Cognizant Technology Solutions Q1 2007 Earnings Call Transcript

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 |  About: Cognizant Technology Solutions Corporation (CTSH)
by: SA Transcripts
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Cognizant Technology Solutions Corp. (NASDAQ:CTSH)

Q1 2007 Earnings Call

May 2, 2007 10:00 am ET

Executives

Scot Hoffman - Financial Dynamics

Francisco D'Souza - President and CEO

Gordon Coburn - Chief Financial and Operating Officer

Analysts

George Price - Stifel Nicolaus

Andrew Steinerman - Bear Stearns

Christine Pezino - JP Morgan

Julio Quinteros - Goldman Sachs

Greg Smith - Merrill Lynch

Sandra Notardonato - Robert W. Baird

Abhi Gami - Banc of America

Adam Frisch - UBS

Presentation

Operator

Good morning. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to the Cognizant Technology Solutions' First Quarter 2007 Earnings 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. Mr. Hoffman, you may begin your conference.

Scot Hoffman

Thank you, operator, and good morning, everyone. By now, you should have received the copy of the company's first quarter 2007 earnings release. If you have not, please call our offices at 212-850-5600, and we'll be sure to get a copy sent to you.

The speakers we have on the call today are Francisco D'Souza, President and Chief Executive Officer; and Gordon Coburn, Chief Financial and Operating Officer of Cognizant Technology Solutions.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC.

I would now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco.

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Francisco D'Souza

Thank you, Scot, and good morning, everyone. Thank you all for joining us today for Cognizant's first quarter 2007 earnings call. This morning, I'll provide an overview of the highlights of our first quarter results and discuss the key drivers of our financial performance. I will also discuss several investments that we have been steadily making in the business to insure that we meet the needs of our clients, effectively manage our growth and deliver strong financial performance to our shareholders.

I'll be joined on today's call by our Chief Financial and Operating Officer, Gordon Coburn.

We are pleased with our strong first quarter financial and operating results which are a testament to the consistent successful execution of our strategy and reflect our ability to further expand our growth platform.

In the first quarter, we exceeded our internal forecast, generating $460.3 million in revenue, which represents an increase of 61% from the first quarter of 2006. GAAP EPS was $0.50 for the quarter, up 56% from the year-ago quarter. Non-GAAP EPS, which excludes stock-based compensation expense of $0.04, was $0.54 in the first quarter, compared to $0.36 in the first quarter of 2006.

We also increased our number of active clients by 25 in the quarter, including five of which are consider strategic. Meaning, these clients have the potential to generate between $5 million and $40 million or more in annual revenue for Cognizant over the long term.

Our growth was driven by strong performance across vertical sectors, including our largest sector BFS or Banking and Financial Services.

I am also pleased to report that during the quarter we continue to make investments in our people and infrastructure on a global scale. We increased our headcounts by close to 12% sequentially with a net addition of approximately 4,600 employees around the world.

During the quarter, our annualized employee attrition declined to 15% from 17% in Q4. While we are pleased with our sequential progress in this area, attrition remains above historical levels. We continue to monitor employee attrition carefully and take necessary short and long-term steps to manage it.

Our more than 43,000 employees are a testament to Cognizant's reputation as an employer of choice in the global services industry and we are continuously focused on maintaining and enhancing our ability to recruit and retain the best talent to grow the company around the world.

As we look forward to the rest of 2007 based on our strong demand pipeline, we've increased our revenue guidance for the full year by $30 million to $2.07 billion.

During the second quarter, the recent appreciation of the Rupee, a new tax on real-estate in India and our Q2 compensation increases will create some pressure on our cost structure.

In order to offset this, we are proactively taking steps with the goal of maintaining operating margins within our target range of 19% to 20% excluding equity-compensation expense for the remainder of the year.

It is important to note that our strategy has always been and remains today, to balance the needs of our shareholders with the need to continually invest in the business to generate industry-leading growth and capture market share. Gordon will take you through our numbers in greater details in a few moments.

Turning to our growth in the quarter, our strong performance continues to be driven by the strategic investments we've made in the business over the last several quarters. Specifically, we continued to expand and globalize our business and invest in attracting and retaining the best talent around the world, deepen our technology expertise and horizontal lines of service ahead of the curve, cultivate market leading domain expertise in each of the industry segments we serve, and build a strong brand for Cognizant.

We continue to see affirmation of the strong demand for our services both in our client relationships and in the ongoing opportunity for new business coming to us from an expanding range of industries across geographic markets. This was reflected in our first quarter results as we once again saw a broad base strength across our vertical segments and solution offerings. Our five strategic clients during the quarter are sand industries, banking and financial services, healthcare and retail and geographies with key strategic wins in the United Kingdom and US, and our pipeline of business across the company is strong. We have also been benefiting from a trend towards the unbundling of large deals in the global IT services market. Customers increasingly up for unbundled deals with the goal of selecting best-of-breed service providers based on their particular expertise across service areas ranging from application outsourcing and IT consulting to infrastructure management and business process outsourcing.

This trend plays to the strength of our business model compounding the value of our investments both in our vertical industry expertise and the expanding range of our horizontal service offerings.

On our last earning calls, I discussed globalizing our businesses as a key strategic priority in 2007. During the first quarter, we made progress both in growing our presence in key customer market, particularly in Europe and in building out our global delivery platform. On the demand side, we saw a sustained momentum in Europe during the quarter both in continental Europe and the United Kingdom, as a result of our investment.

Revenue from European clients grew 84% from the first quarter of 2006 continue to outpace the company average. During the quarter, Europe represented 14% of total company revenues.

Over the last several quarters, we have invested in building out business development teams around the industry verticals and strengthening our marketing efforts in Europe. I am pleased to report that our industry-centric organization in the UK is leading to stronger relationships with clients where we have seen signs of accelerated growth.

