Cognizant Technology Solutions' Management Presents at Barclays Global Technology, Media and Telecommunications Conference (Transcript)

| About: Cognizant Technology (CTSH)

Cognizant Technology Solutions Corporation (NASDAQ:CTSH)

Barclays Global Technology, Media and Telecommunications Conference

May 23, 2013 12:10 pm ET

Executives

Malcolm Frank - Executive Vice President of Strategy and Marketing

Karen McLoughlin - Chief Financial Officer and Principal Accounting Officer

Analysts

Darrin D. Peller - Barclays Capital, Research Division

Darrin D. Peller - Barclays Capital, Research Division

All right. Why don't we start getting started here? So good afternoon, everybody here. I just want to -- if everyone could just sort of take their seats. Thanks again to all of you for being with us at the Barclays TMT Conference. I'm Darrin Peller, the computer services analyst here at Barclays. And I'm obviously very thrilled to have Cognizant with us today as a keynote, talking a lot about really the evolution and technology around the enterprise. And with us today, we're really proud to have both the Head of Strategy for the company, Malcolm Frank, as well as the CFO of the company, Karen McLoughlin, to talk about really first, Frank's going to kick it off for us with a nice overview and about a 10, 15-minute discussion on exactly that, really what's changing, what are the opportunities, what are the different key trends in technology in the enterprise, which -- and there's probably few better people to talk about it than him. And then we're going to go on to some Q&A up here on stage. I know there's a lot of different topics on people's minds around the industry, and we'll try to get to a lot of those topics, including things like the company's growth, the company's opportunity, that obviously, the immigration reform too. We're going to probably save some of that for the end, though. But with that, again, thank you both for being with us today. If everyone could give their full attention now, and I'm going to turn it over to Malcolm.

Malcolm Frank

Great. Thanks, Darrin, and good afternoon. It's a pleasure to be here. We wanted to spend the next few minutes in certainly a conversation about Cognizant, but more so, a discussion about the industry, which we think we're at a true shift point with the technology space and corporate technology. So I just want to take a few minutes to give a perspective on what we're seeing through the eyes of our clients because it's quite substantial and it's also quite exciting. And so we called iyt a [indiscernible] SMAC. In this concept of the SMAC stack, SMAC for social, mobile, analytics and cloud, which has really proven to become the new master architecture for Fortune 500 companies that we serve, and we wanted to share with you some of our experiences and some of the insights there.

What's important about this new technology model, it's different relative to what we saw 20 years ago with client server. Client server, when it was in its instantiation with ERP and CRM and supply chain, financials, HR, was, if you will, a way to tighten up an industrial business model. What we're starting to see with the SMAC technologies is they are changing business models and industry structures altogether. You look at this chart, you suddenly became sad for no reason at all. But this is what's going on.

Look at Kodak, for example. This year, more than 10x as many photographs will be taken at the word worldwide 20 years ago and yet Kodak's in bankruptcy. Imagine that they have a strategy offsite 20 years ago and a Mackenzie or a BCG walked in the room and said, "I've got a magic ball. I'm going to give you a one piece of insight. Photography is integral by an order of magnitude." Well, the management team would say, "Strategy meeting's over. We're going to have a great decade in front of us." And yet something very different occurred. We also see different more news is being generated on daily basis but L.A. Times is bankrupt, The New York Times, dead as a junk status. If you live in New Orleans, you'll only get newspaper 3 days a week. We watch more movies than ever, but Blockbuster obviously went bankrupt and book sales went up 27% a couple of years ago and yet in that time, Borders collapsed as well. This is what's happening with these new business models that are based on SMAC technology.

And so when we work with our clients, they start to recognize that something may be wrong, and they need to start working with firms like us to reimagine, reconceptualize and then rebuild key portions of their business. And as I described, it's based on the SMAC stack. And so this is our acronym for this new movement in technology. There are a lot of folks that you see were talking of the past several years about the piece parts. They would talk about the cloud. They would talk about Big Data. But we actually found that was quite limiting because these technologies, like the differ when pulled together become very powerful and have a multiplier effect. It's quite similar, I talk about client server, the difference is 20 years ago, but the similarity and I lived through it, in 1992, '93, we would talk about the piece parts then. We would talk about the power of the personal computer or relational data base or open systems and UNIX boxes or Cisco networks. But it was when those were pulled together in a stack that we started to move the needle with a business and create true solutions and we are just on the cusp of that with the SMAC stack today. And so this consumerization that we have lived through in our personal lives is now hitting our clients like a tsunami.

If you look at the computer industry, I love these "you are here" dots. If you have ever seen these at malls or at the amusement parks, you will look at that map invariably, there's a 12 year old around you that says, "How does the dot know?" Well, this is our "you are here" dot now. And here's what's fascinating. For all of the investment that's going on with Fortune 500s around their information technology backbone in the last 20 years, we're just getting warmed up. We are in for an extraordinary decade in front of us based on the SMAC stack and it's as quite a busy slide, but let me break it down into its pieces and it will start to make sense.

