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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Cognizant Technology Solutions Third Quarter 2018 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.
Thank you, operator, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's third quarter 2018 results. If you have not, a copy is available on our website, cognizant.com. The speakers we have on today's call are Francisco D'Souza, Chief Executive Officer; 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 to be filed later today.
I would like now to turn the call over to Francisco D'Souza. Please go ahead, Francisco.
Hello, everyone, and thanks for joining our call. This morning, I'd like to cover two topics: first, a few highlights from Q3, and second, since we're about two weeks away from Cognizant's Investor Day, I thought I'd give you a preview on what we'll be discussing.
Let's begin with the quarter. Third quarter revenue was $4.08 billion, within our guided range and up 8.3% year-over-year. Three of our four business segments delivered a strong performance in the quarter driven largely by the increasing adoption of digital across these segments. And in the fourth segment, banking and financial services, we see good growth in our digital offerings, which continues to be offset by pressure on run-the-bank spending. As a result, our digital revenue in the quarter grew in the low 20% range, well above company average and now over 30% of total revenue, reflecting the continuing shift across segments to digital revenues. Underscoring the relevance of our industry-specific digital services to clients, we continue to see our digital portfolio generate margins above the company average.
Our non-GAAP operating margin was 21.1% for the quarter, putting us on track to deliver on our full-year margin commitment. And quarterly non-GAAP EPS was $1.19. As these results suggest, our sustained emphasis on digital services is helping us win more business with attractive margins and deliver higher quality growth as clients shift more of their spending from traditional IT to digital services. Turning to guidance, we expect fourth quarter revenue to be within a range of $4.09 billion to $4.13 billion. For the full year, we expect revenue to be within a range of $16.09 billion and $16.13 billion, a growth of 8.6% to 9%, and we remain confident in our previously stated guidance of achieving a non-GAAP operating margin in 2018 of approximately 21%.
Over the last couple of months, we have announced three acquisitions to further enhance our digital capabilities. Two of them, which closed earlier this month, relate to the Salesforce Platform where Cognizant has one of the industry's largest roster of certified consultants. We acquired Advanced Technology Group, which provides customer and revenue management consulting and implementation services that are focused on the Salesforce Platform. Advanced Technology Group, headquartered in the U.S., has expertise in implementing automated, cloud-based Quote-to-Cash business processes, a new and fast growing part of the Salesforce ecosystem. Their capabilities will strengthen our cloud solutions portfolio as clients shift to business models based on recurring revenue streams.
During the quarter, we also acquired SaaSfocus, one of the largest independent Salesforce Platinum consulting partners in the Asia-Pacific region with operations across Australia and India. SaaSfocus will expand our end-to-end digital transformation services and Salesforce cloud capabilities in Asia-Pacific. We're especially excited about the anticipated acquisition of Softvision announced earlier this month, which will expand our digital engineering capabilities once completed. Softvision is a leader in software product innovation and development using modern agile software engineering tools, techniques, and processes. Softvision will bring more than 2,800 technologists to Cognizant, increasing our ability to provide software engineering services to our clients from a new Eastern European base in Romania, a fast emerging hub for software developers. We expect the acquisition to close later this quarter.
Adding Softvision to Cognizant will enable us to create one of the world's largest digital engineering companies. Our acquisition activity complements our ongoing organic investment in digital capabilities, domain knowledge, global and local delivery, and overall ability to deliver for clients from strategy through implementation and outcomes.
Okay. So, let's move to my second topic, Investor Day, which is scheduled for Friday, November 16, in New York. Our goal for Investor Day is to discuss our mid-term strategy and growth path over the next several years. This strategy centers on helping clients become digital at scale by digitizing their products and services, personalizing the experiences they offer their customers, fully automating their business processes, and modernizing their IT infrastructures. Clients find digital at scale compelling because it generates new revenue streams, new operating models, and new ways of delighting their customers. And we find digital at scale compelling because of how well positioned we are to seize what's becoming a massive market opportunity.
At Investor Day, we'll also cover the financial objectives we'll seek to deliver for the company and for shareholders including our targets for revenue, margins, EPS, and capital return for the next few years. In addition, we'll give you the opportunity to meet and hear from a cross-section of our executive leadership team. Overall, our goal for Investor Day is to present our plan for the future.
One more point before I turn the call over to Raj. For Cognizant, 2018 has been a year of solid execution across many dimensions of the company. We have accelerated Cognizant's pivot to digital while driving revenue growth, margin improvement, and capital returns. And therefore, we expect our forward momentum to continue to deliver strong results.
And now over to Raj who will give you an update on the performance of our industry verticals. Raj?
Thanks, Frank. Good morning, everyone. Cognizant's orientation is digital-first and digital at scale. It's the way we think and the way we work based on what clients need. With that in mind, let's look at how our industry segments performed in the quarter, beginning with Communications, Media and Technology, which had strong year-over-year growth of 17.1%. Within Communications, we are helping clients co-innovate the networks of the future to enable rich complex information to move at speeds more than 30 times faster than what's possible today, leading to a significant improvement in virtual reality, robotics, healthcare, and more.
