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Cognizant Technology Solutions Corporation (NASDAQ:CTSH)
Q1 2018 Earnings Conference Call
May 7, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the Cognizant Technology Solutions First 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. If you'd like to ask a question at that time, please press *1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing *. Thank you, and I would now like to turn the conference over to David Nelson, Vice President of Investor Relations and Treasurer for Cognizant. Please go ahead, sir.

David Nelson -- Vice President of Investor Relations and Treasurer

Thank you, operator, and good morning, everyone. By now, you should have received a copy of the earnings release for the company's first 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. I would now like to turn the call over to Francisco D'Souza. Please go ahead, Francisco.

Francisco D'Souza -- Chief Executive Officer

Good morning, everyone, and thanks for joining our call. This morning, I'd like to cover two topics. First, a few highlights from our Q1 performance, and second, an update on how we're competing effectively and scaling up our business in the current environment. Let's begin with the quarter. We've gotten the year off to a solid start. First-quarter revenue was $3.91 billion, at the high end of our guided range and up 10% year over year. Our first-quarter digital revenue grew about 27%, well above company average, and represented about 29% of total revenue, reflecting the profile of many of our clients, who are pivoting quickly to digital. Our portfolio of digital services generated above-company average margins and our non-GAAP EPS for the quarter was $1.06.

Turning to guidance, we expect second-quarter revenue to be within a range of $4 billion to $4.04 billion. We now expect full-year revenue to be within a range of $16.05 billion and $16.3 billion, a growth of 8.4% to 10%, and we remain confident in our previously stated guidance of achieving a non-GAAP operating margin in 2018 of approximately 21%.

Moving to my second topic, thriving in today's environment, Cognizant continues to be one of the world's fastest-growing professional services companies, even at our scale. We've sustained our growth by innovating in response to macroeconomic and technological changes and the resulting shift in our clients' needs. The current environment is defined in part by global economic momentum, accelerating technological progress, and increasing demand for collocating with clients. As a result of these trends, we see tightening labor markets and skill shortages in many parts of the world. To thrive in this environment, we continue to emphasize three broad approaches that I'd like to cover this morning. I'll refer to them as digitize, internationalize, and localize.

Let's start with digitize. We have a distinctive approach to digital that really resonates with our clients. We help them become digital to their core, digitizing their products and services, personalizing the experience they offer customers, fully automating their business processes, modernizing their IT infrastructures, and doing all of this in tandem. We use this approach to transform clients' entire enterprises: Their business, their operating, and their technology models.

This three-layer transformation enables us to build digital at scale and at speed through our three practice areas: Digital business, digital operations, and digital systems and technologies. This ability to, in essence, run a digital plumb line through all layers of a client's enterprise gives us an edge in pursuing and capturing a significant portion of the huge market opportunity for enterprise transformation. It also serves to expand our presence well beyond the CIO to other decision makers within our accounts, like the CFO, COO, and the Chief Marketing Officer. Reflecting our commitment to partnering with the CMO, we're delighted that Cognizant Interactive, which is part of our digital business practice, was just recognized by Ad Age as one of the world's largest digital [inaudible] agency networks.

At the same time, we've built a strong and scalable foundation on which to keep advancing our digital capabilities and leadership. Our growth foundation has many elements. These include our trusted, intimate relationships with strategic clients and our penetrating knowledge of clients' industries, business models, and technology environments. We know how to apply powerful new technologies like artificial intelligence, the Internet of Things, virtual and augmented reality, robotic process automation, blockchain, cloud, and more. As clients more fully adopt these technologies, we will be able to use our leadership position in these areas to capture a substantial portion of the growth opportunity for all of the services and solutions that will emerge.

In the meantime, our understanding of how to apply these technologies serves to amplify our ability to anticipate clients' needs and rapidly develop solutions at scale and at the highest levels of reliability. Perhaps the most important elements of our growth foundation are our high-end skills, our global and local delivery, and the end-to-end capabilities which include our global consulting teams that advise on strategy, operations, and technology, all of which enable us to build and deliver specialized software platforms and industry-specific solutions to quickly create new value for clients. And therefore, we're sustaining our investment to further scale our digital practices aggressively across industries, geographies, both organically and through acquisitions.

Now, with over 80% of our revenue coming from the work we do for clients in financial services, healthcare, retail, and manufacturing, we're at the center of the fintech, health tech, biotech, and smart product revolutions. Our clients depend on us to keep them at the leading edge of these shifts. We do so by developing solutions to advance their businesses. Here are two quick examples. We partnered with an engine manufacturer to identify potential engine failures on long-haul truck runs. We helped the client increase truck utilization and capture 20,000 faults per month, enabling preventive maintenance across a fleet of 150,000 vehicles.

We also helped a leading healthcare company save as much as $60 million by identifying 85,000 at-risk patients. We developed an advanced machine learning algorithm to analyze and report on the warning signs of patients who are exhibiting behavior that may indicate patterns of substance abuse. This enables professionals to intervene early to improve these patients' quality of life.

We continue to invest to broaden and deepen our services and capabilities, and we've intensified our focus on developing more end-to-end industry-specific solutions. Based on our forward momentum and sustained investment, we expect our digital portfolio to continue to grow at double-digit rates.

