to our strengths and is distinctive in the market. Our third area of investment is in our consulting practice, which is an integral part of our value proposition. Cognizant Business Consulting continues to take a lead role in many of our transformation engagements by helping architect solutions and drive ongoing change management to ensure success in our clients' businesses. Our consultants bring tremendous expertise in industries and functional areas, and we continue to build on that strength. In addition, our consulting practice is deeply integrated with our technology capability and our Business Process Services. Across clients' business, technology and operating model transformations, our consulting practice plays an important role through capabilities such as IT, business and digital strategy, operational improvement, programming change management, and process redesign. Our fourth key area of investment is platform-based solutions and industry utilities that enable clients to achieve new efficiency frontiers and at the same time deploy digital technologies more quickly. We've spoken to you in the past about the trend we've seen towards newer as a service utility models and platform-based solutions which distribute fixed cost across multiple customers in an industry. These models not only drive efficiency but can also enable enterprises to run differently by deploying digital technologies enabling more rapid time-to-value. With that summary of our four key areas of investment, let me close by saying that our willingness to invest in and explore new commercial models make bold decisions about investing early in new technologies and our recognized strong leadership has provided us a solid foundation and a strong platform for growth. Given Cognizant's strong entrepreneurial culture and our ability to adapt to change, I'm confident that we're well-positioned for the next phase of our journey. I'll hand the call over to Gordon to discuss our performance, and then to Karen to provide more financial details. I'll return later for Q&A. Over to you, Gordon.

