David Nelson - Cognizant Technology Solutions Corp. Francisco D'Souza - Cognizant Technology Solutions Corp. Rajeev Mehta - Cognizant Technology Solutions Corp. Karen McLoughlin - Cognizant Technology Solutions Corp..

Edward S. Caso - Wells Fargo Securities LLC Tien-Tsin Huang - JPMorgan Securities LLC Brian L. Essex - Morgan Stanley & Co. LLC Lisa D. Ellis - Sanford C. Bernstein & Co. LLC Bryan C. Keane - Deutsche Bank Securities, Inc. Darrin Peller - Barclays Capital, Inc.

James Schneider - Goldman Sachs Keith Frances Bachman - BMO Capital Markets (United States) Joseph Foresi - Cantor Fitzgerald Securities Ashwin Shirvaikar - Citigroup Global Markets, Inc. (Broker) Glenn Greene - Oppenheimer & Co., Inc. (Broker).

Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. Thank you.

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

Thank you, Rob, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's third quarter 2016 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; Raj Mehta, President; 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 risk and uncertainties as described in the company's earnings release and other filings with the SEC, including our Form 10-Q filed this morning. I would now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco..

business, operations and systems. Let me now turn the call over to our new President, Raj Mehta. On our last earnings call, we introduced you to Raj, a long-standing Cognizant leader.

He's been a Cognizant associate since 1997, building strong relationships with clients throughout his 20 years at Cognizant, and leading many of our market-facing and delivery teams in driving industry-leading growth. Now, as President, he has direct responsibility for the overall P&L of Cognizant's operations.

Raj will talk to you about the success we're already having in executing our strategy from his perspective running these businesses.

Raj?.

our relentless focus on our clients; making sure we have a world-class teams that deliver consistently for them; and scaling our capabilities to address new client needs. I know we're succeeding when clients tell me that working with us feels different.

As we help clients with the shifts they need to make in the digital era, I'm doubling down on the principles that have made us successful, so far; client focus, world-class teams, and scaling capabilities while maintaining our flexible, collaborative way of working.

In working closely with clients across our industry businesses, we see that we face many of the same underlying challenges. They need to deliver the convenient experiences people expect today across their complex organizations. They need to develop an operational agility to respond to fast-changing business needs.

They need to free up dollars to invest in innovation and transformation by optimizing and modernizing their legacy IT systems. It's these challenges that are practices Cognizant digital business, Cognizant digital operations and Cognizant digital systems and technologies are focused on, helping clients answer.

Working closely with Cognizant Business Consulting and domain experts from our industry businesses, we're creating frameworks, platforms, and solutions that clients are finding valuable as they pursue next-level savings and new revenue streams.

Now, I'll review the performance of each of our industry verticals, highlighting key trends and some of the areas we're focusing on with our clients. Our Banking and Financial Services segment was up 1.8% sequentially and 7.1% year over year.

During Q3, the increased macroeconomic uncertainty and the prolonged low-rate interest environment that we have commented on throughout 2016 continued to moderate spending at several of our larger banking clients.

Our super-regional banking businesses continue to perform well as many of those clients look to us for solutions which both optimize cost and generate revenue.

While we've seen a slowdown in spending in recent months with several of our insurance clients who are also pressured by the low interest rate environment, demand has remained solid over the past year.

Clients have been particularly interested in Cognizant digital operations solutions that transform underwriting and claims processes through managed services or other outcome-based delivery models.

Our Healthcare segment, which consists of payer, provider, pharmaceutical, biotech, and medical device clients, grew 3.5% sequentially and 5.7% year-over-year. The industry consolidation among several of the largest U.S. payers continues to weigh on our healthcare payer practice.

Still, we remain positive that the fundamental shifts under way in the market will create long-term opportunities. Through solutions from our Cognizant digital operations practice that combine TriZetto software and Cognizant services, we are well positioned to help clients deal effectively with this disruption.