Our second approach to today's environment is to further internationalize. Non-U.S. markets are, of course, sizable and fast-growing, and the application of digital technologies is absolutely a worldwide phenomenon. Last year, our businesses outside the U.S. crossed the $3 billion revenue mark for the first time. We've expanded our geographic footprint organically, adding new delivery and operations centers as well as collaborators in our key global markets. We have digital at-scale projects under way with the likes of the English Football Association, Soft Bank Robotics, Centrica, Dexia, BHP, and a consortium of Indian life insurers, to name just a few projects.

And, many of our acquisitions over the past couple of years have been outside the U.S., among them Idea Couture, Mirabeau, Brilliant Services, Adaptra, Netcentric, and Zone. In essence, we've been methodically planting seeds across Europe, Asia-Pacific, and Latin America, and many of these have already become growth engines for us. In short, we have the clients, the talent, the operating model, and the integrated delivery to excel outside the U.S., and we see the potential for several of our non-U.S. markets to each become billion-dollar businesses early in the next decade.

Our third emphasis is on continuing to localize. As you can imagine, when you're partnering with clients to transform their business, operating, and technology models, the need to engage with them locally is essential. In fact, the growing volume of digital at-scale work we're doing typically involves agile development and a deeply consultative, in-person approach with clients. So, we continue to invest extensively in trading and rescaling our teams and in substantially expanding our local workforces around the world.

Our goal is to complement the massive delivery capability and operations we have in India with additional specialized points of delivery around the globe. That's why we've built a network of local and regional delivery centers in Europe, Asia, North America, and Latin America. With their proximity to clients, these delivery centers also enable high-quality digital, agile, and secure services that comply with local regulations and have delivered using the technologies and languages clients require. These centers also enable us to hire, develop, and retain talented local people who conserve multiple clients. By the way, as we build skills and capabilities in the local communities where we operate, we're also partnering with educational institutions to establish and fund retraining programs in high-demand digital technologies.

To wrap up, our business is strong, as is our ability to sense and respond quickly to market shifts. Our digitized, internationalized, localized approach is serving us well in today's business environment. We're one of a small handful of companies with the range of capabilities to help clients transform at every level of their enterprises. We've developed a strong and scalable foundation on which to extend our leadership as the builder of the digital economy, and we expect our forward momentum to deliver a strong 2018. And now, over to Raj, who will discuss how we're working with clients to speed them along their digital transformation journeys as well as the specifics of our business segment performance. Raj?

Rajeev Mehta -- President

Thanks, Frank, and good morning, everyone. To echo Frank, we feel very good about Cognizant's range of capabilities, business model, and sustained investment. In combination, they're enabling us to be the scale builder of the digital economy and the go-to transformation partner for our clients. I'm going to cover our industry segment and geographic performance, but first, I want to add to Frank's discussion about how we create value for clients, and there's no better way than with a concrete client example.

Consider the work we're doing with a top property and casualty insurer of high-net-worth individuals and families. Our client needed help rethinking and redesigning a key moment of truth in their clients' process. This is the point where a policyholder calls to report an accident or damage to property. Of course, people are often stressed when they make such a call, so that experience can determine client satisfaction and retention. Cognizant developed an analytics platform informed by artificial intelligence to transform this first notice of loss. Our AI solution enables the insurer to audit and analyze conversations between policyholders and customer service representative and guide the rep in real-time about how best to respond.

We've brought together machine learning, chatbots, voice-to-text transcription, and analytics to automate repeatable processes. The machine learning alone grew our knowledge gained from reviewing 25,000 policyholder calls. This has improved the quality of the information captured and reduced the likelihood of misunderstandings that can result in litigation or fraud. As a result, insurers saw about a 30% reduction in call length and associated expenses and a 15% reduction in total labor and expect to see significant improvement in client satisfaction.

We have many other client engagements under way in which we're doing AI-enabled work that delivers business outcomes of this importance. It's this combination of capabilities, including continued investment in our client-facing teams and further scaling of our practice areas, that equips us to be the go-to partner for our clients' digital at-scale transformations.

Let's look now at how our industry segments performed in Q1. Banking and Financial Services grew 6.2% year over year. In the quarter, we had double-digit growth in our insurance business that was driven primarily by large, strategic deals. Insurers are increasingly interested in using advanced technology to transform the customer experience, as conveyed by my earlier example. Moving to banking, we continue to see strong growth among our mid-tier banking clients as they work to transform their business models, which involves greater investment in advanced technologies. As large money center banks report a more positive industry business climate, they're putting more pressure on their run-the-bank spending while stepping up investment and [inaudible] bank technology. While we're seeing a pickup in this digitally intensive work, we anticipate continued optimization of the legacy portion of our banking business and a modest overall improvement.

Turning to Healthcare, our revenue was up 11.8% year over year. We saw consistent demand across payer clients with increasing interest in our digital, analytics, cloud, and virtualization solutions. 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've expanded our scope to include the provider network of doctors, hospitals, and other clinicians.

We've recently closed our acquisition of casually held Boulder Healthcare Solutions, a leading provider of end-to-end revenue cycle management solutions to hospitals and physicians. Boulder expands our healthcare consulting, IT, and business process services portfolio and extends our leadership in digital healthcare technology and operations. By bringing together Boulder Healthcare with TriZetto, TMG Health, and Top Tier Consulting, we now have offerings that span the payer and provider business value chain.

