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Ladies and gentlemen, welcome to the Cognizant Technology Solutions second quarter earnings conference call. [Operator Instructions]. I would now like to turn the conference over to Katie Royce, Global Head of Investor Relations at Cognizant. Please go ahead.
Thank you, Jeremy, and good afternoon, everyone. By now, you should have received a copy of the earnings release for the company's second quarter 2019 results. If you have not, a copy is available on our website, cognizant.com. The speakers we have on today's call are Brian Humphries, Chief Executive Officer; and Karen McLoughlin, Chief Financial Officer.
Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC.
Additionally, during our call today, we will reference certain non-GAAP financial measures that we believe provide useful information for our investors. Reconciliations of non-GAAP financial measures, where appropriate, to the corresponding GAAP measures can be found in the company's earnings release and other filings with the SEC.
With that, I'd now like to turn the call over to Brian Humphries. Please go ahead, Brian.
Thank you, Katie, and good afternoon, everybody, and thanks for joining. Earlier today, we announced results for our second quarter. Q2 revenue grew 4.7% year-over-year in constant currency to $4.14 billion and non-GAAP EPS was $0.94. While we are pleased that we met our revenue and margin guidance, we are not satisfied with this level of performance. Our second quarter results do not reflect what Cognizant is capable of achieving in this market environment, neither on revenue growth nor margin rate. So as we said about correcting these trends, I'm convinced that a large part of what we need to do is in our own control.
Softness in Banking and Financial Services, which was up 1.7% year-over-year in constant currency, and Healthcare, which was down 1.5% in constant currency, impacted second quarter revenue growth. While certain market dynamics have impacted our results, I believe that much of our weakness in Banking and in the non-Life Sciences portion of Healthcare is attributable to Cognizant-specific issues.
My interaction with clients in both industries underline that they are committed to investing in innovation to help increase their competitiveness and growth. Specific to our banking practice, we've recently implemented a new operating model, which includes a team solely focused on new logos, a team dedicated to the platinum accounts which are a subset of our largest global clients and a banking practice and solutions team to ensure we develop more compelling thought leadership and better align the key partners.
In Healthcare, factors such as the in-sourcing of a large health care payer client and the spending pullback by clients that are in the midst of merger integration impacted our performance in the quarter. Fundamental market changes are reshaping health care requiring our clients to do more with less and get ahead of regulatory compliance and complexity while dealing with cyber threats and privacy concerns. We have a market-leading position in Healthcare and a position of considerable strength upon which to build.
I believe industry specialization would be more important than ever with this shift to digital and hence, expect to be spending a great deal of time with our Healthcare business and clients to ensure we turn around this prized asset. Over the past three months, we've changed the leaders of both Banking and Healthcare to get a fresh perspective, new energy and even greater customer focus. On a positive note, we delivered double-digit growth in Products and Resources and in Communications, Media and Technology. I continue to be pleased with our momentum in international markets. Our global growth markets region, which encompasses our non-North America operations, surpassed the $1 billion run rate for the first time in our history. We intend to invest in our international business, which should continue to be a growth driver for Cognizant.
Later in the call, Karen will take you through the details of the quarter, including segment commentary. As you know, I assumed the role of CEO on April 1. Since then, I have significantly deepened my knowledge of the company whilst reviewing the market opportunity, structure and competitive dynamics. Over the last 18 weeks, I've met with more than 100 clients and partners across three continents and conducted over 60 deep-dive strategic and operational reviews of the company.
I've actively solicited client input on our strategy and the strength of our commercial and delivery teams. I've also spent a great deal of time considering customer needs and buying behavior, our brand position, our business strategy, the effectiveness of our organizational structure, our operating discipline, our portfolio of solutions and indeed, our talent and culture.
It is clear to me that Cognizant has a proud heritage, significant customer loyalty, a broad portfolio of offerings and engaged and talented associates throughout the world. However, we can position ourselves better to participate in the market opportunity, and this work includes: refining our strategic posture and associated enablers to ensure we better participate in the categories that are most relevant to our clients' needs; developing greater thought leadership and an innovation agenda by industry vertical; accelerating investments in revenue growth, including increased sales and marketing, targeted innovation and enhanced partnerships; significantly lowering our cost structure to facilitate these investments in growth and to ensure we are more cost competitive in deals; and ensuring greater operational discipline and a more performance-based culture to make certain we execute with rigor and focus.
Our path to accelerated growth starts with customers, the lifeblood of every company. It is important that we ready ourselves to address the pricing demands of customers in our traditional areas of strength whilst readying ourselves also for the changing dynamics in digital. Given advances in technology, customers regardless of their industry vertical are faced with an unprecedented pace of change and risk of disruption. Against this backdrop, they are focused on modernizing their environments, extracting value from data, better understanding their own customers and accelerating innovation and cloud migration to increase their competitiveness, security and agility.
As investments are shifted to digital, budgets in the legacy are pressured with increased focus on cost reduction during renewals. Given our traditional business mix, Cognizant has been exposed to this headwind. We partially offset this via -- through mid-management, automation and other delivery efficiency levers. In addition, given our strong customer NPS, we have often been able to provide incremental savings to clients by consolidating the work of other vendors.