In our life sciences business, demand has picked up steadily over the past year as drug pipelines and product launches have improved for pharmaceutical and biotech companies. In particular, we're seeing a trend towards multiservice line deals, leveraging analytics, cloud technologies, and platforms.

Our Retail and Manufacturing segment was up 2.8% sequentially and 12% year-over-year. Strength in manufacturing helped to offset ongoing softness in retail. A number of retail clients have moderated their discretionary spending over this past year as consumer spending has been weak.

Cognizant digital business has seen growing demand among manufacturing clients who want to help in transforming the products they make through sensors, IoT, and analytics. They are also looking for solutions that increase the productivity of core IT infrastructure and application services.

Our Other segment, which includes high-tech communications and information, media and entertainment clients, was up 1.7% sequentially and 13.6% year-over-year. Last quarter, we highlighted that macroeconomic uncertainty was causing a slowdown in decision making for our information, media, and entertainment clients.

This has largely been offset by a rebound in our communications business. Let me give you a few examples how Cognizant is partnering with clients in engagements that are pivoting their businesses and shifting their industries in meaningful ways. Let's talk first about KeyBank.

Cognizant has partnered with KeyBank on a variety of different initiatives over the past 10 years, assisting in significant projects like the recent integration of their acquisition of First Niagara Bank. Today, KeyBank wants to leverage digital to compete and lead in their category, and they started that journey with Cognizant.

We are working together to simplify the way they do business and offer their customers streamlined experiences, financial wellness tools, and digital product offers and services. Cognizant is helping with implementation of a transition to the Oracle Banking Platform.

As part of our work, we're helping in delivering improved digital experiences on web and mobile interfaces, reengineering business processes, and enabling new technology architecture for the banks' retail digital channel.

This retail digital channel modernization is the first wave of the transformation, but we'll expand the use of this platform to manage other core processes and to deliver new differentiated services to customers within the coming year.

Let me tell you about another project we're doing in the manufacturing space, helping a top five auto manufacturer change what people expect from their cars. As sales and developed markets plateau, our client is looking to serve new needs of their customers by offering a range of transportation services and solutions.

We are their strategic partner helping to develop their strategy and user experiences and to build a platform that will be the backbone of an evolving new ecosystem of offerings.

While this platform will initially focus on areas such as parking, vehicle health, and retail and awards program, the data captured by their platform will eventually be used to model how people will move differently in the future.

We will work with our client to develop this and other potential opportunities to expand the services that they offer to their customers.

Finally, I would like to highlight a growing part of Cognizant digital systems and technology where our deep knowledge of client legacy environments enable us to modernize their IT by migrating to cloud-based solutions, utilizing providers such as AWS. A couple of recent examples.

We recently worked with LexisNexis to develop a cloud-based solution on AWS that supports search capabilities on a database of over 2 billion searchable documents on their news archive platform. For Sotheby's (18:39), we migrated their critical business applications including their flagship website from on-premise data center to AWS.

For both clients, this is a major step forward towards the modernization of their IT infrastructure. In future calls, you'll continue to hear more from me about what Cognizant and our clients are focusing on together, how we're building world-class teams to serve them better, and how we're scaling our capabilities to meet changing needs.

Now I'll turn the call over to Karen to discuss our financial performance..

Thank you, Raj, and good morning, everyone. As Raj mentioned, the business performed within expectations as third quarter revenue of $3.45 billion was within our guided range and represented sequential growth of 2.5% and a year-over-year increase of 8.4%.

We had a negative currency headwind which impacted sequential revenue growth by $24 million or approximately 70 basis points and year-over-year revenue growth by $42 million or 130 basis points. Non-GAAP operating margin, which excludes stock-based compensation expense and acquisition-related expenses, was 19.3% within our target range of 19% to 20%.

Non-GAAP EPS of $0.86 was $0.01 above our guidance range of $0.82 to $0.85. As a reminder, the remittance of cash from India to the U.S. that occurred in the second quarter had an incremental tax impact of $24 million in quarter three and is expected to have a similar impact in the fourth quarter.