For example, during the quarter, we signed a major UK retailer as a strategic client, where we are implementing a complex Oracle E-Business Suite integrating the client supply chain and customer relationship management processes.

During our last earnings call, we discussed the signature of a letter of intent under which Ordina, one of the fastest growing and largest IT services providers in the Benelux, and Cognizant will collaborate in providing a broad range of technical designs, software development and testing services to the Rabobank group. Rabobank is the largest banking group in the Netherlands.

I am pleased to announce that today we signed definitive agreement on this engagement. As part of the engagement, Rabo has committed to outsource at least 3.8 million hours of work over the next seven years. Portions of this work will be executed by Cognizant using our integrated onsite/offshore delivery model. This win marks the expansion of an existing relationship we have been building with Rabobank since 2003 and further underscores our ability to translate our recent investments in Europe into revenue opportunities for Cognizant.

During the first quarter, we continued our approach of making investments in our global delivery platform to meet future demand. Expanding our global delivery operations is a critical component to our long-term strategy as clients continues to turn to Cognizant to help them strengthen their businesses in key markets where they operate around the world.

We launched Cognizant's delivery operations in South America during the first quarter, selecting Buenos Aires as the location for our initial development presence there. Opening a delivery center in Argentina is a first step to building out our presence in the region.

Cognizant will initially provide applications-related services to Kimberly-Clark Corporation from Buenos Aires as part of the engagement we announced last quarter. We have intimated our presence in Buenos Aires in close collaboration and partnership with Kimberly-Clark, which has a long operating history in Latin America. Kimberly-Clark is providing Cognizant with assistance ranging from temporary office facilities to local operating insight in the region.

This is just another example of the depth with the relationships we have with our clients, who are willing to assist us with jump starting key strategic initiatives which benefit Cognizant's long-term business.

Our strong performance was also driven by our ability to leverage our market-leading position in the vertical industries we serve, especially in financial services, healthcare and life sciences, and retail and manufacturing. I want to spend a few minutes on financial services in particular, since we saw a strong growth in this vertical during the quarter.

Our financial services vertical, which include our banking, insurance and transaction processing practices, our practice areas grew 7% sequentially from a strong fourth quarter and 58% year-over-year. Performance in the vertical was driven by growth both from many of our larger banking and financial services' customers and also from our well-diversified portfolio of BFSI customers at various stages of offshore adoption across our key geographic markets.

Today we serve six of the top US banks and four of the top European banks. In addition, we are serving seven of the top US property and casualty insurance companies, and seven of the top US life insurance companies.

The growth across the vertical also illustrates the effectiveness of our efforts to add significant depth to the solutions we provide to our clients, so that our services remain relevant across the lifecycle of our customer relationship, from early-stage offshoring relationships to sophisticated transformational relationships.

Over the last several years, we have strengthened our financial services' market leadership position and continue to win business because of the deep domain expertise that we bring to the world's top banking, financial services and insurance companies.

One example of the investments we are making is our banking, Domain Consulting Group or DCG as we call it at Cognizant. The group is comprised of 400 consultants with deep banking expertise across nine sub-domains, consumer lending, online banking, credit cards and payments, asset and wealth management, investment banking and brokerage, security services, corporate services and enterprise risk management.

These consultants are an integral part of the banking and financial services vertical and provide strategic input on major client initiatives from conceptualization to implementation, combining a deep understanding of the business challenges that our clients face, with the technical expertise of our delivery team.

The group has been instrumental in driving revenue opportunities from complex, large scale projects including a derivative trading platform for one of the world's top banks, Basel II and Reference Data frameworks for another global bank and a large scale reference data and investment accounting platforms for large asset management firms.

For clients who have been aggressive adopters of offshore outsourcing, the BFS domain consulting group allows us to scale relationships beyond the limits traditionally associated with offshore outsourcing, driving new growth opportunities and further strengthening Cognizant's leadership in the vertical.

Our first quarter results were also driven by growth across key horizontal service offerings including ERP testing, IT infrastructure services and BPO.

ERP is an area in which our strategic investments have been driving significant growth over the last several quarters. As we have said in the past, we enjoyed a strong relationship with SAP and had cultivated a deep knowledge of the next generation NetWeaver platform, at our NetWeaver Test Center. During the first quarter, we continue to win ERP business from customers in the banking and financial services, retail, manufacturing, healthcare, pharmaceutical and technology industries across the US and Europe enabling revenue from ERP solutions to roughly double from the first quarter of 2006. We are also seeing significant opportunities for major ERP implementations and upgrade initiatives beyond SAP. To this end, during the first quarter, we achieved Oracle (Certified Alliance Partner) status and now have over 3,000 Cognizant associates registered with the Oracle partner networks. More importantly, in-line with our focus and technical excellence, over 250 Cognizant engineers are now certified as Oracle consultants. We opened our Oracle Fusion Center of capability and innovation in Kolkata during the first quarter.

Cognizant now offers customers with a full range of ERP solutions from consulting to the implementation and upgrade cycles regardless of which platforms they adopt. We expect to see further growth opportunities from our strategic investments in ERP. Our IT infrastructure services practice continued to record strong growth more than doubling in size from the first quarter of 2006.

Since we acquired AMS Solutions last year, we have seen significant demand for our IT infrastructure services offering, particularly our integrated onshore/offshore Network Operation Center, which went live during the first quarter in response to strong demand from our clients for a truly global infrastructure management delivery model. Cognizant's ability to deliver an IT infrastructure services solution integrated with our vertical industry expertise is evident in a recent win in our information, media and entertainment vertical. In March, we announced that Simon and Schuster, the major publishing house, selected Cognizant to provide end-to-end IT infrastructure management and data centre operation services encompassing 200 servers, 1400 desktops and Simon and Schuster's mission critical applications.

