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Edited Transcript of CTSH earnings conference call or presentation 6-Feb-19 1:00pm GMT

Q4 2018 Cognizant Technology Solutions Corp Earnings Call

TEANECK Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Cognizant Technology Solutions Corp earnings conference call or presentation Wednesday, February 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Nelson

Cognizant Technology Solutions Corporation - VP of IR & Treasurer

* Francisco D'Souza

Cognizant Technology Solutions Corporation - Vice Chair & CEO

* Karen A. McLoughlin

Cognizant Technology Solutions Corporation - CFO

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Conference Call Participants

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* Brian Lee Essex

Morgan Stanley, Research Division - Equity Analyst

* Bryan C. Bergin

Cowen and Company, LLC, Research Division - Director

* Bryan Connell Keane

Deutsche Bank AG, Research Division - Research Analyst

* Edward Stephen Caso

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* James Edward Schneider

Goldman Sachs Group Inc., Research Division - VP

* Keith Frances Bachman

BMO Capital Markets Equity Research - MD & Senior Research Analyst

* Lisa Ann Dejong Ellis

MoffettNathanson LLC - Partner

* Rod Bourgeois

DeepDive Equity Research - Head of Research and Consulting

* Tien-Tsin Huang

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Cognizant Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to David Nelson, Vice President, Investor Relations and Treasurer at Cognizant. Please go ahead, sir.

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David Nelson, Cognizant Technology Solutions Corporation - VP of IR & Treasurer [2]

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Thank you, operator, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's fourth quarter and full year 2018 results. If you have not, a copy is available on our website, cognizant.com. The speakers we have on today's call are Francisco D'Souza, Chief Executive Officer; and Karen McLoughlin, Chief Financial Officer.

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

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

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [3]

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Good morning, everyone, and thank you for joining us. This morning, Cognizant announced solid Q4 and full year 2018 results. We also announced, as you've seen, our plan to effect a smooth transition in our leadership team to take the company forward in the coming years. Having cofounded Cognizant, which celebrated its 25th anniversary less than 2 weeks ago, I've spent half my life here, and I've had the privilege of serving as CEO for the past 12 years.

Last year, in connection with the board's regular leadership assessment and succession planning processes, I informed my fellow board members that I was considering stepping down from my role as CEO sometime in 2019. As a board, we embarked upon a methodical search for my successor to ensure a fully thought through and orderly transition when the time came. Our announcement this morning is the result of that process.

I'm pleased that Mr. Brian Humphreys, who is the CEO of Vodafone Business and a member of Vodafone Group's Executive Committee, will be the new CEO of Cognizant effective April 1 of this year. Brian is a terrific executive, and I look forward to working with him closely to ensure the smoothest possible transition. I speak for all of my fellow directors in saying that Brian is a strong choice to lead Cognizant in its next phase of growth. I'll have more to say about Brian in a minute.

Before I do, I want to take a moment to thank the entire global Cognizant team for the tremendous accomplishments of the past 25 years, and in particular, during my tenure as CEO. My thank yous need to begin with my long-time colleague and the President of Cognizant, Raj Mehta. Raj has been our president for the past 2.5 years and has provided Cognizant with his leadership, operational skills and passion for clients for more than 2 decades in a variety of operating roles. We are grateful to Raj for his countless contributions to the growth and success of Cognizant over the years. He's ready for a new challenge and has decided to step down from his role as president and to leave the company shortly after Brian arrives. On behalf of the board, I wish Raj well in his future endeavors.

I'm proud of what our global team has worked with such skill and energy to build during my CEO tenure. Over the past dozen years, we've grown annual revenues from $1.4 billion to $16 billion, moving Cognizant into the Fortune 200. We scaled our talent base over that period from 39,000 to 282,000 associates. And since our IPO, we've increased the company's market value more than 400-fold, from less than $100 million to approximately $40 billion.

I'm especially proud of how we've served as a trusted partner and guide to our clients as they transition from one technology era to the next and as they transform their businesses to improve operational performance and generate new growth. And now with the mainstream adoption of digital at scale, we have invested significantly in the distinctive capability needed to set Cognizant up for its next stage of sustainable strong growth and value creation, as we outlined for many of you during our November Investor Day.

In fact, over the past several years, we've evolved nearly every aspect of our company: our domain knowledge, our services portfolio, our methodologies, our geographic footprint, global and local delivery, our leadership team and even our culture, to ensure that we can provide compelling value to clients and capture this market opportunity, which is larger than any we've seen before.

We're gratified that others have recognized the strength of this foundation, as Fortune Magazine recently named us one of the world's most admired companies for the 11th year in a row. It's been an honor and a privilege to lead the best team in the industry as we've accomplished milestones that few others in the services business have been able to match. So on April 1, the time will be right for me to pass the baton to Brian, who has the experience, the drive and the commitment to execute on our growth agenda.

