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..

Brian L. Essex - Morgan Stanley & Co. LLC Lisa Dejong Ellis - Sanford C. Bernstein & Co. LLC James Schneider - Goldman Sachs & Co. LLC Edward S. Caso - Wells Fargo Securities LLC Darrin Peller - Barclays Capital, Inc. Bryan C. Keane - Deutsche Bank Securities, Inc. Moshe Katri - Wedbush Securities, Inc. Tien-Tsin Huang - JPMorgan Securities LLC Bryan C.

Bergin - Cowen & Co. LLC Damian Wille - Jefferies LLC Joseph A. Vafi - Loop Capital Markets LLC Arvind Anil Ramnani - KeyBanc Capital Markets, Inc..

Ladies and gentlemen, welcome to the Cognizant Technology Solutions second quarter 2017 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. 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..

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 risks and uncertainties as described in the company's earnings release and other filings with the SEC, including our Form 10-Q filed later today. I would now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco..

one, to invest in and scale our digital practices to solve clients' current and emerging challenges; two, to continue to invest in our core business, which remains very relevant as we accelerate our shift to digital; and three, to implement our margin improvement and capital return programs.

We believe our performance through the first half demonstrates the consistency of our execution against this plan. So this morning, I'd like to highlight our progress in helping clients achieve the full value of digitizing their entire enterprises, or what we call being digital at scale.

For clients, digital at scale is both their defining competitive challenge and their long-term direction. Now that digital is mainstream, enterprise transformation is no longer an elective. It's mandatory for competing effectively.

This enterprise-wide effort is about remaking their business models, operating models, and technology models, all three simultaneously, so it's a heavy lift. As a result, clients need more from us than ever before. They're seeking our expertise to reimagine, redefine, and transform their businesses to create new sources of value.

And that's why we've invested in and continue to scale our three practice areas, which run across our business segments. They are Cognizant Digital Business, Cognizant Digital Operations, and Cognizant Digital Systems & Technology.

Cognizant Digital Business now harnesses the expertise of more than 40,000 digital professionals who focus on developing virtual channels with customers and creating smart products.

These digital business experts identify insights, develop strategies, and they design, prototype, and scale digital experiences to reshape clients' products and business models, all of this effort in generating new growth.

Turning to Cognizant Digital Operations, our team is drawing on deep process and technology knowledge to help clients reengineer, digitize, manage, and operate their core business processes to lower costs and deliver growth.

Within digital operations, we're making good progress building repeatable industry utilities both organically and through acquisitions.

As part of our extended strategic relationship with Health Care Services Corporation, we announced an agreement in June to acquire TMG Health, a subsidiary of HCSC and a leading national provider of business process services for Medicare Advantage, Medicare Part D, and managed Medicare plans.

TMG Health will further strengthen our scalable business process and service on BPaaS solutions for the government and public health programs markets. Along with building industry utilities, we are continuing to push the envelope of the intelligent automation of clients' repeatable vertical processes.

Examples include mortgage document processing, insurance claims processing, and medical claims management. In these cases, we're applying artificial intelligence and machine learning to bring significant efficiencies to tasks such as adjudicating and processing claims, reconciling invoices, and retrieving and comparing complex data.

Cognizant robots based on our own automation technology along with other intelligent automation solutions now process hundreds of thousands of transactions a day for several of our customers across industries.

Turning to Cognizant Digital Systems & Technology, we're working with clients to simplify, modernize, and secure their heritage IT infrastructure and applications. For example, as our clients look to create an agile, secure, and resilient platform, we're increasingly helping them migrate workloads to the cloud.

Cloud migration and operation, which take many forms, have become a significant opportunity for us. For example, in May we moved our flagship TriZetto products to the Microsoft Azure cloud and launched our TriZetto Healthcare Cloud Solution, a secure compliant SaaS platform for healthcare players of any size.

With our new TriZetto Healthcare Cloud Solution, the more than 300 active TriZetto clients now have the option to migrate their on-premise software to the cloud, and we can help them with the services to do just that.

Once their workloads are migrated, we can provide ongoing technology services to securely manage and maintain the software or even move them to a BPaaS model where the Cognizant Digital Operations team can manage their end-to-end business and technology operations.