Thank you, Francisco. We're very pleased with our performance for the first half of 2015. As Francisco said, we have been well-positioned to take advantage of a strong underlying demand environment. The mix of services and capabilities within our portfolio enable us to benefit from the current shifts in clients' spending priorities. As noted previously, clients are focused on driving efficiency of operations and on driving down their cost of operations, in order to remain competitive and to fund their digital transformations. Let me now provide some more context on performance within our individual industry practices. Our Banking and Financial Services segment grew 7.7% sequentially, and 18.1% year-over-year, driven by strength in both banking and insurance. Within banking, growth was broad-based across our clients, who remain focused on cost optimization, vendor consolidation, regulatory compliance, and cyber security. In addition, there is an increased focus on automation and digital, particularly in areas that improve customer experience and customer self-service. Within insurance, we continue to see strong demand for solutions which help transform both the claims and underwriting processes, delivering both greater efficiencies and improved customer service. For example, during Q2, Cognizant helped a leading U.K. bank to conceptualize, design, and build an innovative new solution for its mortgage business. This engagement involved creating new digital channels for mortgage processing by intermediaries. The end result was a significant increase in the volume of business from brokers, and as much as a 75% reduction in the time it takes for new broker on-boarding. Our healthcare segment, which consists of payer, provider, pharmaceutical, biotech, and medical device clients, grew 2.1% sequentially and 39% year-over-year. The year-over-year increase includes the impact of TriZetto. As the healthcare landscape is changing rapidly, we continue to see our payer clients take a cautious approach to spending. An increased focus on medical cost, consumerization, and a changing regulatory environment is driving consolidation, as well as an ongoing search for solutions that fundamentally change the business model and economics of healthcare management. Given our prominence in the healthcare industry and long history of helping healthcare clients during times of consolidation, we believe that we're well-positioned to partner with our clients as they navigate these transitions. An example of industry consolidation is the proposed acquisition of Health Net by Centene announced in early July. As a result of the acquisition, we do not expect that the seven-year master service agreement with Health Net covering end-to-end administrative services will be implemented. However, with our existing relationship extended through 2020, we're pleased to say that Cognizant will remain a key strategic technology and operations partner to Health Net. In addition, we negotiated the right to license from Health Net certain intellectual property. We expect to leverage that IP, along with TriZetto software and Cognizant's assets, to continue to drive our platform-based solutions. Moving on to our life sciences business, we continue to see a trend towards multiservice deals leveraging cloud technologies and platforms. Luminous, a world leader in medical devices, deployed Cognizant's proprietary platform MedVantage, a cloud-based, integrated, complaint management solution that we built on the Force.com platform. By seamlessly integrating with Luminous's existing salesforce.com infrastructure, MedVantage enables Luminous to provide its stakeholders improved service, efficiency, and reporting. The MedVantage platform is a good example of how we closely collaborate and work with cloud-based providers to enhance functionality. Our retail and manufacturing segment was up 5.4% sequentially and 12.4% year-over-year. We continue to see an improving demand environment, particularly around modernizing supply chains, as well as driving digital and multichannel commerce solutions. On the manufacturing and logistics side, we're working with a major auto manufacturer to integrate Apple Watch and other wearables into their vehicles, providing better analytics and insight, and ultimately driving a better customer experience. In designing this solution, we brought together our multidisciplinary capabilities, including product engineering, embedded systems and Internet of Things, as well as analytics for enhanced customer experience. Another example is the work we're doing for one of India's leading engineering conglomerates to modernize its technology landscape and help digitally transform its businesses to deliver innovative products, provide superior customer service, and drive growth. This is a good example of how we've leveraged our global expertise to penetrate new markets and drive new areas of growth. Our other segment, which includes high-tech communications, information, media and entertainment clients, was up 11.5% sequentially and 20.3% year-over-year, driven by strong demand across all areas. Let me now turn to our Horizon 2 service lines. We continue to be pleased with the market traction we're seeing across all three service lines: Cognizant Business Consulting, Cognizant Infrastructure Services, and Cognizant Business Process Services. Each of these grew faster than the company average. As Frank mentioned earlier, Cognizant Business Consulting, or CBC, continues to be a critical competitive differentiator for us. Today, in approximately 70% of consulting deals, CBC competes primarily against Tier 1 global consulting firms. In addition to standalone consulting engagements, CBC today leads many of our transformation deals, helping architect the deals, reengineer processes, and drive change management in our clients' businesses. Reflecting our growing strength in consulting, Cognizant was recently named a leader in the Forrester Wave Business Transformation Consultancies report. Cognizant is one of just five global companies to be named a leader. We were recognized for the investments made in high-quality assets for large-scale business transformations, including building up software and other reusable assets that position us to exploit the long-term trend towards asset-based consulting. Cognizant Business Process Services, or BPS, saw a continued success during the quarter, led by work in insurance, healthcare ,and financial services. Outsourcing of business processes is a crucial component of bringing operational efficiencies to our clients and increasing technology and automation and increasingly, technology and automation are an integral part of the solution. Cognizant Infrastructure Services continues to see robust growth, primarily in solutions that drive simplification, predictable operations, and accelerated delivery. Increasingly, this is being delivered by combining applications and infrastructure, and enabled by newer technologies such as the hybrid cloud. From a geographic standpoint, North America grew 5.8% sequentially and 25.7% year-over-year. Our European operations recorded strong growth. Compared to the first quarter, revenue from Europe was up 5.5% sequentially while the U.K. grew 4.4%. Continental Europe grew 7.3% sequentially. Despite recent macro headlines, our pipeline in Europe continues to be strong. Finally, we saw continued strong traction in the Rest of World, which was up 10.7% sequentially. Growth was driven primarily by strength in markets such as India and Australia. For the second quarter, we were successful in growing our revenue by a record $174 million sequentially while keeping our global head count essentially flat. During 2014 and the first quarter of 2015, we hired aggressively. We did this hiring as well as significant workforce retraining to ensure that we would be ahead of the curve in having the right skills and resources in place to meet the growing demand – client demand for digital transformation. These investments have clearly positioned us to capitalize on the surge in demand environment leading to record revenue growth for the second quarter. After the staffing investments in 2014 and Q1 of this year, totaling approximately 46,000 net additions, we have the opportunity to drive utilization back up to a more appropriate level while meeting client demand and we moved well down this path during the second quarter. This has freed up dollars to fund our annual compensation increments and key investments in our business while meeting our margin commitments we have set for our shareholders. While attrition is historically seasonally higher in the second quarter due to the timing of bonus payouts and associates leaving for higher education, second quarter annualized attrition this year at 19% was higher than normal. Although higher attrition was an industry-wide phenomenon this quarter, we are working to improve our retention levels through a number of employee engagement initiatives. Due to our industry-leading growth, we know that we provide career opportunities that most others simply cannot. As we have transitioned more towards digital services these past few years, we've been working with our employees to provide clear career paths and role expectations as well as re-skilling our people for the next generation of demand. We are implementing programs to ensure that we will have a highly motivated and engaged workforce who share in our success and understand the tremendous career opportunities that we offer. Over time, we're confident that our attrition numbers will trend down towards more historic levels. We're pleased with the strength of our performance across industries, service lines, and geographies that we serve during the second quarter. With that, let me have Karen now provide more color on the financial details of the strong performance.