While these strategies may be effective in the short term, we need to significantly accelerate our shift to digital as we consider our intermediate and longer-term future. The pivot to digital requires us to rethink many aspects of our company, including our brands, skills, processes, systems and tools. Client engagements will become more project-oriented, meaning more contracts with lower TCV. Our account teams will need to build relationships with the broader C-suite as budget owners, decision-makers and influencers extend well beyond the CIO.
And we will need more consultative selling skills, more digital talents, more targeted sales compensation programs and more intellectual property and thought leadership aligned by industry vertical. Delivery will be increasingly agile with near and onshore delivery complementing offshore centers. The skills of our associates and our leadership team must further evolve. This is a multiyear transition that is essential to our future.
Against this backdrop, customers are choosing their strategic partners. So as we more readily embrace digital, we must ensure our client-facing resources and our branding represent our strategic ambition. Meanwhile, we need to be even more deliberate in our solutions portfolio, which includes increasing our investment in areas that provide the greatest value to clients while generating the best return for Cognizant. This requires a rigorous capital framework to accelerate our position in emerging categories whilst reducing our cost structure in mature and declining categories.
We have a strong foundation to build from in some of the growth categories. One such example and one I'm extremely excited about is digital engineering. This is a large, attractive market with 20%-plus growth rates. To accelerate our position in this market, we have recently decided to combine Cognizant's digital engineering capabilities with Cognizant's Softvision. Until now, our assets have been distributed across Cognizant, and our structure and operating model have been fragmented and inconsistent. This combined practice with over 11,000 associates and revenue of approximately $800 million would provide a powerful combination of software product development and application modernization services to clients across the globe.
I believe that our focused efforts will ensure greater brand recognition in this important category and allow us to do more meaningful -- more meaningfully participate in the market opportunity. Our increased focus in digital engineering reflects the market opportunity before us and the growing needs from our clients to achieve top line growth, improve customer engagement through superior experience and boost productivity at an accelerated pace. With this combined practice, we will bring together current and emerging technologies, scale cross-functional teams and innovate talent and delivery methods into a single product-centric operating model.
We are building the digital culture into our operating model that influences how our clients conceive, design, engineer and shift digital projects at speed. At the same time, we are leveraging decades of experience and expertise in our clients' technology stack to produce a cloud-ready architecture.
We will finalize our strategic positioning in the coming weeks. However, as we enable our customers to disrupt and innovate the modern, scalable, agile, data-enabled and future-proof architectures, it is clear that we should further accelerate our investments in digital engineering, cloud and IoT. And we must strengthen our partnerships with industry leaders to buttress our own capabilities. That being said, this is not a strategic overhaul but rather a refinement of the strategic positioning, our capital allocation and the enablers critical to execute our strategy.
Against this strategic backdrop, we need to determine the necessary steps to be taken to unlock Cognizant's growth potential. For this reason, we have established a transformation office, which is charged with reviewing six areas of focus as follows: strategic choices, which include where we want to make strategic bets to better expose us to growth categories; organizational structure, which includes our operating model, our matrix and roles and responsibilities within this; talent, which includes attracting, developing and retaining talent, our culture, our compensation structures and our skills; delivery transformation, which includes optimizing our unit cost of delivery across a global delivery model; sales force transformation, which includes compensation plans, customer segmentation, increased partnerships, sales coverage ratios and consultative selling; and finally, fit for growth, which aims to ensure we have the cost structure, processes and tools to facilitate growth. Each work stream is led by a member of our executive committee. It's cross-functional in nature and is set against a comprehensive change management and communications framework.
We've made significant progress in a short period of time. I'm personally excited about the findings of the transformation office, which underlines to me that we can meaningfully change our competitiveness in this market. We've identified opportunities to sharpen our strategic focus, simplify the organization, clarify roles and responsibilities, empower our teams closer to the customer and free up investments in growth by significantly reducing our cost structure.
But we have more work to do in the weeks ahead, including internal change management and communications to maximize associate engagement. We expect to outline the details of this program, including the execution plan and associated restructuring charges, on the third quarter earnings call.
Happy customers feed the first line of the income statement, so as we aim to accelerate our revenue growth, I want to lead by example by striving to be in front of customers every single day. I've asked for greater innovation and growth focus from our executives and have made some changes in the leadership team, both external hires and indeed internal promotions. Meanwhile, to ensure our senior leaders get closer to our customers and our frontline operations, we've initiated a process to optimize our spans and layers. This has the added benefit of speeding up decision-making, improving communication and reducing costs.
Growth also requires investments in sales coverage, targeted M&A and a competitive cost structure. Therefore, even ahead of the execution of the conclusions of the transformation office, we have moved on a number of things, including: the acquisition of Zenith Technologies, which expands Cognizant's IoT portfolio and extends our Life Sciences domain expertise by enabling us to become a single-source provider of end-to-end smart factory capabilities, a key growth driver in Industry 4.0; the separation of Digital Systems & Technology, one of our three service lines, from our delivery organization to increase focus on that service line; the establishment under one leader of an end-to-end delivery organization aimed at dramatically reducing our unit cost of delivery whilst optimizing delivery KPIs; and the approval to hire 500-plus revenue-generating associates over the coming quarters, a combination of customer-facing and sales support professionals, will help us expand existing accounts as we generate new ones.