Business process outsourcing is another service area, where we saw substantial growth in the first quarter. Today, we are seeing robust BPO activity across a broad spectrum of sectors demonstrating how we have coupled Cognizant's market leadership across our industry vertical businesses with our vertically focused BPO service offerings to drive new revenue opportunity for the company.

We have grown BPO strengths to approximately 1,200 associates, including doctors, lawyers, statisticians, chartered accountants and MBAs through a BPO strategy focused on integrating our custom offshore process, support model with technology and domain expertise. As a result, we won several notable BPO client engagements in the first quarter across banking and financial services, insurance, healthcare, life sciences and telecom. For example, a leading Medicare peer organization has engaged Cognizant to provide claims processing and adjudication prudentially.

In the financial services' vertical, Cognizant is providing back office, fixed income accounting for one of the world's most prominent private equity firm, and a leading cable provider has engaged Cognizant to deliver triple-play accounting for its cable, telecom and internet services. Overall, we are pleased with the progress we are making across our horizontal solution offerings.

Finally, as I said at the beginning of the call, we continue to invest in enhancing the Cognizant brand to support our growth strategy around the world. Our efforts in this area were evident in several industry recognitions that Cognizant received during the first quarter. First, we are delighted that Forrester Research has named Cognizant as a top offshore provider in their report entitled "The Forrester Wave: North American Applications Outsourcing Q1, 2007."

Cognizant was one of only a select number of companies chosen to participate in the research. And we are happy that Forrester awarded Cognizant with "the highest overall grade for cultural fit while remaining price competitive" among the top off-shorens.

Second, our investments in enhancing our horizontal solution offerings also continue to receive industry recognition. In particular, Gartner recognized both our CRM and data warehousing solutions by placing both service offerings in the respective Gartner Magic Quadrants during the first quarter, underscoring how the Cognizant brand is increasingly associated with top solution offerings in the industry.

Third, we are honored that Cognizant was ranked 12th on Business Week's 50 best performing companies in the March 26th issue of the publication, building on our earlier recognition as one of Business Week's top-ten hard grow companies.

The rankings represent Business Week's selection of the best in class from each of the ten sectors that make up the S&P 500, were top companies in each sector are rated based on sales growth, average return of capital, total return, profitability and rank within industry sector.

During 2007, we are accelerating our focus on building strong brand recognition for Cognizant through strong thought leadership growth in major industry and trade organizations. As you know, Lakshmi Narayanan has taken on much of this responsibility in his new role as Cognizant's Vice Chairman. Lakshmi was recently elected chairman of NASSCOM for the 2007 and 2008 term, where he is also representing Cognizant's voice in addressing broad industry issues such as innovation, talent development and data security. Overall, we are very pleased with our performance for the first quarter and continue to be confident in our growth strategy for 2007.

Now I will turn the call over to Gordon to walk you through our financials in greater detail. Gordon?

Gordon Coburn

Thank you, Francisco, and good morning to everyone. I would like to provide some additional information on the first quarter and then discuss our financial expectations for the second quarter as well as for the full year 2007. Revenue for the first quarter exceeded our prior guidance and expectations due to continued strength in Europe, strong year-over-year growth in healthcare, life sciences and financial services, as well as improvement in manufacturing retail and logistics.

Quarterly revenue grew 8% sequentially and 61% year-over-year, as the quarter proceeded, we continue to see healthy volume growth across the broad range of services in industries. Our core businesses remained vibrant and our pipeline is robust. During the quarter, our financial services segment which includes our practices and insurance, banking and transaction processing grew by over $78 million year-over-year and represented 47% of revenue for the quarter.

Healthcare grew over $47 million and represented 24% of revenues. Retail, manufacturing and logistics grew by almost $25 million, representing approximately 15% of revenues for the quarter. The remaining 14% of our revenues came primarily from other service-oriented industries including telecom, media and technology, which grew by over $24 million.

During the quarter financial services grew 58% year-over-year and 7% sequentially. Healthcare grew 76% year-over-year and 2% sequentially. Retail, manufacturing and logistics grew 55% year-over-year and 22% sequentially.

Growth in our retail, manufacturing and logistics segment was driven by several new retail accounts that we've won and are now ramping up including the previously announced transaction with Kimberly-Clark. Our other segment grew 57% year-over-year and 10% sequentially. Growth in our other segment benefited from growth in our information and media operations.

For the quarter, application management represented 53% of revenues and application development was 47%. Both services continued to grow significantly in Q1. Application management grew 73% year-over-year and 12% sequentially. Application development grew 50% year-over-year and 5% sequentially, reflecting a healthy demand environment for our entire services offering. We shift towards maintenance revenue during the quarter. It was driven in part by several high growth accounts focusing initially on application management.

During the quarter, 85% of revenue came from clients in North America. Europe was 14% of total revenue. The remaining 1% of revenue came from the Asian market. Our European business grew 12% sequentially and 84% year-over-year, as we continued to invest in that region.

We added approximately 45 new customers during the first quarter. We closed the quarter with an active customer base of approximately 420. During the quarter the number of accounts that we considered to be strategic and have the potential to become significant revenue sources for us in the future, increased by five, bringing total number of strategic clients to 92. We ended work for approximately 20 clients during the quarter, almost all of which were very small.

Turning to cost, on a GAAP basis cost of revenues exclusive of depreciation and amortization, increased 61% for the quarter compared to the first quarter of 2006. First quarter cost of revenues included approximately 3.3 million of equity-based compensation expense.