There's another way of helping clients take advantage of cloud computing's agility, flexibility, and cost savings, and that's by moving their custom applications to cloud platform-as-a-service environments.

For example, we've expanded our alliance with cloud native leader Pivotal to speed the enterprise-wide adoption of cloud applications and software platforms. And by the way, Cognizant now has more than 4,000 cloud professionals, the majority certified on Pivotal, Amazon Web Services, Microsoft Azure, and Google Cloud.

Now cloud migration is just one example of how the Digital Systems & Technology team works with clients.

In the course of simplifying, modernizing, and securing clients' heritage IT environments, our team is working to ready their technology backbones for the rigorous demands of an always-on, high-throughput, highly secure environment, which is typical of large digital deployments today.

In this way, the knowledge of our clients' technology environments, built up over many years, has become a significant advantage in our ability to provide them with the technology transformation services. Now the way we pull together the full range of services and solutions from our three practice areas is through Cognizant Consulting.

As these practices work with clients to transform their business, operating, and technology models, Consulting makes their journey faster and smoother.

Now nearly 6,000 strong, our consultants advise CEOs, CFOs, chief operating officers, and line of business heads in addition to the CIOs we've long worked with on issues that cut across strategy, operations, and technology. Consulting is a powerful enabler for our practices and continues to drive large transformational deals for us.

And I'm pleased to report that IDC has now positioned Cognizant as a leader, one of only four in its global MarketScape for digital transformation, consulting, and systems integration services. To sum up, as our second quarter results confirm, we continue to grow our business while shifting an increasing focus to enabling digital transformation.

Most businesses today recognize the need to go all in on digital. They know they can't simply glue digital solutions onto industrial business models. So clients need a partner with the proven ability to transform their entire enterprises.

We believe Cognizant is one of the few companies with the range of knowledge and capabilities that clients need to be fully digital. And therefore, the market is moving our way, directly into the wheelhouse of our expertise. We think this transformation mandate will drive our success for years to come.

We're committed to fully executing our strategic plan and extending our lead in digital, and that's how we will sustain our momentum in 2018 and beyond. And now over to Raj, who will provide examples of how we're building repeatable industry-specific solutions for clients to take advantage of this opportunity.

Raj?.

a significant uplift in revenue; a double-digit reduction in operating costs; and a far more compelling customer experience. Many companies face similar challenges and need cloud-based digital commerce solutions, so we see plenty of market opportunity for our next-gen sales platform.

Another area where operating models need to be modernized and automated is workflows. To bring intelligence to these workflows, we've developed and are deploying our proprietary digital automation fabric. This fabric combines image recognition, artificial intelligence, machine learning, and process automation.

Here are two examples of clients applying our advanced framework. For a leading mortgage information service provider, we've worked to redesign the workflows of their loan origination, servicing, and support functions.

The result, our implementation reduces staff by a third and can pass (14:55) more than 200 million pages a year with data accuracy that exceeds 99%. And for a global property and casualty insurer, our deployment has substantially reduced unnecessary claims and saved tens of millions of dollars.

We continue to expand this framework to other industry solutions. Now I want to turn to the financial performance of our business segments and geographies. Let's start with banking and financial services. Second quarter revenues were up 4.1% year over year, driven mostly by our growth in insurance.

In insurance, we're seeing broad-based growth across clients and strong demand for multi-service line managed service deals.

The overall performance of our banking clients has improved from the first quarter, but we still see large money center banks taking a conservative approach to their spending and continuing to focus on optimizing their cost structures. This is being partly offset by continued strong growth in our mid-tier accounts.

In healthcare, our second quarter revenues were up 9.5% year over year, driven by both our life science and payer clients. Broadly, we've seen a healthy pickup in demand across our payer clients. This includes pent-up demand from those healthcare payers involved in M&A activity last year.

The healthcare industry continues to shift from fee-for-service to value-based care models. In response, healthcare organizations seek new ways to deliver consumer-centric care while driving operational efficiency and lowering medical costs. These competitive pressures persist despite continued uncertainty about the ACA's future.

We've invested heavily in our healthcare practice, creating a differentiated offering that has positioned us well to meet evolving client demand. And we're actively helping many of our clients manage through this transition. Let's turn to our other business segments, Products and Resources and Communications, Media and Technology.