Within Media, analytics has become essential to our clients' long-term success, and in our Technology vertical, content moderation continues to drive client revenue. We're proud to be working with several of the world's largest born-digital companies, which also engage us to apply AI, software engineering, and IoT solutions to help develop new business models. They know that to retain their customers, they must constantly create new and compelling experiences, and it's worth noting that in the third quarter, two of our technology clients were part of Cognizant's ten largest clients and both are continuing to grow. That compares with just three years ago when our entire top ten were either banking or healthcare clients.
Moving to Products and Resources, we increased revenue 11.5% year-over-year led by strong growth from our retail and manufacturing clients. In retail, we had one of our best quarters in years. Traditional retailers are racing to strengthen their digital business channels to meet the Amazon challenge of frictionless omni-channel experiences, hyper-personalized retailing, and responsive supply chain systems. We're helping retailers implement the next stage of unified commerce and partnering with them to enable enterprise-wide transformation. The example tells a story. A mid-sized U.S. retailer wanted to offer their customers a more engaging experience as well as the convenience of buy anywhere, fulfill anywhere, and return anywhere. We helped the clients a define omni-channel roadmap and implement a cloud-based commerce solution that provides full scale order management. With the new solution in place, our client has increased the number of orders through digital channels to around 1 million a month. And we see plenty of opportunity ahead in retail as clients strive to achieve better consumer engagement and retention by using advanced e-commerce and digital ecosystem management.
In manufacturing, spending among our clients remains strong as they continue to invest in making their products smarter and their consumer experiences richer. This effort is also driving digital initiatives on the factory floor, including more use of AI-driven autonomy to augment human decision making. The newest phase of manufacturing uses automated and digitized systems to bring together physical with digital. This phase combines machine to machine communication, Internet of Things, analytics, and big data to provide much better visibility into operations.
For example, we're working with a global industrial manufacturing leader to improve their overall plant efficiency and transform their operations, while saving them several hundred million dollars over the next few years. We're doing this by reducing maintenance downtime, improving throughput, lifting worker productivity, and enabling increased levels of automation. Our engagement will cover more than 20 global manufacturing sites and create digital trends of their environment. These are virtual replicas of what's happening on the factory floor in near real-time and continuously analyze incoming data streams. Clients will use this analysis to manage the performance of their machines, lines, and plants with the aim of achieving significant gains in up time and productivity.
Now let's turn to banking and financial services, which grew 2.6% year-over-year. Banks realized they need to break away from their legacy IT foundations and become digital at scale. That's the best way to reinvent their business models, improve their customer engagement, and achieve the technical agility needed for rapid learning and adapting. As mentioned on prior calls, our banking clients' intense focus on continuing their run-the-bank spending has affected a substantial portion of our work for them. But even with that, these clients are stepping up their spending on advanced technologies to transform their businesses. And as we extend our portfolio of services, our banking-related digital revenue has seen solid growth. We believe this growth will increasingly offset the pressure we are seeing on the run-the-bank spending.
We're optimistic about the shift for two reasons. First, all banks realize they must rewrite their futures with digital. And second, our banking clients headquartered in North America are beginning to see their spending on technology rise with a growing portion of that spend allocated to digital transformation. In Europe, we expect banks to follow a similar trend. So, the expansion of our digital services is starting to bring growth back into a number of our large banking clients. This is especially true in the areas of core modernization and digital engineering services. For example, a major bank sought our help to move their legacy applications onto a cloud-native architecture to reduce cost and complexity, increase their output productivity, and become more agile. Drawing on our deep knowledge of the bank's systems, we worked with Pivotal Software to re-factor legacy applications onto the Pivotal Cloud Foundry, an open-source platform. We demonstrated how seamlessly we can integrate legacy technologies with cloud-native architecture. We are able to dramatically reduce the time it takes to release code, and we provide the bank with agile capabilities such as auto-scaling and auto-recovery.
Now let's look at Healthcare where revenue was up 9.6% year-over-year. For healthcare providers and payers, the focus continues to be on improving efficiencies and advancing patient care and satisfaction. We continue to invest and position our healthcare practice to capture demand as clients shift their underlying business models from fee-for-service to value-based care. To complement our strong position in the payer market, we have expanded our scope to include the provider network of doctors, hospitals, and other clinicians. And we see continuing traction in this network. During the quarter, our healthcare consulting practice, Cognizant's largest consulting practice, had very strong growth.
Turning to our Life Science practice, we excel at helping biopharma and med tech companies thrive in a world of shrinking patent expirations by improving their product development and manufacturing processes in a stringent regulatory environment. We are encouraged by a couple of developments that are driving growth in this practice. First, we see continued traction in our platform solution. Our Shared Investigator Platform is now live at five large pharmaceutical clients. This cloud-based collaboration platform makes it easier for critical trial researchers to access, share and analyze data. We have another five clients signed up with implementation expected over the next few quarters. And along with the license revenue from our Shared Investigator Platform, we will typically realize consulting, implementation, and processing services.
