Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second Quarter 2018 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. Thank you. I would now like to turn the conference over to David Nelson, Vice President, Investor Relations and Treasurer at Cognizant. Please go ahead, sir.

Thank you, operator and good morning everyone. By now you should have received a copy of the earnings release for the company's second quarter 2018 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; 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 to be filed later today. I would now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco.

Good morning everyone and thanks for joining our call. This morning I'd like to cover two topics, first, a few financial highlights in Q2 and then a brief update on how we're continuing to gain share with our leading digital services. Let's begin with the quarter. We're now about halfway through executing the financial strategy we announced 18 months ago. As this quarter's results show, we're making solid progress on key aspects of our plan and we're on track to meet our goals for the year. Second quarter revenue was $4.01 billion, within our guided range, and up 9.2% year-over-year. In the quarter, our digital revenue grew in the low 20% range, well above company average, and is approaching 30% of total revenue, reflecting our continuing shift to digital revenues. Our portfolio digital services generated margins above the company average, and our non-GAAP EPS for the quarter was $1.19. As these results underscore our emphasis on digital services is helping us win more business with attractive margins. And that enables us to deliver higher quality growth for the company. During Q2, we also launched a $600 million accelerated share repurchase and we're on track to deliver on our commitment to return $3.4 billion to stockholders by the end of 2018. Turning to guidance, we expect third quarter revenue to be within a range of $4.06 billion to $4.1 billion. We expect full-year revenue to be within a range of $16.05 billion and $16.3 billion, a growth of 8.4% to 10%. And we remain confident in our previously stated guidance of achieving non-GAAP operating margin in 2018 of approximately 21%. Now moving to my second topic, thriving in today's business environment. Last quarter, I covered Cognizant's execution progress using a three-part framework, digitize, globalize, and localize. Using that same framework, I'd…

Thanks, Frank, and good morning, everyone. Over the last several years, we've been investing to diversify our business beyond Financial Services and Healthcare and expand our presence in new industries where we're building a range of digital capabilities for clients. A sign of how well our effort to diversify is working is that the company grew over 9% in the quarter, despite the underperformance of our largest industry segment, and three of our four industry segments delivered double-digit growth. Let's take a closer look at how our verticals performed, starting with our Communications, Media and Technology, which had strong year-over-year growth of 15.8%. This performance came mostly from our Technology and Media clients and offset slower growth with our clients in the Communications industry, where consolidation and M&A activity are under way. Among our Technology clients are a who's who of Silicon Valley marquee names. Their rapid growth is enabled in part by our ability to help accelerate digital-at-scale. These digital native leaders deal with billions of users and vast amounts of content, so they turn to us to help them efficiently monitor, verify and manage their ever-expanding volume of information and streamline and manage their ad operations. For our Media clients, it's a similar story. We look to their strategy of using digital first approach to drive a differentiated customer experience across all their content. These clients seek our help to become digital businesses at the core. And we respond with solutions that span the full content life cycle from creation to consumption. We also provide marketing and advertising solutions that leverage their rich data capture across all their touch points to create personalized offerings in the new digital world. Moving to Products and Resources, we increased revenue 12.4% year-over-year led by strong growth of our energy and utility…

Thank you, Raj, and good morning, everyone. Q2 performance was solid. Revenue of $4.01 billion, increased 9.2% year-over-year, including 100 basis points favorable impact from currency. Europe grew 19.2% year-over-year in Q2, including a 6.4% positive impact from currency. And the rest of world was up 3.8% from a year ago, including a 60-basis point negative impact from currency. Results in both the UK and Asia-Pacific were impacted by the weakness in some of our larger banking clients. While acquisitions like Netcentric and Mirabeau are further enhancing our digital leadership in Continental Europe, leading to a number of recent digital wins. Non-GAAP operating margin, which excludes stock-based compensation expense, acquisition-related expenses, and the initial funding of the Cognizant U.S. Foundation, was 22%, and non-GAAP EPS was $1.19, exceeding our guidance primarily due to strong operating margin performance. 18 months ago, we announced a plan to return $3.4 billion to stockholders by the end of 2018 through a combination of $2.7 billion in stock repurchases and $700 million in dividends. With the anticipated Q3 completion of the accelerated share repurchase we previously announced on June 15th, we will deliver early on our share repurchase commitment. And today, we declared a quarterly cash dividend of $0.20 per share for shareholders of record at the close of business on August 22. We are committed to maintaining a robust capital return program and anticipate having an update to the program in the coming quarters. Now let me discuss additional details of our financial performance. Consulting and technology services represented 57.1% of revenue and outsourcing services 42.9% of revenue for the quarter. Consulting and technology services grew 6% year-over-year. Outsourcing services revenue grew 13.6% from Q2 a year ago. In the quarter, a large transformational project moved to steady state with a corresponding step-up of…

