Ladies and gentlemen, welcome to the Cognizant Technology Solutions third quarter 2017 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to David Nelson, Vice President, Investor Relations and Treasurer for Cognizant. Please go ahead, sir.

Thank you, operator, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's third quarter 2017 results. If you have not, a copy is available on our website, cognizant.com. Additionally, we have loaded an investor presentation onto our website. This presentation covers the key points discussed on this call. The speakers we have on today's call are Francisco D'Souza, Chief Executive Officer; Raj Mehta, 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, including our Form 10-Q filed later today. I would now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco.

Good morning, everyone and thank you for joining us today. Cognizant delivered solid third quarter results. Q3 revenue was $3.77 billion, which is at the high end of our guided range and up 9.1% year-over-year. Three of our four business segments were strong contributors to our performance. Healthcare, product and resources and communications and media and technology averaged double digit growth rates. Our third quarter digital related revenue grew well above company average. And to further enhance our digital capabilities, we recently announced two acquisitions. Netcentric, a leading independent Adobe partner in Europe and a leading provider of digital experience and marketing solutions for some of the world's most recognized brands. And Zone, a UK based leading independent full service digital agency that specializes in interactive digital strategy, technology and content creation. These acquisitions will broaden our portfolio of digital services and solutions. To continue with our financial results, non-GAAP EPS quarter for the quarter was $0.98 and our non-GAAP operating margin was 20%. For 2017, we delivered three consecutive quarters of strong execution at the top and bottom lines. This consistent performance underscores the soundness of our strategy and investments and the continuing strong demand for our portfolio of services. Turning to guidance, we are again raising the low end of our revenue guidance range and expect full year revenue to be in the range of $14.78 billion and $14.84 billion. And we expect our full year 2017 non-GAAP operating margin to be at least 19.6%. Now, we're in the business to help our clients adapt, compete and grow in the face of continual shifts and disruptions within their markets. Therefore, we've systematically built out significant capabilities to enable clients to transition from the physical to the digital world. Today making that shift has become mandatory for them. Most…

Thanks, Frank. At the core of our competitive advantage in digital is our ability to lead clients through the three layer enterprise transformation Frank just described. This work is the focus of our three practice areas. Cognizant digital business helps clients conduct business digitally by developing virtual channels with customers and creating smart products. Our experts design, prototype and scale digital experiences to reshape clients' products and business models, all aimed at generating new growth. Cognizant digital operations draws on deep process and technology knowledge to help clients reengineer, digitize, manage and operate their core business processes to lower costs and deliver growth. And Cognizant digital systems and technology works with clients to simplify, modernize and secure their heritage, IT infrastructure and applications. In addition, our nearly 6000 consultants as well as CEOs, CFOs, Chief Operating Officers and line of business heads in addition to the CIOs, we've long worked with on issues that cut across strategy, operations and technology. Since digital at scale requires our clients to rebuild all three models, Cognizant will often apply the capabilities of all three practice areas on their behalf. Here's an example of our multi practice efforts. We're partnering with a leading provider of educational content that needed to pivot its business to deliver more affordable next generation learning that is both interactive and immersive. In the first stage of our work, Cognizant digital systems and technology helped the client set up a shared service center. The center consolidated the global systems and technologies, delivering economies of scale and saving tens of millions of dollars and have become the backbone of the clients' more agile and efficient IT operations. In the second stage, our digital business teams worked with the clients to develop a new operating model for content that leads with digital…