The second development fueling growth is a number of large enterprise transformation deals in the process of ramping up. For example, we're working with one of the world's largest medical device and pharmaceutical companies to help drive several of their billion dollar brands in more than a dozen markets across the globe. Our clients needed to create an agile, efficient, and scaled global marketing organization, so we're enabling this with our assetSERV digital asset management solution. It's a cloud-based pre-configured platform that helps enterprises manage end-to-end content life cycle and deliver engaging customer experiences. We're helping the client support new ways of working by enabling reduced duplication and spend, enhanced collaboration, greater asset use and reuse, and leveraged scale.
Overall, the story of our industry segments continues to be one of steady execution and progress. We are resolved to be our clients' go-to transformation partner. To that end, we continue to invest significantly in digital engineering, interactive intelligent process automation, platform solutions, analytics and AI, and core modernization, all of it is directed at helping our clients drive digital at scale.
With that, I'll turn it over to Karen. Karen?
Thank you, Raj, and good morning, everyone. The business performed within expectations in the third quarter as revenue of $4.08 billion was within our guided range and increased 8.3% year-over-year, including a 70-basis-point negative impact from currency. The adoption of the new revenue recognition standard had a $33 million positive impact to revenue in the quarter. Europe grew 15.1% year-over-year in Q3, including a 130-basis-point negative impact from currency, and the rest of world was up modestly from a year ago, including a 590-basis-point negative impact from currency. Similar to trends that we saw in the second quarter, results in both the UK and Asia-Pacific were impacted by the weakness in some of our larger banking clients, while acquisitions like Netcentric and Mirabeau are enhancing our digital leadership in continental Europe, leading to a number of recent digital wins.
Non-GAAP operating margin, which excludes stock-based compensation expense, acquisition-related expenses, and realignment charges, was 21.1% and non-GAAP EPS was $1.19, exceeding our guidance due to solid operating margin performance and a lower non-GAAP tax rate. The Q3 GAAP tax rate of 28% was higher than our previous guidance of 26%, primarily due to higher net non-operating foreign exchange losses driven by the depreciation of the Indian rupee partially offset by changes to our geographic mix of earnings. The board has declared a quarterly cash dividend of $0.20 per share for shareholders of record at the close of business on November 20.
Before turning to details of our financial performance, I'd like to provide an update on the status of the FCPA investigation. As a reminder, in September of 2016, we voluntarily notified the DOJ and SEC of possible FCPA violations, and during 2016, we recorded out-of-period corrections related to $4 million of potentially improper payments. Our discussions with the DOJ and SEC have progressed to a point where we are now able to reasonably estimate a probable loss and have recorded an accrual of $28 million in our financial statements in Q3. While we believe that we are getting closer to the conclusion of this matter, we are unable to predict with certainty the timing of a final resolution.
Now turning to our financial performance, Consulting & Technology Services represented 57.7% of revenue and Outsourcing Services 42.3% of revenue for the quarter. Consulting & Technology Services grew 6.6% year-over-year, and Outsourcing Services revenue grew 10.7% from Q3 a year ago. Outsourcing growth benefited from the inclusion of our recent acquisition of Bolder Healthcare as well as large client engagements such as TMG Health. During the third quarter, 36% of our revenue came from fixed price contracts and transaction-based contracts were approximately 11% of total revenue during the quarter. We added seven strategic customers in the quarter, defined as those with a potential to generate at least $5 million to $50 million or more in annual revenue. This brings our total number of strategic clients to 378.
And now moving to an update on margins. In the third quarter, we had solid margin performance as we continued to build on the improvements we've made in our business over the last 22 months such as sustained higher levels of utilization, optimal pyramid structure, simplification of our business unit overhead structure, and leveraging our corporate function spend more effectively.
Specifically during the quarter, we continued to improve our cost structure by further optimizing the higher end of our resource pyramid, resulting in $11 million in realignment charges. Net of hedges, our Q3 margins also benefited from the depreciation of the Indian rupee versus the prior year quarter by 74 basis points. Solid margin performance allowed us to absorb the wage increases and promotions in the quarter, while remaining on track to achieve our full-year non-GAAP operating margin target of approximately 21%.
As we drive towards approximately 22% non-GAAP operating margins in 2019, we expect continued margin improvement to be underpinned by both ongoing operational efficiency and discipline, as well as effecting a shift within our business to focus on higher value services, improving profitability within our portfolio of large structured contracts, and reassessing less profitable opportunities that do not further our position in the digital marketplace.