The increase in cost of revenues was due to additional technical staff for on-site and offshore required to support our revenue growth. We increased our technical staff by over 4,300 during the quarter and ended the quarter with approximately 40,800 technical staffs. This is a net increased of almost 15,750 technical staff from March 31, 2006. For the first quarter SG&A including depreciation and amortization expenses was $121.7 million on a GAAP basis up from $73.7 million in the first quarter of 2006.

GAAP SG&A expense in Q1 2007 included approximately $4.2 million of equity-based compensation expense. GAAP operating income for the quarter increased 57% to $83.6 million from $53.2 million in the first quarter of last year. On a non-GAAP basis, which excludes the impact of $7.4 million of equity-based compensation expense, operating income for the first quarter was $91 million, up 50% over last year. Our GAAP operating margin was 18.2% for the quarter, and our non-GAAP operating margin for the quarter was 19.8% in line with our target range of 19% to 20%.

Interest income for the first quarter increased to $6.7 million, compared to $3.4 million in the first quarter of 2006. Interest income increased due to a higher global cash balance, cash and short-term investments, as well as an increase in short-term interest rates. We had a $17,000 foreign exchange loss during the quarter. Our GAAP tax rate for the first quarter was 16.4%.

Turning to the balance sheet, our balance sheet remained very healthy. We finished the quarter with over $673 million of cash and short-term investments up over $250 million from March 31, 2006, and up about $25 million from December 2006. During the quarter, operating activities generated over $12 million of cash, compared to a use of about $4 million of cash in the first quarter of 2006. Financing activities, primarily the exercise of stock options, and related tax benefits generated approximately $40 million of cash in the quarter. These amounts were partially offset by slightly over $28 million of capital expenditures. In addition, we generated approximately $360 million of cash due to currency translation adjustments.

For 2007, we continue to expect to spend approximately $180 million of capital expenditures, a substantial majority of which is related to the construction program and equipping of additional development facilities to support our growth, which we have previously announced.

Our collection of trade receivables improved slightly from the first quarter of 2006. Based on our $347.8 million balance on March 31, we finished the quarter with a DSO including unbilled receivables of 68 days compared to 69 days in the same period last year. On a quarterly sequential basis, the number of going days as well as our daily volume during the first quarter was skewed towards March, negatively impacting our DSO compared to the fourth quarter of last year.

In Q1, excluding unbilled receivables, our DSO was approximately 59 days. The quality of our receivables portfolio remains very strong. Our unbilled receivables balance was approximately $46.6 million at the end of the first quarter, up about $13 million or 40% from March 31st of 2006, and up about $7 million from Q4 of last year. Approximately 50% of our March 31st unbilled balance was billed in April.

During the first quarter, 25.3% of our revenue came from fixed-price contracts, up from 24.7% in the fourth quarter of 2006 and down from 25.9% in the first quarter of 2006. When we look at the mix by solution type during the first quarter, 30% of our developed revenue and 21% of our maintenance revenue came from fixed-price contracts during the quarter.

Turning to headcount, again, at the end of the first quarter, our worldwide headcount including both technical professionals and support staffs totaled approximately 43,450. This represents a net increase of approximately 4,600 during the quarter and 16,700 since March 31, 2006. Slightly more than 50% of our Q1 hires were recent college graduates who'll enter our training program, the remainder were lateral hires of experienced IT professionals.

Turnover, both voluntary and involuntary was approximately 15% during the first quarter, on an annualized basis. As discussed during our February call, we've launched a global initiative to ensure that our employees receive appropriate rewards, recognition and personal and professional growth opportunities across their entire lifecycle with Cognizant. We believe this initiative is already contributing to the improved retention rates we have experienced since third quarter of last year.

Onsite utilization declined slightly to around 84% for the quarter on a sequential basis. Offshore utilization excluding recent college graduates who were in our training programs during the quarter was approximately 69%, including trainee's offshore utilization was approximately 54% for the quarter. We had well over 5,000 unbilled people in our training program at the end of the quarter.

I would now like to comment on our growth expectations for the second quarter of 2007, as well as the full year. The investments we are making are producing results. They are allowing us to differentiate ourselves from the market place both in terms of winning and growing new clients as well as expanding our service offering. This has resulted in stronger than expected results for Q1 and provides us with a strong foundation for continued growth in 2007.

During Q2, and the remainder of 2007, we will face three challenges through operating margins. I'll explain them first and then I will outline the steps we are taking to mitigate these challenges. First, as planned, we face the impact of our raises and promotions which become effective during Q2. Annual raises came in roughly where we planned with an average increase of approximately 16% offshore and modest on-site increases of very low single-digits. Second, the recently proposed India budget includes the provision to tax a rental of commercial real estate, assuming the taxes are inactive as proposed, retroactive to April 1st, will cost us approximately 15 to 20 basis points each quarter.

Finally, we are being negatively impacted by unexpected appreciation in the Indian Rupee. During the first quarter, the average rate for the Rupee was 44, a 2% depreciation compared to the average rate in the fourth quarter of last year. And the Rupee has continued to appreciate. Assuming that the average rate for Q2 equals the current exchange rate of approximately 41, we will experience 7% depreciation in the average rate for Q2 compared to Q1. As a reminder, every 1% movement in the Rupee results in a 20 basis point impact on operating margin. Assuming low additional movement in the Rupee in Q2, the sequential impact for Q2 would be approximately a 140 basis point reduction in operating margin.

We have already begun implementing actions to offset the planned compensation increases and the unplanned appreciation of Rupee and our tax and real estate. These actions seek to balance our goals investing for industry leading growth right to leaving operating margins within our historic target range of 19% to 20% excluding stock-based compensation expense.