Finally, we need to drive more of a performance culture in our client teams. Therefore, we will overhaul our sales commission plans for the new fiscal year, ensuring that we can better attract, retain and reward top performers. The new plans will have a greater mix of variable compensation, ensuring greater meritocracy and better align our overall incentives with the company's strategic direction.
The growth mandate is now starting to permeate the entire company, informing our big decisions and investments and beginning to reshape the critical behaviors of our employees. As we focus on growth, we've also made some operational and cost structure decisions that Karen will address later in the call. This will help our cost structure in the second half, even ahead of the full conclusions of the transformation office.
Cognizant is a vast organization, brimming with talent. In a time of change, we must engage the winning spirit of our 290,000 associates to get back to the basics that resulted in our long record of success. Leaders are key in transitions. For our most talented leaders who are at the director level and above, we recently implemented a retention program to let them know how valued they are and how committed we are to their continued career growth with us.
Communication is more important than ever right now, so in recent months, we've also greatly increased communication to our associates. We've stressed that growth is our number one priority and provide a context on which -- on what is needed for us to return to growth. I personally am spending a lot of time meeting with associates, reminding them of our tremendous assets and great heritage that we're building on and the substantial market opportunity in front of us.
Let me wrap up by saying that I now have a much clearer understanding of the market opportunity, which is meaningful, and Cognizant's opportunities and challenges against this backdrop. While we've taken some tactical decisions in the last three months on cost and growth, the true potential of Cognizant and the extent of the work to be done on costs and transformation in the quarters ahead is becoming apparent via the transformation office. The opportunity teed up from the output of these work streams gives me reason to be optimistic. I see plenty of opportunities to take cost out of the business, to invest in growth and to improve our working capital. We will spend more time on this in the third quarter earnings call.
I've covered a lot of ground so let me quickly underscore the five focal points of our work: refining our strategic posture; developing greater thought leadership and an innovation agenda by industry sector; accelerating investments in growth; significantly lowering our cost structure; and ensuring greater operational discipline and a more performance-based culture.
While there is a lot of work to be done to ensure Cognizant returns to its historical levels of performance, I can assure you that our team is up for the challenge and looking forward to winning again. With that, it's my pleasure to turn the call over to Karen, who will give you an update on both our operational and financial performance as well as a view on how we see the balance of the year. Karen?
Thank you, Brian, and good afternoon, everyone. Second quarter revenue of $4.14 billion was at the high end of our guided range and represented growth of 3.4% year-over-year or 4.7% in constant currency. Digital revenue growth accelerated from previous quarters to the mid-20% range and now contributes approximately 35% of our total revenue.
Moving to the industry verticals where overall company performance continues to be impacted by both Financial Services and Healthcare. Financial Services growth was up 1.7% in constant currency, driven by modest improvement in Banking primarily from the contribution of the previously announced partnership with three Finnish financial institutions to transform and operate a shared core banking platform. In insurance, growth continued to be sluggish as delays in decision-making impacted the start of new work from projects in the pipeline. We anticipate some improvement in insurance in Q3 with the ramp-up of several of these projects.
In Banking, we continue to see softness at a few of our largest banking clients and a cautious approach to spend with several of our regional banking clients in North America that were impacted by M&A activity. Consistent with recent trends, two of our Top 5 banking clients continue to show good growth while spend at the other three clients remains under pressure.
We anticipate some cautiousness in overall levels of spend in the banking sector in the second half of the year due to weakness in capital markets across banking, M&A activity with the U.S. regional banks and weak macro factors. Moving on to Healthcare, which declined 1.5% year-over-year in constant currency. Within our Healthcare vertical, the decline with our payer clients was largely the result of several large clients involved in mergers as well as the accelerated movement of some work to a captive at a large client. We continue the ramp-down of an account in which we were a subcontractor to a third party, also continue to negatively impact revenue. While the ramp-down of the work is largely complete, we expect some continued year-over-year revenue impact in Q3 and a minimal impact in Q4.
For our payer client, moving work to a captive and those involved in mergers, we expect the second half of the year to stabilize near Q2 levels. We continue to expect that there will be meaningful future revenue opportunity associated with integration work that typically follows a merger. Life Sciences had another quarter of double-digit growth year-over-year. We are seeing good traction with digital operation services, managing pharmacovigilance cases globally, large enterprise transformation deals and momentum with our industry-specific platforms such as the shared investigator portal for clinical trials. And as Brian mentioned, we closed the acquisition of Zenith Technologies earlier this week.
Products and Resources had another strong quarter, showing 12.3% growth year-over-year in constant currency. This is the sixth consecutive quarter of double-digit constant currency growth. We saw continued positive momentum in retail where we have well above the company average mix of digital revenue in our largest clients. And we continue to see strength in cloud and digital engineering services and increased demand for interactive, IoT and analytics solutions across clients.
Our Communications, Media and Technology segment had another strong quarter with year-over-year growth of 14.1% in constant currency. Technology saw double-digit growth, driven primarily by our digital content services and solutions. Through our acquisition of Softvision, we are also seeing good traction for digital engineering solutions with our technology clients. Within Communications and Media, growth was negatively impacted by spending reductions in a few large clients. As we move into the second half of the year, we expect to see some slowdown in the year-over-year growth rate of the technology vertical as we start to lap the significant ramp-up of the digital operations work with several large clients. We expect this to be partially offset by improvements in Communications and Media.