From a people and talent perspective, our annualized attrition rate at 22% remains elevated. The value that we create for our clients is predominantly knowledge-based work. So we depend heavily on the insights, passion, and collaboration of our global associates. We believe that the higher attrition is largely the result of increasing global demand for the very skills we specialize in, the growing shortage of technology talent, particularly in local markets and the transition our organization has gone through to build a scalable foundation for expanding our digital leadership. We continue to focus on our workforce strategy and management.
Turning to our balance sheet which remains very healthy, we finished the quarter with $4.8 billion of cash and short-term investments. This balance net of debt was down by $144 million from December 31 and includes restricted short-term investments of $405 million. These restricted amounts are related to the ongoing dispute with the Indian Income Tax Department.
We had strong cash generation in the quarter with cash flow from operations of $862 million and free cash flow which we define as operating cash flow net of CapEx was $768 million. Our outstanding debt balance was $724 million at the end of the quarter, and there was no outstanding balance on our revolver.
During the third quarter, we repurchased approximately 1.4 million shares, including 1.1 million which represented final share settlement of the $600 million ASR launched in June. Our diluted share count decreased to 580 million shares for the quarter.
I would now like to comment on our outlook for Q4 and the full year 2018. For the full year 2018, we expect revenues to be in the range of $16.09 billion to $16.13 billion, which represents growth in the range of 8.6% to 9%. 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 remainder of the year.
Based on current exchange rates and the positive currency impact realized year-to-date, the full-year favorable revenue impact from currency is now expected to be approximately 30 basis points versus the full year 2017. This is down from our original estimate of 100 basis point impact at the beginning of the year.
For the fourth quarter of 2018, we expect to deliver revenue in the range of $4.09 billion to $4.13 billion. Based on current exchange rates, the Q4 negative impact from currency is expected to be approximately 100 basis points versus Q4 of 2017.
For the fourth quarter, we expect to deliver non-GAAP EPS of at least $1.05. This guidance anticipates a share count of approximately 582 million shares and a tax rate of approximately 31%.
For the full year 2018, we expect non-GAAP operating margins to be approximately 21% and to deliver non-GAAP EPS of at least $4.50. This guidance anticipates a full year share count of approximately 584 million shares and a tax rate of approximately 28%.
Our expected GAAP tax rate for the fourth quarter and for the full year is higher than our previous guidance due to incremental foreign currency exchange losses driven by the depreciation of the INR against the U.S. dollar, which are not deductible for tax purposes. Additionally, earlier this month the State of New Jersey enacted legislation that would result in an incremental annual income tax expense of approximately $70 million beginning in 2018. However, we intend to implement prudent and feasible tax planning strategies during the fourth quarter of 2018, which we expect to significantly reduce this income tax expense resulting from this enacted legislation.
Accordingly, our Q4 and full-year estimated tax rate reflects the anticipated implementation of these tax planning strategies. We are maintaining our full year EPS guidance despite the outperformance in Q3 to absorb the higher than expected tax rate. Our non-GAAP EPS guidance excludes stock-based compensation, acquisition-related expenses and amortization, realignment charges, net non-operating foreign currency exchange gains and losses, the tax effects of the above adjustments, and adjustment to the one-time 2017 incremental income tax expense related to the Tax Reform Act, and our initial contribution to the Cognizant U.S. Foundation. Our guidance also does not account for the impact from shifts in the regulatory environment including areas such as immigration or tax.
In summary, our solid execution in Q3 along with continued investment in the business has positioned us well to deliver another solid year of revenue and earnings growth in 2018.
Operator, we can open the call for questions.
Thank you. . Thank you. The first question comes from the line of Ed Caso with Wells Fargo. Please proceed with your question.
Hi. This is Justin Donati on for Ed. Thanks for taking my questions. First one, can you break out the organic revenue growth in the healthcare unit ex-Bolder?
Good morning, Justin. This is Karen. We have not broken that out, but the Bolder contribution in the quarter was fairly small. We had said when we acquired Bolder earlier in the year that the full-year estimate was about $100 million for the year. So roughly a little over $30 million a quarter is what that's running.
Thank you. The next question is from the line of Bryan Keane with Deutsche Bank. Please proceed with your question.
I wanted to ask about the tax rate, it's running I guess a little bit higher and that's causing the EPS to drop lower than consensus. So can you talk a little bit about, Karen, the sustainability of that higher tax rate as we go forward and as we model 2019? And then secondly, Raj, some speculation around CEO succession planning, maybe you can comment on those plans? Thanks.
Brian, it's Karen. I'll answer the tax rate and then I'll turn over to Frank to talk about any succession planning that may or may not be happening. So the tax rate, so this has happened before. If folks go back and take a look at the spring, summer timeframe of 2013, when there's a sudden depreciation in the rupee, we have seen this impact before. Because what happens is with so many of our assets being in India and the depreciation of the rupee, we end up with this big foreign exchange movement that is not deductible for tax purposes in India. And so that drives up the consolidated rate. But it doesn't have a long-term impact.