The tax impact of this transaction had a $0.04 per share impact on our Q3 GAAP EPS that was excluded from our non-GAAP EPS calculation due to the nonrecurring nature of the transaction.

Before I provide a detailed commentary on the quarter's performance, let me provide some additional color on the ongoing internal investigation, which is being overseen by our Audit Committee. As Frank noted, based on the results of the investigation to-date, we are not restating our historical financial statements.

At present, the investigation has identified a total of approximately $5 million in potentially improper payments for certain company-owned facilities in India.

Of that amount, based on the preliminary results of the investigation to-date and as disclosed in our Form 10-Q and earnings release, we determined that it was appropriate at this time to record an out-of-period correction of $3.1 million related to certain of these payments.

Also, as disclosed in the Form 10-Q, we announced a determination of a material weakness as of December 31, 2015 and the subsequent interim period.

As based on the results of the investigation to-date, certain members of senior management may have participated in or failed to take action to prevent the making of potentially improper payments by either overwriting or failing to enforce the controls established by the company relating to real estate and procurement principally in connection with permits for certain facilities in India.

We have already taken and continue to take remediation measures in the areas of procurement and accounts payable as they relate to real estate transactions in India. Now turning to third quarter performance. Consulting and technology services and outsourcing services represented 57.4% and 42.6% of revenue, respectfully, for the quarter.

Consulting and technology services grew 2.4% sequentially and 6.9% year-over-year. Outsourcing services revenue grew 2.6% sequentially and 10.3% from Q3 a year ago, driven by strength across digital operations and the infrastructure portion of Cognizant digital systems and technology.

From a geographic standpoint, North America grew 3.3% sequentially and 7.9% year-over-year. Europe declined 1.7% sequentially after a 4.4% negative currency impact and grew 5.6% from last year after an 8.3% negative currency impact.

Growth in Europe was driven primarily by the ramp of work coming from recent wins particularly in markets such as Germany and the Nordics. The UK declined 5.7% sequentially and 2.3% year-over-year after a 7% and a 13.9% negative currency impact, respectfully. Continental Europe grew 3.5% sequentially and 17% over the prior year.

We have established a solid foothold on the continent and expect this to continue to be a driver of future growth. Finally, we saw a continued strong traction in the rest of the world, which was up 3.8% sequentially and 23.2% year-over-year.

During the third quarter, 37.5% of our revenue came from fixed price contracts, and as expected, overall pricing was stable. We added seven strategic customers in the quarter defined as clients that have the potential to generate at least $5 million to $50 million or more in annual revenue, bringing our total number of strategic clients to 322.

We added 11,500 net new hires in the quarter. Annualized attrition of 16.6% during the quarter, including BPO and trainees, was down 350 basis points from the year-ago period. While attrition remained slightly elevated, we are pleased with the year-over-year decline as we continue to enhance our various employee engagement initiatives.

Total head count at the end of the quarter was 255,800 employees globally, of which 239,500 were service delivery staff. Offshore utilization was 73%. Offshore utilization, excluding recent college graduates in our training program, was 79%, and on-site utilization was 90% during the quarter. Our balance sheet remains very healthy.

We finished the quarter with $4.9 billion of cash and short-term investments. Net of debt, this was up by $390 million from the quarter ending June 30 and up by $861 million from the year-ago period. Moving on to receivables which were $2.5 billion at the end of the quarter.

We finished the quarter with a DSO including unbilled receivables of 74.5 days. This is roughly flat with the last quarter. Our unbilled receivables balance was $424 million, down from $451 million at the end of Q2.

We billed approximately 58% of the Q3 unbilled balance in October, and the decrease in unbilled receivables was primarily due to the timing of certain milestone deliverables. Our outstanding debt balance was $900 million at the end of the quarter, and there were no outstanding borrowings on our revolving credit facility. Turning to cash flow.