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question. James Schneider - Goldman Sachs & Co. LLC: Good morning and thanks for taking my question. I was wondering if you could maybe give us a little bit more color on the environment you're seeing with respect to financials and specifically, large banks. You talked about the continued pressure on the run-the-bank kind of spend but can you maybe give us – I think in your slides you talked about seeing some signs of incremental demand at some of the larger accounts. So can you maybe give us a sense about how firm that increased demand is, what kind of services you're seeing those from, and maybe any kind of color in terms of how fast that might develop?

Hey, Jim. This is Raj, here. Look, as we said, right, I mean I think the entire Financial Services story is a mix where insurance and the mid-tier banks are doing really well and where some of the challenges are is on these large money center banks. And I think when we drill in o the large money center banks, we're talking about a handful of clients. And the good news is it looks like our North American banks, the large ones, we are seeing a turnaround there. And just to give you an example, one of our largest banking accounts went through that shift a couple of years ago, the technology shift. That's really changed. We're seeing very healthy growth at that relationship now and 40% of our work is around digital. And where the challenge still comes around is couple of our European-based accounts. And I think, as we've said before, right, each one is on a different schedule in terms of shifting towards technology. We're making smart decisions as well too, in terms of making sure that the business that we're going after is profitable business and healthy business for us as well. So we're making some conscious decisions there is as well. But I would tell you that in all of them we continue to grow in digital, they're all strategic partners. The banking revenue that we have in digital is consistent to the overall digital revenue that we have as a company. And I think we will get to – we've seen that we can deliver, we can transform these accounts. At these relationships, we impact the client, not only in the digital, but in the operations and their core technologies. So we're optimistic that those will also turn, but it's hard to predict when they will turn. James Schneider - Goldman Sachs & Co. LLC: That's helpful color. Thanks. And then maybe just as a quick follow-up, on the margin outlook, you kind of talked about the elevated attrition and what you're doing in terms of wage increases to offset that or get that back down. Maybe, Karen, can you address kind of how the back half margins will play out, both in terms of the cost reductions you're making at the top end of the pyramid, whatever increases you're making at the bottom end? And then whether ASC 606 is still going to be a margin tailwind in the back half?

So, Jim, as we said in the prepared remarks, obviously, we continue to target approximately 21% for non-GAAP operating margin, which, obviously, does suggest a reduction in the back half of the year. Typically, when we do raises and promotions, you'll see about a point – one to two points negative impact in the quarter. This year we've actually split the timing of the raises and the promotions, so we're currently – as we just announced, raises and promotions for the bottom half of the pyramid, for more the junior folks will happen in Q3; for the more senior folks that will happen in the Q4 timeframe. So you will see some bump down this quarter and then subsequently in the fourth quarter. The margin benefit from ASC 606 is a little bit hard to predict. Obviously, as we've said, just given – it's hard to know the exact timing and specifics of contracts. But we don't expect it to have a material impact on the overall results for the rest of the year, but, certainly, we will see some pressure on margins because of raises and promotions as we get into the back half of the year. But we, obviously, are still committed to our approximately 21% target for the year.

Thank you. Our next question comes from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question. Tien-Tsin Huang - JPMorgan Chase & Co.: Thanks. Good morning. So good margin upside here, but it looks like revenue growth came in at the lower end of peers. So wanted to revisit how you're balancing your margin goals versus revenue growth. What level of revenue growth are you aiming for relative to your peers or the industry? I guess, what I'm trying to get at is how you're benchmarking revenue growth when setting your growth targets as you're going into executing the second half of your margin strategy.

Hey, Tien-Tsin. It's Frank. Look, I think revenue was right within the range we guided to for the quarter. So I don't see any – I don't ascribe sort of anything particularly significant to this quarter's revenue number. And I think we've said in general that as we execute this pivot and accelerate the shift to digital that our focus is on sort of balanced revenue growth. We certainly expect to grow in line with the overall industry. As Raj said a minute ago, Raj made the comment in the context of Financial Services, but I think it's true across the business. We're being prudent about making choices of the kind of work we go offer. We're focused now on accelerating the shift to digital, focusing on higher margin work, higher value work – because that's the important work for our clients that has longevity. But I certainly expect to grow in line with the industry and continue to be confident that we can deliver the margin targets that we've laid out for you.