The board embarked on the search process with a view to our long-term future, knowing that the full transformative effect of the digital buildout on our clients, our company and the economy is still to come. We sought someone with a track record of success across multiple companies, industries, technology, geographies, roles and organizational cultures. Brian fits that bill. At Vodafone Business, for example, which had annual revenues of approximately $14 billion in fiscal 2018, Brian is responsible for the entire global portfolio, which consists of all B2B fixed and mobile customers as well as IoT, cloud hosting and security services. Brian has successfully run large-scale global technology businesses, and he has a focused and disciplined approach to execution and driving profitable growth.

Brian's first day as Cognizant's CEO will be April 1. Until then, I'll continue in my role as Vice Chairman and CEO. And once he is on board, I'll transition to the full-time role of Executive Vice Chairman to actively support Brian and to help him get off to a running start. When that transition concludes, I'll remain on the board as Vice Chairman. I'm fully committed to ensuring Brian's success and Cognizant's continued growth in my current and future roles.

Turning to an update on our business. I'd like to run through a few Q4 and full year highlights, followed by guidance for 2019. And then I'll comment on the strategic plan we introduced nearly 3 months ago at Investor Day.

Starting with Q4. Revenue was $4.13 billion, within our guided range and up 8.8% year-over-year in constant currency. In the quarter, our digital revenue grew in the mid-20% range, well above company average, and is now over 30% of total revenue, reflecting our continuing shift to digital revenues. Our portfolio of digital services generated margins above the company average, and our non-GAAP EPS for the quarter was $1.13.

For the year as a whole, revenue grew 8.5% in constant currency to $16.13 billion. During the year, we diversified our revenue base and our client roster and invested significantly for growth. We instilled greater operating discipline across the company, further simplified the business and acquired 5 companies. And for the year, we returned $1.6 billion to shareholders through our capital return program.

Let's turn to guidance. For the full year, we expect revenue growth to be within a range of 7% to 9% in constant currency, which falls within the medium-term target we defined at the Investor Day. And for the first quarter of 2019, we expect revenue growth to be within a 7.5% to 8.5% range in constant currency.

Turning to margins. As you'll recall from Investor Day, from here forward, we will include stock-based compensation expense and acquisition-related charges in our non-GAAP measure of operating margin. For 2019, our adjusted operating margin target will be approximately 19%.

I'd like to offer a few thoughts now on the demand environment. As we've referenced on prior calls, we are moving quickly to an era in which technology's role has shifted, from supporting the business to actually being the business. Clients are clearheaded about this dynamic and continues to see the business case for digital transformation as absolutely compelling, even against the backdrop of some global economic volatility. Our strategy for continuing to deliver disciplined and profitable growth, as outlined at the November Investor Day, responds directly to our clients' mandate for transformation.

To help clients speed their journey to digital at scale, we're investing to build distinctive leadership in 6 advanced capabilities: interactive; artificial intelligence and analytics; intelligent process automation; platform solutions; core modernization; and digital engineering. These 6 capabilities are aligned to our 3 practice areas and play to our expertise and strong market positions. And all 6 areas offer ample headroom for growth. And when we combine our focused investment through these capabilities with targeted acquisitions as well as continued geographic expansion and industry diversification, we have our engine for delivering continued growth. The board and I kept this strategy front of mind during the CEO selection process we undertook, so we expect the strategy presented at the Investor Day to continue to direct Cognizant's approach to the market opportunity, shaped, of course, by Brian's perspective as he transitions into the CEO role.

I want to close by saying how fortunate I am to lead a company of Cognizant's scale and stature, and how proud I am of the work our associates do every day across the globe. I look forward to continuing on the board and to ensuring a smooth transition. And I'm confident that Cognizant's best days are ahead.

With that, I'll turn the call over to Karen, who will give you an update on both our operational and financial performance. Karen?

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [4]

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Thank you, Frank, and good morning, everyone. Q4 performance was solid, rounding out full year results, which were within our expectations and reflect continued execution of our strategy to drive sustainable revenue and earnings growth.

Fourth quarter revenue of $4.13 billion was at the high end of our guided range and increased 7.9% year-over-year or 8.8% in constant currency. The adoption of the new revenue recognition standard had an $11 million positive impact to revenue in the quarter.

Banking and Financial Services continued to see slower growth at 2.8% year-over-year in constant currency, driven by softness at a few of our largest banking clients. As we discussed back at our Investor Day in November, the pressure in our banking business has primarily been driven by some of our largest banking clients. 2 of our top 5 clients continue to show good growth going into 2019, while spend at the other 3 clients remains under pressure. Despite the continued pressure in these 3 accounts, the rest of our banking portfolio continues to grow nicely. And based on deals that we've already closed and our late-stage pipeline of deals, we do expect recovery in banking over the course of 2019. As I will discuss in a few moments, we have made significant progress in developing platforms and solutions for the European banking markets and expect to see accelerated growth in those markets in 2019.

Moving on to Healthcare, which grew 7% year-over-year in constant currency. Growth with our Healthcare payer and provider clients, excluding the contribution from Bolder Healthcare, was impacted by the continued ramp down of an account in which we were a subcontractor to a third party and a temporary slowdown with several large clients involved in mergers, where the potential spending associated with integration work is not yet underway. We expect this to continue into Q1.