So essentially the impact hits the quarter in which it happens and there will be a little bit of spillover into Q4 just because of the timing of the rupee movement. But if we assume that the rupee stays fairly stable going forward, then we will actually revert back to the guided tax rate. So, if people recall it, earlier in the year we had guided to a longer term tax rate of 24% to 26% with the implementation of the (29:45) tax at the federal level earlier in the year we said people should guide towards the higher end of that tax rate and that is still a reasonable position for people to assume.
And, Brian, it's Frank. I'll take the question about succession planning. At this point, there are no changes to my responsibilities or to Raj's responsibilities. You addressed the question to Raj, but I'll take it. As I've said before, succession planning is the responsibility of the board, specifically the Nominating, Governance and Public Affairs Committee of the board and we have not made any announcements on that except that you would have seen an announcement recently that as it relates to the chairman of the board, Michael Patsalos-Fox was elected Cognizant's new chairman. And he's been on the board since July of 2012, has a long history and long background in management technology consulting from his many years at McKinsey, and he succeeds John Klein who was elected to our board back in 1998 and who had served as chairman of the board since December of 2003. John will continue to remain on the board.
Thank you. The next question is from the line of Tien-Tsin Huang with JPMorgan. Please proceed with your question.
Thanks so much. Good morning. Just want to clarify and then ask a follow-up just on the revenue revision to the year. Can you detail that for us, Karen? Between FX, acquisitions, and what might be incrementally weaker. And then I wanted to ask around the Softvision acquisition, we like that you guys are getting into the software engineering side. What kind of synergies might you expect by putting Softvision onto the Cognizant network? Can we expect something different here versus other deals? And maybe could we expect more in the way of investments going ahead? Thanks.
So, let me do the revenue roll forward, Tien-Tsin, and then I'll turn over to Frank and let him talk about Softvision and the benefits thereof.
So, from a revenue perspective, I would think about it this way on a full-year basis. So on a full-year basis, essentially the 606 benefit that we've received to-date, this quarter it was a little over $30 million, has essentially been wiped out by the foreign currency movement. So FX and rev rec essentially offset each other on a full year basis or year-to-date, and I anticipate it to be on a full-year basis at this point. And then from an inorganic perspective, it's less than 1 point of revenue at this point. I think it was about 40 basis points in the quarter in Q3 was the impact of inorganic revenue growth. So it's been fairly small.
Tien-Tsin, let me talk about – it's Frank. Let me talk a little bit about digital engineering and Softvision in particular. When Softvision closes, we anticipate it to close in Q4, putting Softvision together with Cognizant's existing software engineering capability, we think will create one of the largest software engineering capabilities in the industry. Cognizant already has a very strong software engineering capability that we built largely organically over the years. Part of that has come also from acquisitions that we've done in the past, for example, TriZetto and so on, which came with a strong software engineering DNA.
What Softvision will bring to us once it closes is, of course, the 2,800 creative technologists, the base in Romania that we think is a significant source of software engineering talent. And of course, software engineering and digital engineering is the new way of developing software and so we see revenue synergies as we bring that combined Cognizant and Softvision platform to many of our clients across industries, including, as Raj said in his prepared comments, to the financial services industry.
And Tien-Tsin, sorry before we move on, Katie just pointed out to me that I misspoke. The inorganic impact for the quarter was about a 1.5 point for the year, it's about 1 point of revenue year-to-date. So apologies for that.
Your next question comes from the line of Brian Essex with Morgan Stanley. Please proceed with your question.
Hi. Good morning. And thank you for taking the question. I was wondering maybe, Raj, could you speak to some of the hiring trends that you're seeing in the market? We're hearing about some of the peers, particularly in India, I guess, pursuing retention payments to improve retention rates. I know you that you guys have focused more on training up within your organization, particularly with regard to full staff developers. And then maybe on the mix shift, how you're seeing the mix shift of head count with that attrition. Are you hiring in places that you're not seeing the attrition, and how you anticipate that to impact margins going forward?
Yeah, Brian. Look, I think overall in terms of head count, look, our global head count increased to about 274,000, up from 268,000 the last quarter. So it's about a net addition of about 5,300. Overall in the year, we were continuing to find good talent in the marketplace in all of our geographies. We hired about 14,000 professionals around the world. And we also have a stated goal of hiring about 25,000 professionals in the U.S. over the next couple of years. So, I think there's a lot of talent in the marketplace. We're obviously addressing some of the attrition. The attrition was a little bit high for us, and we're obviously continuing to investing in cross training our resources, looking at ways of – in terms of employee engagement, retaining talent, looking at ways of also creating new opportunities in terms of job rotation as well to control that.
But in terms of the – look, in terms of the mix of the pyramids and geographical split, no major changes. I mean, obviously you'll have certain projects that have some greater on-site component at certain phases of their life cycle but overall no major shifts in terms of onsite and technology delivery. And I think in terms of the margin point that you pointed out, it's important to note, as we continue to hire locally, look, you'll have some resources that will be a little bit more expensive than resources that we have leveraged in the past on visas. But I think overall when you look at it, that the total cost when you include the immigration costs, the travel costs, it's fairly constant, so it doesn't really impact margins significantly, whether you hire individuals locally or leverage (37:40).