Thank you, Raj and good morning, everyone. Q3 performance was solid and we continue to make significant progress on each element of our overall plan. Third quarter revenue of 3.77 billion was at the high end of our guidance range and increased 9.1% year-over-year. Non-GAAP operating margin, which excludes stock-based compensation expense, acquisition related expenses and realignment charges, was 20% and non-GAAP EPS was $0.98. In the third quarter, we completed the $1.5 billion accelerated share repurchase program and today, we declared a quarterly cash dividend of $0.15 per share for shareholders of record at the close of business on November 20. This dividend will be payable on November 30. Now, let me discuss additional details of our financial performance. Consulting and technology services represented 58.6% of revenue and outsourcing services 41.4% of revenue for the quarter. Consulting and technology services grew 11.3% year-over-year, driven by an increased demand for digital solutions. Outsourcing services revenue grew 6.1% from Q3 a year ago. During the third quarter, 38% of our revenues came from fixed price contracts. We continue to make progress towards shifting the mix of our business over the longer term towards more fixed price or managed services arrangement. We added seven strategic customers in the quarter, defined as the potential to generate at least 5 million to 15 million or more in annual revenue. This brings our total number of strategic clients to 350. And now moving to an update on margins. In Q3, we continued to take actions that will improve our cost structure and operating margins, while allowing us to continue to invest in the business for growth. These actions resulted in approximately $19 million of charges related to the realignment program, primarily from severance costs incurred in the quarter. Going forward, we expect to incur additional…

[Operator Instructions] Our first question comes from the line of Tien-Tsin Huang with JPMorgan.

Just I want to ask actually about your margin performance, especially in SG&A, which stood out, it was especially low versus our model. So a couple of questions there. Just the confidence to have the lower SG&A so far hasn't hurt your sales pipeline, your ability to replenish the pipeline, the backlog and then also just gross margin implications in the fourth quarter and next year, given all the moving pieces with utilization and wages and whatnot. I know, you managed the overall margin, but just kind of any help between the two lines would be appreciated.

This is Karen. I think we've been very thoughtful around cost management this year. We knew going into 2017 based on the work that we did late last year that there were opportunities to more effectively manage our SG&A spend, particularly around the corporate functions and we've talked about things like facilities and other costs within SG&A. So, well, SG&A overall was down in terms of dollars, Q3 versus Q3 of last year. We're very comfortable that we have protected the investments that we need to make to continue to grow the business. And, I think you'll see SG&A move around a little bit from quarter-to-quarter as we continue on that path. In terms of gross margin, it is obviously trending a little bit lower than where it had been. Part of what happened in Q3 or a significant part of what happened is that we did take up our variable compensation accrual rates during the quarter. Obviously, the business has performed very well this year. It's been a tough year for a lot of our folks as we've gone through a lot of this transition and so we wanted to ensure that, as we move into next year that we can pay out good variable compensation for the year. So that did put some pressure on the Q3 gross margin as of the year-to-date catch up. What you'll see as we move into Q4 is that raises and promotions will kick in, in Q4 effective in October. Typically that's been in the July timeframe, we did defer that this year with all the transition happening in the company. And then as you said, as we move into 2018 and beyond we'll continue to manage to the operating margin targets that we've set for the organization.

Thank you. Our next question comes from line of Brian Essex with Morgan Stanley. Please proceed with your question.

Karen, I was wondering if you can comment a little bit on contribution of TMG in the quarter, how that might impact your full-year guidance. And the opportunity there is that going to be maybe similar to TriZetto where you have longer sales cycles or how do you think about that and how that kind of builds into the healthcare portion of your platform.

So thanks Brian, so the TMG deal did close towards the end of the third quarter. So there's a small amount of revenue in Q3 for that transaction. As you may know the vast majority of that work is with one client and then there were a number of other third-party clients as part of that contract. It will start to move towards a steady-state essentially in Q4. We have not broken out the size of the transaction. But it is essentially straight line revenue for the next two years and then it will move to more of a transaction based pricing model in the future. There's a combination of contract structures in that deal, but roughly speaking it will be straight line for the next few quarters of revenue.

I know you had some in the healthcare segment exposure to some consolidation, the rumors around a transaction with Aetna and consolidation in the CRO market, are you seeing any of that, it doesn't really seem like you are, but just wondering if you - that's coming up in conversation at all.

Go ahead. I'll let Raj comment on that.

Look Brain, I think over our healthcare - healthcare just remains strong for us. Nothing or any conversations or impacts right now of any potential acquisitions, I think overall as you know we've invested a lot in our healthcare business. We see strong growth in both the mid-size payers along with large payer company out there. In addition to that we continue to see a lot of opportunities on our BPaaS solutions.