One of the actions we are implementing is the targeted increase in our global utilization rates. As we have discussed in prior calls, we have been running the business with historically low levels of utilization, and we actually brought down a little bit more in Q1. Therefore, we believe we have room to increase these rates. We believe that our scale efficiencies allow us to do this, while still raising available skilled employees to meet client demand. This is why we have reduced our headcount goal for the year, while increasing our revenue guidance.

We roughly reduced our headcount goal by about 1.5% and increased our revenue guidance by about 1.5% which equates to on a year-over-year basis to roughly a 3% increase in utilization. Obviously on a sequential basis, it will be more than that since we brought utilization down in Q1. Every one point improvement in global utilization results in approximately a 50 basis point improvement in operating margin.

In addition, as we work to gain the benefits of increased utilization, we are closely monitoring our larger discussion of spending items such as travel as well as growth in non-billable support staff, a significant cost driver for us, where we have opportunity to leverage higher investments. In addition, based on the Rupee's movement, we will push for rate increases beyond the average realized increase of 2% which is currently factored into our guidance.

For the second quarter of 2007, we are now projecting revenue of at least $500 million. This represents roughly 8.5% sequential growth and more than 48% year-over-year growth. We continued our significant revenue visibility to draw high level of the recurring revenue and the long-term nature of our customer relationships. In fact, today, we have customer commitments for well over 90% of our second quarter revenue guidance.

For the full year, based on the strong demand environment for offshore services and our favorable experience with ramp up rates, we are pleased to increase our guidance to at least $2.70 billion, a $30 million increase from our prior guidance for 2007. This revised guidance represents growth of at least 45% and an increase of more than $645 million compared to 2006. As it has been typical on prior years, we expect the majority of our growth for 2007 will come from the ramp up of clients we've won over the past few years.

Assuming no further material appreciation of the Rupee, our guidance assumes that we will be near the midpoint of our targeted 19% to 20% non-GAAP, once again, before the impact of equity-based compensation of our non-GAAP range for operating margin for the year and at the low end of the range for the second quarter.

As we work to absorb the impact of the Rupee, the new real estate tax and wage inflation, our goal is to balance shareholder value with a desire to continue to invest in the business to maintain long-term industry leading growth. We are taking a very proactive stands in achieving these two goals.

With the successive level of revenue growth and our expected operating margins, we are currently comfortable with our ability to deliver in Q2 GAAP EPS of $0.51 and non-GAAP EPS of $0.56, excluding equity compensation expense of $0.05. This guidance includes anticipation of the Q2 share count of approximately 152.8 million shares, a tax rate of 16.4%, and an operating margin towards the lower end of our historic guidance range of 19% to 20% excluding equity compensation costs, as well as a non-operating foreign exchange balance sheet translation loss in the second quarter due to the movement of the Rupee in April. And once again, that would be below the line loss, which we typically have either a small gain or loss each quarter.

For the full year 2007, based on current business trends, we currently project the GAAP EPS to be at least $2.13 and full year non-GAAP to be at least $2.34 excluding equity compensation expense of $0.21. This guidance includes the anticipation of a full-year tax rate of 16.4% of full year share count of approximately $153.3 million shares and then, operating margin on a non-GAAP basis towards the middle of our guidance range. Please note that our guidance assumes no negative impact from the proposed fringe benefit tax on the exercise stock options in India.

Based on our current understanding of the anticipated final rules which will be issued later this spring, we currently believe that the rule change will be neutral to Cognizant and its employees since our employees already pay full personal income tax in India at the time of exercise and since our plants are not registered in India.

In conclusion, we are very pleased with our industry-leading revenue growth for Q1 and are quite optimistic about our market position for the future. We believe that we understand the margin-related issues currently being faced by the industry and that we are taking appropriate and proactive short-term and longer-term actions to effectively manage these issues.

Now, we would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question is from the line of George Price with Stifel Nicolaus.

George Price - Stifel Nicolaus

Good morning and congratulations on another very nice quarter. I guess, in terms of the 2007 outlook clearly you are expecting continued strong demand, so I think some may have been hoping for a little bit more of a raise for the '07 guidance overall. Is there anything out there in the market that concerns you from a demand perspective making more caution? Any macro, any impact to client spending patterns or indications based on macro indicators, any concerns given the trends away from development application maintenance anything like that?

Francisco D'Souza

Hi, it's Francisco. George, actually at this point, while there is mixed economic news out there. We have not seen any slow down in demand our informal channel tax and continue to indicate that demand is healthy and that was reflected, I think, in our strong performance in Q1, and also in our increased guidance for the full year. So, at this point, we don't see any of the mixed economic news that's out there translating into a slowdown in demand.

George Price - Stifel Nicolaus

Where would you attribute, for a couple of quarters now, we've been seeing application maintenance really ramp-up faster than development and obviously development had a trend for probably a couple of years that memory serve. What would you attribute that to?

Gordon Coburn

George, this is Gordon, obviously we saw very strong sequential growth in maintenance and that was driven in part by a couple of the newer clients who are in the high ramp up phase, ramping up on the maintenance side of the business. But our development business obviously did very well in Q4, so the sequential comps were a little difficult. We continue to have nice growth in development. And the other thing to remember, development impacts a little bit more in Q1 than maintenance because it is more discretionary a lot of times client won't start their development activity till the new budget here, so the budgets are finalized and released versus maintenance which will start without it.

George Price - Stifel Nicolaus

Okay, and then is it fair to say that in terms of your action on the hiring, which I notice is pretty modest relative to some of your competitors. Is that really, incrementally, Gordon, driven by where the Rupee is? I mean I guess if the Rupee had more of a neutral impact, would you have taken that action?