So these 5 architectures. The first that ran for roughly 15 years with the mainframe decade, many vendors -- but IBM was really the dominant vendor in that period. The minicomputer, with a lot of Boston companies, Digital, Data General, Prime, Wang, that really took off during that architecture. And then of course, client server was primarily Microsoft with the winner but also SAP, Oracle, Hewlett-Packard, Sun Microsystems, and then the last 10 years that we've experienced with the Internet and what that's meant to the corporation.

These build on top of each other and we have seen increased velocity and increased spend as we go forward. Here's the key portion and this is where our clients are. If you follow Cognizant, we actually talk about a concepts of run better and run different to help our clients with their dual mandates. And their dual mandate is this, at the top of the fourth S curve, they've got their entire legacy environment of systems and legacy environment of processes. And they need to consolidate those. They need to run those better, faster and cheaper. And that's what we do and that's what we've done for a long time and we've built quite a sizable enterprise of about 165,000 employees doing that. But they're also saying, "I need to get to that next S curve. I needed to run different. And so how do I understand how to use these technologies at enterprise scale? How do I rebuild process around this? How do I manage against the analytics that are within my firm?" And they want to do that out of 1 platform. Because the new systems tie back to the backbone, number one, but number two, is their budgets are not going up even though their technology demands are going through the roof. And so we provide off of 1 platform the ability to make that older S curve better, faster cheaper to self fund the investments around the new one. And so we found that, that's in the Dynamite value proposition. It's why we, in a tough economic environment, are still growing at 17% off of the large denominator because of this value proposition with clients.

So getting back to these waves, just a bit of history, but it's not for historical purposes, it's to show where we're going. If you look at the mainframe environment, we had roughly 1 million computers at its peak around corporations worldwide. With many computers that went up by an order of magnitude to 10 million with the PC and distributed UNIX environment, it went up to 100 million computers and in this fourth architecture, where we are today, it's about 1 billion. In fact, where we are right now, there are about 10 billion computers in use. And you may stop and say, that doesn't pass the sniff test. There's 7 billion humans, 10 billion computers, what gives? Well, I'm going to give you a homework assignment. Go home tonight. Whenever you get home, take inventory. In our household, myself and my wife, 4 kids and 2 dogs, we took inventory 23 computers. We're not proud of it but that's what it is. And so we're starting to see this once you add up all your laptops and PCs and tablets and smart devices and throw in the Xbox while you're at it and you're starting to get to some numbers that look like this. What do clients see with that? Let me just take 1 example with mobility. We're seeing a tremendous amount of work in helping clients mobile-enable their legacy environments. So this maybe somebody saying, a lot of my users are no longer in the office and so I want them to see our CRM systems, or I want them to see our ERP systems through their tablet as they're wandering around. I sort of think of this as lipstick on a pig. It's a technology challenge more than a business challenge. But we see tremendous demand that exist there.

But here is what occurs, once they start doing that, they recognize this process is wrong. The process that was on the presumption that everybody would be in one room, but now they're out there mobile, they're out there 24/7. I really need to rethink the business process and the organizational model and the financial to support that. We're seeing a lot of demand there. And then finally, they start to recognize, I need to truly innovate. Maybe business model itself is incorrect. And so if I'm a Blockbuster looking at a Netflix model, maybe the whole model is wrong to begin with, and I need to rebuild my business for the mobile world. So this is where we're getting hold into and why we feel quite good about the investments we're making and what we call our 3-horizon model within our company and where we see growth coming from.

