CTSH

Cognizant Technology Solutions Corporation (CTSH)

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Cognizant Technology Solutions (CTSH)

Q3 2012 Earnings Call

November 07, 2012 8:00 am ET

Executives

David Nelson

Francisco D'Souza - Chief Executive Officer and Director

Gordon J. Coburn - President

Karen McLoughlin

Karen McLoughlin - Chief Financial Officer and Principal Accounting Officer

Analysts

Bryan Keane - Deutsche Bank AG, Research Division

Christopher Hickey - Atlantic Equities LLP

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Sara Gubins - BofA Merrill Lynch, Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

Kathryn L. Huberty - Morgan Stanley, Research Division

Mayank Tandon - Needham & Company, LLC, Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Darrin D. Peller - Barclays Capital, Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Presentation

Operator

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2012 Earnings Conference Call. [Operator Instructions]. 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 at Cognizant. Please go ahead, sir.

David Nelson

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 2012 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, the 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 risk and uncertainties as described in the company's earnings release and other filings with the SEC.

I would now like to turn the call over to Francisco D'Souza. Francisco?

Francisco D'Souza

Thanks, Dave, and good morning, everyone. This morning, Cognizant released third quarter results, and I'm once again pleased with our performance. Revenue grew to just over $1.89 billion, a 5.4% sequential increase and an 18% increase over the same quarter last year. We maintained our non-GAAP operating margin at the top of our guided range at 20%.

Our results reflect broad-based growth across nearly all sectors, services and geographies, with outperformance primarily driven by a stronger-than-expected quarter in banking and Financial Services and Continental Europe. Gordon will provide additional color around this during his remarks.

Our ability to deliver another quarter of industry-leading growth is continued validation of the strength of our approach and the uniqueness of our value proposition. For several quarters, we have been speaking of the dual mandate with which we see our clients grappling. The dual mandate refers to the fact that clients need to drive efficiency and effectiveness on the one hand as they cope with cyclical economic pressures, and they need to invest in innovation and growth on the other hand as consumers, employees and other stakeholders increasingly demand ever greater digital experiences based on new technologies.

Our results this quarter once again show that our intimate client relationships, deep industry and technology knowledge and robust global delivery network position Cognizant to anticipate and deliver the services that clients need to tackle this dual mandate. Our ability to respond to market needs is the result of our focus across 3 horizons of investment. Within Horizon 1, our core application development maintenance, system implementation and testing services continue to show solid performance as clients embrace managed services models that allow them to create a variable cost structure that more closely matches their business demand.

Within Horizon 2, we saw growth rates that exceed the company average. In fact, this quarter, Horizon 2 offerings are approaching 20% of Cognizant's total revenue. In Business Process Outsourcing or BPO, and IT Infrastructures Services or ITIS, growth is driven by clients recognizing our global scale and competitiveness and turning to us for more complex and often larger engagements. We are further strengthening our position in ITIS as evidenced by the data center expansion we recently announced. And in Cognizant Business Consulting or CBC, we continue to differentiate ourselves as thought leaders, evidenced by a number of new local wins and further penetration of Cognizant's existing strategic accounts.

Across both Horizon 1 and 2, we are continuing to see a trend towards larger transformational engagements like those with Philips and ING about which we have previously spoken. The trend is driven by clients' need to achieve significant and rapid impact on their business in response to the pressures brought about by the dual mandate. Our pipeline of these larger engagements remains strong.

Within Horizon 3, we continue to develop offerings in 3 areas: new technologies, new delivery models and new markets. We have spoken about the significant mind share impact that these offerings are having with clients. We are now also beginning to see a revenue impact. This is particularly true within the new social, mobile, analytics and cloud technologies that comprise the SMAC stack. At our annual U.S. Cognizant Community event that we held last month, nearly 400 client executives joined us to discuss the impact these technologies are having and will continue to have. What emerged from our 2.5-day conversation is continuing consensus that this wave of technology is having a transformative impact on businesses across industries. Clients recognize a significant disruption that book retailing, music, movies, photography, et cetera, have already seen and understand that these technologies will have an impact to varying degrees across all industries. They also agree that [indiscernible] this transition requires a strong partner who can bring to bear a combination of leading-edge capabilities and a deep knowledge of the specifics of their business and existing technology landscape. Our Horizon 3 investments have prepared us to be that partner.

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