Thank you, Gordon, and good morning, everyone. Second quarter revenue of $3.09 billion represented growth of 6% sequentially and 22.6% year-over-year. While currencies were relatively stable on a sequential basis, on a year-over-year basis, we had a $75 million, or 300-basis-point negative impact to revenue growth due to currency. Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition related expenses, was 20.2%, slightly above our target range of 19% to 20%. This positions us well to absorb wage inflation and promotions that take effect in Q3 while still being able to continue to invest in the business. Non-GAAP EPS of $0.79 exceeded guidance by $0.07. The Q2 tax rate was lower than anticipated due to the favorable settlement of a discrete tax item during the quarter. Consulting and technology services and outsourcing services represented 57% and 43% of revenue respectively for the quarter. Consulting and technology services increased 8% sequentially and 35% year-over-year. Outsourcing services were up 3% sequentially and grew 9% from Q2 a year ago. During Q2, we saw continuation of the trends that we have seen in recent quarters whereby clients are shifting spend from legacy application maintenance towards discretionary spending, including digital and other transformational projects. During the second quarter, 35% 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 285. During the second quarter, we repurchased 2.4 million shares for a total cost of approximately $153 million. To date, we have repurchased approximately 38 million shares for a total cost of approximately $1.4 billion under our stock repurchase authorization of $2 billion and have approximately $600 million remaining unutilized. Our fully diluted share count remained unchanged at 613.9 million shares in the quarter. Total receivables were $2.5 billion at the end of the quarter, and we finished the quarter with a DSO including unbilled receivables of 71.9 days. This is down from 73 days in Q1. The unbilled portion of our receivables balance was approximately $387 million, down slightly from $388 million at the end of Q1. We built approximately 50% of the Q2 unbilled balance in July. Our balance sheet remains very healthy. We finished the quarter with approximately $3.57 billion of cash and short-term investments, up by approximately $217 million from the quarter ending March 31, and down by approximately $563 million from the year-ago period. Our outstanding debt balance was approximately $1.1 billion at the end of the quarter, including $100 million outstanding on our revolver. Operating activities generated approximately $456 million. Financing activities were approximately $149 million use of cash during the quarter, and capital expenditures were approximately $76 million during the quarter. Let me now provide some color on our business and operating metrics. During the quarter, we added approximately 300 net employees and we ended the quarter with approximately 218,000 employees globally. Approximately 204,000 of our employees were service delivery staff. As expected, utilization was up on a sequential basis. Offshore utilization increased by almost 300 basis points to approximately 73%. Offshore utilization excluding recent college graduates who are in our training program was approximately 78% and on-site utilization was approximately 93% during the quarter. I would now like to comment on our outlook for Q3 and the full year. As Frank mentioned, we are increasing our full year revenue and non-GAAP EPS guidance to reflect the robust demand environment and the strong over-performance during quarter two in spite of the anticipated loss of $100 million in incremental revenue from Health Net. We are revising our full year revenue guidance to at least $12.33 billion, representing revenue growth of at least 20.1% over 2014. This does anticipate slower growth in the second half of this year to cover additional downside risk or disruption due to potential M&A activity amongst our clients. 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 course of the year. For the third quarter of 2015, we expect to deliver revenue of at least $3.14 billion. During the third quarter and for the full year, we expect to operate within our target non-GAAP operating margin range of 19% to 20%. Due to the impact of wage increases and promotions, which are effective in Q3, we would not expect our non-GAAP operating margin to be above this range for the remainder of the year. For Q3, we expect to deliver non-GAAP EPS of at least $0.75. 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 613.9 million shares, and a tax rate of approximately 26%. We are raising our full year non-GAAP EPS guidance by $0.07 to at least $3. This guidance anticipates a share count of approximately 613.9 million shares and a tax rate of approximately 25.2%. Now, we would like to open the call for questions. Operator?

Thank you. Our first question is coming from the line of Darrin Peller with Barclays. Please proceed with your question.

Thanks, guys. Nice job on the quarter. Just want to touch first on the overall upside to guidance in the quarter. Obviously, it was pretty strong. The guidance raise came despite Health Net again. So just when we look at the overall guidance, can you walk through some of the drivers and strengths specifically what actually drove the beat for the quarter? And I understand, Karen, you mentioned second half a little bit slower trend, but are there actually any deals you see happening besides Health Net that would impact that?