This is interesting. I talked about 10 billion computers worldwide today. If you look at predictions from MIT or Cisco or IDC, people are saying there's going to be between 50 billion and 100 billion computers worldwide by 2020 alone. So this is going to be, for example, the next car you buy may have 10, 20 IP addressable systems online at all times. And so actually, talking to the manufacturer but more importantly, whether you're driving down the roads to have that information not just coming from the car but what's coming from the Pandora that you're streaming through the dashboard, ways that you're using GPS. A phenomenal amount of data, which is being thrown off of that machine, it will be hooked to your next-generation Outlook system. So if you are in traffic, your GPS is going to tell Outlook, you're going to be 15 minutes late and it's going to notify those people. If you're getting close to your home, it's going to open up the security systems, going to set the temperature to the right level for you, so the house is ready when you get home. This is the "Internet of Things," and we're helping our clients with this. In fact, we're working with clients around such issues as creating an IP addressable toothbrush. And so you may think, what's in it for them? There is a lot of in it for them. It turns out 9 out of 10 Americas don't know how to brush their teeth. So look to the person to the right, look to the person to the left, in front, behind you, and the vast majority that don't know how to brush their teeth. And so this is something that would actually measure the duration, the angle, the pressure, and similar to a Nike fuel bands, would actually go to an application to actually show you how you're doing and help you with your dental hygiene, so forth and so on. And so if software eating the world, it absolutely is, and we see this in product environment, we see this in service environment that we're in the time of tremendous change. And with all of this, with this proliferation of devices, and, this proliferation of usage, data is growing faster than devices. So this is a projection from IDC. In fact, they came out with this a few years ago from 2011 to 2020, they were saying the data would grow 44x. This is data under management by corporation would grow 44-fold. They went back, looked at it again and they boosted it to 50x. So have you ever seen Jaws? That great line, "We're going to need a bigger boat." That's what our clients are saying, "We're going to need a bigger boat." How do we manage all of this? How do we run the firm on analytics? How do we get advanced algorithms and the data scientists and the people that can really help us manage the firm with new levels of insight and new levels of foresight? And you probably also noticed on this chart, there's a challenge. Even under the best of circumstances, the IT labor pool is only going to grow 1.5-fold in that time frame. So were living through interesting times where we're seeing an explosion of devices and an explosion of data, a whole new expectation of consumers and employees and yet, we're in a limited labor pool to manage against that. And so we can see then, just to finish up on the data portion, it's growing faster than the devices. So this is data under management, 2.6 exabytes in the minicomputer phase, went up to 15.8 in the client server world, up to 54 in desktop Internet, 1,800 today and exploding to 35,000 by 2020. So when I said we're really leaning in to very interesting times, it's data like this that supports it in general. But more importantly, it's clients coming to us saying that they're looking at specific issues.

It maybe a strategic issue. Look just 10, 15 years ago, these were what I'd call widget winners. They won their markets with industrial business models. Look then just 10, 15 years later, these are the companies that knocked them out of the box because they're built on the realities or the principles of the SMAC stack. These companies on the right understand very deeply social, mobile, analytics, cloud. And it's not a glue on to a business model on the left. It's actually the underlying principle by which the business is built. You may have seen Netflix was the cover story of BusinessWeek last week and they consume 1/3 of all Internet traffic in the United States on a nightly basis. It's remarkable what's occurred there. And so when they came out with that Kevin Spacey show, it was actually based on looking at their algorithms, understanding what customers would want. And so actually, through data, it is now informing product, it is informing design, it is greatly informing customer experience and this is where we're seeing the rules of many industries being changed.

This may look esoteric but it's a way of thinking about it. We are living in a time where the traditional inputs for a business, capital, labor, raw materials are pretty static. And yet as we just talked about, information is utterly exploding. And these are the changes that we're seeing. Some managers may say, "Yes, yes, yes. I know the whole border story, but that's a book thing. I know the blockbuster thing, that's a video thing. What does that have to do with me?" And it's our theory of the case that those are the canaries in the coal mine, they have everything to do with you. And you look at this similar to a nature. As temperatures rise, the form of these different materials must change and it's sort of obvious and we just know that.

But on the right, we're actually seeing as information explodes, it's hitting some industries earlier than others, but it's going to keep moving through these. So we've seen in the last 10 years what it's done to encyclopedias or maps or personal communications and movie rentals. We think we're now going to start to see similar changes in places like insurance, in retail banking, in life sciences, in healthcare, so forth and so on.

And it's really in 4 primary areas. One is the customer interface. So that customer interface where -- where was it in Cheers? Everybody knows your name. It's when you go into Amazon, you go into Pandora. They know who you are and what they know of you, meeting their institutional knowledge with their algorithms creates this highly customized experience, which is very, very powerful and the dissonance the customers have between that and other products is too jarring.

We hear people say, why is it that my $300 smartphone is so smart and my $30,000 car is so phenomenally dumb? And so that is going to change and we're starting to see that change in many, many places. The products, as well, you look at GE. GE is now making their products smart. So a jet engine is actually a social jet engine. So when it's in flight, its actually creating a social network around it. And it's giving off 200-plus realtime data points to the engineers at GE, to the engineers, for example, at American Airlines and they can head off problems, small problems before they become big problems and they're actually committing back to their customers how much they can drop to the bottom line as a result of those smart products. Also in managing supply chain partners, and I think ultimately, how do you change the employee experience to become a true social enterprise and this is very important with millennial associates. These are employees 35 and younger. They grew up online and really have a different expectation of how they want to interact with their employer and what technologies are available to them. So we think with the very early days of this, it's really started in some markets around the customer interface. But we think it's going to hit all 4 of these areas at scale.

Let me finish up with this thought. There is a very tight correlation around professional services models and these technology curves. And so in the mainframe, in many era, it gave rise to and EDS, IBM, CSC business model in professional services. Quite interesting is when we got to the client server phase, there's a new model and we had firms like Cambridge Technology Partners and Sapient that came racing out of the gates and had very good runs. But ultimately, Accenture was the winner there, back when it was Anderson Consulting. But they went from 500 million up to 20-plus billion through that wave and what it was able to drive and really gained market leadership.