Now moving on to the geographies. Europe grew 14.2% year-over-year in constant currency. In both the U.K. and Continental Europe, we saw strength in Life Sciences. And while a few of our larger banking relationships in Europe remained under pressure, we did see good growth from several of our newer logos including the partnership with the three Finnish financial institutions.
Additionally, in the U.K., we saw strength in Products and Resources. The rest of the world grew 6.4% year-over-year in constant currency. Results in Asia Pacific continued to be negatively impacted by the weakness in some of our larger banking clients. We saw double-digit growth within insurance, manufacturing and logistics and Life Sciences clients in the region as well as good traction with winning work with a number of new clients.
Shifting now to margins. Our GAAP operating margin and diluted EPS were 14.9% and $0.90, respectively. Adjusted operating margin, which excludes realignment charges, was 16.1%, and our adjusted diluted EPS was $0.94 in the quarter. Our adjusted operating margin was in line with our expectations but down approximately 300 basis points year-over-year.
While year-over-year headcount growth slowed from the prior two quarters, the year-over-year decline in operating margin was primarily due to costs related to the headcount growth of 7% outpacing constant currency revenue growth of 4.7% in the quarter; and the impact of contract renegotiations with recently merged Healthcare clients, which negatively impacted operating margins by 320 basis points and 40 basis points, respectively.
Revenue and headcount in digital operations continue to grow above company average, and we saw a slight increase in the on-site mix at senior levels for the organization. This was partially offset by lower incentive and stock-based compensation. The lower segment operating margins in our Communications, Media and Technology segment reflects the growth of digital content services and solutions in this segment, which generate lower margins than other services in the portfolio.
For the remainder of 2019, we expect margins to improve as we align our cost structure with our revenue expectations. While we expect to be in a better position to discuss our longer-term view of margins in the coming quarters, there are several areas that we can and will address in the second half of the year to allow us to reduce costs to reinvest in areas to drive growth, including attracting and retaining the best talent and expanding our portfolio of digital solutions.
Even ahead of the conclusion of a broader benchmarking exercise, in the second quarter, we took targeted actions at the senior levels of our pyramid to simplify our organization structure. These actions are expected to result in $65 million of annualized savings with approximately half of that to be realized in the remainder of 2019. In Q3 and Q4, we expect to further reduce overall costs through a number of actions, including aligning headcount growth with revenue growth by further slowing the pace of hiring and being thoughtful on where we backfill attrition. Headcount growth on a full year basis will align to our full year constant currency revenue guidance.
We will have greater discipline on capturing improved pricing levers, more closely aligning promotions and wage increases with bill rate adjustments; more rigor around redeploying unbilled resources in our accounts, and we will continue to optimize our pyramid by adjusting our spans of control. And we will have enhanced oversight regarding our use of subcontractors and the balance between subcontractors and full-time associates. We will also have significantly tighter control of areas within SG&A such as disciplined hiring of non-billable resources, further rationalization of our real estate portfolio, tighter control over T&E including significantly reduced travel for internal and other nonclient-facing meetings, limiting business-class travels, relocations, et cetera, and only investing in marketing events that will provide an appropriate rate of return. These actions will help fund our continued investment in areas that support revenue growth. Additionally, the shift to higher-value services such as digital will continue to support higher margins.
From a people and talent perspective, our annualized attrition rate of 23% was up from 19% in Q4 but flat versus the prior year quarter. We continue to focus on our workforce strategy and management such as the announced retention program to recognize and retain our best talent. We expect to incur an additional $48 million of compensation-related costs during the remainder of 2019 for this program.
Turning to our balance sheet, which remains very healthy. We have finished the quarter with $3 billion of cash and short-term investments, down $1.5 billion from December 31, 2018. This decrease is largely due to the $1.8 billion of share repurchases completed year-to-date under our stock repurchase program, including over $1 billion of repurchases in the second quarter. As a reminder, our short-term investment balance includes restricted short-term investments of $429 million related to the ongoing dispute with the Indian Income Tax Department.
We generated $479 million of free cash flow in the quarter. Additionally, we had an uptick of DSO of 3 days compared to Q2 2018, which negatively impacted free cash flow by $135 million. Approximately half of the DSO increase was due to unbilled receivables related to the billing construct of certain long-term contracts. We believe that we have the opportunity to improve our cash conversion and are initiating a working capital program that we expect will improve free cash flow by several hundred million dollars in the coming quarters.
Our outstanding debt balance was $746 million at the end of the quarter. There was no outstanding balance on the revolver. During the second quarter, we opportunistically repurchased approximately 18.7 million shares for approximately $1 billion, and our diluted share count decreased to 564 million shares for the quarter. On a year-to-date basis, we have repurchased over 28 million shares for approximately $1.8 billion. We have $738 million remaining under our existing share repurchase authorization.
For our cash generated from operations, remaining cash on the balance sheet and our revolving credit facility, we continue to have access to plenty of liquidity to fund both capital return and acquisitions.
I would now like to comment on our outlook for Q3 and the full year 2019. For the full year 2019, we expect revenue to grow in the range of 3.9% to 4.9% year-over-year or $16.75 billion to $16.9 billion in constant currency. Based on current exchange rates, this translates to growth within the range of 2.8% to 3.8% or $16.57 billion to $16.73 billion, reflecting our assumption of a negative 110 basis points for foreign exchange for the full year compared to an assumption of a negative 90 basis points in our prior guidance. This guidance continues to reflect the muted outlook for Banking and Healthcare.