As health care delivery is shifting from a fee-for-service to a value-based care model, we are seeing increased collaboration and partnerships across payers and providers, with the focus on effective consumer engagement with data-driven insights. So while we have seen periods of slower growth in health care, we believe that our investments in the industry have positioned us well to take advantage of this shift over the long term.

Products and Resources had another strong quarter, showing 15.4% growth year-over-year in constant currency. We were pleased with the good growth in both retail and manufacturing and logistics in Q4 in what is typically a seasonally weak quarter for those industries. Let me give you an example of work we are doing to help clients along their transformation journey in this segment.

A leading U.S. fast food chain that pioneered the concept of the classic 1940s drive-through with the on-the-go convenience, is facing the challenge of digital technologies redefining the very concept of convenience. They needed to elevate the guest experience and increase operational efficiencies in order to stay competitive. Cognizant helped to develop an overall digital strategy, and the restaurant chain's first mobile app, including location finding, menu viewing, ordering and online payment, combined with kitchen, customer service and supply chain management tools. When the app was initially launched, purchasers saw an average of 12% increase in order value. It has now been deployed across all 2,000-plus franchise locations.

Our Communications, Media and Technology segment had another strong quarter, with year-over-year growth of 20.1% in constant currency, driven by our technology clients. A recent client engagement in our Communications, Media and Technology segment tells our AI and analytics story. A major software company needed to achieve a higher percentage of subscription renewals for its software and services, reduce costly customer churn and drive additional sales. The client, however, lacked the central repository of information about past customer transactions, key decision-makers on accounts or product-related issues, in other words, the very details needed to expand sales and close more deals.

Our team partnered with the client, applying big data and machine learning to develop an automated cloud-based central data repository and predictive analytics that enabled the client to connect the dots of customer behavior across its entire product portfolio. Using machine learning and predictive analytics, the client is now able to predict customer churn with 80% accuracy, take proactive steps to retain high-risk, high-value customers and spot patterns to identify customers most receptive to cross-sell and upsell.

Many of you may know that Cognizant was born in the data and analytics space, and we've been consolidating our position here over the last 25 years, so we've been at this for some time. And today, we are a top 3 leader in this market. This is just one example of our analytics and AI practice at work.

Now moving on to geos. The Rest of World grew 4.7% year-over-year in constant currency. Results in Asia Pacific continued to be negatively impacted by the weakness in some of our larger banking clients. Europe grew 20.3% year-over-year in constant currency. Our investments, both organic and inorganic, have given us a solid footprint in Continental Europe, from which we expect continued strong growth.

We've grown our geographic footprint organically by expanding our client roster, adding new delivery and operational centers and developing local talent in the markets we serve. Our organic growth has been accelerated with the ramp-up of a number of strategic client engagements in Benelux in banking and manufacturing, Nordics in energy and banking, France in banking and life sciences, Switzerland in life sciences, and Germany with life sciences and communication, media and technology. Acquisitions, such as Netcentric, Hedera, Zone and Mirabeau, have enhanced our digital leadership in the region and complemented our ability to service our clients across the entire range of their digital transformation.

As I mentioned earlier, we have made significant progress developing platforms and solutions specifically for banking clients in Europe. These include solutions for core banking, credit operations, cloud transformation and digital transformation. These solutions, which require deep industry expertise and local presence, are expected to bring sizable revenue opportunities in the coming years.

As an example of core banking transformation, we've recently announced a partnership with 3 Finnish financial institutions: the Savings Bank Group, Oma Savings Bank Plc and POP Bank Group, to transform and operate the shared core banking platform based on Temenos T24 and Temenos Payment Hub, that will enable their digital transformation plans. More than 10% of Finnish banking deposits and loans will be managed by the new platform. This partnership will not only help support our acceleration of revenue growth, beginning in the second quarter, but over the longer term will provide expanded opportunities in other markets across Europe.

An example of cloud transformation is our partnership with ABN AMRO clearing to cloud enable its global IT infrastructure and lay the foundation for digital transformation. Further, we have a good pipeline of similar opportunities as we enter 2019.

Shifting now to margins. Non-GAAP operating margin, which excludes stock-based compensation expense, acquisition-related expenses and realignment charges, was 19.5%. Non-GAAP EPS was $1.13, exceeding our guidance, primarily due to a lower non-GAAP tax rate.

The Q4 GAAP tax rate of 20.6% was lower than our previous guidance of 31%, primarily due to net non-operating foreign exchange gains, driven by the appreciation of the Indian rupee and guidance regarding the GILTI provision of the tax reform act issued in the fourth quarter of 2018. This tax guidance led to a reversal of the incremental income tax expense accrued for this provision earlier in the year.

For the full year 2018, revenue of $16.13 billion represented growth of 8.9% or 8.5% in constant currency. Non-GAAP operating margin was 20.7%, in line with our guidance of approximately 21%. And non-GAAP EPS was $4.57.

As we presented at our Investor Day in November, starting in 2019, we are revising our non-GAAP operating margin and EPS definitions. Going forward, our adjusted operating margin and EPS will no longer exclude stock-based compensation expense and acquisition-related expenses. When calculated under the new methodology, the full year 2018 adjusted operating margin was 18.1% and adjusted EPS was $4.02.