Operating activities generated $594 million. Financing activities were a $119 million use of cash during the quarter, and capital expenditures were $74 million during the quarter.

During the third quarter, we repurchased just over 2.5 million shares for a total cost of $145 million, and our diluted share count decreased to 608.5 million shares for the quarter.

As of the end of Q3, we had repurchased 48.8 million shares for a total cost of $2 billion under our stock repurchase authorization of $3 billion, we had approximately $1 billion remaining unutilized. I would now like to comment on our outlook for Q4 and the full year.

For the full-year 2016, we are trimming the high end of our revenue expectations to be in the range of $13.47 billion to $13.53 billion which represents growth of approximately 8.5% to 9%.

For the fourth quarter of 2016, we expect to deliver revenue in the range of $3.45 billion to $3.51 billion including $18 million of incremental negative currency impact due to the recent weakening of the pound sterling.

As is the typical pattern in the fourth quarter, client furloughs, seasonality of our retail practice, and fewer billing days will have an impact on sequential revenue growth. During the fourth quarter and for the full year, we expect to operate within our target non-GAAP operating margin range of 19% to 20%.

For the fourth quarter, we expect to deliver non-GAAP EPS in the range of $0.85 to $0.88. Our non-GAAP EPS guidance excludes net non-operating foreign currency exchange gains and losses, stock-based compensation and acquisition-related expenses and amortization.

For the remainder of the year, our non-GAAP diluted EPS guidance also excludes the impact of a onetime incremental income tax expense related to the India share buyback transaction. This guidance anticipates a share count of approximately 609 million shares. For the full year, we expect to deliver non-GAAP EPS in the range of $3.38 to $3.41.

This guidance anticipates a full-year share count of approximately 609.6 million shares and a tax rate of approximately 35%, including an approximate $238 million impact from the incremental tax from the India remittance. Now, we would like to open the call for questions.

Operator?.

Thank you. Thank you. Our first question comes from the line of Edward Caso with Wells Fargo. Please proceed with your question..

Good morning. Thank you for releasing your 10-Q. Could you talk a little bit about the Financial Services vertical? And how much of the Q3 and particularly Q4 pace of business is sort of unique to this year and unique to the current challenging environment for your clients? And how much of it may be more secular in nature? Thank you..

Yeah. Hey, Edward. This is Raj Mehta here. Look, we've talked about Financial Services in terms of some of the macroeconomic trends, especially around the low-rate interest environment.

But I think it's important to note, it's not just banking, but it's across many of our industries we serve that technology is becoming more intensive to our clients, and our clients are becoming more dependent on technology and the data to compete.

We continue to believe that the benefits of outsourcing, including the ability to attract talent, scale efficiently and bring deep technology and domain knowledge, have not changed, and the benefits clients can – they can't replicate that on their own.

So – in summary, right, the range of skills that are required, and the technology is broadened and not narrowed, and we're still very looking forward in terms of continuing to growing these businesses in that respect..

Thank you. Our next question is from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question..

Yeah, good morning. Thanks for the FCPA update and the materiality stuff there. So, has the FCPA issue had any impact on the client side and on the investigation itself, what needs to happen from here for the issue to be resolved? Could there be any additional costs to remedy the internal controls, for example? Thanks..

Hey, Tien-Tsin. It's Frank. Look, I would say, it's business as usual in terms of serving clients at this point. As I said, we expect no impact on our ability to provide high-quality services to clients, and in fact, haven't seen any.

The fundamentals are we've got great associates doing good work every day on behalf of our clients, and I think our clients recognize that. The investigation is ongoing.

I don't want to speculate on how long it's going to take or the costs that may be associated with it going forward, but our commitment is to conduct a thorough investigation and we're committed to doing that..

Thank you..

Thanks..

Our next question is from the line of Brian Essex with Morgan Stanley. Please proceed with your question..

Hi. Good morning and thank you for taking the question. I was wondering if you could comment at least on the Healthcare vertical. You've had some pretty large customers there that have throttled back on spending all year.