Our next question comes from the line of Keith Bachman with Bank of Montreal. Please proceed with your question.
Hi. Thank you very much. I also want to ask two. I want to start, Karen, with you on the margins. If I look at your margin performance this quarter, frankly it was disappointing and I think the stock is reflecting that. If you take out the benefit of currency and the benefit of accounting transition, your margin was actually down year-over-year. And it's unclear to me when you're talking about the 22% margin aspiration for CY2019, you're actually growing more than 100 – or intend to grow more than 100 basis points. And it's just hard to reconcile how that margin aspiration isn't going to have revenue consequences and cause your revenues to frankly underperform industry growth rates. And I'd like to follow-up with a question as well.
So, Keith, you also have to keep in mind that in Q3 of this year, which we did not have last year, we also had the raises and promotions, which was about 1 point of margin impact. So when you look at what's happening, certainly in the quarter while there was some benefit for the rupee; on a year-to-date basis, the rupee benefit is about zero. And while there has been some benefit obviously from the new rev rec, we have also had about 80 basis points of true operational improvement through continued driving of utilization as well as managing the pyramid and our SG&A cost effectively as well.
So, we are extremely comfortable with both where the company is performing today, we are exactly in line with the goals that we set for ourselves which was approximately 21% margin this year. And on track to deliver approximately 22% margin target for next year as we have always said, we do not anticipate exceeding the margin target for the year. We will continue to take any dollars that we can and continue to reinvest those in the business above the 21% and continue to drive the shift to digital. We're very pleased with how that transition is taking place. We're very pleased with the solid revenue growth that the company has had for the year and the fact that we are very much in line with the expectations we set out both for ourselves and with our shareholders at the beginning of this year. And this is a big transition that the company is going through, but we believe managing very well both at the top line and at the bottom line and we'll continue to do so.
My follow-up is to Francisco, and I want to ask the question that was asked slightly differently previously. But there has been some newspaper articles written about succession issues at Cognizant. And you are a member of the board. And frankly, your stock has underperformed almost every metric from the last one, two, and three years. And I'm just curious how you think the board takes that into account when thinking about succession issues in terms of looking internally versus externally, and thinking about succession planning. Thank you.
Keith, let me just – I'll come to that in a second. I just want to go back to the point Karen was making on margin and reiterate the point that Karen made, which is that, we've said that for 2018, we will deliver approximately 21% operating margin, and the way we run the business, as we have in the past and as we have for many, many years is once we've set a target operating margin for a given year or a given period, we take that very seriously. We deliver to that. But then we reinvest back in the business anything above that. So our goal is this year not to, as Karen said, deliver above the approximately 21% that we are targeting for the year. But to reinvest on top of that as we run the business – rather reinvest the excess on top of that back in the business for growth and for the transition that we're going through. And that's sort of the approach to margin.
So as Karen said, in any given period, we'll have some operational improvements that drive margin improvement. We'll have some good guys from other parts from other things that may or may not be inside of our control. The way we look at that sort of is a portfolio of drivers of margin which we then use to say how much do we reinvest back in the business for growth and long-term sustainability.
Look, I have nothing more to add, Keith, on the issue of succession. Except what I said, as I said, the board is constantly looking at this, that the issue of succession planning is the responsibility of the board, and we are continuing to assess and continue to make plans on the topic. We have nothing to announce at this point, and when the board is ready to make announcements, we'll do that.
Thank you. The next question is from the line of Bryan Bergin with Cowen & Company. Please proceed with your questions.
Hi. Good morning. Thank you. I wanted to ask on BFSI, were there specific large clients that drove the decel from Q2 and was it all still Europe driven? Just trying to understand what changed there? And can you comment on whether you have any better viability for a potential inflection point in overall BFSI growth? Thank you.
Yeah, Bryan, this is Raj. Look, overall BFSI I think it's still a mix of a couple of different stories going on. Insurance continues to be strong. We're doing really well in the mid-tier banks. It's good to see now that we're starting to see the shift in North America. All of our North American large banking clients – in the last quarter we saw digital really driving a lot of the growth that we've had, and we're seeing good traction in terms of making that shift on the North American based clients where digital is outpacing some of the losses that we have in terms of just to run-the-bank spending that's going on.
So I think North America is in good shape. Some of the – I would say a couple of the global banking clients that are outside of North America are the places that we still have some challenges. But I think the good news is we know how to manage that shift, and we expect that over a period of time, those clients as well will significantly start seeing the shift more towards the digital spend.
Thank you. Our next question comes from the line of Ashwin Shirvaikar with Citi. Please proceed with your questions.