Today they make up over a third of our total company's revenue and are meaningful contributors to our growth and our portfolio diversification. Products and Resources grew 13.2% year over year as a result of continued strong performance with our manufacturing and logistics clients.

As these clients sensor-enable their products, they're embracing enterprise digital transformation. To harness the power of their connected products, we must rearchitect and transform their supporting business processes as well as simplify and modernize their technology models.

That's how they'll create new digital products and drive new revenue streams. Our Communications, Media and Technology segment had another strong quarter of broad-based growth, up 16.8% year over year. Our clients in CMT are focused on creating a differentiated experience that delivers personalized content to their customers.

Doing so requires each client to efficiently and effectively manage content, from acquisition through targeted distribution and analytics. We're responding with a repeatable digital content operations solution.

It uses human intervention, machine learning, and digital platforms to ensure the right content is viewed by the right person at the right time and place. Now let's look at our performance in emerging geographies. Europe was up 5.7% year over year after a 6.1% negative currency impact.

This was driven by strength on the continent in key markets such as France and the Netherlands and by strategic investments made in the second half of 2016. By the way, earlier this month we opened our new London Digital Business Collaboratory.

This co-lab combines human-centric design with digital technologies to enable clients to deliver engaging new experiences for their customers. To close out our geographic discussion, we had continued strong growth in the rest of the world, which was up 21.2% year over year.

This growth was driven by key Asia-Pacific markets such as India and Australia. And just as we have done in continental Europe, we're building a strong local presence and investing both organically and inorganically in these emerging markets. In recent calls, we've talked about Cognizant's evolving workforce and delivery.

I'd like to add a few points to this discussion. The engines of our digital practice areas are our talented and deeply skilled professionals.

To ensure they stay on digital's cutting edge, we're investing tens of millions of dollars this year to continuously deepen and broaden their skills in areas such as analytics, artificial intelligence, data science, and digital security. Cognizant is also building skills and capabilities in local communities where we operate around the world.

One way is by partnering with educational institutions to establish and fund retraining programs in high-demand digital technologies. For example, we partner with Per Scholas, a national organization to create a job training program in the south Bronx.

It's designed to help New Yorkers access career opportunities in tech, and we plan to hire at least 350 of the program's initial graduates for our client sites in New York's five boroughs. We've also been developing similar training programs in Des Moines, Tampa, Phoenix, and Charlotte as well as internationally.

For example, in Singapore we're partnering with educational institutions to provide the local community with STEM-related training. And in Switzerland, we run an apprentice program that trains students in application development and testing.

In short, our company runs on talent, and we remain committed to attracting, developing, and retaining the best talent in the world. To wrap up, we're driving digital scale by building repeatable industry-specific solutions that enable clients to add significantly more value to their businesses.

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

Karen?.

Thank you, Raj, and good morning, everyone. Q2 performance continued to be strong, and we made significant progress on each element of our overall plan. Second quarter revenue of $3.67 billion was at the high end of our guidance range and increased 8.9% year over year.

We had a negative currency headwind that impacted year-over-year revenue growth by $35 million, or 100 basis points. Non-GAAP operating margin, which excludes stock-based compensation expense, acquisition-related expenses, and realignment charges, was 20%, and non-GAAP EPS was $0.93.

In the second quarter, we continued to execute the $1.5 billion accelerated share repurchase program, with completion expected during the third quarter. And today we declared our second quarterly cash dividend of $0.15 per share for shareholders of record at the close of business on August 22. This dividend will be payable on August 31.

Now let me discuss additional details of our financial performance. Consulting and technology services represented 58.7% of revenue, and outsourcing services 41.3% of revenue for the quarter. Consulting and technology services grew 11.4% year over year, driven by an increased demand for digital solutions.

Outsourcing services revenue grew 5.6% from Q2 a year ago. The slower growth in outsourcing is largely attributable to the timing of the ramp-up of several client engagements and clients continuing to optimize their spend in certain areas such as application maintenance.

We expect growth in our outsourcing services to improve in the second half, as projects ramp and demand in digital operations and infrastructure services remains strong. During the second quarter, 38% of our revenue came from fixed price contracts.