Hi, Darrin. This is Gordon. So for the quarter, the upside was very broad-based. It wasn't one customer, it wasn't one industry. The common theme, it was more on the discretionary and innovation and digital side, so if you think about our traditional outsourcing business versus our consulting technology business, it's clearly more on the innovation side. When we look at the rest of the year, obviously, we had the headwind of – we were expecting an additional $100 million of revenue from Health Net and that was baked into our pipeline plan. Even without that, we raised guidance $20 million beyond the Q2 beat. Nothing specific that concerns us for the second half of the year, however, obviously, there's a lot of M&A activity going on right now. So we certainly want to have an abundance of caution in case we get surprised by something as the year goes on. At this point, there's nothing that we know of that will surprise us, but it's one of these things you certainly want to be cautious of in this environment.

Okay. Could you just quickly mention what the constant currency growth rate is embedded in your guidance? And I'll turn it back in the queue, guys. Thanks again.

So with – the guidance assumes that rates are essentially where they were yesterday, so no fluctuation of rates and they've moved a little bit since July, obviously, the euro and the pound, but that's not very significant for Q2. The constant currency growth was overall about 6% and on a year-over-year basis was 25.5%.

Okay. Got it. Thanks again.

Thank you. Our next question is coming from the line of Ashwin Shirvaikar with Citi. Please proceed with your question.

Thank you and let me add my congratulations for the very strong quarter. Frank, I want to take you up on the digital transformation at scale comment. And the question is this, can the mainstreaming of digital services and sort of the demand profile that comes with it, is that enough of an offset to be sort of the lower growth and possibly even shrinkage of your traditional services? So how are you thinking about that? Francisco D'Souza - Chief Executive Officer & Director: Yeah, Ashwin, it's a good question. I would start by – at the very 50,000 foot level and say, look, there's clearly a trend around the world across businesses and governments to become more technology intensive, not less technology intensive. So if you think about that as sort of the big proxy for demand, then I would say that, to the extent that we are enablers of helping our clients be more technology intensive, the demand environment is strong at the 50,000 foot level. When I look at the more micro level perhaps, what I would say, Ashwin, is that there are a couple of different things which I think are driving demand in digital, which I think are instructive to answer your question. The first is that, as I said before, it's less now about helping a client with a point digital solution and much more about helping clients innovate at scale and sort of adopt continuous innovation. So that sort of creates for us an opportunity, and we're doing this with some clients around building an operating model around continuous innovation. So there's a revenue stream there, if you will, that we think we can leverage on a much more continuous basis. So that's point number one I'd make. The point number two, which is I think very important is that, whenever we've seen these big technology shifts, whether it's the digital shift we're seeing now, the Internet shift that we saw about a decade ago, the client service shifts that we saw a decade before that, there is always a big imperative that clients have around integrating the new technology capability, digital in this case, with the legacy, and that means a lot of work around legacy modernization, a lot of work around new architectures, a lot of work around wrapping the legacy with the components that are necessary to support digital business. And so net-net, I do think that there's plenty of demand here, and the opportunity for us to offset the efficiencies that we're seeing in the traditional business with discretionary and new digital projects is definitely there.

Got it. That's very helpful. Can I ask with regards to Health Net, you lose an anchor client opportunity? Can you talk about the pipeline in terms of the ability to replace that, and when can we return to a more normalized sequential growth expectation?

Ashwin, it's Gordon. When we look at the healthcare business, obviously, growth was a bit slow in the second quarter. There's a lot of change going on in that industry, whether it's M&A or regulatory change, consumerization, all that. When we look at our positioning in the market, we feel very good about that. We look at who our clients are, how our clients look to us for, not just execution but advice on how to both run their business better and for innovation. We feel very good about that. And equally importantly, the change in the Health Net acquisition does not in any way impact our strategy of – our belief that the industry, or portions of it, will move to end-to-end solutions, so the type of deal that we did with Health Net, we think those deals are still out there. We're actively talking to clients about that. So certainly the Health Net change – restructuring was a little bit of a setback for us, but in no way changes our strategy, and everything we're seeing in the market, everything that's happening with the TriZetto integration, makes us feel that we are absolutely making the right decisions on our strategy, and the payer side is a little soft right now, for external reasons. But that's a cycle, and that's the reason we have a portfolio of businesses. So as one is a little softer, another is a little stronger, but long-term, we think healthcare is a terrific place to be in. We think we're better positioned than anyone else in the industry.

Great. Thank you. Congratulations.

Thank you. Our next question is coming from the line of Joseph Foresi with Janney. Please proceed with your question.