Hi. Hey. Sorry about that. I was on mute. I guess my question is with regards to attrition which remains high, could you break out voluntary versus involuntary and what's the plan to reduce it? Also, if you can break down by level of organization or function, any color there would be great. Thanks.
So, Ashwin, it's Karen. We didn't break out involuntary versus voluntary, but the involuntary in the quarter, there was no real change from where it's been, it tends to obviously be fairly small. There was a small restructuring we did over the summer which was about 200 people at the senior levels. I think what we continue to see is that attrition tends to be skewed towards the very lower end of the pyramid, so the junior staff attrition at the senior levels other than what we did with the involuntary program continues to be very low single-digits.
And we tend to see attrition skewed as usual a little bit more offshore than on-site. So really no changes in the trend. It's just obviously the overall number has continued to remain a little bit higher than we'd like it to be. But I think a lot of that is driven by the market demand that we're seeing both with not just competitors but clients and other companies that I think everybody around the world right now is struggling with the shortage of technology talent.
Thank you. Our next question is from Jim Schneider with Goldman Sachs. Please proceed with your question.
Good morning. Thanks for taking my question. Raj, I was wondering if you can maybe give us a little bit more color on the dynamic you've highlighted for several quarters now about run-the-bank spend versus digital spend. As you look into 2019, what are your clients on the banking side telling you about their, first of all, overall wallet spend expectations? And secondly, whether the pace of the declines in some of the run-the-bank spend could moderate at all?
Yeah, Jim. So, look, I think it's a little too early right now to start getting into 2019 in terms of the budgets that we have from some of our large clients. The good news is, I mean, based on current trends, it does look – we are optimistic going into next year. Again, as I mentioned right, I think we've made that turn in North America where we're starting to see significant spend start coming in in terms of the digital. I think with especially a lot of the large banking clients, you've had a lot of in-sourcing that has been going on as well, but I think we've managed through that, and we're starting to see growth in all of our large clients. And I think you'll start seeing that going into next year. The challenge, as I mentioned earlier, right, has been some of the banks that are outside of North America as far as headquarters.
Again, you're seeing some in-sourcing and some of the run-the-bank spending. But I think the good news is the relationships are very healthy. We continue to win more than our fair share at those banks. And we're still strategic clients at those banks, and I see the same playbook that we used in North America working for us as those banks continues to shift more of their spend towards digital into next year as well.
Thank you. The next question is from the line of Darrin Peller with Wolfe Research. Please proceed with your question.
Hey, guys, thanks. Look, let me just start off, I mean, a little bit higher level on a macro basis. Can you just provide a little more color on what you're seeing broadly with regard to IT spend from your clients in discussions as we start to get closer to the end of the year now? Anyone changing their tone around spending given macro trends or tariffs or China or rate concerns or anything else that you're noticing in terms of a pivot in any way one way or the other?
Darrin, it's Frank. I'll take that. I don't see that happening. I continue to see clients investing in technology, investing in digital. As I think Raj said in his prepared comments, I think it's notable that we had the strongest quarter in digital that we've had – excuse in, in retail that we've had in many, many years. If you look at the mix of our clients, another data point that Raj had in his prepared comments is that in the quarter, two of our top 10 clients came from the technology space as opposed to three years ago where all of our top 10 clients were in Financial Services and Healthcare. So we haven't seen a shift in demand in the short-term as a result of the, perhaps, what you're alluding to is the volatility that we've seen over the last month or so. We continue to see just clients sort of doubling down now and saying how do we get to digital at scale and continue to play into that demand as we go into next year.
Thank you. The next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please proceed with your question.
Hi. I wanted to go back to the margin question. Now kind of appears to be a good time to invest to take digital market share. Why not back off the margins and try to grow faster? And then just building on that, has the cost cutting gotten too disruptive to the culture, and how do you think about that as you continue to drive towards efficiency? Thanks.
You know, Joe, I'll let Karen also – it's Frank. I'll let Karen jump in here. I think that it's not always the case that there's this trade-off between margins and growth. There seems to be this thesis that there's a direct trade-off between margins and growth. And while at some point that is certainly the case, as we've said for a while and in fact 18 months ago when we did the analysis on the topic, a lot of the core operational improvements that we've done in the business to drive growth are good operating hygiene types of things that we think are opportunities for us just to run the engine better. We've had – in two months, we'll celebrate 25 years as a company.
We had 20-something years of very, very strong growth. The focus during those years was less on operational excellence. That creates lots of opportunities for us to optimize things around the business. And those things are just good operating discipline. In most cases, those things don't have a direct impact on growth. And so while it may seem at the 50,000 foot level that there's a trade-off between margins and growth, at the place where we are right now, I feel like we are optimizing places where the company had excess, where the company wasn't optimal, we were not best-in-class relative to our peer set. We're looking at that carefully.