We continue to make progress toward shifting the mix of our business over the longer term towards more fixed-price or managed services arrangements. We added seven 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 343. And now moving to an update on margins, in Q2 we took some actions that will improve our cost structure and operating margins while allowing us to continue to invest in the business for growth.

These actions resulted in approximately $39 million of charges related to the realignment program, primarily from severance cost, including those associated with the voluntary separation program that was initiated and concluded in the second quarter.

Of the $39 million of realignment charges, $35 million was for the roughly 400 associates who accepted our voluntary separation package. We expect approximately $60 million of annualized savings as a result of the VSP.

During the remainder of 2017, we expect to incur additional cost related to advisory fees, severance, lease termination, and facility consolidation costs. We remain committed to our target of 22% non-GAAP operating margin in 2019, and to date have made good progress towards this target.

We've made good headway in Q2 driving utilizations higher by slowing the pace of our hiring and improving resource alignment to our reskilling and multi-skilling programs.

These adjustments are structural changes that will help improve our profitability through greater operational efficiency while continuing to provide sufficient resources to support the growth of the business. While our overall head count decreased by approximately 4,400, gross hires were 10,800 in the quarter.

Annualized attrition of 23.6% during the quarter, including BPO and trainees, increased from 17.1% in the year-ago period. Our attrition level was higher than normal given reductions resulting from performance evaluations and the voluntary separation program.

While we will of course carefully manage head count, we will continue to hire and invest in critical skills needed to grow our digital business, and we expect attrition to decline in the coming months. Our offshore utilization for the quarter was 76%.

Offshore utilization excluding recent college graduates who were in our training program was 80%, and onsite utilization was 93%. We expect these ratios to continue to improve over the remainder of the year, as the full benefit of our resource alignment program comes through.

Turning to our balance sheet, which remains very healthy, we finished the quarter with $4.4 billion of cash and short-term investments. Net of debt, this was down by $900 million from December 31 and $188 million from the year-ago period, reflecting the use of cash on hand to primarily fund the ASR.

Receivables were $2.7 billion at the end of the quarter. We finished the quarter with a DSO, including unbilled receivables, of 73 days, marginally higher than last quarter. Our unbilled receivables balance was $409 million, up from $395 million at the end of Q1. We billed approximately 61% of the Q2 unbilled balance in July.

The increase in unbilled receivables was primarily due to the timing of certain milestone deliverables. Our outstanding debt balance was $991 million at the end of the quarter, which included a $150 million outstanding balance on our revolver.

As previously mentioned, as part of our ongoing commitment to return capital to shareholders, we launched a $1.5 billion ASR in March. At that time, we received and retired 21.5 million shares, a portion of the total expected shares to be repurchased under the ASR.

We expect to complete the transaction during the third quarter, at which time the total number of shares to be delivered will be determined based on the volume-weighted average price during this period. Our diluted share count decreased to 591 million shares for the current quarter.

I would now like to comment on our outlook for Q3 and the full-year 2017. Following our strong first half performance, we are raising the low end of our full-year 2017 guidance range, and we now expect revenue to be in the range of $14.7 billion to $14.84 billion, or growth of 9% to 10%.

Our guidance is based on the current exchange rates at the time at which we are providing the guidance and does not forecast for potential currency fluctuations over the course of the year. For the third quarter of 2017, we expect to deliver revenue in the range of $3.73 billion to $3.78 billion.

For the third quarter, we expect to deliver non-GAAP EPS of at least $0.94. This guidance anticipates a share count of approximately 592 million shares and a tax rate of approximately 26%. For the full year 2017, we expect non-GAAP operating margins to be at least 19.5% and to deliver non-GAAP EPS of at least $3.67.

This guidance anticipates a full-year share count of approximately 595 million shares and a tax rate of approximately 23%. This guidance also includes the impact of the $1.5 billion ASR. We will provide additional details on full share count impacts once the purchase has been completed.

Our non-GAAP EPS guidance excludes net non-operating foreign currency exchange gains and losses, stock-based compensation, acquisition-related expenses and amortization, and realignment charges. For the full year, it also excludes the recognition of the Q1 income tax benefit that was previously unrecognized.

Our guidance does not account for any potential impact from events like changes to immigration or tax policies. In summary, we have continued our momentum from the strong start to 2017, and we expect to deliver solid revenue and earnings growth this year along with a substantial capital return to shareholders.