For the third quarter of 2019, we expect to deliver revenue growth in the range of 3.8% to 4.8% year-over-year or $4.23 billion to $4.27 billion in constant currency. Based on current exchange rates, this translates to growth in the range of 2.9% to 3.9% year-over-year or $4.2 billion to $4.24 billion, reflecting our assumption of a negative 90 basis points for foreign exchange for the third quarter. For the full year 2019, we expect adjusted operating margins to be approximately 17%. Based on the actions taken in Q2 and prospective cost alignment actions for the remainder of the year, we anticipate adjusted operating margins of approximately 18% in both Q3 and Q4.
We expect to deliver adjusted diluted EPS in the range of $3.92 to $3.98, an increase from our previous guidance of $3.87 to $3.95, primarily reflecting a lower share count assumption based on the stepped-up repurchases completed in the second quarter and the contribution incentive. This guidance anticipates a full year share count of approximately 562 million shares and a tax rate in the range of 24% to 26%. Guidance provided for adjusted diluted EPS excludes realignment charges and other unusual items, if any, net nonoperating foreign currency exchange gains and losses; clarification, if any, by the Indian government as to the application of the Supreme Court ruling related to the India-defined contribution obligations; and the tax effects of the above adjustments. Our guidance also does not account for the impact from shifts in the regulatory environment, including areas such as immigration and tax.
With that, we can open the call for questions. Operator?
[Operator Instructions]. Our first question comes from the line of Keith Bachman from Bank of Montreal.
And welcome again, Brian, your first quarter under ownership, so to speak. And my question is going to be directed towards you. If -- there's a lot of moving parts, it sounds like, both on how I think about the offense of trying to chase revenues while at the same time trying to balance costs. And so we have your margin targets for the year, but just philosophically, how should we be thinking about these two goals of trying to really nurture the revenue line while at the same time trying to optimize the cost structure? How should investors be thinking about this over the course of this longer journey?
Keith, well, I mean, the first thing I'll say is I do not believe they're mutually exclusive, but let me start first with revenue and then I'll spend some time on costs. We grew, as you know, 4.7% this quarter in constant currency. Within that construct, I would say we had very muted performance in two of our larger segments, Banking and Financial Services and indeed Healthcare, which represents 63% of the business. So one of the first things we have to do to get back to a stronger growth performance is to actually help turn those businesses around, just the law of numbers becomes meaningful.
On top of that, I think we are at the stage now of investing more in growth, changing the dialogue internally, prioritizing growth. As you've seen, we have approved, at this moment in time, and I believe over time we will add to this number, over 500 revenue-generating resources or revenue support resources. So the inclination is to get back to what we've always done, which has been to focus on client centricity and revenue growth.
Now cost is, of course, and strategy is important to revenue growth. First of all, what are our strategic postures, how are we exposed to faster-growing categories of the market, which are both technology categories such as digital engineering, our way of working, IoT, cloud, as well as geographic categories. And that's why I'm pleased to see the continued momentum we have in the global growth markets, which is our non-North America region.
Costs, however, are important to growth because you need to have a very efficient and disciplined cost base to be able to take pricing in the deals, to be able to absorb the renewals, pricing pressure that we are seeing in our traditional business as well as being able to invest in the future. I talked in my prepared remarks around the importance of pivoting to digital and the associated parameters of that, smaller TCV contracts, more contracts, a different delivery model, et cetera.
We also need to invest in people, in M&A and indeed in the brand to make sure that we are more associated not just with the area of the business where we are loved by customers but also with the pivot to digital. Many of these areas are, as you know, key to our constrained assets, both M&A targets as well as even just getting digital resources into the company.
But I will say, I'm four months in at this stage. Having interrogated the data for four months and having spent a great deal of time in the transformation office, I see huge opportunity here on revenue growth and indeed on costs. I'm not going to get into a guidance discussion today around next fiscal year or indeed a multi-year view. But at this moment in time, this, from my perspective, is something that I only see opportunity in, to improve our performance from today's performance.
Our next question comes from the line of Tien-Tsin Huang from JPMorgan.
Glad to see a lot of heavy buybacks, well done there. Just wanted to ask actually on gross margins. Looks like it's the lowest level we've seen in some time. What's driving this? I heard the Healthcare renegotiations. I'm not sure if that was related there. Maybe any comments on pricing, contract execution, that kind of thing and maybe any outlook on gross margin.
Sure. So Tien-Tsin, it's Karen. It's really two factors, one of which is the Healthcare renegotiations that you talked about, about a 40 basis point impact in the fall in gross margin and then also the fact that headcount continued to grow faster than revenue in the quarter. Part of that is our digital operations business, which is growing considerably faster than headcount -- than, sorry, company revenue at this point.
Headcount grew in line with the revenue growth digital operations, but you know that does come at a typically lower gross margin than the IT business. But overall, headcount for the rest of the business did grow faster in revenue, and the vast majority of that cost is sitting in gross margin. And that is obviously one of the things that as we continue to focus on tackling the cost of delivery to the organization, we will be looking to optimize in the coming months and quarters.
Our next question comes from the line of Lisa Ellis from MoffettNathanson.