Now turning to our other metrics. Consulting and technology services represented 58.2% of revenue; and outsourcing services, 41.8% of revenue for the quarter. Consulting and technology services grew 9.5% year-over-year, and outsourcing services revenue grew 5.6% from Q4 a year ago. Consulting growth benefited from the inclusion of several of our recent acquisitions, such as Softvision and ATG, and continued strong demand for digital solutions. Within outsourcing, we saw continued strength in Digital Operations, partially offset by the ramp down of the healthcare customer previously mentioned where we were serving as a subcontractor to a third party.

During the fourth quarter, 37% of our revenue came from fixed price contracts, and transaction-based contracts were approximately 11% of total revenue in the quarter. We added 7 strategic customers in the quarter, defined as those with the potential to generate at least $5 million to $50 million or more in annual revenue. This brings our total number of strategic clients to 385.

And now moving to an update on operations. In the fourth quarter, we continued to build on the operational improvements we've made in our business over the last 2 years, such as higher levels of utilization, improved pyramid structure, simplification of our business unit overhead structure and a more effective leverage of our corporate function spend.

Net of hedges, our Q4 margins also benefited from the depreciation of the Indian rupee versus a year ago by 120 basis points, which allowed us to continue investing for growth. The solid margin performance also allowed us to absorb the remaining wage increases and promotions in the quarter while achieving our full year non-GAAP operating margin target.

In 2019, we expect continued margin improvement to be underpinned by ongoing improvement in operational efficiency and discipline, a continued shift within our business to focus on higher-value services, improving profitability of our portfolio of large structured contracts and ongoing reassessment of less profitable opportunities that do not further our long-term strategic position.

From a people and talent perspective, our annualized attrition rate at 19% declined over 300 basis points from Q3 but remains elevated. While we are pleased with the decline in the attrition rate, we continue to focus on our workforce strategy and overall management.

Turning to our balance sheet, which remains very healthy. We finished the year with $4.5 billion of cash and short-term investments, down $545 million from December 31, 2017. Net of debt, this balance was down by $417 million from December 31, 2017. As a reminder, our cash balance includes restricted short-term investments of $423 million. These restricted amounts are related to the ongoing dispute with the India Income Tax Department.

We had strong cash generation in the quarter, with free cash flow of $606 million. On a full year basis, free cash flow of $2.2 billion as the ratio to net income was just over 1x.

Our outstanding debt balance was $745 million at the end of the quarter, and there was no outstanding balance on the revolver. During the fourth quarter, we repurchased approximately 3.6 million shares, and our diluted share count decreased to 579 million shares for the quarter.

I would now like to comment on our outlook for Q1 and the full year 2019. For the full year 2019, we expect revenue to grow 7% to 9% in constant currency. Based on current exchange rates, this translates to growth of 6.3% to 8.3%, reflecting our assumption of a negative 70 basis points for foreign exchange.

For the first quarter of 2019, we expect to deliver revenue growth of 7.5% to 8.5% in constant currency. Based on current exchange rates, this translates to growth of 5.8% to 6.8%, reflecting or assumption of a negative 170 basis points for foreign exchange.

For the full year 2019, we expect adjusted operating margins under our revised definition to be approximately 19% and to deliver adjusted EPS of at least $4.40, a 10% increase versus 2018 on a like-for-like basis. This guidance anticipates the full year share count of approximately 578 million shares and a tax rate in the range of 24% to 26%. This tax rate range is consistent with our midterm expectations.

Guidance provided for our revised non-GAAP measure, adjusted EPS, excludes realignment charges and other unusual items, if any, net nonoperating foreign currency exchange gains and losses from the tax effects of the above adjustments. Our guidance also does not account for the impact from shifts in the regulatory environment, including areas such as immigration and tax.

We are committed to the more balanced approach to capital allocation that we outlined at our Investor Day last November. Beginning in 2019, we intend to utilize approximately 50% of global free cash flow annually for dividends and share repurchases. This should allow us to maintain a dividend payout ratio of about 20% and reduce our outstanding share count by approximately 1% annually. The board has declared a quarterly cash dividend of $0.20 per share for shareholders of record at the close of business on February 21. Additionally, 25% of our annual global free cash flow is intended to be used for acquisitions that enhance our longer-term strategy of enriching our digital capabilities, expanding our geographic footprint and enhancing our vertical expertise. In summary, our solid execution in 2018, along with continued investment in the business, has positioned us well to deliver another solid year of revenue and earnings growth in 2019.

Operator, we can open the call for questions.

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Questions and Answers

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Operator [1]

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

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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I want to say, Frank, congrats on a amazing run as CEO. Enjoyed working with you and interacting with you. So best wishes to you and Raj as well. I want to -- let's start with that, I guess, on the CEO transition plan. So Brian Humphries, you gave a lot of good detail there. What stood out for him to be chosen as CEO as an outsider? Can we infer that his international experience may be signals of greater global focus for Cognizant on top of carrying forward the plan you set up 3 months ago?