Gordon Coburn

Absolutely, it's driven by the Rupee. Our philosophy is very transparent about it. We clearly were not expecting a 7% depreciation in the Rupee and what we decided is that we want to balance it. That we want to continue to invest but we needed to certainly cover a portion of it. So, obviously we have adjusted our guidance to be at the midpoint of our range. But in order to do that, we need to take utilization out. One thing I think about our business is we've been running with utilization well below the industry average, which gives the ability to pull those leverage without impacting the operations of the business.

George Price - Stifel Nicolaus

Okay. And last thing, just a couple of housekeeping items. I missed the onsite utilization and I wanted to confirm that you said 1% rise, it was in the overall utilization, is 50 basis in operating margin?

Gordon Coburn

Yeah. Onsite utilization was 84% in the quarter and you are correct on the second point.

George Price - Stifel Nicolaus

Okay. And then G&A, could you give G&A in the quarter?

Gordon Coburn

It was $12.26 million.

George Price - Stifel Nicolaus

Great. Thank you.

Operator

Your next question is from the line of Andrew Steinerman with Bear Stearns.

Andrew Steinerman - Bear Stearns

Hi, there. Could you just go over headcount goals? I understand that given the increased utilization to offset the Rupee that you are able to generate, even more revenue growth this year without the extra 1,000 people. But why not hire the extra 1,000 people anyhow, if demand is so strong, if it's the hiring season, right now for college campus. Is this just sort of second quarter, a key quarter to set your pace for hiring?

Gordon Coburn

The hiring, that will be impacted by this is more the lateral hiring. The offers with college kids went out last year and obviously we are on all of those. So, while it's accelerating, decelerating, lateral hiring. And in the end, why are we slowing down hiring, because we want to stay within our target margin range, which we feel we can do without disrupting the business at all, because we are running such a low utilization today.

Andrew Steinerman - Bear Stearns

I got it. That makes sense. And then, also could you give any sense for your two quarter trends? How did the quarter shape up as you looked, January, February, March?

Gordon Coburn

It was a solid quarter, as typical in every first quarter, certainly because of billing date. March is by far the biggest month. But if you equalize for that we had buying growth as well as volume growth as we continue through the quarter.

Andrew Steinerman - Bear Stearns

Okay. And then, just to square away the hiring question. You are doing hiring now, right now, this spring and people will come on next year. So, you are affecting next year's hiring at this time. Are you holding back at all in that uncounted hiring?

Gordon Coburn

The uncounted hiring happens over, essentially, a nine-month period. So, you can't bring everyone on, once you are going to train everyone. Is that what you were talking about?

Andrew Steinerman - Bear Stearns

Okay. Thank you so much.

Operator

Your next question is from the line of Christine Pezino with JP Morgan.

Christine Pezino - JP Morgan

Good morning. Just a couple of questions. First, on the competitive environment. I am just wondering if you have seen any change there specifically with the tier 2 firms, which seem to be improving their growth. Are you seeing them in deals more often or is it the same players?

Francisco D'Souza

Hi, Christine. Its Francisco. No, I think I would characterize it as unchanged. We are continuing to see a strong bifurcation between the tier 1 and the tier 2. In the majority of the situations in which we compete, we are competing against the three top tier India players the other top three India players. And then one or two of the multinationals will be in the mix. We almost never or very rarely see a tier 2 player.

Christine Pezino - JP Morgan

Okay. And then, one thing you didn't mention in Q2 as impacting the margins of visa costs, should we expect something along those lines in Q2 as well?

Gordon Coburn

No, we use combination of H visas and L visas. So, we have the cost in Q1, Q2 tend to be a little bit higher, but I don't expect a spike in Q2.

Christine Pezino - JP Morgan

Okay. And then just my last question on the mix of strategic customers, have you seen any trend in terms of vertical of what kinds of customers are coming online? I would presume that the FSI was the early bulk of those strategic customers? And now maybe you are seeing from another vertical like retail, would that be a fair summary?

Francisco D'Souza

If you look across strategic customers, the overall portfolio of strategic customers is well diversified, the increase of size that we had this quarter will again as I said was diversified across industry segments. We had good growth in the number of strategic financial services customers that we added earlier, over the last 18 or so months we added a number of and continue to add a number of healthcare and life sciences customers. And now increasingly in the last, I would say two quarters or so, we've seen good traction in retail manufacturing as well as we are adding strategic customers in those verticals.

Christine Pezino - JP Morgan

Okay, great, thanks.

Operator

Your next question is from the line of Julio Quinteros with Goldman Sachs

Julio Quinteros - Goldman Sachs

Hi, real quickly Gordon. Can you just give us the metrics on the account percentage contributions top account, top five, top ten?

Gordon Coburn

Certainly, top five is 26%, top ten is 36%. And if you do the math you'll see that the top five is on a sequential basis and down slightly that's not unusual. We saw the same exact phenomenon last year, where the top five is down in the first quarter, top ten was roughly flat. We do not view any of the top five as mature. So, we continue to see opportunities there.

Julio Quinteros - Goldman Sachs

Okay. And then top account itself, are you still looking around the 9% number or has that changed?

Gordon Coburn

We don't have any customers over 10%.

Julio Quinteros - Goldman Sachs

Okay. And then I guess for Francisco. Can you talk a little bit about clients where you are seeing multi service providers, so we have more than one offshore guy doing the work. What is the nature of the competitive environment at some of the largest accounts at least for some other things that we've heard is that, there is more competition among the offshore providers going after each other, at some of the larger accounts. Are you guys seeing that? And how is that expected to play out over the next couple of quarters for you guys?

Francisco D'Souza

Couple of things I would say, first of all, I think there has been an increase in amount of dual sourcing that we are seeing out there. As customers look at offshoring more strategically and it becomes a bigger part of their overall IT portfolio. They are looking at dual sourcing to mitigate risks across at least to providers. So, there is clearly a trend towards dual sourcing. We are also seeing that maybe two years ago, you would see some customers adopting a dual sourcing strategy of one key or one player or perhaps a tier 2 player or small player. You see that happening less in the marketplace today. It generally tends to be dual sourcing amongst the two tier 1 players.