Brian, as you're thinking about your overall strategic plan, can you provide a little bit more color on how your -- you believed you guys should be tackling the deterioration in Cognizant's traditional services, meaning shifting away from or reaccelerating, or whatever the right answer is, those more traditional legacy pieces of the business, which just at an industry level, maybe flat or even in structural decline. That strikes me as one of the trickier aspects things to navigate through here.
Yes. It's a good question because we have strength in our existing customer base, and if you look at the Pareto, we have very strong positions and are highly concentrated in a set of customers but we need to pivot more to digital. As we are pivoting to digital, as I said, there are different characteristics of the deals, of the skill sets we need, of the delivery models, of the buying decision makers, if you will, on behalf of the customers. And this is an area that we definitely want to invest into the next S curve and make sure we are, from a capital allocation point of view, really prioritizing that.
Now in the more traditional businesses, some of them actually give us a foothold into the new application modernization, we'll go hand-in-glove as I said, with the digital engineering space as we start thinking about cloud-native applications. But in a broader sense of the word, Lisa, I'm a big believer in drawing hard decisions across your portfolio and trying to understand where you need to be extremely disciplined from an investment and from a cost structure point of view in terms of optimizing legacy whilst investing in the new. And those are disciplines we need to obviously continue to drive here in Cognizant as we're investing in some of these newer growth categories that should accelerate our CAGR growth.
You have seen in the last quarter, we have aggregated all of delivery under one leader. Previously, delivery was fragmented through a number of leaders in the company. And part of the task of that delivery leader is ultimately to drive a much more aggressive stance in terms of how we think about automation and tooling and putting ourselves in a position that we can be what I would term fit for growth in the legacy as well as the broader company. So optimizing the cost structure, in particular, for the legacy and freeing up capital to invest in the new categories, which should be a growth driver for Cognizant going forward.
Our next question comes from the line of Ed Caso from Wells Fargo.
Can you talk a little bit about your capital deployment strategies from this space? Obviously, you deployed a lot of capital for repurchase. Where does M&A fit into the equation sort of order of magnitude? And is there more share repurchase to be done in the near term?
I'll touch on this and Karen can jump in as well. Look, we saw the opportunity to accelerate share repurchases in the last quarter as an opportunistic situation for us and we took advantage of that. And I have no issues continuing to do so if needed.
From an M&A point of view, I have rejected some M&A and I have approved some M&A in the last four months. So we would look at that as a means to execute our strategy. We're pleased to have acquired Zenith Technologies, which closed most recently. And obviously, we're using M&A as a means to an end. It is not a strategy, it's a means to execute a strategy. Our priority right now is continuing to refine our strategic posture and making sure, to the prior question, we get our capital allocation correct. But we will look upon M&A as something that we will use to execute our strategy going forward. My emphasis at this moment in time continues to be tuck-in acquisitions that strategically align us to even better our competitive positioning in the market that we deem most relevant to us going forward.
And I think, Ed, it's Karen. Obviously, the guidance for the share count does not assume any more buybacks for the rest of the year. As Brian said, we will continue to look at that opportunistically. But as you know, we have far exceeded our initial expectations for this year in line with this framework we outlined last year at Investor Day where we said we expect to spend on average 25% of our global free cash flow towards buybacks, 25% towards dividends and 25% for acquisitions with the rest going to India. At this point, there are no changes to that framework. If and when there are, we will obviously update accordingly.
Our next question comes from the line of Bryan Bergin from Cowen and Company.
Brian, can you give us a sense on just your view of the time frame of what you think it's going to take for Cognizant to address the company-specific issues that you noted in the your -- in the core verticals there? And in the transformation office work streams, has this already been set up and that's in progress? Or is this now to come in 3Q and 4Q?
No. The transformation office was set up probably almost three months ago at this stage, to be honest. It consists of six work streams, as I said, each is led by one of our executive committee members. Each one has a steering committee and indeed a working committee below that. We've been very clear in outlining suppositions that I want us to backsolve to and expected outcomes, and as part of that, some short-term wins along the way.
So we've been also very deliberate, Bryan, in terms of the composition of the teams, making sure we have people that are cross-functional in nature, people who understand the markets both in North America and internationally, people that understand delivery as well as the market-facing commercial teams. I really feel very, very enthused from the output of the work. We've been working extremely hard on that, but it gives me nothing but optimism that there's a huge opportunity for us to free up capital to invest in growth to simplify the organizational structure, clarify roles and responsibilities and ultimately to make us much more successful in the market by accelerating revenue growth and having better solutions to bring to our clients.
So I feel great about that. It is not a new initiative. It's been well underway and frankly, I'm probably more advance in my thinking in the output of that than where I potentially consider I would be three months ago. With regards to Banking and Healthcare, we changed out the leaders of both. This will be some heavy lifting, if I'm very honest. Some of it is because of Cognizant-specific issues that are reflective of the market reality of some M&A in health care where we are heavily exposed to four firms that have merged. And some of it candidly relates to just the need for us to shift faster to digital, to have more thought leadership, to be the even more client-centric and indeed to add more sales coverage. And those are things that are underway at the moment both in Healthcare and indeed in our Financial Services practice or our Banking practice.