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [3]

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Tien-Tsin, thanks a lot for the kind words. Yes. Look, I think that I'll say a couple of things. When we set out to think about my successor, the board conducted a thorough process. And what we were really focused on, Tien-Tsin, what's the strategy that we laid out for all of you at Investor Day as the sort of the core of what's going to take the company forward. And as we assessed our choices, Brian is just a solid choice. He is a well-regarded, highly regarded technology executive. He's got a great track record of success across multiple companies, industries, technologies, geographies, roles and organizational cultures. And I think with his global perspective, but also client focus, experience with transformational technologies, he is the right executive to execute on our strategy as digital continues to permeate and power every industry.

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Tien-Tsin Huang, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Got it, got it. So maybe if I could just add a quick outlook question. Just thinking about fiscal '19, the big differences here in how you might see growth shape up versus 2018. It looks like you're guiding the top end of the outlook to be pretty consistent with what you achieved in '18.

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [5]

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So I think that's fair, Tien-Tsin. if you remember back at Investor Day, right, we talked about that we thought near-term -- near to midterm growth would be in the 6% to 9% on an organic constant currency perspective. And that in the near term, we'd be at the lower end of that range. And as we continued to grow and add on more acquisitions, we would move up the range. So as we're seeing this year, we think it plays out very consistently with what we outlined at Investor Day. Q1 is a little bit slower than the full year. But as we talked about in my comments, we are starting to see some nice recovery with some of the new partnerships in Financial Services, particularly in the European markets. And so we're very confident that as we get into the second quarter, that we'll start to accelerate growth in banking, which then obviously supports the overall growth rates for the year. But I think in terms of general trends, obviously, shift to digital continues and really no significant changes from where we saw the recent quarters.

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Operator [6]

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Our next question comes from the line of Lisa Ellis with MoffettNathanson.

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Lisa Ann Dejong Ellis, MoffettNathanson LLC - Partner [7]

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I'll echo Tien-Tsin's comments. Frank, congratulations on a phenomenal run. I think we're all curious to see what you're off to next. I will actually start then taking this opportunity to ask you one more long-term industry vision question. As you are moving into a -- moving out of your CEO role at Cognizant, when you look out over the next 5 to 10 years, in what ways in your mind will the IT services industry be meaningfully different? And comment on kind of Cognizant's distinctive positioning relative to those changes, things that perhaps we're not -- we don't have from our seats the opportunity to see in the way that you do.

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [8]

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Yes. Thanks a lot, Lisa. I appreciate again the kind words. It's been quite a run. And just as an anecdote, I was thinking about it the other day. This is my 48th quarter that I will be reporting as the CEO of this place. So I guess, as a CEO, you measure by public company quarters. Look, I think, Lisa, the -- here's what I would say to your question. I think that as I look forward, the difference that we're going to see over the next 5, 10 years is -- and I've been saying this. It may even sound somewhat clichéd at the moment. But technology is really going from a decade ago, when it was supporting the back office of a business, to really being the very essence of businesses today. I say often that every enterprise is now a technology enterprise. Every business leader is really a technology leader. Every budget can be considered a technology budget inside of our clients. I mean there's really this pervasiveness of technology that we're already starting to see and, therefore, which I think we're going to continue to see as technology becomes just more and more integral to not just businesses, but governments and societies, and so on and so forth.

Against that context, I think that firms like ours need to really have a set of capabilities that line up directly with that role that technology will play going forward. And that's why I think that the 6 capabilities that we outlined for you at Investor Day are so important. If you look at them as capabilities, they individually represent big market opportunities. But if you look at them as a set, as a group, they really represent what I believe are the core capabilities that every enterprise is going to need to embed deeply into their operations, into their P&L, into their business, so that they can fully take advantage of digital at scale. And so I think that this notion of how you organize yourself as a services business and how you respond to this idea of digital at scale, the pervasiveness of technology across the enterprise is really going to be the core trend that services businesses will have to respond to over the coming decade.

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Lisa Ann Dejong Ellis, MoffettNathanson LLC - Partner [9]

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Great. And then maybe as my follow-up, I'll ask the inevitable every 2-years question, I suppose. With new Congress in session, inevitably over the next couple of months, I imagine we'll hear some noise surrounding H1B visa reform. So just perhaps to get ahead of that, can you proactively highlight what progress Cognizant has made over the last couple of years reducing your dependence on H1B visas? I recall -- I believe at Investor Day, you gave some statistics about the percentage of your U.S. workers that are now permanent residents or citizens, et cetera. Can you just maybe put those top of mind before we see any of that noise coming out over the next couple of months?

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [10]

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Thanks, Lisa. Look, I always start the immigration questions with a big-picture answer, which is that the reality is that, in many parts of the world, certainly in the United States, many parts of Western Europe, there really is a significant shortage of technology talent, which needs to be addressed for these economies to stay -- to remain competitive. If you go back to the first part -- or your first question, as the world becomes more technology-intensive, we -- these economies really need skilled technologists to maintain a competitive edge. We continue to make progress. At Investor Day, we shared with you that, at the moment, in North America, over 40% of our North American workforce or let's say our U.S. workforce is citizens or permanent residents. We continue to make significant progress, and I expect that in the medium term, we'll be well over 50%.