Hi. So I was hoping we could get maybe a little bit more granular on healthcare. Is there any way to quantify the cross-sell opportunities at TriZetto, and maybe even the impact in that business from recent acquisitions? Anything on the outlook going forward?

Sure. So the healthcare – the TriZetto integration is right on track. We're feeling very good about it. The motivation levels within the TriZetto business are great, we've retained all the senior management, we still feel very good and confident about the $1.5 billion of synergy revenue we expect from the deal. As we mentioned on last quarter's call, we're already – that's already measured in hundreds of millions of dollars. We're now actively talking to clients about, as I mentioned, the end-to-end solutions, leveraging the TriZetto platform. So I think things are right on track there. It's also reinforcing a product culture within Cognizant, so we're getting the strategic benefits of that. So we're moving ahead exactly as planned and the receptivity we're seeing from the industry, both for the traditional TriZetto business and the extra investment we've made, both in development as well as the capabilities Cognizant brings to the table in terms of hosting and BPO, clients are saying this is great, and we're winning deals.

Okay. And then just along that line, we've seen some healthcare acquisitions outside of just the TriZetto side of things. What's your thought of the impact on that business, the healthcare business in total for you, and any thoughts on the growth of that business going forward? Can we expect it to be above the aggregate growth rates, or anything that you can give us as we look towards next year?

Sure. So, clearly, the payer side of healthcare is going through a consolidation period. We've seen this in the past in other industries, banking is probably the best example. As that happened, we did very well in the banking consolidation. As we're looking at the healthcare consolidation, some of the deals that have been announced, those are our customers, and we expect those customers to look to us both to help with the integration work and also to help them think about how do they fundamentally transform their businesses. There's going to be a lot of pressure on the cost side, which we think will serve to our favor, but I think that pressure will manifest itself and look at how do you change processes, how do you change the way you do business and because of our consulting capability, we'll be very well-positioned for that. So what we don't know, obviously, is there's some short-term freezes in decision-making. At this point, we've not seen any of that, but as I mentioned earlier, clearly we baked that into our guidance, so we have that cushion in case some of that happens. But if history is any indicator based on what consolidation in other industries, I think long-term, we'll be well-positioned particularly since these are the buyers that have been announced so far are customers with whom we have deep relationships and also with the target companies we do work. So we know those systems, we know those processes. So we'll stay close to our customers. But at this point, we think we're quite well-positioned to help them through the transition.

Thank you.

Thank you. The next question is coming from the line of Edward Caso with Wells Fargo Advisors. Please proceed with your question.

Hi. Good morning. Let me add my congratulations. I was just curious earlier I think Francisco made a comment about helping clients with their legacy integration during this major shift to digital. One of your major competitors seems to be very active in buying front end digital agency capabilities, and I'm sort of curious as you're (38:16) playing as well in the digital agency part of the digital world or are you more focused in the middle and back office? Thanks. Francisco D'Souza - Chief Executive Officer & Director: Ed, it's Frank. As I said, we've developed the Cognizant Digital Works methodology, which is really focused on taking a client from the very front end of ideation around digital all the way through the middle and back office of prototyping and then taking the solutions to scale through the legacy integration. So we're very much playing start to finish, if you will. And we believe that this approach that we have of integrating strategy, design, technology, altogether under the umbrella of the Cognizant Digital Works methodology is unique and differentiated. So we will continue to look to beef up our capabilities across the spectrum, but particularly in the front end design and strategy pieces, because that process is working quite well for us.

My other question is comparing Europe, Continental Europe to the U.S., its focused on sort of run (39:38) the business work versus sort of the new digital work. Is there a different sort of feel into how the interest, demand in Continental versus the U.S.? Thanks. Francisco D'Souza - Chief Executive Officer & Director: I think you have to separate it out a little bit. If you look at the continent, I'm going to exclude the U.K. for a minute here, but if we look at the continent, I think there's still a very healthy pipeline of what we think of as run better kind of work. And that's, frankly, because the businesses in Europe, as you know, continue to face slow economic growth – macroeconomic growth environments. And so there is continued pressure there. And of course, as we've said in the past, Ed, the businesses on the continent, if I could make a generalization, haven't outsourced the run the business kinds of things as much as the counterparts in, say, the U.K. or in the U.S. So there's upside there. Having said that, I would say that many of the countries in Europe are very digital, digitally aware, digitally savvy, and if you include the U.K., the penetrations of digital technologies like mobile and so and so forth in many of these countries and some of these countries are deeper than they are in the U.S. So there is a strong demand for digital in Europe as well. So we're really seeing in the continent this dual mandate of run better and run different playing out, and the demand there, I would say, is quite evenly based.