Any conversations with them that might indicate the tenor or demeanor of their spending in the next year, should those investigations be resolved? I understand they're right around the corner, so I don't know what their spending intentions are or if you'd talked to them with regard to contingency plans one way or the other..

Yeah, it's Frank. Let me try to take a stab at that. Look, I think the Healthcare business at Cognizant – before I talk about the specifics, let me just back this up, right. I think that Healthcare particularly as it relates to the Healthcare payers is really a core area of deep, deep strength at Cognizant.

It has historically been one of our strongest verticals and with the addition of the capabilities from the TriZetto acquisition, I think it further strengthened our position there.

The combination of Cognizant's services capabilities with TriZetto's platform capabilities has enabled us to create a truly unique platform-based offering in that marketplace, and we continue to see good traction in services and solutions that combine TriZetto's software and Cognizant's core services capabilities.

The pipeline of opportunities around that area remains robust, and I continue to be optimistic about the opportunities there. Offsetting that, as we've said to you over the course of this year, is some slowness in the spending from the biggest payers who are particularly the ones that are involved in the potential large combinations.

It's a little too early to forecast what happens with those payers as we go into 2017, but as a general matter, I would say that we have seen them slow spending, discretionary spending, through this period of uncertainty.

And so, as though situations get resolved one way or the other, my expectation is that we have a great portfolio of services to offer that group of customers, and we will be as relevant if not more relevant than we've ever been to serving those needs of those customers..

Thank you. Our next question comes from the line of Lisa Ellis with Bernstein. Please proceed with your question..

Hi. Good morning, guys. Can you talk a little bit about Cognizant Business Consulting? Just an observation that many of the winners, so far, in digital have been some of the very high-end private consultancies.

And I'm curious to know, kind of I know you've got Cognizant Business Consulting, kind of what you're doing to continue to develop that business as well as how you're seeing demand for digital evolving and whether it's kind of moving beyond kind of the high-end consulting tip of the spear and into more, I'd say, mainstream IT services at this point..

Yeah. Hey, Lisa. It's Frank. Let me try to address that. So, let me start with the three practice areas that we discussed on the call today. We've refocused and rebranded our offerings under these three broad practice areas. Cognizant digital business, Cognizant digital operations, and Cognizant digital systems and technology.

And it's not an oversight that the word digital appears in all three of the practice names. The reason is that as we've said to you for quite some time now, our core and fundamental belief is that digital technology is really embedded in all areas in all aspects of our business in some way, shape or form.

And so, Cognizant digital business uses digital technologies to create and deliver meaningful business experiences for clients. Cognizant digital operations uses digital technology to enable and automate core business operations in our clients' core transaction processing areas.

And then, of course, Cognizant digital systems and technology is focused on modernizing, securing, and scaling legacy technology environment. Digital exists in all those places, and to your question about CBC or Cognizant Business Consulting, Cognizant Business Consulting is really an enabler across all three of those practice areas.

The Business Consulting capability is woven in across all of those three practice areas, and really a lot of the work that we are doing today in Cognizant Business Consulting is what I consider to be tip of the spear kind of work that then leads to downstream work in one or more of those three big practice areas.

We've clearly seen digital move beyond just high-end consulting to implementation.

Raj, for example, spoke in his prepared comments about the work we're doing to migrate – that we've done to migrate two big clients to a cloud-based AWS environment, that's an example of sort of what I think of as core technology work that's enabled by new digital technologies, and like that across all the practices we're seeing, not just tip of the spear consulting work, but also downstream implementation work that relates to digital..

Thank you..

Thank you. Our next question is from the line of Bryan Keane with Deutsche Bank. Please proceed with your question..

Hi. Just wanted to ask about the impact of business due to departure of former President, Gordon Coburn, any big reaction out of clients? And then just secondly quickly, Karen any impact to the non-GAAP tax rate due to the internal investigation? Thanks so much..