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [11]

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And I think, Lisa -- this is Karen. If I can just add to that. I mean, as I think you know and if you will recall, last year, we set up our U.S. Foundation, which we funded with $100 million initially to continue to launch more training programs in the U.S. As Frank said, obviously, the biggest challenge is shortage of talent, not just here, but in other parts of the world as well. So we are certainly focused on helping to change that trajectory in the coming years.

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Operator [12]

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Our next question comes from the line of Edward Caso with Wells Fargo Securities.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [13]

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I was curious if you could give more color to your strategic accounts, 385 of them. Sort of how many at this point are above the desired $5 million? And maybe like some of your peers, could you array them as to over $100 million, over $50 million? Just give us a little bit more color other than it goes up 7 every quarter.

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [14]

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Sure. So Ed, this is Karen. All of those accounts are actually over $5 million, and most of them are considerably above $5 million on an annual run rate. We have not broken out how many accounts we have over $100 million, but it is in the range of -- off the top of my head, about 30, over 30 accounts at this point. So there's a fairly large number of significant clients that have emerged over the years.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [15]

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All right. And my other question is on the Healthcare. How sensitive are you to winning sort of these large transformational deals to sort of get the Healthcare group back on track. Congrats to Frank.

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [16]

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Thanks, Ed. Look, I don't think we are dependent on winning large transformational deals. The business is built on this -- and the vast majority, whether it's in Healthcare or in any of the other verticals, is built on this idea of continuing to grow with our clients in a methodical way. That usually involves many, many small and medium-sized projects with each client to continue to grow. We will continue to do large transformational deals. We announced the deal that Karen spoke about recent -- this quarter with the 3 Finnish banks. That's a great example of a transformational deal that plays into our strategy, platforms, and so on and so forth. And so I certainly don't -- will not rule out doing those deals going forward. But I don't think the engine or the Cognizant business is built on an assumption that we're going to do those deals to continue to grow.

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [17]

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And I think, Ed, if I could just also add to what Frank said. And I think we talked about this last quarter a little bit, right. Particularly with the platform deals, so the TMG deal and the EmblemHealth deal, you want certainly that large seed client to launch the platform and be able to build out the capability and so forth. But after that, it actually enables you to add a lot of smaller engagements with smaller clients that historically we may not have not been able to really support in a meaningful way. And we're certainly starting to see that traction now, particularly with the TMG relationship and being able to onboard now smaller opportunities, which obviously you can move a lot faster and they become accretive quite quickly. So that's certainly happening in that side of the business.

And then, overall, in health care, as we had talked about, there's been obviously a number of mergers that are underway in health care. And while we certainly expect to get our fair share of the integration work once that commences, we certainly have seen a little bit of pullback recently as those clients are planning for integration. That's typical. We said that at some point we thought that would happen, and we've seen that a little bit over the last few weeks. But at some point, they will move into execution of the integration.

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Operator [18]

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Our next question comes from the line of Brian Essex with Morgan Stanley.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [19]

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Karen, maybe I was maybe -- wondering if you could touch on inorganic contribution in the quarter. You guys had a pretty active fourth quarter with deals, and it sounds like you continued that activity into this year. Just wondering what the contribution is. And how we might anticipate contributions through the remainder of the year? And I have a quick follow-up.

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [20]

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Sure. So M&A contribution in Q4 was about 250 basis points on a year-over-year perspective. That is also true in Q1, so you will see that again in Q1. But for full year '18, it was about 150 basis points on a year-over-year basis versus '17. And in our 2019 guidance, that includes the deals that we have already completed, which is also about 150 basis points of revenue. New deals, as we talked about at Investor Day, we would expect to add about 150 to 200 basis points a year of new deals, so we've obviously done that for '18. We've done it again, included in our '19 guidance, and then new deals in '19 would be beyond that.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [21]

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Got it. That's super helpful. And then maybe if we could touch on -- you mentioned in your prepared remarks that the impact of the rupee appreciation gave you a little bit of flexibility to invest for growth. I think some are anticipating a little bit of maybe that's flipping to a headwind this year. And if that's the case, what sort of measures might you have to continue to, I guess, to manage that and continue to invest for growth throughout fiscal '19?

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [22]

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Sure. So I mean, we certainly ramped up hiring in the fourth quarter to support growth as we go into '19, and we'll put those folks to good use. I think as we look at '19, utilization stayed fairly consistent last year with '17. We know we've got a little bit of room to continue to push that, if need be. Certainly, we continue to focus on our pyramid as we move into 2019. And then really scaling some of the larger, more structured deals or platform opportunities as we had said really 2 years ago when we had started outlining this new framework that, initially, those deals do tend to be margin dilutive. And as we get into the outer years, which is where we're starting to get now with some of the original ones, you start to see that margin accretion kick in, which then allows us to continue to fund more investments. So those will be some of the major things that we're looking at this year as well as continuing to leverage SG&A. But really, our focus right now is driving for growth and making sure that we're investing in the talent and reskilling and so forth to do that.