When we looked at the Internet, you may remember when the -- back in the time of the great happiness in 1998, 1999, there were some Internet services firms that were hot for a while, Salient, Valiant, Razor Fish, agency.com, because we thought the Internet presented what you delivered to clients. But actually, I think the true Internet services firms are named Infosys, TCS, HCL, Cognizant, Wipro, because the Internet actually changed how you deliver and it allowed a global delivery model to take off. And on a cumulative basis, this is massive value creation, so forth and so on.

If we believe that historically, looking forward with the changes with the SMAC stack drives, we believe we're at a point in our industry, some of these firms who are able to jump curves are going to get outsized returns going forward. Some of those that cannot jump them may start to see some of the challenges that some of these firms saw previously.

So I think if your attention -- but let me just finish up with these thoughts that we are, in our view, entering this fifth wave of corporate IT. Just 2 years ago, we saw this and we thought theory, hypothesis, a lot of evidence for it, but now it's pretty much confirmed through the eyes of our clients that this is where we're going. It's not just an IT issue but this is now transforming process, it's transforming companies, it's transforming industries. You may have seen the projections from Gartner and Forrester, for example, that CMOs will start to get more IT spend and technology spend than CIOs. And so this is something where no longer is there IT in the business, but they really are truly combined. As I talked about, it's going to be in those 4 areas. The customer experience, the product, the employee experience and then working with your partners. And then finally, we think that overall, this is creating tremendous opportunities in our space. But firms need to manage through that and go through a process of creative destruction with services models to capture that market opportunity.

So I thank you for your time. I'm sorry to speak over lunch. But hopefully, that was useful for you and we'll be glad to take questions from Darrin at this point and then from you. Thank you.

Question-and-Answer Session

Darrin D. Peller - Barclays Capital, Research Division

Thanks, Malcolm. I think maybe what we'll do is start off in some questions around some of what you just discussed around the strategy and just what we're seeing in the industry. On that note, I mean, some of these SMAC initiatives and opportunities really fit into your horizons. 3 offerings, but just really, just a few percent of your revenue now, a small percentage today. But can you give us a sense, how many of your clients actually are focusing on this? We only see couple of percent of revenue now or a few percent there. But how much -- how demand is this really and is this considered -- are these considered discretionary items for your clients?

Malcolm Frank

Yes. I guess, the first part of it is, it's the vast majority of our client base. So of our H3 initiatives and what we're doing in SMAC, it is now the majority of our clients. We are deeply engaged with them around those. In a lot of cases, there are still pilots, they're still understanding, how do I roll in mobile solutions, what am I doing around Big Data, what am I doing around cloud, so forth and so on. So it's still early days. But people are becoming very familiar with this.

Darrin D. Peller - Barclays Capital, Research Division

Right. If you broke down, let's just say, the 4 parts you just discussed, what inning are we in, in each? And maybe even give us a little more color on industry-specific, obviously it will depend on which industry.

Malcolm Frank

Absolutely. I think that's the first place to start is the SMAC, across those is they are uneven. We are seeing real vitality in the M and the A. So mobility is just flying off the shelves and the same is true with advanced analytics and algorithms and Big Data. Those are real and they're moving very, very quickly. Cloud is a curious market. We're seeing a lot of activity at the infrastructure layer where people need excess capacity in going to an AWS model for different areas. We're also seeing that with this data that, can I just host some of that with third-party partners in the cloud? So we're seeing at the infrastructure layer a lot of activity and in certain spaces, at the application layer. Social is still young in the enterprise. We're seeing social solutions internally in organizations. But nobody that we have seen has truly cracked the code on a revenue driver across industries in social. So across those 4, that's how we're starting.

Darrin D. Peller - Barclays Capital, Research Division

Okay. So mobility and analytics obviously take the cake right now, at least. From an industry vertical standpoint, I mean obviously, we see a lot of mobility trends in banking and smart, but can you give us a little more color, I mean, specifically where -- what kind of clients do you work on and what types of projects are you doing right now?

Malcolm Frank

We're seeing a ton of the customer interface and it's in retail businesses. So it could be with retail and banking where firms are thinking through similar to Blockbuster. Is that physical store on the corner, the right interface to have with a consumer? And a lot of banks are surely recognized, in many cases, it's not. Asking this customer to "Get in their car, find parking, drive, wait in line and get up from sleep and work there for 6 days and just no idea who you are," as opposed to a really customized and tailored social experience and interface through their tablet. So at the customer interface in retail industries we're seeing that. We are also seeing it in big box retail. So these are large big box stores where they are saying, "The vast majority of my revenue still going through the big box store, but how can I bring the best of the virtual experience to that physical shopping experience?" So a customer could opt in and we're calling it at the intelligent store. So I walked in with my smart device, they say, "Oh, Malcolm is in the store. Here is a shopping list and give me a shopping map, in-aisle, checkouts, coupon redemption right there through my smart device." So bringing that virtual Amazon shopping experience to the physical big box store and pulling those together.