Let me talk about Gordon's departure. I would say that Raj has been a Cognizant veteran for 20 years. Raj has run most of the business operations of the company, the business development, front-end sales and also the delivery operations for several years now. And so, I would say the transition has been seamless.

Raj is supported by a very strong team of Cognizant veterans who have been around the company for many, many years. And so, I would say that transition has been seamless. Our platforms business or what we are now referring to as Cognizant digital operations business reports to me at this point, I have direct oversight on that part of the business.

And let me turn it over to Karen on the tax rate question..

Sure. So, Bryan, there was certainly no impact on the non-GAAP tax rate for the quarter based on the investigation. So during the quarter, there were two things that happened related to the investigation, we talked about the out-of-period adjustment of $3.1 million that we've recorded.

And then, obviously we had some professional fees in conjunction with the investigation that's ongoing, but those were recorded both in our GAAP and in our non-GAAP financial statements. The tax rate did come out a little bit lower than we expected for the quarter, but that was just based on the settlement of some discrete items in the quarter.

Nothing to do with the investigation..

Thank you. Our next question is coming from the line of Darrin Peller with Barclays. Please proceed with your question..

Thanks, guys.

I understand digital can be seen across the business, but just given how much of a driver it is now, is there any way to quantify the actual percentage of your revenue you'd consider digital and kind of what the growth rate is relative to what we've seen in some of your competitors? And then, just for Karen, can you just revisit the strategy again over margins, the stability of margins and the capital return strategy around potential buybacks, given – in light of what's now a somewhat slower top line trend? Thanks, guys..

Sure. So, Darrin, I'll take both of those. So, on the first one, on digital, as we've talked about, and I think we demonstrated in our conversation today around the script, right, we think that digital is becoming really an enterprise-wide initiative.

And as we've said, we think that the definition of digital and how people think about digital revenue will continue to evolve in the coming months and quarters. And so, we have been reluctant frankly to define digital because we don't think there is a clear digital definition across the industry today.

And we've talked about this notion of digital, started in the front-office and now has increasingly moved to the mid-office and the back-office, and hence, the alignment of our three practices that we talked about around digital business, digital operations, and digital systems and technology, which I think starts to get at that notion that it really has become an enterprise-wide initiative for both clients and ourselves.

And increasingly, we think it will impact all of the segments of the business. In fact, it already is today.

So, we have been reluctant to break out what's digital because how do you define a project, whether it's got a digital component to it or is the entire project digital? So, I think those definitions in the market will continue to evolve, and we'll continue to focus on that.

I think in terms of margins, clearly, we have talked about staying in the 19% to 20% range. We have done that historically, and I think certainly for the foreseeable future, people should expect that that is a comfortable range for us to operate in. Obviously, it gives us room to make investments to grow the business.

Those investments continue to shift as we look at more platforms, as that business continues to expand, as we continue to expand new skill sets and new offerings to support the digital marketplace.

Those are most of the investments that we continue to focus on, but I think from a modeling perspective, you should expect us to stay in the 19% to 20% range. From a capital allocation perspective, there's really no change in our strategy there.

I think as we said in the past, people should expect that over the course of a year, we will essentially maintain share neutrality. We have the buyback program available to us, and we will use that as and when we think it's appropriate to do that, and obviously, we demonstrated that with the number of shares that we bought back in Q3.

And we still have about $1 billion left under that program as we look forward into Q4 and beyond..

Thank you. Our next question is from the line of Jim Schneider with Goldman Sachs. Please proceed with your question..

Good morning. Thanks for taking my question.

Given the Q4 growth rate you're guiding to implicitly in around 8% or so, can you kind of give us a sense about based on the backlog of business you see heading into say Q1 or in the beginning of 2017, whether you see that as a kind of a sustainable growth rate at least in the short term given some of the pressures near term that you mentioned before?.

So, Jim, this is Karen. I think it's premature to comment on Q1 or 2017. Clients are just getting under way with their budgets, and so we will obviously work with them on those budgets as we get further into this quarter. And when we release earnings and provide full-year guidance in February, we'll provide an update at that time..