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Operator [23]

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Our next question comes from the line of Jim Schneider with Goldman Sachs.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [24]

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And good luck to you, Frank, in your next phase of your career. Maybe just to start off, on the overall IT spending environment you're hearing from your customers right now. Clearly, they are spending more on digital, less on maintenance. But can you maybe talk about their overall kind of posture as we go into 2019? Any signs of worries around an economic slowdown or a pullback in IT spending? Or are things pretty much running the same course as they have been?

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [25]

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Jim, it's Frank. Look, I think, as I said in my prepared comments, what I see is an environment -- as you said, in traditional, in what you would think of as traditional IT, clearly, pressure on running the business, maintenance types of activities in order to free up the dollars to invest in growth. That trend has been going on for a while. Equally importantly, as I said, as technology permeates organizations, I think we are able to tap into new budgets. As I said, almost every budget is now somewhat a technology budget. Whether it's the R&D budget, whether it's the marketing budget, all of these become new sources of opportunity for us. And so overall, I think our market opportunity has never been larger. It continues to expand given technology permeating all aspects of organizations.

I think as it relates to the macro environment, clearly, there are concerns out there about various issues in Europe, in relations with China, and so on and so forth. I haven't seen it yet translate into a meaningful impact on demand for us. And so at this point, when I think about 2019, I see a solid demand environment.

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James Edward Schneider, Goldman Sachs Group Inc., Research Division - VP [26]

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And then maybe as a follow-up. Regarding the outlook in Financial Services in particular, I think Karen referenced a couple of specific deal wins that would improve the trajectory in Q2. I guess what's your level of confidence in that improvement in financial to sustain itself? And can you maybe just kind of address what you're seeing in your U.S. banking client base as well?

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [27]

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Sure. So in terms of the confidence, Jim, as we talked about, the Finnish deal, for example, is a signed deal, so we're just waiting for final clearance and closing of that. We have other deals similarly in the pipeline that we're very close to finalizing here. So we have a high degree of confidence, particularly in the European markets in terms of what we're seeing. And then as it relates to -- I'm actually going to talk about North America as well as the top 5. So if you recall at Investor Day, right, we talked about the top 5, and that 2 of them had returned to very nice growth. That continued in Q4 and continues into Q1 where we're talking about, in some cases, double-digit year-over-year growth. And those are obviously very large relationships, so it's a very nice turnaround there. The other 3 accounts continue to be under some pressure. And at this point, we're not -- certainly not assuming a big turnaround for our guidance for those accounts. But then if we look at the rest of the North America banking business, it has and continues to grow quite nicely. It just gets under pressure when you have some of these larger relationships pulling down the overall growth rate of the business.

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Operator [28]

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Our next question comes from the line of Bryan Keane with Deutsche Bank.

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Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [29]

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Congrats, Frank. I did want to ask about the CEO change. I'm a little bit surprised it didn't -- the background of Brian isn't somebody with a little more IT services background or an executive from one of your peers or competitors. Can you just talk about why somebody outside the industry necessarily was the right hire for Cognizant?

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [30]

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Thanks, Bryan. As I said before, the board conducted a very methodical search for my successor. We kept in mind very carefully sort of the strategy that we outlined for you during our Investor Day a few months ago. And as we went through that process, we just -- we determined that Brian is the right executive. We think that he's got a terrific track record of success across companies in the technology space, multiple industries, obviously technologies themselves, geographies, roles and organizational cultures. And when we put all of that together, we just think that Brian is the right executive to execute on the strategy that we outlined for you at Investor Day as digital continues to permeate and power, as I said before, every industry.

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Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [31]

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Okay, that's helpful. And then Karen, on the -- I'm just thinking about the guidance. I know the fourth quarter came in about 8.8% in constant currency. Guidance is calling for 7% to 9%. So I guess you're already running at the high end of the revenue guide. And with Financial Services improving in 2019, just thinking about what pulls down maybe the range towards 7% to 9% and not a touch higher since you guys have a little bit of momentum heading into 2019.

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [32]

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I think, Bryan, I mean, certainly, we -- the guidance is consistent with what we outlined at Investor Day. Q1 is a little soft, which obviously puts a little bit of pressure on the full year, although we're very comfortable with the ramp to the back half of the year. But I think, obviously, we like to be prudent particularly earlier in the year. And as we see things start to evolve, we will certainly take that into consideration. But I think right now, we're very comfortable with this. Consistent with what we said back in November, and we've made the investments to support this growth range for this year.

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Operator [33]

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Our next question comes from the line of Bryan Bergin with Cowen and Company.

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Bryan C. Bergin, Cowen and Company, LLC, Research Division - Director [34]

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Regarding your onshore hiring efforts, can you comment on the inflation levels in this tight labor environment, particularly around digital capabilities? And then how are clients responding on pricing and your ability to pass those costs through?

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [35]

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I would say a couple of things which we've said in the past. On a like-for-like basis, once you look at sort of all-in costs, our talent base in the U.S., whether that talent base is, if you will, hired locally or folks that are here on some sort of a visa, there isn't a meaningful cost difference between those 2 talent pools. So we are, from a cost standpoint, indifferent. Of course, as I said earlier, we are in a tight -- in a constrained market, as you pointed out. And so given the demand for our services, we're always struggling to find the talent that we need to fulfill our growth ambitions. But like-for-like, all in, the costs are about the same.