I should clarify that our Healthcare business in Life Sciences is very strong. It continues to grow double digits. It's one of the areas of our portfolio that I feel best about. We have a strong strategy, a strong leadership team. We know the end-to-end value chain for customers and therefore, M&A is facilitated against that. We are doing a little better in insurance than we are in the core banking business. And as I said on the call, we've made some structural changes in the banking team to really put dedicated teams behind hunting new logos, behind some of our most strategic accounts that we deem platinum as well as more broadly, I believe, that in the world of digital, extra emphasis on thought leadership and an innovation agenda is required.
And in my dealings with clients over the last four months, it has become very apparent that we are very established in the legacy or traditional models, but our brand attributes and perhaps our thought leadership isn't where it needs to be on the side of the house that is digital. And that is an area that we need to do better in.
If you do look at the competitive market in terms of what has been announced in the last quarter, it's also clear that there is market growth out there in banking and indeed in health care. And certainly from a banking point of view, we've seen most of our competitors in financial services and insurance grow from the low to the high single digits, and indeed, some even into the double digits. So we have to accelerate quicker, get back on the attack, make sure we hone our thought leadership and get a team that are constantly in front of clients with an agenda around innovation that helps customers think about how they can accelerate or pivot to digital.
I have not seen in any dialogue with customers any macro concern around their desire to spend on innovation. Invariably, the conversations were very clear. If we show up with enough thought leadership and innovation, they have budgets, and of course, the pivot we need to make is to ensure we are cost disciplined on the legacy side of our business to ensure that we can absorb those cost demands at the time of renewals whilst accelerating our investments into the new.
Our next question comes from the line of Bryan Keane from Deutsche Bank.
I wanted to ask about attrition. I thought it was up a little bit, although year-over-year, it's pretty similar. Where do you expect attrition to go? Do you expect it to stay elevated? Or do you expect it to come back down? And maybe you can just talk about if you guys have lost any key managers or personnel and just thinking about the morale of the company through all these changes.
So let me start with the broader question around leadership and then Karen can jump in on the attrition question. Listen, I mean, to be very clear, in a company of 300,000 employees, we will always have leadership changes and it's pretty standard when you have a new CEO who comes onboard. We have been fortunate that at the time of my appointment and indeed before that, the Board secured certain executives to see through a CEO transition, and I'm grateful for their ability to actually get us through that first four to six months of my tenure because it's certainly allowed me the time to get deeper into the business and to make sure that I was ready to run forward.
My perspective is we need a greater emphasis on our customers, greater energy, fresh perspective and candidly in dealing with clients, typically the questions I was asking were how often you've seen our teams, the thought leadership we brought to bear and how we stack up versus the competition and also who were some of the best people in the industry that they recognize and value as people when they are dealing with them. So we have made some very deliberate changes.
Now, of course, we've also had some other departures and I think that's normal particularly in a company that has had a relatively stable leadership team over the best part of two decades. This is not something I will say that I am overly concerned about. The emphasis on growth is permeating through the organization. The people who are touching customers day in, day out is typically not the executive team but the client partners. And those client partners are really, in my mind, enthused with the renewed focus on growth after a few years of more focus on margin rate, if you will.
And of course, don't get this wrong. I'm not taking this for granted by any means. We are paranoid that the first line of the P&L is the customer. But from my perspective, this is a very manageable transition we're going through. And we've made some strong internal promotions. The new Head of North America, DK, has been with Cognizant for over 20 years and is ultimately focused and has always been focused across multiple verticals on growth. I'm also pleased to have promoted Pradeep in Delivery, somebody who's been with Cognizant for 23 years, to enable us to get much more focused in terms of optimizing our delivery structures.
And we've complemented them with some external hires, some executives who used to work with Wipro and indeed more recently Ganesh Ayyar, who was the ex-CEO of Mphasis. So my sense is we want to have the best team we can get our hands on, a team highly motivated, energized, moving with the same speed and urgency that I have and absolutely focused on their teams and on their customers.
And Bryan, as it relates to the 23%, as you said, it is flat year-over-year. And as you know, there is some seasonality to attrition. So typically, after bonuses are paid in March, we do tend to see attrition pick up. Really no changes in terms of the attrition, in terms of where it's coming from up and down the pyramid, the only exception being the director plus attrition ticked up a little bit based on the actions that we took in June as far as the realignment program. But that was the only real, I would say, significant change in attrition both in terms of geography as well as up and down the pyramid. Now I would expect it's going to continue to be lumpy. As we have said for some time now, the job market is strong and as well as we look to optimize cost structure for the organization, that will in itself likely to create some churn.
Our next question comes from the line of Jim Schneider from Goldman Sachs.
As you look forward to the next few quarters, sounds like you expect continued muted trends in financials and maybe some improvement in Healthcare as you get to the end of the year. I guess my question is your Q4 guidance sort of implies that things remain muted kind of across-the-board for some time. Is that just the level of conservatism relative to the outlook? Or do you actually see some headwinds in other segments that could be potentially offsetting that recovery?
Sure. So Jim, this is Karen. Let me tackle that. So Q3 to Q4, there is actually a decline in bill days of about two days and that will cost about $47 million on a constant currency basis. So from a modeling perspective, if you were to take the middle of the range for Q3 and then the middle of the range for the full year guidance, that would actually say on a volume basis that Q4 will be flat with Q3.