Darrin D. Peller - Barclays Capital, Research Division

Okay. One of the agile, almost feel like agile questions, we always get is whether something like the development of cloud is a risk for companies that are in IT services. I mean, we're seeing cloud obviously, hold my back as an opportunity at least in your term ut even beyond just cloud. I mean can, you address that concept? A little bit around not just cloud, but really the all of these. I mean, how are the development and advancements in mobility and Big Data and analytics? And how was that changing your -- what you're needed for versus other companies in the food chain around technology?

Malcolm Frank

Yes. We see it as a growth opportunity, a significant growth opportunity. So I think we should start with that. The second piece is it does require the ability around innovation, and it requires the ability to not just work with the IT group but beyond the IT organization. So in our context, consulting has really taken off for us in the past 3 or 4 years. Our business consulting practice, what we call Cognizant Business Consulting, has seen very robust growth and a lot of it driven by the this need for clients to start to reconceptualize and rearchitect key process that are being driven by these technologies.

Darrin D. Peller - Barclays Capital, Research Division

Right. When we think of Cognizant, and I think a lot of people in this room would probably agree, it's always been a company that's been able to show out performance on top line growth. I think that as the world is changing, you're seeing most companies across technology focused on these things. So as we look forward to the next 5 and 10 years, how do we get comfortable that you -- that Cognizant truly is a still able to differentiate itself versus other companies in the industry whether it's in the outsourcing and IT services space, or even just companies that are traditionally more software that are moving into this space to some extent?

Malcolm Frank

Right. I don't think it's news to anybody. When you talk to management teams across the space, they're going to say, "Well, of course, these are important technologies, and we are seeing them, as well." But I think 2 things. One is, we've got a financial architecture and a business architecture that is well-suited for change. And the third is our culture. But the financial architecture that I think investors have known for years is what we call our strategy of reinvestment that we went to -- we went public. We went to the public markets and made the commitment. We said our ambition is to be the growth leader. But we will have lower margins relative to some of our peers. And for that privilege and it is a privilege to have lower margins, we will reinvest that money around these areas to have tighter client relationships, to have better growth and we've been able to do that to date. So that still holds. The second thing is we have a 3-horizon business model, which is tailored for change. So we've got Horizon 1 which is our traditional business and then Horizons 2 and 3, where we can actually create the right structure around compensation, around culture, around focus to help us navigate through this change. And then I think a third piece and it's a bit touchy-feely, if you will, but we do have a culture of entrepreneurialism. It's -- we do have people to take risk. We are very decentralized as an organization. And I think it helps us move pretty quickly.

Darrin D. Peller - Barclays Capital, Research Division

Okay. Going back for a minute, because we never really had the opportunity to ask you that, the strategy person, this question around cloud which we always get. And I know that David and Karen always get. Is it truly a longer-term risk? Because near-term, you said that it's growth that helps. We know that it helps, you're doing implementation work around cloud. But does it open up the sort of world to allowing others to do what you do later on?

Malcolm Frank

Here's a theory of the case. The theory of the case is, well, you guys seem to do a lot with enterprise applications and if those enterprise applications suddenly go to the cloud, does your model disintermediate? So that is the argument. We've yet to see evidence against that argument. So if you -- we do a ton of work, for example, of firms like Salesforce. And in our case, in the enterprise, in Global 2000, those projects start to look a lot like a civil project. Because the needs to the enterprise, they've got significant data integration needs, they need to customization around process, the need of customization around screen flows. And so yes, we can help that client move to a new software platform and relationship with a software vendor, but as a services provider, they look quite similar. The second piece is the demographics at the application layer of cloud in the enterprise. You have to have standardization. It has to be something that the client says, "I'll buy that one too many model because their standardization with data sources." They are standardization with the functional need. So you're starting to see good vitality in HR, the success factors in workday model is working in the enterprise. We're seeing it with expense reimbursement. You concur, you don't want too get creative for expense reimbursement. So that model makes all the sense in the world in the enterprise. But for 80%-plus in those core systems, if I'm Coke, how do I beat Pepsi? That's not going to be standard. That is going to be ultimately be customized, and it's going to be bespoke to who I am as an organization. And that's where we really play. You have to see it.

Darrin D. Peller - Barclays Capital, Research Division

Almost like sort of the old ERP models, right?

Malcolm Frank

Right.

Darrin D. Peller - Barclays Capital, Research Division

Given, it never really truly standardized out. When you think a little bit about, when you -- I think you mentioned earlier there's going to be a need for 1.5x the number of tech professionals just given all these changes and ongoing trends. I mean, there's obviously a lack of employment right now. There's a very low employment level on technology today in the U.S. Do these trends help break the linearity for your models at all in the sense of need for more personnel? Are you doing something around these that helps that cause?