Thank you. Our next question comes from the line of Keith Bachman with BMO Capital Markets. Please go ahead with your question..

Hi. I want to ask a question, Frank, similar to past question. But if I look at Wipro, Infosys, TCS, and Cognizant both for the reported results of September and guidance and Street numbers for December, it suggests that the industry is growing around 8%. And part of that, ADM is growing less than 5%.

And so, as we begin to reflect on calendar year 2017, I'm wondering what's different as we look at 2017 that's going to allow Cognizant to grow at something better than 8%.

And part of the question is driven by for the past number of years, probably five years, Cognizant has provided guidance for a full calendar year that's below the Street expectations. So, Frank, I was wondering if you wanted to make any comments on the industry.

And the second part of that is how willing would you be, Frank, to pursue M&A that would pressure margins in order to capture some incremental revenue growth? Thank you..

Hi, Keith. So, there were a number of – I think a number of questions, and I will try to get to each of them. I would say that at a macro level, our industry is one – well, first of all, the world continues to become more technology and data intensive. So, that's sort of the 50,000 foot view.

Technology is becoming more complex to implement the skill set, as Raj pointed out in his I think Q&A a minute ago, we have a much broader range of skills that are required to implement new technologies today. And so, we believe that that makes services firms like Cognizant as relevant if not more relevant than we've been in the past.

It's also a fragmented industry, so the opportunity to gain market share and the opportunity to capture markets is very much there.

And we believe that if you drill down further that when you look at our footprint of industries that we serve, if you look at the footprint of geographies that we currently operate in, there remain significant growth opportunities in places where we are underpenetrated.

And so, when you put all of that together, we believe that we have significant growth opportunities ahead of us, that our ability to invest to capture those growth opportunities exists in the company with our financial formula, and so that forms a core thesis and a core basis for how we think about the business going forward.

As it relates to acquisitions, we've said that we will continue to focus. We have a robust M&A program. We look at traditionally smaller tuck-in acquisitions. That's been the primary focus. We will continue to do that. I would expect that as we go forward, you'll see us focus on those kinds of acquisitions.

I would expect that we would be more focused on digital and making digital acquisitions as we look to the next few quarters to bolster our digital capability. I think we've got good strong digital capabilities, but particularly as we look to new industries and geographies, I think you'll see us using inorganic means to grow faster there.

Typically, when we do small acquisitions, the margin profile of those companies may not be where the Cognizant margin profile is, but through our ability to largely keep to cross-sell their services into our core business, we're rapidly able to bring them to Cognizant average margins. And so, I expect we'll continue to do that.

For the small tuck-ins, if there's an acquisition that, when we buy it not at Cognizant margins, I'm not too concerned about that because we've shown that we can bring those back up to Cognizant levels through our ability to cross-sell..

Thank you. Our next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please go ahead with your question..

Hi. I wanted to come at the digital question a little differently. Maybe you can give us some color on how you're measuring success in that business internally and how you're staffing for it.

I think the Street has heard some others frame their exposure, and it would be helpful just to be able to measure how you stack up or to have a little bit more information so we can understand your positioning in that business. Thanks..

I think the primary measure that we are using – Joe, it's Frank – is what portion of our existing client base is engaging us on digital capabilities in some way, shape or form. Now, as Karen said, there's a question of how we define digital.

What we are doing is looking at our newest service offerings and making sure that as our clients define digital – and each of our clients define digital in a slightly different way – that we are engaged with them in their most important and strategic engagements. That's always been the way that we've defined success at Cognizant.

We define success really through the eyes of our customers, and our primary goal is to make sure that with our customers that we are engaging with them in the technology-driven, technology-enabled initiatives that are most important to them at any given point in time..

Thank you. Our next question is from the line of Ashwin Shirvaikar with Citigroup. Please go ahead with your question..

Thanks. Frank, I want to go back to a previous response that you'd given where you kind of said that the ability to provide high-quality services continues and so on, but that really has never been in doubt.