There will be some puts and takes. As we've talked about in our comments, we do expect to see some stabilization of Healthcare off of the Q2 numbers, not on a year-over-year basis. It will continue to show challenges but we do expect it to stabilize on a sequential basis going forward. We do expect, as I said, a little bit of slowdown in the technology practice, just given the tough year-on-year comps as we get back into the back part of the year but that was in our guidance both this quarter as well as last quarter so no real change there from that perspective.
Our next question comes from the line of Joseph Foresi from Cantor Fitzgerald.
I wonder if you could talk about your positioning in digital. Do you think you're competitive in that business? Or is there catch-up to be done? And I think most importantly, how does one company catch up in digital and close the gap if there is one?
So this is Brian. I'll start with our position in digital. There are areas that I've been really blown away with and that have really -- I've left reviews feeling very proud about what we have and feeling that we definitely have a strong foundation to build from. I talked today about the digital engineering team. I have spent a lot of time with Cognizant's Softvision team. But more broadly within Cognizant, we had legacy digital engineering as well as the application monetization efforts that collectively, it really puts us in a position -- if you think about it, 11,000-plus resources with over $800 million of revenue. It puts us in an incredible position to increase our brand recognition and really dramatically change our position in the market vis-Ã -vis some of the, let's say, currently known leaders out there.
IoT is a few hundred million dollars for us and we have broad offerings that are aligned by industry vertical, and I'd expect us to go accelerate that as part of our strategy. More broadly, there are organic investments we need to make. There will be some inorganic plays we need to make there, too. But as I said, I'm not working on something huge at this moment in time and it will be more tuck-ins aligned to our strategy. Of course, behind any organic and indeed inorganic acquisitions, how do you scale digital? Well, you need to have a brand, you need to have capabilities and you need to have systems and tools and the sales and marketing engine to facilitate it. That's why I explicitly called out the fact that we are going through a pivot, which requires us to do some work. It's more project-oriented work, that's good and bad. You need to sell more projects, they have lower TCV, but unlike the legacy business, we will not have the same renewal price erosion that we are faced within the legacy.
We need to have a set of client partners that are capable of speaking to the right level of the organization that typically will extend well beyond the CIO, different decision-makers and buyers, right from the CMO up to the CFO and indeed the CEO and indeed, know how to speak and how to follow up on what collateral to leave and what use cases to bring in and obviously what industry expertise to bring with them into the conversation. More consultative selling and indeed all these practical things that are very often overlooked but nonetheless critical in my opinion to running a world-class operation, things like sales commission plans that need to change and therefore, we need to orient more of our commission towards aligning our sales into areas of the -- that are aligned with our strategy. So that is not something we've historically done. It is something we will do going into the new year. And indeed, the delivery capabilities from an agile delivery point of view becomes relevant as well.
I do feel that as we have near, on and indeed offshore capabilities, if you think about something like digital engineering, if we are able to take the guild and pod model that we have and extend it not just from nearshore but indeed off to our offshore centers, I believe we will have a huge advantage over some of the other players that you know. So listen, this is an area that I'm pumped about, I'm excited about the possibilities we have and I've seen a lot of goodness in the operations. We, of course, now need to accelerate our investments in it and make sure that we take this strategy into execution. And rest assured we are very focused on that.
Our final question comes from the line of Rod Bourgeois from DeepDive Equity Research.
Brian, so I appreciate your candor in admitting that Cognizant's weak growth in Banking and Healthcare is mostly due to company-specific issues. And my question is do you have a point of view at this point on what Cognizant's growth rate would be today if it weren't for these company-specific issues that you're needing to fix? And I guess on a related note, you're making a lot of internal changes now. I'd like your perspective on whether you think these internal changes will cause additional growth disruption in the upcoming months.
So Rod, it's, of course, hard to extrapolate the implication but you can do a sliding scale analysis to understand that for every 100 basis points of improvement in Healthcare or Banking, what is the implied implication on the broader Cognizant story. But given they are 63% of the business, you can clearly understand that these are meaningful shifts to our overall numbers. And every 160 basis points -- $160-or-so million of growth is 1 point of growth for us, and every $6 million of bottom line is $0.01 EPS for us. So these are important levers for us to get right.
We do have a lot of balls in the air at the moment and that's why we are very, very deliberate around the transformation office. We have staffed it with people who know the company well. They have been surrounded by management consultants both internal and indeed external, and we have a huge operation cadence behind that and a broad framework of change management communication and indeed an execution layer that needs to happen.
And Rod, by definition, you will always go home at night and wondering if you're going too far, too fast. But I've got to be honest, I have a great sense of urgency. I'm really proud to have this role. I really am proud to have inherited an organization that is, in my mind, full of talent and I want to lead them forward, and I believe that we are going at the right pace to catch up where we need to catch up and to extend our leadership where we think we're in front.
But we're spending a lot of time around operational excellence and rigor and making sure we contextualize these changes. It's clear, certain employees will be concerned around the amount of work and the hours and the pace in the decision-making. But my belief is that my executive level, I've had a number of executive committee meetings now, we have a cadence of two days every month. We've had some really, really constructive meetings where the teams are on board and we are making the decisions, in my opinion, needed at this moment in time to put Cognizant in a position where we can unlock our true potential.
Right. And with that, this concludes today's call. Thank you all for joining and for your questions.
This concludes today's call. You may disconnect your lines at this time. Thank you for your participation.