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [36]

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Yes. And I think -- I'll just add to that too, so talking a little about pricing. So I think, as Frank said, like-for-like, you're not actually seeing a big change. And certainly, I don't think wage inflation, given skills we're hiring, has -- we've seen that in a significant way. What you do see, obviously, is -- and this is always true, skills that are in hot demand come with a high price, but that's no different now versus the last 10 or 20 years. So -- but the flip side is that, in this environment, clients need that talent as much as we do, and you'll get the pricing to accommodate that. So I think, as we talked about last year, pricing has remained quite consistent. And in fact, last year was the first year in quite a while that you actually had some pricing strength in the market because of the shortage of talent, and that trend has continued.

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [37]

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The last thing maybe I'll add, to sort of jump back in. But remember that when we look at our portfolio of digital -- revenue from digital, that is running -- it has and continues to run at above company average margins, which I think speaks to our ability there to drive pricing despite the fact that, in general, the talent pool, as Karen pointed out, in the digital part of the business is a higher-cost talent pool.

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Operator [38]

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Our next question comes from the line of Keith Bachman with BMO Capital Markets.

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Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [39]

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First, Frank, congratulations on Brian. I know him from his HP days. I think he's a terrific choice. As a matter of fact, I think getting somebody from outside of industry could certainly help Cognizant quite a bit. So congratulations on that. My question was a little bit different in that, if I read the press release correctly, you're the founder of the company, as you said, have tremendous success over a number of years. You're going to move to the board seat, I think, after a transition period. Frequently, particularly with founders, there are situations in which when new leadership comes on board, they eventually get off to allow the new leadership to have unbridled capabilities to direct the strategy. But it doesn't sound like you plan on doing that. Am I correct in reading that?

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [40]

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Keith, my primary and really only goal here is to ensure that we do whatever is necessary to make sure that Brian is incredibly successful as we go through the transition and beyond that. And my commitment to my fellow board members and to the company is that I will play whatever role is necessary to make sure that, that happens, and not a bit more than that. And so we will play that as things come. But at the moment, my commitment is to all of you, to our shareholders, to my 282,000 fellow associates around the world and to my fellow board members, that my commitment is to make sure that I do whatever is in my power to ensure we have an absolutely smooth transition.

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Keith Frances Bachman, BMO Capital Markets Equity Research - MD & Senior Research Analyst [41]

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Fair enough, fair enough. Just one for you, Karen. I just want to understand 606 in 2019. 606 was a help, both the top line and the margins in 2018. My assumption is it's neutral in 2019. And I know it's hard to predict because it depends on the nature of the contracts. But is that the right assumption, that 606 is neutral to both the top line and to the margins in 2019?

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Karen A. McLoughlin, Cognizant Technology Solutions Corporation - CFO [42]

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Yes. That is a fair assumption, Keith. And we will no longer -- in 2019, we will not be breaking it out. That was a 1-year requirement to make that disclosure. So -- but for a modeling perspective, just assume it's neutral.

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Operator [43]

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Ladies and gentlemen, our last question this morning will come from the line of Rod Bourgeois with DeepDive Equity Research.

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Rod Bourgeois, DeepDive Equity Research - Head of Research and Consulting [44]

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And I'd echo the last comment. I think Brian is a great hire, and it's nice to see the sort of new thinking about being more global and so on. I wanted to ask in that context a couple of things. Do you expect, as the CEO change occurs, that anything related to guidance or financial targets might be reconsidered? And also, do you expect any management departures related to the CEO change besides the one that's already been announced?

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Francisco D'Souza, Cognizant Technology Solutions Corporation - Vice Chair & CEO [45]

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Rob, it's Frank. Multiple parts to your question there. Let me just, first of all, just say that, as we think about Raj, I want to just say that it's worth really spending a minute to thank Raj for his countless contributions to the growth and success of Cognizant. When Raj joined the company, I think we were $20 million in revenue, and from that, to over $16 billion last year. Raj has provided leadership, operational skills, passion for clients for over 2 decades in a variety of operating roles. And he's, as you know, served as our president for the past 2.5 years. So I just want to thank Raj, acknowledge his many, many, many contributions to the company on this call, and wish him well in his future endeavors.

I think that as we've outlined for you today, our targets and our guidance for 2019 are based on our best view of the business at this point for the year. We're providing those to you, as we always do, having considered all of the factors that could positively or negatively influence our performance. And this is our best view, and that continues to be the case with the 2019 guidance. I am sure that as Brian comes in, he will bring his perspectives to the role. And when we have updates, we will provide those to you and -- or Brian will going forward. I don't think we have anything else to add to that, Karen.

So I guess thanks very much, everybody. Thanks again for joining the call. I want you all to know that I've truly enjoyed the many, many interactions with all of you over the 48 quarters that I've done this. I look forward to introducing Brian to you in the days ahead and during the transition process once he's on board. So thank you very much.

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Operator [46]

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