Operator, we can open the call for questions..

Our first question comes from the line of Brian Essex with Morgan Stanley. Please proceed with your question..

Good morning and thank you for taking the question. I was wondering if we could just touch on your outlook for the growth in the healthcare space briefly.

Obviously, we've heard across the space that in light of the uncertainty around repeal/replace and the Affordable Healthcare Act (sic) [Affordable Care Act] that there's some hesitancy with regard to budgets.

So I'm curious in terms of what you're seeing on the budget conversation side with your clients, how much is being held back versus how much is a recovery in pent-up spending demand.

And then maybe as a follow-up, any pressure on the BPO or BPaaS side as a result of some of the larger payers pulling out of exchanges?.

Hey, Brian, this is Raj. Look, I think when you look at healthcare, we've invested very heavily on our healthcare practice, and it's really created a differentiated offering which has positioned us well.

And if you look at the entire practice, with what's happening with the healthcare ecosystems, with the providers, the payers, and the pharma, with all the collaboration that's going on there, and these are all big practices for us, so I think that we're positioned very well in healthcare.

And in addition to that, we've talked about last year we had a couple large M&A transactions, and obviously with those going away, you see a lot of the pent-up demand. So there's still some uncertainty with what happens with the ACA. But overall, I think this year and going into next year with the position we are, we're well positioned.

Regarding some of the BPO, we haven't seen any impact on that at all..

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

Hi. Good morning, guys. Karen, this one is probably for you, just a question around the margin plan and your hiring plans.

First, just relative to where you were six months ago when you put forward the margin plan, would you characterize the actions you've taken so far as going better than expected or in line with expected? And then a related question, you mentioned that the gross hiring in the quarter was 10,800 folks.

Can you give a sense for the skill mix and locations of those folks and in particular whether they're coming in at a higher revenue per head level?.

Sure, Lisa, so I think in terms of overall plans and margin trajectory, I think we're right on track. I think Q2 was a little stronger than we expected.

Headcount came down a little faster than we thought and utilization came up a little bit faster than we thought it might, so I think that was positive as we get into the back half of the year, though obviously we'll have raises and promotions. And I would not expect head count to decline from here.

It will actually start to tick back up as we continue to invest for growth and as we look forward to next year and what our plans are for growth there, so I think we reached a low point, at least for 2017 anyhow. In terms of the hiring, as you mentioned, we added 10,800 gross hires during the quarter.

As has been the case for the last several quarters now, you're really seeing a shift mix towards more of the digital skills, higher-end consulting, designers, the data scientists, et cetera, folks who can support our infrastructure business, and then certainly the digital operations business as well, which is experiencing high growth rates.

So it's really a mixture of those three sets of skill types. In terms of the onsite/offshore ratio, we haven't seen a significant change there. You'll see head count shifted a little bit onsite this quarter, but that was really mainly because of the decline in head count for the quarter.

So from a hiring perspective, hiring hasn't really shifted from quarter to quarter..

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

Good morning, thanks for taking my question. I was wondering if you could maybe just talk a little bit more about the financials vertical, obviously muted spending, conservative spending from the banks at this point.

Maybe just talk about what you think gets them unstuck in terms of their discretionary spending plans and whether you have any visibility in terms of bookings, that that's actually going to happen before year-end..

Hi, Jim. This is Raj. So look, I think the overall financial services, I think if we look at the entire practice, obviously insurance continued doing well. Where the challenge is, is a little bit on the banking side. And as we talked about, regional banks are healthy, strong growth. Where we're challenged is on a couple of the large money-center banks.

The good news here is obviously we're in a better position than I think we were at this time last year with them. But as we look out, they're still very much focused on the cost side and optimizing that, but we are, obviously, engaged with many of them on digital-type engagements.

Now as these projects become larger scale enterprise initiatives, I think we're well positioned to benefit from that. But right now, that's our focus area right now in terms of continuing to invest and continuing to be well positioned for those large enterprise transformations..

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

Good morning and congratulations.

A quick question, the TMG Health deal, is that in your guidance or not, and about how much would it contribute this year?.