I think a move that remains to be seen what happens if some of those deals go through, the Aetna CVS deal for example. I think it's early to tell at this point.

Thank you. Our next question comes from the line of Keith Bachman with BMO Capital Markets. Please proceed with your question.

Hi, I want to follow on Tien-Tsin's question a little bit on the margins. It looks your guiding operating margins on a non-GAAP basis in Q4 to be called the mid-19 level. And calendar year it sounds Q4 would also still benefit from some workforce realignment. My question is, can I think you said that in next year, calendar '18 you wouldn't anticipate further headcount reductions. But I'm unclear on without the headcount reductions, how do you continue to advance those operating margins, particularly given some of the gross margin pressure that still seems to be exhibiting. If you could talk a little bit about the forces from here, how do you continue to try to march those operating margins up, when most your competitors' margins are eroding.

Keith, let me break that into a few pieces. In terms of the Q4 margin, we are guiding to a slightly lower Q4 margin than Q3 that is because of the raises and promotions that will kick in in October that's typically about 100 basis points of margin decline. We have obviously not paid all of that into our guidance because we will continue to see some of the benefits occurring from the cost optimization that we've taken so far. So that's what's pushing down the Q4 margins. As we move into 2018 and beyond. We haven't really said that you know we haven't made a statement one way or the other frankly about headcount and what will happen to headcount next year. Margin improvement as we move into 2018 and then into 2019, 2018 will be a continuation of the cost savings that we generated this year and a number of those cost savings didn't start until the mid-summer timeframe. So we'll get the full-year benefit of that. There are additional cost saving opportunities that we continue to look at, whether it be around facilities or travel or other types of expenses as well as headcount and what that means going forward. And then as we move further into '18 and into 2019, we have said that a lot of the margin improvement would come from the shift in the business towards the higher, you know, continuing to move towards higher margin digital business as well as CPaaS, our platform business becomes a larger part of the organization and starts to mature and starts to reach strong margin profile in that business as well.

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

I guess another question on this point about, you now, now that you've got utilization levels back to basically their all-time highs, 93 onsite and about 80 offshore. Can you give some detail around, so what you're doing from a pyramid structure and operation efficiency initiatives to centrally take utilization up further as we look forward. I know you've talked about how you're sort of taking Cognizant into a new stage of maturity when it comes to how you're managing the labor model. Can you just give a little bit of color around that? It feels like now you're sort of at the stage where you've gotten - you've kind of gotten back to where you used to be and from here you've got to take it up one leg further.

So Lisa, I think that's fair in a sense. I think with utilization what we've always said is that as the business continues to grow and mature that utilization rate should continue to trend upwards over time. At 93% onsite we can run the business very comfortably. I think you can get to 94, maybe 95, not sure we can get above 95 on a consistent basis. Certainly offshore as we continue to grow we think there's opportunity to continue to take up utilization. It won't be quarter to quarter, but certainly over the long term that trend line should move upwards. I think as you mentioned another one of the big levers we've been looking at is the pyramid. Historically, we have had a more top heavy pyramid than our peer group and in part to the business that makes a lot of sense, and other parts of the business we think there's opportunity to optimize that. We are also starting to see things like automation kick in both on the delivery side of the organization as well as in our corporate function. So if I look at my finance organization for example, we're using automation to help streamline some of our processes in the organization which allows us to scale the business without having to add headcount. So I think you'll see a number of those opportunities over the next three years.

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

I was wondering if you can maybe just address the financials vertical a little bit. Raj, you provided some helpful color, the difference between the weakness you're seeing from money center banks and with some of the strength in insurance in the smaller banks. Can you maybe give us the sense of, in your client conversations, what they are saying in terms of balancing increased IT budgets potentially in 2018, whether that is part of the conversation or not versus optimization with some legacy systems and kind of directionally where you see their total consulting and outsourcing spend budgets going next year.

