Cognizant Technology Solutions Q3 2010 Earnings Call Transcript

Cognizant Technology Solutions (CTSH)

Q3 2010 Earnings Call

November 01, 2010 8:00 am ET

Executives

David Nelson - VP, IR

Francisco D'Souza - Chief Executive Officer, President and Director

Gordon Coburn - Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer and Treasurer

Analysts

Joseph Foresi - Janney Montgomery Scott LLC

Julio Quinteros - Goldman Sachs Group Inc.

Bryan Keane - Crédit Suisse AG

Rod Bourgeois - Bernstein Research

Edward Caso - Wells Fargo Securities, LLC

Mayank Tandon - Signal Hill Capital Group LLC

Joseph Vafi - Jefferies & Company, Inc.

Darrin Peller - Barclays Capital

Ashwin Shirvaikar - Citigroup Inc

Jason Kupferberg - UBS Investment Bank

Nabil Elsheshai - Pacific Crest Securities, Inc.

Presentation

Operator

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Ladies and gentlemen, welcome to the Cognizant Technology Solutions Second (sic) [Third] Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to David Nelson, Vice President, Investor Relations and Treasury at Cognizant. Please go ahead, sir.

David Nelson

Thank you, operator, and good morning, everyone. By now, you should have received a copy of the company's third quarter 2010 earnings release. 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, President and Chief Executive Officer; and Gordon Coburn, Chief Financial and Operating Officer of Cognizant.

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. Frank, go ahead.

Francisco D'Souza

Thank you, David, and good morning, everyone. Thanks for joining us today. I'm happy to report that Q3 was another strong quarter performance for Cognizant.

Third quarter revenue was $1.2 billion, a sequential increase of 10% and an increase of 43% year-over-year. We maintained our non-GAAP operating margin at the high end of our target range, and we achieved record cash flow level. For the third straight quarter, application development grew faster than application maintenance by a strong margin. Maintenance grew 6% sequentially, while development, an indicator of discretionary spending, grew 14%. Again this quarter, our growth was broad based across sectors, geographies and service offerings.

A portion of the growth in discretionary spending in the third quarter was the tail end of pent-up demand created by two years of cost-cutting and conservative spending. But we think more significantly, the overall increase in spending over the last two quarters, three quarters, is a validation of our view that our clients are dealing with more than the after effects of a cyclical downturn. As I've said on past calls, the major industry that we serve are going to fundamental secular changes.

The secular changes that we see clients addressing are driven by three global trends that are rapidly reshaping the way forward-thinking companies operate. These trends represent three pillars upon which a new normal in some senses for companies is defined.

The first pillar is a new generation of highly distributed and virtualized business models. These models are pushing global talent integration to new levels in search of dramatically better efficiency and effectiveness. The second pillar is a new generation of technologies. Loosely labeled under the umbrella of cloud computing, these technologies, including Web 2.0 mobile computing and social computing and cloud computing, that are once again changing the price performance curve of technology and are redefining the range of business problems that technology can help address. And the third pillar is a new generation of workers and consumers, so-called millennials, who grew up with technology and have dramatically different expectations about the how they interact with companies both as employees and also as consumers.

These three pillars that is new business models, new technologies and a new generation of workers and consumers form the foundation of a new Future of Work. We see clients increasingly turning to Cognizant as they make the investments necessary to adapt to these structural changes as evidenced by our strong performance over the past few quarters. This morning, I want to elaborate on these three pillars and highlight how Cognizant's heritage and investment have prepared us to help client address these challenges. Gordon will then present our detailed financial and operating results. And as always, we'll close with your questions.

So let's jump into the Future of Work. The first pillar that I spoke about is new generation of highly distributed and virtualized business models. And while globalization of services is not new, we see clients pushing the envelope on what activities they feel comfortable outsourcing and increasingly demanding a more variablized cost and consumption model. Traditional organizational boundaries have given way as work migrates to its right location worldwide allowing companies to leverage expertise anywhere and everywhere it resides.

Complex and Dynamic end-to-end processes that were once performed by self-contained workforce are now performed by globally distributed virtual teams that regularly include outside partners. We see this clearly from the rapid growth of new services, such as IT infrastructure services, business process outsourcing, engineering and manufacturing services and enterprise analytics. Clients are outsourcing or partnering on activities that two to three years ago stayed well within the walls of the corporation. Our ability to successfully deploy and orchestrate these new business models, a part of investments, differentiates us.

Investments in sophisticated technology, like Cognizant 2.0 or our on-target infrastructure management platform that seamlessly connect our virtual workforce with that of our clients. Our investment in large-scale program management and Pfizer capabilities, such as those our business consulting group offers with the support of our recent acquisition of PIPC, are also investment in this area.

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