Ed, this is Karen. We have really not baked in any significant revenue from TMG. As you know, that deal still requires regulatory approval. So in the guidance, we did not bake anything in until we get a little bit more clarity – or anything significant until we get a little bit more clarity around the timing of those approvals..

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

Thanks, guys, just a question on the overall environment. First, what areas are showing strength versus the original plan? Obviously, we saw the lower end of guidance increase, and maybe you can hone in a little more on the healthcare financial side.

But really when we think about – you're trending at about 10% growth year to date, year over year, and comps look like they get easier in the second half. So is there anything we should consider in terms of elements on guidance being conservative or any other factor that would cause a deceleration in the second half? Thanks, guys..

Why don't I take that, Darrin? It's Frank. I would say we've invested significantly, as you know, over the last years in building and realigning our business around these three practice areas that I talked about that cut across our business segments.

And we think we're really well positioned right now to capture the emerging and evolving demand for digital solutions, so I think that's the core driver of our growth. As I said in my prepared comments, three out of our four business segments grew when taken together on average double digits, so strong growth.

Financial Services was the only business segment that didn't have strong year-over-year growth. So we feel like we're well positioned. We feel like the solution set that we've been building with these three practice areas is resonating in the marketplace, and we're well positioned.

I think as we look to the back half of the year, it's largely that that gave us the confidence to take the lower end of our guidance range up. But just to set the expectation, I would say given where we are in the year at this point, there's not that much time in our business.

We don't have a lot of runway here to deliver above the high end of our range. So we think it's a prudent range that we've given you in the 9% to 10% range. I don't think there's a lot above that, but I feel very good about how we're positioned as I think about 2018 and beyond..

I think, Darrin, if I could just add to Frank's comments, if you look at Q3 and Q4, it's just for argument's sake you assume that we're in the middle of the range. I think you'll actually see the growth versus last year – growth rates in Q3 and Q4 would actually be higher than in 2016. So I don't think we're seeing a decelerating trend there..

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

Hi, guys, congrats on the solid results. I want to ask on the non-GAAP operating margin. It came in at 20% in 2Q 2017. I guess I'm curious.

Why wouldn't that adjusted operating margin continue at or above that 20% level in the second half? Maybe it has to do with some of the raises and promotions, but I thought there would be some other offsets, but just curious on that.

And then secondly, looking at the implied 4Q 2017 guidance, it looks like stronger than anticipated sequential revenue growth in that fourth quarter. What's driving that? Thanks so much..

So, Bryan, this is Karen. Let me take that. So margins in the back half of the year, there will be a couple of things that will happen. One is we will have raises and promotions kicking in later this year.

The other thing, as we mentioned earlier, while we have not assumed a lot of revenue from the TMG contract, there are some ramp-up costs that are already starting to take place that will accelerate as we get into the back half of the year before the contract even moves over officially. And then obviously, we want to continue to invest for growth.

So as we always have in the past, when we used to talk about a 19% to 20% range and that we would invest above that to continue to drive growth, the same story holds true this year. So as we think about what we need for next year and beyond to really continue to drive the digital transformation, we will continue to invest.

As I mentioned, we would expect head count to certainly not decline any further and, if anything, will start to come back up a little bit as we get back into the back half of the year. So all of those will lead to some decline in margin essentially versus Q2.

And as we said earlier, we remain committed to be at least 19.5% for the year and feel that we're very comfortably on track for the 22% in 2019. As it relates to Q4 revenue, I think certainly we are seeing some good growth as we get into the back half of the year. The pipeline continues to be strong.

We're seeing a nice recovery in the healthcare practice. So I think we're certainly shaping up for a very nice Q3 and Q4 as we get into the back half of the year..

Thank you. Our next question comes from the line of Moshe Katri with Wedbush Securities. Please proceed with your question..

Thanks, good morning, nice quarter. Karen, how much inorganic growth is factored in that 9% to 10% number for the year? And then just in general, I think, Raj, you spoke about a couple of large banks that are maybe a bit weaker in terms of performance. Are they predominantly Europe-based, European, maybe some color on that? Thanks..

Sure, Moshe, I'll take the first part of that and turn it over to Raj for the BFS question. We have not baked any incremental inorganic revenue into our guidance for the remainder of the year.

And obviously, we've done a couple of very small deals this year, but nothing that's material in the current run rate either, so the 9% to 10% is essentially organic revenue..