Jim thanks, this is Raj here. So look at overall financial services, its strong growth that we're seeing on the insurance space clients. Continued a lot of work in terms of digital and obviously looking at new areas in terms of continued optimizing work that we're doing at those clients. The banks it's a mixed story, I mean we're you know as I mentioned earlier, we're seeing double-digit growth on the regional banks. But some of the challenges that exist on these large money center banks that we have and there there's I guess a tale of two stories, right. There's obviously there is continual focus on the cost optimization. And they're obviously leveraging that to free up some of the dollars in terms of investing on the digital side of the business. Now the good news is, obviously we're engaged in many of those digital opportunities with those banks. And actually our digital revenues is growing at those banks in line with the rest of the company as well too. But we haven't seen there an influx of new budgets, obviously we're seeing the whole focus of in terms of continued optimization, freeing up dollars and investing on the digital side.

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

Just looking as, Francisco, just an overall feel for how you guys are doing in transitioning Cognizant's business model to this new model to plan to get to 22% adjusted operating margins in two years. Just curious, so we had a plan, app plan everything is going exactly how you thought, just wanted to get just a feel for that. And then Karen just on digital is there a percentage of total revenues digital now represents and maybe the growth rate. Thanks so much.

I'll talk a little bit about the overall plan. I think we're roughly right on track right where we expected to be. I think about the transition or the shift to digital in two pieces that sort of the services that we offer to clients. And I think we continue to make great progress there. I'll let Karen comment on the overall digital revenue, it grew again double digit - at a double digit pace much ahead company average this quarter. The two acquisitions that we announced a few days ago Netcentric and Zone add to that capability. And we feel good about the transition of the service mix to digital. I think it's also important that just to note that as we've said before that today our portfolio if you look at the entire portfolio of digital revenue it is running at a higher margin than the rest of the business. So overall just a very healthy mix shift going on and I think that that will continue to unfold through 2018 and beyond. The other side of that - of this transition that we talked about when we laid out the plan for you a few quarters ago, at the beginning of this year is on the margin improvement side. And I think we've demonstrated there that we're well on track there. This year, if anything I think we're a little bit ahead of where we thought we'd be. That's good. And we'll continue to, you know, we feel very comfortable as Karen said in her prepared remarks with a target of 22% by 2019. And I think we'll just keep executing on that. And I'll turn it Karen to talk about percent of digit revenue.

So we did not break out the percentage of digital revenue this quarter. As you may remember last quarter we said it was about 26% of revenue, it continues to grow upwards of 25% year-over-year and continues to become a larger part of the business each quarter. One of the things we've also been looking at with Raj referred to in his comments about the FS is that we're seeing very nice traction nearly across all of the business units and all of the industry. So continue to see very good progress there and will continue to update as there's relevant information on that metric.

Thank you. Our next question comes from line of Moshe Katri with Wedbush Securities. Please proceed with your question.

Going back to the commentary regarding the large money center banks and their spending patterns. Raj, is there any indication about the outlook for 2018, and is there an expectation internally in terms of when some of those deals that you're talking about could actually start converting. Thanks.

So look it's a little bit too early right now to start looking into 2018. Obviously I think the bigger opportunity comes as what we've always talked about is digital scale. And many of these large money center banks we have numerous engagements going on. But I think as those opportunities become larger that's when we have an opportunity to see back to the growth that we've gotten accustomed to at those banks.

Having said that, Moshe it's Frank, I think it's worth adding one additional piece of color for you which is that, Karen mentioned that last quarter digital revenue as a percent of total company revenue was about 26%. We are right around there in financial services as well. So this isn't a story of we're waiting for digital revenue and financial services to convert. We're already doing a substantial amount of work in digital, in financial services. So I don't think by any stretch that we are not a significant player in financial - in the digital aspects of financial services as these big money center banks start to think about and start to execute on their digital plans.

But would you say that some of those deals that you're talking to those large banks about could - if they do convert into digital could be pretty significant down the road?