Turning to Products and Resources, we increased revenue 11.4% year over year. Strong growth from our manufacturing and logistics clients continues, which offset sluggish growth in retail. Our strength in the manufacturing, logistics, energy, and utility areas results from our emphasis on leading with digital offerings. An infusion of digital has already made many products smarter and made consumer experience richer. And now, AI-based autonomy, enabled by sensors, data analytics, and machine learning, is making machines far more versatile and self-driven than ever before. This has caused the attention of CXOs, who are increasingly engaging us to implement advanced digital approaches to transform their business models.

Communications, Media, and Technology had another strong quarter of broad-based growth, up 18.4% year over year, with an expansion in areas like creating and curating digital content for digital platform providers. The digital economy is all about creating meaningful experiences with personalized content. As we have seen with many of our Silicon Valley clients, this requires the ability to help manage and run digital business to deliver personalized content. These clients seek our help with sheer volume of content monitoring and moderation, particularly as they intensify their efforts to verify the authenticity of user-generated content and scale globally.

Looking at our geographies, our markets outside the U.S. continue to exhibit strong growth. Europe grew 22.4% year over year in Q1 including 11.7% positive impact from currency, and the rest of the world was up 11.9% from a year ago including a 310-basis-point positive impact from currency. We now have offices in over three dozen countries, and much of our growth has been enabled by successful localization across many of these countries. The value we create for clients is predominantly knowledge-based work, so we depend heavily on the insights, passion, and collaboration of our global associates. We continually invest in the skills and development of all our associates to keep Cognizant strong and relevant to clients.

At the same time, we're aware that our annualized attrition rate of 20.3% this quarter is several points higher than our historic norm for Q1. We believe the high attrition is largely the result of increasing global demand for the very skills we specialize in. The growing shortage of technology talent, particularly in the 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. To sum up, over the past year, we've focused considerable energy and investment in strengthening our foundation for profitable growth and extending our capabilities to help clients succeed in their transformation journeys. Karen, over to you.

Karen McLoughlin -- Chief Financial Officer

Thank you, Raj, and good morning, everyone. The business got off to a solid start in Q1, which positions us well to achieve our updated full-year revenue and margin guidance. First-quarter revenue of $3.91 billion was at the high end of our guidance range and represented a year-over-year increase of 10.3% including a positive 210-basis-point impact from currency. Non-GAAP operating margin, which excludes stock-based compensation expense, acquisition-related expenses, and realignment charges, was 20.3%, and non-GAAP EPS was $1.06.

Our Q1 non-GAAP tax rate of 24.6% was higher than expected, primarily due to the updated interpretation of the global intangible low-taxed income -- or GILTI -- provision of the new U.S. tax law. As I will discuss further in the guidance section of my remarks, this updated interpretation of the GILTI provision is estimated to have a full-year EPS impact of $0.09 per share.

In the first quarter, we demonstrated our commitment to return capital to shareholders through launching a $300 million accelerated share repurchase -- or, ASR -- program in March, with completion expected during the second quarter. This ASR marked the second piece of our expected $1.2 billion share repurchase by the end of 2018. Today, we declared a quarterly cash dividend of $0.20 per share for shareholders of record at the close of business on May 22nd.

Additionally, during the quarter, we repatriated $2 billion of earnings that were available for distribution to the United States as a result of U.S. tax reform. We have already deployed approximately 25% of that cash through the acquisition of Boulder. We are continuing to evaluate the implications of U.S. tax legislation on our overall capital return program.

Now, let me discuss additional details of our financial performance. Consulting and technology services and outsourcing services represented 58% and 42% of revenue respectively for the quarter. Consulting and technology services grew 10.7% year over year and outsourcing services revenue grew 9.7% from Q1 a year ago. During the first quarter, 39% of our revenue came from fixed-price contracts, and we continue to make progress over the long term, changing the mix of our business to more fixed-price or managed services arrangements.

Also, as we've spoken about for some time, we are seeing an increasing trend toward output or transaction-based pricing, and so, beginning with Q1, we are breaking out transaction-based contracts separately, which were approximately 9% of revenue in the quarter. We added seven strategic customers in the quarter, defined as clients that have the potential to generate at least $5 million to $50 million or more in annual revenue, bringing our total number of strategic clients to 364.

And now, moving to a discussion on margin, we remain committed to and are on track to achieve our target of 22% non-GAAP operating margin in 2019. In the first quarter, we continued to focus on driving higher-value services in addition to continual improvement in our business, focusing on levers 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. Our offshore utilization for the quarter was 79%, offshore utilization excluding recent college graduates who are in our training program was 83%, and onsite utilization was 92% during the quarter.

Turning to our balance sheet, which remains very healthy, we finished the quarter with $5 billion of cash, short-term investments, and restricted cash. Net of debt, this was up by $33 million from the quarter ending December 31st and up $1.15 billion from the year-ago period. This balance at the end of the quarter includes restricted cash and short-term investments of $507 million. These restricted amounts are related to the ongoing dispute with the India Income Tax Department.

Receivables were $3 billion at the end of the quarter. We finished the quarter with a DSO of 75 days, up four days versus last quarter. The adoption of the new revenue recognition standard increased our DSO for the quarter by two days. Our outstanding debt balance was $773 million at the end of the quarter. Our diluted share count was 589 million shares for the current quarter.