I think maybe the real question is, are there clients who are sort of in a wait-and-see mode because of the ongoing investigation, because they maybe want some sort of an external approval of your processes and so on.

Are you seeing any impact from the client side? And is that potentially – because I haven't heard you mention the ability to add $1.5 billion of revenue next year, which you've mentioned the previous couple of calls, perhaps at least in the last call.

Could you comment on those?.

I would say, Ashwin, that we haven't, as I said – let me be more specific. We haven't seen clients beyond what I would consider to be the normal course of business slowing down in any way. I would say that it's a little too early to look at 2017 as we've said. And so, I don't want to be providing a view of 2017.

As Karen mentioned, right now, we want to get through our clients' budget cycles. Those are just beginning as you know. That's been our traditional pattern. There's no difference from prior years, and once we get through that process, I think we'll be in a better position to give you a sense of where 2017 lands.

I think we'll be looking at Financial Services and Healthcare in particular as we go into 2017 since those were the two industry groups that for reasons that we've discussed with you at length, didn't perform as we would have liked this year, and so we'll be looking to those as we go into 2017..

Thank you. The next question is from the line of Glenn Greene with Oppenheimer. Please proceed with your question..

Thanks. Good morning. Just a couple of quick questions. I guess, it relates to the full-year guide.

You obviously lowered the high end of the guide perhaps as a combination of sort of being in the midpoint of the range this quarter, but more broadly, I just want to get a sense for the business environment both fundamentally and overall from a macro perspective relative to let's say three months ago.

And maybe at a high level sort of, maybe Karen can describe why the high end of the guide comes down.

Obviously, we got the incremental FX in there, but any other factors? And as it relates to the FCPA investigation, are we confident at this point that it's been fully scoped at that kind of $5 million or so range? And I guess, I was surprised at how quickly you've sort of gotten clarity on this..

So, Glenn, let me take a stab at that. I think in terms of the business environment, I wouldn't actually say there's really been any change in the last three months.

So, obviously, earlier in the year, we had talked about sluggishness in Financial Services and Healthcare, and then over the summer, post the Brexit vote, while we haven't seen disruption I would say specific to Brexit, we certainly saw some concern among insurance clients as well as Financial Services, and we talked about that on our last call.

I wouldn't say there's really been any change in that environment or deterioration in that environment. I think it continued as it was in the quarter or in Q3. Obviously, the pound has deteriorated and so that resulted in an additional $18 million negative headwind as we went into Q4 based on that.

And if we had left the range where it was for Q4, obviously, it would have been a very broad range and certainly, more significant growth than we'd ever added in Q4.

And we thought it was appropriate to taper the top end of the growth range down into something that we thought was more reasonable based on typical buying patterns in Q4 given the fact that there are lower bill days, there are furloughs, the retail practice, as you know, shuts down quite significantly in Q4 as retail clients get ready for the holiday.

They shut down all discretionary spending typically right about now. So, I think what we're seeing in Q4 is a very typical seasonal pattern for the business other than the impact of the FX. And I'm sorry.

Can you repeat your question about the FCPA investigation?.

Are you confident that you fully scoped it at the $5 million and how did you get clarity so quickly?.

Yeah. My apologies. So, it is early days in the investigation. I think, as we've said both in the Q and on the script today, we are continuing to pursue the investigation. We've obviously been working very, very hard to get our arms around this as quickly as we could. And as we said, we've identified to-date $5 million of potential improper payments.

We were able to get to a place where we thought it was appropriate to record the $3.1 million of the $5 million as an out-of-period adjustment in Q3, but we will continue the investigation until we're confident that we've tracked it all down..

Okay. I think we're just about out of time, folks. So, I want to thank everybody for joining us today and for your questions, and we look forward to speaking with you again next quarter. Thank you..

Thank you. This concludes today's Cognizant Technology third quarter 2016 earnings conference call. You may now disconnect your lines at this time..