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

Hi. Just wanted to follow up on the Q2 revenue coming in at the low end of the range, I guess what caused that number to come in towards the low end versus the high end when you gave guidance, I guess, three months ago?

I mean, Bryan, it's – the range is relatively small. Given our size and scale, I don't think there's anything specific, as I said, a minute ago, to point to timing of deals when they close, timing of revenue. I mean, there's just a number of things, given our size and scale the swing between the low and the middle or the high end of the range is just execution during the quarter.

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

Hi. Good morning. Congrats on the expanded disclosure. Much appreciated. My question is around BPO. You've talked about that the recent past as being a positive area. Could you sort of get us updated there and really sort of how you're being differentiated in that space? Thank you.

Ed, I'll start and then ask Karen and Raj, if they want to add anything to it. I think BPO or Digital Operations is – it's one of the faster growing parts of the business, had very strong sequential and year-over-year growth in the second quarter. The business, I would say is doing quite well and our differentiation comes from – we've said this all along but from the earliest days that we were in that business, our differentiation comes from the fact that we're able to really infuse technology into the operations. And I would say as digital has become a more prevalent set of technologies, our ability to drive real automation into the BPO business, into Digital Operations through things like robotic process automation and IPA and using artificial intelligence and so on and so forth, is really differentiating us. So I think it's a combination of deep industry knowledge, which we've always had in our BPO business, so we're very vertically-focused, as you know, in that business, most of the BPO work we do is domain-centric, vertically-focused BPO. That's one part of it. The second part of it is that we've got a – we've had a – continue to have a strong platform strategy in that business. So in Healthcare, with the TriZetto and Bolder and TMG, all come with strong platform assets. And then the third part of it is our ability to really drive strong automation using artificial intelligence, IPA, RPA types of technologies to drive productivity in that business. I think you put those three things together and we have a pretty unique position in that market.

Yeah, the only thing I would add to that, Edward, is I think our BPO story has really expanded from the Financial Services and Healthcare and life sciences industry to now, we're very strong players in our – the Communication, Media and Technology space, we're providing lots of work to a lot of the leading digital companies out there. In addition to that you have a strong story that's being built out in our Products and Resources group as well too. So the BPO story has significantly expanded in terms of where it was a couple of years ago.

Thank you. Our next question comes from the line of Brian Essex with Morgan Stanley. Please proceed with your question. Brian Essex - Morgan Stanley & Co. LLC: Hi. Good morning and thank you for taking the question. Maybe Karen, I had a question for you. As we look at your efforts to localize and optimize your labor pyramid, maybe could you comment on the current visa environment and what you're seeing with regard to company's willingness to offshore, particularly in what appears to be a more challenging visa environment? Are they more willing to balance where the work is done?

So, Brian, I don't think we've really seen any change from a clients' perspective. You've got some clients who are more willing, you've got other clients who prefer to keep more of the work on-site. So we really haven't seen any shift in behavior from a client perspective. I think, as we've talked about and others have talked about in the market for some time now, there were certain types of work that clients are looking to do more on-site, some more agile development and so forth. And then when you're in a heavy transformation environment like we are today and a lot more consulting that tends to have a heavier on-site ratio. But overall, I wouldn't say that we've seen any changes in behavior from clients due to any of the immigration concerns.

Thank you. Our next question comes from the line of Bryan Bergin of Cowen and Company. Please proceed with your question. Bryan C. Bergin - Cowen & Co. LLC: Hi. Good morning. Thank you. Can you expand upon your efforts to drive more business within the Comm, Media, Tech and the Products and Resources vertical? Do you expect to continue to grow at these double-digit levels? And talk about how you're finding the M&A channel in those verticals. Thank you.

So, Bryan, I'll jump in and I'll let Frank add as well. Look, the Comm, Media and Technology is a segment that, if you recall not so long ago, we called it as others, but we've seen significant traction. We've been investing heavily into the space. I do think that at some point, right, some of the clients that we have that we're working with will become some of our largest clients for Cognizant. So I think we're making good progress in doing core technology work, digital operations and then helping in terms of – on the business side as well, too, so a healthy growth. In terms of M&A, I don't think anything specific that we're focused on CMT, but I think we look at it in terms of broad, just in terms of all the practices, right? If there is a core technology that help expand those relationships, if there's key consulting capabilities that help us broaden and deepen our relationships at those clients, we'll – or if there's geographic plays or platform plays. So I think that's our approach with CMT as well.