Moshe, the large money central banks obviously have both a European and U.S. presence. So I think you're seeing softness there because of the discretionary work not kicking in as fast as we would like it. Now again, like I said, we're engaged in a lot of the digital initial work with those banks.

And as these banks continue to get healthier, I would expect that you would start seeing some more of the enterprise transformation initiatives that we're expecting. And I think we're well positioned. If you look at it from the business to the operations to the technology layers, I think there are very few companies that can help these banks.

And so that's obviously areas that we're investing in, and we're hopeful for future growth as they get healthier..

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

Thank you, nice results here. Just – I think it's smart to not include TMG Health, I'm just curious about the BPaaS pipeline.

How does that look today? How active is it? And then on TriZetto cloud, will you actively mine your legacy accounts to convert them to cloud? Is there any way to size the impact of this potential work if you flip the whole portfolio to cloud? Thanks..

Hi, Tien-Tsin. It's Frank. Let me try to take that. Look, the BPaaS pipeline is really healthy right now. We feel very, very good about the TriZetto BPaaS, the healthcare BPaaS opportunities. Obviously, TMG Health is part of a relationship, BPaaS relationship that we are building with TMG's parent, HCSC.

And so that's just one example that we feel good about where we are with healthcare BPaaS. And I think that it's fair to say that our strong performance – part of our strong performance in healthcare this second quarter and going forward is the result of the investments that we've made in the scaling up of our BPaaS offerings, so good traction there.

As I said in my prepared remarks, the healthcare cloud, the TriZetto Healthcare Cloud that we launched on Microsoft Azure, it's still early days. We have 300 active TriZetto clients that we could migrate over. We absolutely will go back to them and work with them on the migration.

And as I said, the economics will generally be a one-time revenue opportunity for us to migrate but then an ongoing revenue opportunity for us to manage, maintain, monitor, upgrade, support those implementations once they're in our cloud.

And then of course, there's an additional opportunity beyond that, which is converting them to our full BPaaS offering once they're on our cloud, so I think it's a multi-layer opportunity.

Given that the 300 clients range from small health plans all the way up to the very biggest health plans, each individual opportunity I think is quite different and varied in size. And so I'm not going to give you an overall opportunity, but 300 clients and I think multi-layers of the opportunity as I look over multiple years..

Thank you. Our next question comes from the line of Bryan Bergin with Cowen & Company. Please proceed with your question..

Hi, good morning. Thank you. Just on automation, can you give us an update on your automation investments and your progress there? Any quantitative details you could also share, whether it's level of FT (47:38) savings or just client-based implementations? Thanks..

It's Frank. I would say that we continue to push forward actively across many areas of the business in looking at applying advanced automation. And I would just remind you that historically, we've always had a practice of automating in our businesses, in our practices.

So my comments here are related specifically to what I think of as advanced automation that makes use of new technologies like robotic process automation and artificial intelligence and machine learning and so on and so forth. We gave you a few examples during our prepared remarks in our Digital Operations business. We have several clients.

We have a proprietary Cognizant technology that came to us as part of the TriZetto acquisition, which we've now expanded, not just to serve healthcare clients but to serve a broad range of clients.

That combined with the work we're doing with third-party automation providers, we now have hundreds of thousands of – we process hundreds of thousands of transactions across many clients. But we're not stopping there.

We are working to automate in our Digital Systems & Technology business, particularly infrastructure, application value management, quality engineering services. All of these are opportunities for us to automate, and we continue to do that. So that's the second part of it.

The third part of it is that as we're building out industry solutions, as Raj spoke about, we often find that, for example, in the digital automation fabric that Raj mentioned, machine learning and artificial intelligence are important components there as well. So across the business, we continue to push forward very hard in automation.

It's hard to give you quantitative numbers. We're seeing automation benefits anywhere from 10%, 20% productivity to 30% productivity. There's a wide range in there. And I think we'll continue to see those benefits as the impact of automation broadens across the business.

And I think that's part of the reason that we will continue to drive utilization higher as we automate more..

Thank you. Our next question comes from the line of Ramsey El-Assal with Jefferies. Please proceed with your question..