Thank you.

Thank you. Our next question is coming from the line of Brian Essex with Morgan Stanley. Please proceed with your question. Brian L. Essex - Morgan Stanley & Co. LLC: Good morning and congratulations again on the quarter. I was wondering from a higher level of guidance perspective if you can give us a little bit of color on expected seasonality. It looks like historically the third quarter has been a much stronger quarter, but last year, you kind of accelerated in the fourth quarter off with (41:45) some pressure in the third quarter. It looks like this year you've got a little bit softer expectations for the second half. I guess question number one, is that more discretionary in nature and more caution on recent discretionary spending trend? And I guess the second question would be do you anticipate returning to more of a stronger 3Q seasonality eventually or is this a new trend in the back half? Francisco D'Souza - Chief Executive Officer & Director: Hey, Brian. It's Frank. I'll just give you sort of comments at the high level, then I'll ask Karen to give specific comments on the guidance. In general, if you look at our demand patterns, Q2 tends to be the strongest quarter. If you go back historically, and the reason for that is that our clients are by and large on a calendar budget cycle and clients tend to have their budgets finalized some time during the first quarter. So the second quarter is the quarter where you get essentially the full quarter impact of discretionary spending based on budgets that have been approved by the client. So generally speaking, Q2 tends to be the strongest quarter. Q3 is a good – historically has been – is a good quarter but not quite as strong as the second quarter and then Q4 tapers off as the year winds down. So that's been our historical demand pattern. Last year was a little different because of the impact of the acquisition of TriZetto in the third quarter and fourth quarter, as you saw, some of that. So you have to strip that out from the numbers and I think if you strip out the TriZetto acquisition, you generally get the same kind of a demand pattern.

Yes. So I think I would just echo what Frank said, Brian, about historical seasonality being – Q2 being the strongest, Q3 tends to slow down a little bit, then Q4 being the slowest. Last year, we had two things. So in Q3, as you remember, is when we had to adjust our guidance and we had some one-time customer hits in Q3 of last year and so Q4 was a little bit of an anomaly. And then also we had the TriZetto acquisition which kicked in the – around November 20, so that was about $80 million of growth in Q4 of last year sequentially. So this year we would expect a much more traditional pattern with Q2 being the strongest, Q3 a little bit slower, and then Q4 will be a little bit different than our historical pattern. Historically, our core business slows down quite significantly in Q4, but we will have TriZetto. Obviously, Q4 is their strongest quarter typically given the nature of their business. So it will be a little bit more balanced this year than it would have been historically for us. Brian L. Essex - Morgan Stanley & Co. LLC: Got it. And then on a discretionary side, any caution around spend or thoughts on customer budgets as we go into the back half of the year?

I think really other than the conversation we had around M&A earlier and just being cautious around whether there's any slowdown as customers go through some of that transition in the next few months, there's nothing other than that that we see on the horizon right now. Brian L. Essex - Morgan Stanley & Co. LLC: Helpful. Thank you.

Thank you. Our next question is coming from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.

Hi, guys. So just wanted to ask about the head count growth, I know it was flat. So for us, looking at the model, it won't have an impact on 2015 head count growth as utilization increases, but just trying to figure out if the slowdown in head count growth will impact future growth rates outside of 2015 as we get beyond 2015. Thanks.

Hey, Bryan. It's Gordon. The answer is no, it doesn't. Let me explain why. First of all, with utilization, and let me just talk about blended utilization combined on-site and offshore, we're still two points below where we were at the beginning of 2014. From the beginning of 2014, we dropped about five points and that was a very conscious decision. And now as we had to shift our workforce and re-skill our workforce, we've now taken it back up but we still have some more room to take it up. So even when you think about the rest of this year, you'll still see some increasing utilization. We're doing our college hiring just as we normally would. So the college kids that come on board now through the end of the year, those people will be available for billing next year, and then obviously for lateral hiring, that's really just-in-time hiring, so we turn that on and off as we need. The key is having that pipeline of the college kids, because it's a long training period. So we'll be in good shape to support next year's growth.