Again, I want to separate. We are already doing a considerable amount of work. So, yet there are deals that if they convert could be significant going down the road, but we are already - the point I was making, Moshe, is that today digital is already and financial services is roughly in line with our company average. So think about the 26% number, we're right around there in financial services. So we're already doing a considerable amount of work in digital and financial services.

Moshe, this is Karen, let me just sort of wrap that. I think as both Frank and Raj talked like strong digital business and banking, I think it is too early to say whether or not that results in a net increase in growth in 2018. We're not making any commentary right now on 2018 or whether we continue to see the shift that we've been seeing with the banks today which is they take money from one pocket in terms of their legacy spend or their business as usual spend and redirect that spend to digital. How that balance plays out in 2018 I think it's too early to tell.

Thank you. Our next question comes from the line of Arvind Anil Ramnani with KeyBanc Capital Markets. Please proceed with your question.

I just had a question on your healthcare business over the past few years your healthcare capabilities has been materially enhanced based on the internal capabilities, acquisitions, your client base. At the same time, the healthcare market has changed and expected to continue to change with value based care et cetera. How do you all think of the opportunity over this space over the next two three years and how do you feel you all are positioned?

Look I think Arvind, I'll turn it, I'll let Raj answer as well, but it's Frank. Look I think changes is, change plays to our strengths actually. As the healthcare market changes and evolves we have just sort of a very strong end to end portfolio of service offerings whether that's consulting to help our clients figure out what they need to do to respond to the changes, whether that's operating in terms of our BPaaS offerings and our ability to run core parts of the operation for our client or whether that's on the technology front as they think about modernizing and digitizing their technology backbone. I think we're very well positioned both at the business model, the operating model and the technology model level. So as these changes come to healthcare given that we have such a strong portfolio of assets both software assets, intellectual property in the form of our people and capabilities. I think you put that together and we're very - we feel like we're very well positioned for healthcare going forward.

I would just add to Frank's comments, I think we've obviously seen a lot of traction around our BPaaS solutions. And then strong growth in the payers rate as well. But I think as we move look out, as the healthcare industry continues to evolve, you're starting to see a lot of providers, large providers come up with the own plans. And I think that's a good opportunity for us as well with Evolution, obviously there are showing a lot of interest in our BPaaS solution as well. So I think we're well positioned and continue to look forward for next year.

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

First question is about EmblemHealth and the impact on the quarter. How much was that still not thrown over from third quarter last year. And I guess that should be to lay out in the fourth quarter. I think we estimated around 100 bps or so to the overall growth rate, but just whether TMG is outstanding there. And then just a follow up on capital allocation, you finished 1.5 billion accelerated buyback. I know you have a couple of billion in your authorization left. I don't remember ever hearing, but can you tell us what you've - what you guys would want to do for capital allocation towards acquisitions, just given the digital push. And on that topic what was inorganic, what contributed to inorganic growth this year from acquisitions. Thanks guys.

So Darrin, this is Karen, let me start and Raj and Frank can join in if necessary. We start with the capital allocation question around the buyback, as you mentioned that we completed the ASR in Q3. We have also committed that between now and the end of 2018, we'll allocate another $1.2 billion back to a buyback program we haven't defined that we'll provide more color on that in an appropriate time. We have not broken out the dollars that we're committing towards M&A. But certainly in our capital allocation strategy we have we've held a nice fair amount for M&A deals. We've talked now for some time about ramping up the volume of those deals. And obviously we've been doing that closed or find rather not closed two deals last week. And certainly our pipeline of M&A deals is quite active and so we would expect to continue to ramp up that volume of deals. And we will keep a nice balance between returning cash to shareholders services both organic and inorganic growth for the organization. In terms of TMG and Emblem, so Emblem as you said did start to lap in the middle of Q3. So small incremental year-over-year revenue growth for Emblem and then in Q4 that will fully lap. And then TMG as we said we haven't broken out the size of the TMG relationship, but it did start in the last part of the third quarter and we'll obviously ramp to full scale in Q4. In terms of overall organic versus inorganic growth, the inorganic growth in 2017 is very small. We had a couple of [indiscernible] so forth, which were all very small deals that we've closed over the last 12 months, a very small percentage of growth this year has been from inorganic.