Malcolm Frank

Yes. In Horizon 3, we are building business that are around nonlinearity. So we've had a few of them, one is Cloud360. It's an offering from us that helps clients manage heterogeneous cloud environments. So they go cloud and cloud and cloud, and they wake up and say, "Well, how do I manage these 6 different cloud environments in my organization." And so we have an offering called Cloud360 that is product, its people, its process where, as a service, they can manage those environments. So we have another one, I call it assetSERV, around digital asset management. So these are marketing departments that have this proliferation of digital assets and they need to manage them. And so those are examples of businesses that we're starting to see nonlinearity in those Horizon 3 offerings.

Darrin D. Peller - Barclays Capital, Research Division

And are they going to move fast enough to really enable you to meet the needs? Or are there maybe, just enough people out there that you can actually keep up until this get to the point, the point of scale where...

Malcolm Frank

Yes, we're still seeing a Horizon 1, Horizon 2 good growth in those businesses. And I think we're fortunate that we've reached a point where we're an employer of choice. So I think that there are other firms -- and where this is really showing up is actually within a lot of client organizations that they may have trouble in some cases attracting in-house talents, but in the market -- last quarter, we hired 6,000 people. So we're still seeing -- we still have the ability to attract talent.

Darrin D. Peller - Barclays Capital, Research Division

If we move for a moment just from the Horizon 3 to Horizon 2 offerings, I know BPO is in there, it's obviously would have been a big discussion recently with some trends looking very strong. Yes, can you give us a little color on what your goals are there and how that's been trending for you? Horizon 2, I think is almost 20% of revenues now and so it's obviously getting very large. BPO is a big part of that. What are the plans?

Malcolm Frank

Correct. Horizon 3, for people that don't know, it's -- what is not just new to us but new to the market. So when I talk Cloud360 and assetSERV, those are really new business models. Horizon 2 is newer to us but well understood by the marketplace. So think of when Volvo or BMW went into SUVs, it was new for them but people knew what an SUV was from Chevrolet or from jeep or from whomever. So we have 3 businesses there. One is management consulting, which I described as Cognizant Business Consulting. The second is BPO and the third is IT Infrastructure. We see all 3 of those as significant growth opportunities. So I talked about consulting. Quickly, with BPO, we take it slightly different approach than the common definition. We go after very verticalized business process outsourcing. So this is not the horizontal that you'll see with call centers and the rest. But we will actually, for example, help clients with their data analytics around clinical trials for pharmaceutical firms. So we have a lot of M.D.s on staff. We have a lot of Ph.D.'s and data scientists will help with that very verticalized issue. So that's the type of problem we go after, we get better pricing power, it's much stickier with a client, so we're going after those. Where cloud helps us is actually with their IT infrastructure business. Because we're newer to that business, we are actually riding that wave. It's not cannibalizing our infrastructure business. We really didn't have it. So we're helping clients modernize their infrastructure and moving to more cloud-based models through our IT infrastructure business.

Darrin D. Peller - Barclays Capital, Research Division

Okay. I think just in interest of time, maybe shifting gears to the core business, or at least your Horizon 1 offerings. We're obviously, seeing trends that are still showing very strong on both the outsourcing and the consulting side. Can you give us a little color on what you expect to see in sort of how the years would continue to shape up? Beginning of the year, it started off that there's a lot of uncertainty from some of your competitors and you guys really held strong, at least, in line with your plans 17%-plus top line growth and give us a little color on what you're seeing now.

Malcolm Frank

Sure. I'll cover that for a minute now and hand if off to Karen. When I talk about this run better, run different model, it's helping us a lot in Horizon 1. So you raised earlier that even a SMAC is not a huge revenue driver right now. Clients are saying even on a Horizon 1 opportunity, if I'm going to invest in somebody, I want to have the option to move into those environments. So we're actually finding that, that whole service between run better, run different is helping the Horizon 1 business as it is right now. So, yes, we did come off a good Q1 and quite often, Q1 is a weaker one for us because we're on a calendar year, clients are getting their budgets and projects are just starting to take off. But we are pleased where we came out with Q1 and a lot of that was in the Horizon 1 business.