Okay. And then just quickly, I might have missed this, but just what's the pipeline look like for tuck-in acquisitions or anything out there that could be more sizable? Thanks so much. Congrats. Francisco D'Souza - Chief Executive Officer & Director: Let me talk about it. We continue to actively look at acquisitions, and I think we've got a series of – as we always do, the pipeline of small tuck-in acquisitions continues to be strong. The screen is very much the same as it historically has been. I would say that when we look at technologies, new technologies, new solutions, the pipeline might be a little bit more weighted towards digital and looking at digital capabilities in different parts of the world, in particular, to give us footprint in those areas. We're also looking for acquisitions just in general to get us into certain parts of the world where we don't have as strong a footprint as we would like. I would probably single out or point to Asia as being one area where you'll see us potentially do some acquisitions to strengthen our position in key markets in Asia. We've already done, as you know, the acquisition of Odecee in Australia, which was both a digital acquisition and also helps us strengthen our presence in Australia. So that's the – I would say that's sort of the color that I can provide on the pipeline and of course we continue to be active and keeping our eyes open as assets become available. And as with TriZetto, we don't expect to do another large-scale acquisition until we feel that the TriZetto integration is well on track, which as Gordon said, we feel good about at the moment. But we're always looking in the market and seeing what's available out there.

Okay. Thanks for the color.

Thank you. Our next question is coming from the line of Lisa Ellis with AllianceBernstein. Please proceed with your question. Lisa D. Ellis - Sanford C. Bernstein & Co. LLC: Hey, guys. Good morning. Can you talk more broadly about how your talent and labor strategy is evolving, both as you scale the business and then also as you're meeting the shift in demand and need a more diverse set of skills?

Sure, Lisa. It's Gordon. I think you hit the key thing, as we need a more diverse set of skills. We do a wide range of businesses across multiple geographies. So first, from a sourcing standpoint, we now have college recruiting across the world, and here in the U.S., we recruit at close to 20 universities, plus another 10 or 15 business schools. We've dramatically expanded our European college programs and are moving it into Asia as well. From a lateral hiring standpoint, just as our scale and brand has changed dramatically over the last five years, people view us as an incredibly dynamic and attractive place to work. So when I look at all of our statistics in terms of quality of hire, yield rates on lateral hires, that all looks good. Now, what we need to do, though, is in how we manage the people, since it's no longer one-size-fits-all. So we're very much, and we're well into it, making sure that people understand what the different roles are, what it takes to move up in the organization, so people can manage their careers. And we have a very transparent policy and program, so people from – everything from performance management to promotions, we call this Cognizant Career Architecture. So I think we're actually in quite good shape on this. This is not a place where we put our head in the sand, but we're being proactive, thinking about what's our workforce going to evolve to over time, how do we constantly re-skill people, how do we motivate millennials? Attrition was obviously up a little bit in this quarter, but when I look at the things we're doing, we're convinced we're doing the right stuff and it just takes a little time to kick in. Lisa D. Ellis - Sanford C. Bernstein & Co. LLC: Terrific. Thank you. And then also, as the business shifts a bit, how is the competitive environment shifting, like who are you seeing more frequently, and who are you seeing less? Thanks. Francisco D'Souza - Chief Executive Officer & Director: I think – Lisa, it really depends – it's Frank. I think it really depends on what service line and what geographies you're talking about. As you know, our industry tends to be quite highly fragmented. And, particularly in the digital world, there are smaller boutiques that we sometimes compete with on the front end. But I'll make general broad statements. I think, given our end-to-end value proposition, the run better/run different value proposition, we think that's really driving our growth. We tend to compete most frequently with the large global end-to-end providers that have both digital capabilities and the outsourcing capabilities. We tend to compete now much less with the traditional offshore or India-based pure play, I think of as run better firms. Although certainly they're still an important factor in the marketplace and so on. But we're increasingly competing more with the global multinationals who are – who have both the run better and the run different value proposition. Lisa D. Ellis - Sanford C. Bernstein & Co. LLC: Terrific. Thanks, guys.

Thank you. The next question is coming from the line of Sara Gubins with Bank of America Merrill Lynch. Please proceed with your question.