I would like to now comment on our outlook for Q2 and the full year 2018. For the full year 2018, we expect revenue to be in the range of $16.05 billion to $16.3 billion, which represents growth of 8.4% to 10%. Our guidance is based on the current exchange rates at the time at which we are providing the guidance and does not forecast for potential currency fluctuations over the course of the year. For the second quarter of 2018, we expect to deliver revenue in the range of $4 billion to $4.04 billion, and for the second quarter, we expect to deliver non-GAAP EPS of at least $1.09. This guidance anticipates a share count of approximately 586 million shares and a tax rate of approximately 27%.

For the full year 2018, we expect non-GAAP operating margins to be approximately 21% and to deliver non-GAAP EPS of at least $4.47. This guidance anticipates a full-year share count of approximately 585 million shares and a tax rate of approximately 26%. As I mentioned earlier, our tax rate expectation has increased from our previous guidance due to an updated interpretation of the GILTI provision. The impact of this higher estimated tax rate on EPS is partially offset by our better-than-expected performance in Q1 as well as the expected benefit from the Boulder acquisition, which closed last month. As we receive additional clarification and the interpretation continues to evolve, our estimate of the impact of the GILTI provision could change.

Our non-GAAP EPS guidance excludes stock-based compensations, acquisition-related expenses and amortization, realignment charges, net non-operating foreign currency exchange gains and losses, any future adjustments to the one-time 2017 incremental income tax expense related to the tax reform act, and our contribution to the new Cognizant U.S. foundation, which we expect to fund in the second quarter of this year. Our guidance also does not account for the impact from shifts in the regulatory environment in areas such as immigration or tax.

In summary, our solid execution in Q1, along with continued investment in the business, has positioned us well to deliver another strong year of revenue and earnings growth in 2018. Operator, we can open the call for questions.

Questions and Answers:

Operator

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press *1 on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing *. In the interests of time, we ask that you limit yourself to one questions. One moment, please, while we poll for questions. Our first question is from the line of Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang -- JPMorgan Chase -- Analyst

Thanks, good morning. I wanted to ask if there's any change to your organic revenue growth outlook versus 90 days ago. The Boulder Health deal -- I thought that would have had a little bit more impact starting in the second quarter, so can you also maybe update us on the acquisition contribution to revenue this year? Thanks.

Karen McLoughlin -- Chief Financial Officer

Sure, Tien-Tsin. Let me take that. So, as you would have seen, obviously, we took up the bottom end of the revenue guidance to 8.4%, which did account for the Boulder acquisition. However, FX also moved against us, so that offset about half of the benefit that we'll get from Boulder this year. So, if you recall, at the beginning of the year, we had said there was about 100 basis points of FX year-over-year impact. That number has now dropped to about a 70-basis-point impact on a year-over-year basis because of the recent movement in the European currencies.

Tien-Tsin Huang -- JPMorgan Chase -- Analyst

Got it. So, on the organic revenue side, any change there? Since I'm at it, on the 606 front, can you -- go ahead.

Karen McLoughlin -- Chief Financial Officer

On an organic basis, no changes in our guidance other than for Boulder and the FX movement, as we talked about. The 606, as you saw, was a little over $20 million for the quarter. Obviously, that's more of a timing issue than anything because ultimately, that reverses as those contracts mature, so, on a full-year basis, we still don't expect to have a material impact from 606.

Tien-Tsin Huang -- JPMorgan Chase -- Analyst

That's for the rest of the year? Okay, thank you, Karen.

Operator

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

Bryan Keane -- Deutsche Bank -- Managing Director

Hi, guys. I'll ask my questions up front. Just looking at financial services on the larger bank spend, it doesn't look like we've seen any real pickup and increase in spend there. Secondly, Karen, how long can you guys continue to grow the revenue growth high single digits, low double digits, without growing net headcount much? Thanks.

Rajeev Mehta -- President

I'll take the first part and Karen can answer the second part. Look, our banking portfolio is in transition. Obviously, you're seeing a good, healthy growth in the mid-tier banks, but the challenge is obviously the large money center banks. Honestly, our portfolio is in transition, and one side, you have some of the portfolio which represents more of the legacy work. That continues to get optimized. With that, we continue to evaluate what we think is strategic and to make sure that we continue to deliver high margins on that work.

And then, we're starting to see a strong pickup on the digital portfolio at these banks, and we're actually winning a lot of work there. We're winning in mobility solutions, we're winning in legacy app modernization, even some initial work in blockchain. So, the business in digital is really growing at a healthy pace consistent to the overall Cognizant digital growth. So, overall, the business is growing there, but the portfolio -- as the additional digital spend continues, I think we'll start getting back to the healthy, strong growth that we've seen in banking.

Karen McLoughlin -- Chief Financial Officer

Bryan, to answer your question about headcount, I do think that as we look to the next few months, we'll start to see headcount increase on an overall basis. There's a number of things -- obviously, we did a great job of bringing up utilization last year, and it held fairly flat on a sequential basis from Q4 to Q1 both onsite and offshore, but I wouldn't want to take it up much beyond where we are right now given the current environment, the demand environment, the need for new skills, and so forth that we're seeing in the marketplace.

But, having said that, while you've got headcount growth and strong demand, obviously, in digital, then there are parts of the business were automation and so forth are also helping us to drive utilization and manage headcount more effectively. So, I do think you'll see headcount grow in the coming months, but as we've talked about in the past, I would no longer expect headcount and revenue to grow in line with each other as business continues to evolve.

Bryan Keane -- Deutsche Bank -- Managing Director

Okay. Thanks for the color.