Karen McLoughlin

Yes, so I think to add to what Malcolm was saying, I think 2013 is interesting because it actually feels like it's playing out as somewhat of a normal cyclical year. The last few years, we skipped months in the recession and last year some of our seasonality wasn't as consistent as it had been in the past. But typically, in Q1, what we see is a little bit slower on the discretionary spend side as clients wrap up their budget process and start thinking about their priorities for the year. And then coming out of Q1 in the sort of late March, April timeframe, you start to see discretionary spending ramp up and that's certainly what we saw this year. So Q1 basically played out as we expected. A couple of the key highlights in things that we think will be trends for the year, banking and our BFSI segment really had a terrific Q1, both year-over-year and sequentially. And what we've seen over the last several months is a very nice resurgence in our banking business in particular. So last year, insurance had a very strong year and we would expect that to continue but banking was quite slow, particularly the large North American banks in the first half of the year. We started to see that pick up in the second part of the year and that certainly has continued into Q1, and we expect for that time to come. But what we're seeing in the banking sector, finally, is a pick up in regulatory spend, service have been waiting for when does that start and last year we've seen a little bit of the front end consulting piece of that, but now we're starting to see clients move into the execution some of those projects, as well as the other big thing as Malcolm alluded to and banking is mobile and how do they change their business model moving forward. So banking was very strong. Our Continental Europe business is doing quite nicely. Europe overall, had very nice growth in Q1. We did complete the C1 acquisition in March so that contributed about $8 million to the quarter. But as we've talked about now for 2 or 3 quarters, the pipeline particularly in the continent has really opened up and we're starting to see a lot of traction with customers there around more traditional, larger outsourcing transformational type business. So we expect to continue to see some very good growth there.

Darrin D. Peller - Barclays Capital, Research Division

To jump in, what triggered the change in Europe? Because obviously, it was many, many years of sort of reluctance to get into this market and work with someone like yourselves. Part of it was labor laws, language barriers, but what changed? Because all this time we are seeing from you guys and a couple of others also, some trends.

Karen McLoughlin

Yes, I think it's a couple of things. Obviously, we've always had a lot of strength in banking and life sciences in Europe. So Switzerland was very strong for us, Netherlands was strong for us. But for us particularly, one of the things that helped trigger some of our growth, I think, was our Philips transaction last year. So it started to open up other business segments for us in Continental Europe and so we now have the brand and the scale where clients are inviting us to talk to them. I think in general, in the European economy, I think clients, have just reached a point where they have to change their business model if they're going to be competitive in the global market. And so you're seeing clients willing to tackle some of the issues that may be 3 or 4 years ago, they would have been hesitant to around how did they change their model? They have an aging workforce, they have the same challenges we have in the United States about their local universities not producing enough engineers. So there's just not enough talent in the marketplace for them to continue to be successful. And so they're much more open now to having those dialogues around really how do they globalize their business and their delivery models.

Darrin D. Peller - Barclays Capital, Research Division

In terms of verticals, you mentioned financials, one I'd be remiss at, not just healthcare obviously, a little bit slower. In the scenario, you're saying you're still waiting to see sort of the overcoming of some of the patent cliffs or whatnot. How do we expect that to trend out for the rest of this year, maybe in 2014?

Karen McLoughlin

Well, let's take health care into 2 pieces where you got the payor side of the business and then pharma and life sciences side of the business. As we've talked about for sometime now, we saw this last year, certainly, that we think life sciences will continue to be slow this year. And we had the big patent cliff last year we saw a big pullback in life sciences and although it grew last year, it will continue to grow again this year it will grow slower than company average. Clients are telling us that they are much more bullish about 2014 and their pipeline of new drugs coming to market. I think obviously, we'll take a little bit of a wait-and-see attitude around some of that. But we are in life sciences, starting to see clients again, start to have another round of conversations. So life sciences before the patent cliff had been very aggressive in moving to an outsourced model and had moved a lot of their outmaintenance at Horizon 1 core services to that model in advance of the patent cliff. What you're starting to see now is a lot more dialogue around some of our Horizon 2 service offerings and how can we help to take them to the next level with that, as well as again in the SMAC stack, particularly analytics is obviously as huge for the pharma industry, has been a strong point of ours for several years now so a lot of dialogue there. But I think in terms of a big recovery in pharma, it's certainly not a 2013 item. On the payor side, what's interesting is obviously, we had very good growth in the healthcare business for a long time. We saw a little bit of a pullback in the second part of last year as clients were trying to understand the Healthcare Reform Act and evaluate the impacts on their business. What we're starting to see now is a little bit of a trend towards clients saying "Okay, I understand the impact now. Here's what I want to do with my business model and my platforms and how I want to look moving forward." So starting to see some more pick up around that and around the regulatory work. Also seeing quite a bit of work with the states around the healthcare exchanges and what are they planning to do around that at the individual state level. So I think we're starting to see a little bit of a pickup in healthcare, early to say how strong that will be for this year.

Darrin D. Peller - Barclays Capital, Research Division

Just to wrap it up now. I mean, I want to -- aside from immigration reform is obviously is -- on top of people's minds. I mean, overall from the beginning of the year until now, is there anything that's really surprised you to the upside, or even the downside versus your initial expectations for Cognizant for 2013?

Karen McLoughlin

I think in general, this year is playing out as we expect it to. So Q1 played out exactly as expected, we beat out guidance by $20 million but essentially, we've met our guidance, we've reaffirmed our full year guidance of at least 17% growth. I do think banking has been a little bit of an upside surprise, pleasant one obviously. And I think there could be a little bit more upside in a couple of the other business units. But I think in general, it feels like this is a very steady year where clients are really beginning to focus again on their business, how do they move their business model forward, how do they continue to transform and deal with the secular issues that are facing them, and looking to provide just like ourselves who can really bring a whole range of solutions, including everything from the consulting front and all the way through the execution and the delivery and the innovation piece to help them be successful.