We had done that analysis when we began this exercise. We had a third party come in and look at our operational metrics relative to competition. We've identified areas that where we are not best-in-class and we're focused on closing the gap. And in many of those cases, as I said, there isn't a trade-off with growth. As it relates to culture, I think we're building a muscle in the place around operational excellence and around operational discipline. I think that's a good muscle. I think it's a muscle that will serve the company well, well into the future. And I think that that is a good muscle to be building, and not one that I think is disruptive to the culture. I don't know, Karen, if you want to add to that?
No, I think I would echo, Joe, what Frank said. And I think just to add to that, the benefit of what we're doing today is that because we are growing, this isn't really about cost cutting. In many cases, this is about cost avoidance and really leveraging the investments that we've already made more effectively, particularly around corporate functions and so forth. And if you think about where we have done some head count reductions, they've been extremely minor. So in 2017 in the summer, we did a voluntary program that it was a few hundred people took that program. This year we did an involuntary program at the senior level that was 200 people, on a basis of 270,000 people plus, that is an absolute nit. So I think as Frank said, this is about getting the organization to think about operational excellence and discipline along with revenue growth, and we think it's a very healthy exercise for us to be going through.
Thank you. The next question is from the line of Moshe Katri with Wedbush Securities. Please proceed with your question.
Hey, thanks. Good morning. Thanks for taking my question. Karen, what are your assumptions for organic growth for Q4? And then you keep on mentioning pruning or pruning of low margin businesses. Is there any way to kind of quantify the impact of that pruning on the top line growth this year or maybe for the quarter? I think any color here could be helpful. Thanks.
So, I'll start with the second piece first, Moshe. So on the, what we'd call the long tail accounts, there's been very little revenue impact. Again, this is part of going back to the operating muscle that Frank was just talking about, right, is getting the teams to look at clients where perhaps we're not getting the growth and the margin trajectory that we would like to see and contemplating whether there's truly a strategic relationship there and if not perhaps finding reasonable ways to exit. But the dollars, those are very, very small revenue dollars. And what we tend to see is some of those come with some of the acquisitions we've done in the past where they may have a handful of clients that we would consider strategic clients where we think there's a bigger market opportunity, and then they may have a handful of smaller clients that just won't have the scale to really partner with us in a meaningful way.
So that's a constant thing we look at. But the revenue line, it doesn't really have a material impact. In Q4, in the guidance, obviously, we've assumed both the ATG and SaaSfocus deals which closed in October, but those are small, just a few million dollars of revenue. And then we're anticipating that Softvision will close later in the quarter. But again, in terms of Q4 incremental dollars, we expect that that would be very, very small because we get maybe a few weeks of revenue if that going into the quarter. So beyond that, it's just the acquisitions that we've already done, which is primarily Bolder is the biggest one this year which we said is running about $35 million a quarter of revenue.
Operator, I think we have time for one more question.
Yes. The question is coming from the line of Lisa Ellis with MoffettNathanson.
Hi. Good morning, guys. Glad to be back on the call. This one is I think for Frank, maybe Raj. As you're looking forward, presumably a major goal right now for Cognizant is to get your revenue growth to turn and reaccelerate. Can you just talk about what in your view the sort of building blocks for that are, meaning, do you need to get attrition down to a certain level? Do you need Financial Services growth to kind of recover to a certain level? What's the role of acquisitions in that roadmap? Does digital mix need to get to a certain level? How do you think about that?
So, Lisa, I would say – it's Frank. It's a combination of some of the things that you talked about. I would say we are quite comfortable with the digital portfolio as it is right now, but we'll continue to do acquisitions to strengthen that portfolio of services. Obviously once Softvision closes, that will be an important arrow in the quiver as it relates to digital engineering. The second is the turn, if you will, in banking and financial services. As you saw in this quarter, we were quite pleased with the growth in three of our four segments, which all showed good growth. Financial Services, as Raj said, we see the turn happening in North America where the digital revenue growth is now starting to offset the pressure on the run-the-bank spending. When that turn comes to our clients in the Financial Services clients in the rest of the world, then I think that that will remove a drag from a segment perspective. I would point to those two as the two major factors at this point.
And it goes without saying that as we execute against our plan as you've seen for many, many quarters now, the revenue base of the company diversifies away from Financial Services and Healthcare as the other two segments grow faster off a smaller base. And so we view those as large incremental market opportunities in addition to Financial Services and Healthcare that continue to be large opportunities in their own right.
So we think that overall there's a big market opportunity. The digital portfolio continues to grow at very healthy rates, and so it's a question of focusing that digital portfolio on the large market opportunity that we have. And then of course the last lever is our global growth. We continue to expand the footprint of the company to markets outside of our traditional markets in North America and Europe, and so the rest of – what we call the rest of the world and Asia Pacific continues to be a focus area for us for growth.
Good. I think with that, we'll wrap up the call. I want to thank everybody for joining us today and for your questions. And we look forward to speaking with you again in just a couple of weeks here at our Investor Day. Thank you.
Thank you. This concludes today's Cognizant Technology Solutions third quarter 2018 earnings conference call. You may now disconnect.