Operator

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

Jim Schneider -- Goldman Sachs -- Analyst

Good morning. Thanks for taking my question. Maybe just one more on the financials, Karen. If you could maybe talk about the extent to which you expect attrition to tick down, either short-term -- and, what your plans are to reduce the attrition rate over the longer term, and maybe talk about how much of the attrition was voluntary versus involuntary in the quarter.

Rajeev Mehta -- President

Hi, Jim. We don't break out the voluntary and involuntary. The key point to note is the number that we quoted includes everything, includes our attrition that happens in our BPO business, our training pool, all the voluntary, involuntary, and plus the trainees. I think one thing you've got to keep in mind is obviously, we're committed to reducing the number and in terms of attrition, but we've invested a lot over the past seven years around digital, especially with all of our SMAC -- social mobility, analytic, and cloud -- initiatives.

In addition to that, we've trained many of our associates around all the digital skills, and so, it's not surprising, especially in this environment that we're at. A lot of our employees, a lot of our associates -- given the latest digital technology skills, it's not a surprise our competitors use that as an opportunity to attract associates, but we continue to monitor the levels. I think we've seen this in the past. During the dotcom days, we had fluctuations in terms of attrition, but we continue to attract, we continue to monitor, we continue to engage our employees, and we think we have a great platform for growth for our associates, and we would expect that the attrition levels are coming down in the future quarters.

Karen McLoughlin -- Chief Financial Officer

And also, keep in mind there is some seasonality to attrition. We tend to see attrition spike after bonus payments. You tend to see it spike after promotions, raises, and so forth. If you recall, last year, we deferred our promotions and raises until the fourth quarter, so we've seen a little bit of a change in the seasonality pattern. Obviously, this year, we expect to do raises and promotions on a normal schedule back in early Q3, but there is some seasonality to those numbers.

Jim Schneider -- Goldman Sachs -- Analyst

Okay, thank you. That's helpful. And then, maybe just as a follow-up, could you maybe provide us with a little bit of an update on your M&A outlook, particularly your willingness to commit to some larger deals rather than some of the tuck-in acquisitions you've been doing thus far?

Francisco D'Souza -- Chief Executive Officer

I would say largely consistent with what we have said in the past, which is that the primary focus will continue to be small tuck-ins, and as we've said in the past, as we become bigger, the definition of what is small and what tucks in gets larger. Boulder was a little bit bigger compared to things that we've done in the past, but I'm also -- and, I've said that we are open to looking at something that's larger, more transformative, if it's the right thing. We feel like the TriZetto acquisition that we did a few years ago is now well integrated. We have the capability and the capacity, the management bandwidth, to be able to integrate something larger at this point. But, we'll be cautious, and we will only do something large if it makes strategic sense, and the economics work, and we think we can create value for shareholders, obviously.

The places that we'd obviously be continuing to look would be things like digital -- we've talked a lot about digital and the progress we've made there. If we found something that could accelerate our shift to digital, we would consider something along those lines. We look at international expansion. We talked about international on the script today in prepared comments. I think those are also interesting potential opportunities. We think there's plenty of growth left for us in non-U.S. markets, so we could look at something like that. And then, of course, we continue -- like we did with TriZetto -- to look at software, and IP, and platforms, and those kinds of assets.

Operator

Thank you. The next question is from the line of Jason Kupferberg with Bank of America Merrill Lynch. Please proceed with your question.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Thanks, guys. Good morning. I just wanted to ask a follow-up to start on the attrition point, and I wanted to see if you could give us a little bit of color on which parts of the pyramid, perhaps, drove the increase. I know in the past when there's been a spike, it's tended to be at the lower levels and around the middle. Last year, we had that dynamic. Are you contemplating higher wage increases this year vis-à-vis last year to try and combat some of the war for talent?

Karen McLoughlin -- Chief Financial Officer

Sure, Jason. So, in terms of where the attrition is happening, it does tend to be in the lower end of the pyramid, which is historically where we've seen attrition. Over the years, the middle to upper end of our pyramid tends to have very low attrition, tends to be skewed toward offshore, obviously, which is where the vast majority of the junior part of our pyramid is based, so it's fairly consistent with what we've seen during other periods of high attrition. In terms of wages, we will base ourselves on what the market does, both in India and elsewhere around the world, so as that becomes a little bit more apparent as to what competitors are doing, we will certainly make sure that we are competitive in the marketplace in that regard.

Operator

Thank you. The next question is from the line of Moshe Katri with Wedbush Securities.

Moshe Katri -- Wedbush Securities -- Managing Director

Thanks. Just for clarification, when you spoke about financial services, did you say that you expected a modest improvement this year? And then, just to follow up, is there a way to quantify the portion of the legacy business and financial services just to give us a feel on how to look at the growth of the entire vertical this year? Thanks.

Rajeev Mehta -- President

Yeah, Moshe. What I said is that we're having -- we're starting to see a pickup on the spend on the digital side of the business, and it is growing at a very healthy pace in line with the company. I think with that, as we continue -- in the large money center banks, you're starting to see obviously much healthier with some of the changes with the tax reform, you're starting to see more spending there, so, I would expect that as some of these engagements continue to get larger and more prevalent with the money center banks, at some point, you'll get the increasing demand there to outstrip some of the optimization that's happening on the legacy portfolio.