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

Hi. Thanks for taking my question. I guess a two-part question related to demand. One is, I mean, the demand commentary that you guys have seems to be certainly turning more positive, but when I look at specifically at the 2Q performance, 3Q guide relative to consensus, you're a bit light. And then there's a 4Q catch-up, it seems like. So I wanted to ask about the, sort of the visibility, if you will, into that 4Q catch-up to hit your revenue range. And then the second part of the demand question is, if the ASC 606 accounting pronouncement had been active January 1st of last year, how much of a year-over-year net benefit would it have been? Because I think that's kind of important to size out. Thanks.

So, Ashwin, it's Karen. I'll try and take those and others can chime in. But if you look at the 3Q guide, and let's just, for argument's sake, say you go to the middle of the range, that would suggest about a 1% sequential Q3 to Q4 growth. That's not unreasonable, I mean that's certainly – unless there's some unusual furloughs or anything like that. So I think the guidance for Q3 puts us right where we want to be for the full-year. We're not really expecting any significant acceleration in the fourth quarter. And then in terms of ASC 606, I think really the only color we can give you is the way we've broken it out, which is that because of ASC 606, there's about $52 million of incremental revenue this year. As we said in my prepared remarks, we look at the contracts that existed at the end of last year. It's only about – it's less than a $10 million impact or benefit that we've received from that. It would be almost impossible to go back and redo all the prior-year contracts, so we really just have to look at it based on the current year results and the benefit that we've gotten, which is primarily due to contracts that have been awarded this year.

Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.

Hi. I was wondering, has the mix or the service offerings within digital shifted. And how do you balance the need for investments in digital versus the cost-cutting initiatives? Thanks.

Yeah, I don't think – Joe, it's Frank, I don't think there are sort of quarter-to-quarter meaningful shifts in the digital mix. Of course, as I've said, if you take a longer term perspective, the definition of digital and what constitutes digital has changed dramatically, if you look over, let's say, a five-year period. Five, seven years ago we were talking about social and mobile and analytics and cloud as being the constituent components of digital. Today we're talking more about – in addition to those things, we include artificial intelligence and blockchain and so on and so forth added to manufacturing. All of these new things that are – so the definition of digital certainly is expanding as innovation happens and new things, new technologies emerge. So over longer period, yeah, certainly, the mix, if you will, changes. But quarter-to-quarter, I don't think there's a significant mix shift. And look, I think we're managing margin and investment the way we always have, which is we have a process for thinking about or analyzing the investments that we have, that we'd like to make, that we'd like to allocate capital to. We run the business and as we – we run the business and every quarter or so, every 60, 90 days, we look at our list of investments, say what investments do you want to? We stagger the investments. We say what investments we want to make this quarter or during this period. We release those dollars and that's how we balance margin and making the investments. That's just an ongoing process. We've tightened up that process. It's a muscle that we've had in the past. I think we've strengthened that muscle over the last 18, 24 months. I think that's good healthy capital allocation discipline that we have developed – have had in the past and continue to develop in the company. And I think that's how we look at things quarter-to-quarter or month-to-month, and figure out where to allocate our dollars against the investments that we think are going to have either the most growth return or the most strategic return over a longer period of time.

Thank you. Our next question comes from the line of Jason Kupferberg with Bank of America Merrill Lynch. Please proceed with your question.

Hi, guys. This is actually Amit Singh. Just quickly going back to ASC 606 and the first part is, for your second quarter results, you have benefit on the top-line and bottom-line in margin from ASC 606. How much of that was in the guidance that you provided last quarter? The only thing I'm trying to understand is if you remove the $31 million and if it was not in the guidance then your revenues came in below the guidance range. And then the second part is, for the full-year, I'm trying to understand what does immaterial mean? Does that mean close to zero? And would that mean in the second half of the year now the ASC would be actually a negative to revenue, margins and EPS in the second half of fiscal 2018?

Yeah. So I think, one, if we go back to Q2, right, so when we gave our Q2 guidance, obviously, that was the beginning of May. So we had a pretty good handle on what contracts we're starting and the impact of any contracts, so it was included in our guidance, both from a revenue and a margin perspective. And you can't really break it out because going back to Frank's prior comments, right, we really look at the business on an annual, monthly, quarterly and a semi-annual basis to really look at where do we think margins are going to land, what investments can we make. And we make investments to adjust to the revenue growth and the margin trajectory for the company. So you can't just pull out ASC 606 in isolation because we would have made other trade-offs if not for that. So I don't think you can look it at that way. And when we look at the full-year basis, I mean, keep in mind, even at the bottom end of our range, we're over $16 billion of revenue on a full-year basis. So 1% of revenue is $160 million, and we certainly don't expect the ASC 606 revenue impact to be even that large. So at a company level, it's not material for the year.