Thank you. Our next question comes from the line of Bryan Bergin with Cowen & Company. Please proceed with your question.

I wanted to ask on the marketing related acquisitions you had last week and then others in the past. Can you just talk about how you're integrating them into your tech services or if you're running them autonomously, how that will work? And then what are really the top two or three KPIs you're using to determine the right targets for you? Thanks.

It's Frank, let me take that. When closed the two acquisitions will become part of the Cognizant digital business practice area. So recall that as I said in my prepared remarks, we have - and Raj talked about as well, three big practice areas, Cognizant Digital Business, Cognizant Digital Operations and Cognizant Digital Systems and Technology, these two acquisitions will become part of Cognizant Digital Business. We will continue to let them operate relatively independently, but of course we have a synergy plan which is largely focused on revenue synergies around taking their capabilities and taking those to a broad range of Cognizant clients. We do a tremendous amount of marketing work today for our clients across all three practice areas. So in Cognizant Digital Business, we're doing marketing work that relates to content, content creation, marketing, marketing strategy, channels those kinds of things. In Cognizant Digital Operations we're doing marketing related work that's largely around content and content management, content creation, and curation that Raj spoke a little bit about in his prepared remarks. And in Cognizant Digital Systems and Technology, we're doing a lot of marketing work that you can think about in the broad area of marketing technology, right. So across all of our three practice areas, we're doing a significant amount of marketing related work. These acquisitions in a sense will allow us to put a front end on a lot of that work that we're doing and take that to a client in a more integrated and holistic way. And so that's broad plan. So we'll run them relatively independently, let them continue to do the great work that they've been doing for their clients. We'll execute on the revenue synergy by bringing them - largely by bringing them into our clients. We think there maybe some opportunity to cross-sell our traditional services into their clients and we'll continue to execute on that going forward.

Thank you. Our next question comes from the line of Anil Doradla with William Blair. Please proceed with your question.

So Francisco and Karen, you guys talked about the 22% target. So that's about 200, 250 bps from where we're going to exit this year. So if I look at the trajectory, is most of that increase going to be coming in '19 or is it '18 or is it linearly spaced out based on some of the efforts that you guys are doing.

So Anil, we obviously haven't given 2018 guidance yet, but you should expect to see some benefit next year and then the last part of it will be in 2019.

Francisco, you talked about repeatable business in your opening comments. Are you introducing some new metrics to kind of quantify that? Some are the obvious metrics. But are you creating some new incremental metrics to emphasize on some of that repeatable aspect of the business.

Yeah, I think what I was referring to when I talked about repeatable is the sort of the solution packages and solution offerings that we're creating which we've been talking to you about in the past things like our BPaaS offerings and so on and so forth. By combining sort of our services and software capabilities increasingly together, we're creating these - think of them as solution offerings capabilities that we take to the market. We've always as a company tracked repeat business from our existing clients. And I think that's where you'll really start - where you really see it continue to play out is repeat business from our existing clients because that's going to be the metric that we focus on is to say, are we continuing to be relevant to our existing clients. And to be relevant to our existing clients, we've got to continue to innovate, we've got to continue to find new sources of value and that shows up in repeat business because every year or every period, our clients are assessing the work we're doing for them and they're choosing to give us new work based on the relevance of that work. So the metric that we use internally is repeat business from our existing customer base which is the metric we've been tracking from the beginning as far as I can remember.

Thank you. Ladies and gentlemen we have come to the end of our time allowed for questions. I'd like to turn the call back to Mr. D'Souza for any closing comments.

Well, thanks very much. Look everyone thanks again for joining us today and thanks for your questions. We're pleased with the results this quarter and I look forward to speaking with you again next quarter. Thank you.

Thank you. This concludes today's Cognizant Technology Solutions third quarter 2017 earnings call. You may now disconnect.