So, in terms of the business, we are growing -- the business is growing, even with all of the focus on some of the optimization. Along with that, you have some of the money center banks also looking at -- with some of the changes in regulatory and amount of work that they've outsourced, to continue to look at some work in-house as well, too. So, overall, with all that, the business is growing, and I would expect some sort of pickup at some point later in the year.

Karen McLoughlin -- Chief Financial Officer

Yeah, and Moshe, if I could add to that -- obviously, while banking is growing slower than the overall financial services practice, Q1 was, in fact, its strongest year-over-year growth in the last several quarters. So, while it's still not where we'd like it to be, it's certainly starting to trend in the right direction. And then, in regards to your question of legacy versus digital-type spend, the banking practice is right in line with the company average. The company average is 29% of our revenue right now is digital, and that's right in line with where our financial services practice is as well.

Operator

Thank you. The next question comes from the line of Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar -- Citigroup Research -- Managing Director

Hi, thanks. I wanted to start off with a clarification. Karen, when you said full-year, ASC 606 is immaterial for revenues, would that apply to operating income and EPS as well? And then, the question on reskilling, can you comment broadly -- as you roll out technology training and such, what percent of new skills come from new hires versus reskilled people, and does that have an impact on attrition?

Karen McLoughlin -- Chief Financial Officer

Ashwin, in terms of the revrec changes, obviously, a lot of this is a timing issue. So, depending on the timing of context, the structure of context, and so forth, revenue will either get pushed forward or deferred, and similarly, on the margin side, what happens is under the new rules, there are more of what I would call the transition or implementation costs that we are required to capitalize than we did in the past. So, you saw a little bit of that impact in Q1. At this point, we're not expecting that to have a material impact on the quarter -- on the year, rather -- but obviously, as new contracts come in, that will certainly make the final determination of what that looks like. I'll turn it over to Frank for reskilling.

Francisco D'Souza -- Chief Executive Officer

Ashwin, I'm not sure exactly how to answer your question on reskilling. As you know, we reskilled tens of thousands of employees last year. We continue to do that quite aggressively. But, that's not a recent phenomenon. As Raj pointed out, we've been skilling and training, and more than skilling and training, we've been executing projects in the digital area for the better part of seven or eight years now, from the time we first talked to you about SMAC and so on and so forth. And so, we think we've got a very digitally scaled and skilled workforce, and as Raj pointed out, I think part of the reason that we're seeing higher attrition is that competitors view us as a good place to get talent from. Again, that's not inconsistent with what we've seen in past technology transitions.

We have a very structured process and a very -- we're very focused. When we reskill or retrain somebody, we get them deployed in the new skills as quickly as we can so that from a career management standpoint, obviously, it's maximizing our investment when we do that, but it's also an important retention tool. So, when you think about how we go through the process, reskilling, retraining, and redeploying is really the primary source, and then we rely on recruiting to fill gaps when our reskilling and retraining and redeploying doesn't create the right skills in the right geographies or the right locations. So, recruiting is sort of, in a sense, the last resort when we can't fill from internally. When I say "recruiting," I mean experienced recruiting, of course. We're always recruiting at the entry level to continue to grow the business.

Operator

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

Brian Essex -- Morgan Stanley -- Executive Director

Hi. Good morning and thank you for taking my question. I was wondering if I could first start with a follow-up to Jim's question. Maybe outlook for M&A through the remainder of the year, and maybe to follow up, how much cash in the U.S. on the balance sheet might we see? Is there an acceleration there? Maybe with the composition of what your pipeline looks like relative to prior periods -- is that getting more robust? Just a little color on what expectations for the rest of the year might be.

Francisco D'Souza -- Chief Executive Officer

Brian, I would say the pipeline of small tuck-in acquisitions continues to be robust. I would characterize it as about the same as it's been over the last 12 months -- maybe a little bit more robust, but not meaningfully so. And then, the bigger deals are... We continue to evaluate different things, but those are so unique that I don't think we'd have any more of a substantial pipeline than we've had in the past. We've always continued to look at the bigger deals, but as I said before, we'll be very careful and cautious on what we do, and it's got to be a good fit. So, if we find something that makes sense this year, clearly, we'll look at it and we'll execute on it, but it isn't a foregone conclusion by any stretch that we would do something this year. We'll continue to look and evaluate. I'll turn it over to Karen on U.S. cash.

Karen McLoughlin -- Chief Financial Officer

As I talked about on the call, we did bring back about $2 billion to the U.S., which was obviously a benefit we could do after U.S. tax reform. We spent about a quarter of that -- just under $500 million -- on Boulder. Certainly, our objective is to make sure that we have enough flexibility around the world -- not just in the U.S., but in Europe and elsewhere -- to take advantage of transactions as they occur. As Frank said, the timing is not always that predictable. So, certainly, we will continue to evaluate our cash needs around the world and also evaluate the capital return program as we look forward over the next few months.

Operator

Thank you. The next question is from the line of Rod Bourgeois with DeepDive Equity. Please Proceed with your question.

Rod Bourgeois -- DeepDive Equity Research -- Head of Research and Consulting

Okay, great. I want to ask about how the underlying margin picture might be changing over time. In the industry at large, on the negative side, we've seen margin disappointments at Accenture and IBM, and Infosys just guided to some meaningful margin contraction, and our pricing data do show some challenges in certain key markets. But, on the positive side, your commentary about digital margins has suggested pretty good prospects, so in this context, I want to ask is your path to achieving your long-term margin targets looking more difficult or easier given these big factors in the industry? I'm not asking about guidance. I know your guidance for margin is unchanged. I'm asking about the challenges involving getting to those margin targets and whether the challenges are becoming bigger or smaller as you get closer to 2019.