In general, though, once the customer has made a selection, I wouldn't characterize the competition as any more intense in the recent past and we always have healthy competition for clients. But once we've won a client, we tend to coexist with the other provider at the clients, because essentially we're both in there. And of course, we compete for business within that. But for some extent, the client tries to manage the portfolio as well between the two vendors, so that there is a balance of work. So, I will say that I don't think it's gotten any more competitive than it has in the past.

Julio Quinteros - Goldman Sachs

Okay. And then Gordon, can you comment at all on the EDS business itself, post the Mphasis BFL acquisition. Where are we exactly on that align in terms of revenue contribution or anything else, you might be able to provide a color there?

Gordon Coburn

Yes. As we have said, when we announced the partnership, we viewed them as a value partner. The Mphasis acquisition was not a surprise. They were very upfront when we originally formed the acquisition that they were going to acquire something. They continue to be a value partner of ours and we have a healthy relationship. It's really decent of them to talk about size of the relationship. But it's healthy and it's continuing.

Julio Quinteros - Goldman Sachs

So, you are still generating revenue through that relationship?

Gordon Coburn

Absolutely, Julio.

Julio Quinteros - Goldman Sachs

And then finally, the math on the Rabobank deal, I think I heard you indicate that the outsourcing has been in the neighborhood of three point something million hours contracted already with Rabobank?

Gordon Coburn

Right. Not all of that comes to us. That's the total amount they are outsourcing, portion goes to Ordina and then a portion come to us.

Julio Quinteros - Goldman Sachs

Okay. But you didn't say exactly what was your contribution?

Gordon Coburn

No, we haven't.

Julio Quinteros - Goldman Sachs

Okay. Because it looks like that deal could be in excess of $100 million at 3.8 million hours, right, total?

Gordon Coburn

You mean, total of it in seven years?

Julio Quinteros - Goldman Sachs

Yes.

Gordon Coburn

Yeah. It certainly sounds like its substantial. And the question is, what was the mix between us and Ordina's?

Julio Quinteros - Goldman Sachs

Got it. Okay, great. Thank you.

Operator

Your next question is from the line of Greg Smith with Merrill Lynch.

Greg Smith - Merrill Lynch

Hi. Just quickly on the weak tax effect, the options expense, could we just use the GAAP tax rate for that?

Gordon Coburn

No. It's not quite the GAAP tax rate. The difference becomes the rounding error, (inaudible) differences, it gets a little technical but it was different than the GAAP rate.

Greg Smith - Merrill Lynch

Okay. But it's essentially lower, that was.

Gordon Coburn

It bounces around from quarter-to-quarter.

Greg Smith - Merrill Lynch

Okay.

Gordon Coburn

Other way the math works.

Greg Smith - Merrill Lynch

That's fine.

Gordon Coburn

Sometimes is higher, sometimes is lower.

Greg Smith - Merrill Lynch

Okay. I will follow up. And then just when we modeled the interest income, should we just assume for '07 of the cash on the balance sheet continues to grow?

Gordon Coburn

Yeah. That grows slowly. Yes.

Greg Smith - Merrill Lynch

Okay. And then, just speaking --

Gordon Coburn

I think I also remember, as we mentioned in Q2, we do expect to have a below the line FX loss. You know, we always have a gain or loss each quarter, in Q2, a little bit of loss.

Greg Smith - Merrill Lynch

Okay, good. And then just a bigger picture question, let's say, the Rupee continues to appreciate or you have had higher wage inflation, would you sacrifice ultimately revenue growth to stay within the 19% to 20% operating margin then?

Gordon Coburn

I think, when you talk about sacrificing revenue growth, I take an action, it impacts revenue tomorrow. It's at what point you started impacting long-term revenue. We were in the fortunate position of heavily over-investing in the business today, running at relatively low utilization. So, unlike others who might already be running at pretty high margin, we have the luxury, we believe, of having a bunch of leverage to pull. If it keeps appreciating at 7% a quarter, that gets serious.

Greg Smith - Merrill Lynch

Yes, but I guess I sort of alluded to my next question then because your sort of breaking down your headcount growth a little bit and then increasing utilization. Do you still have some nice cushion or does this push you into a little bit of different profile?

Gordon Coburn

The way to think about, we are using some of our cushion, not all of it.

Greg Smith - Merrill Lynch

Okay.

Gordon Coburn

By definition taking utilization up uses some of the cushion but we are still investing heavily in the business.

Greg Smith - Merrill Lynch

Okay. And then just got to throw it out there, any guesses on where the tax rate goes in '09 and 2010?

Gordon Coburn

A little too early to know, once I get a little bit better sense of how quickly my SEZs will come online, I will be able to answer that.

Greg Smith - Merrill Lynch

Okay. Thanks a lot.

Operator

Your next question is from the line of Sandra Notardonato with Robert W. Baird.

Sandra Notardonato - Robert W. Baird

Great, thank you. I have two questions, first is, it looks like some of your peers hedged to manage the repeat fluctuation. And I believe the last time you guys hedged is back in July of '04. What are your thoughts on that for the future?

Gordon Coburn

The only thing we've ever hedged is the balance sheet. So, where I mentioned Q2 will have a below-the-line loss, from time-to-time I will hedge against that, normally I can just do that with the timing when I move cash around the world. And each, even now, I can keep it within a reasonable risk range. We've never actually hedged operating expense. Some of our competitors' hedged revenue obviously we don't need to do that since our functional currency is not the Rupee. So, if we would hedge something it would be expense. And my velocity is there is a cost to that and if I hedge it, it just puts off the inevitable for whatever period you hedged for. And given that, we are running the business with the bunch of levers to call that are controlled, I believe fairly quickly, the cost the hedge probably that's make sense versus the point.