Hi, good morning. Thanks for taking my question. This is Damian Wille on for Ramsey. I'm hoping you can help us frame how much of your digital sales come from cross-sell versus signing a new logo. And along the same lines, if you could speak to how much of the digital cross-sales you think of as a push from you or a pull from the client. Thanks..

Hi, Damian, it's Frank. Let me try to address that. I would say just it has been historically been Cognizant's pattern that in any period – month, quarter, year – the vast majority of our revenues come from cross-sell to existing clients.

The foundation of our business model, as you know, is serving a small number of clients, serving them very deeply, building multiyear-long relationships with our clients. So that continues to be the case with digital.

I would remind you that core to our competitive advantage in digital is this notion that we're able to use the knowledge that we have of our clients' technology environments, our clients' operating model to help them as they look at transforming their business model.

And so our perspective on digital is this transformation of the business model, the operating model, and the technology model simultaneously. That's really where we feel we have a really strong core competitive advantage, and that advantage is strongest where we have existing relationships.

And we've had a long history of serving the client and understand their technology and operating models in detail. So I would say that a significant portion, certainly the majority of our digital revenue comes from cross-selling to existing clients..

Thank you. Our next question comes from the line of Joseph Vafi with Loop Capital. Please proceed with your question..

Hi, good morning. Thanks for taking my call. I was wondering if you could comment on sustainability of onsite utilization rates at this level if hiring picks up again and if shift to digital drives shorter project durations and potentially a higher onsite mix. Thanks..

So, Joseph, this is Karen. I'll talk about that, and obviously Raj and Frank can chime in. But running at 93%, where we were for Q2, is fine. Onsite utilization, as long as it doesn't get above say 95%, is absolutely fine. We can continue to grow at the pace at which we expect to continue to invest in the business.

So while it certainly came up from Q1 over the last couple of quarters, utilization has ticked down both onsite and offshore. So bringing it back up into a 93% – 94% range is very comfortable for us and we can continue to invest and drive the growth that we want..

I have nothing to add to that, Joe. We could say that as we continue the process of building out regional centers in the U.S.

as opposed to our historical model where folks have been more onsite in our client locations, I think that that will help drive utilization actually higher, because when we have people in a physical location, our ability to redeploy them across clients and so on and so forth, the project then becomes higher. Now that's a longer-term trend.

Our journey of building out regional centers is well underway, but we have some ways to go on that. So I think as regional centers become a greater portion of our overall onsite workforce, I think that will be a contributor to being able to take onsite utilization up higher. And I think, operator, we have time for one more question..

Yes, our final question will come from the line of Arvind Ramnani with KeyBanc Capital Markets. Please proceed with your question..

Hey, guys, congrats and thanks for fitting me in. So it looks like these digital projects are certainly gaining scale and clients clearly value your consulting and advisory services.

Can you talk a little bit more about your consulting capabilities and how you're looking to scale at onsite hiring and leveraging consultants on management? And part two of that question is the impact on margins by hiring more onsite consultants..

Let me try to address that. So first just the data, as said in my prepared remarks, consulting is now just shy of 6,000 people. It has been a focus of ours for more than a decade. We continue to grow it.

Our consulting capability is – I would say in the last few years we've really, really focused it and emphasized the vertical aspect of consulting very, very hard. So I think our 6,000 consultants, the vast majority of them are deep domain experts in the industries where Cognizant is strong.

And increasingly now the work they do is very focused on digital transformation and leading various aspects of our clients' digital transformations. We will continue to grow, and we will continue to scale Consulting. We remain very committed to that business. You're absolutely right.

The Consulting team is becoming a more and more integral part of our client account management teams as they build long-term relationships with clients beyond the technology organizations, and so that's a trend that we view as positive and will continue.

And then in terms of margin impact, I think proportionately I don't see Consulting growing dramatically as an overall part of the total company revenue, so I don't think that it has a meaningful margin impact one way or the other.

We continue to be very comfortable with our ability to grow that part of the business and still maintain our overall margin goals as we think about 2018 and 2019..

And so with that, I'll wrap up. I'd like to thank everybody for joining us today and for your questions, and we look forward to talking with all of you again next quarter. Thank you..

Thank you. This concludes today's Cognizant Technology Solutions second quarter 2017 earnings call. You may now disconnect..