Karen McLoughlin -- Chief Financial Officer

Rod, let me take a stab at that. As you said, there's a number of different factors at play, and as we think about our margin profile and the targets that we set out for ourselves -- the 22% in 2019 -- that was really a compilation of a number of things. So, we knew -- and, I think we said this last year -- that certainly, the 2017 and early 2018 improvements would come from utilization and optimizing some of our SG&A spend and some of our business unit overhead spend, and certainly, we've been right on track with the benefits that we expected to achieve from that. We took a lot of those actions in '17. You're now getting the full-year benefit of that in '18.

And then, as we look forward into 2019, it is more about the shift in the business -- so, the shift to digital, which is currently running at higher margin than the core business -- as well as the platform business. As that continues to evolve and mature, that starts to look much more like a nonlinear business and drive higher margins. So, we're right in that pivot of now looking toward the shift in the business mix to continue to drive the margins for next year, so you do have a number of things that are offsetting each other, but we are very comfortable with the trajectory of the business at this point. We've made very good traction on what I would call the cost optimization. There's still more room and things we think we can do around pyramid and driving automation and so forth in the business, but we continue to evolve. And then, obviously, we'll have to see where the market is heading as we get into 2019 and beyond.

Operator

Our next question is from the line of Bryan Bergin with Cowen and Company.

Bryan Bergin -- Cowen and Company -- Director

Good morning, thank you. I wanted to ask on healthcare -- can you comment on the overall large-deal healthcare pipeline? And then, how may Boulder affect an integrated large-deal offering across healthcare organizations? Thanks.

Rajeev Mehta -- President

Overall, healthcare continues to do well for us. I think probably one of the few companies that have been able to -- with the investments that we've made in healthcare now that we -- not only the payer side of the business, but we also have an opportunity to expand our provider side of the business as well. Look, in terms of the large pipeline, I think those deals like we have done, those B-pass deals around TriZetto -- there continues to be some large type of deals sort of like the emblem one that we've done in the past, but those take a long time to materialize, so it's hard to predict when they will come in, but we do have some of those out there. And, in addition to that, we've seen a lot of progress around our TMG B-pass solution as well. As you're aware, it addresses the Medicare/Medicaid.

So, we're seeing a lot of good traction, and along with that, a lot of new products that are coming out of the TriZetto space as well, the QNXT platform that addresses more of the small player, and then, our Cure Advanced solution as well. So, in addition to that, as you're aware, there's a lot of potential mergers and acquisitions that are out there. We're excited about the opportunity because not only are we working for the company that may get acquired but the acquiree as well, so as those transactions continue to develop, I think there will be a good opportunity for future M&A work as well.

Karen McLoughlin -- Chief Financial Officer

If I could just add to that, Bryan, what's nice with the suite of offerings we have now in healthcare and with the Boulder acquisition in particular is it really does open up that full end-to-end market of not just the payers, which is our historical strength, but also the provider market, and with the platforms now that we have between Boulder, TriZetto, and so forth, we can really offer that full-service suite of offerings for clients, and it also opens up a whole new market of clients, not just in the providers, but in the payer space. What we're seeing is now, with the platform business, bigger opportunities for what I would call small and midsized payers who historically wouldn't have had enough spend, frankly, to be significant clients for us, but with the platform business, we can really open up those opportunities now. So, we continue to be very bullish on the long-term benefits and opportunities for healthcare.

Operator

Thank you. Our next question comes from the line of Glenn Greene with Oppenheimer.

Glenn Greene -- Oppenheimer and Company -- Managing Director

Thanks. Good morning. I'll ask a couple questions up front. Given the size of the Boulder acquisition, maybe you could help us frame the annual revenue contribution, the impact on margins, and give us some sense of what kind of growth expectations for it. And then, the follow-up for Raj would be -- I thought I heard you say that retail was somewhat sluggish, which seems somewhat counterintuitive to me given that the retail environment actually seems fairly solid. So, maybe just some color there.

Karen McLoughlin -- Chief Financial Officer

On Boulder, Glenn, we didn't break it out, but it's roughly -- this year will be roughly $100 million of contribution, fairly neutral on the margin line -- a little bit dilutive, but not enough to be material. And then, obviously, we'll expect the synergies to start to kick in, probably not this year, but maybe toward the end of this year or as we get into next year.

Rajeev Mehta -- President

Glenn, look, I think we're starting to see a little bit of pickup in retail, but I think when I compare it to previous years, it's still a little sluggish. We're starting to see that retailers are starting to invest a lot in emerging technologies such as robotic, RPA, and intelligent automation, and even AI algorithms. So, we're starting to see that, but again, when I compare to previous years, it's still a little sluggish for us.

Operator

Our next question is from the line of Arvind Ramnani with KeyBanc. Please proceed with your question.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Hi. Just a quick clarification. From my understanding, your guidance doesn't include M&A, right?

Karen McLoughlin -- Chief Financial Officer

Arvind, our guidance does not include prospective M&A. It includes the benefits of Boulder and the deals that we've already completed, but it does not include prospective M&A.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Great. Just a broader question on digital -- the definition has certainly evolved from SMAC to digital. Can you comment on what the high growth areas of digital are and how you're able to stay in front of these newer technologies? And also, if you can expand on how you're changing your sales and delivery team's definition of "digital" keeps evolving.