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

Hey. Thanks for taking my question. Raj, in your commentary, you mentioned something in the context of focusing on high growth and high margin accounts. Are we in the process of pruning some of those that are not kind of qualifying within the criteria and that could potentially impact or cap top-line growth down the road, i.e. you guys are focusing on some of the better opportunities out there and obviously they'll be important in the context of top-line growth down the road. Thanks.

Yeah. So, look, the answer is definitely yes, right? I mean, we made a commitment to you that we were going to go focus, shift our business towards more high-value added digital work and add healthy margins. And we are being smart and making sure that we're – the work that we're doing is strategic to our clients and presents a long-term healthy growth, healthy margin opportunities for us, so answer is yes. If there are some work that we feel that doesn't present – meet that criteria, we have chosen to walk away from.

Yeah. Moshe, I would say – it's Frank. I would just add to that. I think the choices are less at the overall client level, although we may do that as well, but more what kind of work within a client we choose to focus our energy and resources on. I would say that if you think in the long run, there're two points I'd make. One is I don't think that the constraint to our business in the long run will be demand. There's lots of demand for technology out there. So it's the smart move to pick your battles carefully and focus on the work that you think is going to be most strategically significant to the client over the long run. And at some level our constraint is where do you deploy your talent and so we're thinking carefully about how we develop our talent, how do we train them for the next generation and the next generation of work after that. And then how do we deploy that talent against the work that's going to be most meaningful to them, give them the most rewarding careers, help them to be most successful over the long run. So I don't – even though we are making very thoughtful choices about the kind of work we go after, I don't think the conclusion of that should be that it slows revenue growth in the long run, because I think there's lots of revenue opportunity within the high growth and the strategic high value margin, things that – areas of the business that we want to go emphasize.

Thank you. Our next question comes from the line of Joseph Vafi with Loop Capital Markets. Please proceed with your question.

Hi. Good morning and thanks for taking my question. Maybe Raj, if you could – I don't know if you could answer this or not. But on those financial services clients where there is a mix headwind, is there a way to perhaps predict when we kind of get over that hump on the headwind? I know there's different clients and different schedules, but is it something that we can overcome exiting 2018 or do you think it potentially lingers into next year? Thanks.

Yeah. So, hi, Joseph. It is hard to predict because each client is different, they're all going through various business scenarios in terms of how they're leveraging technology. But I think one thing that is definitely there, right, all of them realize that it's important to invest in digital. I think – so I do think that we have the winning formula because I think one of the key strengths that we have is because the size and nature of the work that we do there for these clients, impacting lots of the digital work we're doing, the operations and technology and having the strong domain expertise that we have at the clients, I think they all view us as a strategic partner. And I do expect that as more of our mix shifts towards digital, just like it has in North America, that we'll continue to excel at those accounts as well, but it's hard to predict the exact timeframe because each one of those accounts has a different business scenario going on.

Yeah. Operator, I think we have time for one more question.

Thank you. Our final question will come from the line of Harshita Rawat with AllianceBernstein. Please proceed with your question.

Hi. Good morning. Thank you for taking my question. So I have a question on Healthcare revenue growth. It looks like the year-over-year organic revenue growth was very weak, once you adjust for acquisitions. So my question is what's driving the deceleration? And what's the path to achieving mid- to high-single-digit organic revenue growth in that business?

So – and really the only inorganic revenue in Healthcare was Bolder, which we acquired in April. TMG is actually – is a client win that's not an acquisition. So that is organic revenue growth. So I think on a year-over-year basis, the practice grew about 10%, if you back out the Bolder. That was a small piece of it in the quarter, less than $40 million of revenue in the quarter. So I think we continue to see strong growth in Healthcare. I actually think the comps for Healthcare will get more challenging in the back half of the year because we'll start to lap TMG in Q3 and we don't have another large deal. So if you recall, in 2016, we had the Emblem deal, which started in Q3 of 2016. Last year, we had the TMG contract, which started in Q3. There is not currently another very large platform deal slated to begin this year. So the comps will get a little bit tougher because of that. But outside of that, we continue to see nice strong healthy growth in Healthcare.

Perfect. With that, I think we'll wrap up. I want to thank everybody for joining us today, and for your questions. And we look forward to speaking with you again next quarter. Thank you.

Thank you. This concludes today's can teleconference. You may disconnect your lines at this time. Thank you for your participation.