Darrin D. Peller - Barclays Capital, Research Division

Just a quick question on immigration. We're about -- almost out of time. I'll open to some questions before we end. With regard to the legislation or the pending legislation, obviously, the Senate has its version, which has been pretty much holding costs and there's a House version introduced today, or at least, the draft that we saw, which did not include the outlays provision, at least in it. Just can you give us some idea as to what your thoughts are around this in terms the, I guess, changes of getting through in general and maybe overall implications for the industry?

Karen McLoughlin

So whether it gets through or not, I'm not a betting person so -- but I do think there'll be a lot of dialogue around immigration in the coming months. We do not expect this to be a short-term conversation. As you said, looks like members of the House have put forward another version of the bill this morning. We think there will be more to come. So we think over the next several months, there'll be a lot of reiterations, a lot of conversation. I think, based on what we've seen so far, the real objective for us and our clients and hopefully for Washington is that we want to make America a stronger country. We want to be able to allow our customers to continue to be innovative, to be global leaders and then in order to do that, they have to have the best talent in the world. And be able to get that talent where and when they need it. And it's no surprise that IT unemployment in the U.S. is very low, it's 4%, which is essentially full employment, I think for most of us taught when we were in the school. And so this is really about how do we fix that and get the right talent and so I think what we've seen so far is some very good component to the bill around how do we enable the green card process to make that more robust, to make it easier for people to come to the U.S. and become permanent residents and citizens. I think there is still some opportunity to enhance some of the H and the L conversations and how do we enable that, how do we make sure that at the end of the day, we're not doing something that makes it more difficult for American companies to be successful.

Darrin D. Peller - Barclays Capital, Research Division

All right. With that, why don't we see if there's any questions from the audience? There's one, right one in the middle.

Unknown Analyst

Could you just clarify? You said you hired 6,000 people in the last quarter, just can you amplify on that? What areas or...

Karen McLoughlin

No, that's a net add of 6,000 in Q1, so we actually hired more than 6,000. But that was across-the-board, so that is a combination of lateral hires, as well as some college entry-level folks who joined us. This is a very typical hiring quarter for us. So in all of the countries that we operate in, it's in the U.S., it's in India, it's in Europe, across we operate in 40 countries. Again, it was really across our service lines. So our Horizon 1, 2 and 3 businesses, there was really no particular change or shift. That was just a very robust quarter for us. And that obviously, reflects the demand that we think that we are seeing in the marketplace.

Darrin D. Peller - Barclays Capital, Research Division

Just one last question for me. I mean, on the wage inflation and pricing side. Clearly, your margins have been able to maintain pretty strong in the 19, 20, actually north of 19% range for a while. Are we seeing anything that's changing that on that front-house pricing been for you in the last couple of quarters?

Karen McLoughlin

I think that's been very stable for the last year or so now. To go back to 2010 and '11, coming out of the recession, it was a big push to increase rates because people have gone a long time without rate increases. We're now back in a much more normal cycle where you're getting your normal inflation adjustments and so forth with clients. But pricing has been very, very stable over the last several quarters. On the wage inflation side, obviously, Q2, as people started talking about wage increases, particularly offshore, we think there'll be some moderation this year versus prior years. There is quite a large supply of talent in India right now. Some of our competitors have been out talking about ranges in the sort 5%, 10%, which we think is about where the industry will land probably somewhere in the middle of that, including promotions and so forth. So I think you'll see a little bit of moderation this year in on-site wage inflation and for most people, I would assume we would be in the low-single digits as it has been. So no real changes there.

Darrin D. Peller - Barclays Capital, Research Division

Okay. Any other questions?

Unknown Analyst

Just wanted to get more color on the acquisition strategy like you had the C1 Group acquisition in late 2012. Is this the typical size we should expect to see in 2013, 2014?

Malcolm Frank

Yes. We've had an acquisition strategy for years that we will acquire for capability but not for capacity, and that remains consistent. Now as we keep growing, the size of those grows. It correlates to our overall growth. But these are more tuck-ins that will fit within our business model along 3 key areas, to catalyze us in geography and C1 certainly helps in the German-speaking market. And second would be within industry practice, or a third with the service line. And if we can get 2 out of 3, or even 3 out of 3, that's even better. But as we were saying, we have the ability to hire and build capacity organically. So it's all around getting new capability in markets where we see real growth potential, and C1 certainly fit that for the European market.

Darrin D. Peller - Barclays Capital, Research Division

I think we're actually about out of time. So Malcolm, Karen, thank you for being with us. David, thank you again for being here with us in the conferences this year. And thank you everybody for being with us for lunch. CFO for another presentation. Thanks, guys.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!