Francisco D'Souza -- Chief Executive Officer

I guess there are a number of different areas within digital, so I'll point out a few of the key high-growth ones. First of all, digital engineering, which is sort of the new way of app development, is obviously high-growth, and continuing within what we call digital systems and technology, things like cybersecurity, cloud migration, replatforming to the cloud -- all of those are high-growth. Within the digital operations business, the higher-growth parts there are, as Raj pointed out, robotic process automation, intelligent process automation, using other forms of automation and artificial intelligence to automate key business processes.

And then, within our digital business practice, virtually all of that is higher-growth. You look at things like data and insights, you look at Cognizant Interactive that I just spoke a little bit about during my prepared comments, look at smart products and [inaudible] in the digital business portfolio. So, digital business is almost entirely all high-growth. That gives you a little bit of a picture. As we've said in the past, there is no real consistent definition of "digital" across the industry, so I think our definition is a prudent but somewhat conservative definition. We're trying to give you a good sense of what we think of as the core high-value digital work that we do so that you get a sense of the progress that we're making as we continue that shift.

And, I think the second part of your question was on skilling and retraining. I think that we've talked a lot about skilling and retraining, and we're doing a lot of it, equally focusing on rotation of our associates across the business because we think it's important to give people exposure to multiple technologies and skills and capabilities. I think one of the things that's just worth noting is that in many ways, the company has a very strong engine of retraining and reskilling. It's not something that's new in the digital world. We've been reskilling and retraining our employees from Day 1, so we've got a very strong DNA, we've got a very strong capability, and I think reskilling/retraining is something that we do particularly well.

Operator

Thank you. We've reached the end of our question and answer session. We have time for one final question, which will be coming from the line of Frank Atkins with SunTrust.

Frank Atkins -- SunTrust Robinson -- Analyst

Thanks for squeezing me in at the end. I appreciate it. Quick question -- in your prepared remarks, you talked about driving further international business. Can you talk about demand outside the U.S. -- especially on the digital side and the margin -- for that work? And then, as my second part, can you explain a little bit more clearly exactly what the change was in the view on taxes for the year? Thanks.

Francisco D'Souza -- Chief Executive Officer

Sure, Frank. Let me talk about growth outside the U.S. As I said during the prepared comments, last year, our non-U.S. markets crossed $3 billion. We still think there's tremendous opportunity outside in growth there. As you know, the economies around the world, and certainly, in the markets where we participate, are largely doing quite well, so we see the same fundamental drivers of growth in many parts of the world as we see in the U.S. -- of digital adoption as we see in the U.S. In some parts of the world, as happens with technology, you even see stronger growth as some economies leapfrog one generation of technology and go straight to digital, skipping over older generations of technology. So, we see good demand around the world, and in general, as we've said, the margin on our digital work is higher than company average margins. Let me turn it over to Karen on the tax question.

Karen McLoughlin -- Chief Financial Officer

Sure. So, Frank, regarding the tax rate, I think as we all understand, the new U.S. tax laws were put in place fairly quickly back in the fourth quarter, and as we've gone into 2018, there's just been a lot of folks continuing to look at the language and the tax law and continuing to refine both the interpretation of the laws, and in some cases, there have been some clarifications and updates to that.

In particular, the one area of focus that has received some of what I would call reviewed scrutiny is around what they call the global intangible low-tax income, or GILTI. Essentially, what that means for us is that it provides a limit on the amount of foreign tax credits that we're able to get. This was not clear back in the fourth quarter and back in February, when we gave the original guidance, but as we've looked at the laws more closely, at least in its current writing, we believe that that will impact our tax rate for this year, and as we said, it's about $0.09 of EPS.

It is possible that there may be some clarifications around this either later this year, or in the future, or perhaps even a complete revision. We're not sure at this point, but for now, we thought it prudent to base our guidance and our tax rate EPS on the law as it is currently drafted, and that's what caused the change in the impact. For anybody who has more questions, you can certainly reach out to us on that, or there will be more clarification in our 10-Q when that is filed later today or tomorrow.

Francisco D'Souza -- Chief Executive Officer

Great. And, with that, I think we'll wrap up. I want to thank everybody for joining us again today, and for your questions, and we look forward to speaking with you again next quarter. Thanks, everybody.

Operator

This concludes today's Cognizant Technology Solutions First Quarter 2018 Earnings Conference Call. You may now disconnect.

Duration: 62 minutes

Call participants:

David Nelson -- Vice President of Investor Relations and Treasurer

Francisco D'Souza -- Chief Executive Officer

Rajeev Mehta -- President

Karen McLoughlin -- Chief Financial Officer

Tien-Tsin Huang -- JPMorgan Chase -- Analyst

Bryan Keane -- Deutsche Bank -- Managing Director

Jim Schneider -- Goldman Sachs -- Analyst

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Moshe Katri -- Wedbush Securities -- Managing Director

Ashwin Shirvaikar -- Citigroup Research -- Managing Director

Brian Essex -- Morgan Stanley -- Executive Director

Rod Bourgeois -- DeepDive Equity Research -- Head of Research and Consulting

Bryan Bergin -- Cowen and Company -- Director

Glenn Greene -- Oppenheimer and Company -- Managing Director

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Frank Atkins -- SunTrust Robinson -- Analyst

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