Hi. Thanks. Good morning. Given the Health Net/Centene deal, could you help us think about the potential timeline for building the BPO as a service healthcare platform with TriZetto and some Health Net capabilities, and maybe when you might be able to bring on a new client? Francisco D'Souza - Chief Executive Officer & Director: It's Frank. Let me try and address that, and Gordon jump in as well. We have a good pipeline of those types of deals at the moment. Now, let me also caveat that by saying that our pipeline of deals tend to be – are smaller than the Health Net deals. The Health Net was a very, very large deal, but we have a good set of clients that we're talking to around the similar model as Health Net. And the pipeline, I think, of those deals is good. I would remind you that, in our mind, really any client that is running the TriZetto platform is a potential candidate for this kind of model. So we think that, when you look at the value proposition from a client standpoint, and you say, what's the value proposition? We think that our ability to run the software, host the software, run the business process, given our deep domain expertise in healthcare, plus the knowledge of the TriZetto platform, really is very, very compelling to clients. So I don't want to really venture a guess as to when we will be able to talk to you about another similar kind of deal, but my hope would be that, let's say, in the next four quarters, we'd be able to come and talk to you about a similar kind of deal structure, with a client similar to Health Net. But I want to be clear. I don't think we have anything of the size and scale of Health Net right now that we're discussing.

Great. Thanks. And then, just on the wage increases for the third quarter, does the jump in attrition change anything about your plans for wage increases? And could you talk about magnitude of them? Thanks.

Sure Sara, (54:25) yeah, as we've said, for the last six months, and as we've practiced in prior years, we pegged our wage increases right in line with the industry and this year, that translates into high single digits offshore, low single digits on-site. The attrition doesn't necessarily change the magnitude of the wage increases, because people stay for – obviously, compensation is important, but it's also career development, it's the opportunities to move up on the organization to be empowered to take opportunities, the excitement and how dynamic is the organization. So it's a combination of compensation, but also a broad range of employee engagement programs and very importantly, the career architecture work that I mentioned earlier. So people understand our growth rate provides unparalleled opportunities for their long-term career growth.

Thank you.

Thank you. Our final question of the day is coming from the line of Tien-tsin Huang with JPMorgan. Please proceed with your question.

Great. Thanks. Great results all around. Just wanted to ask also on margins. Just – I know there's a lot of chatter in the press around Cognizant managing costs clearly wasn't demand driven. So I'm curious are you taking a different approach to cost and margins?

So the big thing obviously we did is we took utilization up. We slowed down hiring. I view that as that's good operational discipline. And what we want to make sure is that we have the dollars available to make the long-term investments rather than not having operational excellence. So clearly, we slowed down hiring. That's good for employees, because our bench is getting a little big. I think some employees were saying, hey, where's the learning if I'm sitting on the bench? So we've taken our bench down substantially, which I think is very good for employees. The other things such as travel, well, we need to walk the talk. We talk to our clients about being digital, being virtual. Our use of whether it's videoconferencing or other collaboration tools create great opportunities for people not to be on airplanes all the time. It's interesting. As we slowed down travel, our video usage went up 40%. That's great. We're interacting with clients on that. So part of that, it's not – yes, it's great to save the money so we can invest in the future, but it's also important that we're walking the talk on what the future work looks like.

Yeah, it makes a lot of sense. And then I'm just curious, just on the outlook on outsourcing versus the consulting tech piece, is this the new normal for now? I'm just curious if outsourcing can potentially accelerate given what you see in the backlog and pipeline. Thanks. Francisco D'Souza - Chief Executive Officer & Director: I think it's – Tien-tsin, honestly, it's hard to make a forward projection on this one. I think outsourcing will continue to be healthy. If you look at the sort of dynamics of outsourcing, you have a few things going on. You have parts of the world, like I said earlier, like Continental Europe that are still first-time outsourcer, so that's one, I would say, on the positive side. The second positive driver is that you've got parts of outsourcing like Business Process Services and Infrastructure Services where penetration rates are still relatively low. So that's another positive driver of demand. So those are the positives. Then you look at what's offsetting that and you say, clearly clients are shifting budgets from lights on maintenance over to digital. And so that pulls demand down on the outsourcing side. But as long as you're well-positioned to pick it up on the digital side, which we feel like we're very strongly positioned, you pick up those dollars and potentially you pick up more because it's not always a dollar for dollar swap that happens there. So net-net, how does that all net out in terms of the trend line over the next few quarters? It's very hard to make a prediction but I think the message you should take away is that the outsourcing service line is still fundamentally solid. There's still a very strong value proposition there. There are segments of that space that are still underpenetrated, and that will continue to drive demand and then we'll just see how it – where it nets out in terms of the trend line over the coming quarters.

Understood. Congrats on the results. Francisco D'Souza - Chief Executive Officer & Director: All right. Thanks very much. Francisco D'Souza - Chief Executive Officer & Director: And with that, I 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.

Thank you. Ladies and gentlemen, this does conclude today's Cognizant Technology Solutions second quarter 2015 earnings conference call. You may now disconnect.