Sandra Notardonato - Robert W. Baird

Okay. And then my next question, I was wondering, if we can just talk about the relationship of wage rate increases in pricing. If you were to hold utilization study at the more lower level that you reported back in Q4 and over the last couple of years, what percentage increase in bill rate do you need to offset the 16% wage increase that you passed this year?

Gordon Coburn

Give me one second here. I think I would need about 3% or 4%.

Sandra Notardonato - Robert W. Baird

Okay great. Thank you.

Operator

Your next question is from the line of Abhi Gami with Banc of America.

Abhi Gami - Banc of America

Hi, thanks, couple of questions. First of all, you mentioned earlier the EDS relationship is healthy. Is that relationship actually growing?

Francisco D'Souza

Yes, due to the nature but EDS has to comment on?

Abhi Gami - Banc of America

Okay, second. There's a lot of speculation around slow down net and spending about the financial services sector in the US particularly within banking, your growth seems to cover that fairly well. Has there been any change in the nature of demand from within the FSI, so as banking rep (inaudible) picking up or any other color you can provide within that group?

Francisco D'Souza

No Abhi, I think that we haven't seen any shift in pattern, sort of a cost effectors of banking, insurance, transaction processing. I think that's what's driving our growth is that, that is really two things in financial services. One is the breadth of clients we serve, we have actually a very broad range of banking and insurance customers that we're serving today. I gave some color around that during the comments.

And the second thing is that we've been investing over a long time now to continually deepen the service offerings that we have for financial services. So, what we're able to do is, is continue to stay relevant over the life cycle. So, as customers become more comfortable with offshoring and start trusting increasingly more sophisticated engagements to an offshoring model we are there with the capability to be able to match that demand. So, I think that those are the two things that continue to drive our BFS growth, broadening of the portfolio and the deepening of our service offerings particularly our BFS specific service offerings.

Abhi Gami - Banc of America

Okay. I think that's good.

Francisco D'Souza

Thanks.

Gordon Coburn

Operator, we have time for one more question.

Operator

Your final question is from the line of Adam Frisch with UBS.

Adam Frisch - UBS

Thanks guys for squeezing demand here. I just wanted to clarify the point, because it's the only real issue that's impacting your stock this morning and it has to do with the headcount, the down take of growth there by a mere 1,000 people which on a percentage basis is not much but it is a down take. Can we say with some certainty that, that down take is in no way shape or form a reflection of your being less bullish on demand and growth? It's purely to offset the Rupee situation?

Gordon Coburn

Let me be crystal clear here. We get ahead with a 140 basis point margin impact on the Rupee. I have a choice, I could let her off flow through or I can pull some leverage to not let her off flow through. When we looked at it, we said we want to balance the two, so we are letting it a little bit of it flow through we taken our targeting, operating margin as mid-point of our range and we are absorbing the rest and primarily too amusing to absorb it is the margin. At the same time, that is the utilization, at the same time that your headcount down that took revenue growth up which if you do math and works out to I won't take utilization up above three points. So, it's a purely a function of one of the levers like pull through to offset the Rupee appreciation.

Adam Frisch - UBS

Okay. But it's not any reflection of a down take in your assessment of the demand environment or your ability to grow?

Gordon Coburn

Absolutely, not.

Adam Frisch - UBS

Absolutely, not. Okay. So then the next question becomes, what was the rationale of not letting margins go below that 19%, if that was all we do to the Rupee, if it could ensure that you could grow at the rate that the street has become accustom to?

Gordon Coburn

Because I think because of scale efficiencies and so forth, we look down and said yes, we can take utilization up a little bit without hurting the business.

Adam Frisch - UBS

Okay.

Gordon Coburn

And we've made commitments to our investors that our goal is to stay in the 19% to 20% range and given that we do run that business at a much lower margin than others, we thought that's the right balance between near-term shareholder value and long-term revenue growth.

Adam Frisch - UBS

So, what you are doing today is it certainly doesn't impact revenue growth in '07 negatively because you are increasing your guidance. But should we take it as negatively or positively impact in growth in '08?

Gordon Coburn

No, I think where we stand. We think we can run the business at a little bit higher utilization.

Adam Frisch - UBS

Okay.

Gordon Coburn

And support the needs of our clients.

Adam Frisch - UBS

Okay, and still generate the kind of business metrics that we become accustom to?

Gordon Coburn

Headcount has never been a constraint to our growth, and I don't think changing utilization back up point is going to holds down make headcount a constraint to grow.

Adam Frisch - UBS

Okay. And obviously, you spoke real favorably about demand discretionary spend seems good, is there any supply constraint in the marketplace or now you guys always been real strong on the college campuses and so forth, is there is any supply constraints right now?

Gordon Coburn

In general, we don't see supply constraints across the industry, there are always pocket to supply constraint. As certain skills become more in demand and less in demand and supply demand imbalances show up in little pocket here and there. But as I look at a macro-level, we don't see supply demand imbalance.

Adam Frisch - UBS

Okay. Great, so thanks guys for clarifying.

Gordon Coburn

Thank you.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions-and-answers. Are there any closing remarks?

Francisco D'Souza

Thank you again for joining us on our call today. In conclusion, we're very pleased with our financial and operating performance in the first quarter across the company. We are excited about the opportunity ahead for Cognizant as we execute on our long-term growth strategy, continue to globalize our business, and meet the growing demand for our services across industry vertical segments. We look forward to talking with you again next quarter. Thank you.

Operator

This concludes today's conference call. You man now disconnect.

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